Document:

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                                                                   Exhibit 10.13

                              SETTLEMENT AGREEMENT

          SETTLEMENT AGREEMENT (this "Agreement"), dated as of January 31, 2003
by and among NEPHROS, INC., a Delaware corporation (the "Company"), and Lancer
Offshore, Inc. (the "Holder").

          WHEREAS, pursuant to a Subscription Agreement among the Company and
the Holder, dated as of August 5, 2002 (the "Subscription Agreement"), the
Holder purchased a Note due 2003 of the Company in the principal amount of one
million five hundred thousand dollars ($1,500,000.00) (the "Old Note") and class
A warrants (the "Class A Warrants") to purchase an aggregate of 120,000 shares
of the Company's common stock, par value $.001 per share (the "Common Stock");
and

          WHEREAS, the Company and the Holder wish to settle disputes between
them arising in connection with the Subscription Agreement.

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

          1. Termination of Subscription Agreement and Security Interests. The
Subscription Agreement is hereby terminated and shall be of no further force and
effect. The Holder acknowledges that, upon execution hereof, all obligations of
the Company under the Old Note have been satisfied in full and the Company is no
longer indebted to the Holder with respect thereto. The Holder, in its
capacities as both the holder of the Old Note and as the Secured Party (as
defined in the Subscription Agreement) hereby: (i) releases any and all liens
upon and security interests in any collateral under the Subscription Agreement,
and further confirms that the Holder shall claim no lien upon or security
interests in any of the Company's assets or property; and (ii) authorizes the
Company to file any and all appropriate UCC Terminations and/or other releases
as provided by the law to evidence the Holder's release of said liens and
security interests. The Holder shall execute and deliver from time to time all
such other documents, agreements, certificates and instruments and do such
further acts as the Company may reasonably request in order to evidence or give
public notice of such lien terminations, releases, cancellations and
satisfactions.

          2. Closing. The Closing of the issuance of the New Note (as defined
below) and the execution and delivery of an instrument representing the Retained
Warrants (as defined below) shall take place at 10:00a.m., New York City time on
February 11, 2003 at the offices of Kramer Levin Naftalis & Frankel LLP, 919
Third Avenue, New York, New York, 10022, or at such other time, place, and
manner as the Company and the Holder may agree (the "Closing" or "Closing
Date").

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          3. Exchange of Securities.

          3.1. Partial Cancellation and Surrender of Forfeited Warrants. The
Holder hereby transfers to the Company all its right and interest in and to
Class A Warrants exercisable to purchase an aggregate of 45,000 shares of Common
Stock (the "Forfeited Warrants"). On or prior to the Closing, the Holder shall
surrender the Class A Warrants to purchase 120,000 shares of Common Stock to the
Company at its principal executive office, accompanied by proper instruments of
transfer, with respect to the Forfeited Warrants to the Company or in blank.

          3.2. Delivery of, and Amendments to, Retained Warrants. (a) At
Closing, the Company shall deliver to the Holder an instrument evidencing the
Holder's Class A Warrants exercisable to purchase an aggregate of 75,000 shares
of Common Stock that were not transferred to the Company pursuant to Section 3.1
(the "Retained Warrants"), as amended pursuant to this Section 3.2.

          (b) The legends on the Retained Warrants shall be amended to strike
the first sentence of the first legend and to add the following additional
legend:

     THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
     ARE SUBJECT TO THE TERMS OF THIS CLASS A WARRANT, COPIES OF WHICH ARE
     AVAILABLE FROM NEPHROS, INC., INCLUDING, WITHOUT LIMITATION, THE LOCK-UP
     PROVISIONS OF SECTION 12 THEREOF.

          (c) Section 3(a) of the Retained Warrants is hereby amended to read in
its entirety as follows:

               (a) In case the Company shall hereafter, other than pursuant to
     the IPO Reverse Stock Split (as defined below), (i) pay a dividend or make
     a distribution on its capital stock in shares of Common Stock, (ii)
     subdivide its outstanding shares of Common Stock into a greater number of
     shares, (iii) combine its outstanding shares of Common Stock into a smaller
     number of shares or (iv) issue by reclassification of its Common Stock any
     shares of capital stock of the Company (each of (i) through (iv) an
     "Action"), the Per Share Exercise Price shall be adjusted to be equal to a
     fraction, the numerator of which shall be the Aggregate Exercise Price and
     the denominator of which shall be the number of shares of Common Stock or
     other capital stock of the Company that the Holder would have held (solely
     as a result of the exercise of this Warrant and the operation of such
     Action) immediately following such Action if this Warrant had been
     exercised immediately prior to such Action. An adjustment made pursuant to
     this Subsection 3(b) 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.

