Document:

Exhibit 4.1 6 Note

    
      

    

    EXHIBIT
      4.1

     

    THIS
      NOTE IS SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT, A COPY OF WHICH IS
      ON
      FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS, INC.

     

    THIS
      NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
      REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
      “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS NOTE AND 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.

     

    THE
      SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE ISSUED SUBJECT TO THE
      PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT, AND ANY TRANSFEREE OF SUCH
      SECURITIES SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH
      IS ON FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
      INC.

     

    

    

    NEPHROS,
      INC.

     

                                No.
      A-1

     

    6%
      Secured Convertible Note due 2012

     

    $_________

    June
      __,
      2006

     

    Nephros,
      Inc., a Delaware corporation, (the “Company”), for value received, hereby
      promises to pay to ______________________ (the “Holder” or “Registered Holder”),
      or registered assigns, the principal sum set forth above, with accrued but
      unpaid interest thereon at a rate equal to six percent (6%) per annum, on the
      Maturity Date. Payment shall be made at such place as designated by the Company
      upon surrender of this Note (as defined below), and shall be in such coin or
      currency of the United States of America as at the time of payment shall be
      legal tender for the payment of public and private debts. This Note is one
      of a
      duly authorized issue of up to $200,000 aggregate principal amount of Nephros,
      Inc. 6% Secured Convertible Notes due 2012 (individually a “Note” and
      collectively the “Notes”). Certain capitalized terms used herein are defined in
      Section 8. Capitalized terms used herein without definition have the respective
      meanings specified therefor in the Subscription Agreement. The Notes are secured
      by the Collateral pursuant to the Subscription Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    SECTION
      1.    
Interest.

     

    The
      Company will pay interest in arrears on the Maturity Date. Interest on this
      Note
      will accrue daily at a rate of six percent (6%) per annum from the date of
      its
      issuance set forth above and shall be compounded annually.

     

    
      SECTION
        2.    
Prepayment.

    

     

    (a)  Upon
      prior written notice to the Holder (an “Optional
      Prepayment Notice”),
      this
      Note (including interest accrued on the principal hereof) may be prepaid by
      the
      Company, at any time, in whole or in part, which prepayment shall be, except
      as
      expressly provided in clauses (b) through (e) of this Section 2, without penalty
      or premium (an “Optional
      Prepayment”).
      Prepayments shall be applied first to accrued and unpaid interest on this Note,
      then to the unpaid principal amount of this Note.

     

    (b)  In
      addition to all other rights of the Holder contained herein, in connection
      with
      any Major Asset Sale (as defined below), the Company shall offer by written
      notice to the Holder (such notice an “Asset
      Sale Notice”
and,
      with Optional Prepayment Notices, each a “Prepayment
      Notice”)
      to
      prepay (a “Major
      Asset Sale Mandatory Prepayment”
and,
      with Optional Prepayments, each a “Prepayment”)
      outstanding principal and interest on the Notes with the net cash proceeds
      of
      such asset sale actually received by the Company or any subsidiary (the
“Net
      Proceeds”).
      As
      used in this Note, “Major
      Asset Sale”
means
      the sale or transfer of assets of the Company having a Fair Market Value in
      excess of $250,000, other than in the ordinary course of business, in one or
      a
      related series of transactions. The Note may be converted prior to the
      Redemption Date (as defined below), at the option of the Holder in accordance
      with Section
      3.
      Notwithstanding anything to the contrary in this Note, the Company’s obligations
      under this Section
      2(b),
      with
      respect to any Major Asset Sale, may be waived on behalf of all Holders of
      Notes
      by a writing signed by the Secured Party. In the event that the Net Proceeds
      are
      less than the amount of outstanding principal and interest and any premium
      required pursuant to Section
      2(d)
      on the
      Notes then outstanding, then the Net Cash Proceeds allocated for prepayment
      of
      the Notes will be applied to such prepayment of the Notes on a pro rata basis
      to
      the Holders thereof based on then outstanding principal amounts. Any outstanding
      principal and interest on the Notes not redeemed pursuant to an Asset Sale
      Notice shall continue to remain outstanding pursuant to the terms hereof. Any
      such outstanding principal not prepaid shall not then be subject to Section
      2(d)
      or Section 2(e) with respect to such prepayment. In no event shall outstanding
      principal, interest and premium on the Notes in excess of the Net Proceeds
      of
      any Major Asset Sale be required to be prepaid under this
      provision.

     

    (c)  Each
      Prepayment Notice shall set forth: (i) the date fixed for prepayment (the
“Redemption
      Date”),
      which
      must be at least fourteen (14) days after the date of the Prepayment Notice;
      (ii) the amount of accrued and unpaid interest, as of the Redemption Date,
      per
      $1,000 principal amount of Notes to be prepaid pursuant to the Prepayment
      Notice; and (iii) the Conversion Price of the Notes in effect at such time.
      Each
      Asset Sale Notice sent to a Holder which has executed a confidentiality
      agreement in a form reasonably acceptable to the Company, shall, subject to
      any
      applicable law or contractual obligations of confidentiality, include a
      description of the transaction constituting a Major Asset Sale and an
      undertaking to provide to

     

     

    
      
        
        

      

      
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    the
      Holder during the period prior to the Redemption Date such reasonably available
      additional information with respect to the Major Asset Sale as the Holder may
      reasonably request.

     

    (d)  The
      Company shall pay to each Holder a premium in connection with any Prepayment
      hereunder equal to the Applicable Percentage (as defined below) of the principal
      amount of Notes held by such Holder actually prepaid. The “Applicable
      Percentage”
shall
      be fifteen percent (15%) in connection with Prepayments with a Redemption Date
      on or before June 1, 2008, and five percent (5%) in connection with Prepayments
      with a Redemption Date thereafter.

     

    (e)  In
      connection with any Prepayment with a Redemption Date on or before June 1,
      2008,
      or a prepayment of less than the entire then outstanding principal amount of
      Notes after June 1, 2008, the Company shall issue to each Holder a common stock
      purchase warrant, substantially in the form of Exhibit
      A
      hereto,
      representing the right to purchase at issuance a number of shares of Common
      Stock equal to the product of (i) 30,000 (subject to adjustment as provided
      below) and (ii) the quotient obtained by dividing (x) the principal amount
      of
      the Notes held by such Holder actually redeemed, by (y) two hundred thousand
      (200,000). The number set forth in clause (i) of the preceding sentence shall
      be
      equitably adjusted from time to time in the event of and to reflect any Change
      of Shares (as defined below). 

     

    
      SECTION
        3.    Conversion

    

     

    (a)  Conversion.
      The
      Holder may elect, at any time prior to the Maturity Date, to convert this Note
      or any portion thereof and all accrued interest hereon into a number of shares
      of Common Stock equal to the quotient of (i) the sum of the principal amount
      of
      Note being converted plus all interest accrued and unpaid on such principal
      amount, divided by (ii) the then current Conversion Price. 

     

    (b)  Conversion
      Procedures.
      (i)
      Any
      Holder of a Note desiring to convert such Note into Common Stock shall surrender
      such Note at the Company’s principal executive office, accompanied by proper
      instruments of transfer to the Company or in blank, accompanied by irrevocable
      written notice to the Company that the Holder elects so to convert such Note
      (the “Notice of Conversion”) and specifying the name or names (with address) in
      which a certificate or certificates evidencing shares of Common Stock are to
      be
      issued; provided,
      however,
      that if
      the Holder submits a Notice of Conversion with respect to all outstanding Notes,
      then the Company shall not be required to honor such Notice of Conversion unless
      the Secured Party shall have provided the Company with any authorizations
      requested by the Company to file a termination statement with respect to the
      Secured Party’s security interest in the Collateral, as set forth in Section 6
      of the Subscription Agreement.

     

    (ii)  The
      Company need not deem a Notice of Conversion to be received unless the Holder
      complies with all the provisions hereof. The Company will make a notation of
      the
      date that a Notice of Conversion is received, which date of receipt shall be
      deemed to be the date of receipt for purposes hereof.

     

    (iii)  The
      Company shall, within 15 days after such deposit of any Note accompanied by
      a
      Notice of Conversion and compliance with any other conditions herein
contained,
      deliver to the person for whose account such Note was so surrendered
      certificates

     

     

    
      
        
        

      

      
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    evidencing
      the number of full shares of Common Stock to which such person shall be entitled
      as aforesaid, subject to Section 4.

