S-1/A

As filed with the Securities and Exchange Commission on July 20, 2004

Registration No. 333-116162

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

NEPHROS, INC.

(Exact name of registrant as specified in its charter)

Delaware	3841	13-3971809
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification Number)

3960 Broadway

New York, New York 10032

(212) 781-5113

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Norman J. Barta

President and Chief Executive Officer

3960 Broadway

New York, New York 10032

(212) 781-5113

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications to:

Thomas D. Balliett, Esq. J. Michael Mayerfeld, Esq. Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, New York 10022 (212) 715-9100 James Martin Kaplan, Esq. Richard DiStefano, Esq. Blank Rome LLP The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 885-5372

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the Registration Statement becomes effective.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    ¨

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered		Proposed Maximum Offering Price Per Share		Proposed Maximum Aggregate Offering Price(1)		Amount of Registration Fee
common stock, $.001 par value per share	2,875,000	(2)	$	7.00	$	20,125,000	$	2,549.84
underwriter’s warrants to purchase shares of common stock	250,000		$	0.0004	$	100	$	0.02
common stock issuable upon exercise of the underwriter’s warrants	250,000	(3)	$	8.40	$	2,100,000	$	266.07
Total							$	2,815.93	(4)

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933.

(2) Includes 375,000 shares of common stock which may be purchased by the underwriters to cover over-allotments, if any.

(3) Pursuant to Rule 416 under the Securities Act of 1933, this registration statement also covers such indeterminable number of additional shares of common stock as may be issuable as a result of any future anti-dilution adjustments made in accordance with the terms of the underwriter’s warrants.

(4) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion dated July 20, 2004

PROSPECTUS

2,500,000 Shares

Common Stock

Nephros, Inc. is offering 2,500,000 shares of its common stock.

This is our initial public offering. We have applied to have our common stock approved for quotation on the American Stock Exchange under the symbol “NEP.” The initial public offering price will be between $6.00 and $7.00 per share.

Investing in our common stock involves a high degree of risk. See “ Risk Factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

	Per Share		Total
Public Offering Price	$	6.50	$	16,250,000
Underwriting Discounts and Commissions	$	0.585	$	1,462,500
Proceeds to Nephros, Inc. (1)	$	5.915	$	14,787,500

(1) Before deducting expenses of this offering which are estimated to be $1,355,063 (including the underwriter’s non-accountable expense allowance of $487,500).

The underwriter has an option to purchase up to an additional 375,000 shares of common stock from us to cover over-allotments. The underwriter is offering the shares on a firm commitment basis. The underwriter expects to deliver the shares to purchasers on or about             , 2004.

The date of this prospectus is             , 2004

OLpur^™ MD190 Our hollow fiber filter designed
specifically for mid-dilution
hemodiafiltration.

TABLE OF CONTENTS

Prospectus Summary	1
Risk Factors	9
Cautionary Note Regarding Forward Looking Statements	24
Important Assumptions in this Prospectus	25
Use of Proceeds	26
Dividend Policy	27
Capitalization	27
Dilution	29
Selected Financial Data	31
Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Business	41
Management	66
Certain Transactions	78
Principal Stockholders	81
Description of Securities	83
Shares Eligible for Future Sale	88
Underwriting	90
Transfer Agent and Registrar	93
Legal Matters	93
Experts	93
Disclosure of Commission Position on Indemnification for Securities Act Liabilities	93
Where You Can Find Additional Information	94
Index to Financial Statements	F-1

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares of our common stock in this offering. You should read this entire prospectus carefully, especially the investment risks discussed under “Risk Factors,” beginning on page 9. We make certain important assumptions throughout this prospectus, which are discussed in greater detail under “Important Assumptions in This Prospectus” which may be found on page 25.

NEPHROS, INC.

Company Background

We are a development stage medical device and technology company that was founded in 1997 by health professionals, scientists and engineers affiliated with Columbia University to develop cost-effective, improved products and therapies for End Stage Renal Disease, or ESRD, therapy. Although the Chairman of our Board is the Chairman of Columbia University’s Department of Surgery and we license the right to use office space from Columbia University, we do not currently have any other material relationship with Columbia University. Our products incorporate our proprietary Mid-Dilution Diafiltration technologies (“MDF”). We began sales of our first product in March 2004. Because we do not yet have adequate sales history, we will not recognize revenue from these sales until certain rights of return have expired. We have incurred losses since our inception primarily as a result of our research and development efforts. To date, we have relied on private sales of our securities and loans from our shareholders to fund operations. We anticipate, based on our currently proposed plans and assumptions, that the net proceeds of this offering will be sufficient to satisfy our cash requirements, with no further financing, to obtain positive cash flow.

Our goal is to develop and market our MDF technologies and products, which we believe offer improved efficacy over existing ESRD dialysis therapy and, ultimately, improved health of ESRD patients, at costs to dialysis providers that are competitive in the market.

We are incorporated under the laws of the State of Delaware. We maintain our principal executive offices at 3960 Broadway, New York, New York 10032. Our telephone number at that address is (212) 781-5113. We maintain a website at www.nephros.com, however, the information on our website is not part of this prospectus.

The Offering

Common stock offered by us:	2,500,000 shares
Common stock to be outstanding after this offering:	12,452,636 shares. This does not include:
	Ÿ      375,000 shares of common stock reserved for issuance upon exercise of the underwriters’ over-allotment option;

Ÿ      250,000 shares of common stock reserved for issuance upon exercise of the underwriters’ warrants;

Ÿ      1,644,513 shares of common stock underlying stock options granted and outstanding pursuant to our equity incentive plan;

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	Ÿ      170,460 shares of common stock issuable upon exercise of warrants issued in June 2002 to a former supplier; See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Plexus Services Corp.;”
	Ÿ      5,549 shares of common stock issuable upon exercise of warrants issued in September 2002 to certain former lenders. See “Description of Securities – Other Warrants”;
	•        69,491 shares of common stock issuable upon conversion of preferred stock dividends accrued after March 31, 2004 and through May 31, 2004; and
	•        Any shares of common stock that might be issuable to a former lender upon exercise of certain warrants. See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Lancer Offshore, Inc.”
	You should read the discussion under the heading “Capitalization” for more information regarding outstanding shares of our common stock, warrants or options to purchase our common stock. You should also read the discussion under the heading “Underwriting” for more information regarding the underwriters’ over-allotment option and the discussion under the heading “Important Assumptions in this Prospectus” for information about certain important assumptions we have made in this prospectus.
We currently intend to use the net proceeds of this offering for:	•        marketing and sales;
	•        clinical studies, applying for regulatory approvals and research and development;
	•        capital expenditures to facilitate the manufacture of our products;
	•        product engineering;
	•        payment under a settlement agreement with a former supplier;
	•        payment of dividends on our convertible preferred stocks accrued after May 31, 2004 and prior to consummation of the offering; and
	•        working capital and general corporate purposes.
	You should read the discussion under the heading “Use of Proceeds” for more information.
Proposed American Stock Exchange Symbol:	NEP

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Our Business

We have developed next-generation therapies, products and technologies for treating patients with ESRD. We are focused on bringing these devices and technologies to market, initially in some or all of Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland and the United Kingdom (referred to in this prospectus collectively as our “Target European Market”) and then in the United States and worldwide.

ESRD is the stage of advanced chronic kidney disease characterized by the irreversible loss of kidney function. Healthy kidneys remove waste products and excess water from the blood, thus preventing toxin buildup and fluid overload. ESRD patients require either kidney transplantation or ongoing treatment in the form of renal replacement therapy to perform these functions and to sustain life. Because the shortage of compatible kidneys limits the transplantation option, most ESRD patients must rely on renal replacement therapy for the functions normally provided by a healthy kidney.

Existing extracorporeal renal replacement therapies currently include:

• Hemodialysis – the patient’s blood is filtered through a semi-permeable filter known as a dialyzer which allows for the diffusion of waste products and excess water into a solution for dialysis known as dialysate.

• Hemofiltration – the patient’s blood is filtered through a semi-permeable membrane, using a negative pressure similar to a vacuum effect, or a convection process, to draw out solute particles without using a dialysate solution.

• Hemodiafiltration (HDF) – the patient’s blood is filtered by combining the diffusion process of hemodialysis with the convection process of hemofiltration to eliminate waste products and excess water.

Currently, hemodialysis is the most widely used extracorporeal renal replacement therapy. Hemodialysis removes excess water and some waste products sufficiently to sustain life but fails, in our view, to address adequately the ESRD patient’s long-term health and quality of life. Based on our review of industry publications, we believe that the HDF process removes more blood impurities than the other currently available kidney replacement therapies and removes more effectively the larger toxins (known in the industry as “middle molecules” because of their heavier molecular weight) that accumulate in the body. Accordingly, we are focused on the HDF segment of the extracorporeal renal replacement therapy market. The dialyzer (also referred to as a “dialysis filter” or an “artificial kidney”) is an essential component of extracorporeal ESRD therapy. Our first product to market was our OLpur MD190 dialyzer for use with HDF machines, and, to our knowledge, it is the first such product specifically designed for HDF therapy. See “Our Products” below for a further discussion of our products.

Our Technology

We have developed patented technology that we believe will improve ESRD therapy efficacy beyond existing therapies. See “Business – The Nephros Mid-Dilution Diafiltration Process.” Our technology also addresses the economics for providers of ESRD therapy. For example, we have developed an add-on module that converts the most common types of hemodialysis machines into HDF-capable machines. We believe we can provide improved HDF therapy at a cost level competitive with today’s less effective therapies, and our products will therefore encourage the expanded use of HDF therapy in dialysis clinics. We believe that, by providing more effective and economical ESRD therapy, our technology and products will:

• reduce hospitalization, medication and care costs;

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• reduce patient drug requirements;

• improve the dialysis patient’s hemoglobin levels;

• improve blood pressure control for the dialysis patient;

• improve the life expectancy of the patient;

• improve the patient’s health generally and the patient’s overall quality of life;

• provide user-friendly technology solutions to the clinical staff; and

• reduce or eliminate certain capital expense issues currently faced by the clinic.

Our Products

The OLpur MD190 is our dialyzer for use with HDF machines. When compared to existing HDF standards in laboratory bench studies conducted by members of our research and development staff and by a third party, and in clinical studies conducted under the supervision of Bernard Canaud, M.D. of L’institut de Recherche et de Formation en Dialyse, a research institute located in Montpellier, France the OLpur MD190 improves toxin removal from the patient by over 80% for a range of toxins, and in particular, middle molecules. The OLpur MD190 received CE marking – that is, regulatory approval in the European Union and certain other countries which also recognize CE marking – in July 2003, and we initiated sales of the OLpur MD190 in January 2004. We anticipate delaying somewhat our application for approval of OLpur MD190 in the United States in order to combine it with an application for approval of OLpur H₂H.

The OLpur H₂H is an add-on module that converts the most common types of hemodialysis machines into HDF-capable machines, offering advanced software with a simplified user interface. The combined H₂H and dialysis machine system can be used to deliver HDF therapy with the OLpur MD190 dialyzer. A prototype OLpur H₂H module has been developed and bench-tested in our laboratories by members of our research and development staff. We anticipate obtaining CE marking in the second quarter of 2005, and regulatory approval in the United States in the first quarter of 2006.

The OLpur NS2000 is our standalone HDF machine and associated filter technology that integrates our advanced software technology from the OLpur H₂H as well as our OLpur MD190 filter technology. The OLpur NS2000 system is currently in development in conjunction with an established dialysis machine manufacturer in Italy. We anticipate obtaining CE Marking of the NS2000 as well as regulatory approval in the United States in 2006.

The Market

Based on industry publications, we believe that as of year end 2002, the number of ESRD patients worldwide was approximately 1.6 million, expanding at a rate of 6 to 7% per year, and was expected to exceed 2.0 million by 2009. Based on a report on the dialysis market as of year end 2001, and by our calculations, we estimate that of the dialysis patients worldwide, approximately 26% were in the United States, approximately 17% were in the European countries consisting of Austria, Belgium, Bulgaria, Catalonia, Czech Republic, Denmark, Finland, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands, Norway, Poland, Sweden, Turkey and the United Kingdom, and approximately 57% were outside of such territories. We believe that dialysis clinics in our Target European Market (other than the United Kingdom) use dialyzers only once rather than reprocessing and reusing them, thus creating enhanced opportunity for OLpur MD190 sales in our Target European Market.

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According to published industry estimates, the worldwide hemodialysis supplies market generated sales of approximately $6.3 billion in 2003 and is expected to grow an estimated 6% per year through 2009. Based on these statistics, we estimate the market to be approximately $8 billion by 2009. Additionally, based on published industry estimates, we expect the number of dialyzer’s sold worldwide to grow from approximately 100 million units in 2003 to approximately 200 million units in 2009.

Our Marketing Strategy

We intend to generate market acceptance and market share for our products through the following three-stage approach:

• We have introduced our OLpur MD190 through dialysis clinics in our Target European Market because of the presence of HDF machines in this region that are compatible with the OLpur MD190.

• Once we obtain regulatory approval, we intend to introduce the OLpur H₂H to convert existing dialysis machines to HDF-enabled, and therefore OLpur MD190-capable, units. We believe the OLpur H₂H module will expand our OLpur MD190 market opportunity in our Target European Market. We also intend to simultaneously introduce the OLpur H₂H and the OLpur MD190 in the United States as soon as we receive the requisite FDA approval. We believe that, by enabling the conversion of an existing hemodialysis machine to HDF use, these product introductions will open the U.S. markets to HDF therapy.

• After we have acclimated dialysis clinics and patients to improved HDF technology through our OLpur MD190 and OLpur H₂H products and after we have received the requisite regulatory approval, we intend to introduce our OLpur NS2000 stand-alone HDF system, allowing us to offer clinics a complete product portfolio providing an advanced HDF therapy option.

Going Concern Qualification

Our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements attached to this prospectus expressing doubt as to our ability to continue as a going concern. We anticipate, based on our currently proposed plans and assumptions, that the net proceeds of this offering will be sufficient to satisfy our cash requirements, with no further financing, to obtain positive cash flow. However, there can be no assurance that our efforts to produce commercially viable products will be successful, or that we will generate sufficient revenues to provide positive cash flows from operations. If our sales do not meet our projections or our expenses exceed our expectations, then we may need to raise additional funds through additional public or private offerings of our securities. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

PRE-OFFERING TRANSACTIONS

Unless the context requires, all information in this prospectus reflects the following transactions, which will occur on or before the closing of this offering (the “Pre-offering Transactions”):

• a 0.2841-for-1 reverse split of our common stock;

• the conversion, in accordance with our certificate of incorporation, of all of our shares of outstanding preferred stock and accrued dividends thereon as of May 31, 2004 into 8,428,733 shares of our common stock;

• subject to approval of the National Association of Securities Dealers, Inc., issuance to the underwriters or their respective designees, in exchange for $100, warrants to purchase up to an aggregate of 250,000 shares of our common stock;

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• reimbursement of the balance owed to the underwriters for their expenses on a non-accountable basis in the aggregate amount equal to 3% of the gross proceeds of this offering;

• appointment of Howard Davis and William J. Fox to our board of directors;

• retirement of our Amended and Restated Nephros 2000 Equity Incentive Plan and adoption of our Nephros, Inc. 2004 Stock Incentive Plan; and

• establishment of board committees.

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SUMMARY FINANCIAL DATA

The following summary financial data should be read in connection with, and are qualified by reference to, the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2003, 2002 and 2001, and the consolidated balance sheet data at December 31, 2003 and 2002, are derived from our consolidated financial statements included in this prospectus, which have been audited by Grant Thornton LLP, independent registered public accounting firm. The consolidated statements of operations data for the quarters ended March 31, 2004 and 2003 and for the period from our inception on April 3, 1997 through March 31, 2004, and the consolidated balance sheet data as of March 31, 2004, have been derived from our unaudited interim consolidated financial statements included in this prospectus. All share and per share data give effect to an amendment to our certificate of incorporation to be filed prior to the effectiveness of the registration statement to which this prospectus relates which, among other things, will effect a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock.

Consolidated Statements of Operations Data

	Period from Inception to March 31, 2004			Three Months ended March 31,						Year ended December 31,
				2004			2003			2003			2002			2001
	(unaudited)			(unaudited)			(unaudited)
Revenue-other	$	300,000		$	—		$	—		$	—		$	—		$	300,000
Cost of Goods Sold		12,618			12,618			—			—			—			—
Gross Profit (Loss)		287,382			(12,618	)		—			—			—			300,000
Operating expenses:
Research and development		11,966,225			690,024			228,596			1,320,556			957,616			737,858
Selling, general and administrative		9,350,395			1,316,435			545,389			3,673,902			1,097,400			652,828
Total operating expenses		21,316,620			2,006,459			773,985			4,994,458			2,055,016			1,390,686
Loss from operations		(21,029,238	)		(2,019,077	)		(773,985	)		(4,994,458	)		(2,055,016	)		(1,090,686	)
Other income:
Other income		6,113			—			—			—			—			—
Interest income		174,442			1,345			—			—			181			5,497
Interest expense and amortization of debt discount		(1,837,542	)		—			(588,000	)		(641,542	)		(1,196,000	)		—
Gain on disposal of assets		30,007			—			—			—			—			—
Forgiveness of indebtedness		833,793			—			—			—			833,793			—
Abandonment of IPO costs		—			—			(950,000	)		—			—			—
Total other income (expense)		(793,187	)		1,345			(1,538,000	)		(641,542	)		(362,026	)		5,497
Net loss		(21,822,425	)		(2,017,732	)		(2,311,985	)		(5,636,000	)		(2,417,042	)		(1,085,189	)
Cumulative preferred dividends and accretion		(4,710,500	)		(2,071,500	)		(89,000	)		(1,791,000	)		(365,000	)		(314,000	)
Net loss attributable to common stockholders		(26,532,925	)		(4,089,232	)		(2,400,985	)		(7,427,000	)		(2,782,042	)		(1,399,189	)
Net loss per share-
Basic and diluted				$	(2.57	)	$	(1.51	)	$	(4.66	)	$	(1.75	)	$	(0.88	)
Weighted-average shares outstanding-
Basic and diluted					1,593,659			1,593,659			1,593,659			1,593,659			1,592,096
Pro forma per share data (unaudited) Pro forma net loss per share (1)
Basic and diluted				$	(0.23	)	$	(0.50	)	$	(1.07	)	$	(0.55	)	$	(0.26	)
Pro forma weighted average shares outstanding (1)
Basic and diluted					8,637,746			4,588,687			5,283,212			4,423,255			4,180,918

(1) Gives effect to conversion of all mandatorily convertible preferred stock (including accrued preferred dividends) into common stock upon completion of this initial public offering.

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Consolidated Balance Sheet Data

	Quarter ended March 31, 2004			Year ended December 31,
	Pro Forma (1)	Actual		2003		2002
	(unaudited)	(unaudited)
Cash and cash equivalents	5,566,995	5,566,995		4,121,263		240,412
Working capital (deficiency)	3,371,650	3,371,650		1,375,656		(2,190,242	)
Total assets	7,357,554	7,357,554		5,033,888		1,279,583
Short-term debt and accrued liabilities, net	1,750,000	1,750,000		1,750,000		1,610,000
Redeemable preferred stock	—	9,321,551		7,250,051		5,885,550
Stockholders’ equity (deficiency)	4,048,242	(5,273,309	)	(5,382,346	)	(7,995,193	)

(1) Gives effect to the conversion of all mandatorily convertible preferred stock (including accrued preferred dividends) into common stock upon completion of this initial public offering.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. The risks and uncertainties described below are those that we currently believe may materially affect our company. Additional risks and uncertainties may also impair our business operations. If the following risks actually occur, our business, financial condition and results of operations could be seriously harmed, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Company

We have a history of operating losses and a significant accumulated deficit, and we may not achieve or maintain profitability in the future.

We have not been profitable since our inception in 1997. As of March 31, 2004, we had an accumulated deficit of approximately $26.5 million primarily as a result of our research and development expenses. We expect to continue to incur additional losses for the foreseeable future as a result of a high level of operating expenses, significant up-front expenditures, production and marketing activities and very limited revenue from the sale of our products. We began sales of our first product in March 2004, and we may never realize significant revenues from the sale of our products or be profitable. Our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements attached to this prospectus expressing doubt as to our ability to continue as a going concern. Each of the following factors, among others, may influence the timing and extent of our profitability, if any:

• regulatory approval or clearance of our products;

• market acceptance of our products;

• our ability to effectively and efficiently manufacture, market and distribute our products; and

• our ability to sell our products at competitive prices which exceed our per unit costs.

We cannot sell our products, including certain modifications thereto, until we obtain the requisite regulatory approvals and clearances in the countries in which we intend to sell our products. We have not obtained FDA approval for any of our products and cannot sell any of our products in the United States unless and until we obtain such approval. If we fail to receive or experience a significant delay in receiving such approvals and clearances then we may not be able to get our products to market and enhance our revenues.

Our business strategy depends in part on our ability to get our products into the market as quickly as possible. We obtained the Conformité Européene, or CE, mark, which demonstrates compliance with the relevant European Union requirements and is a regulatory prerequisite for selling our products in the European Union and certain other countries that recognize CE marking (collectively, “European Community”), for our OLpur MD190 product on July 31, 2003. We have not yet obtained the CE mark for any of our other products. Similarly, we cannot sell our products in the United States until we receive U.S. Federal Drug Administration, or FDA, clearance. Until we complete the requisite U.S. human clinical trials and submit premarket notification to the FDA pursuant to section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDC Act, we will not be eligible for FDA approval for any of our products.

In addition to the premarket notification required pursuant to section 510(k) of the FDC Act, the FDA could require us to obtain premarket approval of our products under Section 515 of the FDC Act, either because of legislative or regulatory changes or because the FDA does not agree with our determination that we are eligible to use the Section 510(k) premarket notification process. The Section 515 premarket approval process is a significantly more costly, lengthy and uncertain approval process and could materially delay our products coming to market. See “Governmental Regulation – United States” under the “Business” section of this

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prospectus for additional details about the approval process. If we do obtain clearance for marketing of any of our devices under section 510(k) of the FDC Act, then any changes we wish to make to such device that could significantly affect safety and effectiveness will require clearance of a notification pursuant to section 510(k), and we may need to submit clinical and manufacturing comparability data to obtain such approval or clearance. We could not market any such modified device until we received FDA clearance or approval. We cannot guarantee that the FDA would timely, if at all, clear or approve any modified product for which section 510(k) is applicable. Failure to obtain timely clearance or approval for changes to marketed products would impair our ability to sell such products and generate revenues.

The clearance and/or approval processes in the European Community and in the United States can be lengthy and uncertain and each requires substantial commitments of our financial resources and our management’s time and effort. We may not be able to obtain further CE marking or any FDA approval for of any of our products in a timely manner or at all. Even if we do obtain regulatory approval, approval may be only for limited uses with specific classes of patients, processes or other devices. Our failure to obtain, or delays in obtaining, the necessary regulatory clearance and/or approvals with respect to the European Community or the United States would prevent us from selling our affected products in these regions. If we cannot sell some of our products in these regions, or if we are delayed in selling while awaiting the necessary clearance and/or approvals, our ability to generate revenues from these products will be limited.

If we are successful in our initial marketing efforts in some or all of Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland and the United Kingdom (referred to in this prospectus collectively as our “Target European Market”) and the United States, then we plan to market our products in several countries outside of our Target European Market and the United States, including Japan, Korea and China, Canada and Mexico. Requirements pertaining to the sale of medical devices vary widely from country to country. It may be very expensive and difficult for us to meet the requirements for the sale of our products in many of these countries. As a result, we may not be able to obtain the required approvals in a timely manner, if at all. If we cannot sell our products outside of our Target European Market and the United States, then the size of our potential market could be reduced, which would limit our potential sales and revenues.

We cannot assure you that our products will be safe and we are required under applicable law to report any product-related deaths or serious injuries or product malfunctions that could result in deaths or serious injuries, and such reports could trigger recalls, class action lawsuits and other events that could cause us to incur expenses and may also limit our ability to generate revenues from such products.

We cannot assure you that our products will be safe. Under the FDC Act, we are required to submit medical device reports, or MDRs, to the FDA to report device-related deaths, serious injuries and product malfunctions that could result in death or serious injury if they were to recur. Depending on their significance, MDRs could trigger events that could cause us to incur expenses and may also limit our ability to generate revenues from such products, such as the following:

• information contained in the MDRs could trigger FDA regulatory actions such as inspections, recalls and patient/physician notifications;

• since the reports are publicly available, MDRs could become the basis for private lawsuits, including class actions; and

• if we fail to submit a required MDR to the FDA, the FDA could take enforcement action against us.

If any of these events occur, then we could incur significant expenses and it could become more difficult for us to gain market acceptance of our products and to generate revenues from sales. Other countries may impose analogous reporting requirements that could cause us to incur expenses and may also limit our ability to generate revenues from sales of our products.

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Product liability associated with the production, marketing and sale of our products, and/or the expense of defending against claims of product liability, could materially deplete our assets and generate negative publicity which could impair our goodwill.

The production, marketing and sale of kidney dialysis products have inherent risks of liability in the event of product failure or claim of harm caused by product operation. Furthermore, even meritless claims of product liability may be costly to defend against. Although we have acquired product liability insurance for our OLpur MD190 product and intend to acquire additional product liability insurance upon commercialization of any of our additional products, we may not be able to maintain or obtain this insurance on acceptable terms or at all. Because we may not be able to obtain insurance that provides us with adequate protection against all potential product liability claims, a successful claim in excess of our insurance coverage could materially deplete our assets. Moreover, even if we are able to obtain adequate insurance, any claim against us could generate negative publicity, which could impair our reputation and goodwill and adversely affect the demand for our products, our ability to generate sales and our profitability.

Some of the agreements that we may enter into with manufacturers of our products and components of our products may require us:

• to obtain product liability insurance; or

• to indemnify manufacturers against liabilities resulting from the sale of our products.

For example, our agreement with Medica s.r.l. requires that we obtain and maintain certain minimum product-liability insurance coverage and that we indemnify Medica against certain liabilities arising out of our products that they manufacture, providing they do not arise out of Medica’s breach of the agreement, negligence or willful misconduct. See “Business – Manufacturing and Suppliers.” If we are not able to obtain and maintain adequate product liability insurance, we could be in breach of these agreements, which could materially adversely affect our ability to produce our products and generate revenues. Even if we are able to obtain and maintain product liability insurance, if a successful claim in excess of our insurance coverage is made, then we may have to indemnify some or all of our manufacturers for their losses, which could materially deplete our assets.

If we violate any provisions of the FDC Act or any other statutes or regulations, then we could be subject to enforcement actions by the FDA or other governmental agencies.

We face a significant compliance burden under the FDC Act and other applicable statutes and regulations which govern the testing, labeling, storage, record keeping, distribution, sale, marketing, advertising and promotion of our products. If we violate the FDC Act or other regulatory requirements at any time during or after the product development and/or approval process, we could be subject to enforcement actions by the FDA or other agencies, including:

• fines;

• injunctions;

• civil penalties;

• recalls or seizures of our products;

• total or partial suspension of the production of our products;

• withdrawal of any existing approvals or premarket clearances of our products;

• refusal to approve or clear new applications or notices relating to our products;

• recommendations by the FDA that we not be allowed to enter into government contracts; and

• criminal prosecution.

Any of the above could have a material adverse effect on our business, financial condition and results of operations.

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Significant additional governmental regulation could subject us to unanticipated delays which would adversely affect our sales and revenues.

Our business strategy depends in part on our ability to get our products into the market as quickly as possible. Additional laws and regulations, or changes to existing laws and regulations, that are applicable to our business may be enacted or promulgated, and the interpretation, application or enforcement of the existing laws and regulations may change. We cannot predict the nature of any future laws, regulations, interpretations, applications or enforcements or the specific effects any of these might have on our business. Any future laws, regulations, interpretations, applications or enforcements could delay or prevent regulatory approval or clearance of our products and our ability to market our products. Moreover, changes that result in our failure to comply with the requirements of applicable laws and regulations could result in the types of enforcement actions by the FDA and/or other agencies as described above, all of which could impair our ability to have manufactured and to sell the affected products.

Protecting our intellectual property in our technology through patents may be costly and ineffective. If we are not able to adequately protect our intellectual property, then we may not be able to compete effectively and we may not be profitable.

Our future success depends in part on our ability to protect the intellectual property for our technology through patents. We will only be able to protect our products and methods from unauthorized use by third parties to the extent that our products and methods are covered by valid and enforceable patents or are effectively maintained as trade secrets. Our eight granted U.S. patents will expire at various times from 2018 to 2022, assuming they are properly maintained. See “Business – Intellectual Property – Patents” for additional details about our patents.

The protection provided by our patents, and patent applications if issued, may not be broad enough to prevent competitors from introducing similar products into the market. Our patents, if challenged or if we attempt to enforce them, may not necessarily be upheld by the courts of any jurisdiction. Numerous publications may have been disclosed by, and numerous patents may have been issued to, our competitors and others relating to methods of dialysis of which we are not aware and additional patents relating to methods of dialysis may be issued to our competitors and others in the future. If any of those publications or patents conflict with our patent rights, or cover our products, then any or all of our patent applications could be rejected and any or all of our granted patents could be invalidated, either of which could materially adversely affect our competitive position.

Litigation and other proceedings relating to patent matters, whether initiated by us or a third party, can be expensive and time-consuming, regardless of whether the outcome is favorable to us, and may require the diversion of substantial financial, managerial and other resources. An adverse outcome could subject us to significant liabilities to third parties or require us to cease any related development, product sales or commercialization activities. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others and the claims of these patents are ultimately determined to be valid, then we may be required to obtain licenses under patents of others in order to develop, manufacture, use, import and/or sell our products. We may not be able to obtain licenses under any of these patents on terms acceptable to us, if at all. If we do not obtain these licenses, we could encounter delays in, or be prevented entirely from using, importing, developing, manufacturing, offering or selling any products or practicing any methods, or delivering any services requiring such licenses.

If we file patent applications or obtain patents in foreign countries, we will be subject to laws and procedures that differ from those in the United States. Such differences could create additional uncertainty about the level and extent of our patent protection. Moreover, patent protection in foreign countries may be different from patent protection under U.S. laws and may not be as favorable to us. Many non-U.S. jurisdictions, for example, prohibit patent claims covering methods of medical treatment of humans, although this prohibition may not include devices used for such treatment.

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If we are not able to protect our trade secrets through enforcement of our confidentiality and non-competition agreements, then our competitors may gain access to our trade secrets, we may not be able to compete effectively and we may not be profitable.

We attempt to protect our trade secrets, including the processes, concepts, ideas and documentation associated with our technologies, through the use of confidentiality agreements and non-competition agreements with our current employees and with other parties to whom we have divulged such trade secrets. If these employees or other parties breach our confidentiality agreements and non-competition agreements or if these agreements are not sufficient to protect our technology or are found to be unenforceable, then our competitors could acquire and use information that we consider to be our trade secrets and we may not be able to compete effectively.

If our trademarks and trade names are not adequately protected, then we may not be able to build brand loyalty and our sales and revenues may suffer.

Our registered or unregistered trademarks or trade names may be challenged, cancelled, infringed, circumvented or declared generic or determined to be infringing on other marks. See “Business – Intellectual Property.” We may not be able to protect our rights to these trademarks and trade names, which we need to build brand loyalty. Over the long term, if we are unable to establish a brand based on our trademarks and trade names, then we may not be able to compete effectively and our sales and revenues may suffer.

If we are not able to successfully scale-up production of our products, then our sales and revenues will suffer.

In order to commercialize our products, we need to be able to produce them in a cost-effective way on a large scale to meet commercial demand, while maintaining extremely high standards for quality and reliability. If we fail to successfully commercialize our products, then we will not be profitable.

We expect to rely on a limited number of independent manufacturers to produce the OLpur MD190 and our other products for us. Our manufacturers’ systems and procedures may not be adequate to support our operations and may not be able to achieve the rapid execution necessary to exploit the market for our products. Our manufacturers could experience manufacturing and control problems as they begin to scale-up our future manufacturing operations, and we may not be able to scale-up manufacturing in a timely manner or at a commercially reasonable cost to enable production in sufficient quantities. If we experience any of these problems with respect to our manufacturers’ initial or future scale-ups of manufacturing operations, then we may not be able to have our products manufactured and delivered in a timely manner.

We will not control the independent manufacturers of our products, which may affect our ability to deliver our products in a timely manner. If we are not able to ensure the timely delivery of our products, then potential customers may not order our products, and our sales and revenues would be adversely affected.

Independent manufacturers of medical devices will manufacture all of our products and components. We have contracted Medica s.r.l., a developer and manufacturer of medical products with corporate headquarters located in Italy, to assemble and produce our OLpur MD190, and have an agreement with Membrana GmbH, a manufacturer of medical and technical membranes for applications like dialysis with corporate headquarters located in Germany, to produce the fiber for the OLpur MD190. As with any independent contractor, these manufacturers will not be employed or otherwise controlled by us and will be generally free to conduct their business at their own discretion. For us to compete successfully, among other things, our products must be manufactured on a timely basis in commercial quantities at costs acceptable to us. If one or more of our independent manufacturers fails to deliver our products in a timely manner, then we may not be able to find a substitute manufacturer and may lose business. If we are not, or if potential customers believe that we are not, able to ensure timely delivery of our products, then potential customers may not order our products, and our sales and revenues would be adversely affected.

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The loss or interruption of services of any of our manufacturers could slow or stop production of our products, which would limit our ability to generate sales and revenues.

Because we are likely to rely on no more than two contract manufacturers to manufacture each of our products and major components of our products, a stop or significant interruption in the supply of our products or major components by a single manufacturer, for any reason, could have a material adverse effect on us. We expect most of our contract manufacturers will enter into contracts with us to manufacture our products and major components and that these contracts will be terminable by the contractors or us at any time under certain circumstances. We have not made alternative arrangements for the manufacture of our products or major components and we cannot be sure that acceptable alternative arrangements could be made on a timely basis, or at all, if one or more of our manufacturers failed to manufacture our products or major components in accordance with the terms of our arrangements. If any such failure occurs and we are unable to obtain acceptable alternative arrangements for the manufacture of our products or major components of our products, then the production and sale of our products could slow down or stop, and our cash flow would suffer.

If we are not able to maintain sufficient quality controls, then the approval or clearance of our products by the European Union, the FDA or other relevant authorities could be delayed or denied and our sales and revenues will suffer.

Approval or clearance of our products could be delayed by the European Union, the FDA and the relevant authorities of other countries if our manufacturing facilities do not comply with their respective manufacturing requirements. The European Union imposes requirements on quality control systems of manufacturers, which are inspected and certified on a periodic basis and may be subject to additional unannounced inspections. Failure by our manufacturers to comply with these requirements could prevent us from marketing our products in the European Community. The FDA also imposes requirements through quality system requirements, or QSR, regulations, which include requirements for good manufacturing practices, or GMP. Failure by our manufacturers to comply with these requirements could prevent us from obtaining FDA approval of our products and from marketing our products in the United States. Although some of the manufacturing facilities and processes that we expect to use to manufacture our OLpur MD190 have been inspected and certified by a worldwide testing and certification agency (also referred to as a notified body) that performs conformity assessments to European Union requirements for medical devices, they have not been inspected by the FDA. Similarly, although some of the facilities and processes that we expect to use to manufacture our OLpur H₂H and OLpur NS2000 have been inspected by the FDA, they have not been inspected by any notified body. A “notified body” is a group accredited and monitored by governmental agencies that inspects manufacturing facilities and quality control systems at regular intervals and is authorized to carry out unannounced inspections. We cannot be sure that any of the facilities or processes we use will comply or continue to comply with their respective requirements on a timely basis or at all, which could delay or prevent our obtaining the approvals we need to market our products in the European Community and the United States.

Even with approval to market our products in the European Community, the United States and other countries, manufacturers of our products must continue to comply or ensure compliance with the relevant manufacturing requirements. Although we cannot control the manufacturers of our products, we may need to expend time, resources and effort in product manufacturing and quality control to assist with their continued compliance with these requirements. If violations of applicable requirements are noted during periodic inspections of the manufacturing facilities of our manufacturers, then we may not be able to continue to market the products manufactured in such facilities and our revenues may be materially adversely affected.

Once our products are commercialized, we may face significant challenges in obtaining market acceptance of our products, which could adversely affect our potential sales and revenues.

Our products are, or will be, new to the market, and we do not yet have an established market or customer base for our products. Acceptance of our products in the marketplace by both potential users, including ESRD

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patients, and potential purchasers, including nephrologists, dialysis clinics and other health care providers, is uncertain, and our failure to achieve sufficient market acceptance will significantly limit our ability to generate revenue and be profitable. Market acceptance will require substantial marketing efforts and the expenditure of significant funds by us to inform dialysis patients and nephrologists, dialysis clinics and other health care providers of the benefits of using our products. We may encounter significant clinical and market resistance to our products and our products may never achieve market acceptance. Factors that may affect our ability to achieve acceptance of our products in the market place include whether:

• our products will be safe for use;

• our products will be effective;

• our products will be cost-effective;

• we will be able to demonstrate product safety, efficacy and cost-effectiveness;

• there are unexpected side effects, complications or other safety issues associated with our products; and

• government or third party reimbursement for the cost of our products is available at reasonable rates, if at all.

If we cannot develop adequate distribution, customer service and technical support networks, then we may not be able to market and distribute our products effectively and/or customers may decide not to order our products, and, in either case, our sales and revenues will suffer.

Our strategy requires us to distribute our products and provide a significant amount of customer service and maintenance and other technical service. To provide these services, we have begun, and will need to continue, to develop a network of distribution (see “Business – Sales and Marketing”), and a staff of employees and independent contractors in each of the areas in which we intend to operate. We cannot assure you we will be able to organize and manage this network on a cost-effective basis. If we cannot effectively organize and manage this network, then it may be difficult for us to distribute our products and to provide competitive service and support to our customers, in which case customers may be unable, or decide not, to order our products and our sales and revenues will suffer.

We may face significant risks associated with international operations, which could have a material adverse effect on our business, financial condition and results of operations.

We expect to manufacture and to market our products in our Target European Market and elsewhere outside of the United States. We expect that our revenues from our Target European Market will initially account for a significant portion of our revenues. Our international operations are subject to a number of risks, including the following:

• fluctuations in exchange rates of the United States dollar could adversely affect our results of operations;

• we may face difficulties in enforcing and collecting accounts receivable under some countries’ legal systems;

• local regulations may restrict our ability to sell our products, have our products manufactured or conduct other operations;

• political instability could disrupt our operations;

• some governments and customers may have longer payment cycles, with resulting adverse effects on our cash flow; and

• some countries could impose additional taxes or restrict the import of our products.

Any one or more of these factors could increase our costs, reduce our revenues, or disrupt our operations, which could have a material adverse effect on our business, financial condition and results of operations.

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If we are unable to keep our key management and scientific personnel, then we are likely to face significant delays at a critical time in our corporate development and our business is likely to be damaged.

Our success depends upon the skills, experience and efforts of our management and other key personnel, including our chief executive officer, certain members of our scientific and engineering staff and our marketing executives. As a relatively new company, much of our corporate, scientific and technical knowledge is concentrated in the hands of these few individuals. We do not maintain key-man life insurance on any of our management or other key personnel. The loss of the services of one or more of our present management or other key personnel could significantly delay the development and/or launch of our products as there could be a learning curve of several months or more for any replacement personnel. Furthermore, competition for the type of highly skilled individuals we require is intense and we may not be able to attract and retain new employees of the caliber needed to achieve our objectives. Failure to replace key personnel could have a material adverse effect on our business, financial condition and operations.

If a non-competition clause in an employee’s employment agreement with his former employer is enforceable and such employer successfully seeks enforcement thereof, then we may be liable for damages, which could impair our potential profitability.

At the time we entered into an employment agreement with one of our employees, he was subject to an employment agreement with his former employer that included a non-competition clause. The former employer may seek to enforce such non-competition clause that purports to impose a fine upon us, in our capacity as our employee’s employer, and if a court of competent jurisdiction finds us liable for damages, such liability could impair our potential profitability. See “Management – Employment Agreements and Incentive Bonus Programs – Employment Agreement.”

Our certificate of incorporation limits liability of our directors, which could discourage you or other stockholders from bringing suits against our directors in circumstances where you think they might otherwise be warranted.

Our certificate of incorporation provides, with specific exceptions required by Delaware law, that our directors are not personally liable to us or our stockholders for monetary damages for any action or failure to take any action. In addition, we have agreed, and our certificate of incorporation and bylaws provide for, mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law. These provisions may discourage stockholders from bringing suit against a director for breach of duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against any of our directors.

If and to the extent we are found liable in certain proceedings or our expenses related to those or other legal proceedings become significant, then our liquidity could be materially adversely affected and the value of our stockholders’ interests in us could be impaired.

We are the defendant in an action captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v. Nephros, Inc., Case No. 04-CV-20547, pending in the U.S. District Court for the Southern District of Florida (the “Ancillary Proceeding”). That action is ancillary to a proceeding captioned Securities and Exchange Commission v. Michael Lauer, et. al., Case No. 03-CV-80612, also pending in the U.S. District Court for the Southern District of Florida, in which the court has appointed a Receiver to manage Lancer Offshore, Inc. and various related entities (the “Receivership”). See “Business – Legal Proceedings.”

In the Ancillary Proceeding, the Receiver for Lancer Offshore, Inc. alleges that, in consideration for Lancer Offshore, Inc.’s agreement to enter into a settlement agreement in January 2003, we were required to deliver a note in the principal amount of $1,500,000 and an instrument evidencing the portion of warrants previously issued to Lancer Offshore, Inc. that were not surrendered by Lancer Offshore, Inc. pursuant to the settlement

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agreement, and the Receiver seeks payment of $1,500,000, together with interest, costs and attorneys’ fees, as well as delivery of a warrant evidencing the right to purchase until December 2007 an aggregate of 75,000 shares of our common stock for $2.50 per share (without giving effect to any adjustment that may result from the reverse stock split pursuant to the antidilution provisions of such warrant, as amended). Pursuant to our January 2003 settlement agreement with Lancer Offshore, Inc., such warrants were amended to provide that the exercise price per share and the number of shares issuable upon exercise thereof would not be adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated. See “Business – Settlement Agreements – Lancer Offshore, Inc.” Lancer Offshore, Inc. may contend that the 75,000 shares and $2.50 per share exercise terms of their warrant are not subject to adjustment as a result of our currently contemplated 0.2841-for-one reverse stock split. Furthermore, Lancer Offshore, Inc. may claim that the number of shares issuable upon exercise of the warrant should actually be increased to 94,771 and the exercise price proportionally decreased to $1.98 per share, upon consummation of the currently planned split to adjust for the difference between the split contemplated in the warrants (0.2248318-for-one) and our currently planned split (0.2841-for-one). Although we have asserted claims for damages against Lancer Offshore, Inc. that exceed the amount sought in the Ancillary Proceeding by submitting a proof of claim in the Receivership and we have been discussing a potential settlement of all claims with the Receiver, there can be no assurance that these discussions will be successful. See “Business – Legal Proceedings.”

In June 2004, Hermitage Capital Corporation (“Hermitage”) threatened to sue us for warrants it claims are due to it under its settlement agreement with us as well as a placement fee and additional warrants it claims are, or will be, owed in connection with the offering to which this prospectus relates, as compensation for allegedly introducing us to the underwriter. We believe that Hermitage may bring such lawsuit imminently and expect that it will also include claims for various unspecified damages.

The form of warrants that would have been issuable to Hermitage pursuant to the settlement agreement, if the closing of the transactions contemplated by our settlement agreement with Lancer Offshore, Inc. had occurred, contained the same antidilution provisions as were added to Lancer Offshore, Inc.’s warrant pursuant to our settlement agreement with Lancer Offshore, Inc. Accordingly, Hermitage may contend that the 60,000 shares and $2.50 per share exercise terms of the warrant described in the settlement agreement would not be subject to adjustment as a result of our currently contemplated 0.2841-for-one reverse stock split. Furthermore, Hermitage may claim that the number of shares issuable upon exercise of the warrant should actually be increased to 75,817 and the exercise price proportionally decreased to $1.98 per share, upon consummation of the currently planned split to adjust for the difference between the split contemplated in the warrants (0.2248318-for-one) and our currently planned split (0.2841-for-one).

If and to the extent we are found to have significant liability to Lancer Offshore, Inc. or Hermitage, or our expenses related to defending against the Receiver’s claims in the Ancillary Proceeding, any lawsuit Hermitage may bring against us and/or pursuing our claims in the Receivership become significant, then our liquidity could be materially adversely affected and/or our stockholders could experience dilution in their investment in us and the value of our stockholders’ interests in us could be impaired. See “Business – Legal Proceedings.”

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Risks Related to Our Industry

We expect to face significant competition from existing suppliers of renal replacement therapy devices, supplies and services. If we are not able to compete with them effectively, then we may not be profitable.

We expect to compete in the kidney dialysis market with existing suppliers of hemodialysis and peritoneal dialysis devices, supplies and services. Our competitors include Fresenius Medical Care AG, The Gambro Company and Baxter International Inc., currently three of the primary machine manufacturers in hemodialysis, as well as B. Braun Biotech International GmbH, Nipro Medical Corporation, Asahi Kasei Corporation and other smaller machine manufacturers in hemodialysis. Fresenius and Gambro also manufacture hemodiafiltration, or HDF, machines. These companies and most of our other competitors have longer operating histories and substantially greater financial, marketing, technical, manufacturing and research and development resources and experience than we have. Our competitors could use these resources and experiences to develop products that are more effective or less costly than any or all of our products or that could render any or all of our products obsolete. Our competitors could also use their economic strength to influence the market to continue to buy their existing products.

We do not have an established customer base and may encounter a high degree of competition in developing one. Our potential customers are a limited number of nephrologists, national, regional and local dialysis clinics and other healthcare providers. The number of our potential customers may be further limited to the extent any exclusive relationships exist or are entered into between our potential customers and our competitors. We cannot assure you that we will be successful in marketing our products to these potential customers. If we are not able to develop competitive products and take and hold sufficient market share from our competitors, we will not be profitable.

Some of our competitors own or could acquire dialysis clinics throughout the United States, our Target European Market and other regions of the world. We may not be able to successfully market our products to the dialysis clinics under their ownership. If our potential market is materially reduced in this manner, then our potential sales and revenues could be materially reduced.

Some of our competitors, including Fresenius and Gambro, manufacture their own products and own dialysis clinics in the United States, our Target European Market and other regions of the world. Because these competitors have historically tended to use their own products in their clinics, we may not be able to successfully market our products to the dialysis clinics under their ownership. Based on the annual reports for each company as of December 2003: (1) Fresenius treated in its own dialysis clinics approximately 26% of the dialysis patients in the United States, 7% of the dialysis patients in Fresenius’s European market, including the Czech Republic, France, Germany, Hungary, Italy, Portugal, Poland, Slovakia, Slovenia, Spain, Turkey and the United Kingdom, and 9% of the dialysis patients worldwide; and (2) Gambro treated in its own dialysis clinics approximately 14% of the dialysis patients in the United States, 3% of the dialysis patients in Europe and 4% of the dialysis patients worldwide. Based on certain marketing reports, we believe that, in September 2001, approximately 95% of the products then used by dialysis clinics owned by Fresenius were products of Fresenius and approximately 40% of the products then used by dialysis clinics owned by Gambro were products of Gambro. See The Dialysis Industry Could Get Bloody, Kidney Machinations, September 11, 2001.

We believe that there is currently a trend among ESRD therapy providers towards greater consolidation. If such consolidation takes the form of our competitors acquiring independent dialysis clinics, rather than such dialysis clinics banding together in independent chains, then more of our potential customers would also be our competitors. If our competitors continue to grow their networks of dialysis clinics, whether organically or through consolidation, and if we cannot successfully market our products to dialysis clinics owned by these competitors or any other competitors, then our revenues could be adversely affected.

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If the size of the potential market for our products is significantly reduced due to pharmacological or technological advances in preventative and alternative treatments for ESRD, then our potential sales and revenues will suffer.

Pharmacological or technological advances in preventative or alternative treatments for ESRD could significantly reduce the number of ESRD patients needing our products. These pharmacological or technological advances may include:

• the development of new medications, or improvements to existing medications, which help to delay the onset or prevent the progression of ESRD in high-risk patients (such as those with diabetes and hypertension);

• the development of new medications, or improvements in existing medications, which reduce the incidence of kidney transplant rejection; and

• developments in the use of kidneys harvested from genetically-engineered animals as a source of transplants.

If these or any other pharmacological or technological advances reduce the number of patients needing treatment for ESRD, then the size of the market for our products may be reduced and our potential sales and revenues will suffer.

If the number of ESRD patients needing ongoing treatment for ESRD does not increase at the rates projected by certain industry publications, then our potential market will be smaller than expected, and our sales and revenues could be adversely affected.

Based on certain industry publications as of year end 2002, the number of ESRD patients worldwide was approximately 1.6 million and expanding at rate of 6 to 7% per year. If the number of ESRD patients needing ongoing treatment for ESRD does not continue to increase at that rate, the size of the market for our products will not increase at the rate we estimate and, therefore, our anticipated sales and revenues may be reduced, and we may not be profitable. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.38.

If government and other third party reimbursement programs discontinue their coverage of ESRD treatment or reduce reimbursement rates for ESRD products, then we may not be able to sell as many units of our products as otherwise expected, or we may need to reduce the anticipated prices of our products and, in either case, our potential revenues may be reduced.

Providers of renal replacement therapy are often reimbursed by government programs, such as Medicare or Medicaid in the U.S., or other third-party reimbursement programs, such as private medical care plans and insurers. We believe that the amount of reimbursement for renal replacement therapy under these programs has a significant impact on the decisions of nephrologists, dialysis clinics and other health care providers regarding treatment methods and products. Accordingly, changes in the extent of coverage for renal replacement therapy or a reduction in the reimbursement rates under any or all of these programs may cause a decline in recommendations or purchases of our products, which would materially adversely affect the market for our products and reduce our potential sales. Alternatively, we might respond to reduced reimbursement rates by reducing the prices of our products, which could also reduce our potential revenues.

As the number of managed health care plans increases in the United States, amounts paid for our products by non-governmental programs may decrease and we may not generate sufficient revenues to be profitable.

We expect to obtain a portion of our revenues from reimbursement provided by non-governmental programs in the United States. Although non-governmental programs generally pay higher reimbursement rates than governmental programs, of the non-governmental programs, managed care plans generally pay lower

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reimbursement rates than insurance plans. Reliance on managed care plans for dialysis treatment may increase if future changes to the Medicare program require non-governmental programs to assume a greater percentage of the total cost of care given to dialysis patients over the term of their illness, or if managed care plans otherwise significantly increase their enrollment of these patients. If the reliance on managed care plans for dialysis treatment increases, more patients join managed care plans or managed care plans reduce reimbursement rates, we may need to reduce anticipated prices of our products or sell fewer units, and, in either case, our potential revenues would suffer.

If HDF does not become a preferred therapy for ESRD, then the market for our products may be limited and we may not be profitable.

A significant portion of our success is dependent on the acceptance and implementation of HDF as a preferred therapy for ESRD. There are several treatment options currently available and others may be developed. HDF may not increase in acceptance as a preferred therapy for ESRD. If it does not, the market for our products may be limited and we may not be able to sell a sufficient quantity of our products to be profitable.

If the per-treatment costs for dialysis clinics using our products are higher than the costs of clinics providing hemodialysis treatment, then we may not achieve market acceptance of our products in the United States and our potential sales and revenues will suffer.

If the cost of our products results in an increased cost to the dialysis clinic over hemodialysis therapies and such cost is not separately reimbursable by governmental programs or private medical care plans and insurers outside of the per-treatment fee, then we may not gain market acceptance for our products in the United States unless HDF therapy becomes the standard treatment method for ESRD. If we do not gain market acceptance for our products in the United States, then the size of our market and our anticipated sales and revenues will be reduced.

Proposals to modify the health care system in the United States or other countries could affect the pricing of our products. If we cannot sell our products at the prices we plan to, then our margins and our profitability will be adversely affected.

A substantial portion of the cost of treatment for ESRD in the United States is currently reimbursed by the Medicare program at prescribed rates. Proposals to modify the current health care system in the United States to improve access to health care and control its costs are continually being considered by the federal and state governments. We anticipate that the U.S. Congress and state legislatures will continue to review and assess alternative health care reform proposals. We cannot predict whether these reform proposals will be adopted, when they may be adopted or what impact they may have on us if they are adopted. Any spending decreases or other significant changes in the Medicare program could affect the pricing of our products. As we are not yet established in our business and it will take some time for us to begin to recoup our research and development costs, our profit margins are likely initially to be lower than those of our competitors and we may be more vulnerable to small decreases in price than many of our competitors.

Health administration authorities in countries other than the United States may not provide reimbursement for our products at rates sufficient for us to achieve profitability, or at all. Like the United States, these countries have considered health care reform proposals and could materially alter their government-sponsored health care programs by reducing reimbursement rates for dialysis products.

Any reduction in reimbursement rates under Medicare or foreign health care programs could negatively affect the pricing of our products. If we are not able to charge a sufficient amount for our products, then our margins and our profitability will be adversely affected.

20

If patients in our Target European Market were to reuse dialyzers, then our potential product sales could be materially adversely affected.

In the United States, a majority of dialysis clinics reuse dialyzers – that is, a single dialyzer is disinfected and reused by the same patient. However, the trend in our Target European Market is towards not reusing dialyzers, and some countries (such as France, Germany, Italy and the Netherlands) actually forbid the reuse of dialyzers. As a result, each patient in our Target European Market can generally be expected to purchase more dialyzers than each United States patient. The laws forbidding reuse could be repealed and it may become generally accepted to reuse dialyzers in our Target European Market, just as it currently is in the United States. If reuse of dialyzers were to become more common among patients in our Target European Market, then there would be demand for fewer dialyzer units and our potential product sales could be materially adversely affected.

21

Risks Related to this Offering

We may invest or spend the proceeds of this offering in ways with which you do not agree and in ways that may not yield a favorable return.

Our management will have broad discretion over the use of the net proceeds from this offering. Stockholders may not deem such uses desirable. Our use of the proceeds from this offering may vary substantially from our currently planned uses and investors in this offering will be relying on the judgment of our management with respect to the use of proceeds of this offering. We cannot assure you that we will apply such proceeds effectively or that we will invest such proceeds in a manner that will yield a favorable return or any return at all.

Several provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and our bylaws could discourage, delay or prevent a merger or acquisition, which could adversely affect the market price of our common stock.

Several provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and our bylaws could discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, and the market price of our common stock could be reduced as a result. These provisions include:

• authorizing our board of directors to issue “blank check” preferred stock without stockholder approval;

• providing for a classified board of directors with staggered, three-year terms;

• prohibiting us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder unless certain provisions are met;

• prohibiting cumulative voting in the election of directors;

• prohibiting stockholder action by written consent unless the written consent is signed by all stockholders entitled to vote on the action;

• limiting the persons who may call special meetings of stockholders; and

• establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

As a relatively new company with little or no name recognition and with several risks and uncertainties that could impair our business operations, we are not likely to generate widespread interest in our common stock following this offering. Without widespread interest in our common stock, our common stock price may be highly volatile and your investment in our common stock could decline in value.

Prior to this offering, there has been no public market for our common stock. Unlike many companies with publicly traded securities, we have little or no name recognition outside the nephrology community. We are a relatively new company and very few investors are familiar with either our company or our products. As we will not be marketing our products directly to the public, it may be difficult for us to generate the kind of interest in our stock that other companies experience after an initial public offering. After this offering, an active trading market in our common stock might not develop, or if it does develop, might not continue.

Additionally, the market price of our common stock may fluctuate significantly in response to many factors, many of which are beyond our control. Risks and uncertainties described elsewhere in this “Risk Factors” section could impair our business operations or otherwise cause our operating results or prospects to be below expectations of investors and market analysts, which could adversely affect the market price of our common stock. As a result, investors purchasing in this offering may not be able to resell their shares at or above the initial public offering price and could lose all of their investment.

22

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against the company. We may become involved in this type of litigation in the future. Litigation of this type could be extremely expensive and divert management’s attention and resources from running our company.

Because our capital requirements have been and will continue to be significant, we may need funds in addition to the net proceeds of this offering or we will not be able to continue to operate our business. If our business fails, then you could lose your entire investment.

Our capital requirements have been and will continue to be significant. To date, we have been dependent primarily on the net proceeds of private placements of our equity and debt securities, aggregating approximately $23.4 million. We are dependent upon the net proceeds of this offering to fund our marketing and sales efforts, clinical trials, regulatory approvals, research and development as well as our other working capital requirements. We currently have no committed sources of, or other arrangements with respect to, additional financing. We cannot assure you that our existing capital resources, together with the net proceeds from this offering and future operating cash flows, will be sufficient to fund our future operations. Our capital requirements will depend on numerous factors, including:

• the time and cost involved in obtaining regulatory approval for our products;

• the cost involved in protecting our proprietary rights;

• the time and cost involved in manufacturing scale-up and in establishing marketing acceptance;

• the time and cost involved in providing training and technical support networks; and

• the effectiveness of other commercialization activities.

If we require additional capital beyond the cash, if any, generated from our operations and the proceeds of this offering, we would need to seek other forms of financing, through the sale of equity securities or otherwise, to achieve our business objectives. We cannot assure you that we will be able to obtain alternative financing on acceptable terms or at all. Our failure to obtain financing when needed could have a material adverse effect on us. Any additional equity financing could substantially dilute your equity interests in our company and any debt financing could impose significant financial and operational restrictions on us.

Our directors, executive officers and principal stockholders will control a significant portion of our stock after the offering and, if they choose to vote together, could have sufficient voting power to control the vote on substantially all corporate matters.

Even after completion of the offering, our directors, executive officers and principal stockholders will beneficially own a significant percentage of our common stock. Immediately following the offering to which this prospectus relates (without giving effect to the potential exercise of the underwriters’ over-allotment option), our directors, officers and principal stockholders may be deemed to beneficially own approximately 56% of our outstanding common stock. Should they act as a group, they will have the power to elect all of our directors and to control the vote on substantially all other corporate matters without the approval of other stockholders, including those stockholders who purchase stock in this offering. Furthermore, immediately following the offering to which the prospectus relates (without giving effect to the potential exercise of the underwriters’ over-allotment option), Ronald O. Perelman will beneficially own 28.3% of our outstanding common stock (35.3% prior to the offering). On the same basis, WPPN, LP, Wasserstein SBIC Ventures II L.P., WV II Employee Partners, LLC, and BW Employee Holdings, LLC, entities that may be deemed controlled by Bruce Wasserstein (the “Wasserstein Entities”), will beneficially own an aggregate of 15.4% of our outstanding common stock (19.2% prior to the offering), although Mr. Wasserstein himself disclaims beneficial ownership of the shares held by the Wasserstein Entities except to the extent of his pecuniary interest therein (which is less than 1% of our outstanding common stock). Our principal stockholders may have significant influence over our policies and affairs, including the election of directors. Furthermore, such concentration in voting power could enable those stockholders to delay or prevent another party from taking control of our company even where you might find such change of control transaction desirable.

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Future sales of our common stock could cause the market price of our common stock to decline.

The market price of our common stock could decline due to sales of a large number of shares in the market after this offering, including sales of shares by our large stockholders, or the perception that such sales could occur. These sales could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock.

All of our existing security holders (other than Lancer Offshore, Inc.) will be subject to lock-up agreements which prohibit the sale of any of their shares of our common stock in the public market until nine months from the effective date of this prospectus and, thereafter, on a cumulative basis for each holder, of more than  ¹/3 of our common stock held by such holder prior to 12 months from the effective date of this prospectus or more than  ²/3 of our common stock held by such holder prior to 15 months from the effective date of this prospectus. Lancer Offshore Inc. is subject to a lock-up which prohibits the sale of all of the shares issuable upon exercise of its warrants in the public market until 180 days after the effective date. We have entered into registration rights agreements with many of our existing stockholders that entitle them to have an aggregate of 9,841,004 shares registered for sale in the public market. Moreover, many of those shares could be sold in the public market without registration after one year, subject to the limitations of Rule 144 under the Securities Act.

You will incur immediate and substantial dilution.

The assumed initial public offering price per share of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate and substantial dilution in the net tangible book value of their common stock of $5.08 per share, based on the assumed initial public offering price of $6.50 per share. To the extent we raise additional capital by issuing equity securities in the future, you and our other stockholders may experience substantial dilution and future investors may be granted rights superior to those of our current stockholders.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions. Words including “may,” “could,” “would,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which remain beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described in “Risk Factors” and elsewhere in this prospectus. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this prospectus. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

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IMPORTANT ASSUMPTIONS IN THIS PROSPECTUS

Our trademarks are used herein without trademark notices

OLpur and H₂H are among our trademarks for which registrations are pending. We have assumed, in this prospectus, that the reader understands that these terms are source-indicating. Accordingly, such terms appear throughout this prospectus without trademark notices for convenience only and should not be construed as being used in a descriptive or generic sense.

References to Shares of Common Stock in this Prospectus Assume the Filing of an Amendment and Restatement to our Certificate of Incorporation to Effect a Reverse Stock Split and to Fix the Number of Shares Issuable Upon Conversion of Our Preferred Stocks.

Prior to the effectiveness of the registration statement to which this prospectus relates, we intend to file an amendment and restatement of our certificate of incorporation, which, among other things, will effect a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock. See “Description of Securities – Reverse Stock Split.” The proposed amendment and restatement of our certificate of incorporation will also provide that any dividends accrued on our preferred stocks after May 31, 2004 shall be repaid in cash following the offering to which this prospectus relates. By paying these marginal dividends in cash, we can hold constant the number of shares of common stock issuable upon conversion of our preferred stock.

Unless the context otherwise requires, all references in this prospectus to (1) the number of shares of our common stock outstanding, (2) the number of shares of our common stock issuable upon exercise or conversion, as the case may be, of options, warrants or convertible notes or (3) the number of shares of our common stock reserved for issuance, assumes the filing of such amendment and restatement.

All Information in this Prospectus Assumes that we have Obtained all Required Shareholder Approvals on or Prior to Effectiveness of the Registration Statement to which this Prospectus Relates.

Before we can file the amendment and restatement to our certificate of incorporation described above and perform various other actions in connection with this prospectus, we must obtain stockholder approval. We anticipate that we will obtain all required stockholder approval prior to the effectiveness of the registration statement to which this prospectus relates. Accordingly, all information in this prospectus assumes that all such stockholder approvals have been obtained.

Over-allotment Option Granted to the Underwriters has not been Exercised

Unless otherwise indicated, all information in this prospectus assumes that the over-allotment option granted to the underwriters by us has not been exercised.

Warrants are Subject to Antidilution Adjustments

Unless otherwise indicated, the number of shares of capital stock subject to all options and warrants referred to in this prospectus are (or were, as the case may be) subject to provisions known as “antidilution adjustments” that may increase or decrease the number of shares issuable upon exercise thereof and proportionately adjust the exercise price of options and warrants.

Dollar References are to U.S. Dollars

Unless otherwise indicated, all dollar references in this prospectus are (and the “$” symbol refers) to U.S. dollars.

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USE OF PROCEEDS

At an assumed initial offering price of $6.50 per share, net proceeds of this offering will be approximately $13.4 million, after deducting underwriting discounts and commissions and other expenses, and, if the underwriters’ over-allotment option is exercised, net proceeds of this offering will be approximately $15.6 million, after deducting underwriting discounts and commissions and other expenses. We estimate that underwriting discounts and commissions and other expenses of this offering will be in the aggregate amount of approximately $2.8 million and, if the underwriters’ over-allotment option is exercised, approximately $3.1 million. As there has been no public market for our common stock, the assumed initial public offering price of our common stock has been determined by negotiation between us and the underwriters.