               As used herein, the "IPO Reverse Stock Split" means the 0.2248318
     for one reverse stock split of the Common Stock referred to in the
     Company's Registration Statement on Form SB-2 which has been filed with the
     Securities and Exchange Commission.

          (d) The Retained Warrants are hereby amended to add the following
immediately after Section 11 thereof:

               12. Lock-Up Period. If the Company shall effect a primary or a
     secondary public offering of its securities or if at any time, the Company
     shall register its shares of Common Stock under the Securities Act for sale
     to the public, the holder or holders of Common Stock

                                       -2-

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     issued or issuable upon exercise of this Warrant shall not sell publicly,
     make any short sale of, grant any option for the purchase of, or otherwise
     dispose publicly of, any shares of Common Stock without the prior written
     consent of the Company during the period beginning ten (10) days prior to
     the effectiveness of the registration statement pursuant to which such
     public offering shall be made and ending on the date 180 days after the
     effective date of such registration statement. By acceptance of this
     Warrant, or the shares of Common Stock issued or issuable upon exercise
     hereof, the holder hereof or thereof agrees to be bound by the terms of
     this Section 12.

          (e) Section 8(b) of the Retained Warrants is hereby amended to read in
its entirety as follows:

               (b) the Holder at Bishops Square, Redmond's Hill, Third Floor,
          Dublin 2, Ireland, Attention: Investment Manager, or such other
          address as the Holder has designated in writing to the Company.

          3.3. Exchange of Notes. Promptly after the execution hereof (and in
any event prior to the Closing), the Holder shall surrender the Old Note to the
Company at its principal executive office, accompanied by proper instruments of
transfer to the Company or in blank. At Closing, the Company shall deliver to
the Holder a Note in substantially the form attached hereto as Exhibit A, dated
as of the Closing Date and having a principal amount of one million five hundred
thousand dollars ($1,500,000.00) (the "New Note").

          4. Representations and Warranties of Purchasers. The Holder hereby
represents and warrants to the Company as follows:

          4.1. Ownership of Securities. Pursuant to the Subscription Agreement,
the Holder became the sole beneficial owner of the Old Note and Class A Warrants
to purchase an aggregate of 120,000 shares of Common Stock.

          4.2. No Transfer. Neither the Old Note, the Class A Warrants nor any
interest in or to the Old Note or Class A Warrants nor any rights under the
Subscription Agreement have been transferred, assigned, endorsed, pledged,
hypothecated or otherwise encumbered in any manner whatsoever, and no person or
entity, other than the Holder, has or will have any right, claim or interest
(legal, equitable or otherwise) in or to the Old Note, any Class A Warrants, any
Common Stock issuable upon exercise of Old Notes or Class A Warrants or under
the Subscription Agreement.

          4.3. Investment Intent. The Holder recognizes that the purchase of the
New Note, the Retained Warrants and any Common Stock issuable upon exercise of
the Retained Warrants (collectively, the "Securities") involves a high degree of
risk including, but not limited to, the following: (i) the Company remains a
development stage business with limited operating history and requires
substantial funds; (ii) an investment in the Company is highly speculative, and
only investors who can afford the loss of their entire investment should
consider investing in the Company or the Securities, (iii) the Holder may not be
able to liquidate his investment; (iv) transferability of the Securities is
extremely limited; (v) in the event of a disposition of the Securities, the
Holder could sustain the loss of its entire investment and (vi) the Company has
not paid any dividends since inception and does not anticipate the payment of
dividends on the Common Stock in the foreseeable future.

                                       -3-

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          4.4. Lack of Liquidity. The Holder confirms that it is able (i) to
bear the economic risk of this investment, (ii) to hold the Securities for an
indefinite period of time, and (iii) presently to afford a complete loss of its
investment; and represents that it has sufficient liquid assets so that the
illiquidity associated with this investment will not cause any undue financial
difficulties or affect the Holder's ability to provide for its current needs and
possible financial contingencies, and that its commitment to all speculative
investments is reasonable in relation to its net worth and annual income.