     

    (iv)  Subject
      to the following provisions of this paragraph 3(b)(iv), such conversion shall
      be
      deemed to have been made as of the date of such surrender of the Note to be
      converted (the “Conversion Date”), and the person or persons entitled to receive
      the Common Stock deliverable upon conversion of such Note shall be treated
      for
      all purposes as the record holder or holders of such Common Stock on such date
      and the Note shall no longer be deemed outstanding and all rights whatsoever
      in
      respect thereof (including the right to receive interest thereon) shall
      terminate except the right to receive the number of full shares of Common Stock
      to which such person shall be entitled hereunder; provided,
      however,
      that
      the Company shall not be required to convert any Note while the stock transfer
      books of the Company are closed for any purpose, but the surrender of a Note
      for
      conversion during any period while such books are so closed shall become
      effective for conversion immediately upon the reopening of such books as if
      the
      surrender had been made on the date of such reopening, and the Conversion Date
      shall be the date of such reopening and the conversion shall be at the
      Conversion Rate in effect on the Conversion Date.

     

    (c)  Adjustment
      of Conversion Rate and Conversion Price.
      

     

    (i)  Anti-Dilution
      Adjustments.

     

    (A)  Except
      as
      otherwise provided in Subparagraph 3(c)(i)(C), or for Changes of Shares (as
      defined below) 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 Conversion 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 cent)
      (determined as provided in Clause 3(c)(i)(B)(IV) below). Such adjustment shall
      be made successively whenever such an issuance is made.

     

    (B)  For
      purposes of Subparagraph 3(c)(i)(A), the following Clauses I through V shall
      also be applicable:

     

    (I)  No
      adjustment of the Conversion Price shall be made unless such adjustment would
      require a decrease of at least $.01; provided that any adjustments which by
      reason of this Clause 3(c)(i)(B)(I) are not required to be made shall be carried
      forward and shall be made at the time of and together with the next subsequent
      adjustment which, together with adjustments so carried forward, shall require
      a
      decrease of at least $.01 in the Conversion Price then in effect
      hereunder.

     

    (II)  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

     

     

    
      
        
        

      

      
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     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
      of such rights, warrants or options or upon the 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
      rights, warrants or options, plus the consideration received by the Company
      for
      the issuance or sale of such rights, warrants or options, plus, in the case
      of
      such Convertible Securities, the minimum aggregate amount, 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, of
      additional consideration, if any, other than such Convertible Securities,
      payable upon the conversion or exchange thereof, 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 adjustment
      of such amount, of shares of Common Stock issuable upon the exercise of such
      rights, warrants or options or upon the conversion or exchange of such
      Convertible Securities) is less than the Conversion Price as of the date of
      the
      issuance or sale of such rights, warrants or options, then such total maximum
      number of shares of Common Stock issuable upon the exercise of such rights,
      warrants or options or upon the 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 Subparagraph
      3(c)(i)(A) 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 Subparagraph 3(c)(i)(A).

     

    (III)  In
      case
      the Company shall modify the rights of conversion, exchange or exercise of
      any
      of the securities referred to in Clause (II) of this Subparagraph 3(c)(i)(B)
      or
      any other securities of the Company convertible, exchangeable or exercisable
      for
      shares of Common Stock, for any reason other than an event that would require
      adjustment to prevent dilution, so that the consideration per share received
      by
      the Company after such modification is less than the Conversion 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(c), 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. On the expiration or cancellation of any

     

     

    
      
        
        

      

      
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     right,
      warrant or option or the termination or cancellation of any such right to
      convert or exchange any Convertible Securities, the issuance of which, in either
      case, constituted a Dilutive Issuance, the Conversion Price then in effect
      hereunder shall forthwith be readjusted to such Conversion Price as would have
      obtained (x) had the adjustments made upon the issuance or sale of such rights,
      warrants, options or Convertible Securities been made upon the basis of the
      issuance of only the number of shares of Common Stock actually delivered (and
      the total consideration received therefor) upon the exercise of such rights,
      warrants or options or upon the conversion or exchange of such Convertible
      Securities and (y) had adjustments been made on the basis of the Conversion
      Price as adjusted under clause (x) of this sentence for all transactions made
      after the issuance or sale of such rights, warrants, options or Convertible
      Securities.

     

    (IV)  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.

     

    (V)  Upon
      the
      exercise of any rights, warrants or options or the conversion or exchange of
      any
      Convertible Securities, the issuance of which, in either case, constituted
      a
      Dilutive Issuance, the Conversion Price then in effect hereunder shall forthwith
      be readjusted if the actual price per share for which Common Stock is issued
      upon the exercise of such right, warrant or option or the conversion or exchange
      of such Convertible Securities (determined by dividing (x) the
      total

       

    

     

     

    
      
        
        

      

      
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    amount
      of
      consideration received by the Company for the sale of such rights, warrants,
      options or Convertible Securities, plus the actual amount of additional
      consideration, if any, other than such rights, warrants, options or Convertible
      Securities, payable upon the exercise, conversion or exchange thereof, by (y)
      the actual
      number of shares of Common Stock issued upon the exercise conversion or exchange
      of such Convertible Securities) is greater than the deemed price per share
      thereof (determined by dividing (x) the total amount of consideration received
      by the Company for the sale of such rights, warrants, options or Convertible
      Securities, plus the minimum aggregate amount, 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, of additional
      consideration, if any, other than such rights, warrants, options or Convertible
      Securities, payable upon the exercise, conversion or exchange thereof, 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 adjustment of such amount, of shares of Common Stock issuable upon
      the exercise, conversion or exchange of such rights, warrants, options or
      Convertible Securities). In such event, the Conversion Price shall be adjusted
      to such Conversion Price as would have obtained (x) had the adjustments made
      upon the issuance or sale of such rights, warrants, options or Convertible
      Securities been made upon the basis of the issuance of only the number of shares
      of Common Stock actually delivered (and the total consideration received
      therefor) upon the exercise of such rights, warrants or options or upon the
      conversion or exchange of such Convertible Securities and (y) had adjustments
      been made on the basis of the Conversion Price as adjusted under clause (x)
      of
      this sentence for all transactions made after the issuance or sale of such
      rights, warrants, options or Convertible Securities.

     

    (C)  Notwithstanding
      any other provision hereof, no adjustment to the Conversion Price will be
      made:

     

    (I)  upon
      the
      issuance or exercise of any options or other awards granted pursuant to a stock
      incentive plan or similar plan of the Company that was approved by the
      stockholders of the Company or otherwise issued as compensation or inducement
      to
      employment or engagement, so long as the number of shares of Common Stock
      issuable with respect to such awards and other compensation that are outstanding
      at such time does not, in the aggregate, constitute more than 2,818,095 shares;
      or

     

    (II)  upon
      the
      sale of any shares of Common Stock, warrants to purchase Common Stock or
      Convertible Securities in a firm commitment underwritten public offering,
      including, without limitation, shares sold upon the exercise of any
      overallotment option granted to the underwriters in connection with such
      offering; or

     

    (III)  upon
      exercise of any options or warrants that are outstanding as of the date hereof,
      or upon the issuance, conversion of or exercise of any Notes or Warrants;
      or

     

    (IV)  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

     

     

    
      
        
        

      

      
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    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 of
      businesses or assets, excluding any portions of such acquisitions that are
      capital raising; or

     

    (V)  upon
      the
      issuance or sale of Common Stock or Convertible Securities, or any rights,
      options or warrants for the purchase of, Common Stock or Convertible Securities,
      pursuant to the exercise of any rights, options or warrants to receive,
      subscribe for or purchase such securities, whether or not such rights, warrants
      or options were outstanding on the Closing Date or were thereafter issued or
      sold, provided that an adjustment was either made or not required to be made
      in
      accordance with Subparagraph 3(c)(i)(A) in connection with the issuance or
      sale
      of such securities or any modification of the terms thereof; or

     

    (VI)  upon
      the
      issuance or sale of Common Stock or other securities upon conversion or exchange
      of any Convertible Securities, 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, and whether or not such
      Convertible Securities were outstanding on the Closing Date or were thereafter
      issued or sold.