	Intended Use	Amount
1.	For the marketing and sales of our products through active solicitation of customers by exhibiting at trade shows, advertising in trade magazines and setting up a sales group to solicit prospective customers.	$4,600,000
2.	To complete certain clinical studies, obtain appropriate regulatory approvals and expand our research and development with respect to our products.	$2,700,000
3.	To acquire capital equipment needed for the more efficient manufacture of commercial quantities of OLpur MD190 product	$1,500,000
4.	To continue our product engineering to complete clinical grade OLpur H2H and OLpur NS2000 products	$1,400,000
5.	To pay Plexus Services Corp. amounts due under our settlement agreement with them. See “Business – Settlement Agreements.”	$   275,000
6.	Any remaining amounts, for working capital purposes, including for additional salaries and wages as our organization grows and as we expand our presence in our Target European Market and establish operations in the United States and other markets, and for additional professional fees and expenses, other operating costs and payment of dividends on shares of our series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock accruing from May 31, 2004 to the date of the consummation of this offering, which dividends accrue at a rate of 6% per annum and, in the aggregate, amount to approximately $3,000 per day. In the event the underwriters’ over-allotment option is exercised and/or the initial offering price is greater or less than $6.50 per share, then the amount of net proceeds available for working capital and general corporate purposes will be more or less than indicated in this table.	$2,925,000

The foregoing represents our best estimate of the allocation of the net proceeds of this offering based upon the current status of our business. Our estimates regarding the use of proceeds is based on certain assumptions, including the development of our business in the way we anticipate. If any of our assumptions prove incorrect, we may find it necessary to reallocate a portion of the proceeds within the above-described categories or use portions of the proceeds for other purposes. Our estimates may prove to be inaccurate, new programs or activities may be undertaken which will require considerable additional expenditures or unforeseen expenses may occur. Pending use, we will invest the net proceeds of this offering in bank certificates of deposit and other fully insured investment grade interest bearing securities. See “Risk Factors – We may invest or spend the proceeds of this offering in ways with which you may not agree...”

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DIVIDEND POLICY

We have not declared or paid any cash or stock dividends on our common stock since our inception in April 1997. We have not declared or paid any cash dividends on our preferred stock either. However, in order to fix the number of shares of common stock issuable upon conversion of our preferred stocks upon consummation of this offering, we plan to pay any dividends on such preferred stocks that accrue after May 31, 2004 and prior to the consummation of this offering in cash. We presently intend to reinvest earnings to fund the development and expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. The declaration of dividends will be at the discretion of our board of directors and will generally depend upon our earnings, capital requirements, financial position and general economic conditions.

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2004:

• on an actual basis, giving effect to an amendment to our certificate of incorporation to be filed prior to the commencement of this offering, which, among other things, will effect a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock prior to the effectiveness of the registration statement to which this prospectus relates;

• on a pro forma basis, after giving effect to: (i) a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock prior to the effectiveness of the registration statement to which this prospectus relates; and (ii) the automatic conversion of all outstanding series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock into 8,263,107 shares of our common stock, upon the consummation of this offering; and

• on a pro forma basis as adjusted, after giving effect to: (i) a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock prior to the effectiveness of the registration statement to which this prospectus relates; (ii) the automatic conversion of all outstanding series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock into 8,263,107 shares of our common stock, upon the consummation of this offering; (iii) the receipt of net proceeds of $13.4 million from the sale of the 2,500,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses of $867,563; and (iv) the conversion of convertible notes in the aggregate principal amount of $250,000 (except for $50 thereof, which we repaid), the payment of $5,000 of accrued interest thereon and the exercise of warrant rights for the purchase of an aggregate of 87,500 shares of our series A convertible preferred stock for $1.00 per share in connection therewith and the conversion of such preferred stock into common stock upon the consummation of this offering (See “Certain Transactions”).

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	March 31, 2004
	Actual (1)			Pro Forma (1)			Pro Forma As Adjusted (1)
		(unaudited)			(unaudited)			(unaudited)
Short-term convertible notes payable	$	250,000		$	250,000		$	—
Mandatorily Redeemable Convertible Preferred Stock Series B Convertible Preferred Stock, par value $.001 per share: 2,333,333 shares authorized, 2,333,333 shares issued and outstanding; pro forma – 2,333,333 shares authorized, none issued and outstanding; pro forma as adjusted – 2,333,333 shares authorized, none issued and outstanding		2,522,500			—			—
Series C Convertible Preferred Stock, par value $.001 per share: 3,387,500 shares authorized, 3,137,550 shares issued and outstanding; pro forma – 3,387,500 shares authorized, none issued and outstanding; pro forma as adjusted – 3,387,500 shares authorized, none issued and outstanding		3,833,050			—			—
Series D Convertible Preferred Stock, par value $.001 per share: 20,000,000 shares authorized, 11,817,988 shares issued and outstanding; pro forma – 20,000,000 shares authorized, none issued and outstanding; pro forma as adjusted – 20,000,000 shares authorized, none issued and outstanding		2,966,001			—			—
Stockholders’ equity (deficit):
Series A Convertible Preferred Stock, par value $.001 per share: 4,500,000 shares authorized, 4,000,000 shares issued and outstanding; pro forma – 4,500,000 shares authorized, none issued and outstanding; pro forma as adjusted – 4,500,000 shares authorized, none issued and outstanding		4,000			—			—
Common Stock, par value $.001 per share: 49,000,000 shares authorized, 1,593,659 shares issued and outstanding; pro forma – 49,000,000 shares authorized, 9,856,766 shares issued and outstanding; pro forma as adjusted – 49,000,000 shares authorized, 12,452,636 shares issued and outstanding		1,594			9,857			12,453
Additional paid-in capital		23,710,534			33,027,822			46,795,113
Deferred compensation		(2,525,972	)		(2,525,972	)		(2,525,972	)
Accumulated other comprehensive income		69,460			69,460			69,460
Accumulated deficit from inception		(26,532,925	)		(26,532,925	)		(26,532,925	)
Total stockholders’ equity (deficit)		(5,273,309	)		4,048,242			17,818,129
Total capitalization	$	4,298,242		$	4,298,242		$	17,818,129

(1) The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 2004, and does not include the following:

• 375,000 shares of common stock reserved for issuance upon exercise of the underwriters’ over-allotment option;

• 250,000 shares of common stock reserved for issuance upon exercise of the underwriters’ warrants;

• 1,644,513 shares of common stock underlying stock options granted and outstanding pursuant to our equity incentive plan;

• 170,460 shares of common stock issuable upon exercise of warrants issued in June 2002 to a former supplier; See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Plexus Services Corp.;”

• 5,549 shares of common stock issuable upon exercise of warrants issued in September 2002 to certain former lenders. See “Description of Securities – Other Warrants”;

• 69,491 shares of common stock issuable upon conversion of preferred stock dividends accrued after March 31, 2004 and through May 31, 2004; and

• Any shares of common stock that might be issuable to a former lender upon exercise of certain warrants. See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Lancer Offshore, Inc.”

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DILUTION

Purchasers of our common stock in this offering will experience immediate and substantial dilution in the net tangible book value of the common stock from the initial public offering price. Net tangible book value per share represents the amount of our tangible assets reduced by the amount of our total liabilities, divided by the number of shares of common stock outstanding.

As of March 31, 2004, our pro forma net tangible book value was approximately $4.2 million, or approximately $0.43 per share of common stock after giving effect to (1) our reverse stock split, (2) the conversion of convertible notes in the aggregate principal amount of $250,000 (except for $50 thereof, which we repaid), the payment of $5,000 of accrued interest thereon and the exercise of warrant rights for the purchase of an aggregate of 87,500 shares of our series A convertible preferred stock for $1.00 per share in connection therewith (see “Certain Transactions”) and (3) the conversion of all outstanding shares of our series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock into shares of our common stock.

As of March 31, 2004, our pro forma net tangible book value as adjusted for the sale of the 2,500,000 shares of our common stock offered in this offering and application of the net proceeds of approximately $13.4 million (at the assumed initial public offering price of $6.50 per share and after deducting the underwriting discounts and commissions and estimated offering expenses of approximately $868,000) would have been approximately $1.42 per share.

This represents an immediate increase of $0.99 per share to existing stockholders and an immediate and substantial dilution of $5.08 per share to new investors purchasing common stock in this offering.

The following table illustrates this per share dilution:

	Per Share of Common Stock
Assumed initial public offering price per share of common stock	$	6.50
Pro forma net tangible book value as of March 31, 2004		0.43
Increase attributable to new investors		0.99
Pro forma net tangible book value after this offering		1.42
Dilution of net tangible book value to investors in this offering	$	5.08

The following table summarizes on a pro forma basis, as of March 31, 2004, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of our common stock, including the conversion of all the outstanding series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock as well as conversion of outstanding preferred stock issued as of April 28, 2004 upon conversion of convertible notes and exercise of warrant rights granted in connection therewith into shares of our common stock, and investors in this offering, assuming the sale of all 2,500,000 shares offered by this prospectus at the price indicated above and before deducting any underwriting discounts and offering expenses payable by us.

	Shares			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent
Existing Stockholders	9,952,636	79.9	%	$	23,780,338	59.4	%	$	2.39
New Investors	2,500,000	20.1	%	$	16,250,000	40.6	%	$	6.50
Total	12,452,636	100	%	$	40,030,038	100	%

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The above discussion and tables exclude:

• 375,000 shares of common stock reserved for issuance upon exercise of the underwriters’ over-allotment option;

• 250,000 shares of common stock reserved for issuance upon exercise of the underwriters’ warrants;

• 1,644,513 shares of common stock underlying stock options granted and outstanding pursuant to our equity incentive plan;

• 170,460 shares of common stock issuable upon exercise of warrants issued in June 2002 to a former supplier; See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Plexus Services Corp.;”

• 5,549 shares of common stock issuable upon exercise of warrants issued in September 2002 to certain former lenders. See “Description of Securities – Other Warrants”;

• 69,491 shares of common stock issuable upon conversion of preferred stock dividends accrued after March 31, 2004 and through May 31, 2004; and

• Any shares of common stock that might be issuable to a former lender upon exercise of certain warrants. See “Description of Securities – Other Warrants” and “Business – Settlement Agreements – Lancer Offshore, Inc.”

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SELECTED FINANCIAL DATA

The following selected financial data should be read in connection with, and are qualified by reference to, the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2003, 2002 and 2001, and the consolidated balance sheet data at December 31, 2003 and 2002, are derived from our consolidated financial statements included in this prospectus, which have been audited by Grant Thornton LLP, independent registered public accounting firm. The consolidated statements of operations data for the years ended December 31, 2000 and 1999, and the consolidated balance sheet data at December 31, 2001, 2000 and 1999, are derived from our consolidated financial statements that are not included in this prospectus. The consolidated statements of operations data for the quarters ended March 31, 2004 and 2003 and for the period from our inception on April 3, 1997 through March 31, 2004, and the consolidated balance sheet data as of March 31, 2004 and 2003, have been derived from our unaudited interim consolidated financial statements included in this prospectus. All share and per share data give effect to an amendment to our certificate of incorporation to be filed prior to the commencement of this offering which, among other things, will effect a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock prior to the effectiveness of the registration statement to which this prospectus relates.

Consolidated Statements of Operations Data

	Period from Inception to March 31, 2004			Three Months ended March 31,						Year ended December 31,
				2004			2003			2003			2002			2001			2000			1999
	(unaudited)			(unaudited)			(unaudited)															(unaudited)
Revenue – other	$	300,000		$	—		$	—		$	—		$	—		$	300,000		$	—		$	—
Cost of Goods Sold		12,618			12,618			—			—			—			—			—			—
Gross Profit (Loss)		287,382			(12,618	)		—			—			—			300,000			—			—
Operating expenses:
Research and development		11,966,225			690,024			228,596			1,320,556			957,616			737,858			4,781,708			2,682,105
Selling, general and administrative		9,350,395			1,316,435			545,389			3,673,902			1,097,400			652,828			854,315			866,127
Total operating expenses		21,316,620			2,006,459			773,985			4,994,458			2,055,016			1,390,686			5,636,023			3,548,232
Loss from operations		(21,029,238	)		(2,019,077	)		(773,985	)		(4,994,458	)		(2,055,016	)		(1,090,686	)		(5,636,023	)		(3,548,232	)
Other income:
Other income		6,113			—			—			—			—			—			668			5,445
Interest income		174,442			1,345			—			—			181			5,497			22,765			57,970
Interest expense and amortization of debt discount		(1,837,542	)		—			(588,000	)		(641,542	)		(1,196,000	)		—			—			—
Gain on disposal of assets		30,007			—			—			—			—			—			30,007			—
Forgiveness of indebtedness		833,793			—			—			—			833,793			—			—			—
Abandonment of IPO costs		—			—			(950,000	)		—			—			—			—			—
Total other income (expense)		(793,187	)		1,345			(1,538,000	)		(641,542	)		(362,026	)		5,497			53,440			63,415
Net loss		(21,822,425	)		(2,017,732	)		(2,311,985	)		(5,636,000	)		(2,417,042	)		(1,085,189	)		(5,582,583	)		(3,484,817	)
Cumulative preferred dividends and accretion		(4,710,500	)		(2,071,500	)		(89,000	)		(1,791,000	)		(365,000	)		(314,000	)		(169,000	)		—
Net loss attributable to common stockholders		(26,532,925	)		(4,089,232	)		(2,400,985	)		(7,427,000	)		(2,782,042	)		(1,399,189	)		(5,751,583	)		(3,484,817	)
Net loss per share –
Basic and diluted				$	(2.57	)	$	(1.51	)	$	(4.66	)	$	(1.75	)	$	(0.88	)	$	(3.67	)	$	(2.23	)
Weighted-average shares outstanding –
Basic and diluted					1,593,659			1,593,659			1,593,659			1,593,659			1,592,096			1,565,249			1,563,900
Pro forma per share data (unaudited)
Pro forma net loss per share (1)
Basic and diluted				$	(0.23	)	$	(0.50	)	$	(1.07	)	$	(0.55	)	$	(0.26	)	$	(1.59	)	$	(1.29	)
Pro forma weighted average shares outstanding (1)
Basic and diluted					8,637,746			4,588,687			5,283,212			4,423,255			4,180,918			3,510,986			2,700,300

(1) Gives effect to conversion of all mandatorily convertible preferred stock (including accrued preferred dividends) into common stock upon completion of this initial public offering.

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Consolidated Balance Sheet Data

	Quarter ended March 31, 2004					Year ended December 31,
	Pro Forma (1)		Actual			2003			2002			2001			2000			1999
	(unaudited)		(unaudited)												(unaudited)			(unaudited)
Cash and cash equivalents		5,566,995		5,566,995			4,121,263			240,412			277,526			162,921			289,632
Working capital (deficiency)		3,371,650		3,371,650			1,375,656			(2,190,242	)		(1,756,838	)		(1,734,998	)		(293,646	)
Total assets		7,357,554		7,357,554			5,033,888			1,279,583			394,624			347,462			509,046
Short-term debt and accrued liabilities, net		1,750,000		1,750,000			1,750,000			1,610,000			105,000			—			—
Redeemable preferred stock		—		9,321,551			7,250,051			5,885,550			5,520,550			4,266,550			—
Stockholders’ equity (deficiency)	$	4,048,242	$	(5,273,309	)	$	(5,382,346	)	$	(7,995,193	)	$	(7,163,151	)	$	(5,823,962	)	$	(77,379	)

(1) Gives effect to the conversion of all mandatorily convertible preferred stock (including accrued preferred dividends) into common stock upon completion of this initial public offering.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this prospectus.

Overview

Since our inception in April 1997, we have been engaged in the development of hemodiafiltration, or HDF, products and technologies for treating patients with End Stage Renal Disease, or ESRD. Our products include the OLpur MD190, a dialyzer, OLpur H₂H, an add-on module designed to enable HDF therapy using the most common types of hemodialysis machines, and the OLpur NS2000 system, a stand-alone HDF machine with associated filter technology. We began selling our OLpur MD190 dialyzer in some or all of Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland and the United Kingdom (referred to in this prospectus collectively as our “Target European Market”) in January 2004, and have developed prototypes for our OLpur H₂H product. We are developing our OLpur NS2000 product in conjunction with an established machine manufacturer in Italy. We are working with this manufacturer to modify an existing HDF platform they currently offer for sale in parts of our Target European Market, incorporating our proprietary H₂H technology.

We believe that the ESRD therapy industry has seen, at best, incremental improvements in therapy efficacy over the thirty year lifetime of the industry. There have been two significant improvements during this period: the introduction of (1) more water-permeable (or “high flux”) membranes in the 1980s; and (2) functional convective therapy in the form of hemodiafiltration (“HDF”) technology providing real-time, online ultra-purified (or “substitution”) fluid. The objective in enhancing ESRD therapy is to approximate as closely as possible the processes taking place in a healthy kidney. To that end, high flux membranes support the removal of a larger range of toxins by providing for passage of larger toxins across the membrane wall, and HDF brings to bear the same forces as those used in the kidney, namely convection, to further enhance removal of toxins from the blood. While both of these improvements have seen acceptance in the markets where they are available, we believe HDF would see a higher growth rate were it not for the higher costs and complexity of operation associated with offering this treatment modality with existing technologies.

Because of the advantages of HDF in reducing drug requirements and morbidity, and increasing patient life expectancy (see “Business – Overview”), we believe this modality has substantial potential if it can be delivered on a more cost-effective basis. In addition, our efforts are focused on delivering the most effective HDF available as measured by toxin clearance, which we believe will further enhance the beneficial effects of this modality. We face two primary potential challenges in delivering these advances:

(1) Price competition.    We make every effort to be efficient in acquiring our raw materials and manufacturing our product so as to have flexibility in our product pricing. We believe we can comfortably match our competitors’ pricing for products at the premium end of the product spectrum, which is where our market resides. In addition, if we are able to move more product into the market, our manufacturing costs will be reduced in relation to production volume.

(2) Competitive innovation.    We continue to innovate, both on our own and in cooperation with our manufacturers and key suppliers, to ensure that our products will continue to perform competitively. Our own research and development efforts continue, examining innovative approaches to toxin clearance. Additionally, our key suppliers are driven by their own competition to offer superior product. Our manufacturer and key suppliers have recognized us as a substantial sales opportunity as a result of our innovative technology. Accordingly, we have been first to receive new and more effective innovations from these business partners. For example, we are already incorporating more advanced fiber technology into our filter design, which we expect will further enhance toxin clearance.

We have responded to these market conditions by addressing both treatment efficacy and cost in designing our products for ESRD therapy.

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To date, we have devoted substantially all of our efforts to research, clinical development, seeking regulatory approval and establishing manufacturing and marketing relationships and our own marketing and sales support staff for the development, production and sale of our products in our Target European Market and the United States upon their approval by appropriate regulatory authorities.

There are three main factors driving our concentration on our Target European Market and Japan: (1) HDF technology is in use in our Target European Market and Japan but not in the United States; (2) dialysis clinics in our Target European Market (other than the United Kingdom) and Japan use dialyzers only once rather than reprocessing and reusing them, resulting in use of approximately 156 filters per year per patient in these regions, while in the United States, filters are generally re-used for a given patient, resulting in a much lower per-patient annual filter volume; and (3) higher reimbursement rates in our Target European Market and Japan more readily support the acceptance of advanced technology, as evidenced by the adoption of HDF in these regions, in contrast to the United States. For these reasons, even if we were currently permitted to market our filter product in the United States, we would still be focusing primarily on our Target European Market and Japan.

We began sales of our first product in March 2004. Accordingly, our sales history does not yet provide a basis from which to reasonably estimate rates of product return, if any. Consequently, and until we can estimate rates of return, if any, more effectively, we will not recognize revenue from these sales until the rights of return have expired. At December 31, 2003 and March 31, 2004, we had a deficit accumulated of $22.4 million and $26.5 million, respectively, and we expect to incur additional losses in the foreseeable future. We have financed our operations to date primarily through private sales of our equity and debt securities. From inception through December 31, 2003, we received net offering proceeds from private sales of equity and debt securities of approximately $19.6 million. During the same period, we generated revenues of $300,000 from all other sources combined. In the quarter ended March 31, 2004, we received net offering proceeds from private sales of equity and debt securities of approximately $3.8 million and generated no revenues from any other sources. We anticipate, based on our currently proposed plans and assumptions, that the net proceeds of this offering will be sufficient to satisfy our cash requirements, with no further financing, to obtain positive cash flow.

In early 2003, due to cash-flow constraints, we focused on obtaining CE marking for our OLpur MD190 product and raising additional funds. In the second quarter of 2003, we received $1 million from the sale of convertible bridge notes to certain of our existing securityholders. We obtained CE marking for our OLpur MD190 filter in July 2003, triggering the option for the holders of our convertible bridge notes to convert their bridge notes into series D convertible preferred stock and to purchase additional shares of such preferred stock in connection therewith. The bridge notes were all converted in the third quarter of 2003, and we received an additional approximately $4 million (including $210,000 of debt conversion) immediately upon such conversion and another $3 million and $3.8 million in the fourth quarter of 2003 and the first quarter of 2004, respectively, through sales of our series D convertible preferred stock in connection with such conversion. For additional information regarding our sale of bridge notes and series D convertible preferred stock in connection with the conversion thereof, see “Certain Transactions – Bridge Financing.” Following our receipt of CE marking and with the funds generated by the series D convertible preferred stock financing, we entered our current growth phase, accelerating our H₂H development efforts and expanding our accounting, marketing and customer service functions.

The following trends, events and uncertainties may have a material impact on our potential sales, revenue and income from operations:

(1) the completion of our regulatory approval processes for each of our products in our target territories;

(2) the completion of additional clinical trials;

(3) our ability to influence the adoption by physicians, nephrologists and other medical professionals of HDF therapy in the United States and of our technologies and products in each of our target markets; and

(4) the consolidation of dialysis clinics into larger clinical groups.

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To the extent we are unable to succeed in accomplishing (1) through (3), our sales could be lower than expected and dramatically impair our ability to generate income from operations. With respect to (4), the impact could either be positive, in the case where dialysis clinics consolidate into independent chains, or negative, in the case where competitors acquire these dialysis clinics and use their own products, as competitors have historically tended to use their own products in clinics they have acquired.

Critical Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104 Revenue Recognition. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed and determinable; and (iv) collectibility is reasonably assured. We began sales of our first product in March 2004. Accordingly, our sales history does not yet provide a basis from which to reasonably estimate rates of product return, if any. Consequently, and until we can estimate rates of return, if any, more effectively, we will not recognize revenue from these sales until the rights of return have expired.

Research and Development Costs

Our research and development costs are expensed as incurred.

Stock-based Compensation

We accounted for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services.”

We accounted for stock-based compensation to employees under the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and disclosed the effect of the differences which would result had we applied the fair-value-based method of accounting on a pro forma basis, as required by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations in accounting for our employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, as amended by SFAS No. 148, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of our employee and director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. As a private company, estimates of the fair value of our common stock is difficult, due to infrequent sales of equity securities to third parties. Such estimates significantly impact stock-based compensation and are based on management judgments. In calculating fair value for awards to non-employees as well as for pro forma disclosure purposes, there are certain assumptions that we use, as disclosed in note 7 of our consolidated financial statements, consisting of dividend yield, risk-free interest rate, stock price volatility and weighted average expected life of the option.

Inventory

Inventory is stated at the lower of cost or market.

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Plan of Operation

Based on our cash flow projections, we expect that the net proceeds from this offering will be sufficient to satisfy our cash needs, with no further financing required, to obtain positive cash flow. However, if our sales do not meet our projections or our expenses exceed our expectations, then we may need to raise additional funds through additional public or private offerings of our securities. In such event, if we are unable to raise additional funds on a timely basis or at all, any progress with respect to our products, and, therefore, our potential revenues would be adversely affected.

We intend to focus our research and development efforts primarily for the remainder of fiscal 2004 on:

• continuing our clinical studies on the OLpur MD190 to provide definitive demonstration of the OLpur MD190’s efficacy, including four such studies we have already initiated in our Target European Market; and

• advancing our OLpur H₂H product development in order to eventually obtain regulatory approval (a) for the OLpur H₂H product in the European Community (which we have targeted for the second quarter of 2005) and (b) for the OLpur H₂H and the OLpur MD190 in the United States (which we have targeted for the first half of 2006).

We plan to purchase production-related equipment and tooling for placement at facilities of our manufacturers in order to reduce our manufacturing costs in the last six months of 2004 and beyond. For additional information with respect to our research and development efforts, see the discussions under the captions “Our Products,” “Our Strategy,” “Clinical Testing,” and “Governmental Regulation” under the “Business” section of this prospectus.

We intend to focus our sales and marketing efforts for the remainder of fiscal 2004 primarily on expanding our marketing of OLpur MD190 in our Target European Market.

Furthermore, we anticipate initiating marketing of OLpur H₂H in our Target European Market once we obtain the requisite regulatory approvals, and initiating marketing of our OLpur H₂H device in conjunction with our OLpur MD190 filters in the United States as soon as we obtain the requisite regulatory approvals for them. For additional information with respect to our sales and marketing strategy, see “Sales and Marketing” under the “Business” section of this prospectus.

We have already begun generating sales of the OLpur MD190 in our Target European Market; however, our sales history does not yet provide a statistically valid insight into rates of product return, if any. Consequently, and until we can estimate rates of return, if any, more effectively, we will not recognize revenue from these sales until the rights of return have expired. We do not anticipate that we will begin to recognize revenues from sales of the OLpur H₂H in our Target European Market before the end of the second quarter of 2005, nor do we anticipate that we will begin to recognize revenues from sales of the OLpur MD190 in conjunction with OLpur H₂H in the United States before the end of the second quarter of 2006.

In August 2003, we established a European customer service and financial operations center in Dublin, Ireland. Our sales staff are based in various parts of our Target European Market. We have a Clinical Services Director who provides customer support and training. We intend to add two to four members to our sales staff in each of our Target European Market and the United States, as well as two to three members to our administrative staff in each of our Target European Market and the United States. We intend to make our European staff additions as we expand our presence in our Target European Market and such expansion is currently in process. We intend to make our U.S. staff additions at or around the time we file for regulatory approval for the H₂H in the United States, which we expect to occur in the fourth quarter of 2005 or the first quarter of 2006.

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Results of Operations

Three months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Summary Table

	Three months ended March 31,
Line	2003			2004			Increase (decrease)
	(unaudited)			(unaudited)
Research and development	$	228,596		$	690,024		$	461,428
Selling, general and administrative		545,389			1,316,435			771,046
Other income (expense), net		(1,538,000	)		1,345			1,539,345
Net loss		(2,311,985	)		(2,017,732	)		294,253

Research and Development. Research and development expenses are comprised of salaries and fees of our personnel and scientific and engineering consultants and related costs, machine and product parts and software, product testing, patent expenses and clinical studies. The increase in research and development from the first three months of 2003 to the first three months of 2004 is attributable primarily to an approximately $345,000 increase in machine development expenses and an approximately $106,000 increase in outside testing and clinical trials related to our accelerated development of H₂H technology and the associated engineering.

Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, facilities and information systems expense. Our expenses increased in the first three months of 2004 due to: a $301,000 increase in compensation expense, including an approximately $284,000 increase in non-cash compensation associated with option grants primarily driven by the cost of new personnel, including customer service representatives to serve our Target European Market, a sales director, a marketing manager and accounting personnel; as well as $385,000 of expenses related to the establishment of our Irish subsidiary, including the lease of office space in Ireland and compensation of personnel in Ireland.

Other Income (Expense), net. Other income (expense), net consists of interest income earned on cash deposits and short-term investments, reduced by interest expense and amortization of debt discount and gains and losses in sales of property and assets. Our other income (expense), net increased in the first three months of 2004 due to the write off in the first three months of 2003 of approximately $950,000 of abandoned initial public offering costs combined with approximately $559,000 amortization of a debt discount in the first three months of 2003 associated with a convertible promissory note issued in 2002.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Summary Table

	Year ended December 31,
Line	2002			2003			Increase (decrease)
Research and development	$	957,616		$	1,320,556		$	362,940
Selling, general and administrative		1,097,400			3,673,902			2,576,502
Other income (expense), net		(362,026	)		(641,542	)		(279,516	)
Net income (loss)		(2,417,042	)		(5,636,000	)		(3,218,958	)

Research and Development. Research and development expenses are comprised of salaries and fees of our personnel and scientific and engineering consultants and related costs, machine and product parts and software, product testing, patent expenses and clinical studies. The increase in research and development expense was caused primarily by a $73,000 machine development expense incurred in 2003 by our Irish subsidiary, $199,000 of non-cash compensation associated with option grants in 2003; a $229,000 increase in payroll expense due to

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the hiring of four additional employees hired from late 2002 to mid 2003. These increases were partially offset by a $105,000 reduction in clinical trials expense from 2002 to 2003.

Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, facilities and information systems expense. The increase in our selling, general and administrative expenses was primarily due to: $1.8 million in non-cash compensation in connection with options granted in 2003; an increase of approximately $180,000 in marketing expenses related to expanding our marketing and customer service functions; approximately $303,000 in expenses related to establishing our facilities in Ireland; and $196,000 increased patent expense as we maintain more of our patents in additional geographic areas. We expect our expenses from marketing and customer service activities to increase in future periods, as we plan to seek greater market penetration with our OLpur MD190 within our Target European Market and to enter additional markets and introduce additional products once we obtain the requisite regulatory approvals. We expect our patent expenses to continue to increase, as we support more patents in additional territories.

Other Income (Expense), net. Other income (expense), net consists of interest income earned on cash deposits and short-term investments as well as other income, reduced by interest expense and amortization of debt discount and gains and losses in sales of property and assets. Although our amortization of debt discount associated with a convertible promissory note issued in 2002 decreased from approximately $1.2 million in 2002 to $583,000 in 2003, our other expense, net increased as a result of $834,000 income recognized in connection with our settlement in 2002 of a liability to one of our suppliers. Although we had other expense in 2003 of approximately $1.3 million booked in the first and second quarters of 2003 in connection with the write-off of abandoned initial public offering costs, such expense was completely offset by settlement of outstanding liabilities associated with such abandoned initial public offering that we booked in the fourth quarter of 2003.

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Summary Table

	Year ended December 31,
Line	2001			2002			Increase (decrease)
Revenues	$	300,000		$	—		$	(300,000	)
Research and development		737,858			957,616			219,758
Selling, general and administrative		652,828			1,097,400			444,572
Other income (expense), net		5,497			(362,026	)		(367,523	)
Net income (loss)		(1,085,189	)		(2,417,042	)		(1,331,853	)

Revenues. The decrease in revenues occurred because, during the last quarter of 2001, prior to initiating a collaborative product feasibility study we had contemplated with Gambro Renal Products (a division of The Gambro Company), Gambro terminated our agreement and paid us a termination fee of $300,000. As of the date of this prospectus, we do not have any plans to enter into any additional agreements of this nature.

Research and Development. Research and development expenses are comprised of salaries and fees of our personnel and scientific and engineering consultants and related costs, machine and product parts and software, product testing, patent expenses and clinical studies. The increase in our research and development expenses was primarily due to a $46,000 increase in research and development related salaries, $146,000 of expenses associated with our initiation of our clinical trial processes and a $40,000 increase in expenses for the development of the OLpur MD190.

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Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, facilities and information systems expense. The increase was primarily due to a $305,000 increase in professional fees caused by legal and accounting expenses relating to our pursuit of an initial public offering and a $106,000 increase in marketing expenses.

Other Income (Expense), Net. Other income (expense), net consists of interest income earned on cash deposits and short-term investments as well as other income, reduced by interest expense and amortization of debt discount and gains and losses in sales of property and assets. The decrease in our other income was primarily due to approximately $1.2 million amortization of debt discount in 2002 associated with a convertible promissory note issued in connection with a financing in 2002 offset by a $834,000 gain that resulted from the forgiveness of indebtedness by Plexus pursuant to the settlement agreement in June 2002 (see “Business–Settlement Agreements”).

Liquidity and Capital Resources

At December 31, 2003 and March 31, 2004, we had a deficit accumulated of $22.4 million and $26.5 million, respectively, and we expect to incur additional losses in the foreseeable future at least until such time, if ever, that we manufacture and market our products profitably. Our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements attached to this prospectus which expresses doubt as to our ability to continue as a going concern. We have financed our operations to date primarily through private sales of our equity and debt securities. From inception through December 31, 2003, we had received net offering proceeds from private sales of equity and debt securities of approximately $19.6 million. During the same period, we generated revenues of $300,000 from all other sources combined. For the three months ended March 31, 2004, we received net offering proceeds from private sales of equity and debt securities of approximately $3.8 million and generated no revenues from any other sources.

From our inception in 1997 through March 31, 2004, we made approximately $1.2 million of net capital expenditures and used $16.8 million in cash to support our operations. At March 31, 2004, we had cash and cash equivalents of $5.6 million and working capital of $3.4 million.

We expect to put our current capital resources, together with the proceeds of this offering, to the following uses (see “Use of Proceeds”):

• for the marketing and sales of our products;

• to complete certain clinical studies, obtain appropriate regulatory approvals and expand our research and development with respect to our products;

• To acquire capital equipment needed for the more efficient manufacture of commercial quantities of OLpur MD190 product and our other products;

• to continue our product engineering;

• to pay Plexus Services Corp. amounts due under our settlement agreement with them;

• to pay any dividends on shares of our series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock accruing from May 31, 2004 to the date of the consummation of this offering; and

• for working capital purposes, including for additional salaries and wages as our organization grows and as we expand our presence in our Target European Market and establish operations in the United States and other markets, and for additional professional fees and expenses and other operating costs.

In the event the underwriters’ over-allotment option is exercised, we will realize additional net proceeds, which we intend to use for working capital and general corporate purposes. See “Use of Proceeds.” We anticipate, based on our currently proposed plans and assumptions, that the net proceeds of this offering will be sufficient to satisfy our cash requirements, with no further financing, to obtain positive cash flow.

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Over the next 12 months, we expect to spend approximately $3 million on research and development and approximately $1.5 million on the sales and marketing of our products. Our long-term future liquidity sources and requirements will depend on many factors, including the timing and costs associated with obtaining CE marking or United States regulatory approval, continued progress in research and development, clinical studies, manufacturing scale-up, the cost involved in filing and enforcing patent claims and the status of competitive products. In the event that our plans change, our assumptions change or prove inaccurate, or if the proceeds of this offering, together with other funding resources including anticipated sales of our products, otherwise prove to be insufficient to fund our operations, we could be required to seek additional financing. We have no current arrangements with respect to sources of additional financing.

At March 31, 2004, the net operating losses available to offset future taxable income were approximately $23.0 million. These carryforwards expire at various dates beginning in 2012 through 2023. Following any transaction, or series of transactions within any three year period, that constitute(s) a change in control under applicable provisions of the United States Internal Revenue Code, net operating loss carryforwards may be subject to an annual limitation. If we were to experience such a change in control, our ability to use our net operating loss carryforwards to reduce federal income tax liabilities may be limited.

The following table summarizes our contractual cash obligations and other commercial commitments as of December 31, 2003:

	Payment due by period
Contractual Obligations	Total		Less than 1 yr		1 to 3 years		3 to 5 years		More than 5 years
	(in thousands)
Operating lease and similar obligations	$	105	$	60	$	41	$	4	—
Purchase obligations related to manufacturing equipment and molds for the production of our OLpur MD190 filter product		567		567		—		—	—
Total	$	672	$	627	$	41	$	4	—

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Seasonality

Our results of operations have not been, and we do not expect our results of operations in the future to be, materially affected by seasonal changes. Our results of operations have varied, and may continue to vary, significantly from quarter to quarter as a result of extraordinary or non-cyclical factors.

Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative instruments for trading or speculative purposes, and have not, to date, acquired any derivative securities for hedging purposes. Our international operations do subject us to certain currency risks. For example, we have conducted our financing activities and hold our cash and cash equivalents in U.S. dollars, while we pay our manufacturers in Euro. If the dollar were to weaken significantly with respect to the Euro, then the cost of manufacturing our products would increase in dollar terms. Nonetheless, since we expect our sales to be primarily in Euro in the near term, if the dollar were to so weaken, then our revenues would increase in dollar terms. On the other hand, at such time, if ever, that we have material sales in the U.S., if the dollar were to so weaken, it could adversely effect our income.

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BUSINESS

Overview

We are a Delaware corporation founded in 1997 by health professionals, scientists and engineers affiliated with Columbia University to develop advanced End Stage Renal Disease, or ESRD, therapy technology and products that would address both patient treatment needs and the clinical and financial needs of the treatment provider. Although the Chairman of our Board is the Chairman of Columbia University’s Department of Surgery and we license the right to use office space from Columbia University, we do not currently have any other material relationship with Columbia University. We began selling our first product in March 2004. For information regarding our plan of operation for the remainder of 2004, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plan of Operation.”

On June 4, 2003, our wholly-owned subsidiary Nephros International Limited was incorporated under the laws of Ireland. In August 2003, we established an European Customer Service and financial operations center in Dublin, Ireland.

We currently have three products in various stages of development in the hemodiafiltration, or HDF, modality to deliver improved therapy to ESRD patients:

• OLpur MD190, our filter designed expressly for HDF therapy and employing our proprietary Mid-Dilution Diafiltration technology;

• OLpur H₂H, our add-on module designed to allow the most common types of hemodialysis machines to be used for HDF therapy, and

• OLpur NS2000 system, our stand-alone HDF machine and associated filter technology.

We believe that our OLpur MD190 is more effective than any products currently available for ESRD therapy, because our dialyzer is better at removing certain larger toxins (known in the industry as “middle molecules” because of their heavier molecular weight) from blood. We also believe that OLpur H₂H will, upon introduction, expand the use of HDF as a cost-effective and attractive alternative for ESRD therapy.

The accumulation of middle molecules in the blood has been related to such conditions as malnutrition, impaired cardiac function, carpal tunnel syndrome, and degenerative bone disease in the ESRD patient. See “Business – Limitations of Extracorporeal Renal Replacement Therapies.” Based on our review of industry publications, we believe that some of the morbidity associated with chronic hemodialysis results from the retention of middle molecules that are not effectively removed by diffusion in conventional hemodialysis (see R. Ward et al., A Comparison of On-Line Hemodiafiltration and High-Flux Hemodialysis: A Prospective Clinical Study, Journal of American Society of Nephrology, 2000; 11(2):2344-50) and that use of a dialyzer with a high rate of middle molecule removal may reduce the risk of mortality in ESRD patients. See J.K. Leypoldt et al., Effect of Dialysis Membranes and Middle Molecule Removal on Chronic Hemodialysis Patient Survival, American Journal of Kidney Diseases, 1999; 33:349-355.

Based on our review of industry publications, we believe that the HDF process removes more blood impurities than the other currently available kidney replacement therapies and removes more effectively the middle molecules that accumulate in the body. See I. Ledebo, On-Line Hemodiafiltration: Technique and Therapy, Advances in Renal Replacement Therapies, 1999; 6(2):195-208; M.A. Mishkin et al., Solute Removal in Hemodiafiltration Compared to Standard High Flux Dialysis: Combined Analysis of 2 Cross Over Studies, Journal of American Society of Nephrology, 2002; 13:238A/ASN. Moreover, when compared to existing HDF standards in laboratory bench studies conducted by members of our research and development staff and by a third party, and in clinical studies conducted in Montpellier, France, the OLpur MD190 improves toxin removal from the patient by over 80% for a range of toxins, and in particular, middle molecules.

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A number of published industry articles support HDF as a superior modality for ESRD therapy, at least in part due to HDF’s greater clearance of middle molecules. Based on these articles, we believe:

• convective therapies, such as HDF, enhance therapy performance and provide the most blood purification over a wide molecular weight spectrum achievable with present renal replacement therapies (see B. Canaud et al., Ultrafiltration and Convective-Based Dialysis Modalities: New Trends and Applications for Renal Replacement Therapy in ESRD Patients, Nephrology Dialysis Transplantation, 1999; 14(Suppl):98-105; I. Ledebo, On-Line Hemodiafiltration: Technique and Therapy, Advances in Renal Replacement Therapies, 1999; 6(2):195-208; J.K. Leypoldt, Solute Fixes in Different Treatment Modalities, Nephrol. Dialysis Transplant., 2000; 15(Supp.1):3-9);

• HDF can elevate hemoglobin by reducing erythropoietin resistance (a condition whereby the administration of the drug erythropoietin (EPO) is not effective in increasing the production of red blood cells, thus requiring larger doses of EPO to maintain a target hemoglobin level), improving iron utilization and potentially further improving the quality of life for ESRD patients. We believe that the accumulation of uremic toxins (in particular middle molecules) in the blood of dialysis patients causes this EPO resistance. Studies have found that more effective treatments (including on-line HDF) reduce EPO resistance, thus permitting lower EPO dosages to successfully maintain target hemoglobin levels (see C.L. Lin et al., Improved Iron Utilization and Reduced Erythropoietin Resistance by On-Line Hemodiafiltration, Blood Purification, 2002; 20(4):349-56); and

• convective processes, such as HDF, improve vascular stability during therapy, as evidenced by low arterial hypertension in HDF patients (see M. Gonella et al., Optimization of Extracorporeal Dialytic Treatment: On-Line Hemodiafiltration, Minerva Urology Nefrology, 2001; 53(2):105-12).

Furthermore, several articles assert that convective therapies such as HDF have been shown to improve treatment delivery and treatment tolerance when compared to conventional hemodialysis. See M.A. Mishkin et al., Solute Removal in Hemodialysis Compared to Standard High Flux Dialysis: Combined Analysis of 2 Cross Over Studies, Journal of the American Society of Nephrology, 2002; 13:238A/ASN; G.J. Mishkin et al., Improved Treatment Tolerance for Patients Prone to Hypotensive Episodes Using Hemodiafiltration (HDF) with On-Line Production of Substitution Fluid, Journal of the American Society of Nephrology, 1999; 10(9):295A; J.P. Bosch & G.J. Mishkin, Hemofiltration and Double High Flux Dialysis: Risks and Benefits, Curr. Opin. Nephrol. Hypertens., 1998; 7(6):643-7. We also believe that HDF provides improved treatment tolerance as compared to high-flux hemodialysis. See G.J. Mishkin et al., Improved Treatment Tolerance for Patients Prone to Hypotensive Episodes Using Hemodiafiltration (HDF) with On-Line Production of Substitution Fluid, Journal of the American Society of Nephrology, 1999; 10(9):295A.

HDF has been shown to provide distinct advantages over hemodialysis for ESRD therapy, (see J.K. Leypoldt et al., Effect of Dialysis Membranes and Middle Molecule Removal on Chronic Hemodialysis Patient Survival, American Journal of Kidney Diseases 1999; 33(2):349-355; C.L. Lin et al., Improved Iron Utilization and Reduced Erythropoietin Resistance by On-line Hemodiafiltration, Blood Purification, 2002; 20(4):349-56) and we believe that our HDF technology offers further advantages by more effectively removing middle molecules than any other form of HDF therapy available today. We believe that our products will reduce hospitalization, medication and care costs as well as improve patient health (including reduced drug requirements and improved blood pressure profile), and, therefore, quality of life, by removing a broad range of toxins through a more patient-friendly, better-tolerated process. We believe that the OLpur MD190 and the OLpur H₂H will provide these benefits to ESRD patients at competitive costs and without the need for ESRD treatment providers to make significant capital expenditures in order to use our products. We also believe that the OLpur NS2000 system will be the most cost-effective stand-alone hemodiafiltration system available. See “Business – Our Products.”

We began sales of our first product in March 2004. Accordingly, our sales history does not yet provide a basis from which to reasonably estimate rates of product return, if any. Consequently, and until we can estimate

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rates of return, if any, more effectively, we will not recognize revenue from these sales until the rights of return have expired. We have incurred losses since our inception primarily as a result of our research and development efforts. To date, we have relied on private sales of our securities and loans from our securityholders to fund operations.

Industry Background

ESRD is characterized by irreversible loss of kidney function and ESRD is usually the result of years of chronic kidney disease caused by inherited conditions, prolonged medical conditions such as diabetes or high blood pressure, or other events or conditions that harm the kidneys. A healthy kidney removes excess water and various waste products from the blood stream, a process critical to maintaining life. In addition, kidneys play a significant role with hormone levels contributing to healthy bones and red blood cell production. When kidney function drops below certain parameters, treatment is required for patient survival. There are currently only two methods for treating ESRD—renal replacement therapy and kidney transplantation. We believe that, so long as the shortage of suitable kidneys for transplants persists, ESRD patients will continue to need some form of renal replacement therapy and the supplies it requires.

Based on certain market reports, we believe that there were approximately 449,000 ESRD patients in the United States and over 1.7 million ESRD patients worldwide in 2003, with a compounded growth rate of 8% per year and an expected ESRD population of over 2.7 million by 2009. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.38. We believe the worldwide distribution of the population of ESRD sufferers in 2003 and projected in 2009 is approximately as follows:

	ESRD Population(1)
Territory	2003	Projected 2009
United States of America	449,000	633,000
Japan	240,000	345,000
Germany	87,000	129,000
United Kingdom	38,000	57,000
The rest of the World	918,000	1,576,000
Total	1,732,000	2,740,000

(1) See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.38.

Based on our review of industry publications, we believe that growth factors in the ESRD population include an increase in elderly people receiving treatment and new patients with diabetes entering treatment. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.38. Based on information from the Diabetes Public Health Resource website, we believe that the rate of new ESRD cases caused by diabetes continues to climb, reaching 144.8 per million population in 2001, which is almost double the rate of a decade earlier. Additionally, from 1990 to 2001, rates of ESRD caused by hypertension grew almost 50 percent. See NIDDK Recent Advances & Emerging Opportunities: Kidney, Urologic, and Hematologic Diseases, National Institute of Diabetes & Digestive & Kidney Diseases, 2003, p.83.

Based on industry data, we believe that the number of dialysis machines in 2003 was approximately 276,000 and expected to grow to approximately 414,000 (or 7% per year) by 2009 (see The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.58) and that dialysis machines are generally replaced on average every seven years (see Forecasts of the Total European Renal and Hemodialysis Replacement Equipment and Supplies Market, 2000 Frost & Sullivan, p.3-15).

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The dialysis filter (also referred to as a dialyzer or an “artificial kidney”) is an essential component of extracorporeal ESRD therapy. Based on our review of industry reports, the U.S. hemodialysis dialyzer market was projected to grow from 1996 to 2003 at a compounded annual rate of approximately 10.5% and was approximately $384.2 million in 2000. See The Renal and Hemodialysis Equipment Market (2000), 2000 Frost & Sullivan, p.6. The worldwide hemodialysis products and supplies market was approximately $6.3 billion in 2003. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.48.

We are currently competing in the HDF dialyzer market using our OLpur MD190 in parts of our Target European Market. There are currently no FDA approved HDF therapies available in the U.S. market. If we can obtain FDA approval of OLpur MD190 and OLpur H₂H, we will enter the U.S. hemodialysis dialyzer market by combining our OLpur MD190 filter with our OLpur H₂H device which enables the HDF process on the most common hemodialysis machines.

There is an important distinction between the dialyzer markets in the United States and those in our Target European Market and Japan. In the United States, a majority of dialysis clinics re-use dialyzers. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.63-64. Reuse refers to the procedure by which a dialyzer is disinfected and reused by the same patient. Based on our review of industry reports, we believe reuse of dialyzers ranges from 17 times in the United States to negligible reuse in much of our Target European Market and Japan. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.63. Over 70 percent of U.S. patients are subject to reuse. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p.63. As a result, our Target European Market and Japan provide substantially larger dialyzer markets on a per patient basis. Assuming patients receive three treatments per week, up to 156 dialyzers per patient per year are used in markets where reuse is not employed.

Current ESRD Therapy Options

Current renal replacement therapy technologies include (1) two types of dialysis, peritoneal dialysis and hemodialysis, (2) hemofiltration and (3) hemodiafiltration, a combination of hemodialysis and hemofiltration. Dialysis can be broadly defined as the process that involves movement of molecules across a semipermeable membrane. In hemodialysis, hemofiltration or hemodiafiltration, the blood is exposed to an artificial membrane outside of the body. During Peritoneal Dialysis (PD), the exchange of molecules occurs across the membrane lining of the patient’s peritoneal cavity. While there are variations in each approach, in general, the three major categories of renal replacement therapy in the marketplace today are defined as follows:

• Peritoneal Dialysis, or PD, uses the patient’s peritoneum, the membrane lining covering the internal abdominal organs, as a filter by introducing injectable-grade dialysate solution into the peritoneal cavity through a surgically implanted catheter. After some period of time, the fluid is drained and replaced. PD is limited in use because the peritoneal cavity is subject to scarring with repeated episodes of inflammation of the peritoneal membrane, reducing the effectiveness of this treatment approach. With time, a PD patient’s kidney function continues to deteriorate and peritoneal toxin removal alone may become insufficient to provide adequate treatment. In such case the patient may switch to an extracorporeal renal replacement therapy such as hemodialysis or hemodiafiltration.

• Hemodialysis uses an artificial kidney machine to remove certain toxins and fluid from the patient’s blood while controlling external blood flow and monitoring patient vital signs. Hemodialysis patients are connected to a dialysis machine via a vascular access device. The hemodialysis process occurs in a dialyzer cartridge with a semi-permeable membrane which divides the dialyzer into two chambers: while the blood is circulated through one chamber, a premixed solution known as dialysate circulates through the other chamber. Toxins and excess fluid from the blood cross the membrane into the dialysate solution through a process known as “diffusion.”

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• Hemodiafiltration, or HDF, in its basic form combines the principles of hemodialysis with hemofiltration. Hemofiltration is a cleansing process without dialysate solution where blood is passed through a semi-permeable membrane, which filters out solute particles. HDF uses dialysate solution with a negative pressure (similar to a vacuum effect) applied to the dialysate solution to draw additional toxins from the blood and across the membrane. This process is known as “convection.” HDF thus combines diffusion with convection, offering efficient removal of small solutes by diffusion, with improved removal of larger substances (i.e., middle molecules) by convection.

Limitations of Current Extracorporeal Renal Replacement Therapies:

Hemodialysis is the most common form of extracorporeal renal replacement therapy and is generally used in the United States. Hemodialysis fails, in our opinion, to address satisfactorily the long-term health or overall quality of life of the ESRD patient.

We believe that current hemodialysis practices effectively address the removal of smaller toxic molecules such as urea, but do not effectively address the removal of middle molecules, the accumulation of which may lead to such conditions as amyloidosis, carpal tunnel syndrome, malnutrition and resulting cardiovascular death. See J. McClure et al., Carpal Tunnel Syndrome Caused by Amyloid Containing Beta 2 Microglobulin: A New Amyloid and a Complication of Long Term Haemodialysis, Ann. Rheum. Dis., 1986; 45(12):1007-11; L.W. Henderson, Hemofiltration and the Middle Molecule, Blood Purif. 1999; 17:175-177; F.S. Apple et al., Predictive Value of Cardiac Troponin I and T for Subsequent Death in End-Stage Renal Disease, Circulation, December 3, 2002; K. Amann et al., Hyperphosphataemia-A Silent Killer of Patients with Renal Failure?, Nephrol. Dial. Transplant., 1999; 14:2085-2087. See “Business – Overview.” For example, a well-known middle molecule, a protein known as ß_2-microglobulin, is produced by the body on a continuous basis and removed by a healthy kidney; however, based on published studies, we believe that solutes of this size are poorly removed by conventional hemodialysis, and their removal by diffusion through high-flux hemodialysis membranes is also limited, and thus the accumulation of this protein in the body of the ESRD patient leads to the formation of abnormal protein deposits (dialysis-related amyloidosis) and complications such as carpal tunnel syndrome, joint pain and stiffness. See S. Kim, Characteristics of Protein Removal in Hemodiafiltration, Contributions to Nephrology, 1994; 108:23-37; J. McClure et al., Carpal Tunnel Syndrome Caused by Amyloid Containing Beta 2 Microglobulin: A New Amyloid and a Complication of Long Term Haemodialysis, Ann. Rheum. Dis., 1986; 45(12):1007-11; L.W. Henderson, Hemofiltration and the Middle Molecule, Blood Purif. 1999; 17:175-177. We also believe there may be a link between appetite-suppressing middle molecules and the common observation of malnutrition in ESRD patients maintained on hemodialysis or peritoneal dialysis. See L.W. Henderson, Hemofiltration and the Middle Molecule, Blood Purif. 1999; 17:175-177.

We believe that the HDF process, which is currently available in our Target European Market and Japan, offers improvement over other dialysis therapies because of better ESRD patient tolerance and superior blood purification of both small and middle molecules. As discussed in our Business Overview, above, this superior blood purification has been shown to provide better over-all patient health in a series of studies. For example, one study found that when ESRD patients are treated with HDF, the need for carpal tunnel syndrome surgery – an indication of patient morbidity – was reduced by approximately 40%. See F. Locatelli et al., Registro Lombardo Dialisi & Trapianto, Comparison of Mortality in ESRD Patients on Convective and Diffusive Extracorporeal Treatments, Kidney International, 1999; 55:286-293. According to another study, the aggressive removal of larger proteins in the HDF process has been shown to relieve some of the local and systemic inflammatory processes. See S. Kim, Characteristics of Protein Removal in Hemodiafiltration, Contributions to Nephrology, 1994; 108:23-37.

Current Dialyzer Technology used with HDF Systems:

In our view, treatment efficacy of current HDF systems is limited by current dialyzer technology. As a result of the negative pressure applied in HDF, fluid is drawn from the blood and across the dialyzer membrane along with the toxins removed from the blood. A portion of this fluid must be replaced with a man-made injectable-

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grade fluid, known as “substitution fluid,” in order to maintain the blood’s proper fluid volume. With the current dialyzer technology, fluid is replaced in one of two ways: pre-dilution or post-dilution.

• With pre-dilution, substitution fluid is added to the blood before the blood enters the dialyzer cartridge. In this process, the blood can be over-diluted, and therefore more fluid can be drawn across the membrane. This enhances removal of toxins by convection. However, because the blood is diluted before entering the device, it actually reduces the rate of removal by diffusion; the overall rate of removal, therefore, is reduced for small molecular weight toxins (such as urea) that rely primarily on diffusive transport.

• With post-dilution, substitution fluid is added to blood after the blood has exited the dialyzer cartridge. This is the currently preferred method because the concentration gradient is maintained at a higher level, thus not impairing the rate of removal of small toxins by diffusion. The disadvantage of this method, however, is that there is a limit in the amount of plasma water that can be filtered from the blood before the blood becomes too viscous, or thick. This limit is approximately 25% to 30% of the blood flow rate. This limit restricts the amount of convection, and therefore limits the removal of middle and larger molecules.

The Nephros Mid-Dilution Diafiltration Process

Our OLpur MD190 filter uses a design and process we developed called Mid-Dilution Diafiltration, or MDF. MDF is a fluid management system that optimizes the removal of both small toxins and middle-molecules by offering the advantages of pre-dilution HDF and post-dilution HDF combined in a single dialyzer cartridge. The MDF process involves the use of two stages: in the first stage, blood is filtered against a dialysate solution; it is then overdiluted with sterile infusion fluid before entering a second stage, where it is filtered once again against a dialysate solution. Based on laboratory bench studies conducted on our OLpur MD190 by members of our research and development staff and by a third party, and clinical studies conducted in Montpellier, France, discussed below, we believe that the MDF process provides improved toxin removal in HDF treatments, with a resulting improvement in patient health. See “Business – Our Products – OLpur MD190.”

Our Products

Our products currently available or in development include:

OLpur MD190

OLpur MD190 is our dialyzer cartridge that incorporates the patented MDF process and is designed for use with existing HDF platforms currently prevalent in our Target European Market and Japan. The OLpur MD190 incorporates a unique blood-flow architecture that enhances toxin removal with essentially no cost increase over existing devices currently used for HDF therapy.

Laboratory bench studies have been conducted on our OLpur MD190 by members of our research and development staff and by a third party. In laboratory bench studies conducted by members of our research and development staff, OLpur MD190 offered small molecule removal comparable to existing HDF standards and an improvement of over 80% in removing middle molecules. In a third-party study which was performed between April 2001 and June 2001 by the University of Kentucky in concert with Baxter Renal Division, a division of Baxter Healthcare Corporation, each of two prototypes of the OLpur MD190 offered urea (a small molecule) removal comparable to a leading HDF dialyzer in common use at the time (which was used as a control device) and an improvement of over 122% in removing the protein known as ß_2-microglobulin (a middle molecule), when compared to such existing HDF dialyzer. The control device used in this study is still one of the leading HDF dialyzers in common use today.

We completed our initial clinical studies to evaluate the efficacy of our OLpur MD190 as compared to conventional dialyzers in Montpellier, France in 2003, under the supervision of Bernard Canaud, M.D., in

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Dr. Canaud’s capacity as president of L’institut de Recherche et de Formation en Dialyse, a research institute located in Montpellier, France. Dr. Canaud is a nephrologist associated with the Hospal Lapeyronie in Montepellier, France. The results from this clinical study support our belief that OLpur MD190 is superior to post-dilution hemodiafiltration using a standard high-flux dialyzer with respect to B_2-microglobulin clearance. In addition, clearances of urea, creatinine, and phosphate met the design specifications proposed for the OLpur MD190 device. Furthermore, adverse event data from the study suggest that hemodiafiltration with our OLpur MD190 device was well tolerated by the patients and safe. A manuscript describing the results of this study has been prepared and submitted for publication to Kidney International.

Throughout 2004 we have scheduled clinical studies in the United Kingdom, Ireland, France, Germany and Italy to further demonstrate the therapeutic benefits of our products. A multi-center study under the direction of Dr. Canuad (Principal Investigator) is scheduled to start in September 2004. This study will encompass six centers in France and four centers in Germany. Also scheduled to commence in September or October of 2004, are studies by Dr. Ken Farrington in the United Kingdom and Dr. Antonio Santoro in Italy.

We contracted with TÜV Rheinland of North America, Inc., a worldwide testing and certification agency (also referred to as a notified body) that performs conformity assessments to European Union requirements for medical devices, to assist us in obtaining the Conformité Européene, or CE mark, a mark which demonstrates compliance with relevant European Union requirements. We received CE marking on the MD190, as well as certification of our overall quality system, on July 31, 2003.

We initiated sales of OLpur MD190 in our Target European Market in January 2004. In the six month period since January 2004, we have developed our infrastructure both at a clinical and administrative level to support sales. During this period, we have: established a sales presence in countries throughout our Target European Market, either through direct contact or through a distribution network; developed marketing material in the relevant local languages; and attended trade shows where we promoted our product to over 17,000 people from the industry. Sales of OLpur MD190 to date have been on a limited release basis with a select number of customers. We expect to launch the product on a full release basis from September 2004.

We are offering the OLpur MD190 at a price comparable to the existing “high performance” dialyzers sold in the relevant market at the time we introduce our product to the market. We are unable to determine what the market prices will be in the future.

We have filed a pre-IDE application with respect to the OLpur MD190 and have initiated discussions with the FDA to facilitate the 510(k) approval process. At this point, the onus is on us to take the initiative in pushing forward on the application. However, we anticipate delaying somewhat our application for approval of the OLpur MD190 in the United States in order to combine it with an application for approval of OLpur H₂H. We have targeted a meeting with the FDA to discuss this strategy and the appropriate next steps for sometime prior to year end 2004. We believe that our design verification of the OLpur H₂H will have progressed to the point where the device will be ready for clinical trials in the first quarter of 2005, and, provided that such trials are successful, we expect to file a 510(k) application with respect to both the OLpur MD190 and the OLpur H₂H in the fourth quarter of 2005 or the first quarter of 2006 and hope to achieve U.S. regulatory approval in the first half of 2006.

OLpur H₂H

OLpur H₂H is our add-on module that converts the most common types of hemodialysis machines into HDF-capable machines allowing them to use the OLpur MD190. According to industry reports, there were approximately 276,000 installed hemodialysis machines in the world in 2003, and the number is expected to increase to approximately 414,000 in 2009. See The Worldwide Market for Dialysis Equipment, Supplies, and Services, February 2004, A Kalorama Information Market Intelligence Report, p. 58.

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Ausus Technologies, Inc., a provider of repair service for dialysis machine circuit boards and modules, which promotes itself as the largest independent service provider in the United States, has indicated that at least 85% of the circuit cards it had sold or repaired in 2002 were used in machines with volumetric ultrafiltration control. Based on this information, we estimate that in 2003, approximately 85% of the dialysis machines in use by independent dialysis clinics in the United States feature volumetric ultrafiltration control, which is the mechanism required to use our H₂H technology.

We have completed our OLpur H₂H design and laboratory bench testing, all of which were conducted by members of our research and development staff. We plan to submit to the FDA for 510(k) approval of OLpur H₂H together with OLpur MD190, in the fourth quarter of 2005 or the first quarter of 2006 and seek to acquire CE marking in the second quarter of 2005. We expect to make our OLpur H₂H available at a price that does not provide us with significant positive margins in order to encourage adoption of this product and associated demand for our dialyzers.

OLpur NS2000

OLpur NS2000 is our standalone HDF machine and associated filter technology, which is in the development stage. The OLpur NS2000 system is currently in development in conjunction with an established dialysis machine manufacturer in Italy. The OLpur NS2000 will use the basic platform provided by this manufacturer, but will incorporate our H₂H technology including our proprietary substitution fluid systems.

We anticipate having OLpur NS2000 units available for clinical testing by the third quarter of 2005. We have also designed and developed proprietary substitution fluid filter cartridges for use with OLpur NS2000, which have been subjected to pre-manufacturing testing. OLpur NS2000 is currently targeted for market introduction in our Target European Market and the United States no earlier than 2006. In any event, we will need to obtain the relevant regulatory clearances prior to any market introduction of our OLpur NS2000 in our Target European Market or the United States. See “Government Regulation.” We are currently in the design verification stage of development with respect to the NS2000 and anticipate filing our pre-IDE in early 2005 and beginning clinical studies later in 2005. Depending on results, we anticipate filing for regulatory approval (including a 510(k) application) in the fourth quarter of 2005 or the first quarter of 2006 and ultimately receiving CE marking and regulatory approval in the United States during 2006.

Our Strategy

We believe that current mortality and morbidity statistics, in combination with the quality of life of the ESRD patient, has generated demand for improved therapies. We also believe that our products and patented technology offer the ability to remove toxins more effectively than current dialysis therapy, in a cost framework competitive with currently available, less-effective therapies. Our objective is to capitalize on the demand for improved therapy and to generate market acceptance and market share for our products through a three stage approach:

Showcase product efficacy in our Target European Market:

As of January 2004, we initiated sales in our Target European Market for the OLpur MD190. There is an immediate opportunity for sales of the OLpur MD190 in our Target European Market because there is an established HDF machine base using disposable dialyzers. Assuming a three-times-per-week treatment schedule using disposable dialyzers, each ESRD patient will use approximately 156 dialyzers a year. Consequently, we believe that this presents a substantial sales opportunity.

We are marketing our OLpur MD190 directly to major dialysis centers in our Target European Market, including prominent practitioners in ESRD therapy. We believe that an endorsement of our product by early adopters will encourage others to follow. In addition, we have engaged, and are engaging, distributors in several regions of our Target European Market to accelerate our product sales. Each of our current and prospective

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distributors with which we are currently seeking relationships has over two decades of experience in its respective ESRD therapy markets.

Convert existing hemodialysis machines to hemodiafiltration:

We are seeking to complete development of our OLpur H₂H technology, will pursue comprehensive clinical trials to validate OLpur H₂H by the fourth quarter of 2004, and plan to complete the process of obtaining CE marking for OLpur H₂H by the second quarter of 2005. We also plan to complete our regulatory approval processes in the United States for both OLpur MD190 and OLpur H₂H in the first half of 2006. If successfully developed and approved, our OLpur H₂H product will enable HDF therapy using the most common types of hemodialysis machines together with our OLpur MD190 filters. We intend to use the OLpur H₂H to introduce HDF technology to the U.S. dialysis market.

Upgrade dialysis clinics to OLpur NS2000:

We believe the introduction of the OLpur NS2000, targeted for 2006, will represent a further upgrade in performance for dialysis clinics by offering a cost-effective stand-alone HDF solution that incorporates the benefits of our OLpur H₂H technology. We believe the dialysis clinic will entertain OLpur NS2000 as an alternative to its current technology at the dialysis clinic’s machine replacement point. Based on industry reports, we believe dialysis machines are replaced on average every seven years. See Forecasts of the Total European Renal and Haemodialysis Replacement Equipment and Supplies Market, 2000 Frost & Sullivan, p.3-15.