          4.5. Knowledge and Experience. The Holder hereby acknowledges and
represents that the Holder has prior investment experience, including investment
in securities that are non-listed, unregistered and are not traded on the Nasdaq
National or SmallCap Market, nor on the National Association of Securities
Dealers, Inc.'s (the "NASD") automated quotation system.

          4.6. Purchaser Capacity. The Holder hereby represents that the Holder
has the capacity to protect the Holder's own interests in connection with the
transaction contemplated hereby.

          4.7. Receipt of Information. The Holder hereby acknowledges that the
Holder has carefully reviewed this Agreement and all attachments to it, and
hereby represents that the Holder has been furnished by the Company with all
information regarding the Company which the Holder has requested or desired to
know, has been afforded the opportunity to ask questions of, and to receive
answers from, duly authorized officers or other representatives of the Company
concerning the terms and conditions of this Agreement, the Securities and the
affairs of the Company and has received any additional information which the
Holder or its representative has requested.

          4.8. Reliance on Information. The Holder has relied solely upon the
information provided by the Company in this Agreement in making the decision to
invest in the Securities. To the extent necessary, the Holder has retained, at
the sole expense of the Holder, and relied upon, appropriate professional advice
regarding the investment, tax and legal merits and consequences of this
Agreement, its purchase of the Securities, and the exercise of the Retained
Warrants for Common Stock.

          4.9. No Solicitation. The Holder represents that (i) the Holder was
contacted regarding the sale of the Securities by the Company (or an authorized
agent or representative thereof) with whom the Holder had a prior substantial
pre-existing relationship and (ii) no Securities were offered or sold to the
Holder by means of any form of general solicitation or general advertising, and
in connection therewith the Holder neither: (A) received or reviewed any
advertisement, article, notice or other communication published in a newspaper
or magazine or similar media or broadcast over television or radio whether
closed circuit, or generally available; nor (B) attended any seminar meeting or
industry investor conference whose attendees were invited by any general
solicitation or general advertising.

          4.10. Registration. The Holder hereby acknowledges that the offering
of Securities pursuant to this Agreement has not been reviewed by the Securities
and Exchange Commission or any state regulatory authority, since such offering
is intended to be exempt from

                                       -4-

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the registration requirements of Section 5 of the Securities Act pursuant to
Regulation D. The Holder shall not sell or otherwise transfer the Securities
unless such Securities are registered under the Securities Act or unless an
exemption from such registration is available.

          4.11. Purchase for own Account. The Holder understands that the
Securities have not been registered under the Securities Act by reason of a
claimed exemption under the provisions of the Securities Act which depends, in
part, upon the Holder's investment intention. In this connection, the Holder
hereby represents that the Holder is acquiring the Securities for the Holder's
own account for investment and not with a view toward the resale or distribution
to others or for resale in connection with, any distribution or public offering
(within the meaning of the Securities Act), nor with any present intention of
distributing or selling the same and the Holder has no present or contemplated
agreement, undertaking, arrangement, obligation or commitment providing for the
disposition thereof. The Holder was not formed for the purpose of acquiring the
Securities.

          4.12. Holding Period. The Holder understands that there is no public
market for the Securities and that no market may ever develop for any such
Securities. The Holder understands and hereby acknowledges that the Company is
under no obligation to register any of the Securities under the Securities Act
or any applicable non-United States, state securities or "blue sky" laws. The
Holder shall hold the Company and its directors, officers, employees,
controlling persons and agents and their respective heirs, representatives,
successors and assigns harmless from, and shall indemnify them against, all
liabilities, costs and expenses incurred by them as a result of (i) any
misrepresentation made by the Holder contained in this Agreement, (ii) any sale
or distribution by the Holder in violation of the Securities Act or any
applicable non-United States, state securities or "blue sky" laws or (iii) any
untrue statement made by the Holder.

          4.13. Legends. The Holder consents to the placement of the legend set
forth below on any certificate or other document evidencing the New Note:

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES
LAWS, AND 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 EXEMPTION FROM THE
SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH
APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

          The Holder consents to the placement of the legend set forth below on
any certificate or other document evidencing the Retained Warrants:

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED

                                       -5-

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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 EXEMPTION FROM THE SECURITIES ACT. ANY SUCH TRANSFER MAY
ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS
OF OTHER APPLICABLE JURISDICTIONS.

          The Holder further consents to the placement of one or more
restrictive legends on the Securities as required by applicable securities laws.
The Holder is aware that the Company will make a notation in its appropriate
records with respect to the restrictions on the transferability of the
Securities.