     

    Notwithstanding
      anything to the contrary in this Subparagraph 3(c)(i)(C), Clause 3(c)(i)(B)(III)
      shall apply to any modification of the rights of conversion, exchange or
      exercise of any of the securities referred to in Clauses (V) and (VI) of this
      Subparagraph 3(c)(i)(C).

     

    (D)  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.

     

    (ii)  Change
      of Shares Adjustments.
      In the
      event the Company shall, at any time or from time to time after the date hereof
      (i) issue any shares of Common Stock as a stock dividend to the holders of
      Common Stock or (ii) subdivide or combine the outstanding shares of Common
      Stock
      into a greater or lesser number of shares (any such issuance, subdivision or
      combination being herein called a “Change of Shares”), then the Conversion Price
shall
      be
      changed to a price (rounded to the nearest cent) determined by multiplying
      the
      Conversion Price in effect immediately prior to such Change of Shares by a
      fraction, the numerator of which shall be the number of shares of Common Stock
      outstanding immediately

     

     

    
      
        
        

      

      
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    prior
      to
      the Change of Shares and the denominator of which shall be the number of shares
      of Common Stock outstanding immediately following the Change of
      Shares.

     

    (d)  Anti-Dilution
      Notices.
      After
      each adjustment of the Conversion Price pursuant to Subsection 3(c), the Company
      will prepare a certificate signed by the Chief Executive Officer or President,
      and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
      Secretary, of the Company setting forth: (i) the Conversion Price as so adjusted
      and (ii) a brief statement of the facts accounting for such adjustment. The
      Company will file such certificate with the transfer agent for the Notes and
      cause a brief summary thereof to be sent by ordinary first class mail to each
      Registered Holder at its last address as it shall appear on the transfer agent’s
      record books. No failure to mail such notice nor any defect therein or in the
      mailing thereof shall affect the validity of such adjustment. The certificate
      of
      an officer of the transfer agent or the Secretary or an Assistant Secretary
      of
      the Company that such notice has been mailed shall, in the absence of fraud,
      be
      prima facie evidence of the facts therein stated. The transfer agent, if other
      than the Company, may rely on the information in the certificate as true and
      correct and has no duty nor obligation independently to verify the amounts
      or
      calculations therein set forth.

     

    (e)  Reservation
      of Shares; Transfer Taxes; 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
      conversion of the Notes, such number of shares of its Common Stock free of
      preemptive rights as shall be sufficient to effect the conversion of all Notes
      from time to time outstanding. The Company shall use its 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 conversion of all the then-outstanding Notes.

     

    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 shares of Common
      Stock on conversion of the Notes. 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 Common Stock (or other securities or assets) in a name
      other than that in which the Notes so converted were 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.

     

    (f)  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);

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

     

    (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)  of
      any
      Liquidation Event;

     

    then
      the
      Company shall cause to be mailed to the Registered Holders, at their last
      addresses as they shall appear upon the stock transfer books of the Company,
      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 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.

     

    (g)  Other
      Changes in Conversion Rate.
      The
      Company from time to time may increase the Conversion Rate by any amount for
      any
      period of time if the period is at least 20 days and if the increase is
      irrevocable during the period. Whenever the Conversion Rate is so increased,
      the
      Company shall mail to the Registered Holders a notice of the increase at least
      15 days before the date the increased Conversion Rate takes effect, and such
      notice shall state the increased Conversion Rate and the period it will be
      in
      effect.

     

    (h)  Minimum
      Conversion Price.
      Notwithstanding anything to the contrary herein, in no case shall the Conversion
      Price be adjusted to an amount less than $.001 per share, the current par value
      of the Common Stock.

     

    (i)  Limitation
      on Conversion.
      Notwithstanding anything to the contrary set forth herein, unless and until
      the
      Stockholder Approval (as defined below) has been obtained, the Company shall
      not
      issue any shares of Common Stock upon conversion of the Notes and exercise
      of
      Warrants. “Stockholder Approval” shall mean the vote of stockholders, if any, as
      may be required by the applicable rules and regulations of the American Stock
      Exchange (or any successor entity or any other Stock Market on which the Common
      Stock is then listed or quoted) applicable to approve the issuance of shares
      of
      Common Stock pursuant to the conversion of this Note and exercise of Warrants,
      if and when taken together with conversion and/or exercise of other convertible
      securities of the Company.

     

    (j)  Automatic
      Conversion.
      At its
      option, at any time, the Company may cause the Notes to be converted in whole
      or
      in part, on a pro rata basis, into fully paid and nonassessable shares of Common
      Stock at the then effective Conversion Rate if the Market Price

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

     

    of
      the
      Common Stock is equal to or greater than 240% of the Conversion Price for the
      30
      trading days immediately preceding the delivery of the Mandatory Conversion
      Notice (as defined below), provided that, during such 30 trading day period,
      the
      average daily volume of shares traded is at least 35,000 (subject to adjustment
      for any Change of Shares); provided that no Default or Event of Default shall
      have occurred and be continuing on the date on which the Mandatory Conversion
      Notice is given; and, provided, that if such conversion is prior to a
      Stockholder Approval, such conversion shall be limited to the extent necessary
      to ensure that no Registered Holder receives a number of shares which, together
      with such Converting Holder’s Previous Shares, would exceed such Converting
      Holder’s Maximum. Any Notes so converted shall be treated as having been
      surrendered by the holder thereof for conversion pursuant to Section 3 on the
      date of such mandatory conversion (unless previously converted at the option
      of
      the holder) and shall be subject to the limitations of Section
      3(i).

     

    No
      greater than 60 nor fewer than 20 days prior to the date of any such mandatory
      conversion, notice (the “Mandatory Conversion Notice”) by first class mail,
      postage prepaid, shall be given to the Registered Holders of the Notes to be
      converted, addressed to such Registered Holders at their last addresses as
      shown
      on the stock transfer books of the Company. Each such Mandatory Conversion
      Notice shall specify the date fixed for conversion, the place or places for
      surrender of Notes, and the then effective Conversion Rate pursuant to Section
      3.

     

    Any
      Mandatory Conversion Notice which is mailed as herein provided shall be
      conclusively presumed to have been duly given by the Company on the date
      deposited in the mail, whether or not the Registered Holder receives such
      notice; and failure properly to give such notice by mail, or any defect in
      such
      notice, to the Registered Holders of any Note to be converted shall not affect
      the validity of the proceedings for the conversion of any other Notes. On or
      after the date fixed for conversion as stated in the Mandatory Conversion
      Notice, each holder of Notes called to be converted shall surrender such Notes
      to the Company at the place designated in such Mandatory Conversion Notice
      for
      conversion. Notwithstanding that the Notes properly called for conversion shall
      not have been surrendered, the Notes shall no longer be deemed outstanding
      and
      all rights whatsoever with respect to the Notes so called for conversion (except
      the right of the holders to convert such Notes upon surrender thereof) shall
      terminate.

     

    (k)  Ambiguities/Errors.
      The
      Board of Directors of the Company shall have the power to resolve any ambiguity
      or correct any error in the provisions relating to the convertibility of the
      Notes, and its actions in so doing shall be final and conclusive.

     

    
      SECTION
        4.    
Fractional
        Shares.

    

     

    No
      fractional shares or scrip representing fractional shares of Common Stock shall
      be issued upon conversion of this Note. If more than one certificate evidencing
      Notes 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 principal amount of the Notes so surrendered. Instead
      of
      any fractional share of Common Stock which would otherwise be issuable upon
      conversion of this Note (or of such aggregate number of Notes), the Company
      may
      elect, in its sole discretion, independently for each Holder, whether such
      number of shares of Common Stock 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

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

     

     equal
      to the same fraction of the Market Price as of the close of business on the
      day
      of conversion.

     

    
      SECTION
        5.    
Events
        of Default Defined.