Manufacturing and Suppliers

We do not intend to manufacture any of our products or components. We have entered into an agreement dated May 12, 2003, with Medica s.r.l., a developer and manufacturer of medical products with corporate headquarters located in Italy, to assemble and produce our OLpur MD190. The agreement requires us to purchase from Medica a specified percentage of the OLpur MD190’s that we directly market, where such percentage is reduced over the course of the agreement and provides for certain volume discounts. In addition, Medica will be given first consideration in good faith for the manufacture of OLpur MD190s that we do not directly market. No less than semiannually, Medica will provide a report to representatives of both parties to the agreement detailing any technical know-how that Medica has developed that would permit them to manufacture the OLpur MD190 less expensively and both parties will jointly determine the actions to be taken with respect to these findings. If the fiber wastage with respect to the OLpur MD190s manufactured in any given year exceeds 5%, then Medica will reimburse us up to half of the cost of the quantity of fiber represented by excess wastage. Medica will manufacture the OLpur MD190 in accordance with the quality standards outlined in the agreement. Upon recall of any OLpur MD190 due to Medica’s having manufactured one or more products that fail to conform to the required specifications or were not manufactured in accordance with any applicable laws, Medica will be responsible for the cost of recall. The agreement also requires that we maintain certain minimum product-liability insurance coverage and that we indemnify Medica’s against certain liabilities arising out of our products that they manufacture, providing they do not arise out of Medica’s breach of the agreement, negligence or willful misconduct. The agreement provides for an initial term of three years, with successive automatic one-year renewal terms, until either party gives the other notice that it does not wish to renew at least 90 days prior to the end of the term. The agreement may be terminated prior to the end of the term by either party, upon the occurrence of certain insolvency-related events or breaches by the other party.

We have also entered into an agreement dated December 17, 2003, with Membrana GmbH, a manufacturer of medical and technical membranes for applications like dialysis with corporate headquarters located in Germany, to continue to produce the fiber for the OLpur MD190. Pursuant to the agreement, we will purchase the fiber for the OLpur MD190 at a volume-discounted price to be determined at the conclusion of each calendar year. If the total amount of fiber purchased during the calendar year exceeds the amount used to set the invoice price for that year, then Membrana will refund to us the excess funds that we paid over the expenditure that

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would have occurred if the price for the actual volume had been invoiced all year. Conversely, if we purchase less fiber than the quantity used to set the invoice price during a calendar year, then we will pay Membrana the amount that we would have paid had the price for the actual volume been invoiced all year. In either case, the payments will be made by January 31 of the following year. The term of the agreement is perpetual, however, it may be terminated by either party, upon certain insolvency events or breaches by the other party, if prior to the fourth anniversary of the agreement, and for any or no reason after such anniversary.

Sales and Marketing

We have established and are seeking to expand our own sales and marketing organization to sell products in our Target European Market and, subject to regulatory approval, the United States. Our marketing staff has experience in both these areas. Our Senior Vice President, Marketing and Sales was formerly the Managing Director for Gambro Healthcare Europe, one of our major competitors. During his tenure with Gambro, he successfully initiated and developed the marketing of vertically-integrated dialysis products and services in France, Spain and the Middle East. We also have a Director of Sales who was a Territory Manager for Cobe Laboratories/Gambro, another of our major competitors, and was formerly Vice President of Renal Ventures Management, a corporation that developed dialysis clinics in the United States on a joint venture basis. See “Management – Key Employees.”

Our marketing strategy involves the marketing of our OLpur MD190 and OLpur H2H within the ESRD therapy market in the following two phases:

Phase I: In the first phase, which we have already begun, we are marketing the OLpur MD190 to healthcare providers such as hospitals, dialysis clinics, managed care organizations and nephrology physician groups, which already own the equipment necessary to use the OLpur MD190 and/or understand hemodiafiltration therapy. We expect that we will be able to demonstrate the toxin removal advantages of the OLpur MD190 to those healthcare providers who have a working knowledge of hemodiafiltration therapy. We have begun marketing the OLpur MD190 in our Target European Market, and plan to begin marketing in the United States as soon as we obtain the requisite approvals.

Phase II: In the second phase, we intend to introduce the OLpur H₂H to healthcare providers within the ESRD therapy market. Our goal is to achieve market penetration by offering the OLpur H₂H for use by healthcare providers inexpensively, thus permitting the providers to use the OLpur H₂H without a large initial capital outlay. We believe that this will allow healthcare providers to upgrade their therapeutic performance profile and generate demand for our dialyzers with at most a very small cost increase on a per treatment basis, and without replacing their existing machines. We do not expect to generate any significant positive margins from sales of OLpur H₂H. We plan to begin marketing the OLpur H₂H in our Target European Market and the United States as soon as we obtain the respective requisite approvals.

As part of our marketing strategy, we also intend to introduce the OLpur NS2000 if and when we obtain the requisite regulatory approvals. We have targeted the OLpur NS2000 for market introduction in 2006.

We have begun implementing further our sales and marketing efforts with respect to the OLpur MD190 and OLpur H₂H. For example:

• We participated in the 29th Annual Congress of European Renal Association – European Dialysis and Transplant Association (ERA-EDTA) in Copenhagen, Denmark in July 2002 and the American Society of Nephrology’s (ASN) 35th Annual Meeting in Philadelphia, Pennsylvania in November 2002;

• We participated in the 30th Annual Congress of ERA-EDTA in Berlin, Germany in June 2003, the 36^th Annual Meeting of the ASN in San Diego in November 2003, and the 31^st Annual Congress in Lisbon, Portugal in May 2004; and

• We are participating in regional events throughout the United States and our Target European Market.

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At each of these events we have a display booth providing literature, digital media, and other materials regarding our company and products. We have established a customer service and financial processing facility in Dublin, Ireland, with telephone-toll-free multi-lingual customer support available to our customer base in our Target European Market. We have engaged a full time Director of Clinical Services who has a background in nephrology nursing, administration and education who will provide customer training and support. We have also initiated four studies designed to continue our evaluation of effectiveness of the OLpur MD190 when used on ESRD patients in our Target European Market. We intend for these studies to provide us with valuable information regarding the efficacy of our product and an opportunity to introduce the OLpur MD190 to medical institutions in our Target European Market. We have engaged a medical advisor to help us in structuring our clinical study protocols, and to support physicians’ technical inquiries regarding our products.

A potential increase in managed care in the United States presents both a challenge and an opportunity for us. While an increase in managed care may lead to a reduction in product pricing, we believe that, as a result of increased managed care, healthcare providers will focus on the following global costs: (1) the total cost of hospitalizations or admissions and (2) the total cost of daily medications required to sustain the ESRD patients. Based on industry publications, we believe that the costs associated with ESRD-related medical procedures and medication are reduced for hemodiafiltration patients when compared with hemodialysis patients. See G. Bonforte et al., Improvement of Anemia in Hemodialysis Patients Treated by Hemodiafiltration with High- Volume On-Line-Prepared Substitution Fluid, Blood Purification, 2002;20:357-363, p.362. Accordingly, even if managed care increases in the United States, we believe our products will be attractive to health care providers if our products can offer improved therapy at costs comparable to competing products.

As discussed above, we intend to market our products primarily to healthcare providers such as hospitals, dialysis clinics, managed care organizations, and nephrology physician groups. We intend to ship our products to these potential customers with the assistance of the manufacturers of our products. We have engaged, and are in discussions with product distributors in our Target European Market, and major medical device manufacturers/providers in Japan, Korea, China, and South America, regarding license and/or distribution opportunities for our technology.

We and Bio-Implant Handels GmbH have entered into a three-year non-exclusive distribution agreement with respect to distribution of our products in Germany and, subject to our consent which we may withdraw on a country-by-country basis in the event we engage other avenues of distribution in such countries, European Union member countries residing east of Germany. Bio Implant Handels will purchase our products at certain volume discounts which are to be renegotiated on an annual basis and resell them in the applicable territories. We are obligated under the distribution agreement to provide certain training and, in the event of an emergency, as reasonably determined by us, to provide direct customer in-service support in the relevant territories. We are also obligated under the agreement to maintain product liability and other insurance as is commercially reasonable and customary in the industry. The agreement may be terminated by either party upon the occurrence of certain insolvency-related events, fraudulent acts or breaches by the other party. In addition, we may terminate the agreement upon certain changes of control or management with respect to Bio Implant Handels.

We and Kostmed BV have entered into a three-year distribution agreement with respect to distribution of our products in The Netherlands. Under the agreement, Kostmed will purchase products from us at a discounted price that is subject to renegotiation on an annual basis, and their purchase obligations are subject to minimum volume commitments that increase during each year of the term. We are also obligated under the agreement to maintain product liability and other insurance as is commercially reasonable and customary in the industry. The agreement may be terminated by either party upon the occurrence of certain insolvency-related events, fraudulent acts or breaches by the other party. In addition, we may terminate the agreement upon certain change of control or management with respect to Kostmed.

To date, we have had only preliminary meetings with major medical device manufacturers/providers in Japan, Korea, China and South America. We have scheduled follow-up meetings in Japan with certain prospective licensees and distributors in July 2004.

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Research and Development

Our research and development efforts continue on several fronts directly related to our current product line. In particular, we are examining ways to enhance further the removal of toxins from the blood by modifying certain blood characteristics. We have applied, and will continue to apply, if and when available, for U.S. Government grants in relation to this research, and will apply for further grants as appropriate. We received a U.S. Government grant in the amount of $99,837 in the third quarter of 2003 to pursue some of this research. According to the terms of the grant, we seek reimbursement from the U.S. Government for expenses incurred with respect to this research. As of March 31, 2004, we had not yet submitted a claim for reimbursement. We are also working on additional machine devices, next-generation user interface enhancements and other product enhancements. Our research and development expenditures were $1,320,556, $957,616 and $737,858 for the fiscal years ended December 31, 2003, 2002 and 2001, respectively, and $690,024 for the three months ended March 31, 2004.

Competition

The dialyzer and renal replacement therapy market is subject to intense competition. Accordingly, our future success will depend on our ability to meet the clinical needs of physicians and nephrologists, improve patient outcomes and remain cost-effective for payors.

We expect to compete with other suppliers of ESRD therapies, supplies and services. These suppliers include Fresenius Medical Care AG, The Gambro Company and Baxter International Inc., currently three of the primary machine manufacturers in hemodialysis. At present, Fresenius, Gambro and Baxter also manufacture HDF machines. These companies and a number of our other competitors have substantially greater financial, scientific and technical resources, research and development resources, marketing and manufacturing resources and sales experience than we have and greater experience in developing products, providing services and obtaining regulatory approvals.

Some of our competitors, including Fresenius and Gambro, manufacture their own products and own dialysis clinics in the United States, our Target European Market and other regions of the world. Because these competitors tend to use their own products in their clinics, we may not be able to successfully market our products to the dialysis clinics under their ownership.

Based on the annual reports for each company as of December 2003: (1) Fresenius treated in its own dialysis clinics approximately 26% of the dialysis patients in the United States, 7% of the dialysis patients in Fresenius’s European market, including the Czech Republic, France, Germany, Hungary, Italy, Portugal, Poland, Slovakia, Slovenia, Spain, Turkey and the United Kingdom, and 9% of the dialysis patients worldwide (see Fresenius annual report; cf. The Dialysis Industry Could Get Bloody, Kidney Machinations, September 11, 2001); and (2) Gambro treated in its own dialysis clinics approximately 14% of the dialysis patients in the United States, 3% of the dialysis patients in Europe and 4% of the dialysis patients worldwide (see Gambro annual report; cf. The Dialysis Industry Could Get Bloody, Kidney Machinations, September 11, 2001).

Other competitive considerations include pharmacological and technological advances in preventing the progression of ESRD in high-risk patients such as those with diabetes and hypertension, technological

developments by others in the area of dialysis, the development of new medications designed to reduce the incidence of kidney transplant rejection and progress in using kidneys harvested from genetically-engineered animals as a source of transplants.

We are not aware of any other companies using technology similar to ours in the treatment of ESRD. Our competition would increase, however, if companies that currently sell ESRD products, or new companies that enter the market, develop technology that is more efficient than ours. Barriers to entry in our industry include:

• a large investment in research and development;

• costly and time-consuming regulatory hurdles to overcome before any products can be marketed and sold;

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• high costs for marketing and for building an effective distribution network, both of which are particularly difficult in a market already dominated by a few well-established key players; and

• the ability to obtain financing during the entire start up period.

We believe that in order to become competitive, we will need to develop and maintain competitive products and take and hold sufficient market share from our competitors. Therefore, we expect our methods of competition to include:

• continuing our efforts to develop, have manufactured and sell products which, when compared to existing products, perform more efficiently and are available at prices that are acceptable to the market;

• displaying our products and providing associated literature at major industry trade shows in the United States, our Target European Market and Asia;

• initiating discussions with dialysis clinic medical directors, as well as representatives of dialysis clinical chains, to develop interest in our products;

• offering the OLpur H₂H at a price that does not provide us with significant positive margins in order to encourage adoption of this product and associated demand for our dialyzers; and

• pursuing alliance opportunities in certain territories for distribution of our products and possible alternative manufacturing facilities.

Intellectual Property

Patents

We attempt to protect our technology and products through patents and patent applications. In addition to the United States, we are also applying for patents in other jurisdictions, such as the European Patent Office, Canada and Japan, to the extent we deem appropriate. We have built a portfolio of patents and applications covering our products, including their hardware design and methods of hemodiafiltration.

We believe that our patent strategy will provide a competitive advantage in our target markets, but our patents may not be broad enough to cover our competitors’ products and may be subject to invalidation claims. Our U.S. patents for the “Method and Apparatus for Efficient Hemodiafiltration” and for the “Dual-Stage Filtration Cartridge,” have claims that cover the OLpur MD190 product and the method of hemodiafiltration employed in the operation of the product. Although there are pending applications with claims to the present embodiments of the OLpur H₂H and the OLpur NS2000 products, these products are still in the development stage and we cannot determine if the applications (or the patents that may issue on them) will also cover the ultimate commercial embodiment of these products. See “Risk Factors – Protecting our intellectual property in our technology through patents may be costly and ineffective...” In addition, technological developments in ESRD therapy could reduce the value of our intellectual property. Any such reduction could be rapid and unanticipated.

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As of the date of this prospectus, we have eight issued U.S. patents, seven pending U.S. patent applications, 13 pending patent applications in each of the European Patent Office, Japan and Canada and four pending patent applications in each of Brazil, China, Israel, South Korea, Mexico, and Russia. The titles, patent numbers and normal expiration dates (assuming all the U.S. Patent and Trademark Office fees are paid) of our eight issued U.S. patents are set forth in the chart below.

Title	Patent Number	Expiration Date
Method and Apparatus for Efficient Hemodiafiltration	6,303,036	July 30, 2019
Two Stage Diafiltration Method and Apparatus	6,406,631	July 30, 2019
Non-Isosmotic Diafiltration System	6,423,231	October 29, 2019
Dual Stage Hemodiafiltration Cartridge	6,315,895	December 30, 2019
Sterile Fluid Filtration Cartridge and Method for Using Same	6,635,179	December 30, 2019
Method for High Efficiency Hemofiltration	6,620,120	May 22, 2018
Thermally Enhanced Dialysis/Diafiltration System	6,716,356	May 29, 2021
Dual-Stage Filtration Cartridge	6,719,907	January 26, 2022

Our pending patent applications relate to a range of dialysis technologies, including cartridge configurations, cartridge assembly, substitution fluid systems, and methods to enhance toxin removal.

Trademarks

As of the date of this prospectus, we do not have any registered trademarks. Centrapur, OLpur, H₂H and our stylized “N” logo are among our non-registered trademarks, for which trademark registration applications are pending in both the U.S. Patent and Trademark Office and the European Union Office for Harmonisation in the Internal Market.

Settlement Agreements

Plexus Services Corp.

In June 2002 we entered into a settlement agreement with Plexus Services Corp., a supplier of engineering consulting services, with respect to a claim for payment by us to Plexus of approximately $1.9 million for engineering consulting services relating to the research and development of a machine technology that we were pursuing prior to the OLpur NS2000. Pursuant to this settlement agreement, Plexus agreed to release us from liability with respect to its claim in exchange for:

• our issuance to Plexus of warrants to purchase 170,460 shares of our common stock at an exercise price of approximately $10.56 per share which expire in June 2007; and

• our payment to Plexus of an aggregate amount of $650,000 in three installments.

We paid the first scheduled installment of $300,000 in August 2002 and we paid an additional $75,000 in 2003. The balance of $275,000 is due and we expect to pay it out of the proceeds of the offering to which this prospectus relates. We and Plexus agreed to release each other from any and all claims or liabilities, whether known or unknown, that we had against the other as of the date of the settlement agreement, except for obligations arising out of the settlement agreement itself.

Lancer Offshore, Inc.

Lancer Offshore, Inc. was a hedge fund. Subsequent to our engaging in the financing transaction with Lancer Offshore, Inc. described below, and despite having reported $657 million in assets under management as of April 30, 2003, Lancer Offshore, Inc. was the subject of an involuntary liquidation proceeding commenced by

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regulators in the British Virgin Islands in May 2003. Thereafter, the SEC commenced a proceeding captioned Securities and Exchange Commission v. Michael Lauer, et. al., Case No. 03-CV-80612 in the U.S. District Court for the Southern District of Florida. The court ordered the seizure of the fund’s assets, and appointed a receiver to control the fund.

Prior to any of these proceedings, in August 2002, we entered into a subscription agreement with Lancer Offshore, Inc. The subscription agreement provided that Lancer Offshore, Inc. would purchase, in three installments, (1) $3,000,000 principal amount of secured notes due March 15, 2003 convertible into 340,920 shares of our common stock and (2) warrants to purchase until December 2007 an aggregate of 68,184 shares of our common stock at an exercise price of approximately $8.80 per share. In accordance with the subscription agreement, the first installment of securities, consisting of $1,500,000 principal amount of the notes and 34,092 of the warrants, was sold. However, Lancer Offshore, Inc. failed to fund the remaining installments. Following this failure, we attempted to resolve our resulting dispute with Lancer Offshore, Inc. by entering into a settlement agreement dated as of January 31, 2003, pursuant to which, among other things:

• the parties terminated the subscription agreement and gave mutual releases relating to it;

• Lancer Offshore, Inc. agreed to surrender to us all of its warrants except a portion thereof exercisable to purchase 75,000 shares of common stock for $2.50 per share (without giving effect to any adjustment that may result from the reverse stock split pursuant to the antidilution provisions of such warrant, as amended);

• such warrants were amended to provide that the exercise price per share and the number of shares issuable upon exercise thereof would not be adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated;

• the secured convertible note in the principal amount of $1,500,000 referred to above was cancelled;

• Lancer Offshore, Inc. agreed to deliver to us at a subsequent closing the old note and warrants and to reaffirm certain representations and warranties;

• we agreed to issue to Lancer Offshore, Inc. at a subsequent closing an unsecured note in the principal amount of $1,500,000 bearing no interest, not convertible into common stock and due on January 31, 2004 or earlier under certain circumstances; and

• Lancer Offshore, Inc. made a series of representations concerning its suitability and capabilities as an investor.

Lancer Offshore, Inc. never satisfied the closing conditions under this settlement agreement and the closing was never held. Accordingly, we never issued the $1,500,000 note that the settlement agreement provided for us to issue at such closing. See “Business – Legal Proceedings.”

Hermitage Capital Corporation.

In April 2002, we entered into a letter agreement with Hermitage Capital Corporation which, among other things, required us to provide Hermitage Capital Corporation with:

• a placement fee of 10% of the total amount of funds raised during the term of the letter agreement from investors introduced by Hermitage Capital Corporation in a financing through the issuance and placement of certain of our equity or convertible debt securities;

• warrants to purchase an amount of shares of our common stock equal to 4.16% of the amount of financing raised from investors introduced by Hermitage Capital Corporation in any such financing; and

• a placement fee of 10% of the total amount of funds raised in any such financing successfully consummated during the three years immediately following the term of the letter agreement with an investor that was introduced to us by Hermitage Capital Corporation during the term of the letter agreement.

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The stated term of the letter agreement was from April 30, 2002 through September 30, 2004. Pursuant to the terms of the letter agreement, we paid Hermitage Capital Corporation, as placement agent, $150,000 in connection with our transactions with Lancer Offshore, Inc. in August 2002. We have entered into a settlement agreement with Hermitage Capital Corporation dated as of February 13, 2003 pursuant to which, among other things:

• the letter agreement was terminated;

• the parties gave mutual releases relating to the letter agreement; and

• we agreed to issue to Hermitage Capital Corporation or its designees, upon the closing of the transactions contemplated by the settlement agreement with Lancer Offshore, Inc., warrants exercisable until February 2006 to purchase 60,000 shares of common stock for $2.50 per share (without giving effect to any adjustment that may result from the reverse stock split pursuant to the antidilution provisions of such warrant), which number of shares and exercise price would not have been adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated.

The closing contemplated by the settlement agreement with Lancer Offshore, Inc. never occurred and the closing was never held. Accordingly, we never issued the warrants that the settlement agreement with Hermitage provided for us to issue upon such closing. See “Business – Legal Proceedings.”

Governmental Regulation

The research and development, manufacturing, promotion, marketing and distribution of our products in the United States, our Target European Market and other regions of the world are subject to regulation by numerous governmental authorities, including the U.S. Food and Drug Administration, or the FDA, the European Union and analogous agencies.

United States

The FDA regulates the manufacture and distribution of medical devices in the United States pursuant to the Food, Drug and Cosmetic Act of 1938, or the FDC Act. All of our products are regulated in the United States as medical devices by the FDA under the FDC Act. Noncompliance with applicable requirements can result in, among other things:

• fines;

• injunctions;

• civil penalties;

• recall or seizure of products;

• total or partial suspension of production;

• withdrawal of existing approvals or premarket clearances of products;

• refusal to approve or clear new applications or notices relating to such non-compliant person’s products;

• recommendations by the FDA that such non-compliant person not be allowed to enter into government contracts; and

• criminal prosecution.

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The FDA also has authority to require repair, replacement or refund of the cost of any device illegally manufactured or distributed.

Under the FDC Act, medical devices are classified in one of three classes, namely Class I, II or III, on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness.

• Class I devices are medical devices for which general controls are deemed sufficient to ensure their safety and effectiveness. General controls include provisions related to (1) labeling, (2) producer registration, (3) defect notification, (4) records and reports and (5) quality service requirements, or QSR.

• Class II devices are medical devices for which the general controls for the Class I devices are deemed not sufficient to ensure their safety and effectiveness and require special controls in addition to the general controls. Special controls include provisions related to (1) performance and design standards, (2) post-market surveillance, (3) patient registries and (4) the use of FDA guidelines.

• Class III devices are medical devices generally limited to life-sustaining, life-supporting or implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices, that the FDA deems to require the most restrictive controls to ensure their safety and effectiveness.

Before a new medical device can be introduced to the market, FDA clearance of a premarket notification under Section 510(k) of the FDC Act or FDA clearance of a premarket approval application under Section 515 of the FDC Act must be obtained. A Section 510(k) clearance will be granted if the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed Class I or Class II medical device or to a Class III medical device for which the FDA has not called for premarket approval under Section 515. The Section 510(k) premarket clearance process is generally faster and simpler than the Section 515 premarket approval process. We understand that it generally takes four to 12 months from the date a Section 510(k) notification is accepted for filing to obtain Section 510(k) premarket clearance and that it may take several years from the date a Section 515 application is accepted for filing to obtain Section 515 premarket approval, although it may take longer in both cases.

We expect that all of our products will be categorized as Class II devices and that these products will not require clearance of premarket approval applications under Section 515 of the FDC Act, but will be eligible for marketing clearance through the premarket notification process under Section 510(k). We have determined that we are eligible to utilize the Section 510(k) premarket notification process based upon our products’ substantial equivalence to previously legally marketed devices in the United States. However, we cannot assure you:

• that we will not need to reevaluate the applicability of the Section 510(k) premarket notification process to our products in the future;

• that the FDA will agree with our determination that we are eligible to use the Section 510(k) premarket notification process; or

• that the FDA will not in the future require us to submit a Section 515 premarket approval application, which would be a more costly, lengthy and uncertain approval process.

The FDA has recently been requiring a more rigorous demonstration of substantial equivalence than in the past and may request clinical data to support premarket clearance. As a result, the FDA could refuse to accept for filing a Section 510(k) notification made by us pending the submission of additional information. The FDA may determine that any one of our proposed products is not substantially equivalent to a legally marketed device or that additional information is needed before a substantial equivalence determination can be made. A “not substantially equivalent” determination, or request for additional data, could prevent or delay the market introduction of our products that fall into this category, which in turn could have a material adverse effect on our potential sales and revenues. Moreover, even if the FDA does clear one or all of our products under the Section 510(k) process, it may clear a product for some procedures but not others or for certain classes of patients and not others.

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For any devices cleared through the Section 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device or that constitute a major change to the intended use of the device will require a new Section 510(k) premarket notification submission. Accordingly, if we do obtain Section 510(k) premarket clearance for any of our products, we will need to submit another Section 510(k) premarket notification if we significantly affect that product’s safety or effectiveness through subsequent modifications or enhancements.

If human clinical trials of a device are required in connection with a Section 510(k) notification and the device presents a “significant risk,” the sponsor of the trial (usually the manufacturer or distributor of the device) will need to file an Investigational Device Exemption, or IDE, application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal testing and/or laboratory bench testing. If the IDE application is approved, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as specified in the IDE. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of subjects. We intend to file one IDE with respect to the OLpur MD190and the OLpur H₂H, and another IDE with respect to the OLpur NS2000. We have filed a pre-IDE application with respect to the OLpur MD190 and have initiated discussions with the FDA to facilitate the 510(k) approval process. At this point, the onus is on us to take the initiative in pushing forward on the application. However, we anticipate delaying somewhat our application for approval of the OLpur MD190 in the United States in order to combine it with an application for approval of OLpur H₂H. We have targeted a meeting with the FDA to discuss this strategy and the appropriate next steps for sometime prior to year end 2004. We believe that our design verification on the OLpur H₂H will have progressed to the point where the device will be ready for clinical trails in the first quarter of 2005, and, provided that such trials are successful, we expect to file a 510(k) application with respect to both the OLpur MD190 and the OLpur H₂H in the fourth quarter of 2005 or the first quarter of 2006 and hope to achieve U.S. regulatory approval in the first half of 2006.

The Section 510(k) premarket clearance process can be lengthy and uncertain. It will require substantial commitments of our financial resources and management’s time and effort. Significant delays in this process could occur as a result of factors including:

• the FDA’s failure to schedule advisory review panels;

• changes in established review guidelines;

• changes in regulations or administrative interpretations; or

• determinations by the FDA that clinical data collected is insufficient to support the safety and effectiveness of one or more of our products for their intended uses or that the data warrants the continuation of clinical studies.

Delays in obtaining, or failure to obtain, requisite regulatory approvals or clearances in the United States for any of our products would prevent us from selling those products in the United States and would impair our ability to generate funds from sales of those products in the United States, which in turn could have a material adverse effect on our business, financial condition, and results of operations.

The FDC Act requires that medical devices be manufactured in accordance with the FDA’s current QSR regulations which require, among other things, that:

• the design and manufacturing processes be regulated and controlled by the use of written procedures;

• the ability to produce medical devices which meet the manufacturer’s specifications be validated by extensive and detailed testing of every aspect of the process;

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• any deficiencies in the manufacturing process or in the products produced be investigated;

• detailed records be kept and a corrective and preventative action plan be in place; and

• manufacturing facilities be subject to FDA inspection on a periodic basis to monitor compliance with QSR regulations.

If violations of the applicable QSR regulations are noted during FDA inspections of our manufacturing facilities or the manufacturing facilities of our contract manufacturers, there may be a material adverse effect on our ability to produce and sell our products.

Before the FDA approves a Section 510(k) premarket notification, the FDA is likely to inspect the relevant manufacturing facilities and processes to ensure their continued compliance with QSR. Although some of the manufacturing facilities and processes that we expect to use to manufacture our OLpur MD190 and OLpur NS2000 have been inspected and certified by a worldwide testing and certification agency (also referred to as a notified body) that performs conformity assessments to European Union requirements for medical devices, they have not all been inspected by the FDA. Similarly, although some of the facilities and processes that we expect to use to manufacture our OLpur H₂H have been inspected by the FDA, they have not all been inspected by any notified body. A “notified body” is a group accredited and monitored by governmental agencies that inspects manufacturing facilities and quality control systems at regular intervals and is authorized to carry out unannounced inspections. Even after the FDA has cleared a Section 510(k) submission, it will periodically inspect the manufacturing facilities and processes for compliance with QSR. In addition, in the event that additional manufacturing sites are added or manufacturing processes are changed, such new facilities and processes are also subject to FDA inspection for compliance with QSR. The manufacturing facilities and processes that will be used to manufacture our products have not yet been inspected by the FDA for compliance with QSR. We cannot assure you that the facilities and processes used by us will be found to comply with QSR and there is a risk that clearance or approval will, therefore, be delayed by the FDA until such compliance is achieved.

In addition to the requirements described above, the FDC Act requires that:

• all medical device manufacturers and distributors register with the FDA annually and provide the FDA with a list of those medical devices which they distribute commercially;

• information be provided to the FDA on death or serious injuries alleged to have been associated with the use of the products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur; and

• certain medical devices not cleared with the FDA for marketing in the United States meet specific requirements before they are exported.

European Union

The European Union began to harmonize national regulations comprehensively for the control of medical devices in member nations in 1993, when it adopted its Medical Devices Directive. The European Union directive applies to both the manufacturer’s quality control system and the product’s technical design. Depending on the class of medical devices, a manufacturer may choose alternative regulatory approaches to demonstrate compliance with European Union provisions. We have subjected our entire business in our Target European Market to the most comprehensive procedural approach in order to demonstrate the quality standards and performance of our operations, which we believe is also the fastest way to launch a new product in the European Community.

The regulatory approach we chose to demonstrate compliance with European Union provisions requires the certification of a full quality management system by a notified body charged with examining the quality

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management system. We engaged TÜV Rheinland of North America, Inc. (“TÜV Rheinland”) as the notified body to assist us in obtaining a European Union certificate for our quality management system and in demonstrating our compliance with the European Union requirements.

Under the regulatory approach we chose to demonstrate compliance with European Union provisions, only after a company receives a European Union certificate for its quality management system may such company assess whether products that it has developed and/or manufactured satisfy European Union requirements. European Union requirements for products are set forth in harmonized European Union standards and include conformity to safety requirements, physical and biological properties, construction and environmental properties, and information supplied by the manufacturer. A company demonstrates conformity to these requirements, with respect to a product, by pre-clinical tests, biocompatibility tests, qualification of products and packaging, risk analysis and well-conducted clinical investigations approved by ethics committees.

Once a manufacturer having a European Union-certified full quality management system has assessed the conformity of its products with harmonized European standards and has determined that its products conform with these standards, the manufacturer then declares and documents such conformity and places a “CE” mark on the relevant products. The CE mark, which stands for Conformité Européenne, demonstrates compliance with the relevant European Union requirements. Products subject to these provisions that do not bear the CE mark cannot be imported to, or sold or distributed within, the European Union.

In July 2003, we received a certification from TÜV Rheinland that our quality management system conforms with the requirements of the European Community. At the same time, TÜV Rheinland approved our use of the CE marking with respect to the design and production of high permeability hemodialyzer products for ESRD therapy. As of the date of this prospectus, the manufacturing facilities and processes that we are using to manufacture our OLpur MD190 have been inspected and certified by a notified body.

Regulatory Authorities in Regions outside of the United States and the European Union

We also plan to sell our products in foreign markets outside the United States which are not part of the European Union. Requirements pertaining to medical devices vary widely from country to country, ranging from no health regulations to detailed submissions such as those required by the FDA. We believe the extent and complexity of regulations for medical devices such as those produced by us are increasing worldwide. We anticipate that this trend will continue and that the cost and time required to obtain approval to market in any given country will increase, with no assurance that such approval will be obtained. Our ability to export into other countries may require compliance with ISO 13485, which is analogous to compliance with the FDA’s QSR requirements. Other than the CE marking of our OLpur MD190 product, we have not obtained any regulatory approvals to sell any of our products and there is no assurance that any such clearance or certification will be issued. We anticipate obtaining CE marking of our OLpur H₂H product in the second quarter of 2005, and regulatory approval in the United States in the first half of 2006. We anticipate obtaining CE Marking of the NS2000 as well as regulatory approval in the United States in 2006.

Reimbursement

In both domestic markets and markets outside of the United States, sales of our products will depend in part, on the availability of reimbursement from third-party payors. In the United States, ESRD providers are reimbursed through Medicare, Medicaid and private insurers. In countries other than the United States, ESRD providers are also reimbursed through governmental and private insurers. In countries other than the United States, the pricing and profitability of our products generally will be subject to government controls. Despite the continually expanding influence of the European Union, national healthcare systems in its member nations, reimbursement decision-making included, are neither regulated nor integrated at the European Union level. Each country has its own system, often closely protected by its corresponding national government. The following reflects the current reimbursement landscape in the United States.

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Medicare Reimbursement

Medicare generally provides health insurance coverage for persons who are age 65 or older and for persons who are completely disabled. Medicare also provides coverage for other eligible patients, regardless of age, who have been medically determined to have ESRD. For patients eligible for Medicare based solely on ESRD (generally patients under age 65), Medicare eligibility begins three months after the month in which the patient begins dialysis. During this three-month waiting period, Medicaid, private insurance or the patient is responsible for payment for dialysis services. This waiting period is waived for individuals who participate in a self-care dialysis-training program.

For ESRD patients under age 65 who have any employer group health insurance coverage (regardless of the size of the employer or the individual’s employment status), Medicare coverage is generally secondary to the employer coverage during a 30-month coordination period that follows the establishment of Medicare eligibility or entitlement based on ESRD. During the coordination period, an employer group health plan is responsible for paying primary benefits at the rate specified in the plan, which may be a negotiated rate or the healthcare provider’s usual and customary rate. As the secondary payer during this coordination period, Medicare will make payments up to the applicable composite rate for dialysis services to supplement any primary payments by the employer group health plan if the plan covers the services but pays only a portion of the charge for the services.

Medicare generally is the primary payer for ESRD patients after the 30-month coordination period. Under current rules, Medicare is also the primary payer for ESRD patients during the 30-month coordination period if, before becoming eligible for Medicare on the basis of ESRD, the patient was already age 65 or over (or eligible for Medicare based on disability) unless covered by an employer group health plan (other than a “small” employer plan) because of current employment. This rule eliminates for many dual-eligible beneficiaries the 30-month coordination period during which the employer plan would serve as primary payer and reimburse health care providers at a rate that we believe may be higher than the Medicare composite rate. The rule regarding entitlement to primary Medicare coverage when the patient is eligible for Medicare on the basis of both age (or disability) and ESRD has been the subject of frequent legislative and regulatory change in recent years and there can be no assurance that the rule will remain unchanged in the future.

When Medicare is the primary payer, it reimburses 80% of the composite rate set by the Medicare prospective reimbursement system for each dialysis treatment. The beneficiary is responsible for the remaining 20%, as well as any unmet Medicare deductible amount, although an approved Medicare supplement insurance policy, other private health insurance or Medicaid may pay on the beneficiary’s behalf. The composite payment rates, effective January 1, 2002, for urban renal facilities published in February 2001 by the Department of Health and Human Services for outpatient dialysis services ranged from $121.24 to $144.05 per treatment depending on the location of the renal facility. We have confirmed with the Department of Health and Human Services that these composite payment rates currently remain in effect. Reimbursement rates are subject to periodic adjustment based on certain factors, including legislation and executive and congressional budget reduction and control processes, inflation and costs incurred in rendering the services, but in the past have had little relationship to the cost of conducting business.

We are unable to predict what, if any, future changes may occur in the Medicare composite reimbursement rate or in any other reimbursement program. Any reductions in the Medicare composite reimbursement rate or in any other reimbursement program could have a material adverse effect on our revenues and net earnings. In addition, there have been various legislative proposals for the reform of numerous aspects of Medicare, including extension of the coordination period and expanded enrollment of Medicare beneficiaries in managed care programs. See “Business – Reimbursement – Potential Health Care Legislation.”

Private Reimbursement

Some ESRD patients have private insurance that covers dialysis services. As discussed above, health care providers receive reimbursement for ESRD treatments from the patient or private insurance during a “waiting

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period” of up to three months before the patient becomes eligible for Medicare. In addition, if the private payer is an employer group health plan, it is generally required to continue to make primary payments for dialysis services during the 30-month period following eligibility or entitlement to Medicare. In general, employers may not reduce coverage or otherwise discriminate against ESRD patients by taking into account the patient’s eligibility or entitlement to Medicare benefits.

We believe that before Medicare primary coverage is established, private payers may reimburse dialysis expenses at rates significantly higher than compensation under the Medicare composite rate on a per-treatment basis. When Medicare becomes a patient’s primary payer, private insurance often covers the per-treatment 20% coinsurance that Medicare does not pay.

Medicaid

Reimbursement Medicaid programs are state-administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs may also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (e.g., oral medications) that are not covered by Medicare. Some Medicaid programs require Medicare recipients to pay a share of the cost of services based upon the recipient’s level of income or assets, but other programs provide for coverage without coinsurance amounts.

Potential Health Care Legislation

Because the Medicare program represents a substantial portion of the federal budget, Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts otherwise payable by the program to health care providers in order to achieve deficit reduction targets or meet other political goals. Legislation and/or regulations may be enacted in the future that may significantly modify the Medicare ESRD program or substantially affect reimbursement for dialysis services. Such legislation or regulations may materially adversely affect our potential revenues from the United States market.

Product Liability and Insurance

The production, marketing and sale of kidney dialysis products have an inherent risk of liability in the event of product failure or claim of harm caused by product operation. We have acquired product liability insurance in the amount of 5 million euro, or approximately $6.2 million. A successful claim in excess of our insurance coverage could materially deplete our assets. Moreover, any claim against us could generate negative publicity, which could decrease the demand for our products, our ability to generate revenues and our profitability.

Some of our existing and potential agreements with manufacturers of our products and components of our products do or may require us (1) to obtain product liability insurance or (2) to indemnify manufacturers against liabilities resulting from the sale of our products. If we are not able to maintain adequate product liability insurance, we will be in breach of these agreements, which could materially adversely affect our ability to produce our products. Even if we are able to obtain and maintain product liability insurance, if a successful claim in excess of our insurance coverage is made, then we may have to indemnify some or all of our manufacturers for their losses, which could materially deplete our assets.

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Employees

As of January 1, 2004, we employed a total of seventeen employees, fifteen of whom were full time and two of whom were employed on a consulting basis or part-time. These seventeen employees were distributed among our various operating departments as follows:

Department	Number of Employees
Research and Development	6
General and Administrative	4
Customer Service	3
Marketing and Sales	2
Quality Systems	1
Clinical Services Director	1

As of the fourth quarter of 2003, we established in our Target European Market a customer service and financial operations center in Dublin, Ireland. We have a Clinical Services Director who serves to provide customer support and training. Our sales staff is currently based in Ireland and France. We intend to add two to four members to our sales staff in each of our Target European Market and the United States, as well as two to three members to our administrative staff in each of our Target European Market and the United States. We intend to make our European staff additions as we expand our presence in our Target European Market and such expansion is currently in process. We intend to make our United States staff additions at or around the time we file for regulatory approval for the H₂H in the United States, which we expect to occur in the fourth quarter of 2005 or the first quarter of 2006.

No employees are covered by collective bargaining agreements. We consider our relationship with our employees generally to be good.

Facilities

Our U.S. facilities are located at 3960 Broadway, 3^rd and 4^th Floors, New York, New York 10032 and consist of approximately 2,678 square feet of space. On July 1, 2004, we entered into a license agreement for the use of this space with the Trustees of Columbia University in the City of New York. The term of the license agreement is for one year with a monthly cost of $8,839, including monthly internet access. This license replaces a one year license for space at the same location that we had entered into on July 1, 2003, and adds approximately 578 square feet of office space to provide facilities for our sales, marketing and nursing staff, and for accounting staff that we expect to hire during 2004. We use our facilities to house our corporate headquarters and research facilities. Our offices and laboratories are housed in the Mary Woodard Lasker Building, a part of the Audubon Business and Technology Center administered by Columbia University, which is equipped to accommodate biotechnology and medical product development companies. Of the space we license, 1,500 square feet is dedicated laboratory space, which is equipped with laboratory equipment, such as benches, fume hoods, gas, air and water systems, and the remaining 1,178 square feet is dedicated office space. We believe that our insurance coverage adequately covers our interest in our office space.

Our facilities in our Target European Market are located at 1st Floor, Suite 5, The Avenue, Beacon Court, Sandyford, Dublin 18, Ireland and consist of approximately 500 square feet of space. On August 1, 2003 we entered into a lease for this space with Mohan & Company, an accounting firm wholly-owned by our Director of Finance, Europe, Cormac Mohan. The term of the lease is for three years with a monthly rent of 1,000 Euro (approximately $1,240). We use our facilities to house our customer service and accounting operations. The Avenue, Beacon Court is a new office complex within approximately 10 miles of downtown Dublin. We believe this space is currently adequate to meet our needs.

We do not own any real property for use in our operations or otherwise.

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Legal Proceedings

We are the defendant in an action captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v. Nephros, Inc., Case No. 04-CV-20547, that was commenced on March 8, 2004, and is pending in the U.S. District Court for the Southern District of Florida (the “Ancillary Proceeding”). That action is ancillary to a proceeding captioned Securities and Exchange Commission v. Michael Lauer, et. al., Case No. 03-CV-80612, that was commenced on July 8, 2003, and is also pending in the U.S. District Court for the Southern District of Florida, wherein the court has appointed a Receiver to manage Lancer Offshore, Inc. and various related entities (the “Receivership”).

In the Ancillary Proceeding, the Receiver for Lancer Offshore, Inc. alleges that, in consideration for Lancer Offshore, Inc.’s agreement to enter into the settlement agreement, we were required to deliver a note in the principal amount of $1,500,000 and an instrument evidencing the portion of warrants previously issued to Lancer Offshore, Inc. that were not surrendered by Lancer Offshore, Inc. pursuant to the settlement agreement, and the Receiver seeks payment of $1,500,000, together with interest, costs and attorneys’ fees, as well as delivery of a warrant evidencing the right to purchase until December 2007 an aggregate of 75,000 shares of our common stock for $2.50 per share (or 21,308 shares of our common stock for $8.80 per share, if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant, as amended). See “Business – Settlement Agreements – Lancer Offshore, Inc.”

On or about April 29, 2004, we served an answer in which we denied liability for, and asserted numerous defenses to, the Receiver’s claims. We believe that we have valid defenses to the Receiver’s claims and the prospective claims mentioned above, and intend to contest them vigorously. At this time the Ancillary Proceeding has not progressed past the initial pleading stage. In addition, on or about March 30, 2004, we asserted claims for damages against Lancer Offshore, Inc. that exceed the amount sought in the Ancillary Proceeding by submitting a proof of claim in the Receivership. We have been discussing a potential settlement of all claims with the Receiver. However, there can be no assurance that these discussions or the outcome of any of these proceedings will be successful.

Lancer Offshore, Inc. may contend that the 75,000 shares and $2.50 per share exercise terms of their warrant are not subject to adjustment as a result of our currently contemplated 0.2841-for-one reverse stock split. Furthermore, Lancer Offshore, Inc. may claim that the number of shares issuable upon exercise of the warrant should actually be increased to 94,771 and the exercise price proportionally decreased to $1.98 per share, upon consummation of the currently planned reverse stock split to adjust for the difference between the split contemplated in the warrants (0.2248318-for-one) and our currently planned split (0.2841-for-one). We believe that the plain language of the amended warrant only excepts from adjustment the specific reverse stock split referred to in our registration statement that had been filed with the SEC at such time and was later withdrawn. In addition to the plain language of the amendment, we believe certain equitable considerations support our position that the warrant is subject to adjustment for our currently planned 0.2841-for-one reverse stock split.

We have currently reserved for the Ancillary Proceeding on our balance sheets as of December 31, 2003 and March 31, 2004 as a $1,500,000 accrued liability. Such balance sheets do not include any adjustment for the possibility of a settlement of the Ancillary Proceeding or otherwise reflect our claims against the Receivership. Nonetheless, if and to the extent that our expenses related to defending against the Receiver’s claims in the Ancillary Proceeding and/or pursuing our claims in the Receivership become significant or if we are found to have significant liability under the warrant or for costs and fees, then our liquidity could be materially adversely affected and/or our stockholders could experience dilution in their investment in us and the value of our stockholders’ interests in us could be impaired.

In June 2004, Hermitage Capital Corporation (“Hermitage”) threatened to sue us seeking warrants to purchase 60,000 shares of our common stock for $2.50 per share (or 17,046 shares of our common stock for $8.80 per share, if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant) as

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well as a placement fee and additional warrants it claims are, or will be, owed in connection with the offering to which this prospectus relates, as compensation for allegedly introducing us to the underwriter. We believe that Hermitage may bring such lawsuit imminently and expect that it will also include claims for various unspecified damages. We believe that we have valid defenses to any claim that Hermitage may foreseeably bring, and intend to contest any such suit vigorously. Additionally, we have informed Hermitage of our belief that our settlement agreement with them bars any claim for compensation under the April 2002 letter agreement or otherwise, other than their warrants provided thereunder, and that under the settlement agreement, the warrants are payable only if and after Lancer Offshore, Inc. holds a closing with us pursuant to its settlement agreement, which has not occurred. See “Business – Settlement Agreements – Hermitage Capital Corporation.”

The form of warrants that would have been issuable to Hermitage pursuant to the settlement agreement, if the closing of the transactions contemplated by our settlement agreement with Lancer Offshore, Inc. had occurred, contained the same antidilution provisions as were added to Lancer Offshore, Inc.’s warrant pursuant to our settlement agreement with Lancer Offshore, Inc. Accordingly, Hermitage Capital Corporation may contend that the 60,000 shares and $2.50 per share exercise terms of the warrant described in the settlement agreement would not be subject to adjustment as a result of our currently contemplated 0.2841-for-one reverse stock split. Furthermore, Hermitage may claim that the number of shares issuable upon exercise of the warrant should actually be increased to 75,817 and the exercise price proportionally decreased to $1.98 per share, upon consummation of the currently planned split to adjust for the difference between the split contemplated in the warrants (0.2248318-for-one) and our currently planned split (0.2841-for-one). We believe that the plain language of the amended warrant only excepts from adjustment the specific reverse stock split referred to in our registration statement that had been filed with the SEC at such time and was later withdrawn. In addition to the plain language of the amendment, we believe certain equitable considerations support our position that the warrant is subject to adjustment for our currently planned 0.2841-for-one reverse stock split.

Except for the matters described above, there is no current or pending legal proceeding to which we are a party or to which any of our properties is subject.

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MANAGEMENT

Information Concerning Directors, Executive Officers and Key Employees

Directors and Executive Officers

The following table sets forth information regarding our directors and executive officers:

Name	Age	Position
Eric A. Rose, M.D.	53	Chairman of the Board and Class III Director
Norman J. Barta	47	President, Chief Executive Officer and Class III Director
Lawrence J. Centella	63	Class III Director
Howard Davis	49	Class I Director
Donald G. Drapkin	56	Class II Director
William J. Fox	47	Class II Director
W. Townsend Ziebold, Jr.	42	Class I Director
Marc L. Panoff	34	Chief Financial Officer

Upon the consummation of this offering, our amended and restated certificate of incorporation will provide for a classified board of directors consisting of three classes of directors, each serving staggered, three-year terms. The terms of the Class I Directors will expire in 2005, the Class II Directors in 2006; and the Class III Directors in 2007.

Eric A. Rose, M.D. has served as chairman of our board of directors and a director since our inception in 1997. Dr. Rose served as our president and chief executive officer from May 1999 until July 2002. Since 1994, Dr. Rose has been the Morris and Rose Millstein/Johnson & Johnson Professor and Chairman of the Department of Surgery at the Columbia University College of Physicians and Surgeons, and Surgeon in Chief at the Columbia Presbyterian Medical Center. Dr. Rose is a director of SIGA Technologies, Inc., a publicly-traded biotechnology company focused on the design and development of novel products for the prevention and treatment of serious infectious diseases. Dr. Rose received a B.A., summa cum laude, in Psychology from Columbia College and an M.D. from Columbia University College of Physicians and Surgeons.

Norman J. Barta has served as our president and chief executive officer and as a director since July 2002, and served as our chief financial officer from October 1998 until July 2004. Mr. Barta has served as our treasurer and secretary since May 1999. Mr. Barta served as our chief operating officer from October 1999 to July 2002. From 1994 to 1997, Mr. Barta provided financial planning and management for the research and development division of National Medical Care (currently a division of the Fresenius Medical Care AG), which prior to its acquisition by Fresenius, was one of the largest dialysis providers in the world. Prior to that, Mr. Barta was a consultant for Corestates Bank, where he restructured and optimized cash management and treasury areas for the bank’s corporate and public-sector clients. Mr. Barta received a B.S. in Mathematics and Economics from Carnegie-Mellon University and an M.B.A. from the University of Chicago.

Lawrence J. Centella has served as a director of our company since January 2001. Mr. Centella serves as president of Renal Patient Services, LLC, a company that owns and operates dialysis centers, and has served in such capacity since June 1998. From 1997 to 1998, Mr. Centella served as executive vice president and chief operating officer of Gambro Healthcare, Inc., an integrated dialysis company that manufactures dialysis equipment, supplies dialysis equipment and operates dialysis clinics. From 1993 to 1997, Mr. Centella served as president and chief executive officer of Gambro Healthcare Patient Services, Inc. (formerly REN Corporation). Prior to that, Mr. Centella served as president of COBE Renal Care, Inc., Gambro Hospal, Inc., LADA International, Inc. and Gambro, Inc. Mr. Centella is also the founder of LADA International, Inc. Mr. Centella received a B.S. from DePaul University.

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Howard Davis will begin to serve as a director of our company upon the consummation of this offering. Since 2003, Mr. Davis serves as Senior Vice President – Capital Markets with The Shemano Group, which is underwriting this offering. From 1997 to 2003, Mr. Davis served as the executive vice president of GunnAllen Financial Inc., where he was the executive responsible for the investment banking and finance division. Mr. Davis has advised us that he will not be involved with the marketing of our securities after the consummation of this offering. From 1990 to 1997, Mr. Davis served as the president and chief executive officer of Kensington Securities, Inc., a National Association of Securities Dealers, Inc. broker dealer. Prior to joining Kensington Securities, Inc. in 1990, Mr. Davis had served as the president, and, prior to that, as chief financial officer, of Numero Uno Franchise Corporation, a Los Angeles based franchisor of pizzeria and Italian restaurants. Mr. Davis is also a former instructor in franchising at California State University. Mr. Davis was a former member of the board of directors and the audit and compensation committees of Intelli-Check, Inc., a corporation which files reports pursuant to the Securities Exchange Act of 1934. Mr. Davis attended the University of Southern California; California State University, Northridge; and Kent State University, where he majored in Finance and Accounting.

Donald G. Drapkin has served as a director of our company since our inception in 1997. Mr. Drapkin served as our interim president, chief executive officer and treasurer from 1997 until May 1999. Mr. Drapkin has been vice chairman and a director of MacAndrews & Forbes Holdings Inc. and various affiliates since 1987, including, as of the date of this prospectus, the following corporations which file reports pursuant to the Securities Exchange Act of 1934: Revlon Consumer Products Corporation and Revlon, Inc. MacAndrews & Forbes Holdings Inc. is a holding company that has no business operations of its own, but holds investments in various businesses from time to time. Prior to joining MacAndrews & Forbes, Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP for more than five years. In addition to those listed above, Mr. Drapkin is a director of the following corporations which file reports pursuant to the Securities Exchange Act of 1934: Anthracite Capital, Inc.; Playboy Enterprises, Inc. and SIGA Technologies, Inc., a biotechnology company focused on the design and development of novel products for the prevention and treatment of serious infectious diseases. Mr. Drapkin received a B.A. from Brandeis University and a J.D. from Columbia University.

William J. Fox will begin to serve as a director of our company upon the consummation of this offering. Since February 1999, Mr. Fox has served as chairman, president, chief executive officer and a director of AKI, Inc. and president, chief executive officer and a director of AKI Holdings, Inc., a marketing and interactive advertising company. Prior to that, Mr. Fox served as president of Strategic and Corporate Development for Revlon Worldwide and chief executive officer of Revlon Technologies. From 1994 to April 1999, Mr. Fox served as a director, and from 1997 to 1999, Mr. Fox served as senior executive vice president, of both Revlon Inc. and Revlon Consumer Products Corporation. For the five years ending 1999, Mr. Fox was also senior vice president of MacAndrews & Forbes Holdings, Inc. Mr. Fox currently serves as non-executive co-chairman of the board and a director of Loehmann’s Holding Inc. and has served as a vice-chairman of the board and a director of Hain Food Group, Inc. and, until December 1997, as a vice president, and until December 1998, a vice-chairman of the board and a director of The Cosmetic Centers, Inc., a corporation which filed a voluntary bankruptcy petition in April 1999. Mr. Fox currently serves as a director of LQ Corporation, Inc.

W. Townsend Ziebold, Jr. has served as a director of our company since 1999. Mr. Ziebold was elected as a director of our company by the holders of shares of our series B convertible preferred stock in accordance with certain voting rights that terminate upon the mandatory conversion of such shares into shares of our common stock upon the consummation of this offering. Approximately 80% of our outstanding shares of series B convertible preferred stock are beneficially owned by Cypress Capital Assets, LP. Since 1996, Mr. Ziebold has been president of Wasserstein Levered Venture Partners II, LLC, the venture capital affiliate of Wasserstein & Co., L.P., where Mr. Ziebold has led several of Wasserstein & Co., L.P.’s investments. Mr. Ziebold is a former director and non-executive chairman of Imax Corporation, a leading large-screen film projection company, and is a former director of Collins & Aikman Corporation, a $2 billion sales diversified manufacturing company, and Maybelline, Inc., a leading mass market cosmetics manufacturer. Mr. Ziebold received a B.A. in Economics from Trinity College and an M.B.A. from the Stanford School of Business.

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Marc L. Panoff began serving as our chief financial officer in July 2004. Previously, since August 2001, Mr. Panoff had been the vice president of finance of Walker Digital Management, LLC, a privately held research and development laboratory that invents, patents and develops business solutions. Companies created by Walker Digital intellectual property include Priceline.com and Synapse Group, Inc. From 1994 to 2001, Mr. Panoff served as the corporate controller of Medicis Pharmaceutical Corporation, a publicly-traded specialty pharmaceutical concern specializing in treating dermatological conditions. From 1992 to 1994 Mr. Panoff served as a staff auditor for KPMG in New York. Mr. Panoff received a B.S. in Business Administration from Washington University in St. Louis and an M.B.A. from Arizona State University. Mr. Panoff is a Certified Public Accountant in the state of New York.

There are no family relationships among any of our directors and executive officers.

Upon consummation of the offering to which this prospectus relates, our board of directors will consist of seven members. Our amended and restated certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered, three-year terms. Except as otherwise provided by our bylaws for filling vacancies on our board of directors, a portion of our board of directors will be elected each year at our annual meeting of stockholders for a three-year term and hold office until their respective successors are elected, or until their earlier resignation or removal. The underwriter of this offering has the right to designate an individual as a non-voting advisor to our board of directors who will be entitled (i) to attend any or all of the meetings of our board of directors, (ii) to receive copies of all notices and other documents provided to our directors and (iii) to receive the same cash compensation and reimbursement of expenses as we afford to our directors who are not also officers or employees of ours. The underwriter has agreed that, so long as Mr. Davis, or any other individual designated by the underwriter, serves as a member of our board of directors, we shall be deemed to have satisfied our obligation to provide the underwriter with the option to designate a non-voting advisor to our board of directors.

Key Employees

Gregory Collins, Ph.D. has served as our senior scientist since 1998. From 1993 to 1997, Dr. Collins was a research and development program manager at National Medical Care, where he was responsible for research and development projects relating to dialyzer cartridges and bloodlines. From 1990 to 1993, Dr. Collins served as a senior level research and development engineer at National Medical Care, where he applied basic scientific theory to practical device development using his training in solute transport, and gained technical expertise in the spinning of hollow fiber semi-permeable membranes, dialyzer cartridge design and assembly techniques, and novel test method development. Dr. Collins received a B.S., summa cum laude, in Chemical Engineering from Arizona State University and a Ph.D., magna cum laude, in Bioengineering from U.C. San Diego. Dr. Collins is 43 years old.

Jan Rehnberg has served as our Senior Vice President, Marketing and Sales since January 2004. From 1998 to 2003, Mr. Rehnberg served as Managing Director of Gambro Healthcare Europe, where he developed their European market by establishing or acquiring 110 clinics serving 8,000 patients. From 1990 to 1998, Mr. Rehnberg was the President Director General (Managing Director) of Gambro SA France, where he reorganized and expanded the market for Gambro Renal Products. From 1985 to 1990, Mr. Rehnberg was the Managing Director Gambro SA Spain, where he served a similar function. From 1982 to 1984, Mr. Rehnberg was the Area Manager Middle East for Gambro, with responsibility for 14 Arab countries in which he developed product line sales, and established distributorships & agency agreements. Mr. Rehnberg received his Bachelor of International Business Administration from Lund University, Sweden. Mr. Rehnberg is 52 years old.

Nicholas Staub, B.A. has served as our Director of Sales since November 2003. From 1999 to 2003, Mr. Staub served as the Vice President of Development for Renal Ventures Management, where he was responsible for development of new dialysis clinics and co-venture relationships with Nephrologists and Hospitals. From 1986 to 1999, Mr. Staub was the Territory Manager for Cobe Laboratories/Gambro, where he marketed dialysis

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equipment and supplies to clinics in the Eastern United States. Mr. Staub received his B.A. in Business Administration from Menlo College of Business. Mr. Staub is 47 years old.

See “Management – Employment Agreements and Incentive Bonus Programs.”

Board Committees

Upon the consummation of this offering, our compensation committee will consist of two members, Lawrence J. Centella and and W. Townsend Ziebold, Jr., each of whom is an independent director in accordance with the American Stock Exchange listing standards. The compensation committee will be responsible for recommending compensation and benefits for the executive officers to the board of directors. It will also administer our Nephros 2000 Equity Incentive Plan and our Nephros 2004 Stock Incentive Plan and will be authorized to grant options under the latter plan.

Upon the consummation of this offering, our audit committee will consist of three members, Lawrence J. Centella, William J. Fox and W. Townsend Ziebold, Jr., each of whom is an independent director in accordance with the American Stock Exchange listing standards and Section 10A of the Securities Exchange Act and the rules and regulations promulgated thereunder. The board has determined that Mr. Fox is an “audit committee financial expert” as defined in Regulation S-K promulgated by the SEC. The audit committee will review the qualifications of our independent auditors, is responsible for their appointment, compensation, retention and oversight and reviews the scope, fees and results of activities related to audit and non-audit services. The audit committee will review with the accountants and our financial management the annual financial statements and discuss the effectiveness of internal accounting controls.

Upon the consummation of this offering, our nominating and corporate governance committee will consist of three members, Lawrence J. Centella, William J. Fox and W. Townsend Ziebold, Jr., each of whom is an independent director in accordance with the American Stock Exchange listing standards. The nominating and corporate governance committee will assist the board of directors in identifying qualified individuals to become board members, in determining the composition of the board and its committees, in monitoring a process to assess board effectiveness and in developing and implementing our corporate procedures and policies.

The full board of directors conducted the responsibilities of these committees during fiscal 2003.

Compensation Committee Interlocks and Insider Participation

Mr. Barta, who has held several executive offices during the last completed fiscal year, as well as Mr. Drapkin and Dr. Rose, each of whom is a former executive officer, have participated in deliberations, during the last completed fiscal year, of our board of directors concerning executive officer compensation.

Director Compensation

We will pay our directors $500 per meeting for board meetings attended in person and $100 per meeting for board meetings attended telephonically and will reimburse our directors for expenses incurred by them in connection with serving on our board of directors. We will pay the chairman of the Audit Committee $500 per meeting for meetings of the Audit Committee attended in person and $100 per meeting attended telephonically.

We will grant each non-employee director who first joins our board options to purchase 10,000 shares of our common stock in respect of such first year of service at an exercise price per share equal to the fair market value price per share of our common stock on the date of grant. We will also grant each non-employee director options to purchase 5,000 shares of our common stock at an exercise price per share equal to the fair market value price per share of our common stock on the grant date for each year of service as a member of our board after the first year of such service.

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Executive Compensation

The following tables set forth in summary form information concerning the compensation paid by us during the fiscal years ended December 31, 2003, 2002 and 2001, to our chief executive officer and our other executive officers whose salary and bonus for the year exceeded $100,000 and who served as an executive officer as of December 31, 2003.

SUMMARY COMPENSATION TABLE

	Annual Compensation			Long Term Compensation Awards
Name and Principal Position	Year	Salary (dollars)	Bonus (dollars)	Number of Securities Underlying Options
Norman J. Barta President and Chief Executive Officer (1)	2003 2002 2001	201,635 139,331 130,000	61,350 0 250	327,567 0 0
Marc L. Panoff Chief Financial Officer (2)	2003 2002 2001	0 0 0	0 0 0	0 0 0

(1) Mr. Barta served as our chief operating officer from October 1999 until July 2002 and our chief financial officer from October 1998 until July 2004.

(2) Mr. Panoff began serving as our chief financial officer in July 2004. Mr. Panoff’s initial annual base salary is $140,000, and he will be considered for a possible merit increase in connection with his performance review, scheduled to be performed prior to January 1, 2005. In addition, Mr. Panoff may be awarded a bonus based on performance.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning the grant of stock options under our 2000 Equity Incentive Plan to the executive officers named above during fiscal year 2003. We did not grant any stock appreciation rights during the fiscal year ended December 31, 2003.

Individual Grants									Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Options Term (1)
Name (a)	Number of Securities Underlying Options Granted (#) (b)	Percent of Total Options Granted to Employees In Fiscal Year (c)		Exercise of Base Price ($/Sh) (d)		Market Price on Date of Grant ($/Sh) (2)		Expiration Date (e)	0% ($)		5% ($) (f)		10% ($) (g)
Norman J. Barta	161,937 165,630	17.83 18.24	% %	$ $	2.78 1.76	$ $	6.16 7.04	1/30/13 5/30/13	$	$547,315 874,489	$ $	1,174,638 1,607,779	$ $	2,137,073 2,732,789

(1) Potential realizable value is based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the options’ respective ten-year terms. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the fair market value on the date of grant, as determined by our board of directors, assuming that the aggregate stock value derived from that calculation compounds at the annual 0%, 5% or 10% rate shown in the table for the entire ten-year term of the option and subtracting from that result the aggregate option exercise price.

(2) The fair market value of the options expiring on January 30, 2013 (granted on January 30, 2003) was determined based on the proposed initial public offering price as reflected in our registration statement on Form SB-2 that had been filed with the SEC at such time and was later withdrawn. The fair market value of the options expiring on May 30, 2013 (granted on May 30, 2003) was determined based on the proposed initial public offering price as reflected in this registration statement.

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AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the number of unexercised options and the December 31, 2003 fiscal year-end value of unexercised options on an aggregated basis held by the executive officers named above. As we have not granted any stock appreciation rights, there were no stock appreciation rights outstanding at the end of fiscal year ended December 31, 2003.

	Shares Acquired on Exercise	Value Realized	Number of Securities Underlying Unexercised Options at Fiscal Year-End		Value of Unexercised In-the- Money Options at Fiscal Year-End (dollars) (1)
Name			Exercisable	Unexercisable	Exercisable		Unexercisable
Norman J. Barta	0	0	272,225	197,392	$	1,430,113	$	835,605

(1) Options are “in-the-money” if, on December 31, 2003 the fair market value of our common stock exceeded the exercise price of those options. The amount shown under the column “Value of Unexercised In-the-Money Options at Fiscal Year-End” is calculated by determining the difference between the aggregate fair market value of our common stock underlying the options on December 31, 2003 and the aggregate exercise price of the options. For purposes of this calculation, since there had been no public trading market for our common stock as of December 31, 2003, the assumed initial public offering price of $6.50 per share was used as the fair market per share value of our common stock on such date. Notwithstanding the foregoing, the assumed initial public offering price of $6.50 per share does not necessarily represent the actual per share value of our common stock on December 31, 2003.