          4.14. Address of Purchaser. The Holder hereby represents that the
address of the Holder set forth in Section 7.3 is the Holder's principal
business address.

          4.15. Power and Authority. The Holder represents that the Holder has
full power and authority (corporate, statutory and otherwise) to execute and
deliver this Agreement, to perform its obligations hereunder and to acquire and
hold the Securities. This Agreement constitutes the legal, valid and binding
obligation of the Holder, enforceable against the Holder in accordance with its
terms.

          4.16. Authorization. Subject to the terms contained in this Agreement
(a) the Holder is authorized and qualified to become an investor in the Company
and the person signing this Agreement on behalf of the Holder has been duly
authorized by the Holder to do so, and (b) the Holder is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization.

          4.17. Securities Laws. The Holder acknowledges that at such time, if
ever, as the Securities are registered, sales of the Securities will be subject
to applicable non-United States and state securities laws.

          4.18. Brokers. The Holder represents and warrants that it has not
engaged, consented to nor authorized any broker, finder or intermediary to act
on its behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. The Holder
shall indemnify and hold harmless the Company from and against all fees,
commissions or other payments owing to any such person or firm acting on behalf
of the Holder hereunder.

          4.19. Beneficial Owner. The Holder will be the sole beneficial owner
of the Securities that the Holder acquires.

          4.20. Accredited Investor. The Holder represents and warrants that it
is an "accredited investor," as such term is defined in Rule 501 of the
Securities Act.

          4.21. Reliance on Representation and Warranties. The Holder
understands that the Securities are being offered and issued to the undersigned
in reliance on specific exemptions from the registration requirements of United
States Federal and state securities laws and that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,

                                       -6-

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acknowledgments and understandings of the undersigned set forth herein in order
to determine the applicability of such exemptions and the suitability of the
undersigned to acquire the Securities.

          5. Conditions to Closing. The obligations of the Company to close on
the issuance of the New Note and New Warrants are subject to fulfillment of each
of the following conditions:

          5.1. Representations and Warranties. The representations and
warranties of the Holder set forth in Section 4 hereof shall be true and correct
on and as of the Closing Date with the same force and effect as if made on such
date.

          5.2. Authorizing Action. The Board of Directors and, if necessary, the
stockholders of the Holder shall have duly adopted resolutions in the form
reasonably satisfactory to the Company and shall have taken all action necessary
for the purpose of authorizing the Holder to consummate all of the transactions
contemplated hereby and the execution of this Agreement on behalf of Holder by
the signatory hereto.

          5.3. Secretary's Certificate. The Holder shall have delivered, or
shall have caused to be delivered, to the Company, in form and substance
satisfactory to the Company, a certificate, dated as of the Closing Date,
executed by the Secretary of the Holder certifying (i) the names of the officers
of the Holder authorized to sign this Agreement, together with the true
signatures of such officers; (ii) copies of resolutions passed by the Board of
Directors and, if applicable, the stockholders of the Holder authorizing the
appropriate officers of the Holder to execute and deliver this Agreement and to
consummate the transactions contemplated hereby.

          5.4. Performance. The Holder shall have performed and complied with
all other agreements and conditions contained in this Agreement required to be
performed or complied with by it on or before the Closing.

          5.5. No Violation. No action or proceeding by or before any court,
administrative body or governmental agency shall have been instituted or
threatened which seeks to enjoin, restrain or prohibit, or is reasonably likely
to result in material damages in respect of, this Agreement or the complete
consummation of the transactions contemplated hereby; and the consummation of
the transactions contemplated by this Agreement shall not be in violation of any
law or regulation, and shall not be subject to any injunction, stay or
restraining order.

          6. Mutual Release. Each of the Holder and the Company (in such
capacity, the "Releasor") hereby releases the other, together with its officers,
directors, employees, agents and stockholders and their respective affiliates
(collectively, "Releasees") from any and all claims, actions, causes of action,
suits, debts, accounts, reckonings, covenants, contracts, controversies,
agreements, promises, damages, expenses, demands and other obligations or
liabilities of any nature whatsoever, in law or equity, whether known or
unknown, which any Releasor ever had or now has against any of the foregoing,
for, upon, or by reason of, any matter, course or thing whatsoever from the
beginning of the world to the date of this Agreement in any way relating to or
arising out of the Subscription Agreement, the Old Note or the Forfeited
Warrants.