    

     

    The
      following shall each constitute an “Event of Default” hereunder:

     

    (a)  the
      failure of the Company to make any payment of principal of or interest on this
      Note when due;

     

    (b)  the
      Company shall, (i) apply for or consent to the appointment of a receiver,
      trustee, liquidator or custodian of itself or of all or a substantial part
      of
      its property, (ii) be unable to, or admit in writing its inability, pay its
      debts generally as they mature, (iii) make a general assignment for the benefit
      of its or any of its creditors, (iv) be dissolved or liquidated, (v) commence
      a
      voluntary case or other proceeding seeking liquidation, reorganization or other
      relief with respect to itself or its debts under any bankruptcy, insolvency
      or
      other similar law now or hereafter in effect or consent to any such relief
      or to
      the appointment of or taking possession of its property by any official in
      an
      involuntary case or other proceeding commenced against it, or (vi) take any
      action for the purpose of effecting any of the foregoing;

     

    (c)  proceedings
      for the appointment of a receiver, trustee, liquidator or custodian of the
      Company or of all or a substantial part of the property thereof, or an
      involuntary case or other proceedings seeking liquidation, reorganization or
      other relief with respect to the Company or the debts thereof under any
      bankruptcy, insolvency or other similar law now or hereafter in effect shall
      be
      commenced and an order for relief entered or such proceeding shall not be
      dismissed or discharged within 90 days of commencement;

     

    (d)  any
      representation, warranty or certification made herein or pursuant hereto (or
      in
      any modification or supplement hereto) or under the Registration Rights
      Agreement or the Subscription Agreement by the Company was not true or correct
      in any material respect when made;

     

    (e)  the
      Company shall Incur any Senior Debt without the prior written approval of the
      Secured Party;

     

    (f)  the
      Company shall default in the performance of any of its obligations under, or
      shall otherwise breach, any covenant in any agreement or instrument for borrowed
      money in an aggregate amount in excess of $500,000, the effect of which causes
      or permits any holder or holders of such agreement or instrument to cause such
      borrowed money to be declared due and payable prior to its stated maturity
      and
      such holder or holders in fact declare such money due and payable;
      and

     

    (g)  one
      or
      more judgments for the payment of money in any aggregate amount in excess of
      $500,000 (to the extent not covered by insurance) shall be rendered against
      the
      Company and the same shall remain undischarged for a period of 90 days during
      which execution
      shall not be effectively stayed, or any action shall be legally taken by a
      judgment creditor to levy upon assets or properties of the Company to enforce
      such judgment.

     

     

    
      
        
        

      

      
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      SECTION
        6.    
Remedies
        upon Event of Default.
        

    

     

    (a)  If
      an
      Event of Default occurs and is continuing for a period of 15 or more consecutive
      days, the
      holder or holders of Notes constituting a majority of the principal amount
      of
      Notes then outstanding (the
      “Majority Noteholders”), by notice to the Company, may declare the unpaid
      principal of and accrued interest on all the Notes then outstanding to be due
      and payable without presentment, demand, protest or any other notice of any
      kind, all of which are hereby expressly waived (an “Acceleration”). Upon any
      such declaration, such principal and accrued interest shall be due and payable
      immediately. Majority Noteholders may rescind an Acceleration and its
      consequences; provided, however, that no such rescission shall effect any
      subsequent Default or impair any right consequent thereto.

     

    (b)  Majority
      Noteholders or Secured Party may waive an existing Default or Event of Default
      and its consequences. Upon any such waiver, such Default shall cease to exist
      and any Event of Default arising therefrom shall be deemed to have been cured
      for every purpose of this Note; but no such waiver shall extend to any
      subsequent or other Default or impair any right consequent thereon.

     

    (c)  Upon
      the
      occurrence and during the continuance of an Event of Default, Secured Party
      may,
      at their election, without notice of its election and without demand, take
      any
      action permitted by law, including the exercise of any rights accorded a secured
      creditor under the Uniform Commercial Code as in effect in New
      York.

     

    (d)  To
      the
      extent permitted by law, the remedies provided herein shall be exclusive of
      any
      other remedies now or hereafter existing at law or in equity or by statute
      or
      otherwise.

     

    (e)  In
      any
      suit for the enforcement of any right or remedy under this Note or the
      Subscription Agreement, a court in its discretion may require the filing by
      any
      party litigant in the suit of an undertaking to pay the costs of the suit,
      and
      the court in its discretion may assess reasonable costs, including reasonable
      attorneys’ fees, against any party litigant in the suit, having due regard to
      the merits and good faith of the claims or defenses made by the party
      litigant.

     

    SECTION
      7.         Lost,
      Mutilated, etc. Note.

     

    Upon
      receipt by the Company of evidence reasonably satisfactory to it of the loss,
      theft, destruction or mutilation of this Note and of indemnity or bond
      reasonably satisfactory to it, and upon reimbursement to the Company of all
      reasonable expenses incidental thereto, and upon surrender and cancellation
      of
      this Note (in case of mutilation) the Company will make and deliver in lieu
      of
      this Note a new Note of like tenor and unpaid principal amount and dated as
      of
      the date to which interest has been paid on the unpaid principal amount of
      this
      Note in lieu of which such new Note is made and delivered.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    SECTION
      8.         Certain
      Definitions. 

     

    (a)  “Collateral”
      includes all of the property of the Company whether now owned or hereafter
      acquired, regardless where located, including without limitation the following:
      (a) all accounts and other rights of the Company to payment of money, no
      matter

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

     how
      evidenced, all chattel paper, instruments and other writings evidencing any
      such
      right, and all goods repossessed or returned in connection therewith; (b) all
      chattel paper (including electronic chattel paper); (c) all inventory, including
      but not limited to all raw materials, work in process, materials used or
      consumed in the Company’s business, and finished goods, together with all
      additions and accessions thereto and replacements therefor, all substitutes
      therefor, all improvements to and returns of such inventory, and products
      thereof; (d) all deposit accounts and all funds, certificates, documents,
      instruments, checks, drafts, wire transfer receipts and other earnings, profits
      or other proceeds from time to time representing, evidencing, deposited into
      or
      held in the deposit accounts or payable to the Company in respect thereof;
      (e)
      all general intangibles; (f) all equipment, fixtures and real property; (g)
      all
      intellectual property, including, without limitation, all copyrights, trademarks
      and patents and all applications and licenses thereof; (h) all commodity
      contracts, security entitlements; financial assets and investment property,
      including, without limitation, all capital stock and other ownership interests
      and the certificates (if any) representing such capital stock and ownership
      interests and all dividends, cash, instruments and other property from time
      to
      time received, receivable or otherwise distributed or distributable in respect
      of or in exchange for any or all of the foregoing; (i) all money; (j) all
      commercial tort claims; (k) all Debt from time to time owed to the Company
      by
      any person or entity, including without limitation, all instruments evidencing
      such Debt; (l) all letter of credit rights and letters of credit; (m) all
      automobiles and motor vehicles; (n) all computer hardware and software; (o)
      all
      consumer goods; (p) all supporting obligations arising from or related to any
      of
      the property described in clauses (a)
      through
(o)
      above;
      (q) any and all rights in and claims under insurance policies, judgments and
      rights thereunder and tort claims; (r) all documents, books and records; (s)
      all
      other goods and personal property of the Company of any kind or character,
      whether tangible or intangible; (t) all rights of the Company in all of the
      foregoing; and (u) all products and proceeds, in cash or otherwise, of any
      of
      the foregoing property.

     

    (b)  The
      “Conversion Price” shall initially be $2.10 per share of Common Stock, subject
      to adjustment as provided below, representing an initial conversion rate
      (subject to adjustment) of approximately 476.19 shares of Common Stock per
      $1,000 of principal amount of Note being converted (the “Conversion
      Rate”).

     

    (c)  “Default”
      means an event which, with notice or the passage of time, or both, would become
      an Event of Default.

     

    (d)  “Fair
      Market Value” of any asset (including any security) means the fair market value
      thereof as determined by the Board of Directors of the Company in good
      faith.

     

    (e)  “Incur”
      means, with respect to any Senior Debt or other obligation of any person, to
      create, issue, incur (by conversion, exchange or otherwise), assume, guarantee
      or otherwise become or remain directly or indirectly liable for such Senior
      Debt
      or other obligation. 

     

    (f)  “Liquidation
      Event” means any (i) liquidation, dissolution or winding up of the Company,
      whether voluntary or involuntary, (ii) a sale or other disposition of all
      or substantially all of the assets of the Company or (iii) 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

     

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

     

    exchanged
      for or changed into stock or securities of another entity, cash and/or any
      other
      property.

     

    (g)  “Maturity
      Date” means June 1, 2012.