Employment Agreements and Incentive Bonus Programs

Agreement with Mr. Norman J. Barta

Norman J. Barta is serving as our president and chief executive officer under a written employment agreement with us. This agreement, as amended to date, has a term that expires on June 30, 2007. This agreement provides Mr. Barta with an annual base salary as of April 15, 2003 of $225,000. On July 31, 2004, Mr. Barta’s annual base salary will be increased by the dollar amount paid to Mr. Barta in respect of six milestones discussed below. During each year that Mr. Barta is employed with us, our compensation committee will review Mr. Barta’s performance and determine, in its sole discretion, whether to further increase Mr. Barta’s annual base salary.

We have agreed to pay Mr. Barta a bonus equal to 10% of his salary at the time each of the following six milestones is achieved: (1) the OLpur MD190 hemodiafiltration device or a related device is deemed ready to enter a clinical trial by the FDA or an analogous body outside of the United States in a region where there exists significant market opportunity for the sale of the device; (2) the completion of a clinical trial of the device in such a region; (3) the first regulatory approval of the device in such a region; (4) a second hemodiafiltration device is deemed ready to enter a clinical trial by the FDA or an analogous body outside of the United States in a region where there exists significant market opportunity for the sale of such device; (5) the completion of the clinical trial of the second device in such a region; and (6) the first regulatory approval of the second device in such region. To date, milestones (1) through (3) have been achieved, and accordingly Mr. Barta’s base salary will be increased, on July 31, 2004, by $60,000 or more if any additional milestones are achieved on or prior to such date. After July 2004, at least two additional realistic milestones will be set for each year, with the total potential payment for these additional milestones, if achieved, each year equaling at least 20% of Mr. Barta’s annual base salary as of the date the milestones are set. We have also agreed to pay to Mr. Barta a bonus of one percent of the license fee or technology access fee not tied directly to sales or expressed as a percentage of receipts or by reference to units produced which is paid to us with respect to any consummated licensing agreement of the ESRD therapy machines or dialyzer technology devices, subject to a maximum bonus of $500,000 per license agreement (including renewals and amendments) and to an aggregate maximum of $2,000,000.

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In February 2003, we granted to Mr. Barta additional options, pursuant to our equity incentive plan, to purchase 161,937 shares of our common stock at an exercise price of $2.78 per share, a portion of which will be immediately exercisable and the remainder of which will vest upon the achievement of certain milestones. Similarly, in May 2003, we granted to Mr. Barta additional options, pursuant to our equity incentive plan, to purchase 165,630 shares of our common stock at an exercise price of $1.76 per share, a portion of which will be immediately exercisable and the remainder of which will vest upon the achievement of certain milestones. See “Equity Incentive Plan.”

Mr. Barta’s employment agreement provides that upon termination by us for cause, as defined in the agreement, death or disability, we will pay to him only the base salary and any milestone bonuses due and payable under the terms of the agreement through the date of termination and those that become due and payable within 90 days of that date. If we terminate Mr. Barta for any other reason, Mr. Barta will be entitled to (1) any accrued but unpaid base salary for services rendered through the date of termination; (2) any unpaid milestone bonuses due and payable on or prior to the date of termination or within 90 days thereafter; (3) any unpaid licensing bonuses due and payable on or prior to the date of termination or in respect of licenses consummated during the 90 days following the date of termination; and (4) the continued payment of the base salary (in the amount as of the date of termination) for the remainder of the three-year term (to be paid at the times such base salary would have been paid had his employment not been terminated).

Agreement with Mr. Marc L. Panoff

Mr. Panoff began serving as our chief financial officer on July 12, 2004, pursuant to a letter agreement dated as of June 16, 2004. Such agreement has a term that will expire on July 31, 2006, unless terminated earlier. Mr. Panoff’s initial annual base salary is $140,000, and he will be considered for a possible merit increase in connection with his performance review, scheduled to be performed prior to January 1, 2005. In addition, Mr. Panoff may be awarded a bonus based on performance. We have agreed, subject to the approval of our Compensation and Audit Committees, to grant Mr. Panoff options to purchase 56,820 shares of our common stock for $2.39 per share. Mr. Panoff’s agreement provides that upon termination by us for cause (as defined in the agreement), death or disability or by his voluntary resignation or retirement, we shall pay him only his accrued but unpaid base salary for services rendered through the date of termination. If we terminate Mr. Panoff’s employment for any other reason, then he shall be entitled to: (1) any accrued but unpaid base salary for services rendered through the date of termination; (2) any unpaid bonuses due or payable on or prior to the date of termination; and (3) the continued payment of his base salary for the remainder of the term and, if we terminate his employment during the six month period immediately prior to the scheduled date of expiration of the term, then up to six months after such termination.

Employment Agreement

At the time we entered into an employment agreement with one of our employees, he was subject to an employment agreement with his former employer that included a non-competition clause. Although such employee began his employment with us several months ago, his former employer has not sought or threatened to seek to enforce such non-competition clause. Furthermore, we believe that such non-competition clause may not be enforceable under applicable law. Nevertheless, such non-competition clause purports to impose a fine upon us, in our capacity as such employee’s employer, of approximately $13,000 for each violation thereof.

Equity Incentive Plans

2000 Equity Incentive Plan

In January 2000, our board of directors adopted the Nephros 2000 Equity Incentive Plan. In January 2003, our board of directors adopted an amendment and restatement of the plan and renamed it the Amended and Restated Nephros 2000 Equity Incentive Plan (the “2000 Plan”). The Board of Directors subsequently approved an amendment increasing the number of shares available for grant under the 2000 Plan. The adoption of the 2000

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Plan and its restatement and subsequent amendment were approved by the Company’s shareholders. The 2000 Plan provided for the granting of incentive stock options (options that offer the recipient certain favorable tax treatment), nonqualified stock options (options that are not incentive stock options) and shares of our common stock. Our employees, directors, officers and other individuals or entities whom the committee administering the 2000 Plan believed were key to our success were eligible to receive grants under the 2000 Plan.

The 2000 Plan is administered by our compensation committee or any other committee of the board of directors (the “Committee”) that the board designates to administer the 2000 Plan. In addition, the board of directors may act as the Committee and administer the 2000 Plan. The Committee, in its sole discretion and subject to the terms of the 2000 Plan, determined who among the eligible individuals received awards under the 2000 Plan, the type of award, the number of shares subject to any such award and the terms and conditions of the award.

The 2000 Plan provided that awards may be made with respect to an aggregate of 2,130,750 shares of our common stock. During any three-year period, no individual was permitted to receive awards with respect to more than 639,225 (30% of the total shares available). The number of shares subject to outstanding awards will automatically be adjusted to reflect certain changes in our corporate structure, such as stock splits or reverse stock splits.

As of December 31, 2003, we had granted incentive stock options and nonqualified stock options to purchase 1,593,375 shares of common stock at a weighted average exercise price of $1.56 per share under the provisions of the 2000 Plan, of which stock options to purchase 1,438,825 shares of common stock at a weighted average price of $1.51 per share were then outstanding. As of March 31, 2004, options for 920,441 shares were vested and eligible for exercise and none of the stock options had been exercised. In June 2004, the Board of Directors retired the 2000 Plan and no additional awards may be granted under the 2000 Plan.

2004 Stock Incentive Plan

In 2004, the Board of Directors adopted and the Company’s stockholders approved the Nephros, Inc. 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan provides for grants of restricted stock and stock appreciation rights, as well as stock options (referred to collectively as “awards”), to our employees, consultants and non-employee directors. Restricted stock and stock appreciation rights can provide value to recipients that is equivalent to stock options while utilizing fewer shares of stock, and therefore are less dilutive to existing shareholders.

The following is a brief description of the 2004 Plan. The full text of this 2004 Plan is attached as Exhibit 10.2 to this Registration Statement, and the following description is qualified in its entirety by reference to this Exhibit.

Administration and Duration

The 2004 Plan is administered by our compensation committee. It is anticipated that each member of the compensation committee will be a “non-employee Director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Upon the consummation of this offering, our compensation committee will consist of two independent Directors. Nevertheless, if the compensation committee is not so composed it will not invalidate any award. The Board of Directors also may act in place of the compensation committee. The compensation committee has the authority to interpret the 2004 Plan, to establish and revise rules and regulations relating to the 2004 Plan, and to make any other determinations that it believes necessary or advisable for the administration of the 2004 Plan.

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Limit On Awards Under the 2004 Plan

Awards may be granted under the 2004 Plan with respect to a maximum of 486,237 shares of our common stock. No individual may be granted awards with respect to more than 485,000 shares in any calendar year. The shares to be delivered under the 2004 Plan will be made available from authorized but unissued shares, from treasury shares, or from shares purchased in the open market or otherwise. Shares that are subject to awards under the 2004 Plan but are not actually issued (for example because the award lapsed or was cancelled), shares acquired on option exercise that are returned to the Company as payment of the exercise price of an option and shares of unvested restricted stock that are forfeited, will be available for further awards and options.

Eligibility for Awards

Any employees of and consultant to the Company and any non-employee director of the Company that is designated by the compensation committee as a “key person” will be eligible to participate in the 2004 Plan. Designation as a key person reflects a determination that the individual can contribute to the growth and profitability of the Company or otherwise is entitled to an award in connection with the individual’s extraordinary performance, promotion, retention, or recruitment. From time to time, the compensation committee will determine who will be granted awards and the number of shares subject to such awards. The compensation committee may delegate to one or more officers the authority to designate the employees eligible to receive awards (other than the key officers) and the size of each such award. An individual who receives an award under the 2004 Plan is referred to as a “Participant.”

Change in Control

The 2004 Plan provides that if there is a change in control after the completion of this offering, unless the agreement granting an award provides otherwise, all awards under the 2004 Plan will become vested and exercisable as of the effective date of the change in control. As defined in the 2004 Plan, a change in control means the occurrence of any of the following events: (i) any “person,” including a “group,” as such terms are defined in sections 13(d) and 14(d) of the Securities Exchange Act of 1934 and the rules promulgated thereunder, becomes the beneficial owner, directly or indirectly, whether by purchase or acquisition or agreement to act in concert or otherwise, of more than 50% of the outstanding shares of our common stock; (ii) the complete liquidation of Nephros, (iii) the sale of all or substantially all of our assets; or (iv) a majority of the members of our Board of Directors are elected to the Board without having previously been nominated and approved by a majority of the members of the Board incumbent on the day immediately preceding such election. Notwithstanding the foregoing, a change in control shall not be deemed to have occurred as a result of an underwritten public offering of our common stock.

Stock Options

Options granted under the 2004 Plan may be either non-qualified stock options or incentive stock options qualifying under Section 422 of the Code. The exercise price of an incentive stock option may not be less than the fair market value of the stock on the date the option is granted. The option price is payable in cash or, with the consent of the compensation committee, in shares of our common stock or by means of a brokered cashless exercise.

The compensation committee determines the terms of each stock option grant at the time of grant. Unless the option agreement granting an option specifies otherwise, options to employees will be exercisable as to one-quarter of the shares on each of the first four anniversaries of the option grant and will remain exercisable until the tenth anniversary of the date of the grant. In no event can an incentive stock option be exercised after the tenth anniversary of the date of grant.

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Stock Appreciation Rights

A stock appreciation right (“SAR”) entitles the Participant to receive – in cash or shares of stock, at the compensation committee’s discretion – the excess of the fair market value of a share of stock on the date of exercise over the fair market value on the date of grant. A SAR may, but need not, relate to an option. The compensation committee determines the terms of each SAR at the time of the grant.

Restricted Stock

The compensation committee, in its discretion, may grant awards of restricted stock. A share of restricted stock is a share of our common stock that may not be transferred before it is vested and may be subject to such other conditions as the compensation committee sets forth in the agreement evidencing the award. In addition, if the Participant terminates employment, he or she will forfeit any unvested shares. The grant or vesting of a restricted stock award may be made contingent on achievement of performance goals established by the compensation committee.

Amendment or Termination

The Board of Directors may amend, alter or terminate the 2004 Plan without stockholder approval, except that stockholder approval is required for amendments to the 2004 Plan to the extent necessary under applicable stock exchange rules, or to ensure that options can continue to qualify as incentive stock options or that awards will be exempt from the Code section 162(m) deduction limitation. Consequently, the Board of Directors may not, without stockholder approval, increase the total number of shares reserved for issuance under the 2004 Plan or make any other material changes to the 2004 Plan. In addition, no amendment, alteration or termination by the Board of Directors may adversely affect the rights of a holder of a stock incentive award without the holder’s consent. Unless terminated earlier, no new awards may be granted under the 2004 Plan after the tenth anniversary of the date it was adopted by the Board. However, outstanding awards made before the tenth anniversary will continue in accordance with their terms.

Federal Income Tax Consequences

The following discussion outlines generally the current federal income tax consequences of the 2004 Plan. Applicable tax laws and their interpretations are subject to change at any time and application of such laws may vary in individual circumstances.

Incentive Stock Options

A Participant who is granted an incentive stock option does not recognize taxable income upon the grant or exercise of the option. However, the difference between the fair market value of our common stock on the date of exercise and the option exercise price is a tax preference item that may subject the Participant to alternative minimum tax. A Participant generally will receive long-term capital gain or loss treatment on the disposition of shares acquired upon exercise of the option, provided that the disposition occurs more than two years from the date the option is granted, and the Participant holds the stock acquired for more than one year. A Participant who disposes of shares acquired by exercise prior to the expiration of the forgoing holding periods realizes ordinary income upon the disposition equal to the difference between the option price and the lesser of the fair market value of the shares on the date of exercise and the disposition price. Any appreciation between the fair market value of the shares on the date of exercise and the disposition price is taxed to the Participant as long or short-term capital gain, depending on the length of the holding period. To the extent the Participant recognizes ordinary income, the Company receives a corresponding tax compensation deduction.

Nonqualified Stock Options

A Participant will not recognize income upon the grant of a nonqualified option. Upon exercise, the Participant will recognize ordinary income equal to the excess of the fair market value of the stock on the date of

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exercise over the price paid for the stock. The Company is entitled to a tax compensation deduction equal to the ordinary income recognized by the Participant. Any taxable income recognized by a Participant in connection with an option exercise is subject to income and employment tax withholding. When the Participant disposes of shares acquired by the exercise of a nonqualified option, any amount received in excess of the fair market value of the shares on the date of exercise will be treated as capital gain. Dispositions made after one year from the exercise date will be treated as long-term capital gain. Dispositions made less than one year from the exercise date will be treated as short-term capital gain.

Stock Appreciation Rights

A Participant will not recognize income upon the grant of a SAR. Upon exercise, the Participant will recognize ordinary income equal to the cash or fair market value of the shares of common stock received from the exercise, which will be subject to income and employment tax withholding. The Company will receive a tax compensation deduction equal to the ordinary income recognized by the Participant.

Restricted Stock

Generally, a Participant will not recognize income upon the grant of restricted stock. When the shares of restricted stock vest, the Participant will recognize ordinary income equal to the fair market value of the stock and also will be subject to income and employment tax withholding. The Company will receive a tax compensation deduction equal to the amount of ordinary income recognized by the Participant. A Participant who receives a restricted stock award may elect to accelerate his or her tax obligation by submitting a Code Section 83(b) election within 30 days after the grant date, pursuant to which the Participant will be taxed on the fair market value of the restricted stock as of the grant date, and the Company will receive a tax compensation deduction as of the grant date equal to the ordinary income recognized by the Participant. Any gain or loss upon a subsequent disposition of the shares will be long-term capital gain or loss if the shares are held for more than one year and otherwise will be short-term capital gain or loss. If, after making the Section 83(b) election, the shares are forfeited, the Participant will not be entitled to a loss deduction.

Code Section 162(m)

Code Section 162(m) denies a federal income tax deduction for certain compensation in excess of $1 million per year paid to the chief executive officer and the four other most highly paid executive officers of a publicly traded corporation. Under a special transition rule, awards made within the first three years after this offering will not be subject to the Section 162(m) limitation. In addition, to the extent that payment or exercise of an award would not be deductible to the Company as a result of Section 162(m), the 2004 Plan permits the compensation committee to defer that payment or exercise until the Participant no longer is subject to Section 162(m).

Nephros Equity Incentive Plan Information

As of December 31, 2003

Plan Category	Number of Shares of Common Stock to be Issued upon Exercise of Outstanding Options	Weighted-Average Exercise Price of Outstanding Options		Number of Shares of Common Stock Remaining Available for Future Issuance under Equity Incentive Plan (2)
Equity Compensation Plans Approved by Shareholders(1)	1,438,825	$	1.51	691,925	(3)
Equity Compensation Plans Not Approved by Shareholders	0		N/A	0

(1) The only equity compensation plan maintained by the Company as of December 31, 2003 was the 2000 Plan, described above.

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(2) Excludes shares of our common stock to be issued upon exercise of outstanding options.

(3) In addition to options, the 2000 Plan authorizes the grant of unrestricted shares of common stock.

401(k) Plan

The Company has established a 401(k) deferred contribution retirement plan (the “401(k) Plan”) which covers all employees. The 401(k) Plan provides for voluntary employee contributions of up to 15% of annual compensation, as defined in the 401(k) Plan. As of January 1, 2004, the Company began matching 100% of the first 3% and 50% of the next 2% of employee contributions to the 401(k) Plan.

Limitations on liability and indemnification

We are a Delaware corporation. The Delaware General Corporation Law provides that Delaware corporations may indemnify any of their directors or officers who are or are threatened to be a party to any legal action resulting from fulfilling their duties to the corporation against reasonable expenses, judgments and fees (including attorneys’ fees) incurred in connection with such action if the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of no contest, or its equivalent, will not create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. However, no indemnification will be permitted in cases where it is determined that the director or officer was liable for negligence or misconduct in the performance of his duty to the corporation, unless the court in which such action was brought determines that the person is fairly and reasonably entitled to indemnity, and then only for the expenses that the court deems proper. A corporation is permitted to advance payment for expenses occurred in defense of an action if its board of directors decides to do so.

In addition, Delaware corporations may purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation against any liability asserted against him and incurred by him in such capacity whether or not the corporation would have the power to indemnify him against such liability under the provisions of the Delaware General Corporation Law. We currently have directors’ and officers’ liability insurance to provide our directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, errors and other wrongful acts.

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CERTAIN TRANSACTIONS

Convertible Promissory Notes

In April 2002, we sold eight convertible notes in the aggregate principal amount of $250,000, pursuant to which we agreed to pay, in August 2002, to the holders the principal amount due under each holder’s convertible note, together with interest on the unpaid principal amount at the rate of 6% per annum, compounded semi-annually, from the date of the convertible note. In connection with such transaction, we granted the purchasers of such convertible notes warrant rights to purchase an aggregate of 125,000 shares of our series A convertible preferred stock at a price of $1.00 per share, to be exercisable through April 2004.

As of April 28, 2004, we and the holders of these notes agreed to convert the entire principal amount of such notes (except for $50 of Mr. Drapkin’s note, which we repaid) into an aggregate of 249,950 shares of our series C convertible preferred stock and that we will pay accrued interest on such convertible notes amounting to $5,000 in the aggregate. The holders of these convertible notes have accepted the right to receive the foregoing shares, accrued interest and warrant rights in full satisfaction of our obligation to repay the notes. In connection with the warrant rights related to these convertible notes, in April 2004, we sold an aggregate of 87,500 shares of our series A convertible preferred stock to the holders of such notes at a price of $1.00 per share.

Each of Eric A. Rose, M.D., a director and beneficial holder of more than 5% of our common stock, Donald G. Drapkin, a director and, prior to the consummation of the offering, a beneficial holder of more than 5% of our common stock, and Ronald O. Perelman, a beneficial holder of more than 5% of our common stock, among others, purchased the respective securities set forth in the table below in this transaction.

Name	Principal Amount of Convertible Note		Number of Shares of Series C Convertible Preferred Stock Issued Upon Conversion of Convertible Note	Number of Shares of Series A Convertible Preferred Stock Issued Upon Exercise of Warrant Rights
Eric A. Rose, M.D.	$	75,000	75,000	0
Donald G. Drapkin	$	25,000	24,950	12,500
Ronald O. Perelman	$	25,000	25,000	12,500

Bridge Financing

In May 2003, we entered into a Commitment Agreement with Ronald O. Perelman, pursuant to which, we agreed to sell convertible bridge notes in the aggregate principal amount of $1,000,000 at face value. The outstanding principal amount of such convertible bridge notes, together with interest at the rate of 6% per annum, would become due and payable on January 26, 2004. Pursuant to the Commitment Agreement, we offered the holders of our then outstanding capital stock and convertible notes the opportunity to invest in a portion of the bridge notes pro rata, in accordance with the number of shares issuable upon conversion of the capital stock and convertible notes then held by them. Under the Commitment Agreement, Mr. Perelman had agreed to purchase additional bridge notes, if and to the extent that the other securityholders elected not to purchase their respective pro rata shares of the bridge notes, thus ensuring that we would sell exactly $1,000,000 in aggregate principal amount of bridge notes. In June 2003, we sold the convertible bridge notes to twenty-three of our security holders. Pursuant to the Commitment Agreement, Mr. Perelman had the right to elect whether he and the other holders would have the option to convert the bridge notes and purchase additional shares of series D convertible preferred stock at any time prior to the earlier of (i) 10 days after we notified Mr. Perelman that we obtained a CE mark on our initial product and (ii) January 15, 2004. We received such CE mark on July 31, 2004 and promptly notified Mr. Perelman thereof. On August 1, 2003, Mr. Perelman elected to proceed with the conversion and purchase. As of September 11, 2003, each of the holders converted its bridge note into shares of our series D convertible preferred stock at a conversion price equal to the liquidation preference of the series D convertible preferred stock, in accordance with the terms thereof.

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Pursuant to the terms of the bridge notes, in order to convert each holder’s bridge note, such holder was required to commit to purchase, for the aggregate liquidation preference thereof, a number of additional shares of series D convertible preferred stock having an aggregate liquidation preference equal to any amount, at such holder’s option, between 9 and 11 times the principal amount of the bridge note being converted. The purchase of the additional shares of series D convertible preferred stock occurred in three installments, with 3,993,793 shares purchased at the time of conversion on September 11, 2003, another 3,000,000 shares purchased as of December 1, 2003, and the remaining 3,811,538 shares purchased as of March 3, 2004.

Upon completion of the private placement, we issued an aggregate of 11,817,988 shares of our series D convertible preferred stock (including 1,012,657 shares issued upon conversion of principal of, and accrued interest on, the bridge notes). Among others, Donald G. Drapkin, a director and prior to the consummation of the offering is a beneficial holder of more than 5% of our common stock, Ronald O. Perelman, a beneficial holder of more than 5% of our common stock, and BW Employee Holdings LLC and WPPN, LP, entities controlled by Bruce Wasserstein, where such entities in the aggregate beneficially hold more than 5% of our common stock, purchased such notes, as set forth below. The series D convertible preferred stock is convertible into shares of our common stock at a conversion price (after adjusting for the reverse stock split contemplated in connection with this offering) of approximately $2.32 per share. Accordingly, the 11,817,988 shares of our series D convertible preferred stock, together with dividends accrued thereon through May 31, 2004, will automatically convert into an aggregate of 5,249,647 shares of our common stock simultaneously with the offering to which this prospectus relates.

Name	Principal Amount of Convertible Bridge Notes			Number of Shares of Series D Convertible Preferred Stock Issued Upon Conversion of Bridge Notes (1)		Purchase Price of Additional Series D Convertible Preferred Stock Purchased in Connection with Conversion			Number of Shares of Series D Convertible Preferred Stock Issued Upon Additional Purchases
Donald G. Drapkin	$	72,188.56			(2)			(2)		(2)
Ronald O. Perelman	$	557,091.86		637,245	(3)	$	6,712,084.62	(4)	6,483,983	(5)
BW Employee Holdings LLC	$	18,809.06		19,047		$	175,000.00		175,000
WPPN, LP	$	171,583.73		173,756				(6)		(6)
Wasserstein SBIC Ventures II, L.P.			(6)		(6)	$	1,869,145.52	(6)	1,869,145	(6)
WV II Employee Partners, LLC			(6)		(6)	$	12,147.51	(6)	12,148	(6)

(1) Shares issued include amount for accrued interest on convertible note.

(2) Mr. Drapkin transferred his bridge note to Mr. Perelman prior to conversion, as discussed below.

(3) Includes 73,102 shares issued upon conversion of the bridge note initially issued to Mr. Drapkin.

(4) Includes $794,074.16 paid for the purchase of shares of series D convertible preferred stock in connection with the conversion of the bridge note initially issued to Mr. Drapkin, less the satisfaction of non-interest bearing loans in the principal amount of $210,000 made to us by Dr. Rose and Mr. Drapkin, which were assigned to Mr. Perelman and then applied toward the purchase price, as discussed below.

(5) Includes 794,074 shares purchased in connection with the conversion of the bridge note initially issued to Mr. Drapkin, less 160,000 shares, 203,102 shares and 75,000 shares which Mr. Perelman instructed us to issue to Dr. Rose, Mr. Drapkin, and Mehmet Oz, M.D., respectively.

(6) WPPN, LP assigned its rights and obligations to purchase additional shares of our series D convertible preferred stock to Wasserstein SBIC Ventures II, L.P., which purchased 99.3543% of the additional shares and WV II Employee Partners, LLC, which purchased 0.6457% of the additional shares.

During 2001, 2002 and 2003, Eric A. Rose, M.D. made non-interest bearing demand loans to us in the aggregate principal amount of $160,000. On September 11, 2003, Dr. Rose assigned all of his right title and interest in the loans to Ronald O. Perelman in exchange for 160,000 shares of our series D convertible preferred stock due to Mr. Perelman at the first closing. Mr. Perelman instructed us to issue the 160,000 shares directly to

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Dr. Rose and the $160,000 outstanding under the loans was applied to the purchase price of the series D convertible preferred stock to be purchased by Mr. Perelman. The loans have been repaid and satisfied in full.

During 2003, Donald G. Drapkin made non-interest bearing demand loans to us in the aggregate principal amount of $50,000. On September 11, 2003, Mr. Drapkin assigned all of his right title and interest in (i) the loans, (ii) his note, convertible into series D convertible preferred stock, in the principal amount of $72,188.56 and (iii) $80,000, to Ronald O. Perelman in exchange for 203,102 shares of our series D convertible preferred stock due to Mr. Perelman at the first closing. Mr. Perelman instructed us to issue the 203,102 shares directly to Mr. Drapkin and the $50,000 outstanding under the loans was applied to the purchase price of the series D convertible preferred stock to be purchased by Mr. Perelman. The loans have been repaid and satisfied in full.

Option Grants

In May 2003, we granted to each of Norman J. Barta, Donald G. Drapkin and Eric A. Rose, M.D. options, pursuant to our 2000 Plan, to purchase 165,630 shares of our common stock at an exercise price of $1.76 per share, a portion of which were immediately exercisable and the remainder of which will vest over a two year period.

New Member of the Board of Directors

Upon the consummation of this offering, Howard Davis will begin to serve as a director of our company. Mr. Davis serves as Senior Vice President – Capital Markets with The Shemano Group, which is underwriting this offering. Mr. Davis has advised us that he will not be involved with the marketing of our securities after the consummation of this offering.

We believe that all of the transactions described above were made and are on terms no less favorable to us than those that could have been obtained from independent third parties in arms-length negotiations.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of our common stock before this offering and as adjusted to reflect the sale of shares of our common stock in this offering, by:

• each person, group or entity who beneficially owns more than 5% of our common stock;

• each of our directors;

• each of our named executive officers; and

• all of our directors and executive officers as a group.

The following table reflects the number of shares of our common stock outstanding as of the date of this prospectus and assumes (i) the completion of the reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock prior to the effectiveness of the registration statement to which this prospectus relates; and (ii) the automatic conversion of all shares of series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock outstanding upon the consummation of this offering into 8,428,733 shares of our common stock, simultaneously with the consummation of this offering. The table reflects percentages of beneficial ownership (i) if the underwriters’ over-allotment option is not exercised and (ii) if the underwriter’s over-allotment option is exercised in full.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of that security, or “investment power,” which includes the power to dispose of or to direct the disposition of that security. A person is also deemed to be a beneficial owner of any security as to which that person has a right to acquire beneficial ownership presently or within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner to the same securities, and a person may be deemed to be the beneficial owner of the same securities as to which that person has no economic interest. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.

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Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.

		Percentage of Beneficial Ownership
Name and Address	Number of Shares of Common Stock Beneficially Owned Before Offering	Before Offering		After Offering (Assuming No Exercise of Over-Allotment Option)		After Offering (Assuming Exercise of Over-Allotment Option in Full)
Ronald O. Perelman (1)	3,540,438	35.3	%	28.3	%	27.5	%
Wasserstein entities (2)	1,929,048	19.2	%	15.4	%	15.0	%
Wasserstein SBIC Ventures II, L.P. (3)	829,104	8.3	%	6.6	%	6.4	%
WPPN, LP (4)	919,124	9.2	%	7.3	%	7.1	%
Norman J. Barta (5)	333,760	3.2	%	2.6	%	2.5	%
Eric A. Rose, M.D. (6)	844,529	8.3	%	6.7	%	6.5	%
Lawrence J. Centella (7)	28,410	*		*		*
Howard Davis (8)	—	—		—		—
Donald G. Drapkin (9)	609,300	6.0	%	4.8	%	4.7	%
William J. Fox (10)	69,171	*		*		*
W. Townsend Ziebold, Jr. (11)	834,786	8.3	%	6.7	%	6.5	%
All executive officers and directors as a group	2,719,956	25.8	%	20.9	%	20.3	%

* Represents less than 1% of the outstanding shares of our common stock.

(1) Mr. Perelman’s address is 35 East 62nd Street, New York, New York 10021. Mr. Perelman is the sole stockholder of Mafco Holdings, Inc., a holding company of which MacAndrews & Forbes Holdings, Inc. is a wholly-owned subsidiary.

(2) The Wasserstein entities include WPPN, LP, Wasserstein SBIC Ventures II, L.P., WV II Employee Partners, LLC, and BW Employee Holdings, LLC. The address of the Wasserstein entities is 1301 Avenue of the Americas, 44th Floor, New York, New York 10019. Bruce Wasserstein may be deemed to have beneficial ownership of the shares owned by the Wasserstein entities. However, Mr. Wasserstein disclaims beneficial ownership of these shares except for his pecuniary interest in 87,871 shares. The Wasserstein entities’ ownership is as follows: (i) 919,124 shares of our common stock issuable upon automatic conversion of shares of our series B convertible preferred stock, series C convertible preferred stock, and series D convertible preferred stock upon the consummation of this offering, which are owned by WPPN, LP, the general partner of which is Cypress Management Partners, LLC, the sole member of which is Cypress Capital Assets, LP, the general partner of which is Cypress Capital Advisors, LLC, an entity that may be deemed controlled by Bruce Wasserstein; (ii) 829,104 shares of our common stock issuable upon automatic conversion of shares of our series D convertible preferred stock upon the consummation of this offering, which are owned by Wasserstein SBIC Ventures II, L.P., the general partner of which is Wasserstein Levered Venture Partners II, LLC, the sole member of which is Wasserstein Investments LLC, the sole member of which is Wasserstein Holdings, LLC, an entity that may be deemed controlled by Mr. Wasserstein; (iii) 5,388 shares of our common stock issuable upon automatic conversion of shares of our series D convertible preferred stock upon the consummation of this offering, which are owned by WV II Employee Partners, LLC, the managing member of which is Wasserstein & Co., L.P., an entity controlled by Wasserstein Investments, LLC, the sole member of which is Wasserstein Holdings, LLC, an entity that may be deemed controlled by Mr. Wasserstein; and (iv) 175,432 shares of our common stock issuable upon automatic conversion of shares of our series A convertible preferred stock, series C convertible preferred stock, and series D convertible preferred stock upon the consummation of this offering, which are owned by BW Employee Holdings, LLC, an entity that may be deemed controlled by Mr. Wasserstein.

(3) The same shares listed as beneficially owned by Wasserstein SBIC Ventures II, L.P. are also included in the shares listed as beneficially owned by the Wasserstein entities (See Note 2 above).

(4) The same shares listed as beneficially owned by WPPN, LP are also included in the shares listed as beneficially owned by the Wasserstein entities (See Note 2 above).

(5) Mr. Barta’s address is c/o Nephros, Inc., 3960 Broadway New York, New York 10032. The shares identified as being beneficially owned by Mr. Barta include 305,350 shares issuable upon exercise of options granted under the 2000 Plan.

(6) Dr. Rose’s address is c/o Nephros, Inc., 3960 Broadway New York, New York 10032. The shares identified as being beneficially owned by Dr. Rose include 99,378 shares issuable upon exercise of options granted under the 2000 Plan.

(7) Mr. Centella’s address is 3331 N. Ridge Ave, Arlington Heights, IL 60004.

(8) Mr. Davis’ address is 5850 Canoga Ave, #315, Woodland Hills, CA 91367.

(9) Mr. Drapkin’s address is 35 East 62nd Street, New York, New York 10021. The shares identified as being beneficially owned by Mr. Drapkin include 99,378 shares issuable upon exercise of options granted under the 2000 Plan.

(10) Mr. Fox’s address is c/o Arcade Marketing, Inc., 1700 Broadway, Suite 2200, New York, New York 10019.

(11) Mr. Ziebold’s address is 1301 Avenue of the Americas, 44th Floor, New York, New York 10019. The shares identified as being beneficially owned by Mr. Ziebold include (i) 829,104 shares that Mr. Ziebold, as president of Wasserstein Levered Venture Partners II, LLC, the general partner of Wasserstein SBIC Ventures II, L.P., may be deemed to beneficially own and as to which Mr. Ziebold disclaims beneficial ownership; and (ii) 5,682 shares issuable upon exercise of options granted under the 2000 Plan. The shares identified as being beneficially owned by Mr. Ziebold do not include 5,388 shares owned by WV II Employee Partners, LLC, an employee investment vehicle in which Mr. Ziebold is a participant and as to which Mr. Ziebold disclaims beneficial ownership.

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DESCRIPTION OF SECURITIES

Authorized and Outstanding Capital Stock

Our authorized capital stock consists of 49,000,000 shares of common stock and 31,000,000 shares of preferred stock. As of the date of this prospectus and giving effect to a reverse stock split, discussed in detail below, there were approximately 1,593,659 shares of common stock outstanding and 21,626,321 shares of preferred stock outstanding, held by 46 stockholders of record. Our common stock is held by 11 stockholders of record. Of our preferred stock, there were 4,087,500 shares of our series A convertible preferred stock outstanding held by 30 stockholders of record, 2,333,333 shares of our series B convertible preferred stock outstanding held by 2 stockholders of record, 3,387,500 shares of our series C convertible preferred stock outstanding held by 29 stockholders of record and 11,817,988 shares of our series D convertible preferred stock outstanding held by 28 stockholders of record. Some of our stockholders hold multiple classes of our outstanding capital stock.

Immediately prior to the effectiveness of the registration statement to which this prospectus relates, each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock, as described below under the heading “Reverse Stock Split.” Simultaneously with the consummation of this offering, all outstanding series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock will automatically be converted into 8,428,733 shares of our common stock.

After giving effect to the reverse stock split and the conversions discussed in the preceding paragraph, but without giving effect to the sale of shares of our common stock pursuant to this offering, there will be 10,022,395 shares of common stock outstanding and no shares of preferred stock outstanding. After giving effect to the reverse stock split and the conversions of our convertible preferred stock and the sale of shares of our common stock pursuant to this offering, there will be a total of 12,522,395 shares of common stock outstanding and no shares of preferred stock outstanding, assuming that the underwriters do not exercise their over-allotment option.

Common Stock

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of our stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of our common stock entitled to vote in any election of directors may elect all of the directors standing for election. Apart from preferences that may be applicable to any holders of preferred stock outstanding at the time, holders of our common stock are entitled to receive dividends, if any, ratably as may be declared from time to time by our board of directors out of funds legally available therefor. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive ratably our net assets available after the payment of all liabilities and liquidation preferences on any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future.

Preferred Stock

Under the terms of our amended and restated certificate of incorporation, our board of directors has authority, without any vote or action of our stockholders, to issue up to 779,167 shares of “blank check” preferred stock in one or more series and to fix the related rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption terms (including sinking fund provisions) and liquidation preferences and the number of shares constituting a series or the designation of such series.

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The rights of the holders of our common stock will be subject to, and could be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. Our board of directors may designate and fix rights, preferences, privileges and restrictions of each series of preferred stock which are greater than those of our common stock. Our issuance of preferred stock could, among other things:

• restrict dividends on our common stock;

• dilute the voting power of our common stock;

• impair the liquidation rights of our common stock; or

• discourage, delay or prevent a change of control of our company.

Although we currently have no plans to issue shares of blank check preferred stock, we may issue them in the future.

Underwriter’s Warrants

Subject to the approval of the National Association of Securities Dealers, Inc., upon the consummation of this offering, we will issue to the underwriters or their respective designees, in exchange for $100, warrants to purchase up to an aggregate of 250,000 shares of our common stock. We have reserved an equivalent number of shares of common stock for issuance upon exercise of these warrants. Each warrant represents the right to purchase one share of common stock for a period of four years commencing one year from the effective date of this offering. The exercise price of the warrants is 120% of the price at which our shares of common stock are sold pursuant to this offering. The warrants have a cash-less exercise feature which allows them to be exercised through the surrender of a portion of the warrants (determined based on the market price of our common stock at the time of exercise) in lieu of cash payment of the exercise price. The warrants contain provisions that protect their holders against dilution by adjustment of the exercise price and number of shares issuable upon exercise on the occurrence of specific events, such as stock dividends or other changes in the number of our outstanding shares except for shares issued under certain circumstances, including shares issued under our equity incentive plan and any equity securities for which adequate consideration is received. No holder of these warrants will possess any rights as a stockholder unless the warrant is exercised. The holders of the warrants will be entitled to one demand and customary “piggy-back” registration rights to register the shares underlying the warrants. Such registration rights shall continue for a period of five years from the effective date of this offering.

Other Warrants

In June 2002, in settlement of certain amounts owed by us to Plexus Services Corp., a former supplier of engineering consulting services, we issued warrants to purchase 170,460 shares of our common stock at an exercise price of approximately $10.56 per share, which are exercisable through June 2007. See “Business – Settlement Agreements.”

In December 2002, we issued promissory notes to two lenders in the aggregate principal amount of $250,000 at an exercise price of approximately $8.80 per share. In connection with these loans, we issued the holders thereof warrants to purchase an aggregate of 5,549 shares of Common Stock.

Pursuant to our settlement agreement, dated as of January 31, 2003, with Lancer Offshore, Inc., Lancer Offshore, Inc. had retained certain warrants to purchase shares of our common stock. See “Business – Settlement Agreements.”

Reverse Stock Split

Prior to the effectiveness of the registration statement of which this prospectus is a part, the Company will effect a reverse stock split pursuant to which each share of our common stock then outstanding will be converted into 0.2841 of one share of our common stock.

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Registration Rights

We granted registration rights to the purchasers of shares of our series A convertible preferred stock pursuant to a stock purchase agreement. Pursuant to the stock purchase agreement, we granted each of these holders piggy-back registration rights to, on up to two occasions, include the shares of common stock underlying their respective shares of our series A convertible preferred stock in any registration statement we file on our own behalf or on behalf of our other stockholders, at any time after this offering. The piggy-back registration rights will expire once the stockholders’ shares of common stock become freely saleable under Rule 144 or Rule 701 during any 90-day period, provided, that these provisions do not apply to any stockholder who owns more than 2% of our outstanding common stock. Subject to lock-up agreements, we could be required to file additional registration statements, covering up to approximately 1,136,400 shares in the aggregate, for the stockholders who hold these shares.

We have also entered into registration rights agreements with holders of shares of our series B convertible preferred stock, our series C convertible preferred stock and our series D convertible preferred stock. Pursuant to these registration rights agreements, we granted these holders (1) demand registration rights to, on no more than two occasions for the holders of common stock issued upon conversion of the series B convertible preferred stock and series C convertible preferred stock acting together, and two occasions for the holders of common stock issued upon conversion of the series D convertible preferred stock, at any time six months after the effective date of this prospectus, request that we file a registration statement on Form S-1 under the Securities Act on their behalf to register their shares of common stock; (2) piggy-back registration rights to include their shares of common stock in any registration statement we file on our own behalf or on behalf of our other stockholders, and (3) unlimited rights to request that we file a registration statement on Form S-3 on their behalf to register their shares of common stock. The registration rights will expire once such stockholders’ shares of common stock become freely saleable under Rule 144. Subject to lock-up agreements, we could be required to file additional registration statements, covering up to 9,706,568 shares in the aggregate (including all but 68,184 of the same shares that are subject to the registration rights described in the immediately preceding paragraph), for the stockholders who hold these shares.

We have also agreed to grant certain registration rights to our underwriters. Pursuant to the underwriting agreement, the holders of the underwriters’ warrants will be entitled to one demand and customary “piggy-back” registration rights to register the shares of common stock underlying such warrants. Such registration rights shall continue for a period of five years from the effective date of this offering.

Anti-Takeover Effects of Provisions of the Delaware General Corporation Law and Our Charter Documents.

Several provisions of the Delaware General Corporation Law and our amended and restated certificate of incorporation and bylaws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize stockholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.

Blank Check Preferred Stock

Under the terms of our amended and restated certificate or incorporation, our board of directors has authority, without any further vote or action by our stockholders, to issue up to 779,167 shares of blank check preferred stock. Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

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Classified Board of Directors

From and after the consummation of this offering, our amended and restated certificate of incorporation will provide for the division of our board of directors into three classes of directors, with each class as nearly equal in number as possible, serving staggered, three-year terms. Approximately one-third of our board of directors will be elected each year. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of our company. It could also delay stockholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for two years.

Business Combinations

As a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which contains specific provisions regarding “business combinations” between corporations organized under the laws of the State of Delaware and “interested stockholders.” These provisions prohibit us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

• prior to such date, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

• upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

• on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 ²/3% of the outstanding voting stock that is not owned by the interested stockholder.

For purposes of these provisions, a “business combination” includes mergers, consolidations, exchanges, asset sales, leases and other transactions resulting in a financial benefit to the interested stockholder and an “interested stockholder” is any person or entity that beneficially owns 15% or more of our outstanding voting stock and any person or entity affiliated with or controlling or controlled by that person or entity.

Election and Removal of Directors

Our amended and restated certificate of incorporation does not provide for cumulative voting in the election of directors. Our by-laws require parties other than the board of directors to give advance written notice of nominations for the election of directors. From and after the consummation of this offering, our amended and restated certificate of incorporation will provide that our directors may be removed only for cause and only upon the affirmative vote of the holders of at least a majority of the outstanding shares of our common stock entitled to vote for such directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

Limited Actions by Stockholders

From and after the consummation of this offering, our amended and restated certificate of incorporation and our by-laws will provide that any action required or permitted to be taken by our stockholders must be effected at an annual or special meeting of stockholders or by the unanimous written consent of our stockholders. Our amended and restated certificate of incorporation will provide that, subject to certain exceptions, only our board of directors, the chairman of our board of directors, our president, vice president or secretary may call special meetings of our stockholders. Our bylaws will also contain advance notice requirements for proposing matters that can be acted on by the stockholders at a stockholder meeting. Accordingly, a stockholder may be prevented from calling a special meeting for stockholder consideration of a proposal over the opposition of our board of directors and stockholder consideration of a proposal may be delayed until the next annual meeting.

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American Stock Exchange Listing

We have applied for approval of our common stock for listing on the American Stock Exchange under the symbol “NEP”. Even if we are approved for listing on the American Stock Exchange, we cannot assure you that a trading market for our securities will develop or be sustained, or at what price the securities will trade. In addition, we may fail to meet certain minimum standards for continued listing. In such event, our common stock will be delisted, and its price will no longer be quoted. This may make it extremely difficult to sell or trade our common stock.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 12,522,395 shares of common stock outstanding, assuming the underwriters’ over-allotment option is not exercised. Of these shares, the shares of common stock offered hereby will be freely tradable without restriction unless these shares are held by affiliates as defined in Rule 144(a) under the Securities Act. The remaining 10,022,395 shares of common stock to be outstanding after this offering will be restricted shares under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144. Subject to the lock-up agreements described below and the provisions of Rule 144, additional shares will become available for sale in the public market.

In general, under Rule 144, an affiliate of ours, or a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, will be entitled to sell that number of shares in any three-month period that does not exceed the greater of:

• one percent of the then outstanding shares of our common stock, which will be approximately 125,223 shares immediately after this offering, assuming no exercise of the underwriters’ over-allotment option, or

• the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.

Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about us. A person or persons whose restricted shares are aggregated who is not deemed to have been our affiliate at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell his or her restricted shares pursuant to Rule 144(k) without regard to the limitations described above.

All of our existing security holders (other than Lancer Offshore, Inc.) will be subject to lock-up agreements which prohibit the sale of all of their shares of our common stock in the public market until nine months from the effective date of this prospectus, and thereafter to the extent such sales, on a cumulative basis for each holder, exceed  ¹/3 of our common stock held by such holder prior to 12 months from the effective date or  ²/3 of our common stock held by such holder prior to 15 months from the effective date. Lancer Offshore Inc. is subject to a lock-up which prohibits the sale of any shares issuable upon exercise of its warrants in the public market until 180 days after the effective date. There are presently no agreements between the underwriters and any of our stockholders or affiliates releasing them from these lock-up agreements prior to the expiration of the applicable period.

We granted registration rights to the purchasers of shares of our series A convertible preferred stock pursuant to a stock purchase agreement. Pursuant to the stock purchase agreement, we granted each of these holders piggy-back registration rights to, on up to two occasions, include the shares of common stock underlying their respective shares of our series A convertible preferred stock in any registration statement we file on our own behalf or on behalf of our other stockholders, at any time after this offering. The piggy-back registration rights will expire once the stockholders’ shares of common stock become freely saleable under Rule 144 or Rule 701 during any 90-day period, provided, that these provisions do not apply to any stockholder who owns more than 2% of our outstanding common stock. Subject to lock-up agreements, we could be required to file additional registration statements, covering up to 1,136,400 shares in the aggregate, for the stockholders who hold these shares.

We have also entered into registration rights agreements with holders of shares of our series B convertible preferred stock, our series C convertible preferred stock and our series D convertible preferred stock. Pursuant to these registration rights agreements, we granted these holders (1) demand registration rights to, on no more than two occasions for the holders of common stock issued upon conversion of the series B convertible preferred

88

stock and series C convertible preferred stock acting together, and two occasions for the holders of common stock issued upon conversion of the series D convertible preferred stock, at any time six months after the effective date of this prospectus, request that we file a registration statement on Form S-1 under the Securities Act on their behalf to register their shares of common stock; (2) piggy-back registration rights to include their shares of common stock in any registration statement we file on our own behalf or on behalf of our other stockholders, and (3) unlimited rights to request that we file a registration statement on Form S-3 on their behalf to register their shares of common stock. The registration rights will expire once such stockholders’ shares of common stock become freely saleable under Rule 144. Subject to lock-up agreements, we could be required to file additional registration statements, covering up to 9,772,820 shares in the aggregate (including all but 68,184 of the same shares that are subject to the registration rights described in the immediately preceding paragraph), for the stockholders who hold these shares.

We have also agreed to grant certain registration rights to our underwriters. Pursuant to the underwriting agreement, the holders of the underwriters’ warrants will be entitled to one demand and customary “piggy-back” registration rights to register the shares of common stock underlying such warrants. Such registration rights shall continue for a period of five years from the effective date of this offering.

Prior to this offering, there has been no public market for our common stock. Sales of substantial amounts of common stock or the availability of such shares for sale could adversely affect prevailing market prices of our common stock and our ability to raise additional capital. You should read the discussion under the heading entitled “Risk Factors – Future sales of our common stock could cause the market price of our common stock to decline” for further information about the effect future sales could have on the market price of our common stock.

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UNDERWRITING

Subject to the terms and conditions of the underwriting agreement between us and The Shemano Group, Inc., the underwriter of this offering, a copy of which agreement is filed as an exhibit to the registration statement of which this prospectus forms a part, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase all 2,500,000 shares of our common stock offered. Howard Davis, Senior Vice President – Capital Markets of The Shemano Group, Inc., will serve as a director of our company upon consummation of this offering.

The underwriter has advised us that it will offer the shares as set forth on the cover page of this prospectus, which includes the underwriting discount indicated there, and that they will initially allow concessions not in excess of $         per share on sales to certain dealers. After the initial public offering, concessions to dealer terms may be changed by the underwriters.

The following table shows the offering price to the public, underwriting discounts and commissions and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriter of the over-allotment option.

	Per Share		Total (Assuming No Exercise of Over-allotment Option)		Total (Assuming Full Exercise of Over-allotment Option)
Public Offering Price	$	6.50	$	16,250,000	$	18,687,500
Underwriting Discounts and Commissions	$	0.585	$	1,462,500	$	1,681,875
Proceeds to Nephros, Inc. (1)	$	5.915	$	14,787,500	$	17,005,625

(1) Before deducting expenses of this offering which, assuming no exercise of the overallotment option, are estimated to be $1,355,063 (including the underwriter’s non-accountable expense allowance of $487,500), and, assuming full exercise of the over-allotment option, are estimated to be $1,428,188 (including the underwriter’s non-accountable expense allowance of $560,625).

The underwriter has advised us that they do not intend to confirm sales of the shares to any account over which they exercise discretionary authority in an aggregate amount in excess of five (5%) percent of the total securities offered hereby.

We have granted to the underwriter an option that expires 30 days after the date of this prospectus, exercisable as provided in the underwriting agreement, to purchase up to an additional 375,000 shares of our common stock at a net price of $         per share which option may be exercised only for the purpose of covering over-allotments, if any. To the extent that the underwriter exercises this option, the underwriter will become obligated, subject to certain conditions, to purchase the additional shares of common stock, and we will be obligated, pursuant to this option, to sell these shares to the underwriter to the extent this option is exercised.

The underwriting agreement provides that we will reimburse the underwriters for their expenses on a non-accountable basis in the aggregate amount equal to 3% of the gross proceeds of this offering, $50,000 of which has been paid to date and the balance of which shall be paid upon the consummation of this offering. The underwriting agreement provides for reciprocal indemnification between us and the underwriter against certain liabilities in connection with the registration statement, including liabilities under the Securities Act of 1933, as amended. For a period of three years following the effective date of this offering, The Shemano Group, Inc. will have the right to have one representative attend each meeting of our board of directors and each meeting of any committee thereof and to participate in all discussions of each such meeting. The presence of Mr. Davis, or any other individual designated by the underwriter, as a member of our Board of Directors satisfies this requirement.

Howard Davis, Senior Vice President of The Shemano Group, Inc., will be a director of our company upon the completion of this offering. Mr. Davis’ service as a director and Senior Vice President of The Shemano

90

Group, Inc. may create potential conflicts of interests. As compensation for its underwriting services, The Shemano Group, Inc. will receive warrants for 250,000 common shares, with accompanying demand and piggy-back registration rights. The Shemano Group, Inc. may choose to exercise its warrants and sell the underlying common shares at a time when such exercise and sales would adversely affect us. The Shemano Group, Inc. and its affiliates may provide us with investment banking, financial advisory, or commercial banking services in the future, for which they each may receive customary compensation. There are currently no arrangements or understandings with respect to any investment banking, financial advisory, or commercial banking services to be provided by The Shemano Group, Inc. and its affiliates in the future. If any arrangements or understandings are entered into in the future, the details of such would be subject to the mutual agreement of the parties at that time. To minimize any potential conflicts, Mr. Davis will not take part in any board deliberations relating to The Shemano Group, Inc.

Subject to the approval of the National Association of Securities Dealers, Inc., upon the consummation of this offering, we will sell to the underwriters or their respective designees at an aggregate purchase price of $100, warrants to purchase up to an aggregate of 250,000 shares of our common stock. Each warrant represents the right to purchase one share of common stock for a period of four years commencing one year from the effective date of this offering. The exercise price of the warrants is 120% of the price at which our shares of common stock are sold pursuant to this offering. The warrants contain provisions that protect their holders against dilution by adjustment of the exercise price and number of shares issuable upon exercise on the occurrence of specific events, such as stock dividends or other changes in the number of our outstanding shares except for shares issued under certain circumstances, including shares issued under our equity incentive plan and any equity securities for which adequate consideration is received. No holder of these warrants will possess any rights as a stockholder unless the warrant is exercised. The warrants may not be sold, transferred, assigned or hypothecated for a period of six months from the effective date of this offering, except to officers or partners (but not directors) of the underwriter and members of the selling group and/or their officers or partners.

The holders of the warrants will be entitled to one demand and customary “piggy-back” registration rights to register the shares underlying the warrants. Such registration rights shall continue for a period of five years from the effective date of this offering. Any profit realized from the sale of shares of common stock underlying the underwriters’ warrants may be deemed additional underwriting compensation. The exercise of the underwriter’s over-allotment option will not result in an increase in the number of shares of common stock underlying the underwriter’s warrants or in the granting of any additional warrants to the underwriters.

All of our existing security holders (other than Lancer Offshore, Inc.) will be subject to lock-up agreements which prohibit the sale of all of their shares of our common stock in the public market until nine months from the effective date of this prospectus, and thereafter to the extent such sales, on a cumulative basis for each holder, exceed  ¹/3 of our common stock held by such holder prior to 12 months from the effective date or  ²/3 of our common stock held by such holder prior to 15 months from the effective date. Lancer Offshore Inc. is subject to a lock-up which prohibits the sale of any shares issuable upon exercise of its warrants in the public market until 180 days after the effective date. There are presently no agreements between the underwriters and any of our stockholders or affiliates releasing them from these lock-up agreements prior to the expiration of the applicable period.

The underwriter may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and “passive” market making in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the shares of common stock or warrants in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the underwriter to reclaim a selling concession from a syndicate member when the shares of common stock or warrants originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. In “passive” market making, market makers in the securities who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or

91

purchases of the securities until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than they would otherwise be in the absence of these transactions. These transactions may be effected on the American Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

In connection with the offering, the underwriter may make short sales of our shares and may purchase our shares on the open market to cover positions created by short sales. Short sales involve the sale by the underwriter of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriter’s over-allotment option to purchase additional shares in the offering. The underwriter may close out any covered short position by either exercising its over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. “Naked” short sales are sales in excess of the over-allotment option. The underwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there might be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Similar to other purchase transactions, the underwriter’s purchases to cover the short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market.

Prior to this offering, there has been no public market for our common stock. Consequently, the assumed initial public offering price of our common stock has been determined by negotiation between us and the underwriter. Factors considered in determining the public offering price of such stock included our net worth and earnings, the amount of dilution per share of common stock to the public investors, the estimated amount of proceeds believed necessary to accomplish our proposed goals, prospects for our business and the industry in which we operate, the present state of our activities and the general condition of the securities markets at the time of the offering.

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TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company. Its address is 17 Battery Place, New York, New York 10004.

LEGAL MATTERS

Certain legal matters in connection with this offering will be passed upon for us by Kramer Levin Naftalis & Frankel LLP, New York, New York. Certain legal matters relating to our patents and patent applications in connection with this offering will be passed upon for us by Darby & Darby P.C., New York, New York.

Certain matters related to the offer and sale of the shares will be passed on for the underwriters by Blank Rome LLP, New York, New York.

EXPERTS

Our consolidated financial statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001, included in this prospectus and elsewhere in the registration statement to which this prospectus relates, have been audited by Grant Thornton LLP, independent registered public accounting firm, as stated in their report with respect thereto and are included in this prospectus and elsewhere in the registration statement in reliance upon the authority of said firm as experts in accounting and auditing.

Certain matters dealing with patents set forth in “Risk Factors – Protecting intellectual property in our technology through patents, If we are not able to protect our intellectual property…” and “Business – Intellectual Property” have been included in this prospectus in reliance upon the written opinion of Darby & Darby, P.C., New York, New York.

DISCLOSURE OF COMMISSION POSITION ON

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by that director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether that indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus concerning the contents of any contract or other document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.

For further information with respect to us and the common stock we are offering, please refer to the registration statement. A copy of the registration statement can be inspected by anyone without charge at the public reference room of the Securities and Exchange Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Copies of these materials can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains information regarding registrants that file electronically with the Commission.

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INDEX TO FINANCIAL STATEMENTS

Nephros, Inc. and Subsidiary

(A Development Stage Company)

	Page
Report of Independent Registered Public Accounting Firm	F-2
Financial Statements
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Statement of Changes in Stockholders’ Equity (Deficit)	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

After the effect of the reverse stock split discussed in Note 1, the undersigned would be able to render the following audit report.

/S/    GRANT THORNTON LLP

New York, New York

April 28, 2004

To the Board of Directors and Shareholders of Nephros, Inc.

We have audited the accompanying consolidated balance sheets of Nephros, Inc. (a Delaware corporation in the development stage) and Subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders equity (deficit) and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nephros, Inc. and Subsidiary as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters, including raising equity and attaining break-even cash-flow operations are addressed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

F-2

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Consolidated Balance Sheets

	Pro Forma March 31, 2004		March 31, 2004			Year ended December 31,
						2003			2002
	(unaudited)		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	5,566,995		$	4,121,263		$	240,412
Receivables				21,559			—			—
Inventory				164,110			201,964			—
Prepaid expenses and other current assets				762,739			218,613			12,572
Deferred cost of goods sold				21,559			—			—
Deferred IPO and debt issuance costs				144,000			—			946,000
Total current assets				6,680,962			4,541,840			1,198,984
Property assets, at cost less accumulated depreciation of $416,825, $384,889 and $342,358 in March 31, 2004, December 31, 2003 and December 31, 2002, respectively				669,770			488,226			76,777
Other assets				6,822			3,822			3,822
Total assets			$	7,357,554		$	5,033,888		$	1,279,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses			$	1,537,753		$	1,416,183		$	946,226
Accrued IPO costs				—			—			833,000
Deferred revenue				21,559			—			—
Loan from related party				—			—			110,000
Short-term loan				—			—			250,000
Short-term convertible note payable				250,000			250,000			250,000
Accrued liabilities				1,500,000			1,500,000			1,000,000
Total current liabilities				3,309,312			3,166,183			3,389,226
Mandatorily Redeemable Convertible Preferred Stock
Series B preferred stock, $.001 par value; 2,333,333 shares authorized; 2,333,333 shares issued and outstanding at March 31, 2004, December 31, 2003 and December 31, 2002 – liquidation preference at March 31, 2004, December 31, 2003 and December 31, 2002 of $2,532,666, $2,496,666 and $2,355,666, respectively; none outstanding on a pro forma basis	—			2,522,500			2,484,000			2,333,000
Series C preferred stock, $.001 par value; 3,387,500, 3,387,500 and 3,140,000 shares authorized at March 31, 2004, December 31, 2003 and December 31, 2002, respectively; 3,137,550 shares issued and outstanding at March 31, 2004, December 31, 2003 and December 31, 2002 – liquidation preference at March 31, 2004, December 31, 2003 and December 31, 2002 of $3,839,550, $3,784,550 and $3,569,550, respectively; none outstanding on a pro forma basis	—			3,833,050			3,775,550			3,552,550
Series D preferred stock, $.001 par value; 20,000,000, 20,000,000 and -0- shares authorized at March 31, 2004, December 31, 2003 and December 31, 2002 respectively; 11,817,988, 8,006,450 and -0- shares issued and outstanding at March 31, 2004, December 31, 2003 and December 31, 2002 – liquidation preference at March 31, 2004, December 31, 2003 and December 31, 2002 of $12,061,988, $8,112,450 and $-0-, respectively; none outstanding on a pro forma basis	—			2,966,001			990,501			—
	—			9,321,551			7,250,051			5,885,550
Stockholders’ equity (deficiency):
Series A preferred stock, $.001 par value, 4,500,000, 4,500,000 and 4,000,000 shares authorized at March 31, 2004, December 31, 2003 and December 31, 2002 respectively; 4,000,000 shares issued and outstanding at March 31, 2004, December 31, 2003 and December 31, 2002 – liquidation preference of $5,000,000; none outstanding on a pro forma basis	—			4,000			4,000			4,000
Common stock, $.001 par value; 49,000,000, 49,000,000 and 30,000,000 authorized at March 31, 2004, December 31, 2003 and December 31, 2002 respectively; 1,593,659 shares issued and outstanding at March 31, 2004, December 31, 2003 and December 31, 2002; 9,856,766 outstanding on a pro forma basis	9,857			1,594			1,594			1,594
Additional paid-in capital	33,027,822			23,710,534			19,005,356			7,015,906
Deferred compensation	(2,525,972	)		(2,525,972	)		(2,049,940	)		—
Accumulated other comprehensive income	69,460			69,460			100,337			—
Accumulated deficit from inception	(26,532,925	)		(26,532,925	)		(22,443,693	)		(15,016,693	)
Total stockholders’ equity (deficiency)	4,048,242			(5,273,309	)		(5,382,346	)		(7,995,193	)
Total liabilities and stockholders’ equity (deficiency)			$	7,357,554		$	5,033,888		$	1,279,583

The accompanying notes are an integral part of these statements.

F-3

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Consolidated Statements of Operations

	Period from Inception to March 31, 2004			Three Months ended March 31,						Year ended December 31,
				2004			2003			2003			2002			2001
	(unaudited)			(unaudited)			(unaudited)
Revenue-other	$	300,000		$	—		$	—		$	—		$	—		$	300,000
Cost of Goods Sold		12,618			12,618			—			—			—			—
Gross Profit (Loss)		287,382			(12,618	)		—			—			—			300,000
Operating expenses:
Research and development		11,966,225			690,024			228,596			1,320,556			957,616			737,858
Selling, general and administrative		9,350,395			1,316,435			545,389			3,673,902			1,097,400			652,828
Total operating expenses		21,316,620			2,006,459			773,985			4,994,458			2,055,016			1,390,686
Loss from operations		(21,029,238	)		(2,019,077	)		(773,985	)		(4,994,458	)		(2,055,016	)		(1,090,686	)
Other income (expense):
Other income		6,113			—			—			—			—			—
Interest income		174,442			1,345			—			—			181			5,497
Interest expense and amortization of debt discount		(1,837,542	)		—			(588,000	)		(641,542	)		(1,196,000	)		—
Gain on disposal of assets		30,007			—			—			—			—			—
Forgiveness of indebtedness		833,793			—			—			—			833,793			—
Abandoned IPO costs		—			—			(950,000	)		—			—			—
Total other income (expense)		(793,187	)		1,345			(1,538,000	)		(641,542	)		(362,026	)		5,497
Net loss		(21,822,425	)		(2,017,732	)		(2,311,985	)		(5,636,000	)		(2,417,042	)		(1,085,189	)
Cumulative preferred dividends and accretion		(4,710,500	)		(2,071,500	)		(89,000	)		(1,791,000	)		(365,000	)		(314,000	)
Net loss attributable to common stockholders		(26,532,925	)		(4,089,232	)		(2,400,985	)		(7,427,000	)		(2,782,042	)		(1,399,189	)
Net loss per share –
Basic and diluted				$	(2.57	)	$	(1.51	)	$	(4.66	)	$	(1.75	)	$	(0.88	)
Weighted-average shares outstanding –
Basic and diluted					1,593,659			1,593,659			1,593,659			1,593,659			1,592,096
Pro forma per share data (unaudited)     Pro forma net loss per share
Basic and diluted				$	(0.23	)	$	(0.50	)	$	(1.07	)	$	(0.55	)	$	(0.26	)
Pro forma weighted average shares outstanding
Basic and diluted					8,637,746			4,588,687			5,283,212			4,423,255			4,180,918

The accompanying notes are an integral part of these statements.