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          7. Miscellaneous.

          7.1. Integration; Amendments and Waivers. (a) This Agreement and
Exhibit A hereto set forth the entire agreement and understanding among the
parties as to the subject matter hereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
This Agreement may be amended only by mutual written agreement of the parties.
Any rights under this Agreement may be waived only by a writing signed by the
party entitled to the benefit thereof.

          (b) After an amendment or waiver becomes effective it shall bind every
holder of Securities regardless of whether such holder held such Securities at
the time such amendment or waiver became effective, or subsequently acquired
such Securities.

          7.2. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
registered assigns. Notwithstanding the foregoing, without the Company's prior
written consent, the Holder may not assign any of its rights under this
Agreement.

          7.3. Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given personally or when mailed
by certified or registered mail, return receipt requested and postage prepaid,
or by a nationally recognized overnight courier service and addressed to the
addresses of the respective parties set forth below or to such changed addresses
as such parties may have fixed by notice; provided, however, that any notice of
change of address shall be effective only upon receipt:

               If to the Company:

               Nephros, Inc.
               3960 Broadway
               New York, NY 10032
               Telephone: (212) 781-5113
               Telecopy: (212) 781-5166
               Attn: President

               If to the Holder:

               Lancer Offshore, Inc.
               Bishops Square
               Redmond's Hill
               Third Floor
               Dublin 2, Ireland
               Telephone: (212) 521-8400
               Telecopy: (212) 521-8401
               Attn: Investment Manager

                                       -8-

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; provided further that notices sent by courier or mail shall be deemed received
on the date of receipt indicated by the return verification provided by the U.S.
postal service or the records of the courier service.

          7.4. Governing Law. The validity, performance, construction and effect
of this Agreement shall be governed by the internal laws of the State of New
York without giving effect to such State's principles of conflict of laws.

          7.5. Counterparts. This Agreement may be executed in any number of
counterparts and, notwithstanding that any of the parties did not execute the
same counterpart, each of such counterparts shall, for all purposes, be deemed
an original, and all such counterparts shall constitute one and the same
instrument binding on all of the parties hereto. Delivery of an executed
counterpart of a signature page to this Agreement by telecopier shall be as
effective as delivery of a manually executed counterpart of a signature page of
this Agreement.

          7.6. Headings. The headings of the Sections hereof are inserted as a
matter of convenience and for reference only and in no way define, limit or
describe the scope of this Agreement or the meaning of any provision hereof.

          7.7. Severability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless the provision held
invalid shall substantially impair the benefit of the remaining portion of this
Agreement.

                                       -9-

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

                                             LANCER OFFSHORE, INC.

                                             By: /s/ Michael Lauer
                                                 -------------------------------
                                                 Name: Michael Lauer
                                                 Title: Investment Manager

                                             NEPHROS, INC.

                                             By: /s/ Norman Barta
                                                 -------------------------------
                                                 Name: Norman Barta
                                                 Title: Chief Executive Officer

                                      -10-<PAGE>

                                                                   Exhibit 10.14

                              SETTLEMENT AGREEMENT

          SETTLEMENT AGREEMENT (this "Agreement"), dated as of February 13, 2003
by and among NEPHROS, INC., a Delaware corporation (the "Company"), and
Hermitage Capital Corporation ("Hermitage").

          WHEREAS, pursuant to an Engagement Agreement among the Company and
Hermitage, dated as of April 30, 2002 (the "Engagement Agreement"), Hermitage
was retained, among other things, to assist the Company in arranging for a
private placement in the approximate amount of three to five million dollars
($3,000,000.00 to 5,000,000.00) (the "Financing"); and

          WHEREAS, Hermitage identified a potential investor ("Lancer") in the
Financing; and

          WHEREAS, the Financing was never completed because Lancer breached the
Subscription Agreement entered into in connection therewith (the "Subscription
Agreement"); and

          WHEREAS, the Company and Lancer are entering into a Settlement
Agreement, dated as of January 31, 2003 (the "Lancer Settlement Agreement"),
pursuant to which the Company and Lancer are settling certain disputes among
them arising in connection with the Subscription Agreement; and

          WHEREAS, the Company and Hermitage wish to settle certain matters
between them arising in connection with the Engagement Agreement.

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

          1. Termination of Engagement Agreement. The Engagement Agreement is
hereby terminated and shall be of no further force and effect. The compensation
being paid by the Company to Hermitage pursuant to this Agreement, together with
the one hundred fifty thousand dollars ($150,000.00) that the Company has
already paid to Hermitage, is in lieu of any compensation owing to Hermitage
under the Engagement Agreement or otherwise.