     

    (h)  “Market
      Price,” with respect to any security, shall mean the average last sale price
      thereof on the relevant Stock Market for the thirty (30) consecutive trading
      days ending with the trading day immediately preceding the date as of which
      the
      Market Price is being determined (with appropriate adjustments for subdivisions
      or combinations of shares effected during such period), provided that if there
      no sales of such security on the Stock Market for a majority of the trading
      days
      in the measurement period, then “Market Price” shall mean Fair Market
      Value.

     

    (i)  “Registered
      Holder,” with respect to any Note, shall mean the holder of record
      thereof.

     

    (j)  “Senior
      Debt” means (without duplication), whether recourse to all or a portion of the
      assets of the Company and whether or not contingent, (i) every obligation of
      the
      Company for money borrowed and (ii) every obligation of the Company evidenced
      by
      bonds, debentures, notes or other similar instruments, including obligations
      incurred in connection with the acquisition of property, assets or businesses,
      in each case, that is senior or pari passu in right of payment to the Notes.
      In
      no event shall “Senior Debt” include any trade payable or accrued expenses
      arising in the ordinary course of business which are not more than 180 days
      past
      due or which are being contested in good faith and by appropriate
      proceedings.

     

    (k)  “Subscription
      Agreement” means the subscription agreement of even date herewith entered into
      between the Company and the Holder.

     

    (l)  “Secured
      Party” means Southpaw Credit Opportunity Master Fund LP.

     

    (m)  “Securities
      Act” means the United Stated Securities Act of 1933, as amended.

     

    (n)  “Stock
      Market” shall mean, with respect to any security, the principal national
      securities exchange on which such security is listed or admitted to trading
      or,
      if such security is not listed or admitted to trading on any national securities
      exchange, shall mean The Nasdaq National Market System (“NNM”) or The Nasdaq
      SmallCap Market (“SCM” and, together with NNM, “Nasdaq”) or, if such security is
      not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security
      is
      not quoted on the OTC Bulletin Board, shall mean the over-the-counter market
      as
      furnished by any NASD member firm selected from time to time by the Company
      for
      that purpose.

     

    SECTION
      9.    Miscellaneous.

     

    (a)  This
      Note
      may be amended only by mutual written agreement of the Company and the Holder
      or, if such amendment shall apply to all outstanding Notes, with the written
      consent of the Company and the Secured Party. 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

     

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    Company
      has obtained the written consent or waiver of the Holder or, if such consent
      or
      waiver shall apply to all outstanding Notes, the Secured Party. Any amendments
      approved in compliance with this Section 9 shall bind the Holder’s successors
      and assigns.

     

    (b)  Forbearance
      from Suit. 
      No holder of Notes shall institute any suit or proceeding for the enforcement
      of
      the payment of principal or interest unless the Secured Party joins in such
      suit
      or proceeding.

     

    (c)  Governing
      Law. 
      This Note shall be governed by, and construed in accordance with, the laws
      of
      the State of New York, excluding the body of law relating to conflict of laws.
      Notwithstanding anything to the contrary contained herein, in no event may
      the
      effective rate of interest collected or received by the Holder exceed that
      which
      may be charged, collected or received by the Holder under applicable
      law.

     

    (d)  Interpretation. 
      If any term or provision of this Note 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 herein, this Note 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 Holder. 
      This Note and any of the rights, interests or obligations hereunder, may be
      assigned at any time in whole or in part by the Holder, without the consent
      of
      the Company, if the transferee is an “accredited investor” as defined in
      Regulation D under the Securities Act and agrees to be bound by all of the
      provisions of the Note, the Subscription Agreement and the Registration Rights
      Agreement, including without limitation, making representations and warranties
      identical to those of the Holder contained in such documents but with respect
      to
      such transferee and as of the date of such transfer.

     

    (g)  Assignment
      by the Company. 
      Neither this Note 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.

     

    (h)  Saturdays,
      Sundays, Holidays. 
      If any date that may at any time be specified in this Note as a date for the
      making of any payment of principal or interest under this Note 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.

     

    (i)  Subscription
      Agreement. 
      This Note is subject to the terms contained in the Subscription Agreement and
      the registered Holder of this Note is entitled to the benefits of such
      Subscription Agreement to the extent provided therein.

     

    

    [Signature
      page follows immediately]

     

    
 

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, this 6% Secured Convertible Note due 2012 has been executed
      and
      delivered on the date first above written by the duly authorized representative
      of the Company.

     

                        NEPHROS,
      INC.

     

                        By:_____________________________

                   Name:

                   Title:
      

    

     

     

     

     

     

    
 

    

     

    18Exhibit 10.1 Subscription Agreement

    
      

    

    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 6% Secured Convertible Notes due 2012 (the “6%
      Notes”),
      of
      the Company, set forth on the signature page hereof, for a purchase price equal
      to the principal amount thereof. 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 6% Notes shall be substantially as set forth in the form of 6%
      Secured Convertible Note due 2012 attached hereto as Exhibit
      A
      (the
“Form
      of Note”).

     

    The
      6%
      Notes that are the subject of this Agreement are part of an offering by the
      Company (the “Offering”)
      of up
      to two hundred thousand dollars ($200,000) aggregate principal amount of 6%
      Notes (the “Maximum
      Amount”).
      The
      Company is offering 6% Notes until June 15, 2006, 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”).
      Each
      subscriber in the Offering shall enter into a registration rights agreement
      among the Company and the Investors (as defined therein), in substantially
      the
      form attached hereto as Exhibit
      B
      (the
“Registration
      Rights Agreement”).

     

    The
      Company may hold the first closing of the Offering (the “First
      Closing”)
      at any
      time on or prior to the Expiration Date. Following the First Closing, the
      Company may continue to sell 6% Notes up to the Maximum Amount and may conduct
      closings from time to time for additional shares sold. A final closing will
      be
      held promptly after the earlier to occur of (i) the Expiration Date and (ii)
      acceptance of subscriptions for sale of the Maximum Amount. The Company may
      terminate the Offering at any time without prior notice. Also, the Company
      may
      reject any subscription for 6% Notes in whole or in part for any reason in
      its
      sole discretion.

     

    The
      undersigned understands that the 6% Notes are being offered and issued pursuant
      to an exemption from the registration requirements of the Securities Act,
      provided by Section 4(2) of such Act. As such, the 6% Notes are being offered
      and sold

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    only
      to
      investors who qualify as “Accredited Investors” (as defined in Rule 501
      promulgated under the Securities Act), and the Company is relying on the
      representations made by the undersigned in this Agreement in determining the
      availability of such exemption. The 6% Notes are, and any shares of common
      stock, par value $0.001 per share, of the Company (the “Common Stock”) issued
      upon conversion thereof will be, “restricted securities” for purposes of the
      United States securities laws and cannot be transferred except as permitted
      under those laws.

     

    (b) The
      undersigned is delivering (i) an executed copy of the signature page of and
      Exhibit
      C
      to this
      Agreement, (ii) an executed copy of the signature page, or counterpart signature
      page, to the Registration Rights Agreement, and (iii) the subscription payment,
      in immediately available funds, which may be made by wire transfer to the
      Company pursuant to the following instructions:

     

    Bank:           Bank
      of
      America 

    

    ABA
      No.:        026009593

    

    Account
      Name:      Nephros,
      Inc.

     

    Account
      No.:         
94293
      070902

    

    Apply
      To:        Nephros,
      Inc.

    

    Attention:        Client
      Manager

     

    If
      the
      Offering is oversubscribed, or for any other reason determined by the Company
      in
      its discretion, the Company may determine to reject a subscription or to accept
      a subscription for only a portion of the 6% Notes for which the undersigned
      has
      subscribed in this Agreement. If this subscription is accepted by the Company,
      in whole or in part, then the Company will deliver to the undersigned 6% Notes
      in the aggregate principal amount for which the undersigned’s subscription is
      accepted. If this subscription is rejected in whole or in part, then the Company
      shall promptly refund to the undersigned, without interest, any funds that
      the
      undersigned had delivered to the Company in excess of the aggregate principal
      amount (and purchase price) of any 6% Notes for which the undersigned’s
      subscription is accepted.

     

    (c) The
      undersigned may not withdraw this subscription or any amount paid pursuant
      thereto except as otherwise provided below. 