F-4

NEPHROS INC. AND SUBSIDIARY

(A Development Stage Company)

Statement of Changes in Stockholders’ Equity (Deficit)

	Series A Preferred Stock			Common Stock			Stock Subscription Receivable			Deferred Compensation			Additional Paid-in Capital		Accumulated Other Comprehensive Income			Accumulated Loss From Inception
	Shares	Amount		Shares	Amount																Total
Issuance of common stock upon inception	—	$	—	1,562,550	$	1,563	$	(5,500	)	$	—		$	3,937	$	—		$	—		$	—
Issuance of preferred stock	4,000,000		4,000	—		—		(2,500,000	)		—			4,996,000		—						2,500,000
Net loss	—		—	—		—		—			—			—		—			(453,001	)		(453,001	)
Balance, December 31, 1997	4,000,000		4,000	1,562,550		1,563		(2,505,500	)		—			4,999,937		—			(453,001	)		2,046,999
Net loss	—		—	—		—		—			—			—		—			(1,146,061	)		(1,146,061	)
Balance, December 31, 1998	4,000,000		4,000	1,562,550		1,563		(2,505,500	)					4,999,937		—			(1,599,062	)		900,938
Noncash stock-based compensation	—		—	2,699		3		—			—			997		—			—			1,000
Collection of stock subscription receivable	—		—	—		—		2,505,500			—			—		—			—			2,505,500
Net loss	—		—	—		—		—			—			—		—			(3,484,817	)		(3,484,817	)
Balance, December 31, 1999	4,000,000		4,000	1,565,249		1,566		—			—			5,000,934		—			(5,083,879	)		(77,379	)
Noncash stock-based compensation	—		—	—		—		—			—			5,000		—			—			5,000
Cumulative preferred dividend and accretion	—		—	—		—		—			—			—		—			(169,000	)		(169,000	)
Net loss	—		—	—		—		—			—			—		—			(5,582,583	)		(5,582,583	)
Balance, December 31, 2000	4,000,000		4,000	1,565,249		1,566		—			—			5,005,934		—			(10,835,462	)		(5,823,962	)
Noncash stock-based compensation	—		—	28,410		28		—			—			59,972		—			—			60,000
Cumulative preferred dividend and accretion	—		—	—		—		—			—			—		—			(314,000	)		(314,000	)
Net loss	—		—	—		—		—			—			—		—			(1,085,189	)		(1,085,189	)
Balance, December 31, 2001	4,000,000		4,000	1,593,659		1,594		—			—			5,065,906		—			(12,234,651	)		(7,163,151	)
Issue of warrants	—		—	—		—		—			—			430,000		—			—			430,000
Noncash stock-based compensation	—		—	—		—		—			—			20,000		—			—			20,000
Beneficial conversion and warrants issued in connection with convertible note payable	—		—	—		—		—			—			1,500,000		—			—			1,500,000
Cumulative preferred dividend and accretion	—		—	—		—		—			—			—		—			(365,000	)		(365,000	)
Net loss	—		—	—		—		—			—			—		—			(2,417,042	)		(2,417,042	)
Balance, December 31, 2002	4,000,000		4,000	1,593,659		1,594		—			—			7,015,906		—			(15,016,693	)		(7,995,193	)
Issue of warrants	—		—	—		—		—			—			19,000		—			—			19,000
Noncash stock-based compensation	—		—	—		—		—			(3,964,000	)		3,964,000		—			—			—
Beneficial conversion recognized in connection with issuance of preferred stock	—		—	—		—		—			—			8,006,450		—			—			8,006,450
Amortization of deferred compensation	—		—	—		—					1,914,060			—		—			—			1,914,060
Cumulative preferred dividend and accretion	—		—	—		—		—			—			—		—			(1,791,000	)		(1,791,000	)
Other comprehensive income	—		—	—		—		—			—			—		100,337			—			100,337
Net loss	—		—	—		—		—			—			—		—			(5,636,000	)		(5,636,000	)
Balance, December 31, 2003	4,000,000		4,000	1,593,659		1,594		—			(2,049,940	)		19,005,356		100,337			(22,443,693	)		(5,382,346	)
Noncash stock-based compensation	—		—	—		—		—			(893,640	)		893,640		—			—			—
Beneficial conversion recognized in connection with issuance of preferred stock	—		—	—		—		—			—			3,811,538		—			—			3,811,538
Amortization of deferred compensation	—		—	—		—		—			417,608			—		—			—			417,608
Cumulative preferred dividend and accretion	—		—	—		—		—			—			—		—			(2,071,500	)		(2,071,500	)
Other comprehensive loss	—		—	—		—		—			—			—		(30,877	)		—			(30,877	)
Net loss	—		—	—		—		—			—			—		—			(2,017,732	)		(2,017,732	)
Balance, March 31, 2004	4,000,000	$	4,000	1,593,659	$	1,594	$	—		$	(2,525,972	)	$	23,710,534	$	69,460		$	(26,532,925	)	$	(5,273,309	)
(Unaudited)

The accompanying notes are an integral part of these statements.

F-5

NEPHROS INC. AND SUBSIDIARY

(A Development Stage Company)

Consolidated Statements of Cash Flows

	Period from inception to March 31, 2004			Three Months ended March 31,						Year ended December 31,
				2004			2003			2003			2002			2001
	(unaudited)			(unaudited)			(unaudited)
Operating activities
Net Loss	$	(21,822,425	)	$	(2,017,732	)	$	(2,311,985	)	$	(5,636,000	)	$	(2,417,042	)	$	(1,085,189	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		446,831			31,935			12,039			42,531			56,785			70,466
Forgiveness of indebtedness		(833,793	)		—			—			—			(833,793	)		—
Noncash stock-based compensation		2,417,668			417,608			298,620			1,914,060			20,000			60,000
Amortization of debt discount		1,798,000			—			583,000			602,000			1,196,000			—
Deferred IPO costs		30,000			—			863,000			30,000			—			—
Gain on disposal of assets		(30,007	)		—			—			—			—			—
(Increase) decrease in operating assets
Accounts receivable		(21,559	)		(21,559	)		—			—			—			—
Prepaid expenses		(762,739	)		(544,126	)		968			(206,041	)		(9,711	)		4,094
Inventory		(164,110	)		37,853			—			(201,963	)		—			—
Other assets		(6,822	)		(3,000	)		—			—			7,632			1,690
Deferred cost of goods sold		(21,559	)		(21,559	)		—			—			—			—
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses		2,127,046			(22,430	)		1,434			43,457			173,794			27,351
Deferred revenue		21,559			21,559			—			—			—			—
Net cash used in operating activities		(16,821,910	)		(2,121,451	)		(552,924	)		(3,411,956	)		(1,806,335	)		(921,588	)
Investing activities
Purchase of property assets		(1,169,945	)		(213,478	)		—			(453,980	)		(30,779	)		(8,807	)
Proceeds from disposal of property and equipment		83,352			—			—			—			—			—
Net cash used in investing activities		(1,086,593	)		(213,478	)		—			(453,980	)		(30,779	)		(8,807	)
Financing activities
Proceeds from issuance of preferred stock, net		19,705,538			3,811,538			—			6,796,450			—			—
Issuance of common stock		5,500			—			—			—			—			—
Paid IPO costs		(30,000	)		—			—			—			(30,000	)		—
Loan from related party, net		210,000			—			100,000			100,000			5,000			105,000
(Payments) proceeds from issuance of short term loan, net		(25,000	)		—			—			(250,000	)		225,000			—
Proceeds from issuance of convertible notes payable, net		3,540,000			—			250,000			1,000,000			1,600,000			940,000
Net cash provided by financing activities		23,406,058			3,811,538			350,000			7,646,450			1,800,000			1,045,000
Effective exchange rates on cash		69,460			(30,877	)		—			100,337			—			—
Net increase (decrease) in cash		5,566,995			1,445,732			(202,924	)		3,880,851			(37,114	)		114,605
Cash, beginning of period		—			4,121,263			240,412			240,412			277,526			162,921
Cash, end of period	$	5,566,995		$	5,566,995		$	37,488		$	4,121,263		$	240,412		$	277,526
Supplemental disclosure of cash flow information Non cash investing and financing activities:
Cumulative preferred dividend and accretion		4,710,500			2,071,500			89,000			1,791,000			365,000			314,000
Issuance of warrants in connection with settlement with a supplier		400,000			—			—			—			400,000			—
Beneficial conversion and warrants issued in connection with issuance of short term convertible notes		1,530,000			—			—			—			1,530,000			—
Conversion of notes payable into preferred stock		2,150,000			—			—			1,210,000			—			940,000
Cash paid for:
Interest		21,842			—			—			21,842			—			—

The accompanying notes are an integral part of these statements.

F-6

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Note 1 – Organization and Nature of Operations

Nature of Operations

Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. Nephros was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced End Stage Renal Disease (“ESRD”) therapy technology and products. Although the Chairman of our Board is the Chairman of Columbia University’s Department of Surgery and we license the right to use office space from Columbia University, we do not currently have any other material relationship with Columbia University. The Company has three products in various stages of development in the hemodiafiltration, or HDF, modality to deliver improved therapy for ESRD patients. These are the OLpur^™ MD190, a filter, or “dialyzer,” designed expressly for HDF therapy, the OLpur^™ H₂H^™, an add-on module designed to allow the most common types of hemodialysis machines to be used for HDF therapy, and the OLpur^™ NS2000 system, a stand-alone hemodiafiltration machine and associated filter technology. The Company believes that the OLpur MD190 is more effective than any other dialyzers currently available for ESRD therapy. In laboratory bench studies and in clinical studies conducted under the supervision of Bernard Canaud, M.D. of L’institut de Recherche et de Formation en Dialyse, a research institute located in Montpellier, France, the Company’s hemodiafiltration products have been shown to remove a range of larger toxins, known collectively as “middle molecules” due to their molecular weight, more effectively than existing hemodialysis or hemodiafiltration methods. These middle molecules are thought to contribute to such conditions as malnutrition, impaired cardiac function, carpal tunnel syndrome, and degenerative bone disease in the ESRD patient.

On June 4, 2003, Nephros International Limited was incorporated under the laws of Ireland as a wholly-owned subsidiary of the Company. In August 2003, the Company established an European Customer Service and financial operations center in Dublin, Ireland.

The Company is a development stage company, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises,” as it continues to devote substantially all of its efforts to establishing its business, and, although it has commenced its planned principal operations and began generating sales, the Company had not recognized any revenues from such operations as of March 31, 2004. Revenues earned by the Company to date are primarily related to consulting services rendered to third parties outside of the planned principal operations.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Through December 31, 2003, the Company had incurred development stage losses totaling approximately $22.4 million and used cash of approximately $14.7 million in operations from inception through December 31, 2003. The Company anticipates, based on its currently proposed plans and assumptions, that the net proceeds of the proposed initial public offering (Note 14) will be sufficient to satisfy its cash requirements, with no further financing, to obtain positive cash flow. However, there can be no assurance that the Company’s efforts to produce commercially viable products will be successful, or that the Company will generate sufficient revenues to provide positive cash flows from operations. If the Company’s sales do not meet its projections or its expenses exceed its expectations, then the Company may need to raise additional funds through additional public or private offerings of its securities. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

F-7

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Reverse Stock Split

Prior to the consummation of the Company’s initial public offering (Note 14), the Company will effect a reverse stock split pursuant to which each share of its common stock will be converted into 0.2841 of one share of common stock. Unless otherwise noted, all share and per share amounts for all periods presented have been retroactively restated to give effect to this reverse stock split.

Note 2 – Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements of the Company include the accounts of Nephros, Inc. and Nephros International Limited, a wholly-owned subsidiary which was formed in August 2003. Material intercompany items have been eliminated in consolidation.

Pro Forma Presentation

The unaudited pro forma stockholders equity presentation at March 31, 2004, gives effect to the mandatory conversion of all of the convertible preferred stock (including accrued preferred dividends) outstanding at March 31, 2004 into common stock (see Notes 5 and 6), upon the completion of the Company’s proposed initial public offering (see Note 14). Such presentation does not include the accrual or conversion of dividends accrued after March 31, 2004 but prior to the completion of the proposed initial public offering. It also does not include the conversion of the series C convertible preferred stock issued in April 2004 upon conversion of certain notes or the shares of series A convertible preferred stock issued in April 2004 upon the exercise of certain warrant rights granted in connection with such notes (see Note 12).

Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 and for the period from inception to March 31, 2004 have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position at March 31, 2004 and the results of its operations and its cash flows for the three month periods ended March 31, 2004 and 2003 and for the period from inception to March 31, 2004. All such adjustments are of a normal recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements. Results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2004.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from those estimates.

F-8

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Concentration of Risk

Cash and cash equivalents are financial instruments which potentially subject the Company to concentrations of credit risk. The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash and cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts payable and debt approximate fair value due to the short-term maturity of these instruments.

Inventory

Inventory, principally consisting of finished goods (MD190 filters), is stated at the lower of cost or market.

Patents

The Company has filed numerous patent applications with the United States Patent and Trademark Office and in foreign countries. All costs and direct expenses incurred in connection with patent applications have been expensed as incurred.

Property and Equipment

Property and equipment are stated at cost and are being depreciated over the estimated useful lives of the assets, which range between three and five years. Research equipment is being depreciated using an accelerated method of 200% declining balance. Furniture and fixtures as well as other equipment is being depreciated using the straight-line method.

Accounting for Long-lived Assets

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” which was adopted by the Company effective January 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets (excluding goodwill) or assets to be disposed of. Management has performed a review of all long-lived assets and has determined that no impairment of the carrying values of its long-lived assets exists as of December 31, 2003.

Revenue Recognition

Revenue is recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104 Revenue Recognition. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed and determinable; and (iv) collectibility is reasonably assured.

F-9

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

The Company’s sales history does not yet provide a basis from which to reasonably estimate rates of product return, and therefor revenues from shipments during the quarter ended March 31, 2004 were deferred. In addition, cost of revenue to the extent of amount billed was deferred and will be recognized when the revenue is recognized. Excess of cost over amount billed of $12,618 was recognized as gross margin loss in the quarter ended March 31, 2004.

Advertising

The Company has incurred minimal advertising costs to date, and all advertising costs have been expensed as incurred.

Shipping and Handling

The Company is responsible for all shipping and handling costs for the distribution of its product, and such costs are recorded in cost of goods sold.

Stock-based Compensation

The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services.”

The Company accounted for stock-based compensation to employees under the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and discloses the effect of the differences which would result had the Company applied the fair-value-based method of accounting on a pro forma basis, as required by SFAS No. 123, “Accounting for Stock-Based Compensation.” Had compensation expense for stock options granted under the Nephros 2000 Equity Incentive Plan (the “2000 Plan”) been determined based on fair value at the grant dates, the Company’s net loss and net loss per share for the years ended December 31, 2003, 2002 and 2001 and for the three months ended March 31, 2004 and 2003 would have been as follows:

	Three Months Ended March 31,						Years Ended December 31,
	2004			2003			2003			2002			2001
Net loss:
As reported	$	(4,089,232	)	$	(2,400,985	)	$	(7,427,000	)	$	(2,782,042	)	$	(1,399,189	)
Less – compensation recognized under the intrinsic-value method		417,608			226,620			1,914,060			—			—
Add – compensation under the fair value method		(362,096	)		(402,098	)		(2,592,869	)		(44,756	)		(22,772	)
Pro forma	$	(4,033,720	)	$	(2,576,463	)	$	(8,105,809	)	$	(2,826,798	)	$	(1,421,961	)
Net loss per share:
As reported	$	(2.57	)	$	(1.51	)	$	(4.66	)	$	(1.75	)	$	(0.88	)
Pro forma	$	(2.53	)	$	(1.62	)	$	(5.08	)	$	(1.77	)	$	(0.89	)

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires accounting for deferred income taxes under the asset and liability method. Deferred

F-10

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable in future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.

Research and Development Costs

Research and development costs are expensed as incurred.

Income (Loss) per Common Share

Historical –

In accordance with SFAS No. 128, “Earnings Per Share,” net loss per common share amounts (“basic EPS”) were computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding and excluding any potential dilution. Net loss per common share amounts assuming dilution (“diluted EPS”) is generally computed by reflecting potential dilution from conversion of convertible securities and the exercise of stock options and warrants. However, because their effect is antidilutive, the Company has excluded common equivalent shares of 7,844,257, 3,673,522 and 3,236,576 from the computation of diluted EPS for the years ended December 31, 2003, 2002 and 2001. Similarly, the Company has excluded common equivalent shares of 9,690,355 and 3,963,872 from the computation of diluted EPS for the three months ended March 31, 2004 and 2003, as their effect is antidilutive.

Pro Forma (Unaudited) –

Pro forma net loss per share is calculated assuming conversion of all convertible preferred stock and accumulated dividends outstanding for the periods presented, which convert upon the completion of the Company’s proposed initial public offering (see Note 14). The following table reconciles the numerator and denominator for the calculation:

	Three months ended March 31,						Years ended December 31,
	2004			2003			2003			2002			2001
Numerator:
Net loss attributable to common stockholders	$	(4,089,232	)	$	(2,400,985	)	$	(7,427,000	)	$	(2,782,042	)	$	(1,399,189	)
Preferred dividend and accretion		2,071,500			89,000			1,791,000			365,000			314,000
Pro forma net loss	$	(2,017,732	)	$	(2,311,985	)	$	(5,636,000	)	$	(2,417,042	)	$	(1,085,189	)
Denominator:
Weighted average basic shares outstanding		1,593,659			1,593,659			1,593,659			1,593,659			1,592,096
Assumed conversion of preferred stock and preferred dividend		7,044,087			2,995,128			3,689,553			2,829,596			2,588,822
Pro forma weighted average basic shares outstanding		8,637,746			4,588,687			5,283,212			4,423,255			4,180,918

Translation of Foreign Currency

The functional currency of Nephros International Limited is the Euro, and its translation gains and losses are included in accumulated other comprehensive income.

F-11

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Comprehensive Income (Loss)

The Company complies with the provisions of SFAS No. 130, “Reporting Comprehensive Income,” which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity (or other comprehensive income (loss)) such as unrealized gains or losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income (loss) must be reported on the face of the annual financial statements. The Company’s operations did not give rise to any material items includable in comprehensive loss, which were not already in net loss for the years ended December 31, 2002 and 2001. In 2003, the comprehensive loss was $5,535,663.

The Company’s operations did not give rise to any material items includable in comprehensive loss, which were not already in net loss for the three months ended March 31, 2003. For the three months ended March 31, 2004, the comprehensive loss was $2,048,609.

New Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position and results of operations.

Note 3 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are comprised of the following:

	March 31 2004		December 31,
			2003		2002
Advances on account of inventory	$	560,000	$	—	$	—
Other		202,739		218,613		12,572
Total	$	762,739	$	218,613	$	12,572

Note 4 – Property and Equipment

Property and equipment are comprised of the following:

	March 31 2004			December 31,
				2003			2002
Research equipment	$	369,595		$	365,269		$	347,969
Manufacturing equipment		525,782			333,632			—
Computer equipment		138,299			122,206			65,818
Furniture and fixtures		52,919			52,008			5,348
		1,086,595			873,115			419,135
Less: accumulated depreciation		(416,825	)		(384,889	)		(342,358	)
	$	669,770		$	488,226		$	76,777

F-12

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Depreciation expense for the years ended December 31, 2003, 2002 and 2001, was $42,531, $56,785 and $70,466, respectively.

Depreciation expense for the three months ended March 31, 2004 and 2003 was $31,935 and $12,039, respectively.

Note 5 – Mandatorily Redeemable Convertible Preferred Stock

As of April 1, 2000, the Company issued 2,333,333 shares of $.001 par value per share series B convertible preferred stock, at a price of $0.86 per share for aggregate proceeds of approximately $2 million. The series B stockholders are entitled to a cumulative dividend at the rate of 6% per annum, when, as and if declared by the Board of Directors, and to a liquidation preference of $0.86 per share plus any accrued and unpaid dividends. Each share of series B convertible preferred stock can be converted at any time into 0.2841 shares of common stock, and upon any such conversion all accrued and unpaid dividends on such share of series B convertible preferred stock will be converted to common stock at a conversion price of approximately $3.03 per share, and is automatically converted upon a Qualified Public Offering of the Company, as defined in the Company’s amended and restated certificate of incorporation.

The series B convertible preferred stock is redeemable on or at any time after February 8, 2005, at the election of the holders of at least two-thirds of the shares of series B, series C, and series D convertible preferred stocks, voting together as a class and calculated on an as converted basis. The redemption price will be equal to the greater of $0.86 (plus any accrued and unpaid dividends), or the then fair market value per share of the series B convertible preferred stock.

Preferred dividends on series B convertible preferred stock were $141,000, $137,000 and $129,000 for the years ended December 31, 2003, 2002 and 2001. Preferred dividends on series B convertible preferred stock were $36,000 and $33,000 for the three months ended March 31, 2004 and 2003.

As of July 1, 2000, the Company issued 2,197,550 shares of $.001 par value per share series C convertible preferred stock at a price of $1.00 per share. The series C stockholders are entitled to a cumulative dividend at a rate of 6% per annum, when, as and if declared by the Board of Directors, and to a liquidation preference of $1.00 per share plus any accrued and unpaid dividends. Each share of series C convertible preferred stock can be converted at any time into 0.2841 shares of common stock, and upon any such conversion all accrued and unpaid dividends on such share of series C convertible preferred stock will be converted to common stock at a conversion price of approximately $3.52 per share, and is automatically converted upon a Qualified Public Offering of the Company, as defined in the Company’s amended and restated certificate of incorporation.

The series C convertible preferred stock is redeemable on or at any time after May 16, 2005, at the election of the holders of at least two-thirds of the shares of series B, series C, and series D convertible preferred stocks, voting together as a class calculated on an as-converted basis. The redemption price will be equal to the greater of $1.00 (plus any accrued and unpaid dividends), or the then fair market value per share of the series C convertible preferred stock.

During June 2001, the Company issued convertible notes payable for aggregate proceeds of $940,000. As of June 30, 2001, such notes were converted into an additional 940,000 shares of series C convertible preferred stock, at a conversion price of $1.00 per share.

Preferred dividends on series C convertible preferred stock were $213,000, $208,000, and $165,000 for the years ended December 31, 2003, 2002 and 2001. Preferred dividends on series C convertible preferred stock was $55,000 and $52,000 for the three months ended March 31, 2004 and 2003.

F-13

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

In June 2003, the Company filed an Amendment and Restatement to its Certificate of Incorporation which, among other things, increased the authorized number of shares of series C convertible preferred stock from 3,140,000 to 3,387,500 shares.

In connection with the issuance of series B and C convertible preferred stock, the Company incurred issuance costs of approximately $100,000. Such cost was recorded as a reduction in the carrying amount of such preferred stock and is being accreted over the five-year period to the earliest redemption date. Accretion of preferred stock issuance cost was $20,000 for each of the years ended December 31, 2003, 2002 and 2001 and $5,000 for each of the three month periods ended March 31, 2004 and 2003.

As of September 11, 2003, the Company issued 5,006,450 shares of $.001 par value series D convertible preferred stock at a price of $1.00 per share (including 1,012,657 shares that were issued upon conversion of $1,000,000 aggregate principal amount of convertible bridge notes and accrued interest thereon). As of December 1, 2003, the Company issued an additional 3,000,000 shares of series D convertible preferred stock at a price of $1.00 per share. As of March 3, 2004, the Company issued an additional 3,811,538 shares of series D convertible preferred stock at a price of $1.00 per share.

The series D stockholders are entitled to a cumulative dividend at a rate of 6% per annum, when, as and if declared by the Board of Directors, and to a liquidation preference of $1.00 per share plus any accrued and unpaid dividends. Each share of series D convertible preferred stock can be converted at any time into approximately 0.4310 shares of common stock, and upon any such conversion all accrued and unpaid dividends on such share of series D convertible preferred stock will be converted to common stock at a conversion price of approximately $2.32 per share, and is automatically converted upon a Qualified Public Offering of the Company, as defined in the Company’s amended and restated certificate of incorporation.

The series D convertible preferred stock is redeemable on or at any time after February 8, 2005, at the election of the holders of at least two-thirds of the shares of series B, series C and series D convertible preferred stocks, voting together as a class calculated on an as-converted basis. The redemption price will be equal to the greater of $1.00 (plus any accrued and unpaid dividends), or the then fair market value per share of the series D convertible preferred stock.

In connection with the issuance of series D convertible preferred stock, the Company recorded a beneficial conversion feature (“BCF”) of $8,006,450 for the year ended December 31, 2003. In connection with the issuance of series D convertible preferred stock in March 2004, the Company recorded a BCF of $3,811,538 for the three months ended March 31, 2004. Such BCFs were recorded as reductions in the carrying amount of such preferred stock and is being accreted over the period to the earliest redemption date (February 2005). Accretion of BCF was $1,231,000 for the year ended December 31, 2003. Accretion of BCF for the three months ended March 31, 2004 was $1,763,000.

In connection with the issuance of series D convertible preferred stock, the Company recorded issuance cost of $426,500. Such cost was recorded as a reduction in the carrying amount of such preferred stock and is being accreted over the period to the earliest redemption date (February 2005). Accretion of issuance costs was $80,000 for the year ended December 31, 2003. Accretion of issuance costs for the three months ended March 31, 2004 was $74,500.

Preferred dividends on series D convertible preferred stock was $106,000, $-0- and $-0- for the years ended December 31, 2003, 2002 and 2001. Preferred dividends on series D convertible preferred stock was $138,000 and $-0- for the three months ended March 31, 2004 and 2003.

F-14

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Note 6 – Stockholders’ Equity

In July 1997, the Company issued 4,000,000 shares of $.001 par value series A convertible preferred stock, at a price of $1.25 per share for aggregate proceeds of $5,000,000. The series A stockholders are entitled to voting and dividend rights equal to common stockholders. The series A convertible preferred stock has a liquidation preference of $1.25 per share, plus any accrued but unpaid dividends. Each share of series A convertible preferred stock can be converted at any time into 0.2841 shares of common stock, and is automatically converted upon the Company’s initial public offering.

In June 2003, the Company filed an Amendment and Restatement to its Certificate of Incorporation which, among other things, increased the authorized number of shares of common stock from 30,000,000 to 49,000,000 shares.

Note 7 – Stock-Based Compensation

In 2000, the Company adopted the 2000 Plan, under which 2,130,750 (7,500,000 pre-split) shares of common stock, have been authorized for issuance upon exercise of options granted, and which may be granted by the Company. As of December 31, 2003, 1,037,249 options had been issued to employees and were outstanding. As of March 31, 2004, 1,229,585 options had been issued to employees and were outstanding. The options expire on various dates between December 31, 2009 and March 15, 2014, and vest upon a combination of the following: immediate vesting; straight line vesting of two, three or four years; and certain milestones.

As of December 31, 2003, 401,575 options had been issued to non-employees and were outstanding. As of March 31, 2004, 414,928 options had been issued to non-employees and were outstanding. Such options expire at various dates between December 31, 2006 and March 15, 2014 and vest upon a combination of the following: immediate vesting; straight line vesting of two, three or four years; and certain milestones.

In May 2003, the Company’s Board of Directors increased the number of shares of common stock authorized for issuance upon exercise of options granted under the 2000 Plan from 1,278,450 to 2,130,750, subject to stockholder approval. In June 2003, the Company’s stockholders approved such increase.

F-15

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

Option activity for the years ended December 31, 2003 and 2002, is summarized as follows:

	Shares		Weighted-average exercise price
Outstanding at December 31, 2000	583,115			.32
Options granted	—			—
Options exercised	—			—
Options canceled	(37,218	)		.32
Outstanding at December 31, 2001	545,898		$	.32
Options granted	—			—
Options exercised	—			—
Options canceled	(9,090	)		.32
Outstanding at December 31, 2002	536,807			.32
Options granted	1,010,260			2.27
Options exercised	—			—
Options canceled	(108,242	)		2.78
Outstanding at December 31, 2003	1,438,825			1.51
Options granted	205,688			2.39
Options exercised	—			—
Options canceled	—			—
Outstanding at March 31, 2004	1,644,513			1.62
Exercisable at December 31, 2003	893,452			1.08
Exercisable at March 31, 2004	920,441			1.11

At December 31, 2003, there were 691,925 shares available for future grants under the 2000 Plan.

The portion of stock options granted to employees which is time vested is accounted for as a fixed award.

For options issued prior to 2003, no compensation has been recorded on such portion as it had no intrinsic value at the date of grant.

For options issued in 2003, the value of the option at the date of grant in excess of the option price is recognized as compensation over the period of vesting.

The portion of stock options granted to employees which was based on performance achievement is accounted for as a variable award. As vesting depends upon discrete events, the measurement date and the expense recognition will occur when such targets are achieved.

The weighted-average fair value of options granted in 2003 is $6.09. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3.33%; no expected dividend yield; expected lives of ten years; and expected stock price volatility of 80%.

F-16

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

The following table summarizes information about stock options outstanding at December 31, 2003:

	Options outstanding				Options exercisable
Range of exercise prices	Number outstanding as of December 31, 2003	Weighted-average remaining contractual life	Weighted-average exercise price		Number exercisable as of December 31, 2003	Weighted-average exercise price
$.32	533,966	5.67	$	.32	533,966	$	.32
$1.76	499,732	8.97		1.76	201,597		1.76
$2.32	5,682	9.31		2.32	2,841		2.32
$2.69 to 2.78	399,445	8.71		2.77	155,048		2.78
	1,438,825				893,452

Note 8 – 401(k) Plan

The Company has established a 401(k) deferred contribution retirement plan (the “401(k) Plan”) which covers all employees. The 401(k) Plan provides for voluntary employee contributions of up to 15% of annual compensation, as defined. As of January 1, 2004, the Company began matching 100% of the first 3% and 50% of the next 2% of employee contributions to the 401(k) Plan.

Note 9 – Leases

At December 31, 2003, the Company had noncancellable operating leases on real and personal property that expire in 2007 for the rental of its office and research and development facilities and equipment. Rent expense for the years ended December 31, 2003, 2002 and 2001 totaled approximately $87,000, $77,000 and $73,000.

As of December 31, 2003, future net minimum rental payments required under operating leases are as follows:

Year ending December 31,
2004	$	60,012
2005		22,260
2006		18,495
2007		4,200
	$	104,967

Note 10 – Commitments and Contingencies

Settlement Agreements

In June 2002, the Company entered into a settlement agreement with one of its suppliers. The Company had an outstanding liability to such supplier in the amount of approximately $1,900,000. Pursuant to this settlement agreement, the Company and the supplier agreed to release each other from any and all claims or liabilities, whether known or unknown, that the Company had against the other as of the date of the settlement agreement, except for obligations arising out of the settlement agreement itself. The settlement

F-17

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

agreement required the Company to grant to the supplier (i) warrants to purchase 170,460 shares of common stock of the Company at an exercise price of approximately $10.56 per share that expire in June 2007 and (ii) cash payments of an aggregate amount of $650,000 in three installments. The warrants were valued at $400,000 using the Black-Scholes model. Accordingly, the Company recorded a gain of approximately $850,000 based on such settlement agreement. On June 19, 2002, the Company issued the warrant to the supplier, and on August 7, 2002, the Company satisfied the first $300,000 installment of the agreement. The second installment of $100,000 was due on February 7, 2003, and the Company paid $75,000 towards the installment. The Company expects to pay the balance of $275,000 with proceeds from its proposed initial public offering (See Note 14).

In April 2002, the Company entered into a letter agreement with a placement agent, the stated term of which was from April 30, 2002 through September 30, 2004. As of February 2003, the Company entered into a settlement agreement with such placement agent pursuant to which, among other things: the letter agreement was terminated; the parties gave mutual releases relating to the letter agreement; and the Company agreed to issue such placement agent or its designees, upon the closing of certain transactions

contemplated by a separate settlement agreement between the Company and Lancer Offshore, Inc. (“Lancer”), warrants exercisable until February 2006 to purchase an aggregate of 60,000 shares of common stock for $2.50 per share (or 17,046 shares of our common stock for $8.80 per share, if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant, as amended). The Company has received correspondence from the placement agent requesting the issuance of warrants pursuant to the settlement agreement. However, since Lancer never satisfied the closing conditions and, consequently, a closing has not been held, the Company has not issued any warrants to the placement agent in connection with our settlement agreement with them.

Fee Abatement

The Company settled outstanding liabilities arising out of certain professional services rendered to it. The Company had booked liabilities for such services of approximately $1,400,000. The gains on these transactions were recorded in the fourth quarter of 2003.

Litigation

In August 2002, the Company entered into a subscription agreement with Lancer. The subscription agreement provided that Lancer would purchase, in three installments, (1) $3,000,000 principal amount of secured notes due March 15, 2003 convertible into 340,920 shares of our common stock, and (2) warrants to purchase until December 2007, an aggregate of 68,184 shares of our common stock at an exercise price of approximately $8.80 per share. In accordance with the subscription agreement, the first installment, consisting of $1,500,000 principal amount of the notes and 34,092 of the warrants, was tendered. However, Lancer failed to fund the remaining installments. Following this failure, the Company entered into a settlement agreement with Lancer dated as of January 31, 2003, pursuant to which, (i) the parties terminated the subscription agreement; (ii) Lancer agreed to surrender 12,785 of the original 34,092 warrants issued to it; (iii) the warrants that were not surrendered were amended to provide that the exercise price per share and the number of shares issuable upon exercise thereof would not be adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated; and (iv) the secured convertible note in the principal amount of $1,500,000 referred to above was cancelled. Lancer agreed to deliver to the Company at a subsequent closing the cancelled note and warrants and to reaffirm certain representations and warranties and the Company agreed to issue to Lancer at such

F-18

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

subsequent closing an unsecured note in the principal amount of $1,500,000 bearing no interest, not convertible into common stock and due on January 31, 2004 or earlier under certain circumstances. Lancer never fulfilled the conditions to the subsequent closing and, accordingly, the Company never issued the $1,500,000 note that the settlement agreement provided would be issued at such closing.

The above transaction resulted in the Company becoming a defendant in an action captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v. Nephros, Inc., Case No. 04-CV-20547, pending in the U.S. District Court for the Southern District of Florida (the “Ancillary Proceeding”). That action is ancillary to a proceeding captioned Securities and Exchange Commission v. Michael Lauer, et. al., Case No. 03-CV-80612, also pending in the U.S. District Court for the Southern District of Florida, in which the court has appointed a Receiver to manage Lancer and various related entities (the “Receivership”). In the Ancillary Proceeding, the Receiver seeks payment of $1,500,000 together with interest, costs and attorneys’ fees as well as delivery of a warrant evidencing the right to purchase until December 2007 an aggregate of 75,000 shares of our common stock for $2.50 per share (or 21,308 shares of our common stock for $8.80 per share, if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant, as amended), that the Receiver alleges are due as a result of our settlement agreement with Lancer. The Company believes that it has valid defenses to the Receiver’s claims, and intend to contest them vigorously. Additionally, the Company has asserted claims for damages against Lancer that exceed the amount sought in the Ancillary Proceeding by submitting a proof of claim in the Receivership. The Receiver and the Company are currently discussing a potential settlement of all claims.

Suppliers

The Company is committed to use one supplier for its production of products for sale in Europe, however no minimum purchase requirements are in effect.

Note 11 – Income Taxes

At December 31, 2003, the Company had Federal, New York State, and New York City income tax net operating loss carryforwards of approximately $20 million each. The Company also has Federal and New York State research tax credit carryforwards of approximately $500,000, respectively. The Federal net operating loss and tax credit carryforwards will expire at various times between 2012 and 2023 unless previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss and credit carryforwards may be limited, if a cumulative change in ownership of more than 50% occurs within a three-year period.

Significant components of the Company’s deferred tax assets as of December 31, 2003, 2002, and 2001 are shown below:

	2003			2002			2001
Deferred tax assets:
Net operating loss carryforwards	$	9,300,000		$	6,300,000		$	5,300,000
Research and development credits		500,000			500,000			460,000
Total deferred tax assets		9,800,000			6,800,000			5,760,000
Valuation allowance for deferred tax assets		(9,800,000	)		(6,800,000	)		(5,760,000	)
Net deferred tax assets	$	—		$	—		$	—

F-19

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

At March 31, 2004, the tax credit and loss carryforward was approximately $23 million.

A valuation allowance of $9,800,000, $6,800,000 and $5,760,000 in 2003, 2002, and 2001, respectively, has been recognized to offset the deferred tax assets as realization of such assets is uncertain.

The effective tax benefit for the years ended December 31, 2003, 2002, and 2001 is different from the tax benefit that would result from applying the statutory tax rates, due to the valuation allowance that has been recognized.

Note 12 – Related Party Transactions

a. Prior to December 31, 2000, the Company completed three private placements of its equity securities (see Notes 4 and 5), in which some of the Company’s current and former directors and holders of more than 5% of the Company’s common stock, purchased equity securities. The current and former directors and holders of more than 5% of the Company’s common stock, who purchased equity securities in these private placements, purchased equity securities on substantially the same terms and conditions as the other participants.

b. In 2001, the Company issued 940,000 shares of series C convertible preferred stock to certain of its directors and existing shareholders upon conversion of $940,000 principal amount of convertible notes.

c. In April 2002, the Company issued convertible notes in the aggregate principal amount of $250,000, pursuant to which the Company agreed to pay to the holder the principal amount due under each holder’s convertible note, together with interest on the unpaid principal amount at the rate of 6% per annum, compounded semi-annually, from the date of the convertible note.

These notes were convertible, into 250,000 shares of the Company’s series A convertible preferred stock or 250,000 shares of the Company’s series C convertible preferred stock at the Company’s election. In addition, the Company had agreed to issue warrants to these note holders to purchase through April 2004, an additional 125,000 shares of its series A convertible preferred stock or such common shares as would be issuable upon conversion of the preferred stock.

In April of 2004, the Company and holders of these notes agreed to convert the entire principal amount of these notes (except for $50, which the Company repaid) into an aggregate of 249,950 shares of series C convertible preferred stock, and the Company will pay accrued interest on such convertible notes amounting to $5,000 in the aggregate. In connection with the warrant rights related to these convertible notes, in April 2004, the Company sold an aggregate of 87,500 shares of series A convertible preferred stock to the holders of such notes for $1.00 per share.

d. In May 2003, the Company entered into a Commitment Agreement with a holder of more than 5% of the Company’s stock, pursuant to which, the Company agreed to sell convertible bridge notes in the aggregate principal amount of $1,000,000 at face value. The outstanding principal amount of such convertible bridge notes, together with interest at the rate of 6% per annum, would become due and payable on January 26, 2004. Pursuant to the Commitment Agreement, the Company offered the holders of its then outstanding capital stock and convertible notes the opportunity to invest in a portion of the bridge notes pro rata, in accordance with the number of shares issuable upon conversion of the capital stock and convertible notes then held by them. Under the Commitment Agreement, such 5% holder had agreed to purchase additional bridge notes, if and to the extent that the other security holders elected not to purchase their respective pro rata shares of the bridge notes, thus ensuring that the Company would sell exactly $1,000,000 in aggregate principal amount of bridge notes. In June

F-20

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

2003, the Company sold the convertible bridge notes to twenty-three of the Company’s security holders. Pursuant to the Commitment Agreement, the 5% holder had the right to elect whether he and the other holders would have the option to convert the bridge notes and purchase additional shares of series D convertible preferred stock at any time prior to the earlier of (i) 10 days after the Company notified such 5% holder that the Company obtained a CE mark on the initial product and (ii) January 15, 2004. The Company received such CE mark on July 31, 2003 and promptly notified such 5% holder thereof. On August 1, 2003, the 5% holder elected to proceed with the conversion and purchase. As of September 11, 2003, each of the holders converted its bridge note into shares of series D convertible preferred stock at a conversion price equal to the liquidation preference of the series D convertible preferred stock, in accordance with the terms thereof.

Pursuant to the terms of the bridge notes, in order to convert each holder’s bridge note, such holder was required to commit to purchase, for the aggregate liquidation preference thereof, a number of additional shares of series D convertible preferred stock having an aggregate liquidation preference equal to any amount, at such holder’s option, between 9 and 11 times the principal amount of the bridge note being converted. The purchase of the additional shares of series D convertible preferred stock occurred in three installments, with 3,993,793 shares purchased at the time of conversion on September 11, 2003, another 3,000,000 shares purchased as of December 1, 2003, and the remaining 3,811,538 shares purchased as of March 3, 2004.

e. During 2001, 2002 and 2003, the Chairman of the Board of Directors of the Company made non-interest bearing demand loans to the Company in the aggregate principal amount of $160,000. On September 11, 2003, the Chairman assigned all of his right, title and interest in the loans to a holder of more than 5% of the Company’s stock in exchange for 160,000 shares of the Company’s series D convertible preferred stock due to such 5% stockholder at the first closing. Such 5% stockholder instructed the Company to issue the 160,000 shares directly to the Chairman and the $160,000 outstanding under the loans was applied to the purchase price of the series D convertible preferred stock to be purchased by such 5% stockholder.

f. During 2003, a Director made non-interest bearing demand loans to the Company in the aggregate principal amount of $50,000. On September 11, 2003, the Director assigned all of his right, title and interest in (i) the loans, (ii) his note, convertible into series D convertible preferred stock, in the principal amount of $72,189, and (iii) $80,000, to a holder of more than 5% of the Company’s stock in exchange for 203,102 shares of series D convertible preferred stock due to such 5% stockholder at the first closing. Such 5% stockholder instructed the Company to issue the 203,102 shares directly to said Director and the $50,000 outstanding under the loans was applied to the purchase price of the series D convertible preferred stock to be purchased by such 5% stockholder.

Note 13 – Debt

In August 2002, the Company entered into a subscription agreement with Lancer Offshore, Inc. (“Lancer”). The subscription agreement provided that Lancer would purchase, in three installments, (1) $3,000,000 principal amount of secured notes due March 15, 2003, convertible into 340,920 shares of common stock of the Company, and (2) warrants to purchase until December 2007, an aggregate of 68,184 shares of the common stock of the Company, at an exercise price of approximately $8.80 per share. In accordance with the subscription agreement, the first installment, consisting of $1,500,000 principal amount of the notes and 34,092 of the warrants, was sold. The $1,500,000 note issued in August 2002, contained a beneficial conversion of $1,110,000, which was recorded as a debt discount and was amortized over the term of the

F-21

NEPHROS, INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

(Information as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 is unaudited)

debt (7.5 months). In connection with the issuance of such note, the Company incurred issuance costs of approximately $224,000. Such costs are recorded as debt issuance costs and were amortized over the term of the debt (7.5 months). The notes were originally to bear interest at the rate of 8% per annum, and be convertible at any time into shares of common stock at a price of approximately $8.80 per share. The warrants were valued at $390,000 using the Black-Scholes model, and were recorded as a debt discount, which was amortized over the term of the debt (7.5 months).

Lancer failed to fund the remaining installments under the subscription agreement. Following such failure, the Company entered into a settlement agreement with Lancer, dated as of January 31, 2003, pursuant to which: (i) the parties terminated the subscription agreement; (ii) Lancer agreed to surrender 12,785 of the original 34,092 warrants issued to it; (iii) the warrants that were not surrendered were amended to provide that the exercise price per share and the number of shares issuable upon exercise thereof would not be adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated; and (iv) the secured convertible note in the principal amount of $1,500,000 referred to above was cancelled. Lancer agreed to deliver to the Company at a subsequent closing the cancelled note and warrants and to reaffirm certain representations and warranties and the Company agreed to issue to Lancer at such subsequent closing an unsecured note in the principal amount of $1,500,000 bearing no interest, not convertible into common stock and due on January 31, 2004 or earlier under certain circumstances. Lancer never fulfilled the conditions to the subsequent closing and, accordingly, the Company never issued the $1,500,000 note that the settlement agreement provided would be issued at such closing.

In December 2002, the Registrant issued promissory notes in the aggregate principal amount of $250,000 to two lenders. Each of these loans was payable on the earlier to occur of (i) 30 days after the consummation of our initial public offering and (ii) December 26, 2003. Each of these loans accrued interest, calculated quarterly in arrears, at a rate of 7% per annum from December 26, 2002 to March 31, 2003, 10% per annum from April 1, 2003 to April 30, 2003, and 15% per annum from May 1, 2003 to December 26, 2003. In connection with these loans, the Registrant issued the holders thereof warrants to purchase an aggregate of 5,549 shares of Common Stock at an exercise price of approximately $10.56 per share, and paid Hermitage Capital Corporation, as placement agent, an aggregate amount of $25,000. The warrants were valued at $19,000 using Black-Scholes model, and were recorded as interest expense. On September 22, 2003, the Registrant prepaid the outstanding principal of, and all $21,842 of accrued interest on, these promissory notes in full.

Note 14 – Subsequent Events

The Company is pursuing an initial public offering of its common stock, yielding proceeds to the Company of a minimum $15 million, before taking into account applicable underwriting discounts, commissions and offering expenses.

F-22

OLpur^™ H₂H^™ Our add-on module can convert
current dialysis machines into
hemodiafiltration-capable systems.

No dealer, salesman or other person has been authorized to give any information or to make representations other than those contained in this prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any sale hereunder will, under any circumstances, create an implication that the information herein is correct as of any time subsequent to its date. This prospectus does not constitute an offer to or solicitation of offers by anyone in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such an offer is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation.

2,500,000 SHARES

COMMON STOCK

PROSPECTUS

            , 2004

You should rely only on the information contained in this document. We have not authorized anyone to provide you with any other information. This document may be used only where it is legal to sell these securities. The information in this document may not be accurate after the date on its cover.

Until             , 200_, all dealers effecting transactions in the registered securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The Registrant estimates that expenses payable by the Registrant in connection with the offering described in this Registration Statement will be as follows:

	Total
SEC registration fee (actual)	$	2,815.93
NASD filing fee		2,512.51
Accounting fees and expenses		150,000.00
American Stock Exchange listing fee		65,000.00
Legal fees and expenses		500,000.00
Printing and engraving expenses		50,000.00
Blue Sky fees and expenses		7,500.00
Directors and officers’ insurance		25,000.00
Transfer agent and registrar fees		5,000.00
Miscellaneous expenses		59,734.56
Total	$	867,563.00

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law (the “DGCL”) permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, that is one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they will have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made if such person will have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought will determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.

The Registrant’s Amended and Restated Certificate of Incorporation provides for indemnification of directors and officers of the Registrant to the fullest extent permitted by the DGCL. The Registrant has obtained liability insurance for each director and officer for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of the Registrant.

Item 15. Recent Sales of Unregistered Securities.

The number of shares of the Registrant’s Common Stock, par value $.001 per share (“Common Stock”), set forth below have been adjusted to reflect the Registrant’s reverse stock split to be completed prior to the effectiveness of this Registration Statement. See the description under the heading “Description of Securities – Reverse Stock Split” in Part I of this Registration Statement.

During March through November 2001, the Registrant issued 940,000 shares of series C convertible preferred stock for an aggregate purchase price of $940,000, to Donald G. Drapkin, Ronald O. Perelman, Eric A. Rose, M.D. and WPPN, LP and certain other existing stockholders who were accredited investors.

II-1

In April 2002, the Registrant sold convertible promissory notes in the principal amount of $250,000 to Donald G. Drapkin, Ronald O. Perelman and Eric A. Rose, M.D., and certain other existing stockholders who were accredited investors. In connection with such transaction, the Registrant granted the purchasers of such convertible notes the right to purchase an aggregate of 125,000 shares of the Registrant’s series A convertible preferred stock, par value $.001 per share (the “Series A Preferred Stock”) at a conversion price of $1.00 per share, exercisable through April 30, 2004. As of April 28, 2004, such convertible notes (except for $50 thereof, which we repaid) were converted into 249,950 shares of our series C convertible preferred stock, and such warrant rights were exercised to purchase an aggregate of 87,500 shares of our series A convertible preferred stock at $1.00 per share.

In June 2002, in settlement of certain amounts owed by the Registrant to Plexus Services Corp., a former supplier of engineering consulting services, the Registrant issued warrants to purchase 170,460 shares of Common Stock at an exercise price of $10.56 per share, which warrants expire in June 2007.

In August 2002, the Registrant entered into a subscription agreement with Lancer Offshore, Inc. The subscription agreement provided that Lancer Offshore, Inc. would purchase, in three installments, (1) $3,000,000 principal amount of secured notes due March 15, 2003 convertible into 340,920 shares of the Registrant’s common stock and (2) warrants to purchase until December 2007 an aggregate of approximately 68,184 shares of Common Stock at an exercise price of approximately $8.80 per share. In accordance with the subscription agreement, the first installment of securities, consisting of $1,500,000 principal amount of the notes and warrants to purchase approximately 34,092 shares of common stock, was sold. However, Lancer Offshore, Inc. failed to fund the remaining installments. Following this failure, the Registrant attempted to resolve our resulting dispute with Lancer Offshore, Inc. by entering into a settlement agreement dated as of January 31, 2003, pursuant to which, among other things: (i) the parties terminated the subscription agreement and gave mutual releases relating to it; (ii) Lancer Offshore, Inc. agreed to surrender to the Registrant all of its warrants except a portion thereof exercisable to purchase 21,308 shares of Common Stock (if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant, as amended); (iii) the warrants that were not surrendered were amended to provide that the exercise price per share and the number of shares issuable upon exercise thereof would not be adjusted as a result of a 0.2248318-for-one reverse stock split of our common stock that was contemplated at such time but never consummated; (iv) the secured convertible note in the principal amount of $1,500,000 referred to above was cancelled; (v) the Registrant agreed to issue to Lancer Offshore, Inc. at a subsequent closing an unsecured note in the same principal amount bearing no interest, not convertible into Common Stock and due on January 31, 2004 or earlier under certain circumstances; and (vi) Lancer Offshore, Inc. made a series of representations concerning its suitability and capabilities as a investor.

Lancer Offshore, Inc. never satisfied the closing conditions under this settlement agreement, and, accordingly, the Registrant never issued the $1,500,000 note that the settlement agreement provided for the Registrant to issue at such closing. The Registrant is the defendant in an action captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v. Nephros, Inc., Case No. 04-CV-20547, pending in the U.S. District Court for the Southern District of Florida (the “Ancillary Proceeding”). That action is ancillary to a proceeding captioned Securities and Exchange Commission v. Michael Lauer, et. al., Case No. 03-CV-80612, also pending in the U.S. District Court for the Southern District of Florida, in which the court has appointed a Receiver to manage Lancer Offshore, Inc. and various related entities (the “Receivership”). In the Ancillary Proceeding, the Receiver for Lancer Offshore, Inc. seeks payment of $1,500,000, together with interest, costs and attorneys’ fees, as well as delivery of a warrant evidencing the right to purchase until December 2007 an aggregate of 75,000 shares of the Registrant’s common stock for $2.50 per share (or 21,308 shares of the Registrant’s common stock for $8.80 per share, if adjusted for the reverse stock split pursuant to the antidilution provisions of such warrant, as amended). The Registrant believes that the Registrant has valid defenses to the Receiver’s claims and the prospective claim mentioned above, and intends to contest them vigorously. Additionally, the Registrant has asserted claims for damages against Lancer Offshore, Inc. that exceed the amount sought in the Ancillary Proceeding by submitting a proof of claim in the Receivership. The Registrant has been discussing a potential settlement of all claims with the Receiver. However, there can be no assurance that these discussions or the outcome of any of these proceedings will be successful.

II-2

Lancer Offshore, Inc. may contend that the 75,000 shares and $2.50 per share exercise terms of their warrant are not subject to adjustment as a result of the Registrant’s currently contemplated 0.2841-for-one reverse stock split. Furthermore, Lancer Offshore, Inc. may claim that the number of shares issuable upon exercise of the warrant should actually be increased to 94,771 and the exercise price proportionally decreased to $1.98 per share, upon consummation of the currently planned reverse stock split to adjust for the difference between the split contemplated in the warrants (0.2248318-for-one) and our currently planned split (0.2841-for-one). The Registrant believes that the plain language of the amended warrant only excepts from adjustment the specific reverse stock split referred to in the Registrant’s registration statement that had been filed with the SEC at such time and was later withdrawn. In addition to the plain language of the amendment, the Registrant believes certain equitable considerations support its position that the warrant is subject to adjustment for the Registrant’s currently planned 0.2841-for-one reverse stock split.

In December 2002, the Registrant issued two promissory notes in the aggregate principal amount of $250,000 to Joseph Giamanco and George Hatsopoulous. Each of these loans was payable on the earlier to occur of (i) 30 days after the consummation of our initial public offering and (ii) December 26, 2003. Each of these loans accrued interest, calculated quarterly in arrears, at a rate of 7% per annum from December 26, 2002 to March 31, 2003, 10% per annum from April 1, 2003 to April 30, 2003, and 15% per annum from May 1, 2003 to December 26, 2003. In connection with these loans, the Registrant issued the holders thereof warrants to purchase an aggregate of 5,549 shares of Common Stock, and paid Hermitage Capital Corporation, as placement agent, an aggregate amount of $25,000. On September 22, 2003, the Registrant prepaid the outstanding principal of, and all $21,842 of accrued interest on, these promissory notes in full.

In June 2003, the Registrant sold convertible bridge notes in the aggregate principal amount of $1,000,000 at face value to twenty-three of its existing, accredited security holders, including Donald G. Drapkin, Ronald O. Perelman, BW Employee Holdings LLC, and WPPN, LP. The outstanding principal amount of such convertible bridge notes, together with interest at the rate of 6% per annum, would become due and payable on January 26, 2004. As of September 11, 2003, each of the holders of such bridge notes converted its bridge note into shares of our series D convertible preferred stock at a conversion price equal to the liquidation preference of the series D convertible preferred stock, in accordance with the terms thereof. Pursuant to the terms of the bridge notes, in order to convert each holder’s bridge note, such holder was required to commit to purchase, for the aggregate liquidation preference thereof, a number of additional shares of series D convertible preferred stock having an aggregate liquidation preference equal to any amount, at such holder’s option, between 9 and 11 times the principal amount of the bridge note being converted. The purchase of the additional shares of series D convertible preferred stock occurred in three installments, with 3,993,793 shares purchased at the time of conversion on September 11, 2003, another 3,000,000 shares purchased as of December 1, 2003, and the remaining 3,811,538 shares purchased as of March 3, 2004. See “Certain Transactions – Bridge Financing.”

The issuances of the above securities were considered to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in these transactions. All recipients either received adequate information about us or had access to such information.

II-3

Item 16. Exhibits and Financial Statement Schedules.

EXHIBIT INDEX

1.1*	Form of Underwriting Agreement. (1)
3.1*	Amended and Restated Certificate of Incorporation of the Registrant.
3.2*	Amended and Restated By-laws of the Registrant.
4.1	Specimen of Common Stock Certificate of the Registrant.
4.2*	Form of Underwriter’s Warrant.
4.3	Form of Convertible Promissory Note due August 7, 2002.
4.4	Form of Senior Convertible Bridge Notes due 2004.
4.5	Class C Warrant for the Purchase of Shares of Common Stock, dated September 22, 2003, issued to Joseph Giamanco by the Registrant.
4.6	Class C Warrant for the Purchase of Shares of Common Stock, dated September 22, 2003, issued to George Hatsopoulous by the Registrant.
4.7	Stock Purchase Warrant, dated June 19, 2002, issued to Plexus Services Corp. by the Registrant.
4.8	Class A Warrant for the Purchase of Shares of Common Stock, dated August 5, 2002, issued to Lancer Offshore, Inc.
5.1*	Opinion of Kramer, Levin, Naftalis & Frankel LLP.
10.1	Amended and Restated 2000 Nephros Equity Incentive Plan. (1)
10.2	2004 Nephros Stock Incentive Plan. (1)
10.3	Form of Subscription Agreement dated as of June 1997 between the Registrant and each Purchaser of Series A Convertible Preferred Stock.
10.4*	Amendment and Restatement to Registration Rights Agreement, dated as of May 17, 2000 and amended and restated as of June 26, 2003, between the Registrant and the holders of a majority of Registrable Shares (as defined therein).
10.5	Promissory Note dated as of December 26, 2002 issued to Joseph Giamanco by the Registrant.
10.6	Promissory Note dated as of December 26, 2002 issued to George Hatsopoulous by the Registrant.
10.7	Employment Agreement dated as of November 21, 2002 between Norman J. Barta and the Registrant. (1)
10.8	Amendment to Employment Agreement dated as of March 17, 2003 between Norman J. Barta and the Registrant. (1)
10.9	Amendment to Employment Agreement dated as of May 31, 2004 between Norman J. Barta and the Registrant. (1)
10.10	Form of Employee Patent and Confidential Information Agreement.
10.11	Form of Employee Confidentiality Agreement.
10.12	Settlement Agreement dated June 19, 2002 between Plexus Services Corp. and the Registrant
10.13	Settlement Agreement dated as of January 31, 2003 between Lancer Offshore, Inc. and the Registrant.
10.14	Settlement Agreement dated as of February 13, 2003 between Hermitage Capital Corporation and the Registrant.

II-4

10.15	License Agreement dated as of July 1, 2003 between the Trustees of Columbia University in the City of New York and the Registrant.
10.16	Form of Transmittal Letter Agreement, dated as of April 28, 2004, between each holder of convertible promissory notes due August 7, 2002 and the Registrant.
10.17	Commitment Agreement between Ronald Perelman and the Registrant, dated as of May 30, 2003.
10.18	Form of Subscription Agreement between the Registrant and each purchaser of Senior Convertible Bridge Notes due 2004.
10.19	Supply Agreement between Nephros, Inc. and Membrana GmbH, dated as of December 17, 2003. (2)
10.20	Employment Agreement dated as of June 16, 2004 between Marc L. Panoff and the Registrant. (1)
10.21	Manufacturing and Supply Agreement between Nephros, Inc. and Medica s.r.l., dated as of May 12, 2003. (2)
10.22	License Agreement dated as of July 1, 2004 between the Trustees of Columbia University in the City of New York and the Registrant.
21.1	Subsidiaries of Registrant.
23.1	Consent of Grant Thornton LLP.
23.2*	Consent of Kramer, Levin, Naftalis & Frankel LLP (included in its opinion filed as Exhibit 5.1 hereto).
23.3*	Consent of Darby & Darby P.C.
24.1**	Power of Attorney.
99.1	Consent of Director Nominee (Howard Davis).
99.2	Consent of Director Nominee (William J. Fox).

* To be filed by amendment.

** Previously filed.

(1) Management contract or compensatory plan arrangement.

(2) Portions omitted pursuant to a request for confidential treatment.

Item 17. Undertakings.

The Registrant hereby undertakes to provide the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-5

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on July 20, 2004.

By:	/S/    NORMAN J. BARTA
	Norman J. Barta President and Chief Executive Officer

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/S/    NORMAN J. BARTA Norman J. Barta	President, Chief Executive Officer and Director	July 20, 2004
/S/    MARC L. PANOFF Marc L. Panoff	Chief Financial Officer	July 20, 2004
/S/    ERIC A. ROSE, M.D.* Eric A. Rose, M.D.	Chairman of the Board of Directors and Director	July 20, 2004
/S/    LAWRENCE J. CENTELLA* Lawrence J. Centella	Director	July 20, 2004
/S/    DONALD G. DRAPKIN* Donald G. Drapkin	Director	July 20, 2004
/S/    W. TOWNSEND ZIEBOLD, JR.* W. Townsend Ziebold, Jr.	Director	July 20, 2004

*By:	/S/    NORMAN J. BARTA
	Norman J. Barta Attorney-in-Fact

II-7

EXHIBIT INDEX

1.1*	Form of Underwriting Agreement.
3.1*	Amended and Restated Certificate of Incorporation of the Registrant.
3.2*	Amended and Restated By-laws of the Registrant.
4.1	Specimen of Common Stock Certificate of the Registrant.
4.2*	Form of Underwriter’s Warrant.
4.3	Form of Convertible Promissory Note due August 7, 2002.
4.4	Form of Senior Convertible Bridge Notes due 2004.
4.5	Class C Warrant for the Purchase of Shares of Common Stock, dated September 22, 2003, issued to Joseph Giamanco by the Registrant.
4.6	Class C Warrant for the Purchase of Shares of Common Stock, dated September 22, 2003, issued to George Hatsopoulous by the Registrant.
4.7	Stock Purchase Warrant, dated June 19, 2002, issued to Plexus Services Corp. by the Registrant.
4.8	Class A Warrant for the Purchase of Shares of Common Stock, dated August 5, 2002, issued to Lancer Offshore, Inc.
5.1*	Opinion of Kramer, Levin, Naftalis & Frankel LLP.
10.1	Amended and Restated 2000 Nephros Equity Incentive Plan. (1)
10.2	2004 Nephros Stock Incentive Plan. (1)
10.3	Form of Subscription Agreement dated as of June 1997 between the Registrant and each Purchaser of Series A Convertible Preferred Stock.
10.4*	Amendment and Restatement to Registration Rights Agreement, dated as of May 17, 2000 and amended and restated as of June 26, 2003, between the Registrant and the holders of a majority of Registrable Shares (as defined therein).
10.5	Promissory Note dated as of December 26, 2002 issued to Joseph Giamanco by the Registrant.
10.6	Promissory Note dated as of December 26, 2002 issued to George Hatsopoulous by the Registrant.
10.7	Employment Agreement dated as of November 21, 2002 between Norman J. Barta and the Registrant. (1)
10.8	Amendment to Employment Agreement dated as of March 17, 2003 between Norman J. Barta and the Registrant. (1)
10.9	Amendment to Employment Agreement dated as of May 31, 2004 between Norman J. Barta and the Registrant. (1)
10.10	Form of Employee Patent and Confidential Information Agreement.
10.11	Form of Employee Confidentiality Agreement.
10.12	Settlement Agreement dated June 19, 2002 between Plexus Services Corp. and the Registrant.
10.13	Settlement Agreement dated as of January 31, 2003 between Lancer Offshore, Inc. and the Registrant.
10.14	Settlement Agreement dated as of February 13, 2003 between Hermitage Capital Corporation and the Registrant.
10.15	License Agreement dated as of July 1, 2003 between the Trustees of Columbia University in the City of New York and the Registrant.

II-8

10.16	Form of Transmittal Letter Agreement, dated as of April 28, 2004, between each holder of convertible promissory notes due August 7, 2002 and the Registrant.
10.17	Commitment Agreement between Ronald Perelman and the Registrant, dated as of May 30, 2003.
10.18	Form of Subscription Agreement between the Registrant and each purchaser of Senior Convertible Bridge Notes due 2004.
10.19	Supply Agreement between Nephros, Inc. and Membrana GmbH, dated as of December 17, 2003. (2)
10.20	Employment Agreement dated as of June 16, 2004 between Marc L. Panoff and the Registrant. (1)
10.21	Manufacturing and Supply Agreement between Nephros, Inc. and Medica s.r.l., dated as of May 12, 2003. (2)
10.22	License Agreement dated as of July 1, 2004 between the Trustees of Columbia University in the City of New York and the Registrant.
21.1	Subsidiaries of Registrant.
23.1	Consent of Grant Thornton LLP.
23.2*	Consent of Kramer, Levin, Naftalis & Frankel LLP (included in its opinion filed as Exhibit 5.1 hereto).
23.3*	Consent of Darby & Darby P.C.
24.1**	Power of Attorney.
99.1	Consent of Director Nominee (Howard Davis).
99.2	Consent of Director Nominee (William J. Fox).

* To be filed by amendment.

** Previously filed.

(1) Management contract or compensatory plan arrangement.

(2) Portions omitted pursuant to a request for confidential treatment.

II-9

EX-4.1

Exhibit 4.1

EX-4.3

                                                                     Exhibit 4.3

                                    [FORM OF]

                           CONVERTIBLE PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND IT MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS IT HAS BEEN SO REGISTERED OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.

                                  NEPHROS, INC.
                           6% NOTE DUE AUGUST 7, 2002

$                                                                  April 8, 2002
  ---------

     NEPHROS, INC. (the "Company"), for value received, hereby promises to pay
to               , or permitted assigns (the "Payee"), on August 7, 2002, the
   --------------
principal sum of             thousand dollars ($           ), together with
                 -----------                    -----------
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid principal amount hereof at the rate of six percent (6%) per annum,
compounded semi-annually, from the date hereof.

1.   Prepayment

     The Company shall have the right to prepay all or any part of the principal
amount of this Note, together with accrued interest thereon through the date of
prepayment (except as provided in the following sentence), without penalty,
either (x) in cash or (y) by delivery to the Payee of the number of shares of
capital stock of the Company into which the principal amount of this Note to be
so prepaid would then be convertible as provided Section 3 below. To the extent
that the principal amount of this Note is so prepaid within 120 days after the
date hereof, no interest on the principal amount so prepaid shall be due or
payable. In the event that the Company determines to prepay this Note in cash,
it shall provide the Payee with at least 10 days advance notice of such
prepayment in order to afford the Payee the opportunity, prior to such
prepayment, to convert this Note into capital stock of the Company pursuant to
Section 3 below.