          2. Issuance of Warrants. At the Closing (as defined in the Lancer
Settlement Agreement), the Company shall issue warrants (the "Class B Warrants")
to purchase an aggregate of 60,000 shares of common stock, par value $.001 per
share, of the Company at an initial exercise price of $2.50 per share, in the
form attached hereto as Exhibit A, to Hermitage; provided, however, that, if
Hermitage notifies the Company in writing at or prior to the Closing that it
wants to designate any NASD members participating in the Financing and/or
officers or employees of Hermitage or any such NASD members to receive all or
any portion of the Class B Warrants, then Hermitage may identify up to ten (10)
such designees and their respective

<PAGE>

allocations of the 60,000 Class B Warrants by irrevocable written notice
received by the Company on or prior to August 10, 2003, and the Company shall
issue the Class B Warrants to such designees in such respective allocations, by
August 31, 2003; provided, further, that each such designee makes, with respect
to such designee, the same representations and warranties to the Company that
Hermitage is making with respect to itself pursuant to Section 3 hereof.

          3. Representations and Warranties of Hermitage. Hermitage hereby
represents and warrants to the Company as follows:

          3.1. Investment Intent. Hermitage recognizes that the purchase of the
Class B Warrants and any Common Stock issuable upon exercise thereof
(collectively, the "Securities") involves a high degree of risk including, but
not limited to, the following: (i) the Company remains a development stage
business with limited operating history and requires substantial funds; (ii) an
investment in the Company is highly speculative, and only investors who can
afford the loss of their entire investment should consider investing in the
Company or the Securities, (iii) Hermitage may not be able to liquidate its
investment; (iv) transferability of the Securities is extremely limited; (v) in
the event of a disposition of the Securities, Hermitage could sustain the loss
of its entire investment and (vi) the Company has not paid any dividends since
inception and does not anticipate the payment of dividends on the Common Stock
in the foreseeable future.

          3.2. Lack of Liquidity. Hermitage confirms that it is able (i) to bear
the economic risk of this investment, (ii) to hold the Securities for an
indefinite period of time, and (iii) presently to afford a complete loss of its
investment; and represents that it has sufficient liquid assets so that the
illiquidity associated with this investment will not cause any undue financial
difficulties or affect Hermitage's ability to provide for its current needs and
possible financial contingencies, and that its commitment to all speculative
investments is reasonable in relation to its net worth and annual income.

          3.3. Knowledge and Experience. Hermitage hereby acknowledges and
represents that Hermitage has prior investment experience, including investment
in securities that are non-listed, unregistered and are not traded on the Nasdaq
National or SmallCap Market, nor on the National Association of Securities
Dealers, Inc.'s (the "NASD") automated quotation system.

          3.4. Capacity. Hermitage hereby represents that Hermitage has the
capacity to protect Hermitage's own interests in connection with the transaction
contemplated hereby.

          3.5. Receipt of Information. Hermitage hereby acknowledges that
Hermitage has carefully reviewed this Agreement and all attachments to it, and
hereby represents that Hermitage has been furnished by the Company with all
information regarding the Company which Hermitage has requested or desired to
know, has been afforded the opportunity to ask questions of, and to receive
answers from, duly authorized officers or other representatives of the Company
concerning the terms and conditions of this Agreement, the Securities and the
affairs of the Company and has received any additional information which
Hermitage or its representative has requested.

                                        2

<PAGE>

          3.6. Reliance on Information. Hermitage has relied solely upon the
information provided by the Company in this Agreement in making the decision to
invest in the Securities. To the extent necessary, Hermitage has retained, at
the sole expense of Hermitage, and relied upon, appropriate professional advice
regarding the investment, tax and legal merits and consequences of this
Agreement, its purchase of the Securities, and the exercise of the Class B
Warrants for Common Stock.

          3.7. No Solicitation. Hermitage represents that (i) Hermitage was
contacted regarding the sale of the Securities by the Company (or an authorized
agent or representative thereof) with whom Hermitage had a prior substantial
pre-existing relationship and (ii) no Securities were offered or sold to
Hermitage by means of any form of general solicitation or general advertising,
and in connection therewith Hermitage neither: (A) received or reviewed any
advertisement, article, notice or other communication published in a newspaper
or magazine or similar media or broadcast over television or radio whether
closed circuit, or generally available; nor (B) attended any seminar meeting or
industry investor conference whose attendees were invited by any general
solicitation or general advertising.