     

    2.    
       Conditions.
      It is
      understood and agreed that this subscription is made subject to the Company’s
      execution and delivery of the Registration Rights Agreement and acceptance
      of
      the undersigned as a Holder thereunder.

     

    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 for any changes resulting solely from the Offering:

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

     

    4.  (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.

     

    (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 6%
      Notes subscribed for hereunder, the shares of Common Stock issuable upon
      conversion thereof, the Warrants (as defined below) issuable thereunder and
      the
      shares of Common Stock issuable upon exercise thereof (collectively, the
“Subject
      Securities”).
      All
      necessary proceedings of the Company have been duly taken to authorize the
      execution, delivery, and performance of this Agreement, the 6% Notes and the
      Registration Rights Agreement (collectively, the “Transaction
      Documents”).
      The
      Transaction Documents and the Warrants have been duly authorized by the Company
      and, when and, in the case of the Warrants, if, 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. The Common
      Stock
      issuable upon conversion of the 6% 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 that
      result from such 6% Common Stock being held by any person other than the
      Company. The 6% Notes are duly authorized, and when issued pursuant to the
      Transaction Documents, will be validly issued. The Warrants are duly authorized,
      and when issued, pursuant to the Transaction Documents, will be validly
      issued.

     

    (c)
       Except
      for the consent of the Secured Party, no consent of any party to any contract,
      agreement, instrument, lease or license to which the Company is a party or
      to
      which any of its properties or assets are subject is required for the execution,
      delivery or performance by the Company of any of the Transaction Documents
      or
      the issuance and sale of the Subject Securities.

     

    (d) 
      The
      execution, delivery and performance of Transaction Documents and the Warrants
      and the issuance and sale of the Subject
      Securities will
      not
      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 or call a default
      under any contract or agreement to which the Company is a party or violate
      or
      result in a breach of any term of the certificate of incorporation or by-laws
      of
      the Company, or, assuming compliance with applicable state securities or “blue
      sky” laws, violate any law, rule, regulation, order, judgment or decree binding
      upon, the Company, or to which any of their respective operations, businesses,
      properties or assets are subject, the breach, termination or violation of which,
      or default under which, would have a material adverse effect on the operations,
      business, properties or assets of the Company.

     

    (e) 
      The
      Company’s capitalization is disclosed in the Nephros SEC Filings available to
      the undersigned on the Securities and Exchange Commission’s website at
http://www.sec.gov.
      

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    (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 hereby
      based on any agreement, arrangement or understanding with or known to the
      Company.

     

    (g) 
      Except
      as
      would not reasonably be expected to have a Material Adverse Effect, the Company
      is not in violation or default of any provisions of its certificate of
      incorporation or bylaws, as may be amended, as applicable, any instrument,
      judgment, order, writ or decree, or any material provision of any contract
      or
      agreement, to which it is a party or by which it is bound or of any provision
      of
      federal, state or local statute, rule or regulation applicable to the Company
      or
      its business. Except as would not reasonably be expected to have a Material
      Adverse Effect, the execution, delivery and performance of the Transaction
      Documents and the consummation of the transactions contemplated thereby will
      not
      result in any such violation or be in conflict with or constitute, with or
      without the passage of time and giving of notice, either a default under any
      such provision, instrument, judgment, order, writ, decree, contract or
      agreement, or require any consent, waiver or approval thereunder, or constitute
      an event which results in the creation of any lien, charge or encumbrance upon
      any assets of the Company (solely except as provided in this
      Agreement).

     

    (h) 
      Except
      as
      disclosed in the Nephros SEC filings, the Company is not a party to any
      litigation, action, suit, proceeding or investigation, nor, to the knowledge
      of
      the Company, has any litigation, action, suit, proceeding or investigation
      been
      threatened against the Company where such litigation, action, suit, proceeding
      or investigation would, if adversely determined, reasonably be expected to
      (i)
      have a material adverse affect on the financial condition of the Company or
      (ii)
      have a material adverse effect on the ability of the Company to perform its
      obligations under this Agreement or any of the other Transaction Documents
      (either (i) or (ii), a “Material Adverse Effect”).

     

    (i) 
      The
      Company 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 arising under this Agreement (Liens described in clauses (i), (ii)
      and (iii) are referred to as “Permitted
      Liens”).
      With
      respect to the property and assets it leases, 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.

     

    (j) 
      Except
      as
      disclosed in the Financial Statements (as defined below) or incurred in the
      ordinary course of business, the Company has no obligations or liabilities
      of
      any kind (absolute or contingent, direct or indirect) pursuant to any agreement
      of any kind related to any indebtedness of any kind. 

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    (k) 
      Except
      for
      this Agreement, the Company has not heretofore assigned or granted a security
      interest in any of the assets pledged as collateral pursuant to this
      Agreement.

     

    (l) 
      The
      Company owns, free and clear of all Liens, or is licensed or otherwise possesses
      legally enforceable rights to use, all patents, trademarks, trade names, service
      marks and copyrights material to the operation of the Company’s business, and
      any applications related to any of the foregoing (collectively, “Intellectual
      Property”).

     

    (m) 
      All
      reports required to be filed by the Company since and including the Company’s
      Annual Report on Form 10-KSB for the year ended December 31, 2004, to and
      including the relevant Closing (collectively, the “Nephros
      SEC Filings”)
      have
      been duly filed with the Securities and Exchange Commission, complied at the
      time of filing in all material respects with the requirements of their
      respective forms and were complete and correct in all material respects as
      of
      the dates at which the information was furnished, and contained (as of such
      dates) no untrue statement of a material fact or omitted to state a material
      fact necessary in order to make the statements contained therein, in light
      of
      the circumstances under which they were made, not misleading. The parties agree
      that it shall not be a breach of this Section
      3(m)
      if the
      Company did not timely file any report.

     

    (n) 
      The
      financial statements and supporting schedules (the “Financial
      Statements”)
      included in the Company’s Annual Report on Form 10-KSB for the year ended
      December 31, 2005 (the “Balance
      Sheet Date”)
      are
      complete and correct in all material respects and present fairly the financial
      position of the Company as of the dates specified and the results of operations
      for the periods specified, in each case, in conformity with generally accepted
      accounting principles applied on a consistent basis during the periods involved,
      except as indicated therein or in the notes thereto. Except as disclosed in
      the
      Company’s 10-QSB available to the undersigned pursuant to Section
      3(e)
      hereof,
      since the Balance Sheet Date there has not been, except where it would not
      reasonably be expected to have a Material Adverse Effect, (a) any payment of
      dividends on, or other distribution with respect to, or any direct or indirect
      redemption, purchase or acquisition of, any shares of the capital stock or
      other
      securities of the Company, (b) any disposition of any tangible or intangible
      material asset of the Company, (c) any damage, destruction or loss (whether
      or
      not covered by insurance) of any material asset of the Company, or (d) any
      change in the accounting methods, practices or policies followed by the Company
      or any change in depreciation or amortization policies or rates theretofore
      adopted, which has not been adequately provided for or disclosed in the
      Financial Statements.

     

    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
      C
      to this
      Agreement, which is being delivered to the Company herewith. 

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (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, the individual
      signing on behalf of the undersigned is duly authorized to execute the
      Transaction Documents.

     

    (c) 
      Each
      of
      the Transaction Documents has been duly executed and delivered by the
      undersigned and constitutes the legal, valid and binding obligation of the
      undersigned, enforceable against the undersigned in accordance with its
      terms.

     

    (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, read carefully and is familiar with the Transaction
      Documents and the Nephros SEC Filings.

     

    (f) 
      The
      undersigned is familiar with the business, plans and financial condition of
      the
      Company, the terms of the Offering and any other matters relating to the
      Offering; the undersigned has received all materials which have been requested
      by the undersigned; 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. The undersigned has had access to
      all additional information that the undersigned has deemed necessary to verify
      the accuracy of the information set forth in this Agreement and the Nephros
      SEC
      Filings, and has taken all the steps necessary to evaluate the merits and risks
      of an investment as proposed under this Agreement.