2.   Events of Default

     Any of the following shall constitute an Event of Default hereunder ("Event
of Default"):

          (a) the Company shall fail to make any payment of principal or
interest when due hereunder;

          (b) the Company shall become insolvent or admits its inability to pay
its debts as they become due, or any proceeding shall be instituted by the
Company seeking relief on its behalf as debtor, or to adjudicate it a bankrupt
or insolvent, or seeking liquidation, reorganization, arrangement, adjustment or
composition or other relief with respect to it or its



debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors or any similar law now or hereafter in effect, or seeking
appointment of a receiver, trustee, liquidator, custodian or other similar
official for it or for any part of its property, or the Company shall consent by
answer or otherwise to any such relief or to the institution of any such
proceeding against it;

          (c) any proceeding is instituted against the Company seeking to have
an order for relief entered against it as debtor or to adjudicate it a bankrupt
or insolvent, or seeking liquidation, reorganization, arrangement, adjustment or
composition or other relief with respect to it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors or any
similar law now or hereafter in effect, or seeking appointment of a receiver,
trustee, custodian, liquidator or other similar official for it or for any part
of its property which either (i) results in any such entry of an order for
relief, adjudication of bankruptcy or insolvency or issuance or entry of any
other order having a similar effect or (ii) remains undismissed for a period of
forty-five (45) days;

          (d) a receiver, trustee, liquidator, custodian or other similar
official is appointed for any part of the Company's assets; or

          (e) any assignment is made for the benefit of the Company's creditors.

     The entire unpaid principal balance of this Note, together with interest
accrued thereon, shall become immediately due and payable (i) automatically upon
the occurrence of any Event of Default described in clauses (b) through (e)
above, or (ii) immediately upon written notice from the Payee to the Company
upon the occurrence of any Event of Default described in clause (a) above.

3.   Conversion

     This Note shall be convertible on the terms set forth below into shares of
the Company's Series C Convertible Preferred Stock, $.001 par value, or, at the
Company's option, into shares of the Company's Series A Convertible Preferred
Stock or into shares of a new class or series of the Company's capital stock
having rights and preferences substantially equivalent to those of the Series C
or Series A Convertible Preferred Stock (such Series C or Series A Convertible
Preferred Stock or substantially equivalent capital stock of the Company, the
"Conversion Stock").

          (a) The Company shall use its reasonable efforts in good faith to take
such corporate and other action as may be required to authorize and permit the
issuance and delivery of the Conversion Stock upon prepayment or conversion of
this Note in accordance with its terms, including, without limitation, the
amendment of the Company's Certificate of Incorporation (and, to the extent
applicable, the Certificate of Designation, Preferences and Rights of the Series
C and/or Series A Convertible Preferred Stock). After the completion of such
action, the Payee shall have the right, at its option, at any time and from time
to time, to convert all or any part of this Note into the number of fully paid
and nonassessable shares of Conversion Stock of the Company equal to the
quotient obtained by dividing (A) the principal amount of the Note then being
converted by (B) the Conversion Price (as defined below), as last

                                      -2-



adjusted and then in effect. The conversion price per share at which shares of
Conversion Stock shall be issuable upon conversion of this Note shall be $1.00
(in each case, the "Conversion Price"), as adjusted pursuant to paragraph (c)
below. The Payee may exercise the conversion right pursuant to this paragraph
(a) by delivering to the Company the Note to be converted, accompanied by
written notice stating that the Payee elects to convert all or a specified
portion of the principal amount of the Note and stating the name or names (with
address) in which the certificate or certificates for the shares of Conversion
Stock are to be issued. Conversion shall be deemed to have been effected on the
date when such delivery is made (the "Conversion Date").

          (b) As promptly as practicable after the conversion of any portion of
this Note into Conversion Stock under paragraph (a) above, the Company shall
issue and deliver to or upon the written order of the Payee, to the place
designated by the Payee, a certificate or certificates for the number of full
shares of Conversion Stock to which the Payee is entitled, and a cash amount in
respect of any fractional interest in a share of Conversion Stock equal to the
product of $1.00 multiplied by such fractional interest. The person in whose
name the certificate or certificates for Conversion Stock are to be issued shall
be deemed to have become a stockholder of record on the applicable Conversion
Date. Upon conversion of only a portion of this Note surrendered for conversion,
the Company shall issue and deliver to or upon the written order of the Payee,
at the expense of the Company, a new Note representing the unconverted portion
of the principal amount hereof.

          (c) The Conversion Price shall be subject to adjustment from time to
time as follows:

               (i) If the Company shall, at any time or from time to time after
     the date hereof, issue any shares of its Series C Convertible Preferred
     Stock (or other class or series of its capital stock then constituting
     Conversion Stock) without consideration or for a consideration per share
     less than the Conversion Price in effect immediately prior to the issuance
     of such Conversion Stock, then such Conversion Price, as in effect
     immediately prior to each such issuance, shall forthwith be lowered to a
     price equal to the quotient obtained by dividing:

                    (A) an amount equal to the sum of (x) the total number of
               shares of Conversion Stock outstanding on a fully diluted basis
               immediately prior to such issuance, multiplied by the Conversion
               Price in effect immediately prior to such issuance, and (y) the
               consideration (as reasonably determined by the Board of Directors
               of the Company in the case of any consideration other than cash)
               received by the Company upon such issuance; by

                    (B) the total number of shares of Conversion Stock
               outstanding on a fully diluted basis immediately after the
               issuance of such Conversion Stock.

               (ii) In the event of any capital reorganization of the Company,
     any reclassification of the stock of the Company, any stock dividend or
     subdivision, split-up or combination of shares, or any consolidation or
     merger of the Company, this Note shall thereafter be convertible into the
     kind and number of shares of stock or other securities or property of the
     Company or of the company resulting from such consolidation or

                                      -3-



     surviving such merger to which the holder of the number of shares of
     Conversion Stock deliverable (immediately prior to the time of such
     reorganization, reclassification, dividend, subdivision, split-up,
     combination of shares, consolidation or merger) upon conversion of this
     Note would have been entitled upon such event.

4.   Warrants

     Subject to completion of such corporate and other action as may be required
therefor, which the Company shall use its reasonable efforts in good faith to
take within 120 days after the date hereof, the Company shall issue and deliver
to or upon the written order of the Payee warrants ("Warrants") to purchase for
cash an additional     shares of Conversion Stock (that is, an amount equal to
                   ---
50% of the number of shares of Conversion Stock into which this Note shall be
convertible) at a warrant exercise price per share equal to the Conversion Price
as adjusted from time to time pursuant to paragraph 3(c).

5.   Reservation of Shares

     The Company shall at all times keep reserved, free from preemptive rights,
out of its authorized but unissued shares of capital stock, (A) solely for the
purpose of effecting the conversion or prepayment of this Note and exercise of
the Warrants, sufficient shares of Conversion Stock to provide for the
conversion or prepayment of the outstanding principal amount of this Note and
exercise of the Warrants, and (B) solely for the purpose of effecting the
conversion of the Conversion Stock by its terms into shares of the Company's
Common Stock, $.001 par value ("Common Stock"), sufficient shares of Common
Stock to provide for the conversion of the Conversion Stock then outstanding or
issuable upon conversion or prepayment of this Note and exercise of the
Warrants.

6.   Miscellaneous

     This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of New York applicable to
contracts executed and fully performed within the State of New York.

     All notices and other communications provided for under or otherwise made
in connection with this Note shall be in writing (including telegraphic, telex,
and facsimile transmissions) and mailed or transmitted or delivered, (i) if to
the Company, at the Company's address at 3960 Broadway, New York, NY 10032,
Attention: Norman Barta, or at such other address as shall be designated by the
Company by written notice to the Payee from time to time, and (ii) if to the
Payee, at the Payee's address at                                     , Personal
                                 ------------------------------------
& Confidential, or at such other address as shall be designated by the Payee by
written notice to the Company from time to time. Except as otherwise provided in
this Note, all such notices and communications shall be effective when deposited
in the mails or delivered to the telegraph company, or sent, answer back
received or confirmed, by telex or facsimile transmission, respectively,
addressed as aforesaid.

     No failure or delay on the part of the Payee in exercising any right,
power, privilege or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power, privilege or
remedy preclude any other or further exercise thereof or the

                                      -4-



exercise of any other right, power, privilege or remedy hereunder. The rights
and remedies provided herein are cumulative, and are not exclusive of any other
rights, powers, privileges or remedies, now or hereafter existing, at law or in
equity or otherwise.

     No amendment, modification or waiver of any provision of this Note nor
consent to any departure by the Company therefrom shall be effective unless the
same shall be in writing and signed by the Payee, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

     This Note shall be binding upon the Company and its legal representatives,
successors and assigns and the terms hereof shall inure to the benefit of the
Payee and his legal representatives, successors and assigns.

     The provisions of this Note are severable, and if any provision shall be
held invalid or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall not in any manner affect such provision in
any other jurisdiction or any other provision of this Note in any jurisdiction.

     This Note sets forth the entire agreement of the Company and the Payee with
respect to this Note and may be modified only by a written instrument executed
by the Company and the Payee.

     The Company agrees that in any action or proceeding brought on or in
connection with this Note (i) the Supreme Court of the State of New York for the
County of New York, or (in a case involving diversity of citizenship) the United
States District Court of the Southern District of New York, shall have
jurisdiction of any such action or proceeding, to which jurisdiction the Company
irrevocably submits, irrevocably waiving any objection to the laying of venue in
any such court and further irrevocable waiving any claim that any such action or
proceeding in any such court is in an inconvenient forum, (ii) service of any
summons and complaint or other process in any such action or proceeding may be
made by the Payee upon the Company by registered or certified mail directed to
the Company at its address referenced above, the Company hereby waiving personal
service thereof, and (iii) within thirty (30) days after such mailing the
Company shall appear or answer to any summons and complaint or other process,
and should the Company fail to appear to answer within said thirty (30) day
period, it shall be deemed in default and judgment may be entered by the Payee
against the Company for the amount as demanded in any summons or complaint or
other process so served.

     The Company agrees to pay all expenses reasonably incurred by the Payee in
connection with the collection and enforcement of this Note, including, without
limitation, reasonable attorney's fees and disbursements.

     The Company hereby waives presentment, demand for payment, notice of
dishonor, notice of protest, and protest, and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this instrument. This Note may not be negotiated, endorsed, assigned,
transferred, hypothecated or pledged except with the prior written consent of
the Company (which consent shall not unreasonably be withheld). In the event

                                      -5-



that this Note is negotiated, endorsed, assigned, transferred, hypothecated
and/or pledged, the obligations of the Company hereunder shall continue in full
force and effect.

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed as of April 8, 2002.

                                         NEPHROS, INC.


                                         By:
                                             -----------------------------------

                                       -6-

EX-4.4

                                                                     Exhibit 4.4

THIS NOTE AND THE SECURITIES ISSUABLE UPON EXERCISE OF CONVERSION AND PURCHASE
RIGHTS HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF: (i) A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT; OR
(ii) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE, OR ISSUABLE UPON EXERCISE OF CONVERSION AND
PURCHASE RIGHTS HEREUNDER, AND THE RIGHTS OF THE HOLDER OF SUCH SECURITIES, IF
ANY, IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF MAY 17, 2000 AMONG NEPHROS,
INC. AND THE HOLDERS OF OUTSTANDING CAPITAL STOCK OF SUCH COMPANY. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF NEPHROS, INC.

                                  NEPHROS, INC.

                                    [FORM OF]

                                                                         No.
                                                                             ---
                     Senior Convertible Bridge Note due 2004

$
  -----------
                                                                   June 26, 2003

          Nephros, Inc., a Delaware corporation, (the "Company"), for value
received, hereby promises to pay to                         (the "Holder"), or
                                    ---------- ------------
registered assigns, the principal amount of             ($         ), 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 Nephros, Inc. Senior Convertible Bridge Notes
due 2004 (individually a "Note" and collectively the "Notes") in an aggregate
principal amount of one million dollars ($1,000,000.00). Certain capitalized
terms used herein are defined in Section 8.



SECTION 1. Interest.

          The Company shall pay interest in arrears on the Maturity Date.
Interest on this Note will accrue from the date of its issuance set forth above.

SECTION 2. Prepayment.

          Upon 20 days prior written notice to the Holder, this Note (including
interest accrued on the principal hereof) may be prepaid by the Company, at any
time, in whole but not in part, without penalty or premium if the Equity
Financing Option is not exercised by the Committed Investor within 10 days after
the Company notifies the Committed Investor that it has obtained a CE mark in
Europe on its initial product.

SECTION 3. Conversion and Purchase of Extra Equity.

          (a) Conversion and Purchase Right. Promptly after obtaining a CE mark
in Europe on its initial product, the Company shall give the Holder notice
thereof (the "Trigger Notice"). If the Holder is a Qualified Person at such
time, the Holder shall have 10 days from the Trigger Notice in which it may
irrevocably elect (subject to the condition precedent that the Committed
Investor exercises the Equity Financing Option) to convert this entire Note and
all accrued interest hereon, in whole but not in part, into the number of whole
shares of New Preferred that have an aggregate liquidation preference equal to
the principal amount of this Note together with any accrued but unpaid interest
thereon (subject to Section 4); provided that the Holder simultaneously elects
to purchase (which right the Holder is hereby granted, contingent upon the
simultaneous conversion of this Note), for the aggregate liquidation preference
thereof, a number of additional shares of New Preferred (the "Extra Equity")
having an aggregate liquidation preference equal to any amount, at the Holder's
option, between 9 and 11 times the principal amount of this Note (such amount,
the "Extra Equity Subscription Amount").

          (b) Procedures. (i) Any Holder of a Note desiring to convert such Note
into New Preferred 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 (the "Notice of
Conversion and Purchase"), in the form attached hereto as Annex I, to the
Company that the Holder elects so to convert such Note and that the Holder
elects to purchase the Extra Equity and specifying the Extra Equity Subscription
Amount, which must be at least 9 times, and no more than 11 times, the principal
amount of this Note, accompanied by payment by cash or certified check of the
portion of the Extra Equity Subscription Amount equal to 4 times the principal
amount of this Note (the "First Closing Purchase Price") and specifying the name
or names (with address) in which a certificate or certificates evidencing shares
of New Preferred are to be issued. On the last business day of the calendar
month that is two months after the date of the Notice of Conversion and Purchase
(the "Second Closing Date"), the Holder shall deliver to the Company payment, by
cash or certified check, of a portion of the Extra Equity Subscription Amount
that is equal to 3 times the principal amount of this Note (the "Second Closing
Purchase Price"). On the last business day of the calendar month that is three
months after the Second Closing Date (the "Third Closing Date"), the Holder
shall deliver to the Company payment, by cash or certified check, of the unpaid
portion of the Extra Equity Subscription Amount (which, depending on the total
Extra

                                      -2-



Equity Subscription Amount elected by such Holder, will be at least 2 times, and
no more than 4 times, the principal amount of this Note) (the "Third Closing
Purchase Price").

               (ii) The Company need not deem a Notice of Conversion and
Purchase to be received unless the Holder complies with all the provisions
hereof (including, without limitation, payment of the Extra Equity Subscription
Amount). The Company will make a notation of the date that a Notice of
Conversion and Purchase is received, which date of receipt shall be deemed to be
the date of receipt for purposes hereof.

               (iii) The Company shall, as soon as practicable after such
surrender of any Note accompanied by a Notice of Conversion and Purchase and
compliance with any other conditions herein contained (including, without
limitation, payment of the First Closing Purchase Price), deliver to the person
for whose account this Note was so surrendered certificates evidencing the
number of full shares of New Preferred having an aggregate liquidation
preference equal to the First Closing Purchase Price, subject to Section 4. On
the Second Closing Date, upon compliance with the conditions herein contained
(including, without limitation, payment of the Second Closing Purchase Price),
the Company shall deliver to the person for whose account this Note was
surrendered, certificates evidencing the number of full shares of New Preferred
having an aggregate liquidation preference equal to the Second Closing Purchase
Price, subject to Section 4. On the Third Closing Date, upon compliance with the
conditions herein contained (including, without limitation, payment of the Third
Closing Purchase Price), the Company shall deliver to the person for whose
account this Note was surrendered certificates evidencing the number of full
shares of New Preferred having an aggregate liquidation preference equal to the
Second Closing Purchase Price, subject to Section 4.

               (iv) Subject to the following provisions of this Paragraph
3(b)(iv), such conversion and such purchases shall be deemed to have been made
as of the dates of such surrender of the Note and payment of the respective
portions of the Extra Equity Subscription Amount, and the person or persons
entitled to receive the New Preferred deliverable upon such conversion and
purchases shall be treated for all purposes as the record holder or holders of
such New Preferred on such respective dates, and the Note shall no longer be
deemed outstanding and all rights whatsoever in respect hereof (including the
right to receive interest hereon) shall terminate except the right to receive
the number of full shares of New Preferred to which such person shall be
entitled hereunder; provided, however, that the Holder's obligations to purchase
New Preferred on the Second Closing Date and the Third Closing Date shall
survive the conversion of this Note; and provided, further, that the Company
shall not be required to convert any Note or sell any New Preferred while the
stock transfer books of the Company are closed for any purpose, but the
surrender of a Note for conversion and the tender of any of the Extra Equity
Subscription Amount during any period while such books are so closed shall
become effective for conversion and/or purchase immediately upon the reopening
of such books as if such surrender and/or tender had been made on the date of
such reopening.

          (c) Reservation of Shares; Transfer Taxes; Etc. The Company shall at
all times beginning promptly after the exercise of the Equity Financing Option
reserve and keep available, out of its authorized and unissued shares of New
Preferred, solely for the purpose of effecting the conversion of the Notes, such
number of shares of its New Preferred free of

                                      -3-



preemptive rights as shall be sufficient to effect the conversion of all Notes
from time to time outstanding.

          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 New Preferred 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 New Preferred (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.

SECTION 4. Fractional Shares.

          No fractional shares or scrip representing fractional shares of New
Preferred shall be issued upon conversion of this Note and exercise of the
purchase rights hereunder. If more than one certificate evidencing Notes shall
be surrendered for conversion and exercise at one time by the same Holder, the
number of full shares issuable upon conversion and exercise thereof shall be
computed on the basis of the aggregate principal amount and Extra Equity
Subscription Amount of the Notes so surrendered. Instead of any fractional share
of New Preferred which would otherwise be issuable at a given time upon
conversion of this Note (or of such aggregate number of Notes) and exercise of
the purchase rights hereunder (or thereunder), the Company may elect, in its
sole discretion, independently for each Holder, whether such number of shares of
New Preferred will be rounded to the nearest whole share (with a .5 of a share
rounded upward) or whether such Holder will be given cash, in lieu of any
fractional share, in an amount equal to the same fraction of the liquidation
preference per share of New Preferred.

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;

          (b) the Company, pursuant to or within the meaning of any Bankruptcy
Law:

               (i) commences a voluntary case,

               (ii) consents to the entry of an order for relief against it in
an involuntary case,

               (iii) consents to the appointment of a Custodian of it or for all
or substantially all of its property, and such Custodian is not discharged
within 30 days, or

               (iv) makes a general assignment for the benefit of its creditors;

          (c) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that remains unstayed and in effect for 60 consecutive days
and that:

                                      -4-



               (i) is for relief in any involuntary case against the Company,

               (ii) appoints a Custodian of the Company or for all or
substantially all of the property of the Company, or

               (iii) orders the liquidation of the Company.

          The term "Bankruptcy Law" means Title 11 of the U.S. Code or any
similar federal, foreign or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, examiner or
similar official under any Bankruptcy Law.

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 aggregate 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 (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 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) 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.

          (d) In any suit for the enforcement of any right or remedy under this
Note, 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.

                                      -5-



SECTION 8. Certain Definitions.

          (a) "Committed Investor" means Ronald Perelman.

          (b) "Commitment Agreement" means the Commitment Agreement among the
Company and the Committed Investor, dated as of May 30, 2003.

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

          (d) The "Equity Financing" means the conversion of Notes into New
Preferred and the sale by the Company, pursuant to the exercise of certain
purchase rights under the Notes, of a minimum of $9.00 and a maximum of $11.00
of New Preferred for every $1.00 principal amount of Bridge Notes being
converted, in each case, at a conversion or purchase price per share equal to
the liquidation preference per share of the New Preferred.

          (e) "Equity Financing Option" means the right but not the obligation
of the Committed Investor, pursuant to the Commitment Agreement, to elect to
proceed with the Equity Financing. The Equity Financing Option is exercisable at
any time prior to the earlier of (i) 10 days after the Company notifies the
Committed Investor that it has obtained a CE mark in Europe on its initial
product and (ii) January 15, 2004.

          (f) "Maturity Date" means January 26, 2004.

          (g) "New Preferred" means the Series D Convertible Preferred Stock of
the Company, par value $.001 per share.

          (h) "Qualified Person" means an "accredited investor," within the
meaning of Regulation D under the Securities Act, that will acquire any
securities obtainable directly or indirectly upon conversion and exercise of
this Note for its own account for investment and not with a view to, or for sale
in connection with, any distribution thereof in violation of the Securities Act.

          (i) "Securities Act" means the United States Securities Act of 1933,
as amended.

SECTION 9. Miscellaneous.

          (a) This Note may be amended only by mutual written agreement of the
Company and the Majority Noteholders, and 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,
only if the Company has obtained the written consent or waiver of the Holder or
the Majority Noteholders. Any amendments approved in compliance with this
Section 9 shall bind the Holder's successors and assigns, as well as executors
and other personal representatives.

          (b) 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

                                      -6-



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.

          (c) 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.

          (d) Successors and Assigns. 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.

          (e) 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.

                                      -7-



          IN WITNESS WHEREOF, this Senior Convertible Bridge Note due 2004 has
been executed and delivered on the date first above written by the duly
authorized representative of the Company.

                                         NEPHROS, INC.


                                         By:
                                             -----------------------------------
                                             Name: Norman J. Barta
                                             Title: President & CEO



                                                                         ANNEX I

                        NOTICE OF CONVERSION AND PURCHASE

To: Nephros, Inc.

          The undersigned, pursuant to the provisions set forth in the Senior
Convertible Bridge Note due 2004, in the principal amount of $
                                                              ----------------
standing in the name of the undersigned (the "Note"), hereby irrevocably elects
both:

          (i) to convert the entire Note and all accrued interest hereon into
the number of whole shares of New Preferred that have an aggregate liquidation
preference equal to the principal amount of the Note together with any accrued
but unpaid interest thereon; and

          (ii) to purchase $               (which amount (the "Extra Equity
                            --------------
Subscription Amount") is at least $            , and no more than
                                   ------------
$               ) aggregate liquidation preference of additional New Preferred
 ---------------
at a purchase price equal to the liquidation preference thereof.

          Enclosed herewith is $             in cash or a certified check for
                                ------------
payment of the First Closing Purchase Price. On         , 2003 [Second Closing
                                                ----- --
Date], the undersigned shall deliver to the Company payment of the Second
Closing Purchase Price, by cash or certified check, of $            . On
                                                        ------------     -----
  , 2003 [Third Closing Date], the undersigned shall deliver to the Company
- --
payment, by cash or certified check, of the then-unpaid portion of the Extra
Equity Subscription Amount that the undersigned has selected in clause (ii),
above.

          The certificate or certificates evidencing shares of New Preferred to
be issued upon conversion of the Note and the purchase of additional shares of
New Preferred in accordance with the terms of the Note should be registered in
the following name(s) (if no information is provided, the New Preferred will be
issued in the name of the registered holder of the Note:

                                           -------------------------------------

          ------------------------------   -------------------------------------

          ------------------------------   -------------------------------------
          [name(s)]                        [address(es)]

          The undersigned represents that it understands that any securities
obtainable upon the conversion and purchase described above have not been
registered for sale under Federal or state securities laws and are being offered
and sold to the undersigned pursuant to one or more exemptions from the
registration requirements of such securities laws. The undersigned is an
"accredited investor" within the meaning of Regulation D under the Securities
Act. In the absence of an effective registration of such securities or an
exemption therefrom, any certificates for such securities shall bear a legend in
substantially the form set forth on the first page of the Note. The undersigned
understands that it must bear the economic risk of its investment in the Company
for an indefinite period of time, as such securities have not been registered
under Federal or state securities laws and therefore cannot be sold unless
subsequently registered under such laws, unless as exemption from such
registration is available.

          Capitalized terms used but not defined herein have the respective
meanings ascribed to them in the Note.

                                           -------------------------------------

                                           Dated:
                                                  ------------------------------

      (Before Signing, Please Make Sure You Have Filled In A Dollar Amount
                           In Paragraph (ii), Above.)

EX-4.5

                                                                     EXHIBIT 4.5

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

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

                                  NEPHROS, INC.

                                     Form of

                  Class C Warrant for the Purchase of Shares of
                                  Common Stock

No. C-1                                                       September 22, 2003

                FOR VALUE RECEIVED, NEPHROS, INC., a Delaware corporation (the
"Company"), hereby certifies that Joe Giamanco or his registered assigns (the
"Holder") is entitled to purchase from the Company, subject to the provisions of
this Warrant (the "Warrant"), at any time on or after the date hereof (the
"Initial Exercise Date"), and prior to 11:59 P.M., New York City time, on
September 11, 2006 (the "Termination Date"), 15,627 fully paid and
non-assessable shares of the Common Stock, $.001 par value, of the Company
("Common Stock"), at an exercise price of $2.50 per share of Common Stock for an
aggregate exercise price of thirty-nine thousand sixty-seven dollars and fifty
cents ($39,067.50) (the aggregate purchase price payable for the Warrant Shares
hereunder is hereinafter sometimes referred to as the "Aggregate Exercise
Price"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the price to be paid for each share of Common Stock are subject
to possible adjustment from time to time as hereinafter set forth. The shares of
Common Stock or other securities or property deliverable upon such exercise as
adjusted from time to time is hereinafter sometimes referred to as the "Warrant
Shares." The exercise price of a share of Common Stock in effect at any time and
as adjusted from time to time is hereinafter sometimes referred to as the "Per
Share Exercise Price." The Per Share Exercise Price is



subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall also be adjusted, by dividing the
Aggregate Exercise Price by the Per Share Exercise Price in effect immediately
after such adjustment. The Aggregate Exercise Price is not subject to adjustment
except to the extent of any partial exercise of this Warrant. This Warrant may
constitute one in a series of warrants (the "Class C Warrants") which includes
this Warrant and any other Class C Warrant for the Purchase of Shares of Common
Stock of the Company, of like tenor hereto.

                1.      Exercise of Warrant.

                (a)     This Warrant may be exercised in whole or in part, at
any time by its holder commencing on the Initial Exercise Date and prior to the
Termination Date:

                        (i)     by presentation and surrender of this Warrant,
        together with the duly executed subscription form attached at the end
        hereof, at the address set forth in Subsection 8(a) hereof, together
        with payment, by certified or official bank check or wire transfer
        payable to the order of the Company, of the Aggregate Exercise Price or
        the proportionate part thereof if exercised in part; or

                        (ii)    by presentation and surrender of this Warrant,
        together with the duly executed cashless exercise form attached at the
        end hereof (a "Cashless Exercise") at the address set forth in
        Subsection 8(a) hereof. The exchange of Common Stock for the Warrant
        shall take place on the date specified in the Cashless Exercise Form or,
        if later, the date the Cashless Exercise Form is surrendered to the
        Company (the "Exchange Date"). Such presentation and surrender shall be
        deemed a waiver of the Holder's obligation to pay the Aggregate Exercise
        Price, or the proportionate part thereof if this Warrant is exercised in
        part. In the event of a Cashless Exercise, this Warrant shall represent
        the right to subscribe for and to acquire the number of shares of Common
        Stock equal to (x) the number of shares of Common Stock specified by the
        Holder in its Cashless Exercise Form (the "Total Number") (such number
        not to exceed the maximum number of shares of Common Stock subject to
        this Warrant, as may be adjusted from time to time) less (y) the number
        of shares of Common Stock equal to the quotient obtained by dividing (A)
        the product of the Total Number and the existing Per Share Exercise
        Price by (B) the fair market value per share of Common Stock at such
        time, as determined by the Board of Directors of the Company in good
        faith (the "Per Share FMV"). No Cashless Exercise shall be effected
        unless the Per Share FMV is greater than the Per Share Exercise Price as
        of the Exchange Date.

                (b)     If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder duly legended as
authorized by the subscription form. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant; provided that
the Company shall pay to the Holder of the Warrant cash in lieu of such
fractional shares.

                                      - 2 -



                2.      Reservation of Warrant Shares; Fully Paid Shares; Taxes.
The Company hereby represents that it has, and until expiration of this Warrant
agrees that it shall, reserve for issuance or delivery upon exercise of this
Warrant, such number of shares of the Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant in full, and agrees that
all Warrant Shares so issued and/or delivered will be validly issued, fully paid
and non-assessable, and further agrees to pay all taxes (other than income
taxes) and charges that may be imposed upon such issuance and/or delivery. 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 Warrants so
exercised 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.

                3.      Protection Against Dilution.

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

                (b)     In the event of any capital reorganization or
reclassification not otherwise covered in this Section 3, or any consolidation
or merger to which the Company is a party other than a merger or consolidation
in which the Company is the continuing corporation, or in case of any sale or
conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any exchange effected in
connection with a merger of a third corporation into the Company), the Holder of
this Warrant shall have the right thereafter to receive on the exercise of this
Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance and in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests thereafter of
the Holder of this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of this Warrant. The above

                                      - 3 -



provisions of this Subsection 3(b) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, statutory
exchanges, sales or conveyances.

                (c)     Whenever the Per Share Exercise Price payable upon
exercise of this Warrant is adjusted pursuant to this Section 3, the number of
shares of Common Stock underlying this Warrant shall simultaneously be adjusted
to equal the number obtained by dividing the Aggregate Exercise Price (as the
same shall be reduced to the extent of any partial exercise of this Warrant) by
the adjusted Per Share Exercise Price.

                (d)     If, as a result of an adjustment made pursuant to this
Section 3, the Holder shall become entitled to receive, upon exercise of the
Warrant, shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive) shall determine the allocation of the
adjusted Per Share Exercise Price between or among shares or such classes of
capital stock or shares of Common Stock and other capital stock.

                4.      Limited Transferability. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder except in compliance with
the provisions of the Act and the applicable state securities "blue sky" laws,
and is so transferable only upon the books of the Company which it shall cause
to be maintained for such purpose. The Company may treat the registered Holder
of this Warrant as he or it appears on the Company's books at any time as the
Holder for all purposes.

                5.      Loss, etc., of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company (which may
include a bond), if lost, stolen or destroyed, and upon surrender and
cancellation of this Warrant, if mutilated, the Company shall execute and
deliver to the Holder a new Warrant of like date, tenor and denomination.

                6.      Investment Intent.

                (a)     The Holder represents, by accepting this Warrant, that
it understands that this Warrant and any securities obtainable upon exercise of
this Warrant have not been registered for sale under Federal or state securities
laws and are being offered and sold to the Holder pursuant to one or more
exemptions from the registration requirements of such securities laws. The
Holder is an "accredited investor" within the meaning of Regulation D under the
Securities Act of 1933, as amended (the "Act"). In the absence of an effective
registration of such securities or an exemption therefrom, any certificates for
such securities shall bear the legend set forth on the first page hereof. The
Holder understands that it must bear the economic risk of its investment in this
Warrant and any securities obtainable upon exercise of this Warrant for an
indefinite period of time, as this Warrant and such securities have not been
registered under Federal or state securities laws and therefore cannot be sold
unless subsequently registered under such laws, unless as exemption from such
registration is available.

                (b)     The Holder, by its acceptance of its Warrant, represents
and warrants to the Company that it has sufficient knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of the prospective investment in Warrant Shares

                                      - 4 -



and of making an informed investment decision with respect thereto. The Holder
acknowledges that any disclosure materials it has received from the Company may
not contain all information that is necessary to make an investment decision
with respect to the Company and the Warrant Shares and that it must rely on its
own examination of the Company and the terms and conditions of this Warrant
prior to making any investment decision with respect to the Warrant Shares. The
Holder further represents and warrants that it has been afforded full
opportunity to ask questions and obtain copies of all relevant documents
concerning the Company and the Warrant Shares, and all of its questions and
requests for documents and information have been answered to its complete
satisfaction.

                (c)     The Holder, by its acceptance of its Warrant, represents
to the Company that it is acquiring this Warrant and will acquire any securities
obtainable upon exercise of this Warrant for its own account for investment and
not with a view to, or for sale in connection with, any distribution thereof in
violation of the Act. The Holder agrees that this Warrant and any such
securities will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Act and any
applicable state securities laws or (ii) such sale or transfer is made pursuant
to one or more exemptions from the Act.

                7.      Status of Holder. This Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a stockholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a stockholder, prior to the exercise hereof.

                8.      Notices. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:

                (a)     the Company c/o Audubon Business and Technology Center,
        Columbia-Presbyterian Medical Center, 3960 Broadway, 4th Floor, New
        York, NY 10032, Attention: President, or such other address as the
        Company has designated by notice to the Holder; or

                (b)     the Holder at 4 White Rock Terrace, Holmdel, NJ 07733 or
        such other address as the Holder has designated by notice to the
        Company.

                9.      Headings. The headings of this Warrant have been
inserted as a matter of convenience and shall not affect the construction
hereof.

                10.     Applicable Law. This Warrant shall be governed by and
construed in accordance with the law of the State of New York without giving
effect to principles of conflicts of law thereof.

                11.     Amendments. This Warrant may be amended only by mutual
written agreement of the Company and the holder or holders holding Class C
Warrants exercisable for a majority of the shares of Common Stock issuable upon
exercise of all then-outstanding Class C Warrants (the "Majority Holders"), and
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,

                                      - 5 -



agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or waiver of the Majority Holders.

                12.     Lock-up. (a) General Lock-up. If the Company shall
effect a primary or a secondary public offering of its securities or if at any
time, the Company shall register its shares of Common Stock under the Securities
Act for sale to the public, the holder or holders of Common Stock issued or
issuable upon exercise of this Warrant shall not sell publicly, make any short
sale of, grant any option for the purchase of, or otherwise dispose publicly of,
any shares of Common Stock without the prior written consent of the Company
during the period beginning ten (10) days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made and
ending on the date 180 days after the effective date of such registration
statement. By acceptance of this Warrant, or the shares of Common Stock issued
or issuable upon exercise hereof, the holder hereof or thereof agrees to be
bound by the terms of this Section 12.

                        (b)     Special IPO Lock-up. In the event of an initial
public offering (the "IPO") of Common Stock (whether such IPO occurs prior to or
after the issuance hereof), the Holder, during the period commencing seven days
prior to the date of the final prospectus relating to the IPO and ending 360
days thereafter (the "Restricted Period"):

                        (i)     agrees not to (x) offer, pledge, sell, contract
        to sell, sell any option or contract to purchase, purchase any option or
        contract to sell, grant any option, right or warrant to purchase, or
        establish or increase a put equivalent position or liquidate or decrease
        a call equivalent position within the meaning of Section 16 of the
        Securities Exchange Act of 1934, as amended, and the rules and
        regulations promulgated thereunder or otherwise transfer or dispose of,
        directly or indirectly, any shares of Common Stock or other capital
        stock of the Company or any securities convertible into or exercisable
        or exchangeable for any shares of Common Stock or other capital stock of
        the Company (collectively, the "Securities") or (y) enter into any swap
        or other arrangement that transfers all or a portion of the economic
        consequences associated with the ownership of any Securities of the
        Company, or publicly announce an intention to effect any such
        transaction (regardless of whether any of the transactions described in
        clause (x) or (y) is to be settled by the delivery of Common Stock, or
        such other Securities, in cash or otherwise), without the prior written
        consent of the lead underwriter for such IPO (the "Underwriter");

                        (ii)    authorizes the Company to cause the transfer
        agent to decline to transfer and/or to note stop transfer restrictions
        on the transfer books and records of the Company with respect to any
        Securities for which the Holder is the record holder and, in the case of
        any such Securities for which the Holder is the beneficial but not the
        record holder, agrees to cause the record holder to authorize the
        Company to cause the transfer agent to decline to transfer and/or to
        note stop transfer restrictions on such books and records with respect
        to such Securities; and

                        (iii)   agrees that the restrictions set forth in this
        Section 12(b) shall apply (A) for 450 days with respect to any
        transaction involving any Securities in excess of one-third (1/3) of the
        Securities held by the Holder on the date of the final prospectus,

                                      - 6 -



        and (B) for 540 days with respect to any transaction involving any
        Securities in excess of two-thirds (2/3) of the Securities held by the
        Holder on the date of the final prospectus.

                                      - 7 -



                IN WITNESS WHEREOF, the undersigned, acting for and on behalf of
the Company, has executed this Warrant as of the date first written above.

                                      NEPHROS, INC.


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

                                      - 8 -



                                  SUBSCRIPTION

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

Dated:                                 Signature:
      ------------------                         ----------------------------
                                       Address:
                                               -------------------------------


                                CASHLESS EXERCISE

                The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exchange the within
Warrant for up to ______________ shares of Common Stock of Nephros, Inc.
pursuant to the cashless exercise provisions of the Warrant. The undersigned
hereby confirms the representations, warranties and covenants made by it in the
Warrant.

Dated:                                 Signature:
      ------------------                         ----------------------------
                                       Address:
                                               -------------------------------

                                      - 9 -



                                   ASSIGNMENT

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

Dated:                                 Signature:
      ------------------                         ----------------------------
                                       Address:
                                               ------------------------------


                               PARTIAL ASSIGNMENT

                FOR VALUE RECEIVED __________________________ hereby assigns and
transfers unto _________________________ the right to purchase __________ shares
of the Common Stock, $.001 par value per share, of Nephros, Inc. covered by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Nephros, Inc.

Dated:                                 Signature:
      ------------------                         ----------------------------
                                       Address:
                                               ------------------------------

                                     - 10 -

EX-4.6

                                                                     EXHIBIT 4.6

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

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

                                  NEPHROS, INC.

                                     Form of

                  Class C Warrant for the Purchase of Shares of
                                  Common Stock

No. C-2                                                       September 22, 2003

                FOR VALUE RECEIVED, NEPHROS, INC., a Delaware corporation (the
"Company"), hereby certifies that George Hatsopoulos or his registered assigns
(the "Holder") is entitled to purchase from the Company, subject to the
provisions of this Warrant (the "Warrant"), at any time on or after the date
hereof (the "Initial Exercise Date"), and prior to 11:59 P.M., New York City
time, on September 11, 2006 (the "Termination Date"), 3,907 fully paid and
non-assessable shares of the Common Stock, $.001 par value, of the Company
("Common Stock"), at an exercise price of $2.50 per share of Common Stock for an
aggregate exercise price of nine thousand seven hundred sixty-seven dollars and
fifty cents ($9,767.50) (the aggregate purchase price payable for the Warrant
Shares hereunder is hereinafter sometimes referred to as the "Aggregate Exercise
Price"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the price to be paid for each share of Common Stock are subject
to possible adjustment from time to time as hereinafter set forth. The shares of
Common Stock or other securities or property deliverable upon such exercise as
adjusted from time to time is hereinafter sometimes referred to as the "Warrant
Shares." The exercise price of a share of Common Stock in effect at any time and
as adjusted from time to time is hereinafter sometimes referred to as the "Per
Share Exercise Price." The Per Share Exercise Price is



subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall also be adjusted, by dividing the
Aggregate Exercise Price by the Per Share Exercise Price in effect immediately
after such adjustment. The Aggregate Exercise Price is not subject to adjustment
except to the extent of any partial exercise of this Warrant. This Warrant may
constitute one in a series of warrants (the "Class C Warrants") which includes
this Warrant and any other Class C Warrant for the Purchase of Shares of Common
Stock of the Company, of like tenor hereto.

                1.      Exercise of Warrant.

                (a)     This Warrant may be exercised in whole or in part, at
any time by its holder commencing on the Initial Exercise Date and prior to the
Termination Date:

                        (i)     by presentation and surrender of this Warrant,
        together with the duly executed subscription form attached at the end
        hereof, at the address set forth in Subsection 8(a) hereof, together
        with payment, by certified or official bank check or wire transfer
        payable to the order of the Company, of the Aggregate Exercise Price or
        the proportionate part thereof if exercised in part; or

                        (ii)    by presentation and surrender of this Warrant,
        together with the duly executed cashless exercise form attached at the
        end hereof (a "Cashless Exercise") at the address set forth in
        Subsection 8(a) hereof. The exchange of Common Stock for the Warrant
        shall take place on the date specified in the Cashless Exercise Form or,
        if later, the date the Cashless Exercise Form is surrendered to the
        Company (the "Exchange Date"). Such presentation and surrender shall be
        deemed a waiver of the Holder's obligation to pay the Aggregate Exercise
        Price, or the proportionate part thereof if this Warrant is exercised in
        part. In the event of a Cashless Exercise, this Warrant shall represent
        the right to subscribe for and to acquire the number of shares of Common
        Stock equal to (x) the number of shares of Common Stock specified by the
        Holder in its Cashless Exercise Form (the "Total Number") (such number
        not to exceed the maximum number of shares of Common Stock subject to
        this Warrant, as may be adjusted from time to time) less (y) the number
        of shares of Common Stock equal to the quotient obtained by dividing (A)
        the product of the Total Number and the existing Per Share Exercise
        Price by (B) the fair market value per share of Common Stock at such
        time, as determined by the Board of Directors of the Company in good
        faith (the "Per Share FMV"). No Cashless Exercise shall be effected
        unless the Per Share FMV is greater than the Per Share Exercise Price as
        of the Exchange Date.

                (b)     If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder duly legended as
authorized by the subscription form. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant; provided that
the Company shall pay to the Holder of the Warrant cash in lieu of such
fractional shares.

                                      - 2 -



                2.      Reservation of Warrant Shares; Fully Paid Shares; Taxes.
The Company hereby represents that it has, and until expiration of this Warrant
agrees that it shall, reserve for issuance or delivery upon exercise of this
Warrant, such number of shares of the Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant in full, and agrees that
all Warrant Shares so issued and/or delivered will be validly issued, fully paid
and non-assessable, and further agrees to pay all taxes (other than income
taxes) and charges that may be imposed upon such issuance and/or delivery. 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 Warrants so
exercised 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.

                3.      Protection Against Dilution.

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

                (b)     In the event of any capital reorganization or
reclassification not otherwise covered in this Section 3, or any consolidation
or merger to which the Company is a party other than a merger or consolidation
in which the Company is the continuing corporation, or in case of any sale or
conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any exchange effected in
connection with a merger of a third corporation into the Company), the Holder of
this Warrant shall have the right thereafter to receive on the exercise of this
Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance and in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests thereafter of
the Holder of this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of this Warrant. The above

                                      - 3 -



provisions of this Subsection 3(b) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, statutory
exchanges, sales or conveyances.

                (c)     Whenever the Per Share Exercise Price payable upon
exercise of this Warrant is adjusted pursuant to this Section 3, the number of
shares of Common Stock underlying this Warrant shall simultaneously be adjusted
to equal the number obtained by dividing the Aggregate Exercise Price (as the
same shall be reduced to the extent of any partial exercise of this Warrant) by
the adjusted Per Share Exercise Price.

                (d)     If, as a result of an adjustment made pursuant to this
Section 3, the Holder shall become entitled to receive, upon exercise of the
Warrant, shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive) shall determine the allocation of the
adjusted Per Share Exercise Price between or among shares or such classes of
capital stock or shares of Common Stock and other capital stock.

                4.      Limited Transferability. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder except in compliance with
the provisions of the Act and the applicable state securities "blue sky" laws,
and is so transferable only upon the books of the Company which it shall cause
to be maintained for such purpose. The Company may treat the registered Holder
of this Warrant as he or it appears on the Company's books at any time as the
Holder for all purposes.

                5.      Loss, etc., of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company (which may
include a bond), if lost, stolen or destroyed, and upon surrender and
cancellation of this Warrant, if mutilated, the Company shall execute and
deliver to the Holder a new Warrant of like date, tenor and denomination.

                6.      Investment Intent.

                (a)     The Holder represents, by accepting this Warrant, that
it understands that this Warrant and any securities obtainable upon exercise of
this Warrant have not been registered for sale under Federal or state securities
laws and are being offered and sold to the Holder pursuant to one or more
exemptions from the registration requirements of such securities laws. The
Holder is an "accredited investor" within the meaning of Regulation D under the
Securities Act of 1933, as amended (the "Act"). In the absence of an effective
registration of such securities or an exemption therefrom, any certificates for
such securities shall bear the legend set forth on the first page hereof. The
Holder understands that it must bear the economic risk of its investment in this
Warrant and any securities obtainable upon exercise of this Warrant for an
indefinite period of time, as this Warrant and such securities have not been
registered under Federal or state securities laws and therefore cannot be sold
unless subsequently registered under such laws, unless as exemption from such
registration is available.

                (b)     The Holder, by its acceptance of its Warrant, represents
and warrants to the Company that it has sufficient knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of the prospective investment in Warrant Shares

                                      - 4 -



and of making an informed investment decision with respect thereto. The Holder
acknowledges that any disclosure materials it has received from the Company may
not contain all information that is necessary to make an investment decision
with respect to the Company and the Warrant Shares and that it must rely on its
own examination of the Company and the terms and conditions of this Warrant
prior to making any investment decision with respect to the Warrant Shares. The
Holder further represents and warrants that it has been afforded full
opportunity to ask questions and obtain copies of all relevant documents
concerning the Company and the Warrant Shares, and all of its questions and
requests for documents and information have been answered to its complete
satisfaction.

                (c)     The Holder, by its acceptance of its Warrant, represents
to the Company that it is acquiring this Warrant and will acquire any securities
obtainable upon exercise of this Warrant for its own account for investment and
not with a view to, or for sale in connection with, any distribution thereof in
violation of the Act. The Holder agrees that this Warrant and any such
securities will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Act and any
applicable state securities laws or (ii) such sale or transfer is made pursuant
to one or more exemptions from the Act.

                7.      Status of Holder. This Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a stockholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a stockholder, prior to the exercise hereof.

                8.      Notices. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:

                (a)     the Company c/o Audubon Business and Technology Center,
        Columbia-Presbyterian Medical Center, 3960 Broadway, 4th Floor, New
        York, NY 10032, Attention: President, or such other address as the
        Company has designated by notice to the Holder; or

                (b)     the Holder at Pharos, Inc., 85 First Avenue, Waltham,
        Massachusetts 02254, or such other address as the Holder has designated
        by notice to the Company.

                9.      Headings. The headings of this Warrant have been
inserted as a matter of convenience and shall not affect the construction
hereof.

                10.     Applicable Law. This Warrant shall be governed by and
construed in accordance with the law of the State of New York without giving
effect to principles of conflicts of law thereof.

                11.     Amendments. This Warrant may be amended only by mutual
written agreement of the Company and the holder or holders holding Class C
Warrants exercisable for a majority of the shares of Common Stock issuable upon
exercise of all then-outstanding Class C Warrants (the "Majority Holders"), and
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,

                                      - 5 -



agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or waiver of the Majority Holders.

                12.     Lock-up. (a) General Lock-up. If the Company shall
effect a primary or a secondary public offering of its securities or if at any
time, the Company shall register its shares of Common Stock under the Securities
Act for sale to the public, the holder or holders of Common Stock issued or
issuable upon exercise of this Warrant shall not sell publicly, make any short
sale of, grant any option for the purchase of, or otherwise dispose publicly of,
any shares of Common Stock without the prior written consent of the Company
during the period beginning ten (10) days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made and
ending on the date 180 days after the effective date of such registration
statement. By acceptance of this Warrant, or the shares of Common Stock issued
or issuable upon exercise hereof, the holder hereof or thereof agrees to be
bound by the terms of this Section 12.

                        (b)     Special IPO Lock-up. In the event of an initial
public offering (the "IPO") of Common Stock (whether such IPO occurs prior to or
after the issuance hereof), the Holder, during the period commencing seven days
prior to the date of the final prospectus relating to the IPO and ending 360
days thereafter (the "Restricted Period"):

                        (i)     agrees not to (x) offer, pledge, sell, contract
        to sell, sell any option or contract to purchase, purchase any option or
        contract to sell, grant any option, right or warrant to purchase, or
        establish or increase a put equivalent position or liquidate or decrease
        a call equivalent position within the meaning of Section 16 of the
        Securities Exchange Act of 1934, as amended, and the rules and
        regulations promulgated thereunder or otherwise transfer or dispose of,
        directly or indirectly, any shares of Common Stock or other capital
        stock of the Company or any securities convertible into or exercisable
        or exchangeable for any shares of Common Stock or other capital stock of
        the Company (collectively, the "Securities") or (y) enter into any swap
        or other arrangement that transfers all or a portion of the economic
        consequences associated with the ownership of any Securities of the
        Company, or publicly announce an intention to effect any such
        transaction (regardless of whether any of the transactions described in
        clause (x) or (y) is to be settled by the delivery of Common Stock, or
        such other Securities, in cash or otherwise), without the prior written
        consent of the lead underwriter for such IPO (the "Underwriter");

                        (ii)    authorizes the Company to cause the transfer
        agent to decline to transfer and/or to note stop transfer restrictions
        on the transfer books and records of the Company with respect to any
        Securities for which the Holder is the record holder and, in the case of
        any such Securities for which the Holder is the beneficial but not the
        record holder, agrees to cause the record holder to authorize the
        Company to cause the transfer agent to decline to transfer and/or to
        note stop transfer restrictions on such books and records with respect
        to such Securities; and

                        (iii)   agrees that the restrictions set forth in this
        Section 12(b) shall apply (A) for 450 days with respect to any
        transaction involving any Securities in excess of one-third (1/3) of the
        Securities held by the Holder on the date of the final prospectus,

                                      - 6 -



        and (B) for 540 days with respect to any transaction involving any
        Securities in excess of two-thirds (2/3) of the Securities held by the
        Holder on the date of the final prospectus.

                                      - 7 -



                IN WITNESS WHEREOF, the undersigned, acting for and on behalf of
the Company, has executed this Warrant as of the date first written above.

                                     NEPHROS, INC.

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

                                      - 8 -



                                  SUBSCRIPTION

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

Dated:                                  Signature:
      -----------------                           ---------------------------
                                        Address:
                                                ------------------------------

                                CASHLESS EXERCISE

                The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exchange the within
Warrant for up to ______________ shares of Common Stock of Nephros, Inc.
pursuant to the cashless exercise provisions of the Warrant. The undersigned
hereby confirms the representations, warranties and covenants made by it in the
Warrant.

Dated:                                  Signature:
      -----------------                           ---------------------------
                                        Address:
                                                ------------------------------

                                      - 9 -



                                   ASSIGNMENT

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

Dated:                                  Signature:
      -----------------                           ---------------------------
                                        Address:
                                                -----------------------------

                               PARTIAL ASSIGNMENT

                FOR VALUE RECEIVED __________________________ hereby assigns and
transfers unto _________________________ the right to purchase __________ shares
of the Common Stock, $.001 par value per share, of Nephros, Inc. covered by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Nephros, Inc.

Dated:                                  Signature:
      -----------------                           ---------------------------
                                        Address:
                                                 ----------------------------

                                     - 10 -

EX-4.7

                                                                    Exhibit 4.7

       This Warrant was originally issued on June 19, 2002. THESE SECURITIES
       HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
       APPLICABLE STATE SECURITIES LAWS. THEY 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 THE SECURITIES UNDER
       SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE
       SUBJECT TO APPLICABLE STATE SECURITIES LAWS.

                                 NEPHROS, INC.

                            STOCK PURCHASE WARRANT
                            ----------------------

           Date of Issuance: June 19, 2002        Certificate No. W-1


   FOR VALUE RECEIVED, Nephros, Inc., a Delaware corporation (the "Company"),
hereby grants to Plexus Services Corp. or its permitted assigns (the
"Registered Holder") the right to purchase from the Company 600,000 shares of
the Company's Common Stock at a price per share of $3.00 (as adjusted from time
to time hereunder, the "Exercise Price"). Certain capitalized terms used herein
are defined in Section 4 hereof. The amount and kind of securities obtainable
pursuant to the rights granted hereunder and the purchase price for such
securities are subject to adjustment pursuant to the provisions contained in
this Warrant.

   This Warrant is subject to the following provisions:

   Section 1. Exercise of Warrant.
              -------------------

   1A. Exercise Period. The Registered Holder may exercise, in whole or in part
       ---------------
(but not as to a fractional share of Common Stock), the purchase rights
represented by this Warrant at any time and from time to time after the Date of
Issuance to and including the fifth anniversary thereof (the "Exercise Period").

   1B. Exercise Procedure.

      (i) This Warrant shall be deemed to have been exercised when the Company
   has received all of the following items (the "Exercise Time"):

          (a) a completed Exercise Agreement, as described in paragraph 1C
       below, executed by the Person exercising all or part of the purchase
       rights represented by this Warrant (the "Purchaser");

          (b) this Warrant; and

                                     - 1 -



          (c) a certified check payable to the Company in an amount equal to
       the product of the Exercise Price multiplied by the number of shares of
       Common Stock being purchased upon such exercise (the "Aggregate Exercise
       Price").

      (ii) Certificates for shares of Common Stock purchased upon exercise of
   this Warrant shall be delivered by the Company to the Purchaser within
   twenty business days after the date of the Exercise Time. Unless this
   Warrant has expired or all of the purchase rights represented hereby have
   been exercised, the Company shall prepare a new Warrant, substantially
   identical hereto, representing the rights formerly represented by this
   Warrant which have not expired or been exercised and shall within such
   twenty-day period, deliver such new Warrant to the Person designated for
   delivery in the Exercise Agreement.

      (iii) The Common Stock issuable upon the exercise of this Warrant shall
   be deemed to have been issued to the Purchaser at the Exercise Time, and the
   Purchaser shall be deemed for all purposes to have become the record holder
   of such Common Stock at the Exercise Time.

      (iv) The issuance of certificates for shares of Common Stock upon
   exercise of this Warrant shall be made without charge to the Registered
   Holder for any issuance tax in respect thereof or other cost incurred by the
   Company in connection with such exercise and the related issuance of shares
   of Common Stock. Each share of Common Stock issuable upon exercise of this
   Warrant shall upon payment of the Exercise Price therefor, be fully paid and
   nonassessable and free from all liens and charges, with respect to the
   issuance thereof, created by the Company.

      (v) The Company shall not close its books against the transfer of this
   Warrant or of any share of Common Stock issued or issuable upon the exercise
   of this Warrant in any manner which interferes with the timely exercise of
   this Warrant. The Company shall from time to time take all such action as
   may be necessary to assure that the par value per share of the unissued
   Common Stock acquirable upon exercise of this Warrant is at all times equal
   to or less than the Exercise Price then in effect.

      (vi) The Company shall assist and cooperate with any Registered Holder or
   Purchaser required to make any governmental filings or obtain any
   governmental approvals prior to or in connection with any exercise of this
   Warrant (including, without limitation, making any filings required to be
   made by the Company).

      (vii) Notwithstanding any other provision hereof, if an exercise of any
   portion of this Warrant is to be made in connection with a registered public
   offering or the sale of the Company, the exercise of any portion of this
   Warrant may, at the election of the holder hereof, be conditioned upon the
   consummation of the public offering or sale of the Company in which case
   such exercise shall not be deemed to be effective until the consummation of
   such transaction.

      (viii) The Company shall at all times reserve and keep available out of
   its authorized but unissued shares of Common Stock solely for the purpose of
   issuance upon the exercise of the Warrants, such number of shares of Common
   Stock issuable upon the exercise of all outstanding Warrants. All shares of
   Common Stock which are so issuable shall, when issued, be duly and validly
   issued, fully paid and nonassessable and free from all taxes, liens and
   charges created by the Company. The Company shall take all such actions as
   may be necessary to assure

                                     - 2 -



   that all such shares of Common Stock may be so issued without violation of
   any applicable law or governmental regulation or any requirements of any
   domestic securities exchange upon which shares of Common Stock may be listed
   (except for official notice of issuance which shall be immediately delivered
   by the Company upon each such issuance). The Company shall not take any
   action which would cause the number of authorized but unissued shares of
   Common Stock to be less than the number of such shares required to be
   reserved hereunder for issuance upon exercise of the Warrants.

   1C. Exercise Agreement. The Registered Holder shall exercise this Warrant by
       ------------------
executing and delivering to the Company the Exercise Agreement substantially in
the form set forth in Exhibit I hereto, except that if, with the prior written
consent of the Company, the shares of Common Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Common Stock are to be issued. Such Exercise Agreement shall be
dated the actual date of execution thereof.

   1D. Fractional Shares. No fractional shares of Common Stock shall be issued
       -----------------
upon any exercise of Warrants. If more than one Warrant Certificate shall be
delivered for exercise at one time by the same holder, the number of full
shares or securities that shall be issuable upon exercise shall be computed on
the basis of the aggregate number of Warrants exercised. If a fractional share
of Common Stock would, but for the provisions of paragraph 1A and this
paragraph 1D, be issuable upon exercise of the rights represented by this
Warrant, the Company shall, within five business days after the date of the
Exercise Time, deliver to the Purchaser a check payable to the Purchaser in
lieu of such fractional share in an amount equal to the difference between
Market Price of such fractional share as of the date of the Exercise Time and
the Exercise Price of such fractional share.

   1E. Securities Law Provisions.
       -------------------------

      (i) Except as otherwise permitted by this Section 1E, each certificate
   representing shares of Common Stock issued upon the exercise of a Warrant,
   and each certificate issued upon the transfer of any such Common Stock,
   shall be stamped or otherwise imprinted with a legend in substantially the
   following form:

          "The shares represented by this certificate have not been registered
       under the Securities Act of 1933, as amended (the "Act"), or any other
       securities laws and may not be transferred, sold or otherwise disposed
       of in the absence of such registration or an exemption therefrom under
       such Act or other laws."

      (ii) Prior to any transfer of any Warrant that is not registered under an
   effective registration statement under the Securities Act of 1933, as
   amended (the "Securities Act"), the Registered Holder will give written
   notice to the Company of such Registered Holder's intention to effect such
   transfer and to comply in all other respects with this Section 1E. Each such
   notice (i) shall describe the manner and circumstances of the proposed
   transfer in sufficient detail to enable counsel to render the opinions
   referred to below, and (ii) shall designate counsel for the Registered
   Holder giving such notice. The Registered Holder giving such notice will
   submit a copy thereof to the counsel designated in such notice, which
   counsel shall be experienced in securities law matters and the Company will
   promptly submit a copy thereof to its counsel.

                                     - 3 -



   If in the opinion of both such counsel the proposed transfer may be effected
without registration under the Securities Act, such Registered Holder shall
thereupon be entitled to transfer such securities in accordance with the terms
of the notice delivered by such Registered Holder to the Company. Each Warrant
issued upon or in connection with such transfer shall bear the legend set forth
on the first page of this Warrant.

   If in the opinion of either or both such counsel the proposed transfer may
not legally be effected without registration of such Warrants under the
Securities Act (such opinions to state the basis of the legal conclusions
reached therein), the Company will promptly so notify the Registered Holder
thereof and thereafter such Registered Holder shall not be entitled to transfer
such Warrants until either (x) receipt by the Company of a further notice from
such Registered Holder pursuant to the foregoing provisions of this Section 1E
and fulfillment of the provisions of this Section 1E or (y) such Warrants have
been registered pursuant to an effective registration statement under the Act.
Notwithstanding the foregoing, the Company shall have no obligation to register
any Warrants or, except as stated in the Settlement Agreement and Mutual
Release between Plexus Services Corp. and the Company dated the date hereof,
shares.

   Section 2. Adjustment of Exercise Price and Number of Shares. In order to
              -------------------------------------------------
prevent dilution of the rights granted under this Warrant, the Exercise Price
shall be subject to adjustment from time to time as provided in this Section 2,
and the number of shares of Common Stock obtainable upon exercise of this
Warrant shall be subject to adjustment from time to time as provided in this
Section 2.

   2A. Subdivision or Combination of Common Stock. If the Company at any time
       ------------------------------------------
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced and the number of shares of Common Stock obtainable
upon exercise of this Warrant shall be proportionately increased. If the
Company at any time combines (by reverse stock split or otherwise) its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant shall be proportionately decreased.

   2B. Reorganization, Reclassification, Consolidation, Merger or Sale. Any
       ---------------------------------------------------------------
recapitalization (other than as provided in Section 2A above), reorganization,
consolidation, merger, sale of all or substantially all of the Company's assets
or other transaction, in each case which is effected in such a way that the all
outstanding Common Stock is exchanged in whole or in part for other stock,
securities or assets is referred to herein as "Organic Change." Prior to the
consummation of any Organic Change, the Company shall make appropriate
provision to insure that the Registered Holders of the Warrants shall
thereafter have the right to acquire and receive, in lieu of the shares of
Common Stock immediately theretofore acquirable and receivable upon the
exercise of such holder's Warrant, the securities, cash and other assets to
which the holder of the number of shares of Common Stock purchasable (at the
time of such consolidation, merger or sale) upon the exercise of the Warrants
would have been entitled upon such Organic Change. In any such case, the
Company shall make appropriate provision with respect to such holder's rights
and interests to insure that the provisions of this Section 2 and Section 4
shall thereafter be applicable to the Warrants. The Company shall not effect
any such consolidation, merger or sale in which the Company is not the
surviving or successor entity, unless prior to the consummation thereof, the
successor entity resulting from such consolidation or merger or the entity
purchasing such assets assumes by written instrument (in form and substance
reasonably satisfactory to the

                                     - 4 -



Registered Holder), the obligation to deliver to the Registered Holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.

   2C. Notices.
       -------

      (i) Upon any adjustment of the Exercise Price, the Company shall give
   written notice thereof to the Registered Holder, setting forth in reasonable
   detail the calculation of such adjustment. Failure to give such notice shall
   not affect the validity of the adjustment.

      (ii) The Company shall give written notice to the Registered Holder at
   least 20 days prior to the date on which the Company closes its books or
   takes a record (A) with respect to any dividend or distribution upon the
   Common Stock or (B) with respect to any pro rata subscription offer to
   holders of Common Stock.

   Section 3. Lock-up. By its acceptance of this Warrant, each Registered
              -------
Holder agrees not to, effect any sale or other transfer of equity securities of
Nephros, or any securities convertible into or exchangeable or exercisable for
such securities, during the seven days prior to and the 360 day period
beginning on the effective date of the Company's initial public offering or the
180 day period beginning on the effective date of any other underwritten public
offering (except as part of such underwritten registration), unless (x) senior
management of Nephros is bound by a less burdensome lockup restriction, in
which case the Registered Holder will be bound by the same restrictions
applicable to management or (y) the underwriters managing such underwritten
registration otherwise agree in writing.

   Section 4. Liquidating Dividends. If the Company declares or pays a dividend
              ---------------------
upon the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting
principles, consistently applied) except for a stock dividend payable in shares
of Common Stock (a "Liquidating Dividend"), then the Company shall pay to the
Registered Holder of this Warrant at the time of payment thereof the
Liquidating Dividend which would have been paid to such Registered Holder on
the Common Stock had this Warrant been fully exercised immediately prior to the
date on which a record is taken for such Liquidating Dividend, or, if no record
is taken, the date as of which the record holders of Common Stock entitled to
such dividends are to be determined.

   Section 5. Definitions. The following terms have meanings set forth below:
              -----------

   "Common Stock" means the Company's Common Stock.
    ------------

   "Market Price" means as to any security the average of the closing prices of
    ------------
such security's sales on all domestic securities exchanges on which such
security may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any
day such security is not quoted in the NASDAQ System, the average of the
highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which "Market Price" is
being determined and the 20 consecutive business days prior to such day;
provided that if such security

                                     - 5 -



is listed on any domestic securities exchange the term "business days" as used
in this sentence means business days on which such exchange is open for
trading. If at any time such security is not listed on any domestic securities
exchange or quoted in the NASDAQ System or the domestic over-the-counter
market, the "Market Price" shall be the fair value thereof determined in good
faith by the Board of Directors of the Company.

   "Person" means an individual, a partnership, a joint venture, a corporation,
    ------
a limited liability company, a trust, an unincorporated organization and a
government or any department or agency thereof.

   Section 6. No Voting Rights; Limitations of Liability. This Warrant shall
              ------------------------------------------
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.