          3.8. Registration. Hermitage hereby acknowledges that the offering of
Securities pursuant to this Agreement has not been reviewed by the Securities
and Exchange Commission or any state regulatory authority, since such offering
is intended to be exempt from the registration requirements of Section 5 of the
Securities Act pursuant to Regulation D. Hermitage shall not sell or otherwise
transfer the Securities unless such Securities are registered under the
Securities Act or unless an exemption from such registration is available.

          3.9. Purchase for own Account. Hermitage understands that the
Securities have not been registered under the Securities Act by reason of a
claimed exemption under the provisions of the Securities Act which depends, in
part, upon Hermitage's investment intention. In this connection, Hermitage
hereby represents that Hermitage is acquiring the Securities for Hermitage's own
account for investment and not with a view toward the resale or distribution to
others or for resale in connection with, any distribution or public offering
(within the meaning of the Securities Act), nor with any present intention of
distributing or selling the same and Hermitage has no present or contemplated
agreement, undertaking, arrangement, obligation or commitment providing for the
disposition thereof. Hermitage was not formed for the purpose of acquiring the
Securities.

          3.10. Holding Period. Hermitage understands that there is no public
market for the Securities and that no market may ever develop for any such
Securities. Hermitage understands and hereby acknowledges that the Company is
under no obligation to register any of the Securities under the Securities Act
or any applicable non-United States, state securities or "blue sky" laws.
Hermitage shall hold the Company and its directors, officers, employees,
controlling persons and agents and their respective heirs, representatives,
successors and assigns harmless from, and shall indemnify them against, all
liabilities, costs and expenses incurred by them as a result of (i) any
misrepresentation made by Hermitage contained in this Agreement, (ii) any sale
or distribution by Hermitage in violation of the Securities Act or any
applicable non-United States, state securities or "blue sky" laws or (iii) any
untrue statement made by Hermitage.

                                        3

<PAGE>

          Legends. Hermitage consents to the placement of the legend set forth
below on any certificate or other document evidencing the Class B Warrants:

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND 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 EXEMPTION FROM THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

          Hermitage further consents to the placement of one or more restrictive
legends on the Securities as required by applicable securities laws. Hermitage
is aware that the Company will make a notation in its appropriate records with
respect to the restrictions on the transferability of the Securities.

          3.11. Address of Hermitage. Hermitage hereby represents that the
address of Hermitage set forth in Section 5.3 is Hermitage's principal business
address.

          3.12. Power and Authority. Hermitage represents that Hermitage has
full power and authority (corporate, statutory and otherwise) to execute and
deliver this Agreement, to perform its obligations hereunder and to acquire and
hold the Securities. This Agreement constitutes the legal, valid and binding
obligation of Hermitage, enforceable against Hermitage in accordance with its
terms.

          3.13. Authorization. Subject to the terms contained in this Agreement
(a) Hermitage is authorized and qualified to become an investor in the Company
and the person signing this Agreement on behalf of Hermitage has been duly
authorized by Hermitage to do so, and (b) Hermitage is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization.

          3.14. Securities Laws. Hermitage acknowledges that at such time, if
ever, as the Securities are registered, sales of the Securities will be subject
to applicable non-United States and state securities laws.

          3.15. Brokers. Hermitage represents and warrants that it has not
engaged, consented to nor authorized any broker, finder or intermediary to act
on its behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. Hermitage shall
indemnify and hold harmless the Company from and against all fees, commissions
or other payments owing to any such person or firm acting on behalf of Hermitage
hereunder.

          3.16. Beneficial Owner. Hermitage will be the sole beneficial owner of
the Securities that Hermitage acquires.

                                        4

<PAGE>

          3.17. Accredited Investor. Hermitage represents and warrants that it
is an "accredited investor," as such term is defined in Rule 501 of the
Securities Act.

          3.18. Reliance on Representation and Warranties. Hermitage understands
that the Securities are being offered and issued to the undersigned in reliance
on specific exemptions from the registration requirements of United States
Federal and state securities laws and that the Company is relying upon the truth
and accuracy of the representations, warranties, agreements, acknowledgments and
understandings of the undersigned set forth herein in order to determine the
applicability of such exemptions and the suitability of the undersigned to
acquire the Securities.