     

    (g) 
      The
      undersigned acknowledges that this subscription is and shall be irrevocable
      and
      this subscription and the agreements contained herein shall survive the
      insolvency, death or disability of the undersigned (as applicable), except
      that
      the undersigned shall have no obligation hereunder in the event that its
      subscription is for

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    any
      reason rejected or the Offering is cancelled or terminated by the Company,
      which
      the Company reserves the right to do in its sole and absolute discretion and
      for
      any reason.

     

    (h) 
      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 able to protect the interests of the undersigned in
      connection with this transaction, and the undersigned’s investment in the
      Company hereunder is not material when compared to the undersigned’s total
      financial capacity.

     

    (i) 
      The
      undersigned hereby acknowledges and represents that: (i) the undersigned has
      prior investment experience, including investment in securities which are
      non-listed, unregistered and/or not traded on an automated quotation system;
      (ii) the undersigned recognizes the highly speculative nature of this
      investment; and (iii) the undersigned is able to bear the economic risk which
      the undersigned hereby assumes.

     

    (j) 
      The
      undersigned understands the various risks of an investment in the Company as
      proposed herein and can afford to bear such risks, including, without
      limitation, the risks of losing the entire investment.

     

    (k) 
      The
      undersigned acknowledges that no liquid market for the Subject Securities
      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.

     

    (l) 
      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. 

     

    (m) 
      The
      undersigned acknowledges that the undersigned has been informed by the Company
      of, or is otherwise familiar with, the nature of the limitations imposed by
      the
      Securities Act and the rules and regulations thereunder on the transfer of
      the
      Subject Securities. In particular, 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 Interests, except as contemplated by the terms
      of
      the Registration
      Rights Agreement; (ii) the Subject Securities are sold, assigned or

     

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

     

     transferred
      in accordance with all the requirements and limitations of an exemption from
      registration under the Securities Act. The undersigned further understands
      that
      an opinion of counsel satisfactory to the Company and other documents may be
      required to transfer the Subject Securities.

     

    (n) 
      The
      undersigned acknowledges that the Subject Securities to be acquired will be
      subject to a stop transfer order and any certificate or certificates evidencing
      any Subject Securities shall bear the following or a substantially similar
      legend 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.”

     

    (o) 
      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 violation
      of the securities laws, and has no present intention of distributing or selling
      to others any of such interest or granting any participation therein in
      violation of the securities laws.

     

    (p) 
      In
      subscribing for 6% Notes, the undersigned is not relying on any representations
      and warranties of the Company other than those in this Agreement.

     

    (q) 
      The
      undersigned is not subscribing for 6% Notes as a result of or subsequent to
      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 which the undersigned
      had
      a pre-existing relationship in connection with investments in securities
      generally.

     

    (r) 
      The
      undersigned is not relying on the Company with respect to the tax and other
      economic considerations of an investment.

     

    (s) 
      The
      undersigned understands that the net proceeds from all subscriptions paid and
      accepted pursuant to the Offering (after deduction for any commissions,
      discounts, consulting fees and other expenses of the Offering) may be used
      for
      such purposes as the Company determines from time to time.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (t) 
      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 6% Notes.

     

    (u) 
      The
      undersigned has consulted the undersigned’s own financial, legal and tax
      advisors with respect to the economic, legal and tax consequences of an
      investment in the Subject Securities and has not relied on the Company, its
      officers, directors or professional advisors for advice as to such
      consequences.

     

    (v) 
      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.

     

    (w) 
      The
      undersigned is not now nor shall it be at any time prior to or at the closing
      with respect to the undersigned’s subscription (the “Closing”)
      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, 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”)
      or
      otherwise. Neither the undersigned nor any Person who owns an interest in the
      undersigned (collectively, a “Purchaser
      Party”)
      is now
      nor shall be at any time prior to or at the Closing 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, 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) or otherwise.

     

    (x) 
      The
      undersigned has taken, and shall continue to take until the Closing, such
      measures as are required by law to assure that the funds used to pay to the
      Company the purchase price for the Subject Securities are derived: (i) from
      transactions that do not violate United States law nor, 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.

     

    (y) 
      To
      the
      best of the undersigned’s knowledge, neither the undersigned nor any Purchaser
      Party, nor any Person providing funds to the undersigned:

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    
 

    (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(y));
      (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(y),
      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.

     

    (z) 
      The
      undersigned is in compliance 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 with all procedures required by the Patriot Act and the Bank Secrecy
      Act.

     

    (aa) 
      After
      the
      Closing, the undersigned shall cooperate with the Company, and shall cause
      each
      Purchaser Party to cooperate with the Company, in providing such additional
      information and documentation on the undersigned’s and each Purchaser Party’s
      legal or beneficial ownership, policies, procedures and sources of funds as
      the
      Company deems necessary or prudent to enable the Company to comply with
      Anti-Money Laundering Laws now in existence or hereafter enacted or amended.
      

     

    (bb) 
      If
      any of
      the foregoing representations, warranties or covenants in Sections
      4(w)-(aa)
      hereof
      ceases to be true or if the Company no longer reasonably believes that it has
      satisfactory evidence as to their truth, notwithstanding any other agreement
      to
      the contrary, the Company may, in accordance with applicable regulations, and
      after giving the undersigned reasonable opportunity to provide such satisfactory
      evidence, freeze the undersigned’s investment, including without limitation,
      withholding any dividends or distributions otherwise payable to the undersigned,
      suspending the undersigned’s voting rights and rescinding the undersigned’s
      investment in Subject Securities, and the Company may also be required to report
      such action and to disclose the undersigned’s identity to OFAC or other
      authority. In the event that the Company is required to take any of the
      foregoing actions, the undersigned understands and agrees that it shall have
      no
      claim against the Company, the Escrow Agent and/or their respective affiliates,
      directors, members, partners, interest holders, officers,

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    employees
      and agents for any form of damages as a result of any of the aforementioned
      actions.

     

    (cc) 
      The
      undersigned understands and agrees that any dividend, distribution, or
      rescission proceeds or other payments made to it will be paid to the same
      account from which the undersigned’s investment in the Company was originally
      remitted, unless the Company, in its sole discretion, agrees
      otherwise.

     

    (dd) 
      the
      undersigned represents and warrants that the undersigned has not during the
      last
      thirty (30) days, and hereby agrees that from the date hereof and continuing
      until the undersigned no longer holds any Subject Securities 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
      4(dd),
      if the
      undersigned places a sell order for shares of Common Stock underlying the 6%
      Notes at or following the time conversion of such 6% Notes is requested or
      a
      sell order for shares of Common Stock issuable upon exercise of the Warrants
      at
      or following the time exercise of such Warrants has been requested 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.

     

    5.
       Covenants
      of the Company.
      The
      Company hereby covenants with the undersigned as follows:

     

    (a) 
      Except
      for the 6% Notes, without
      the prior written consent of the
      Secured Party, the Company shall not create, issue, incur (by conversion,
      exchange or otherwise), assume, guarantee or otherwise become or remain directly
      or indirectly liable for Senior Debt (as defined below). “Senior
      Debt”
shall
      mean (without duplication) whether recourse to all or a portion of the assets
      of
      the Company and whether or not contingent, (i) every obligation of the Company
      for money borrowed and (ii) every obligation of the Company evidenced by bonds,
      debentures, notes or other similar instruments, including obligations incurred
      in connection with the acquisition of property, assets or businesses, in each
      case, that is senior or pari passu in right of payment to the 6% Notes. In
      no
      event shall “Indebtedness for Borrowed Money” include any trade payable or
      accrued expenses arising in the ordinary course of business which are not more
      than 180 days past due or which are being contested in good faith and by
      appropriate proceedings. 

     

    (b) 
      For
      each
      of the first, second and third fiscal quarters of each fiscal year, the Company
      shall furnish to the undersigned (which may be satisfied by filing the same
      with
      the Securities and Exchange Commission) no later than such time as the Company
      is required to file quarterly reports pursuant to the Exchange Act, financial
      statements consisting of a balance sheet of the Company as of the end of such
      fiscal

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    quarter,
      together with the statements of income, stockholders’ equity and changes in
      financial condition for such fiscal quarter, and for the portion of the
      Company’s fiscal year ending with the last day of such quarter, setting forth in
      comparative form the figures for such period and figures for the corresponding
      periods of the previous fiscal year, all in reasonable detail, and prepared
      and
      certified by the chief executive officer or the chief financial officer of
      the
      Company as fairly presenting in all material respects the financial condition
      and results of operations as of the balance sheet date for the period then
      ended
      in accordance with generally accepted accounting principles consistently
      applied, excluding footnotes, subject to normal year-end adjustments which
      in
      the aggregate shall not be material.