   Section 7. Transfers. Neither this Warrant nor any rights hereunder are
              ---------
transferable, in whole or in part, unless the Registered Holder has complied
with the transfer conditions referred to in the legend endorsed hereon and in
Section 1 hereof.

   Section 8. Warrant Exchangeable for Different Denominations. This Warrant is
              ------------------------------------------------
exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. The date the Company initially issues
this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of
the number of times new certificates representing the unexpired and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."

   Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to
              -----------
the Company (an affidavit of the Registered Holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the Company,
or, in the case of any such mutilation upon surrender of such certificate, the
Company shall (at the Registered Holder's expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the same rights
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.

   Section 10. Notices. All notices referred to in this Warrant shall be in
               -------
writing and shall be delivered personally, sent by nationally recognized
overnight courier service (charges prepaid) or sent by registered or certified
mail, return receipt requested, postage prepaid and shall be deemed to have
been given (x) if delivered personally, on the date of delivery, (y) if
delivered by overnight courier service, on the date of delivery as evidenced by
the records of the courier service, and (z) if delivered by U.S. mail, 10 days
after having been deposited in the U.S. Mail (i) to the Company, at its
principal executive offices and (ii) to the Registered Holder of this Warrant,
at such holder's address as it appears in the records of the Company (unless
otherwise indicated by any such holder by notice given in accordance with this
Section).

                                     - 6 -



   Section 11. Amendment and Waiver. Except as otherwise provided herein, the
               --------------------
provisions of this Warrant may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the Registered
Holder of the Warrant.

   Section 12. Descriptive Headings; Governing Law. The descriptive headings of
               -----------------------------------
the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The laws of the
State of New York shall govern all issues concerning the relative rights of the
Company and the Registered Holders and the construction, validity, enforcement
and interpretation of this Warrant, without giving effect to any choice of law
or conflict of law provision or rule that would cause the application of the
laws of any jurisdictions other than the State of New York.

                                  * * * * * *

                                     - 7 -



   IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and to be dated the Date of Issuance hereof.

                                          NEPHROS, INC.

                                          By /s/ Norman J. Barta
                                             ----------------------------------
                                          Its CEO
                                             ----------------------------------

                                     - 8 -



                                                                      EXHIBIT I

                              EXERCISE AGREEMENT
                              ------------------

              To:                       Dated:

   The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-    ), hereby agrees to subscribe for the purchase
of        shares of the Common Stock covered by such Warrant and makes payment
herewith by certified check in full therefor at the price per share provided by
such Warrant.

                                          Signature _____________

                                          Address ______________

                                     - 9 -

EX-4.8

                                                                     Exhibit 4.8


THE TERMS OF THIS WARRANT ARE SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT,
COPIES OF WHICH ARE AVAILABLE FROM NEPHROS, INC. NEITHER THIS WARRANT NOR THE
SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OR
AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF OTHER
APPLICABLE JURISDICTIONS.

THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH SECURITIES
IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS AND CONDITIONS
OF A STOCKHOLDERS' AGREEMENT DATED AS OF MAY 17, 2000 AMONG NEPHROS, INC. AND
THE HOLDERS OF OUTSTANDING CAPITAL STOCK OF SUCH COMPANY. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF NEPHROS, INC.


                                  NEPHROS, INC.

                  Class A Warrant for the Purchase of Shares of
                                 Common Stock*

No. A-1                                                          August 5, 2002

     FOR VALUE RECEIVED, NEPHROS, INC., a Delaware corporation (the "Company"),
hereby certifies that Lancer Offshore, Inc. or its registered assigns (the
"Holder") is entitled to purchase from the Company, subject to the provisions of
this Warrant (the "Warrant"), at any time on or after the date hereof (the
"Initial Exercise Date"), and prior to 12:01 A.M., New York City time, on
December 1, 2007 (the "Termination Date"), 120,000 fully paid and non-assessable
shares of the Common Stock, $.001 par value, of the Company ("Common Stock"), at
an exercise price of $2.50 per share of Common Stock for an aggregate exercise
price of three hundred thousand dollars ($300,000) (the aggregate purchase price

- ----------
*    [Please note: this Warrant was amended by the Settlement Agreement, dated
     as of January 31, 2003, between Nephros, Inc. and Lancer Offshore, Inc.]



payable for the Warrant Shares hereunder is hereinafter sometimes referred to as
the "Aggregate Exercise Price"). The number of shares of Common Stock to be
received upon exercise of this Warrant and the price to be paid for each share
of Common Stock are subject to possible adjustment from time to time as
hereinafter set forth. The shares of Common Stock or other securities or
property deliverable upon such exercise as adjusted from time to time is
hereinafter sometimes referred to as the "Warrant Shares." The exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Per Share Exercise Price." The Per
Share Exercise Price is subject to adjustment as hereinafter provided; in the
event of any such adjustment, the number of Warrant Shares shall also be
adjusted, by dividing the Aggregate Exercise Price by the Per Share Exercise
Price in effect immediately after such adjustment. The Aggregate Exercise Price
is not subject to adjustment except to the extent of any partial exercise of
this Warrant. This Warrant constitutes one in a series of warrants (the "Class A
Warrants") which includes this Warrant and any other Class A Warrants issued
pursuant to Section 1 and/or Section 2.2 of the Subscription Agreement dated as
of even date herewith (the "Subscription Agreement") by and among the Company
and the Purchasers (as defined in the Subscription Agreement).

     1. Exercise of Warrant.

     (a) This Warrant may be exercised in whole or in part, at any time by its
holder commencing on the Initial Exercise Date and prior to the Termination Date
by presentation and surrender of this Warrant, together with the duly executed
subscription form attached at the end hereof, at the address set forth in
Subsection 8(a) hereof, together with payment, by certified or official bank
check or wire transfer payable to the order of the Company, of the Aggregate
Exercise Price or the proportionate part thereof if exercised in part.

     (b) If this Warrant is exercised in part only, the Company shall, upon
presentation of this Warrant upon such exercise, execute and deliver (along with
the certificate for the Warrant Shares purchased) a new Warrant evidencing the
rights of the Holder hereof to purchase the balance of the Warrant Shares
purchasable hereunder upon the same terms and conditions as herein set forth.
Upon proper exercise of this Warrant, the Company promptly shall deliver
certificates for the Warrant Shares to the Holder duly legended as authorized by
the subscription form. No fractional shares or scrip representing fractional
shares shall be issued upon exercise of this Warrant; provided that the Company
shall pay to the Holder of the Warrant cash in lieu of such fractional shares.

     2. Reservation of Warrant Shares; Fully Paid Shares; Taxes. The Company
hereby represents that it has, and until expiration of this Warrant agrees that
it shall, reserve for issuance or delivery upon exercise of this Warrant, such
number of shares of the Common Stock as shall be required for issuance and/or
delivery upon exercise of this Warrant in full, and agrees that all Warrant
Shares so issued and/or delivered will be validly issued, fully paid and
non-assessable, and further agrees to pay all taxes (other than income taxes)
and charges that may be imposed upon such issuance and/or delivery. 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 Warrants so
exercised 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.

                                     - 2 -



     3. Protection Against Dilution.

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

     (b) In the event of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party other than a merger or
consolidation in which the Company is the continuing corporation, or in case of
any sale or conveyance to another entity of the property of the Company as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), the Holder
of this Warrant shall have the right thereafter to receive on the exercise of
this Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance and in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests thereafter of
the Holder of this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of this Warrant. The above
provisions of this Subsection 3(b) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, statutory
exchanges, sales or conveyances.

     (c) Whenever the Per Share Exercise Price payable upon exercise of this
Warrant is adjusted pursuant to this Section 3, the number of shares of Common
Stock underlying this Warrant shall simultaneously be adjusted to equal the
number obtained by dividing the Aggregate Exercise Price (as the same shall be
reduced to the extent of any partial exercise of this Warrant) by the adjusted
Per Share Exercise Price.

     (d) If, as a result of an adjustment made pursuant to this Section 3, the
Holder shall become entitled to receive, upon exercise of the Warrant, shares of
two or more classes of capital stock or shares of Common Stock and other capital
stock of the Company, the Board of Directors (whose determination shall be
conclusive) shall determine the allocation of the

                                     - 3 -



adjusted Per Share Exercise Price between or among shares or such classes of
capital stock or shares of Common Stock and other capital stock.

     4. Limited Transferability. This Warrant may not be sold, transferred,
assigned or hypothecated by the Holder except in compliance with the provisions
of the Act and the applicable state securities "blue sky" laws, and is so
transferable only upon the books of the Company which it shall cause to be
maintained for such purpose. The Company may treat the registered Holder of this
Warrant as he or it appears on the Company's books at any time as the Holder for
all purposes.

     5. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company (which may include a bond), if
lost, stolen or destroyed, and upon surrender and cancellation of this Warrant,
if mutilated, the Company shall execute and deliver to the Holder a new Warrant
of like date, tenor and denomination.

     6. Investment Intent.

     (a) The Holder represents, by accepting this Warrant, that it understands
that this Warrant and any securities obtainable upon exercise of this Warrant
have not been registered for sale under Federal or state securities laws and are
being offered and sold to the Holder pursuant to one or more exemptions from the
registration requirements of such securities laws. The Holder is an "accredited
investor" within the meaning of Regulation D under the Securities Act of 1933,
as amended (the "Act"). In the absence of an effective registration of such
securities or an exemption therefrom, any certificates for such securities shall
bear the legend set forth on the first page hereof. The Holder understands that
it must bear the economic risk of its investment in this Warrant and any
securities obtainable upon exercise of this Warrant for an indefinite period of
time, as this Warrant and such securities have not been registered under Federal
or state securities laws and therefore cannot be sold unless subsequently
registered under such laws, unless as exemption from such registration is
available.

     (b) The Holder, by its acceptance of its Warrant, represents to the Company
that it is acquiring this Warrant and will acquire any securities obtainable
upon exercise of this Warrant for its own account for investment and not with a
view to, or for sale in connection with, any distribution thereof in violation
of the Act. The Holder agrees that this Warrant and any such securities will not
be sold or otherwise transferred unless (i) a registration statement with
respect to such transfer is effective under the Act and any applicable state
securities laws or (ii) such sale or transfer is made pursuant to one or more
exemptions from the Act.

     7. Status of Holder. This Warrant does not confer upon the Holder any right
to vote or to consent to or receive notice as a stockholder of the Company, as
such, in respect of any matters whatsoever, or any other rights or liabilities
as a stockholder, prior to the exercise hereof.

     8. Notices. No notice or other communication under this Warrant shall be
effective unless, but any notice or other communication shall be effective and
shall be deemed to

                                     - 4 -



have been given if, the same is in writing and is mailed by first-class mail,
postage prepaid, addressed to:

     (a) the Company c/o Audubon Business and Technology Center,
Columbia-Presbyterian Medical Center, 3960 Broadway, 4th Floor, New York, NY
10032, Attention: President, or such other address as the Company has designated
in writing to the Holder; or

     (b) the Holder at Kaya Flamboyan 9, Curacao, Netherlands, Antilles,
Attention: Investment Manager, or such other address as the Holder has
designated in writing to the Company.

     9. Headings. The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.

     10. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of the State of New York without giving effect to
principles of conflicts of law thereof.

     11. Amendments. This Warrant may be amended only by mutual written
agreement of the Company and the holder or holders holding Class A Warrants
exercisable for a majority of the shares of Common Stock issuable upon exercise
of all then-outstanding Class A Warrants (the "Majority Holders"), and 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, only if the Company has obtained the
written consent or waiver of the Majority Holders.

                                     - 5 -



     IN WITNESS WHEREOF, the undersigned, acting for and on behalf of the
Company, has executed this Warrant as of the date first written above.

                                      NEPHROS, INC.


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

                                     - 6 -



                                  SUBSCRIPTION

                  The undersigned,                           ,  pursuant to the
                                   --------------------------
provisions of the foregoing Warrant, hereby elects to exercise the within
Warrant to the extent of purchasing           shares of Common Stock thereunder
                                    ---------
and hereby makes payment of $           by certified or official bank check in
                             ----------
payment of the exercise price therefor.


Dated:                                  Signature:
      -------------                               ------------------------

      Address:
              -----------------------------------


                                     - 7 -



                                   ASSIGNMENT

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

Dated:                                  Signature:
      -------------                               ------------------------

      Address:
              -----------------------------------



                               PARTIAL ASSIGNMENT

     FOR VALUE RECEIVED                            hereby assigns and transfers
                       ---------------------------
unto                          the right to purchase            shares of the
    -------------------------                      -----------
Common Stock, no par value per share, of Nephros, Inc. covered by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
thereby, and does irrevocably constitute and appoint                           ,
                                                    ---------------------------
attorney, to transfer that part of said Warrant on the books of Nephros, Inc.

Dated:                                   Signature:
      ------------                                 ------------------------

      Address:
              -------------------------------------


                                      - 8 -

EX-10.1

                                                                    Exhibit 10.1

Amended and Restated Nephros 2000 Equity Incentive Plan

SECTION 1
PURPOSE

The Nephros 2000 Equity Incentive Plan (the "Plan") was adopted by the board of
directors of Nephros, Inc., a Delaware corporation (the "Corporation"), in 2000
and was amended and restated in January 2003 and renamed the Amended and
Restated Nephros 2000 Equity Incentive Plan. The purpose of the Amended and
Restated Nephros 2000 Equity Incentive Plan is to provide a means whereby
Nephros, Inc., a Delaware corporation (the "Corporation"), may attract able
persons to remain in or to enter the employ of the Corporation, a Parent
Corporation or a Subsidiary and to provide a means whereby those employees,
directors, officers, and other individuals or entities upon whom the
responsibilities of the successful administration, management, planning, and/or
organization of the Corporation may rest, and whose present and potential
contributions to the welfare of the Corporation, a Parent Corporation or a
Subsidiary are of importance, can acquire and maintain stock ownership, thereby
strengthening their concern for the long-term welfare of the Corporation. A
further purpose of the Plan is to provide such employees and individuals or
entities with additional incentive and reward opportunities designed to enhance
the profitable growth of the Corporation over the long term. Accordingly, the
Plan provides for granting Common Stock, Incentive Stock Options, options which
do not constitute Incentive Stock Options, or any combination of the foregoing,
as is best suited to the circumstances of the particular employees and
individuals or entities as provided herein.

SECTION 2
DEFINITIONS

The following definitions shall be applicable during the term of the Plan unless
specifically modified by any paragraph:

(a)  Approval of the stockholders, or words of similar import, means the
     approval of the holders of a majority of the voting power of all stock
     having the right, under the Corporation's certificate of incorporation, as
     it may be amended from time to time, to vote on all matters submitted to
     stockholders.

(b)  Award means, individually or collectively, any Option granted pursuant to
     the Plan.

(c)  Board means the board of directors of the Corporation. The Board may
     delegate any of its responsibilities hereunder to the Committee.

(d)  Cause means, for the purposes of employment, (1) the definition provided in
     any employment, severance or other agreement governing the relationship
     between the Grantee or Holder and the Corporation that is in effect at the
     time of reference; and (2) if

                                       A-1



     there is no such agreement or any such agreement does not include a
     definition of Cause, any of the following: (i) the gross neglect or willful
     failure or refusal to perform duties (other than as a result of total or
     partial incapacity due to physical or mental illness); (ii) engaging in
     misconduct which is materially injurious to the Company, monetarily or
     otherwise; (iii) perpetration of an intentional and knowing fraud against
     or affecting the Company or any customer, client, agent, or employee
     thereof; or (iv) conviction (including conviction on a nolo contendere
     plea) of a felony or any crime involving, in the good faith judgment of the
     Company, fraud, or dishonesty.

(e)  Change of Control Value means the amount determined in Clause (i), (ii) or
     (iii), whichever is applicable, as follows: (i) the per share price offered
     to stockholders of the Corporation in any merger, consolidation, sale or
     assets or dissolution transaction, (ii) the price per share offered to
     stockholders of the corporation in any tender offer or exchange offer
     whereby a Corporate Change takes place or (iii) if a Corporate Change
     occurs other than as described in Clause (i) or Clause (ii), the fair
     market value per share determined by the Board as of the date determined by
     the Board to be the date of cancellation and surrender of an Option. If the
     consideration offered to stockholders of the Corporation in any transaction
     described in this paragraph or paragraphs (d) and (e) of Section 8 consists
     of anything other than cash, the Board shall determine the fair cash
     equivalent of the portion of the consideration offered which is other than
     cash.

(f)  Code means the Internal Revenue Code of 1986, as amended. Reference in the
     Plan to any Section of the Code shall be deemed to include any amendments
     or successor provisions to such Section and any regulations under such
     Section.

(g)  Committee means the committee, consisting of three officers of the Company
     or members of the Board of the Company, established by the Board to
     administer the Plan; provided, however, that prior to the consummation of
     an initial public offering of the Company's stock, one member of the
     Committee must be appointed by WP Nephros Partners, LLC, or any successor
     entity. If the Committee does not exist, or for any other reason determined
     by the Board, the Board may take any action under the Plan that would
     otherwise be the responsibility of the Committee. To the extent necessary
     for section 162(m) of the Code, the Committee shall be comprised solely of
     outside directors pursuant to Section 4(d) hereof and to the extent
     necessary for Rule 16b-3, the Committee shall be comprised solely of
     non-employee directors.

(h)  Common Stock means the common stock of the Corporation.

(i)  Corporation means Nephros, Inc.

(j)  Corporate Change means one of the following events: (i) the merger,
     consolidation or other reorganization of the Corporation in which the
     outstanding Common Stock is converted into or exchanged for a different
     class of securities of the Corporation, a class of securities of any other
     issuer (except a Subsidiary or Parent Corporation), cash or other property
     other than (a) a merger, consolidation or reorganization of the Corporation
     which would result in the voting stock of the Corporation outstanding

                                       A-2



     immediately prior thereto continuing to represent (either by remaining
     outstanding or by being converted into voting securities of the surviving
     entity), in combination with the ownership of any trustee or other
     fiduciary holding securities under an employee benefit plan of the
     Corporation, at least sixty percent (60%) of the combined voting power of
     the voting stock of the Corporation or such surviving entity outstanding
     immediately after such merger, consolidation or reorganization of the
     Corporation, or (b) merger, consolidation or reorganization of the
     Corporation effected to implement a recapitalization of the Corporation (or
     similar transaction) in which no person acquires more than forty-nine
     percent (49%) of the combined voting power of the Corporation's then
     outstanding stock; (ii) the sale, lease or exchange of all or substantially
     all of the assets of the Corporation to any other corporation or entity
     (except a Subsidiary or Parent Corporation); (iii) the adoption by the
     stockholders of the Corporation of a plan of liquidation and dissolution;
     (iv) the acquisition (other than acquisition pursuant to any other clause
     of this definition) by any person or entity, including without limitation a
     "group" as contemplated by Section 13(d)(3) of the Exchange Act, of
     beneficial ownership, as contemplated by such Section, of more than fifty
     percent (50%) (based on voting power) of the Corporation's outstanding
     capital stock or acquisition by a person or entity who currently has
     beneficial ownership which increases such person's or entity's beneficial
     ownership to fifty percent (50%) or more (based on voting power) of the
     Corporation's outstanding capital stock; or (v) as a result of or in
     connection with a contested election of directors, the persons who were
     directors of the Corporation before such election shall cease to constitute
     a majority of the Board. Notwithstanding the provisions of clause (iv)
     above, a Corporate Change shall not be considered to have occurred upon the
     acquisition (other than acquisition pursuant to any other clause of the
     preceding sentence) by any person or entity, including without limitation a
     "group" as contemplated by Section 13(d)(3) of the Exchange Act, of
     beneficial ownership, as contemplated by such Section, of more than
     twenty-five percent (25%) (based on voting power) of the Corporation's
     outstanding capital stock or the requisite percentage to increase their
     ownership to fifty percent (50%) resulting from a public offering of
     securities of the Corporation under the Securities Act of 1933, as amended.

(k)  Exchange Act means the Securities Exchange Act of 1934, as amended.

(l)  Fair Market Value means, as of any specified date, the closing price of the
     Common Stock on the NASDAQ (or, if the Common Stock is not listed on such
     exchange, such other national securities exchange on which the Common Stock
     is then listed) on that date, or if no prices are reported on that date, on
     the last preceding date on which such prices of the Common Stock are so
     reported. If the Common Stock is not then listed on any national securities
     exchange but is traded over the counter at the time determination of its
     Fair Market Value is required to be made hereunder, its Fair Market Value
     shall be deemed to be equal to the average between the reported high and
     low sales prices of Common Stock on the most recent date on which Common
     Stock was publicly traded. If the Common Stock is not publicly traded at
     the time a determination of its value is required to be made hereunder, the
     determination of its Fair Market Value shall be made by the Board in
     good-faith as required by Section 422(c)(1) of the Code and may be based on
     the advice of an independent investment banker or appraiser recognized to
     be expert in making such valuation).

                                       A-3



(m)  Good Reason means, for the purposes of employment, any of the following:
     (i) any material adverse alteration in the Optionee's title, position,
     status, duties or responsibilities with the Corporation; (ii) any reduction
     in the Optionee's annual base salary or annual or long term aggregate
     compensation and benefits; or (iii) any relocation of the Corporation's
     principal executive offices outside of the New York metropolitan area or
     requiring the Optionee to travel on business in unreasonable amounts in
     relation to the Optionee's duties with the Corporation.

(n)  Grant means individually or collectively, any Common Stock granted pursuant
     to the Plan.

(o)  Grantee means an employee, director, officer, other individual or entity
     who has been granted Common Stock pursuant to the Plan.

(p)  Holder means an individual or entity who has been granted an Award.

(q)  Incentive Stock Option means an Option intended to qualify and designated
     as an "incentive stock option" within the meaning of Section 422(b) of the
     Code.

(r)  Non-Qualified Stock Option means an Option not designated as an Incentive
     Stock Option.

(s)  Option means an Award granted under Section 7 of the Plan and includes both
     Incentive Stock Options to purchase Common Stock and Options which do not
     constitute Incentive Stock Options to purchase Common Stock.

(t)  Option Agreement means a written agreement between the Corporation and an
     employee with respect to an Option.

(u)  Optionee means an employee, director, officer, entity or individual who has
     been granted an Option.

(v)  Parent Corporation shall have the meaning set forth in Section 424(e) of
     the Code.

(w)  Plan means the Amended and Restated Nephros 2000 Equity Incentive Plan.

(x)  Rule 16b-3 means Rule 16b-3 of the General Rules and Regulations of the
     Securities and Exchange Commission under the Exchange Act, as such rule is
     currently in effect or as hereafter modified or amended.

(y)  Subsidiary means a company (whether a corporation, partnership, joint
     venture or other form of entity) in which the Corporation, or a corporation
     in which the Corporation owns a majority of the shares of capital stock,
     directly or indirectly, owns an equity interest of fifty percent (50%) or
     more, except solely with respect to the issuance of Incentive Stock Options
     the term "Subsidiary" shall have the same meaning as the term "subsidiary
     corporation" as defined in Section 424(f) of the Code.

                                       A-4



(z)  References to termination of employment and the like mean, except with
     respect to the second paragraph of Section 10(f), (i) the date the Optionee
     ceases to be employed by, or to provide consulting services for, the
     Company or a Subsidiary or Parent Corporation, or any corporation (or any
     of its subsidiaries) which assumes the Optionee's Award in a transaction to
     which section 424(a) of the Code applies or (ii) the date the Optionee
     ceases to be a Board member, provided, however, that an Optionee (x) who is
     at the time of reference both an employee or consultant and a Board member
     or (y) who ceases to be engaged as an employee, consultant or Board member
     and immediately is engaged in another of such relationships with the
     Company or a Subsidiary or Parent Corporation, shall be deemed to have a
     "termination of employment" only upon the later of the dates determined
     pursuant to (i) and (ii) above. For purposes of clause (i) above, an
     Optionee who continues his or her employment or consulting relationship
     with a Subsidiary or Parent Corporation subsequent to the date that such
     entity ceases to be a Subsidiary or Parent Corporation shall have a
     termination of employment upon the date that such entity ceases to be a
     Subsidiary or Parent Corporation. The Committee may in its discretion
     determine whether any leave of absence constitutes a termination of
     employment for purposes of the Plan. For purposes of the second paragraph
     of Section 10(f), a termination of employment shall be the date the
     individual ceases to be employed by the Company within the meaning of
     section 422 of the Code.

SECTION 3
EFFECTIVE DATE AND DURATION OF THE PLAN

The Plan shall be effective as of the date of its adoption by the Board.
Following such adoption, the Board shall submit the Plan to the stockholders for
approval in order to remain in compliance with requirements for Incentive Stock
Option plans under the Code. If approval of the stockholders is not obtained,
all Awards of Incentive Stock Options hereunder shall then be deemed to be
Awards of Non-Qualified Stock Options. Subject to the provisions of Section 9,
the Plan shall remain in effect for ten years from the date of its adoption by
the Board or, if earlier, until terminated by the Board.

SECTION 4
ADMINISTRATION

(a)  Administration of Plan by Board. The Plan shall be administered by the
     Board or the Committee in compliance with Rule 16b-3. Members of the Board
     shall abstain from participating in and deciding matters which directly
     affect their individual ownership interests under the Plan.

(b)  Powers. Subject to the terms of the Plan, the Board shall have sole
     authority, in its discretion, to determine which employees, officers,
     directors, individuals or entities shall receive an Award or Grant, the
     time or times when such Award or Grant shall be made, whether Common Stock,
     an Incentive Stock Option or non-qualified Option shall be granted and the
     number of shares of Common Stock which may be issued under each Option. In
     making such determinations, the Board may take into account the nature of

                                       A-5



     the services rendered by these individuals, their present and potential
     contribution to the success of the Corporation, a Parent Corporation or a
     Subsidiary, and such other factors as the Board in its discretion shall
     deem relevant.

(c)  Additional Powers. The Board shall have such additional powers as are
     delegated to it by the other provisions of the Plan. Subject to the express
     provisions of the Plan, the Board is authorized to prescribe such rules and
     regulations relating to the Plan as it may deem advisable to carry out the
     Plan, and to determine the terms, restrictions and provisions of each Award
     or Grant, including such terms, restrictions and provisions as shall be
     requisite in the judgment of the Board to cause designated Options to
     qualify as Incentive Stock Options, and to make all other determinations
     necessary or advisable for administering the Plan. The Board may correct
     any defect or supply any omission or reconcile any inconsistency in any
     agreement relating to an Award or Grant in the manner and to the extent it
     shall deem expedient to carry it into effect.

(d)  Compliance With Code (S)162(m). In the event the Corporation, a Parent
     Corporation or a Subsidiary becomes a "publicly-held corporation" as
     defined in Section 162(m)(2) of the Code, the Corporation may establish a
     committee of outside directors meeting the requirements of Code (S)162(m)
     to (i) approve the grant of Options which might reasonably be anticipated
     to result in the payment of employee remuneration that would otherwise
     exceed the limit on employee remuneration deductible for income tax
     purposes by the Corporation pursuant to Code (S)162(m) and (ii) administer
     the Plan. In such event, the powers reserved to the Board in the Plan shall
     be exercised by such compensation committee. In addition, Options under the
     Plan shall be granted upon satisfaction of the conditions to such grants
     provided pursuant to Code (S)162(m) and any Treasury Regulations
     promulgated thereunder.

SECTION 5
GRANT OF OPTIONS AND STOCK SUBJECT TO THE PLAN

(a)  Award Limits. The Committee may from time to time grant Awards and/or make
     Grants to one or more employees, directors, officers, individuals or
     entities determined by him or her to be eligible for participation in the
     Plan in accordance with the provisions of Section 6 of the Plan. The
     aggregate number of shares of Common Stock that may be issued under the
     Plan shall not exceed 5,000,000 shares. The aggregate amount of shares of
     Common Stock with respect to which Awards or Grants may be made to any one
     individual under the Plan during any three-year period shall not exceed
     thirty percent (30%) of the aggregate number of shares referred to in the
     preceding sentence. Any of such shares which remain unissued and which are
     not subject to outstanding Options and/or Grants at the termination of the
     Plan shall cease to be subject to the Plan but, until termination of the
     Plan, the Corporation shall at all times reserve a sufficient number of
     shares to meet the requirements of the Plan. Shares shall be deemed to have
     been issued under the Plan only to the extent actually issued and delivered
     pursuant to an Award or Grant. To the extent that an Award or Grant lapses
     or the rights of its Holder or Grantee terminate, any shares of Common
     Stock subject to such Award or

                                       A-6



     Grant shall again be available for the grant of an Award or making of a
     Grant. The aggregate number of shares which may be issued under the Plan
     shall be subject to adjustment in the same manner as provided in Section 8
     of the Plan with respect to shares of Common Stock subject to Options then
     outstanding. Separate stock certificates shall be issued by the Corporation
     for those shares acquired pursuant to a Grant, the exercise of an Incentive
     Stock Option and for those shares acquired pursuant to the exercise of any
     Option which does not constitute an Incentive Stock Option.

(b)  Stock Offered. The stock to be offered pursuant to an Award or Grant may be
     authorized but unissued Common Stock or Common Stock previously issued and
     outstanding and reacquired by the Corporation.

SECTION 6
ELIGIBILITY

An Incentive Stock Option Award made pursuant to the Plan may be granted only to
an individual who, at the time of grant, is an employee of the Corporation, a
Parent Corporation or a Subsidiary. An Award of an Option which is not an
Incentive Stock Option or a Grant of Common Stock may be made to an individual
who, at the time of Award or Grant, is an employee of the Corporation, a Parent
Corporation or a Subsidiary, or to an individual who has been identified by the
Board or the Committee to receive an Award or Grant due to the individual's
contribution or service to the Corporation, including members of the Board of
Directors of the Corporation, a Parent Corporation or a Subsidiary. An Award or
Grant made pursuant to the Plan may be made on more than one occasion to the
same person, and such Award or Grant may include a Common Stock Grant, an
Incentive Stock Option, an Option which is not an Incentive Stock Option, or any
combination thereof. Each Award or Grant shall be evidenced by a written
instrument duly executed by or on behalf of the Corporation.

SECTION 7
STOCK OPTIONS/GRANTS

(a)  Stock Option Agreement. Each Option shall be evidenced by an Option
     Agreement between the Corporation and the Optionee which shall contain such
     terms and conditions as may be approved by the Board or the Committee and
     agreed upon by the Holder. The terms and conditions of the respective
     Option Agreements need not be identical. Each Option Agreement shall
     designate the Option as an Incentive Stock Option (in the event its terms,
     and the individual to whom it is granted, satisfy the requirements for
     Incentive Stock Options under the Code) or a Non-Qualified Stock Option,
     specify the effect of termination of employment, total and permanent
     disability, retirement or death on the exercisability of the Option. Under
     each Option Agreement, a Holder shall have the right to appoint any
     individual or legal entity in writing as his or her beneficiary under the
     Plan in the event of his death. Such designation may be revoked in writing
     by the Holder at any time and a new beneficiary may be appointed in writing
     on the form provided by the Board or the Committee for such purpose. In the

                                       A-7



     absence of such appointment, the beneficiary shall be the legal
     representative of the Holder's estate.

(b)  Option Period. The term of each Option shall be as specified by the Board
     or the Committee at the date of grant and shall be stated in the Option
     Agreement; provided, however, that an Incentive Stock Option may not be
     exercised more than one hundred twenty (120) months from the date it is
     granted.

(c)  Limitations on Exercise of Option. Any Option granted hereunder shall be
     exercisable at such times and under such conditions as determined by the
     Board or the Committee and as shall be permissible under the terms of the
     Plan, which shall be specified in the Option Agreement evidencing the
     Option.

(d)  Special Limitations on Incentive Stock Options. To the extent that the
     aggregate Fair Market Value (determined at the time the respective
     Incentive Stock Option is granted) of Common Stock with respect to which
     Incentive Stock Options are exercisable for the first time by an individual
     during any calendar year under all incentive stock option plans of the
     Corporation (and any Parent Corporation or Subsidiary) exceeds One Hundred
     Thousand Dollars ($100,000) (within the meaning of Section 422 of the
     Code), such excess Incentive Stock Options shall be treated as Options
     which do not constitute Incentive Stock Options. The Board or the Committee
     shall determine, in accordance with applicable provisions of the Code,
     Treasury Regulations and other administrative pronouncements, which of an
     Optionee's Incentive Stock Options will not constitute Incentive Stock
     Options because of such limitation and shall notify the Optionee of such
     determination as soon as practicable after such determination. No Incentive
     Stock Option shall be granted to an individual if, at the time the Option
     is granted, such individual owns stock possessing more than ten percent
     (10%) of the total combined voting power of all classes of stock of the
     Corporation or of its Parent Corporation or a Subsidiary, within the
     meaning of Section 422(b)(6) of the Code, unless (i) at the time such
     Option is granted the Option price is at least one hundred ten percent
     (110%) of the Fair Market Value of the Common Stock subject to the Option
     and (ii) such Option by its terms is not exercisable after the expiration
     of five years from the date of grant.

(e)  Exercise Price. The purchase price of Common Stock issued under each Option
     shall be determined by the Board or the Committee and shall be stated in
     the Option Agreement, but such purchase price shall, in the case of
     Incentive Stock Options, not be less than the Fair Market Value of Common
     Stock subject to the Option on the date the Option is granted, except that
     the price of any Common Stock purchased pursuant to any Incentive Stock
     Option shall be at least one hundred ten percent (110%) of the fair value
     in the case of any person or entity who owns stock comprising more than ten
     percent (10%) of the total combined voting power of all classes of stock of
     the Corporation or its Parent Corporation or Subsidiary. Fair value in the
     case of options that do not constitute Incentive Stock Options shall be
     defined in accordance with applicable Delaware law.

(f)  Options and Rights in Substitution for Stock Options Made by Other
     Corporations. Options may be granted under the Plan from time to time in
     substitution for stock options held by employees of corporations who
     become, or who became prior to the effective date of

                                       A-8



     the Plan, employees of the Corporation, of any Parent Corporation or of any
     Subsidiary as a result of a merger or consolidation of the employing
     corporation with the Corporation, such Parent Corporation or such
     Subsidiary, or the acquisition by the Corporation, a Parent Corporation or
     a Subsidiary of all or a portion of the assets of the employing
     corporation, or the acquisition by the Corporation, a Parent Corporation or
     a Subsidiary of stock of the employing corporation with the result that
     such employing corporation becomes a Subsidiary.

SECTION 8
RECAPITALIZATION OR REORGANIZATION

(a)  Except to the extent otherwise provided in this Section 8, in the event of
     changes in the outstanding Common Stock by reason of stock dividends, stock
     splits, reverse stock splits, reclassifications, recapitalizations,
     reorganizations, mergers, consolidations, combinations, exchanges or other
     similar changes in capitalization, (i) the aggregate number of shares that
     may be issued under the plan and the aggregate number of shares with
     respect to which Awards or Grants may be made to any one individual in any
     three-year period, as set forth in Section 5 hereof, automatically shall be
     appropriately adjusted consistent with such corporate change, and (ii) the
     number of shares subject to any outstanding Award or Grant and the exercise
     price-per-share of any outstanding Award automatically shall be adjusted so
     that the aggregate exercise price remains the same and the Award or Grant
     relates to the number of shares to which the Holder or Grantee would have
     been entitled pursuant to the terms of such corporate change if immediately
     prior to such corporate change, such Holder or Grantee had been the holder
     of the number of shares then covered by such Award or Grant. The Board
     shall, in good faith, compute the amount of any adjustment which may be
     required by this paragraph, which computation shall be final and binding on
     all parties.

(b)  The existence of the Plan and the Awards and/or Grants made hereunder shall
     not affect in any way the right or power of the Board or the stockholders
     of the Corporation to make or authorize any adjustment, recapitalization,
     reorganization or other change in the capital structure of the Corporation,
     a Parent Corporation or a Subsidiary or their business, any merger or
     consolidation of the Corporation, a Parent Corporation or a Subsidiary, any
     issue of debt or equity securities having any priority or preference with
     respect to or affecting Common Stock or the rights thereof, the dissolution
     or liquidation of the Corporation, a Parent Corporation or a Subsidiary, or
     any sale, lease, exchange or other disposition of all or any part of their
     assets or business or any other corporate act or proceeding.

(c)  If the Corporation recapitalizes or otherwise changes its capital
     structure, thereafter upon any exercise of an Option theretofore granted,
     the Optionee shall be entitled to purchase under such Option, in lieu of
     the number of shares of Common Stock as to which such Option shall then be
     exercisable, the number and class of shares of stock and securities, and
     the cash and other property to which the Optionee would have been entitled
     pursuant to the terms of the recapitalization if, immediately prior to such
     recapitalization, the Optionee had been the holder of such record of the
     number of

                                       A-9



     shares of Common Stock then covered by such Option. The Board shall, in
     good faith, compute the amount of any adjustment which may be required by
     this paragraph, which computation shall be final and binding on all
     parties.

(d)  In the event of a Corporate Change, unless otherwise deemed to be
     impractical by the Board, then no later than (i) two business days prior to
     any Corporate Change referenced in Clause (i), (ii), or (iii) of the
     definition thereof or (ii) ten business days after any Corporate Change
     referenced in Clause (iv) or (v) of the definition thereof, the Board,
     acting in its sole discretion without the consent or approval of any
     Optionee or Grantee, shall act to effect the following alternatives with
     respect to outstanding Options which acts may vary among individual
     Optionees and, with respect to acts taken pursuant to Clause (i) above, may
     be contingent upon effectuation of the Corporate Change: (A) in the event
     of a Corporate Change referenced in Clauses (i) and (ii) acceleration of
     exercise for all Options then outstanding so that such Options may be
     exercised in full for a limited period of time on or before a specified
     date (before or after such Corporate Change) fixed by the Board, after
     which specified date all unexercised Options and all rights of Optionees
     thereunder shall terminate; (B) in the event of a Corporate Change
     referenced in Clauses (iii), (iv) and (v) require the mandatory surrender
     to the Corporation by selected Optionees of some or all of the outstanding
     Options held by such Optionees (irrespective of whether such Options are
     then exercisable under the provisions of the Plan) as of a date (before or
     after such Corporate Change) specified by the Board, in which event the
     Board shall thereupon cancel such Options and pay to each Optionee an
     amount of cash per share equal to the excess, if any, of the Change of
     Control Value of the shares subject to such Option over the exercise
     price(s) under such Options for such shares; (C) in the event of a
     Corporate Change referenced in Clauses (iii), (iv) and (v), make such
     adjustments to Options then outstanding as the Board deems appropriate to
     reflect such Corporate Change; or (D) in the event of a Corporate Change
     referenced in Clauses (iii), (iv) and (v), provide that thereafter upon any
     exercise of an Option theretofore granted the Optionee shall be entitled to
     purchase under such Option, in lieu of the number of shares of Common Stock
     as to which such Option shall then be exercisable, the number and class of
     shares of stock or other securities or property (including, without
     limitation, cash) to which the Optionee would have been entitled pursuant
     to the terms of the agreement of merger, consolidation or sale of assets or
     plan of liquidation and dissolution if, immediately prior to such merger,
     consolidation or sale of assets or any distribution in liquidation and
     dissolution of the Corporation, the Optionee had been the holder of record
     of the number of shares of Common Stock then covered by such Option.
     Notwithstanding the provisions of clauses (B), (C) and (D), above, in the
     event of a Corporate Change referenced in Clause (iv), the provisions of
     clauses (B), (C) and (D) shall only apply if, in connection with such a
     Corporate Change, there is a termination (the "Corporate Change
     Termination") of an Optionee's employment with the Corporation (x) by the
     Corporation without Cause, or (y) by the Optionee with Good Reason.

(e)  Except as hereinbefore expressly provided, issuance by the Corporation of
     shares of stock of any class or securities convertible into shares of stock
     of any class, for cash, property, labor or services, upon direct sale, upon
     the exercise of rights or warrants to subscribe therefore, or upon
     conversion of shares or obligations of the Corporation

                                      A-10



     convertible into such shares or other securities, and in any case whether
     or not for fair value, shall not affect, and no adjustment by reason
     thereof shall be made with respect to, the number of shares of Common Stock
     subject to Options theretofore granted, or the purchase price per share of
     Common Stock subject to Options.

SECTION 9
AMENDMENT OR TERMINATION OF THE PLAN

The Board in its discretion may terminate or alter or amend the Plan or any
Award or Grant from time to time; provided that, except as may be provided in
Section 8 hereof, no change may be made which would impair the rights of a
Holder or Grantee in any previously granted Award or Grant without the consent
of such Holder or Grantee, and provided further, that the Board may not, without
approval of the stockholders, amend the Plan:

(a)  to increase the aggregate number of shares which may be issued pursuant to
     the provisions of the Plan on exercise or surrender of Options or upon
     Grants;

(b)  to change the class of employees eligible to receive Awards and/or Grants
     or increase materially the benefits accruing to employees under the Plan;

(c)  to extend the maximum period during which Awards may be granted or Grants
     may be made under the Plan;

(d)  to modify materially the requirements as to eligibility for participation
     in the Plan; or

(e)  to decrease any authority granted to the Board hereunder in contravention
     of Rule 16b-3.

SECTION 10
OTHER

(a)  No Right to an Award or Grant. Neither the adoption of the Plan nor any
     action of the Board or Designated Officer shall be deemed to give an
     employee any right to be granted an Option to purchase Common Stock, to
     receive a Grant or to any other rights hereunder except as may be evidenced
     by an Option Agreement duly executed on behalf of the Corporation, and then
     only to the extent of and on the terms and conditions expressly set forth
     therein.

(b)  No Employment Rights Conferred. Nothing contained in the Plan or in any
     Award or Grant made hereunder shall (i) confer upon any employee any right
     with respect to continuation of employment with the Corporation or any
     Parent Corporation or Subsidiary, or (ii) interfere in any way with the
     right of the Corporation or any Parent Corporation or Subsidiary to
     terminate his or her employment at any time.

(c)  Other Laws; Withholding. The Corporation shall not be obligated to issue
     any Common Stock pursuant to any Award granted or any Grant made under the
     Plan at any time

                                      A-11



     when the offering of the shares covered by such Award has not been
     registered (or exempted) under the Securities Act of 1933 and such other
     state and federal laws, rules or regulations as the Corporation or the
     Board deems applicable and, in the opinion of legal counsel for the
     Corporation, there is no exemption from the registration requirements of
     such laws, rules or regulations available for the issuance and sale of such
     shares. In the event no such exemption is available, the Corporation shall
     use its best efforts to obtain such an exemption or to register such
     shares. No fractional shares of Common Stock shall be delivered, nor shall
     any cash in lieu of fractional shares be paid. As a condition of issuing
     any Common Stock pursuant to any Award granted or any Grant made under the
     Plan, the Corporation shall have the right to deduct in connection with all
     Awards or Grants any taxes required by law to be withheld and to require
     any payments necessary to enable it to satisfy its withholding obligations.
     The Board in its sole discretion may permit the Holder of an Award or Grant
     to elect to surrender, or authorize the Corporation to withhold shares of
     Common Stock (valued at their Fair Market Value on the date of surrender or
     withholding of such shares) in satisfaction of the Corporation's
     withholding obligation, subject to such restrictions as the Board deems
     necessary to satisfy the requirements of Rule 16b-3.

(d)  No Restriction of Corporate Action. Nothing contained in the Plan shall be
     construed to prevent the Corporation or any Parent Corporation or
     Subsidiary from taking any corporate action which is deemed by the
     Corporation or such Parent Corporation or Subsidiary to be appropriate or
     in its best interest, whether or not such action would have an adverse
     effect on the Plan or any Award made under the Plan. No employee,
     beneficiary or other person shall have any claim against the Corporation or
     any Parent Corporation or Subsidiary as a result of such action.

(e)  Restrictions on Transfer. An Award shall not be transferable otherwise than
     by will or the laws of descent and distribution and shall be exercisable
     during the lifetime of the Holder only by such Holder or the Holder's
     guardian or legal representative.

(f)  Effect of Death, Disability or Termination of Employment. The Agreement or
     other written instrument evidencing an Award shall specify the effect of
     the death, disability or termination of employment of the Holder on the
     Award; provided, however that, if the Option Agreement or other written
     instrument does not so specify, an Optionee or such Optionee's
     representative shall be entitled to exercise outstanding Options to the
     extent that such Options were exercisable as of the date of termination of
     employment (i) within one (1) year from the date of termination of
     employment with the Corporation if such termination is caused by death or
     disability, or (ii) within ninety (90) days from the date of termination of
     employment with the Corporation if such termination is caused by reasons
     other than death, disability or Cause, and if such termination was for
     Cause, all outstanding Options shall expire and shall be of no further
     force or effect as of the commencement of business on the effective date of
     such termination of employment.

     Pursuant to the Code, all outstanding Incentive Stock Options of a Holder
     will automatically be converted to a non-qualified stock option if the
     Optionee or its legal representative does not exercise the Incentive Stock
     Option (i) within three (3) months of the date of termination caused by
     reasons other than death or disability; or (ii) within one (1) year of the
     date of termination caused by disability.

(g)  Rule 16b-3. It is intended that the Plan and any grant of an Award made to
     a person subject to Section 16 of the Exchange Act meet all of the
     requirements of Rule 16b-3. If any provisions of the Plan or any such Award
     would disqualify the Plan or such Award hereunder, or would otherwise not
     comply with Rule 16b-3, such provision or Award shall be construed or
     deemed amended to conform to Rule 16b-3.

(h)  Governing Law. The Plan shall by construed in accordance with the laws of
     the State of Delaware and all applicable federal law.

                                      A-12

EX-10.2

                                                                    Exhibit 10.2

                                  NEPHROS, INC.
                            2004 STOCK INCENTIVE PLAN

                                    Article 1
                Establishment, Purpose and Effective Date of Plan

     1.1 Establishment of the Plan. Nephros, Inc. (the "Company") hereby
establishes an incentive compensation plan to be known as the "Nephros, Inc.
2004 Stock Incentive Plan" (the "Plan"), as set forth in this document. The Plan
permits the grant of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock and phantom stock units to Key Persons.
Subject to ratification by a majority of the shareholders of the Company, the
Plan shall become effective as of July 8, 2004 (the "Effective Date"), and shall
remain in effect as provided in Section 1.3. Awards may be granted under the
Plan on or after the Effective Date, but shall in no event be exercisable or
payable to a Participant prior to such stockholder approval and, if such
approval is not obtained within twelve months after the Effective Date, such
awards and the Plan shall be of no force and effect.

     1.2 Purpose of the Plan. The purpose of the Plan is to promote the success
of the Company by providing incentives to Key Persons that will link their
personal interests to the long-term financial success of the Company and to
growth in stockholder value. The Plan is intended to provide flexibility to the
Company in its ability to motivate, attract, and retain the services of Key
Persons upon whose judgment, interest and special effort the successful conduct
of its operations is largely dependent.

     1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as
defined in Section 1.1, and shall remain in effect, subject to earlier
termination in accordance with Article 9, until all Stock subject to it shall
have been purchased or acquired according to its provisions. However, in no
event may an Award be granted under the Plan on or after the tenth anniversary
of the Effective Date.

                                    Article 2
                          Definitions and Construction

     2.1 Definitions. Whenever used in the Plan with the initial letter of the
word capitalized, the following terms shall have the meanings set forth below,
unless a different meaning is clearly intended by the context.

     (a)  "Award" means, individually or collectively, a grant under the Plan of
          Incentive Stock Options, Nonqualified Stock Options, Stock
          Appreciation Rights, Restricted Stock, or Phantom Stock Units.

     (b)  "Board" or "Board of Directors" means the Board of Directors of the
          Company.



     (c)  "Cause" has the meaning set forth in any employment, severance or
          other agreement governing the relationship between the relevant
          Participant and the Company in effect as of the date the event giving
          rise to Cause occurred. In the absence of such a provision, "Cause"
          means (i) any material violation by the Participant of the terms of
          any agreement between the Participant and the Company, including,
          without limitation, any employment or non-competition agreement, (ii)
          the Participant's conviction (including conviction on a nolo
          contendere plea) of any crime (whether or not involving the Company)
          that either constitutes a felony in the jurisdiction involved or, in
          the good faith judgment of the Company, involves fraud or dishonesty,
          (iii) conduct of the Participant related to the Participant's
          employment for which either criminal or civil penalties against the
          Participant or the Company may be sought or which is otherwise
          materially injurious to the Company, (iv) material violation of the
          Company's policies, including, without limitation, those relating to
          sexual harassment, the disclosure or misuse of confidential
          information, or those set forth in Company manuals or statements of
          policy, or (v) gross neglect or misconduct in the performance of the
          Participant's duties for the Company or the Participant's willful or
          repeated failure or refusal to perform such duties.

          Any rights the Company may have under the Plan resulting from events
          giving rise to Cause shall be in addition to the rights the Company
          may have under any other agreement with a Participant or at law or in
          equity. Any determination of whether a Participant's employment is (or
          is deemed to have been) terminated for Cause shall be made by the
          Committee in its sole discretion, which determination shall be final
          and binding on all parties. If, subsequent to a Participant's
          termination of employment (whether voluntary or involuntary) without
          Cause, it is discovered that the Participant's employment could have
          been terminated for Cause, such Participant's employment shall be
          deemed to have been terminated for Cause. A Participant's termination
          of employment for Cause shall be effective as of the date of the
          occurrence of the event giving rise to Cause, regardless of when the
          determination of Cause is made.

     (d)  "Change in Control" means the occurrence of any of the following
          events: (i) any "person," including a "group," as such terms are
          defined in sections 13(d) and 14(d) of the 1934 Act and the rules
          promulgated thereunder, becomes the beneficial owner, directly or
          indirectly, whether by purchase or acquisition or agreement to act in
          concert or otherwise, of more than 50% of the outstanding shares of
          Stock; (ii) the complete liquidation of the Company, (iii) the sale of
          all or substantially all of the assets of the Company; or (iv) a
          majority of the members of the Board are elected to the Board without
          having previously been nominated and approved by a majority of the
          members of the Board incumbent on the day immediately preceding such
          election. Notwithstanding the foregoing, a Change in Control shall not
          be deemed to have occurred as a result of an underwritten public
          offering of Stock.

     (e)  "Code" means the Internal Revenue Code of 1986, as amended from time
          to time.

                                      -2-



     (f)  "Committee" means the committee appointed by the Board to administer
          the Plan pursuant to Section 3.1.

     (g)  "Company" means Nephros, Inc., a Delaware corporation, or any
          successor as provided in Section 10.7.

     (h)  "Disability" means a permanent and total disability as determined by
          the Committee in good faith, provided that with respect to an ISO, it
          shall mean a disability described in Sections 422(c)(6) of the Code.

     (i)  "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     (j)  "Fair Market Value" of a Share on a specified date means the average
          of the bid and asked closing prices at which one Share is traded on
          the over-the-counter market on that date, as reported on the National
          Association of Securities Dealers Automated Quotation system
          ("NASDAQ"), or the closing price at which a Share is listed if listed
          as a national market security on NASDAQ or on a national securities
          exchange on which Shares are primarily traded; but if no Shares were
          traded on such date, then on the last previous date on which a Share
          was so traded, or, if none of the above is applicable, the value of a
          Share as established by the Committee for such date using any
          reasonable method of valuation.

     (k)  "Incentive Stock Option" or "ISO" means an Option granted under
          Article 6 which is designated an Incentive Stock Option and is
          intended to meet the requirements of Section 422(b) of the Code.

     (l)  "Key Person" means an employee or director of or consultant to the
          Company or one of its Subsidiaries, who, in the opinion of the
          Committee, can contribute to the growth and profitability of the
          Company. "Key Person" also may include those employees, directors or
          consultants identified by the Committee in connection with situations
          concerning extraordinary performance, promotion, retention, or
          recruitment. The granting of an Award under the Plan shall be deemed a
          determination by the Committee that such individual is a Key Person.

     (m)  "Nonqualified Stock Option" or "NSO" means an Option granted under
          Article 6 which is not an Incentive Stock Option.

     (n)  "Option" means an Incentive Stock Option or a Nonqualified Stock
          Option. Subject to the terms and conditions of the Plan and of the
          relevant Option agreement, the grant of an Option entitles a
          Participant to purchase a pre-established number of Shares at an
          exercise price established by the Committee.

     (o)  "Participant" means a Key Person who has been granted an Award under
          the Plan.

     (p)  "Period of Restriction" means the period or periods during which the
          transfer of Shares of Restricted Stock is restricted pursuant to
          Article 7.

                                      -3-



     (q)  "Phantom Stock Unit" shall mean the right, pursuant to Article 8, to
          receive from the Company, in the discretion of the Committee, a Share
          or a cash payment equal to the Fair Market Value of such Share as of a
          specified date in the future.

     (r)  "Plan" means the Nephros, Inc. 2004 Stock Incentive Plan, as described
          in this document.

     (s)  "Restricted Stock" means restricted Shares granted to a Participant
          pursuant to Article 7.

     (t)  "Stock" or "Shares" means the common stock of the Company.

     (u)  "Stock Appreciation Right" or "SAR" means the right, subject to the
          terms of the Plan and the applicable Award agreement, to receive from
          the Company, with respect to each Share subject to the SAR, an amount
          in cash or Shares equal to the excess of the Fair Market Value of a
          Share on the date of exercise of the SAR over the exercise price per
          Share of the SAR.

     (v)  "Subsidiary" means any corporation (other than the Company) in an
          unbroken chain of corporations beginning with the Company if, at the
          time of reference, each of the corporations, other than the last
          corporation in the unbroken chain, owns stock possessing 50 percent or
          more of the total combined voting power of all classes of stock in one
          of the other corporations in such chain.

     2.2 References in the Plan to a "termination of employment" or a
Participant "terminating employment" and the like shall mean the Participant (i)
ceasing to be employed by, or to provide consulting or other services to, the
Company or a Subsidiary or any corporation (or any of its subsidiaries) which
assumes the Participant's award in a transaction to which section 424(a) of the
Code applies, or (ii) ceasing to be a member of the Board of Directors. For
purposes of the foregoing, if a Participant continues in a relationship with the
Company or a Subsidiary as an employee, a consultant or a member of the Board of
Directors, the Participant shall not be considered to have terminated employment
until he or she severs all such relationships with the Company, even if the
nature of his or her relationship changes. The Committee shall determine whether
any leave of absence constitutes a termination of employment for purposes of the
Plan and the impact, if any, of any such leave of absence on Awards previously
granted under the Plan.

     2.3 Gender and Number. Except where otherwise indicated by the context, any
masculine term used in this document also shall include the feminine; and the
plural shall include the singular and the singular shall include the plural.

     2.4 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

                                      -4-



                                    Article 3
                                 Administration

     3.1 The Committee. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee")
consisting of not less than two directors who shall be appointed from time to
time by, and shall serve at the discretion of, the Board of Directors. It is
intended that when the Stock becomes publicly traded each member of the
Committee shall be a "non-employee director" for purposes of Rule 16b-3 under
the Securities Exchange Act of 1934 (the "Exchange Act") and an "outside
director" for purposes of Code Section 162(m) and the regulations thereunder or
that the members of the Committee who do not qualify as both outside directors
and non-employee directors will recuse themselves at the appropriate time to
permit grants hereunder to satisfy the requirements of Code Section 162(m) and
Rule 16b-3. Notwithstanding the foregoing, the fact that the Committee is not
comprised solely of outside directors and non-employee directors and such
members do not recuse themselves, will not invalidate the grant of any Award or
any other action that otherwise satisfies the terms of the Plan. If the
Committee does not exist, or for any other reason determined by the Board, the
Board may take any action under the Plan that otherwise would be the
responsibility of the Committee.

     3.2 Authority of the Committee. Subject to the provisions of the Plan, the
Committee shall have full power to construe and interpret the Plan and the terms
of any Award; to correct any defect, supply any omission and reconcile any
inconsistency in the Plan; to establish, amend or waive rules and regulations
for its administration; to make all other determinations that may be necessary
or advisable for the administration of the Plan; to accelerate the
exercisability or vesting of any Award or the end of a Period of Restriction;
and, subject to the provisions of Article 9, to amend the terms and conditions
of any outstanding Award to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan. Notwithstanding the
foregoing, no action of the Committee may, without the consent of the person or
persons entitled to exercise any outstanding Option or to receive payment of any
other outstanding Award, adversely affect the rights of such person or persons.
Any amendment that is intended to preserve the status of an Option as an
Incentive Stock Option or otherwise to obtain favorable tax treatment for an
Award shall not be considered as adversely affecting the rights of any person.

     3.3 Selection of Participants. The Committee shall have the authority to
grant Awards under the Plan, from time to time, to such Key Persons as it may
select in its discretion, to determine the time or times of receipt, the types
of Awards, and the number of Shares covered by each of the Awards, and to
establish the terms, conditions and provisions of each such Award, including any
vesting and exercisability schedules, performance criteria and restrictions
applicable to the Award.

     3.4 Decisions Binding. All interpretations, determinations and decisions
made by the Committee pursuant to the provisions of the Plan shall be final,
conclusive and binding on all persons, including the Company, its Subsidiaries,
stockholders and employees, and the Participants and their estates and
beneficiaries.

                                      -5-



     3.5 Delegation of Certain Responsibilities. The Committee, in its sole
discretion, may delegate to appropriate officers of the Company the
administration of the Plan under this Article 3, provided that the Committee may
not delegate its authority to grant Awards or to correct errors, omissions or
inconsistencies in the Plan. All authority delegated by the Committee under this
Section 3.5 shall be exercised in accordance with the provisions of the Plan and
any guidelines for the exercise of such authority that may from time to time be
established by the Committee. Notwithstanding the foregoing or any other
provision of the Plan, the Committee or, pursuant to Section 3.1, the Board, may
delegate to one or more officers of the Company the authority to designate the
Key Persons (other than such officer(s)), who will receive Awards under the Plan
and the size and other terms of each such Award, to the fullest extent permitted
by (S)157 of the Delaware General Corporation Law (or any successor provision).

     3.6 Procedures of the Committee. All determinations of the Committee shall
be made by a majority of its members present at the meeting (in person or
otherwise) at which a quorum is present. A majority of the entire Committee
shall constitute a quorum for the transaction of business. Any action required
or permitted to be taken at a meeting of the Committee may be taken without a
meeting if a unanimous written consent, which sets forth the action, is signed
by each member of the Committee and filed with the minutes for proceedings of
the Committee. No member of the Committee shall be liable, in the absence of bad
faith, for any act or omission with respect to his or her services on the
Committee. Service on the Committee shall constitute service as a director of
the Company so that members of the Committee shall be entitled to
indemnification (as provided in Section 10.6), and limitation of liability and
reimbursement with respect to their services as members of the Committee to the
same extent as for services as directors of the Company.

     3.7 Award Agreements. Each Award under the Plan shall be evidenced by an
award agreement or certificate which shall be signed by an officer of the
Company and by the Participant, as applicable, and shall contain such terms and
conditions as may be approved by the Committee, which need not be the same in
all cases. Any Award agreement or certificate may be supplemented or amended in
writing from time to time as approved by the Committee, provided that the terms
of such agreements or certificates as amended or supplemented, as well as the
terms of the original award agreement, are not inconsistent with the provisions
of the Plan. An Option agreement or certificate shall specify whether the Option
is intended to be an Incentive Stock Option or a Nonqualified Stock Option. If
an Option agreement or certificate does not expressly provide that the Option is
an ISO, the Option will be an NSO. Any reference in this Plan to an Award
agreement or the like shall mean an Award agreement or certificate, as the case
may be.

     3.8 Form and Time of Elections. Unless otherwise specified in the Plan,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted modification or
revocation of such election, shall be in writing filed with the Committee at
such times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.

     3.9 Information to be Furnished to the Committee. The Company shall furnish
the Committee with such data and information as it determines may be required
for it to discharge its duties. The records of the Company as to an employee's
or Participant's employment,

                                      -6-



termination of employment, leave of absence, reemployment and compensation, and
comparable information related to directors and consultants, shall be conclusive
on all persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.

                                    Article 4
                            Stock Subject to the Plan

     4.1 Source of Shares. The Shares with respect to which Awards may be made
under the Plan shall be Shares either (a) currently authorized but unissued, (b)
authorized and issued and held in the Company's treasury, or (c) acquired by the
Company for the purposes of the Plan.

     4.2 Limits on Awards. The maximum number of Shares that may be granted to
Participants and their beneficiaries under the Plan shall be as follows:

     (a)  Aggregate Plan Limit. The total number of Shares with respect to which
          Awards may be granted is 1,711,500 Shares. Such amount may be adjusted
          under paragraph (e) below. To the extent that a SAR or Phantom Stock
          Unit does not provide for the issuance of Shares, there is no limit on
          the number of shares with respect to which such SARs or Phantom Stock
          Units may be granted.

     (b)  Individual Limit. The total number of Shares with respect to which
          Awards may be granted to any Key Person during any one calendar year
          shall not exceed 1,707,146 Shares. Such limit may be adjusted under
          paragraph (e) below. Notwithstanding paragraph (d) below, Options
          granted and subsequently canceled or deemed to be canceled in a
          calendar year count against this individual limit for the year in
          which granted, even after their cancellation.

     (c)  ISO Limit. To the extent that the aggregate Fair Market Value
          (determined as of the time the Option is granted) of Shares with
          respect to which ISOs are first exercisable by any employee during any
          calendar year shall exceed $100,000, or such other amount as may be
          established from time to time under Section 422 of the Code, such
          Options shall be treated as Nonqualified Stock Options regardless of
          the terms of the Award.

     (d)  Shares Available Again. The following Shares shall again become
          available for Awards: (i) Shares that are subject to an Option or SAR
          that remain unissued upon the cancellation or termination of such
          Option for any reason, (ii) Shares covered by an Award are not
          delivered to a Participant or beneficiary for any reason, whether
          because the Award is settled in cash or otherwise, (iii) Shares
          previously acquired through option exercise that are surrendered to
          the Company as payment of the Option exercise price, and (iv) Shares
          of Restricted Stock that are forfeited and with respect to which the
          dividends paid on such Shares are also forfeited.

                                      -7-



     (e)  Adjustments in Authorized Shares. In the event of any merger,
          reorganization, split-up, spin-off, consolidation, recapitalization,
          separation, liquidation, extraordinary cash dividend, stock dividend,
          stock split, share combination, exchange of shares, or other change in
          the corporate structure of the Company affecting the Stock, the
          Committee, in its sole discretion, shall adjust the limits set forth
          in paragraphs (a) and (b) above with respect to the number and class
          of Shares, as applicable, which may be granted and delivered under the
          Plan.

     4.3 General Restrictions. Delivery of Shares or other amounts under the
Plan shall be subject to the following:

     (a)  Notwithstanding any other provision of the Plan, the Company shall
          have no liability to deliver any shares of Stock under the Plan or
          make any other distribution of benefits under the Plan unless such
          delivery or distribution would comply with all applicable laws
          (including, without limitation, the requirements of the Securities Act
          of 1933) and the applicable requirements of any securities exchange or
          similar entity.

     (b)  To the extent that the Plan provides for issuance of stock
          certificates to reflect the issuance of Shares, the issuance may be
          effected in the discretion of the Committee on a non-certificated
          basis, to the extent not prohibited by applicable law or the
          applicable rules of any stock exchange.

     4.4 Grant and Use of Awards. In the discretion of the Committee, a
Participant may be granted any Award permitted under the provisions of the Plan,
and more than one Award may be granted to a Participant. Awards may be granted
as alternatives to or replacement of awards granted or outstanding under the
Plan, or any other plan or arrangement of the Company (including a plan or
arrangement of a business or entity, all or a portion of which is acquired by
the Company).

     4.5 Settlement and Payments. Awards may be settled through cash payments,
the delivery of Shares, the granting of replacement Awards, or any combination
of such methods, as the Committee shall determine. Any Award settlement may be
subject to such conditions, restrictions and contingencies as the Committee
shall determine.

                                    Article 5
                          Eligibility and Participation

     5.1 Eligibility. Any person who, in the opinion of the Committee, is a Key
Person is eligible to participate in this Plan, provided, however, that
Incentive Stock Options only may be granted to Key Persons who are employees.

     5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may from time to time select those Key Persons to whom Awards shall be
granted and determine the nature and amount of each Award. No individual, even
if previously designated a Key Person, shall have any right to be granted an
Award under this Plan.