          4. Mutual Release. Each of Hermitage and the Company (in such
capacity, the "Releasor") hereby releases the other, together with its officers,
directors, employees, agents and stockholders and their respective affiliates
(collectively, "Releasees") from any and all claims, actions, causes of action,
suits, debts, accounts, reckonings, covenants, contracts, controversies,
agreements, promises, damages, expenses, demands and other obligations or
liabilities of any nature whatsoever, in law or equity, whether known or
unknown, which any Releasor ever had or now has against any of the foregoing,
for, upon, or by reason of, any matter, course or thing whatsoever from the
beginning of the world to the date of this Agreement in any way relating to or
arising out of the Engagement Agreement.

          5.   Miscellaneous.

          5.1. Integration; Amendments and Waivers. (a) This Agreement and
Exhibit A hereto set forth the entire agreement and understanding among the
parties as to the subject matter hereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
This Agreement may be amended only by mutual written agreement of the parties.
Any rights under this Agreement may be waived only by a writing signed by the
party entitled to the benefit thereof.

          (b) After an amendment or waiver becomes effective it shall bind every
holder of Securities regardless of whether such holder held such Securities at
the time such amendment or waiver became effective, or subsequently acquired
such Securities.

          5.2. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
registered assigns. Notwithstanding the foregoing, without the Company's prior
written consent, Hermitage may not assign any of its rights under this
Agreement.

          5.3. Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given personally or when mailed
by certified or registered mail, return receipt requested and postage prepaid,
or by a nationally recognized overnight courier service and addressed to the
addresses of the respective parties set forth below or to such changed addresses
as such parties may have fixed by notice; provided, however, that any notice of
change of address shall be effective only upon receipt:

                                        5

<PAGE>

               If to the Company:

               Nephros, Inc.
               3960 Broadway
               New York, NY 10032
               Telephone: (212) 781-5113
               Telecopy: (212) 781-5166
               Attn: President

               If to Hermitage:

               Hermitage Capital Corporation
               405 Park Avenue, Suite 801
               New York, New York 10022
               Telephone: (212) 832-2100
               Telecopy: (212) 832-7563
               Attn: President

; provided further that notices sent by courier or mail shall be deemed received
on the date of receipt indicated by the return verification provided by the U.S.
postal service or the records of the courier service.

          5.4. Governing Law. The validity, performance, construction and effect
of this Agreement shall be governed by the internal laws of the State of New
York without giving effect to such State's principles of conflict of laws.

          5.5. Counterparts. This Agreement may be executed in any number of
counterparts and, notwithstanding that any of the parties did not execute the
same counterpart, each of such counterparts shall, for all purposes, be deemed
an original, and all such counterparts shall constitute one and the same
instrument binding on all of the parties hereto. Delivery of an executed
counterpart of a signature page to this Agreement by telecopier shall be as
effective as delivery of a manually executed counterpart of a signature page of
this Agreement.

          5.6. Headings. The headings of the Sections hereof are inserted as a
matter of convenience and for reference only and in no way define, limit or
describe the scope of this Agreement or the meaning of any provision hereof.

          5.7. Severability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless the provision held
invalid shall substantially impair the benefit of the remaining portion of this
Agreement.

                                        6

<PAGE>

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

                                          HERMITAGE CAPITAL CORPORATION

                                          By: /s/ John W. Bendall
                                              ----------------------------------
                                              Name: John W. Bendall
                                              Title: President

                                          NEPHROS, INC.

                                          By: /s/ Norman Barta
                                              ----------------------------------
                                              Name: Norman Barta
                                              Title: Chief Executive Officer

                                        7

<PAGE>

                            CERTIFICATE OF SIGNATORY

I, John W. Bendall, am the President of Hermitage Capital Corporation (the
"Entity").

I certify that I am empowered and duly authorized by the Entity to execute and
carry out the terms of the Settlement Agreement between Nephros, Inc. and the
Entity, dated as of February 13, 2003 (the "Settlement Agreement"), and certify
further that the Settlement Agreement has been duly and validly executed on
behalf of the Entity and constitutes a legal and binding obligation of the
Entity.

IN WITNESS WHEREOF, I have set my hand as of the 13 day of February, 2003.

                                               /s/ John W. Bendall
                                               ---------------------------------
                                                         (Signature)

                                        8

<PAGE>

                                    EXHIBIT A

                            [Form of Class B Warrant]

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