     

    (c) 
      For
      each
      fiscal year, the Company shall furnish to the undersigned (which may be
      satisfied by filing the same with the Securities and Exchange Commission) no
      later than such time as the Company is required to file its annual report
      pursuant to the Exchange Act, financial statements consisting of a balance
      sheet
      of the Company as of the end of such fiscal year, together with the statements
      of income, stockholders’ equity and changes in financial condition for such
      fiscal year, setting forth in comparative form the figures for such fiscal
      year
      and for the previous fiscal year, all in reasonable detail and duly certified
      by
      an opinion of its firm of independent certified public accountants, and prepared
      and certified by the chief executive officer or the chief financial officer
      of
      the Company as fairly presenting in all material respects the financial
      condition and results of operations as of the balance sheet date for the year
      then ended in accordance with generally accepted accounting principles
      consistently applied. 

     

    6.
       Indemnification.
      

     

    (a) 
      General.
      The
      undersigned understands the meaning and legal consequences of the
      representations, warranties and agreements contained in this Agreement and
      the
      other Transaction Documents, including without limitation Section
      4
      hereof,
      and agrees to indemnify and hold harmless the Company and each officer,
      director, partner, employee, agent and controlling person of the Company, past,
      present or future, from and against any and all loss, damage or liability
      (collectively, “Losses”)
      due to
      or arising out of a breach of any such representation, warranty or agreement.
      The Company shall indemnify and hold harmless the undersigned and each officer,
      director, partner, employee, agent and controlling person of the undersigned,
      past, present or future, from and against any and all Losses due to or arising
      out of a breach of any representation, warranty or agreement by the Company
      in
      this Agreement or any other Transaction Document.

     

    (b) 
      Limitation
      on Indemnification.
      The
      maximum amount payable by the undersigned, on the one hand, or the Company,
      on
      the other hand, to all indemnified parties in respect of claims made for
      indemnification under Section 6(a) shall not exceed, in the aggregate, the
      aggregate purchase price of 6% Notes paid by the undersigned in the
      Offering.

     

    (c) 
      Sole
      Remedy.
      The
      parties hereto agree and acknowledge that subsequent to the Closing, the
      indemnification rights provided in this Section
      6
      shall

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    be
      the
      exclusive remedy of the each party hereto against each other party hereto for
      breaches of the representations and warranties contained in this Agreement
      except with respect to (i) claims involving fraud or (ii) any injunctive relief
      to which any party may be entitled.

     

    (d) 
      Notice.
      (a) A
      party
      which is entitled to indemnification under Section
      6
      (in such
      capacity, individually and collectively, an “Indemnified
      Party”)
      with
      respect to any Loss shall give written notice thereof to the party required
      to
      provide such indemnification hereunder (in such capacity, individually and
      collectively, an “Indemnifying
      Party”)
      promptly after receipt of any written claim by any 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
      6(d),
      the
      Indemnifying Party or Parties (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

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    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 (provided that
      any such settlement which results in any adverse consequences to the Indemnified
      Party shall require the consent of such Indemnified Party, which consent shall
      not be unreasonably withheld) all indemnifiable matters related to claims by
      third parties which are susceptible to being settled provided the Indemnifying
      Party’s obligation to indemnify such Indemnified Party therefor will be fully
      satisfied by payment of money by the Indemnifying Party pursuant to a settlement
      which includes a complete release of such Indemnified Party. The Indemnified
      Party shall not 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 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.

     

    7. 
      Creation
      of Security Interest.

     

    (a) 
      Grant
      of Security Interest.
      The
      Company hereby grants and pledges to Southpaw Credit Opportunity Master Fund
      LP
      (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
      sum and interest evidenced by the 6% Notes. Such security interest shall
      automatically terminate upon the (i) earlier of the payment of

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    principal
      and interest on the 6% Notes and (ii) such time as notice of prepayment of
      the
      6% Notes pursuant to Section 2 of the 6% Notes is made and the Company
      designates sufficient funds (which may be proceeds from the sale of Collateral)
      for the prepayment thereof (the “Security Interest Termination Date”).

     

    (b) 
      Designation
      of Secured Party as Agent.
      Each
      purchaser of 6% Notes, by its acceptance of the benefits of this Agreement
      and
      the Subject Securities, hereby irrevocably designates the Secured Party to
      act
      as Secured Party such purchaser’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
      7,
      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.

     

    (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, it being understood and agreed by the Purchasers
      and the Secured Party that 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
      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.

     

    8.
       Transferability.
      Neither
      this Agreement, nor any interest of the undersigned herein, shall be assignable
      or transferable by the undersigned in whole or in part except by operation
      of
      law. Any attempt to assign or transfer this agreement or any interest therein
      other than by operation of law shall be void.

     

    9.
       Confidentiality.
      The
      undersigned acknowledges and agrees that all information, written and oral,
      concerning the Company furnished from time to time to the undersigned,
      including, without limitation, the Memorandum, has been and is
      provided

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    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 of the undersigned up to an aggregate maximum of $2,000, 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 6% Notes from the
      Company, supersedes all existing agreements among them concerning such subject
      matter, and may be modified only by a written instrument duly executed by the
      party to be charged.

     

    (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).

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    
 

    (c) 
      This
      Agreement shall be binding upon and inure to the benefit of the parties hereto,
      the successors and assigns of the Company, and the permitted successors,
      assigns, heirs and personal representatives of the undersigned, not including,
      however, any transferees of the Subject Securities.

     

    (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.

     

    (i) 
      The
      parties hereto irrevocably consent to the jurisdiction of the courts of the
      State of New York and of any federal court located in such State in connection
      with any action or proceeding arising out of or relating to this Agreement,
      any
      document or instrument delivered pursuant to, in connection with or
      simultaneously with this Agreement, or a breach of this Agreement or any such
      document or instrument.

    

    [Signature
      page follows immediately]

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    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 6% Notes subscribed for (and purchase
                price):

               

              $_______________

            	
              Print
                Name of Subscriber:

               

              _________________________________

               

              _________________________________

              Social
                Security Number or other Taxpayer ID Number

               

              By:
                ______________________________

              (Signature
                of Subscriber or Authorized Signatory)

              Name:

              Title:

               

              Address:
                __________________________

               

                      
                __________________________

               

              Telephone:_________________________

               

              Fax:_______________________________

            
	 	 

    

    If
      the 6%
      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 6%
      Notes have been purchased through a broker or other intermediary, please
      identify such entity:________________________________________

     

    [Please
      complete Signature Page for each
      subscriber.]

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    ACCEPTANCE
      OF SUBSCRIPTION

    

    

    _____________________________

    Name
      of
      Subscriber

    

    

    ACCEPTED
      BY:

    

    NEPHROS,
      INC.

     

     

    By:
      ____________________________

    Name:

    Title:

     

    Date:
      _______________________, 2006

    

     

    Accepted
      for $__________ principal
      amount of 6% Notes

    

     

     

     

     

     

    19

    
 

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

           

        

      

    

    Schedule
      3(f)

    

    

    In
      connection with the offering, the Company has entered into an agreement with
      Dutton Associates (“Consultant”)
      pursuant to which Consultant will provide the Company with consulting services
      for the three month period beginning on June 1, 2006, which period shall be
      renewed for additional terms unless canceled in writing by either party on
      30
      days notice prior to the end of such term. In exchange for such consulting
      services, the Company shall pay Consultant $260,000 as follows: (i) an initial
      retainer fee of $100,000; and (ii) a consulting fee of $50,000 per month except
      for the last month which shall be $60,000, payable on the first of each
      month.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

           

        

      

    

    EXHIBIT
      A

    (Form
      of
      Note)

    

     

     

     

     

     

     

     

     

     

     

     

    A-1

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

           

        

      

    

    EXHIBIT
      B

    (Form
      of
      Registration Rights Agreement)

    

     

     

     

     

     

     

     

     

     

     

     

    B-1

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

           

        

      

    

    EXHIBIT
      C

    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.)

     

     

     

    C-1

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