                                      -8-



                                    Article 6
                   Stock Options and Stock Appreciation Rights

     6.1 Grant of Options. Subject to the terms and provisions of the Plan, the
Committee may grant Options to Key Persons at any time and from time to time,
subject to such terms and conditions as the Committee shall determine in its
sole discretion. Subject to Article 4, the Committee shall have complete
discretion in determining the number of Shares subject to Options granted to
each Participant.

     6.2 Grant of Stock Appreciation Rights; Types of Stock Appreciation Rights.
Subject to the terms and provisions of the Plan, the Committee may grant SARs to
such Key Persons, and in such amounts and subject to such vesting and forfeiture
provisions and such other terms and conditions, as the Committee shall determine
in its sole discretion. A SAR may provide for payment by the Company upon
exercise to be in cash or Shares (valued at their Fair Market Value on the date
of exercise of the SAR), as the Committee may determine in its sole discretion.
A SAR may be granted in connection with all or any part of, or independently of,
any Option granted under the Plan. A SAR granted in connection with a
Nonqualified Stock Option may be granted at or after the time of grant of such
Option. A SAR granted in connection with an Incentive Stock Option may be
granted only at the time of grant of such Option. Upon the exercise of a SAR
granted in connection with an Option, the number of Shares subject to the Option
shall be reduced by the number of Shares with respect to which the SAR is
exercised. Upon the exercise of an Option in connection with which a SAR has
been granted, the number of Shares subject to the SAR shall be reduced by the
number of Shares with respect to which the Option is exercised, provided that if
the number of Shares initially subject to the SAR is less than the number of
Shares initially subject to the Option, the number of Shares subject to the SAR
only shall be reduced to the extent that it causes the same number of Shares to
be subject to the Option and the SAR.

     6.3 Adjustment of Options and SARs. The Committee shall adjust the number
of Shares subject to an Option or SAR and the terms of such Option or SAR, as
follows:

     (a)  Increase or Decrease in Issued Shares Without Consideration. Subject
          to any required action by the stockholders of the Company, in the
          event of any increase or decrease in the number of issued Shares
          resulting from a subdivision or consolidation of Shares or the payment
          of a stock dividend (but only on the Shares), or any other increase or
          decrease in the number of such shares effected without receipt of
          consideration by the Company, the Committee shall proportionally
          adjust the number of Shares subject to each outstanding Option and SAR
          and the exercise price-per-Share of each such Option and SAR.

     (b)  Certain Mergers. Subject to any required action by the stockholders of
          the Company, in the event that the Company shall be the surviving
          corporation in any merger or consolidation (except a merger or
          consolidation as a result of which the holders of Shares receive
          securities of another corporation and/or other property, including
          cash), each Option and SAR outstanding on the date of such merger or
          consolidation shall pertain to and apply to the securities which a
          holder of the

                                      -9-



          number of Shares subject to such Option or SAR would have received in
          such merger or consolidation.

     (c)  Certain Other Transactions. In the event of (i) a dissolution or
          liquidation of the Company, (ii) a sale of all or substantially all of
          the Company's assets, (iii) a merger or consolidation involving the
          Company in which the Company is not the surviving corporation, or (iv)
          a merger or consolidation involving the Company in which the Company
          is the surviving corporation but the holders of Shares receive
          securities of another corporation and/or other property, including
          cash, the Committee, in its absolute discretion, shall have the power
          to:

          (A)  cancel, effective immediately prior to the occurrence of such
               event, each Option and SAR outstanding immediately prior to such
               event (whether or not then exercisable) and, in full
               consideration of such cancellation, pay to the Participant to
               whom such Option or SAR was granted an amount in cash, for each
               Share subject to such Option or SAR, equal to the excess of (i)
               the value, as determined by the Committee in its absolute
               discretion, of the property (including cash) received by the
               holder of a Share as a result of such event over (ii) the
               exercise price of such Option or SAR; or

          (B)  provide for the exchange of each Option and SAR outstanding
               immediately prior to such event (whether or not then exercisable)
               for an option or stock appreciation right, as appropriate, on
               some or all of the property which a holder of the number of
               Shares subject to such Option or SAR would have received in such
               transaction or on shares of the acquirer or surviving corporation
               and, incident thereto, make an equitable adjustment as determined
               by the Committee in its absolute discretion in the exercise price
               of the option or stock appreciation right, and/or the number of
               shares or amount of property subject to the option or stock
               appreciation right and/or, if appropriate, provide for a cash
               payment to the Participant to whom such Option or SAR was granted
               in partial consideration for the exchange of the Option or SAR.

     (d)  Other Changes. In the event of any change in the capitalization of the
          Company or corporate change, other than those specifically referred to
          in this Section 6.3, the Committee may, in its absolute discretion,
          make such adjustments in the number and class of Shares subject to
          Options and SARs outstanding on the date on which such change occurs
          and in the per-share exercise price of each such Option and SAR as the
          Committee may consider appropriate to prevent dilution or enlargement
          of rights. In addition, if and to the extent the Committee determines
          it is appropriate, the Committee may elect to cancel each Option or
          SAR outstanding immediately prior to such event (whether or not then
          exercisable), and, in full consideration of such cancellation, pay to
          the Participant to whom such Option or SAR was granted an amount in
          cash, for each Share subject to such Option or SAR, equal to the
          excess of (i) the Fair Market Value of each Share on the date of such
          cancellation over (ii) the exercise price of such Option or SAR.

                                      -10-



     6.4 Exercise Price. The exercise price-per-share of each Option and SAR
granted under this Article 6 shall be established by the Committee or shall be
determined by a method established by the Committee at the time that the Option
or SAR is granted, provided, however, that the exercise price-per-share of an
Incentive Stock Option shall not be less than the Fair Market Value of a Share
as of the date of grant, except as provided in Section 6.6 with respect to 10%
shareholders.

     6.5 Duration of Options and SARs. Each Option and SAR shall expire at such
time as the Committee shall determine at the time of grant; provided, however,
that no ISO shall be exercisable later than the tenth anniversary of the date of
its grant, except as provided in Section 6.6 with respect to 10% shareholders

     6.6 Special Rule for 10% Shareholders. An Incentive Stock Option granted to
an Employee who, at the time of grant, owns (within the meaning of Section
424(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, shall have an exercise price which
is at least 110% of the Fair Market Value of the Stock subject to the Option and
shall not be exercisable later than the fifth anniversary of the date of its
grant.

     6.7 Exercise of Options and SARs. Options and SARs granted under the Plan
shall be exercisable on such terms and conditions and during such periods as the
Committee shall in each instance establish, which need not be the same for all
Participants. In the event that the Committee, at the time of grant, does not
specify the period during which an Option or SAR will be exercisable, such
Option or SAR shall become exercisable with respect to 1/4 of the Shares subject
to such Option or SAR on each of the first four anniversaries of the date of
grant, provided that an SAR granted in connection with an Option may be
exercised only at such times and to the extent that the related Option may be
exercised. Notwithstanding the foregoing, unless the applicable Award agreement
otherwise provides, an Option or SAR shall become exercisable in full upon the
occurrence of a Change in Control. Unless the applicable Award agreement
otherwise provides, once a portion of an Option or SAR becomes exercisable, it
shall remain exercisable until the earlier of (i) the tenth anniversary of the
date of grant or (ii) the expiration, cancellation or termination of the Award.

     6.8 Payment of Option Exercise Price. Options shall be exercised by the
delivery of a written notice to the Company setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full payment
for the Shares, subject to the following:

     (a)  The full exercise price for Shares purchased upon the exercise of any
          Option shall be paid at the time of such exercise (except that payment
          pursuant to paragraph (c) shall be made as soon as practicable after
          exercise of the Option).

     (b)  The exercise price shall be payable in cash or, if permitted by the
          Committee, by tendering, by actual delivery of Shares or by
          attestation, Shares acceptable to the Committee in its discretion and
          valued at Fair Market Value as of the date of exercise, or in any
          combination of cash and Shares, as determined and permitted by the
          Committee.

                                      -11-



     (c)  To the extent permitted by law, the Committee may, in its discretion,
          permit a Participant to elect to pay the exercise price by means of a
          brokered cashless exercise.

     As soon as practicable after receipt of written notification and payment,
the Company shall deliver to the Participant stock certificates issued in the
Participant's name with respect to the number of Shares purchased.

     6.9 Restrictions on Stock Transferability. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option or SAR
under the Plan as it may deem advisable, including, without limitation,
restrictions under applicable Federal securities law, the requirements of any
stock exchange upon which such Shares are then listed and any blue sky or state
securities laws applicable to such Shares.

     6.10 Termination of Employment. Unless the Committee determines otherwise,
if a Participant's employment with the Company or a Subsidiary terminates, any
outstanding Options and SARs that are not exercisable as of the date of
termination shall expire as of the termination of employment and shall be of no
further force or effect. The following provisions shall apply to Options and
SARs that were exercisable at the time the Participant's employment terminates:

     (a)  Death. If a Participant dies while employed by the Company or a
          Subsidiary, any outstanding Options and SARs, to the extent
          exercisable at the time of death, shall remain exercisable until the
          earlier of the expiration date of the Option or SAR and the first
          anniversary of the Participant's death. Any such Option or SAR may be
          exercised by the person or persons who acquire the Participant's
          rights under the Option or SAR by will or by the laws of descent and
          distribution.

     (b)  Disability. If a Participant's employment with the Company or a
          Subsidiary terminates by reason of Disability or if an employee of the
          Company or a Subsidiary is designated an inactive employee by reason
          of Disability, any outstanding Options and SARs, to the extent
          exercisable at the time of such termination or designation, shall
          remain exercisable until the earlier of the expiration date of the
          Option or SAR and the first anniversary of the Participant's
          termination or designation.

     (c)  Cause. If the employment of a Participant shall terminate for Cause,
          rights under all outstanding Options and SARs shall immediately expire
          as of the commencement of business of the effective date of the
          termination of employment and shall be of no further force or effect.

     (d)  Other Reasons. If a Participant's employment with the Company or a
          Subsidiary terminates for any reason other than death, Disability or
          for Cause, all outstanding Options and SARs, to the extent exercisable
          at the time of such termination, shall remain exercisable until the
          earlier of the expiration date of the Option or SAR and three months
          after such date of termination.

     6.11 Nontransferability of Options and SARs. Except as otherwise provided
by the Committee in the applicable Award agreement, no Option or SAR granted
under the Plan may be

                                      -12-



sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution. Unless
otherwise determined by the Committee in accordance with the provisions of the
immediately preceding sentence, an Award may be exercised during the lifetime of
a Participant only by the Participant or, during the period that the Participant
is under a legal disability, by the Participant's guardian or legal
representative.

     6.12 Requirements of Law. Notwithstanding any other provision of the Plan,
the Committee may impose such conditions on exercise of an Option or SAR
(including without limitation the right of the Committee to limit the time of
exercise to specified periods) as may be necessary to satisfy the requirements
of Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934. An
Option or SAR may not be exercised if, in the determination of the Board of
Directors, such exercise would violate the Sarbanes-Oxley Act of 2002 or other
applicable law.

     6.13 Settlement in Cash. Upon the exercise of an Option by a Participant,
the Committee may in its discretion pay to the Participant in lieu of Shares, an
amount in cash equal to the excess of (a) the Fair Market Value at the time of
exercise of all or some of the number of Shares of Stock with respect to which
the Participant is exercising his or her Option, over (b) the total Exercise
Price for such Shares established by the Committee, reduced by (c) withholding
for all applicable taxes.

                                    Article 7
                                Restricted Stock

     7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Restricted
Stock to such Participants and in such amounts as it shall determine.

     7.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by a Restricted Stock agreement that shall specify the Period of
Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Committee shall determine.

     7.3 Transferability. Except as provided in this Article 7, Shares of
Restricted Stock granted under the Plan may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the termination of the
applicable Period of Restriction or for such period of time as shall be
established by the Committee and specified in the Restricted Stock Agreement, or
upon earlier satisfaction of other conditions as specified by the Committee in
its sole discretion and set forth in the Restricted Stock Agreement. All rights
granted to a Participant with respect to the Restricted Stock during the Period
of Restriction shall be exercisable during his or her lifetime only by such
Participant.

     7.4 Other Restrictions. The Committee shall impose such other restrictions
on any Shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable including, without limitation, restrictions under applicable Federal
or state securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.

                                      -13-



     7.5 Issuance of Certificates; Shareholder Rights. Promptly after a
Participant accepts a restricted stock award, the Company or its exchange agent
shall issue to the Participant a stock certificate or stock certificates for the
shares of Restricted Stock covered by the Award or shall establish an account
evidencing ownership of the Shares in uncertificated form. The Participant shall
not be deemed for any purpose to be, or have rights as, a shareholder of the
Company by virtue of the grant of Restricted Stock, except to the extent a stock
certificate is issued or an account is established therefor pursuant to this
Section 7.5, and then only from the date such certificate is issued or such
account is established. Upon the issuance of such stock certificate(s), or
establishment of such account, the Participant shall have the rights of a
stockholder with respect to the Restricted Stock, including the right to vote
the shares, subject to (i) the nontransferability restrictions described in
Section 7.3 and the forfeiture provision described in Section 7.11, (ii) in the
Committee's discretion, a requirement that any dividends paid on such shares
shall be held in escrow until all restrictions on such shares have lapsed, and
(iii) any other restrictions and conditions contained in the applicable
Restricted Stock Agreement.

     7.6 Certificate Legend. In addition to any legends placed on certificates
pursuant to Section 7.4, each certificate representing Shares of Restricted
Stock granted pursuant to the Plan shall bear the following legend:

          "The sale or other transfer of the shares of stock represented by this
     certificate, whether voluntary, involuntary, or by operation of law, is
     subject to certain restrictions on transfer set forth in the Nephros, Inc.
     2004 Stock Incentive Plan, and in the rules and administrative procedures
     adopted pursuant to such Plan. A copy of the Plan, such rules and
     procedures may be obtained from the Secretary of Nephros, Inc."

     7.7 Custody of Stock Certificate(s). Unless the Committee shall otherwise
determine, any stock certificates issued evidencing Restricted Stock shall
remain in the possession of the Company or such other custodian as the Company
may designate until the end of the Period of Restriction.

     7.8 Removal of Restrictions. Except as otherwise provided in this Article
7, Shares of Restricted Stock shall become freely transferable by the
Participant after the last day of the applicable Period of Restriction. Unless
the applicable Restricted Stock agreement otherwise provides, Shares of
Restricted Stock shall become freely transferable by the Participant and
nonforfeitable upon the occurrence of a Change in Control. Once the Shares are
released from the restrictions, the Participant shall be entitled to have the
legend set forth in Section 7.6 removed from his or her Stock certificate.

     7.9 Dividends and Other Distributions. Unless the Committee specifies
deferred payment of cash dividends in the Restricted Stock Agreement, a
Participant holding Shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares during the Period of Restriction. If any such dividends or
distributions are paid in Shares of Stock, such Shares shall be Restricted Stock
and shall be subject to the same restrictions on transferability as the Shares
of Restricted Stock with respect to which such dividends or distributions were
paid.

                                      -14-



     7.10 Termination of Employment for Other Reasons. Except as otherwise
provided by the Committee in the applicable Award agreement, in the event that a
Participant terminates his or her employment with the Company during the Period
of Restriction for any reason, any Shares of Restricted Stock and the related
cash dividends still subject to restrictions as of the date of such termination
shall automatically be forfeited and returned to the Company; provided, however,
that the Committee, in its sole discretion, may waive the automatic forfeiture
of any or all such Shares and may add such new restrictions to such Shares of
Restricted Stock as it deems appropriate.

     7.11 Adjustment of Awards. In the event of a stock dividend, stock split,
share combination, exchange of shares or any other change in the corporate
structure of the Company affecting Restricted Stock, including but not limited
to the events described in section 6.3(a), the Committee in its sole discretion
may adjust the number or class of Shares subject to a Restricted Stock Award
which have not yet been issued, as may be determined to be appropriate and
equitable, to prevent dilution or enlargement of rights.

                                    Article 8
                               Phantom Stock Units

     8.1 Grant of Phantom Stock Units. Subject to the terms and provisions of
the Plan, the Committee may grant awards of Phantom Stock Units to such key
persons, in such amounts, and subject to such terms and conditions as the
Committee shall determine in its discretion. Phantom Stock Units may be awarded
independently of or in connection with any other award under the Plan.

     8.2 Vesting. At the time of grant, the Committee shall specify the date or
dates on which the Phantom Stock Units shall become vested and nonforfeitable,
and may specify such conditions to vesting as it deems appropriate. Unless the
applicable Award agreement otherwise provides, Phantom Stock Units shall become
vested and nonforfeitable upon the occurrence of a Change in Control.

     8.3 Transferability. Except as otherwise provided by the Committee in the
applicable Award agreement, Phantom Stock Units granted under the Plan may not
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
and all rights with respect to the Phantom Stock Units granted to a Participant
under the Plan shall be exercisable during his or her lifetime only by such
Participant.

     8.4 Termination of Employment. Except as otherwise provided by the
Committee in the applicable Award agreement, in the event of the Participant's
termination of employment for any reason, Phantom Stock Units that have not
become vested and nonforfeitable shall be forfeited and cancelled; provided,
however, that the Committee, in its sole discretion, may waive the automatic
forfeiture of any or all such Phantom Stock Units and may add such new
restrictions to such Phantom Stock Units as it deems appropriate.

     8.5 Distribution. At the time of grant, the Committee shall specify the
maturity date applicable to each grant of Phantom Stock Units, which may be
determined at the election of the Participant. Such date may be later than the
vesting date or dates of the Phantom Stock Units.

                                      -15-



On the maturity date of a Phantom Stock Unit, the Company shall transfer to the
Participant one unrestricted, fully transferable share of Common Stock or an
amount in cash equal to the Fair Market Value of one unrestricted, fully
transferable share of Common Stock.

     8.6 Adjustment of Awards. In the event of a stock dividend, stock split,
share combination, exchange of shares or any other change in the corporate
structure of the Company affecting Phantom Stock Units, including but not
limited to the events described in section 6.3(a), the Committee in its sole
discretion may adjust the award of Phantom Stock Units, as may be determined to
be appropriate and equitable, to prevent dilution or enlargement of rights.

                                    Article 9
                    Amendment, Modification, and Termination

     9.1 Amendment, Modification, and Termination. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend, or
modify the Plan. However, the approval of the stockholders of the Company is
required for such action to the extent required under the rules of any stock
exchange on which Stock is traded or to comply with section 422 or 162(m) of the
Code, including, without limitation, any amendment that:

     (a)  increases the total number of Shares which may be issued under this
          Plan, either in the aggregate or to an individual, except as provided
          in Section 4.2(d) above;

     (b)  changes the class of employees eligible to participate in the Plan; or

     (c)  changes the provisions of the Plan regarding the exercise price of an
          Option.

     9.2 Awards Previously Granted. No termination, amendment or modification of
the Plan shall in any manner adversely affect the rights of a Participant (or
any person or persons to whom an Award is permissibly transferred pursuant to
the Plan) with respect to an Award theretofore granted under the Plan without
the written consent of the Participant (or such other person or persons). Any
amendment that is intended to preserve the status of an Option as an Incentive
Stock Option or otherwise to obtain favorable tax treatment for an Award shall
not be considered as adversely affecting the rights of any person.

                                   Article 10
                                  Miscellaneous

     10.1 Beneficiary Designation. A Participant, from time to time, may
designate in writing a beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in case of his or her death. Each designation will revoke all prior designations
by such Participant, shall be in a form prescribed by the Committee, and will be
effective only when filed with the Committee during the Participant's lifetime.
In the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.

     10.2 No Right to Awards. No employee or other person shall have a right to
receive an Award or, having received an Award, to receive any additional Awards.
Neither a Participant

                                      -16-



nor any other person shall, by reason of participation in the Plan, acquire any
right in or title to any assets, funds or property of the Company whatsoever,
including, without limitation, any specific funds, assets, or other property
which the Company or any subsidiary, in its sole discretion, may set aside in
anticipation of a liability under the Plan. A Participant shall have only a
contractual right to the Stock or amounts, if any, payable under the Plan,
unsecured by any assets of the Company, and nothing contained in the Plan shall
constitute a guarantee that the assets of the Company shall be sufficient to pay
any benefits to any person.

     10.3 No Guarantee of Employment. Nothing in the Plan shall interfere with
or limit in any way the right of the Company to terminate any Participant's
employment or services as a consultant at any time, nor confer on any
Participant any right to continue in the employ of or to perform services for
the Company. Except as otherwise provided in the Plan, no Award under the Plan
shall confer on its holder any rights as a shareholder of the Company prior to
the date on which the individual fulfills all conditions for receipt of such
rights.

     10.4 Tax Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any cash, Shares or other benefits under the Plan on satisfaction of
the applicable withholding obligations. The Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy Federal, State and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any grant, exercise, or payment made under or as a result of this Plan.

     10.5 Limitations Imposed by Section 162(m). (b) Nonqualified Deferred
Compensation. Notwithstanding any other provision hereunder, if and to the
extent that the Committee determines the Company's federal tax deduction in
respect of an award may be limited as a result of section 162(m) of the Code,
the Committee may take the following actions:

     (a)  With respect to Options, SARs or Phantom Stock Units, the Committee
          may delay the exercise or payment, as the case may be, in respect of
          such Options, SARs or Phantom Stock Units until a date that is within
          30 days after the date that compensation paid to the Participant no
          longer is subject to the deduction limitation under section 162(m) of
          the Code. In the event that a Participant exercises an Option or SAR,
          or the maturity date with respect to Phantom Stock Units occurs, at a
          time when the Participant is a 162(m) covered employee, and the
          Committee determines to delay the exercise or payment, as the case may
          be, in respect of any such Award, the Committee shall credit cash or,
          in the case of an amount payable in Stock, the Fair Market Value of
          the Stock, payable to the Participant to a book account. The
          Participant shall have no rights in respect of such book account and
          the amount credited thereto shall not be transferable by the
          Participant other than by will or laws of descent and distribution.
          The Committee may credit additional amounts to such book account as it
          may determine in its sole discretion. Any book account created
          hereunder shall represent only an unfunded, unsecured promise by the
          Company to pay the amount credited thereto to the Participant in the
          future.

                                      -17-



     (b)  With respect to Restricted Stock, the Committee may require the
          Participant to surrender to the Committee any Award agreement and
          stock certificates with respect to such Restricted Stock, in order to
          cancel the Award of such Restricted Stock. In exchange for such
          cancellation, the Committee shall credit to a book account a cash
          amount equal to the Fair Market Value of the shares of Common Stock
          subject to such Award. The amount credited to the book account shall
          be paid to the Participant within 30 days after the date that
          compensation paid to the Participant no longer is subject to the
          deduction limitation under section 162(m) of the Code. The Participant
          shall have no rights in respect of such book account and the amount
          credited thereto shall not be transferable by the Participant other
          than by will or laws of descent and distribution. The Committee may
          credit additional amounts to such book account as it may determine in
          its sole discretion. Any book account created hereunder shall
          represent only an unfunded, unsecured promise by the Company to pay
          the amount credited thereto to the Participant in the future.

     10.6 Indemnification. Each person who is or shall have been a member of the
Committee or of the Board shall be indemnified and held harmless by the Company
against and from any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by such person in connection with or resulting from any
claim, action, suit, or proceeding to which such person may be a party or in
which such person may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by such person
in settlement thereof, with the Company's approval, or paid by such person in
satisfaction of any judgment in any such action, suit, or proceeding against
such person, provided such person shall give the Company an opportunity, at its
own expense, to handle and defend the same before such person undertakes to
handle and defend it on such person's own behalf. The foregoing right of
indemnification shall be in addition to any other rights of indemnification to
which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the
Company may have to indemnify them or hold them harmless.

     10.7 Successors. All obligations of the Company under the Plan with respect
to Awards, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.

     10.8 Requirements of Law. The granting of Awards and the issuance of Shares
of Stock under this Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.

     10.9 Governing Law. The Plan, and all agreements under the Plan, shall be
construed in accordance with and governed by the internal laws of the State of
Delaware, without reference to principles of conflict of laws.

                                      -18-

EX-10.3

                                                                    Exhibit 10.3

                             SUBSCRIPTION AGREEMENT

          THIS SUBSCRIPTION AGREEMENT (the "Agreement") is made as of the date
set forth on the signature page hereof between Nephros, Inc., a Delaware
corporation (the "Company"), and the undersigned (the "Subscriber").

                              W I T N E S S E T H:

          WHEREAS, the Company desires to issue $5,500,000 of Series A
Convertible Preferred Stock, par value $.001 per share, of the Company (the
"Preferred Stock" and collectively with the common stock underlying the
Preferred Stock hereinafter sometimes collectively referred to as the
"Securities") in a private placement of the Company's securities (the
"Offering");

          WHEREAS, the Subscriber desires to purchase that number of shares of
Preferred Stock set forth on the signature page hereof on the terms and
conditions hereinafter set forth;

          NOW, THEREFORE, in consideration of the premises and the mutual
representations and covenants hereinafter set forth, the parties hereto do
hereby agree as follows:

I    SUBSCRIPTION FOR PREFERRED STOCK AND REPRESENTATIONS BY SUBSCRIBER

     1    Subject to the terms and conditions hereinafter set forth, the
          Subscriber hereby subscribes for and agrees to purchase from the
          Company such number of shares of Preferred Stock (the "Shares") as set
          forth upon the signature page hereof at a price equal to $1.25 per
          Share and the Company agrees to sell such Shares to the Subscriber for
          said purchase price. Upon drawdown by the Company in accordance with
          Article III of this Agreement, the purchase price attributable to such
          drawdown will be payable by personal or business check, wire transfer
          of immediately available funds or money order made payable to
          "Nephros, Inc." The certificates representing the Securities will be
          delivered by the Company to the Subscriber within ten (10) business
          days following the receipt of Subscriber's payment of the applicable
          drawdown amount.

     2    The Subscriber recognizes that the purchase of the Preferred Stock
          involves a high degree of risk in that, among other things, (i) the
          Company is a development stage business with no operating history and
          requires substantial funds in addition to the proceeds of the
          Offering; (ii) an investment in the Company is highly speculative, and
          only investors who can afford the loss of their entire investment
          should consider investing in the Company and the Preferred Stock;
          (iii) the Subscriber may not be able to liquidate the Subscriber's
          investment; (iv) transferability of the Securities is extremely
          limited and (v) in the event of a disposition, the Subscriber could
          sustain the loss of the Subscriber's entire investment.

     3    The Subscriber represents that the Subscriber is an "accredited
          investor," as such term is defined in Rule 501 of Regulation D
          promulgated under the Securities Act



          of 1933, as amended (the "Act"), as indicated by his responses to the
          questions contained in Article VI hereof, and that the Subscriber is
          able to bear the economic risk of an investment in the Preferred
          Stock. The Subscriber covenants to notify the Company at any time
          prior to the second drawdown (as defined in Article 3) if it is no
          longer an "accredited investor."

     4    The Subscriber hereby acknowledges and represents that (i) the
          Subscriber has prior investment experience, including investment in
          non-listed and unregistered securities, or, to the extent necessary,
          the Subscriber has employed at its own expense and relied upon the
          services of an investment advisor, attorney and/or accountant to read
          all of the documents furnished or made available by the Company both
          to the Subscriber and to all other prospective investors in the
          Preferred Stock and to evaluate the investment, tax and legal merits
          and the consequences and risks of such an investment on the
          Subscriber's behalf; (ii) the Subscriber recognizes the highly
          speculative nature of this investment, and (iii) the Subscriber is
          able to bear the economic risk which the Subscriber hereby assumes.

     5    The Subscriber hereby acknowledges receipt and careful review of the
          Confidential Term Sheet dated July 15, 1997 and the attachments and
          exhibits thereto, all of which constitute an integral part thereof
          (the "Term Sheet"). The Subscriber further represents that it has been
          furnished by the Company during the course of this transaction with
          all information regarding the Company which the Subscriber has
          requested or desired to know, has been afforded the opportunity to ask
          questions of and receive answers from duly authorized officers or
          other representatives of the Company concerning the terms and
          conditions of the Offering and has received any additional information
          which the Subscriber has requested.

     6    (a) The Subscriber has relied solely upon the information provided by
          the Company in the Term Sheet in making the decision to invest in the
          Preferred Stock and the Subscriber covenants that no person other than
          the Company has supplied the Subscriber with any information relating
          to an investment in the Preferred Stock.

          (b) The Subscriber covenants that no Preferred Stock was offered or
          sold to it by means of any form of general solicitation or general
          advertising, and in connection therewith the Subscriber did not (A)
          receive or review any advertisement, article, notice or other
          communication published in a newspaper or magazine or similar media or
          broadcast over television or radio whether closed circuit or generally
          available, or (B) attend any seminar meeting or industry investor
          conference whose attendees were invited by any general solicitation or
          general advertising.

     7    The Subscriber agrees that the Subscriber will not sell or otherwise
          transfer the Securities unless they are registered under the Act or
          unless an exemption from

                                      - 2 -



          such registration is available and until such Subscriber complies with
          the transfer restrictions set forth in herein.

     8    The Subscriber understands that the Securities have not been
          registered under the Act by reason of a claimed exemption under the
          provisions of the Act which depends, in part, upon the Subscriber's
          investment intention. In connection herewith, the Subscriber hereby
          represents that the Subscriber is purchasing the Securities for the
          Subscriber's own account for investment and not with a view toward the
          resale or distribution to others. The Subscriber, if an entity, was
          not formed for the purpose of purchasing the Securities. The
          Subscriber understands that Rule 144 promulgated under the Act
          requires, among other conditions, a one (1) year holding period prior
          to the resale (in limited amounts) of securities acquired in a
          non-public offering without having to satisfy the registration
          requirements under the Act.

     9    Other than as set forth in Article IV hereof, the Subscriber
          understands and hereby acknowledges that the Company is under no
          obligation to register the shares of common stock (the "Common Stock")
          underlying the Preferred Stock under the Act or any state securities
          or "blue sky" laws. The Subscriber consents that the Company may, if
          it desires, permit the transfer of the Securities out of the
          Subscriber's name only when the Subscriber's request for transfer is
          accompanied by an opinion of counsel reasonably satisfactory to the
          Company that neither the sale nor the proposed transfer results in a
          violation of the Act or any applicable state "blue sky" laws
          (collectively, the "Securities Laws").

     10   The Subscriber agrees to hold the Company and its directors, officers,
          employees, controlling persons and agents and each of their respective
          heirs, representatives, successors and assigns harmless and to
          indemnify them against all liabilities, costs and expenses incurred by
          them as a result of any misrepresentation made by the Subscriber
          contained in this Agreement (including the Confidential Investor
          Questionnaire contained in Article VI herein) or any sale or
          distribution by the Subscriber in violation of the Securities Laws.

     11   The Subscriber consents to the placement of a legend on any
          certificate, or other document evidencing the Securities, that such
          Securities have not been registered under the Securities Laws and
          setting forth or referring to the restrictions on transferability and
          sale thereof contained in this Agreement. The Subscriber is aware that
          the Company will make a notation in its appropriate records with
          respect to the restrictions on the transferability of such Securities.

     12   The Subscriber understands that the Company will review this Agreement
          and the Company is hereby given authority by the Subscriber to call
          the Subscriber's bank or place of employment or otherwise review the
          financial standing of the Subscriber; and it is further agreed that
          the Company reserves the unrestricted right, without further
          documentation or agreement on the part of the Subscriber, to reject
          all or a portion of any subscription, to accept subscriptions for
          lesser amounts than subscribed for and to close the Offering to the
          Subscriber at any

                                      - 3 -



          time. In addition, the Subscriber understands and agrees that the
          during the Drawdown Period (as hereinafter defined), the Subscriber
          shall have no rights in or to purchase Securities and the Company, in
          its sole discretion, shall have the right to drawdown in whole or in
          part or to cancel any subscription.

     13   The Subscriber hereby represents that the address of the Subscriber
          furnished by the Subscriber on the signature page hereof is the
          Subscriber's principal residence if the Subscriber is an individual or
          its principal business address if it is a corporation or other entity.

     14   The Subscriber represents that the Subscriber has full power and
          authority (corporate, statutory and otherwise) to execute and deliver
          this Agreement and to purchase the Preferred Stock. This Agreement
          constitutes the legal, valid and binding obligation of the Subscriber,
          enforceable against the Subscriber in accordance with its terms.

     15   If the Subscriber is a corporation, company, trust, employee benefit
          plan, individual retirement account, Keogh Plan, or other tax-exempt
          entity, it is authorized and qualified to become an investor in the
          Company and the person signing this Agreement on behalf of such entity
          has been duly authorized by such entity to do so.

     16   The Subscriber acknowledges that if the Subscriber is a Registered
          Representative of a National Association of Securities Dealers, Inc.
          ("NASD") member firm, the Subscriber must give such firm the notice
          required by the Rules of Fair Practice promulgated by the NASD,
          receipt of which must be acknowledged by such firm in Article 6.4
          below.

II   REPRESENTATIONS BY AND COVENANTS OF THE COMPANY

     The Company hereby represents and warrants to the Subscriber that:

     1    Organization, Good Standing and Qualification. The Company is a
          corporation duly organized, validly existing and in good standing
          under the laws of the State of Delaware and has full corporate power
          and authority to conduct its business as described in the Term Sheet.

     2    Capitalization and Voting Rights. The authorized, issued and
          outstanding capital stock of the Company is as follows: 30,000,000
          authorized shares of Common Stock, of which 5,500,000 shares are
          currently issued and outstanding and 5,000,000 authorized shares of
          Preferred Stock of which none are currently issued or outstanding. All
          issued and outstanding shares of capital stock of the Company are
          validly issued, fully paid and nonassessable. The Preferred Stock has
          been duly and validly authorized and, when issued and paid for
          pursuant to this Agreement, will be validly issued, fully paid and
          nonassessable. Except as set forth in the Term Sheet, there are no
          outstanding options, warrants, agreements, convertible securities,
          preemptive rights or other rights to subscribe for or to purchase any
          shares of capital stock of the Company. Except as set forth in this

                                      - 4 -



          Agreement and as otherwise required by law, there are no restrictions
          upon the voting or transfer of the Securities pursuant to the
          Company's Certificate of Incorporation, Bylaws or other governing
          documents or any agreement or other instruments to which the Company
          is a party or by which the Company is bound.

     3    Authorization; Enforceability. This Agreement has been duly and
          validly authorized by the Company and is enforceable against the
          Company in accordance with its terms, except as enforceability may be
          limited by applicable bankruptcy, insolvency, reorganization,
          moratorium or similar laws affecting the enforcement of creditors'
          rights generally and by general principles of equity (regardless of
          whether enforcement is sought in a proceeding in equity or at law).
          The Company has full power and lawful authority to authorize, issue
          and sell the Preferred Stock to be sold by it hereunder on the terns
          and conditions set forth herein.

     4    Reservation of Common Stock Issuable Upon Conversion. The Company
          shall at all times reserve and keep available out of its authorized
          but unissued shares of Common Stock, solely for the purpose of
          effecting the conversion of the shares of the Preferred Stock, such
          number of its shares of Common Stock as shall from time to time be
          sufficient to effect the conversion of all outstanding shares of the
          Preferred Stock and all shares of Preferred Stock that may be issued
          upon drawdown of subscriptions by the Company.

     5    Certificate of Designations of Series A Preferred Stock. The Series A
          Preferred Stock has the rights, preferences and privileges
          substantially as set forth in the Form of Certificate of Designations
          attached as Exhibit B to the Term Sheet with the conversion ratio as
          set forth therein.

     6    No Conflict; Governmental Consents.

          (a)  The execution and delivery by the Company of this Agreement and
               the consummation of the transactions contemplated hereby will not
               result in the violation of any law, statute, rule, regulation,
               order, writ, injunction, judgment or decree of any court or
               governmental authority to or by which the Company is bound, or of
               any provision of the Certificate of Incorporation or Bylaws of
               the Company, and will not conflict with, or result in a breach or
               violation of, any of the terms or provisions of, or constitute
               (with due notice or lapse of time or both) a default under, any
               lease, loan agreement, mortgage, security agreement, trust
               indenture or other agreement or instrument to which the Company
               is a party or by which it is bound or to which any of its
               properties or assets is subject, nor result in the creation or
               imposition of any lien upon any of the properties or assets of
               the Company.

          (b)  No consent, approval, authorization or other order of any
               governmental authority is required to be obtained by the Company
               in connection with the authorization, execution and delivery of
               this Agreement or with the

                                      - 5 -



               authorization, issue and sale of the Securities, except such
               filings as may be required to be made with, the Securities and
               Exchange Commission (the "SEC"), any state or foreign "blue sky"
               or securities regulatory authority.

     7    Licenses. Except as set forth herein, the Company has sufficient
          licenses, permits and other governmental authorizations currently
          required for the conduct of its business or ownership of properties
          and is in all material respects complying therewith.

     8    Litigation. The Company knows of no pending or threatened legal or
          governmental proceedings against the Company which could materially
          adversely affect the business, property, financial condition or
          operations of the Company.

     9    Representations and Warranties Correct. The representations and
          warranties made by the Company in Article II hereof shall be true and
          correct in all material respects when made, and except for Article
          2.2, shall be true and correct in all material respects on the date of
          each drawdown with the same force and effect as if they had been made
          on and as of such date.

III  TERMS OF SUBSCRIPTION

     1    There will be no minimum commitment amount required for the closing of
          this Offering. Accordingly, the Company may drawdown on subscriptions,
          subject to Article 3.2, immediately following receipt of such
          subscriptions without regard to the aggregate number of shares of
          Preferred Stock subscribed for in the Offering.

     2    The Company shall be permitted to drawdown up to fifty percent (50%)
          of each investors subscription immediately upon acceptance by the
          Company of such subscription and shall be permitted to drawdown the
          remaining fifty percent (50%) of each investors subscription on or
          after the date which is one (1) year from the date of acceptance of
          subscriptions pursuant to this Offering. The Company shall send a
          notice (the "Drawdown Notice") to each Subscriber specifying the
          drawdown amount. The Subscriber shall be required to fund the amount
          specified in the Drawdown Notice within ten (10) business days of
          receipt by the Subscriber of such notice. Any amount of this
          subscription not drawn down upon shall expire on the date which is
          three (3) years from the date of this Agreement (the "Drawdown
          Period").

IV   REGISTRATION RIGHTS

     1    Registration Rights. The Company covenants and agrees as follows:

     2    Definitions. For purposes of this Article IV:

          (a)  The term "Act" means the Securities Act of 1933, as amended.

                                      - 6 -



          (b)  The term "Holder" means any person owning or having the right to
               acquire Registrable Securities or any assignee thereof.

          (c)  The term "1934 Act" shall mean the Securities Exchange Act of
               1934, as amended.

          (d)  The terms "register", "registered" and "registration" refer to a
               registration effected by preparing and filing a registration
               statement or similar document in compliance with the Act, and the
               declaration or order of effectiveness of such registration
               statement or document.

          (e)  The term "Registrable Securities" shall mean (i) the shares of
               Common Stock issuable upon the conversion of the Preferred Stock,
               (ii) any shares of Common Stock issued as (or issuable upon the
               conversion or exercise of any warrant, right or other security
               which is issued as) a dividend or other distribution with respect
               to or in replacement of the Preferred Stock; provided, however,
               that securities shall only be treated as Registrable Securities
               if and only for so long as they (A) have not been disposed of
               pursuant to a registration statement declared effective by the
               Commission, (B) have not been sold in a transaction exempt from
               the registration and prospectus delivery requirements of the Act
               so that all transfer restrictions and restrictive legends with
               respect thereto are removed upon the consummation of such sale or
               (C) are held by a Holder or a permitted transferee of a Holder.

     3    "Piggy-back" Registration Rights. If (but without any obligation to do
          so), at any time after the initial public offering (the "IPO") of the
          Company's Common Stock, the Company proposes to register any of its
          stock or other equity securities under the Act in connection with the
          public offering of such securities solely for cash (other than a
          registration relating solely to the sale of securities to participants
          in a Company stock plan, a registration on any form which does not
          include substantially the same information as would be required to be
          included in a registration statement covering the sale of the
          Registrable Securities or a registration in which the only Common
          Stock being registered is Common Stock issuable upon conversion of
          debt securities which are also being registered), the Company shall,
          at such time, promptly give each Holder written notice of such
          registration. Upon the written request of each Holder given within ten
          (10) days after mailing of such notice by the Company in accordance
          with Article 4.1, the Company shall, on up to two (2) occasions and
          subject to the limitations set forth in this Agreement (including the
          provisions of Article 4.8), include in the Company's registration
          statement under the Act all of the Registrable Securities that each
          such Holder has requested to be registered; provided, however, that
          nothing in this Article 4.3 shall prevent the Company from at any time
          abandoning or delaying any such registration without obligation to any
          Holder.

                                      - 7 -



     4    Obligations of the Company. Whenever required under this Article IV to
          include Registrable Securities in a Company registration statement,
          the Company shall, as expeditiously as reasonably possible:

          (a)  Use its reasonable best efforts to cause such registration
               statement to become effective, and, upon the request of the
               Holders of a majority of the Registrable Securities registered
               thereunder, keep such registration statement effective for a
               period of up to one hundred twenty (120) days or until the
               distribution contemplated in the Registration Statement has been
               completed; provided, however, that such 120-day period shall be
               extended for a period of time equal to the period that the Holder
               refrains from selling any securities included in such
               registration at the request of an underwriter of Common Stock (or
               other securities) of the Company, and provided further that if
               applicable rules under the Act governing the obligation to file a
               post-effective amendment permits, in lieu of filing a
               post-effective amendment which (x) includes any prospectus
               required by Section 10(a)(3) of the Act or (y) reflects facts or
               events representing a material or fundamental change in the
               information set forth in the registration statement, the Company
               may incorporate by reference information required to be included
               in (x) and (y) above to the extent such information is contained
               in periodic reports filed pursuant to Section 13 or 15(d) of the
               1934 Act in the registration statement.

          (b)  Prepare and file with the SEC such amendments and supplements to
               such registration statement, and the prospectus used in
               connection with such registration statement, as may be necessary
               to comply with the provisions of the Act with respect to the
               disposition of all securities covered by such registration
               statement.

          (c)  Furnish to the Holders such numbers of copies of a prospectus,
               including a preliminary prospectus, in conformity with the
               requirements of the Act, and such other documents as they may
               reasonably request in order to facilitate the disposition of
               Registrable Securities owned by them.

          (d)  Use its reasonable best efforts to register and qualify the
               securities covered by such registration statement under such
               other securities or Blue Sky laws of such jurisdictions as shall
               be reasonably requested by the Holders; provided that the Company
               shall not be required in connection therewith or as a condition
               thereto to qualify to do business or to file a general consent to
               service of process in any such states or jurisdictions, unless
               the Company is already subject to service in such jurisdiction
               and except as may be required by the Act.

          (e)  In the event of any underwritten public offering, enter into and
               perform its obligations under an underwriting agreement, in usual
               and customary form, with the managing underwriter of such
               offering. Each Holder

                                      - 8 -



               participating in such underwriting shall also enter into and
               perform its obligations under such an agreement.

          (f)  Notify each Holder of Registrable Securities covered by such
               registration statement at any time when a prospectus relating
               thereto is required to be delivered under the Act of the
               happening of any event as a result of which the prospectus
               included in such registration statement, as then in effect,
               includes an untrue statement of a material fact or omits to state
               a material fact required to be stated therein or necessary to
               make the statements therein not misleading in the light of the
               circumstances then existing.

          (g)  Cause all such Registrable Securities registered hereunder to be
               listed on each securities exchange on which similar securities
               issued by the Company are then listed.

          (h)  Provide a transfer agent and registrar for all Registrable
               Securities registered pursuant hereunder and CUSIP number for all
               such Registrable Securities, in each case not later than the
               effective date of such registration.

     5    Furnish Information. It shall be a condition precedent to the
          obligation of the Company to take any action pursuant to this Article
          IV with respect to the Registrable Securities of any selling Holder
          that such Holder shall furnish to the Company such information
          regarding the Holder, the Registrable Securities held by the Holder,
          and the intended method of disposition of such securities as shall be
          required to effect the registration of such Holder's Registrable
          Securities.

     6    Expenses of Company Registration. The Company shall bear and pay all
          expenses incurred in connection with any registration, filing or
          qualification of Registrable Securities with respect to the
          registrations pursuant to Article 4.3 for each Holder, including
          (without limitation) all registration, filing, and qualification fees,
          printers and accounting fees relating or apportionable thereto, but
          excluding underwriting discounts and commissions relating to
          Registrable Securities; provided, however, that the Company shall not
          bear the cost of any professional fees or costs of accounting,
          financial or legal advisors to any of the Holders. Notwithstanding the
          foregoing, each Holder shall pay all registration expenses which such
          Holder is required to pay under applicable law.

     7    Underwriting Requirements. In connection with any offering involving
          an underwriting of shares of the Company's capital stock, the Company
          shall not be required under Article 4.3 to include any of the Holders'
          securities in such underwriting unless they accept the terms of the
          underwriting as agreed upon between the Company and the underwriters
          selected by it (or by other persons entitled to select the
          underwriters), and then only in such quantity as the underwriters
          determine in their sole discretion will not jeopardize the success of
          the offering by the Company. If the total amount of securities,
          including Registrable Securities, requested by stockholders to be
          included in such offering

                                      - 9 -



          exceeds the amount of securities sold other than by the Company that
          the underwriters determine in their sole discretion is compatible with
          the success of the offering, then the Company shall be required to
          include in the offering only that number of such securities, including
          Registrable Securities, which the underwriters determine in their sole
          discretion will not jeopardize the success of the offering (the
          securities so included to be apportioned pro rata among the selling
          stockholders according to the total amount of securities entitled to
          be included therein owned by each selling stockholder or in such other
          proportions as shall mutually be agreed to by such selling
          stockholders). For purposes of the preceding parenthetical concerning
          apportionment, for any selling stockholder that is a holder of
          Registrable Securities and that is a partnership or corporation, the
          partners, retired partners and stockholders of such holder, or the
          estates and family members of any such partners and retired partners
          and any trusts for the benefit of any of the foregoing persons shall
          be deemed to be a single "selling stockholder", and any pro-rata
          reduction with respect to such "selling stockholder" shall be based
          upon the aggregate amount of shares carrying registration rights owned
          by all entities and individuals included in such "selling
          stockholder", as defined in this sentence.

     8    Delay of Registration. No Holder shall have any right to obtain or
          seek an injunction restraining or otherwise delaying any such
          registration as the result of any controversy that might arise with
          respect to the interpretation or implementation of this Article IV.

     9    Indemnification. In the event any Registrable Securities are included
          in a registration statement under this Article IV:

          (a)  To the extent permitted by law, the Company will indemnify and
               hold harmless each Holder, any underwriter (as defined in the
               Act) for such Holder and each person, if any, who controls such
               Holder or underwriter within the meaning of the Act or the 1934
               Act, against any losses, claims, damages, or liabilities (joint
               or several) to which they may become subject under the Act, or
               the 1934 Act, insofar as such losses, claims, damages, or
               liabilities (or actions in respect thereof) arise out of or are
               based upon any of the following statements, omissions or
               violations (collectively a "Violation"): (i) any untrue statement
               or alleged untrue statement of a material fact contained in such
               registration statement, including any preliminary prospectus or
               final prospectus contained therein or any amendments or
               supplements thereto, (ii) the omission or alleged omission to
               state therein a material fact required to be stated therein, or
               necessary to make the statements therein not misleading, or (iii)
               any violation or alleged violation by the Company of the Act, the
               1934 Act, or any rule or regulation promulgated under the Act, or
               the 1934 Act, and the Company will pay to each such Holder,
               underwriter or controlling person, as incurred, any legal or
               other expenses reasonably incurred by them in connection with
               investigating or defending any such loss, claim, damage,
               liability, or action; provided, however, that the indemnity
               agreement

                                     - 10 -



               contained in this Article 4.9(a) shall not apply to amounts paid
               in settlement of any such loss, claim, damage, liability, or
               action if such settlement is effected without the consent of the
               Company (which consent shall not be unreasonably withheld), nor
               shall the Company be liable in any such case for any such loss,
               claim, damage, liability, or action to the extent that it arises
               out of or is based upon a Violation which occurs in reliance upon
               and in conformity with written information famished expressly for
               use in connection with such registration by any such Holder,
               underwriter or controlling person.

          (b)  To the extent permitted by law, each selling Holder will
               indemnify and hold harmless the Company, each of its directors,
               each of its officers who has signed the registration statement,
               each person, if any, who controls the Company within the meaning
               of the Act, any underwriter, any other Holder selling securities
               in such registration statement and any controlling person of any
               such underwriter or other Holder, against any losses, claims,
               damages, or liabilities (joint or several) to which any of the
               foregoing persons may become subject, under the Act, or the 1934
               Act, insofar as such losses, claims, damages, or liabilities (or
               actions in respect thereto) arise out of or are based upon any
               Violation, in each case to the extent (and only to the extent)
               that such Violation occurs in reliance upon and in conformity
               with written information furnished by such Holder expressly for
               use in connection with such registration; and each such Holder
               will pay, as incurred, any legal or other expenses reasonably
               incurred by any person intended to be indemnified pursuant to
               this Article 4.9(b), in connection with investigating or
               defending any such loss, claim, damage, liability, or action;
               provided, however, that the indemnity agreement contained in this
               Article 4.9(b) shall not apply to amounts paid in settlement of
               any such loss, claim, damage, liability or action if such
               settlement is effected without the consent of the Holder, which
               consent shall not be unreasonably withheld; provided, that, in no
               event shall any indemnity under this Article 4.9(b) exceed the
               gross proceeds from the offering received by such Holder.

          (c)  Promptly after receipt by an indemnified party under this Article
               4.9 of notice of the commencement of any action (including any
               governmental action), such indemnified party shall, if a claim in
               respect thereof is to be made against any indemnifying party
               under this Article 4.9, deliver to the indemnifying party a
               written notice of the commencement thereof and the indemnifying
               party shall have the right to participate in, and, to the extent
               the indemnifying party so desires, jointly with any other
               indemnifying party similarly notified, to assume the defense
               thereof with counsel selected by the indemnifying party and
               approved by the indemnified party (whose approval shall not be
               unreasonably withheld); provided, however, that an indemnified
               party (together with all other indemnified parties which may be
               represented without conflict by one counsel) shall have the right
               to retain one separate counsel, with the fees and expenses to be
               paid

                                     - 11 -



               by the indemnifying party, if representation of such indemnified
               party by the counsel retained by the indemnifying party would be
               inappropriate due to actual or potential differing interests
               between such indemnified party and any other party represented by
               such counsel in such proceeding. The failure to deliver written
               notice to the indemnifying party within a reasonable time of the
               commencement of any such action, if prejudicial to its ability to
               defend such action, shall relieve such indemnifying party of any
               liability to the indemnified party under this Article 4.9, but
               the omission so to deliver written notice to the indemnifying
               party will not relieve it of any liability that it may have to
               any indemnified party otherwise than under this Article 4.9.

          (d)  If the indemnification provided for in this Article 4.9 is held
               by a court of competent jurisdiction to be unavailable to an
               indemnified party with respect to any loss, liability, claim,
               damage, or expense referred to therein, then the indemnifying
               party, in lieu of indemnifying such indemnified party hereunder,
               shall contribute to the amount paid or payable by such
               indemnified party as a result of such loss, liability, claim,
               damage, or expense in such proportion as is appropriate to
               reflect the relative fault of the indemnifying party on the one
               hand and of the indemnified party on the other in connection with
               the statements or omissions that resulted in such loss,
               liability, claim, damage, or expense as well as any other
               relevant equitable considerations. The relative fault of the
               indemnifying party and of the indemnified party shall be
               determined by reference to, among other things, whether the
               untrue or alleged untrue statement of a material fact or the
               omission to state a material fact relates to information supplied
               by the indemnifying party or by the indemnified party and the
               parties' relative intent, knowledge, access to information, and
               opportunity to correct or prevent such statement or omission.

          (e)  Notwithstanding the foregoing, to the extent that the provisions
               on indemnification and contribution contained in the underwriting
               agreement entered into in connection with the underwritten public
               offering are in conflict with the foregoing provisions, the
               provisions in the underwriting agreement shall control.

          (f)  The obligations of the Company and Holders under this Article 4.9
               shall survive the completion of any offering of Registrable
               Securities in a registration statement under this Article IV, and
               otherwise.

     10   Reports Under Securities Exchange Act of 1934. With a view to making
          available to the Holders the benefits of Rule 144 promulgated under
          the Act and any other rule or regulation of the SEC that may at any
          time permit a Holder to sell securities of the Company to the public
          without registration or pursuant to a registration on Form S-3, the
          Company agrees to:

                                     - 12 -



          (a)  make and keep public information available, as those terms are
               understood and defined in SEC Rule 144, at all times after ninety
               (90) days after the effective date of the registration statement
               filed in connection with an IPO by the Company;

          (b)  file with the SEC in a timely manner all reports and other
               documents required of the Company under the Act and the 1934 Act;
               and

          (c)  furnish to any Holder, so long as the Holder owns any Registrable
               Securities, forthwith upon request (i) a copy of the most recent
               annual or quarterly report of the Company and such other reports
               and documents so filed by the Company, and (ii) such other
               information as may be reasonably requested in availing any Holder
               of any rule or regulation of the SEC which permits the selling of
               any such securities without registration or pursuant to such
               form.

     11   Lock-Up Provision. In connection with the IPO, the Holder hereby
          agrees to be subject to a lock-up for a period of one hundred eighty
          (180) days following the IPO or such longer period as may be required
          by the underwriter or underwriters of such IPO. In connection with any
          subsequent public offering of the Company's securities, the Holder
          hereby agrees to be subject to a lock-up for a period of sixty (60)
          days or such longer period following such public offering as required
          by the underwriter or underwriters of such public offering. During
          such periods, the Holder agrees not to directly or indirectly sell,
          offer to sell, contract to sell, including, without limitation,
          "short" or "short against the box" (as those terms are generally
          understood), grant any option to purchase or otherwise transfer or
          dispose of (other than to donees who agree to be similarly bound) any
          securities of the Company held by it at any time during such period.
          This Article 4.11 shall be binding upon any transferee of the
          Securities.

          In order to enforce the foregoing covenant, the Company may impose
          stock-transfer instructions with respect to the Registrable Securities
          of each Holder (and the shares or securities of every other person
          subject to the foregoing restriction) until the end of such period.

          Notwithstanding the foregoing, the obligation described in this
          Article 4.11 shall not apply to a registration relating solely to
          employee benefit plans on Form S-1 or Form S-8 or similar forms which
          may be promulgated in the future, or a registration relating solely to
          a Commission Rule 145 transaction on Form S-4 or similar forms which
          may be promulgated in the future.

     12   Termination of Registration Rights. In addition, the right of any
          Holder to request inclusion in any registration pursuant to Article
          4.3 shall terminate if all shares of Registrable Securities held by
          such Holder may immediately be sold under Rule 144 or Rule 701 during
          any 90-day period; provided, however, that the provisions of this
          Article 4.12 shall not apply to any Holder who owns more than two
          percent

                                     - 13 -



          (2%) of the Company's outstanding stock until such time as such Holder
          owns less than two percent (2%) of the outstanding stock of the
          Company.

V    MISCELLANEOUS

     1    Any notice or other communication given hereunder shall be deemed
          sufficient if in writing and sent by (a) telecopy or facsimile at the
          address or number designated below (if delivered on a business day
          during normal business hours where such notice is to be received); or
          (b) registered or certified mail, return receipt requested, or
          delivered by hand against written receipt therefor, addressed to
          Nephros, Inc., c/o 787 Seventh Avenue, New York, New York, 10019,
          Attn: Michael S. Weiss, or such other office designated by the
          Corporation, and to the Subscriber at his address indicated on the
          signature page of this Agreement. Notices shall be deemed to have been
          given or delivered on the date of mailing, except notices of change of
          address, which shall be deemed to have been given or delivered when
          received.

     2    This Agreement shall not be changed, modified or amended except by a
          writing signed by the parties to be charged, and this Agreement may
          not be discharged except by performance in accordance with its terms
          or by a writing signed by the party to be charged.

     3    This Agreement shall be binding upon and inure to the benefit of the
          parties hereto and to their respective heirs, legal representatives,
          successors and assigns. This Agreement sets forth the entire agreement
          and understanding between the parties as to the subject matter hereof
          and merges and supersedes all prior discussions, agreements and
          understandings of any and every nature among them.

     4    Upon the execution and delivery of this Agreement by the Subscriber,
          this Agreement shall become a binding obligation of the Subscriber
          with respect to the purchase of Preferred Stock as herein provided;
          subject, however, to the right hereby reserved to the Company to
          reject or decrease any subscription, enter into the same agreements
          with other subscribers and to add and/or delete other Persons as
          subscribers.

     5    NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY
          OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS
          AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND
          GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
          PRINCIPLES OF CONFLICTS OF LAW.

     6    In order to discourage frivolous claims, the parties agree that unless
          a claimant in any proceeding arising out of this Agreement succeeds in
          establishing his claim and recovering a judgment against another party
          (regardless of whether such claimant succeeds against one of the other
          parties to the action), then the other party shall be entitled to
          recover from such claimant all of its/their reasonable

                                     - 14 -



          legal costs and expenses relating to such proceeding and/or incurred
          in preparation therefor.

     7    The holding of any provision of this Agreement to be invalid or
          unenforceable by a court of competent jurisdiction shall not affect
          any other provision of this Agreement, which shall remain in full
          force and effect. If any provision of this Agreement shall be declared
          by a court of competent jurisdiction to be invalid, illegal or
          incapable of being enforced in whole or in part, such provision shall
          be interpreted so as to remain enforceable to the maximum extent
          permissible consistent with applicable law and the remaining
          conditions and provisions or portions thereof shall nevertheless
          remain in full force and effect and enforceable to the extent they are
          valid, legal and enforceable, and no provisions shall be deemed
          dependent upon any other covenant or provision unless so expressed
          herein.

     8    It is agreed that a waiver by either party of a breach of any
          provision of this Agreement shall not operate, or be construed, as a
          waiver of any subsequent breach by that same party.

     9    The parties agree to execute and deliver all such further documents,
          agreements and instruments and take such other and further action as
          may be necessary or appropriate to carry out the purposes and intent
          of this Agreement.

     10   This Agreement may be executed in two or more counterparts each of
          which shall be deemed an original, but all of which shall together
          constitute one and the same instrument.

     11   (a) The Subscriber agrees not to issue any public statement with
          respect to the Subscriber's investment or proposed investment in the
          Company or the terms of any agreement or covenant between it and the
          Company without the Company's prior written consent, except such
          disclosures as may be required under applicable law or under any
          applicable order, rule or regulation.

          (b) The Company agrees not to disclose the names, addresses or any
          other information about the Subscribers, except as required by law;
          provided, that the Company may use the name (but not the address) of
          the Subscriber in registration materials filed with the SEC.

     12   The Subscriber represents and warrants that it has not engaged,
          consented to or authorized any broker, finder or intermediary to act
          on its behalf, directly or indirectly, as a broker, finder or
          intermediary in connection with the transactions contemplated by this
          Agreement. The Subscriber hereby agrees to indemnify and hold harmless
          the Company from and against all fees, commissions or other payments
          owing to any such person or firm acting on behalf of the Subscriber
          hereunder.

                                     - 15 -



     13   Nothing in this Agreement shall create or be deemed to create any
          rights in any Person not a party to this Agreement, except for the
          holders of Registrable Securities.

VI   CONFIDENTIAL INVESTOR QUESTIONNAIRE

          6.1 The Subscriber represents and warrants that the Subscriber comes
within one category marked below, and that for any category marked, the
Subscriber has truthfully set forth, where applicable, the factual basis or
reason the Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO
THIS Article WILL BE KEPT STRICTLY CONFIDENTIAL. The Subscriber agrees to
furnish any additional information which the Company deems necessary in order to
verify the answers set forth below.

Category A |_|   The Subscriber is an individual (not a partnership,
                 corporation, etc.) whose individual net worth, or joint net
                 worth with his or her spouse, presently exceeds $1,000,000.

                      Explanation. In calculating net worth you may include
                      equity in personal property and real estate, including
                      your principal residence, cash, short-term investments,
                      stock and securities. Equity in personal property and real
                      estate should be based on the fair market value of such
                      property less debt secured by such property.

Category B |_|   The Subscriber is an individual (not a partnership,
                 corporation, etc.) who had an income in excess of $200,000 in
                 each of the two most recent years, or joint income with his or
                 her spouse in excess of $300,000 in each of those years (in
                 each case including foreign income, tax exempt income and full
                 amount of capital gains and losses but excluding any income of
                 other family members and any unrealized capital appreciation)
                 and has a reasonable expectation of reaching the same income
                 level in the current year.

Category C |_|   The Subscriber is a director or executive officer of the
                 Company which is issuing and selling the Preferred Stock.

                                     - 16 -



Category D |_|   The Subscriber is a bank; a savings and loan association,
                 insurance company, registered investment company; registered
                 business development company; licensed small business
                 investment company ("SBIC"); or employee benefit plan within
                 the meaning of Title 1 of ERISA and (a) the investment decision
                 is made by a plan fiduciary which is either a bank, savings and
                 loan association, insurance company or registered investment
                 advisor, or (b) the plan has total assets in excess of
                 $5,000,000 or is a self directed plan with investment decisions
                 made solely by persons that are accredited investors.

                           --------------------------

                           --------------------------
                                (describe entity)

Category E |_|   The Subscriber is a private business development company as
                 defined in Article 202(a)(22) of the Investment Advisors Act of
                 1940.

                           --------------------------

                           --------------------------
                                (describe entity)

Category F |_|   The Subscriber is a corporation, partnership, Massachusetts
                 business trust, or a non-profit organization within the meaning
                 of Article 501(c)(3) of the Internal Revenue Code, in each case
                 not formed for the specific purpose of acquiring the Preferred
                 Stock and with total assets in excess of $5,000,000.

                           --------------------------

                           --------------------------
                                (describe entity)

Category G |_|   The Subscriber is a trust with total assets in excess of
                 $5,000,000, not formed for the specific purpose of acquiring
                 the Preferred Stock, where the purchase is directed by a
                 "sophisticated person" as defined in Regulation 506(b)(2)(ii).

                                     - 17 -



Category H |_|   The Subscriber is an entity all the equity owners of which are
                 "accredited investors" within one or more of the above
                 categories. If relying upon this Category alone, each equity
                 owner must complete a separate copy of this Agreement.

                           --------------------------

                           --------------------------
                                (describe entity)

Category I |_|   The Subscriber is not within any of the categories above and is
                 therefore not an accredited investor.

          6.2 SUITABILITY (please answer each question)

          (a) For an individual Subscriber, please describe your current
employment, including the company by which you are employed and its principal
business:

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

          (b) For an individual Subscriber, please describe any college or
graduate degrees held by you.

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

          (c) For all Subscribers, please list types of prior investments:

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

          (d) For all Subscribers, please state whether you have participated in
other private placements before:

                                YES |_|   NO |_|

          (e) For all Subscribers, please indicate frequency of such prior
participation in private placements of:

                                     - 18 -



                     Public
                    Companies   Companies   Biotechnology Companies

     Frequently        |_|         |_|               |_|

     Occasionally      |_|         |_|               |_|

     Never             |_|         |_|               |_|

          (f) For individual Subscribers, do you expect your current level of
income to significantly decrease in the foreseeable future:

                                YES |_|   NO |_|

          (g) For individual Subscribers, do you expect your total net worth to
significantly decrease in the foreseeable future:

                                YES |_|   NO |_|

          (h) For trust, corporate, partnership and other institutional
Subscribers, do you expect your total assets to significantly decrease in the
foreseeable future:

                                YES |_|   NO |_|

          (i) For all Subscribers, do you have any other investments or
contingent liabilities which you reasonably anticipate could cause you to need
sudden cash requirements in excess of cash readily available to you:

                                YES |_|   NO |_|

          (j) For all Subscribers, are you familiar with the risk aspects and
the non-liquidity of investments such as the securities for which you seek to
subscribe?

                                YES |_|   NO |_|

          (k) For all Subscribers, do you understand that there is no guarantee
of financial return on this investment and that you run the risk of losing your
entire investment?

                                YES |_|   NO |_|

                                     - 19 -



          6.3 MANNER IN WHICH TITLE TO BE HELD (circle one)

               (a)  Individual Ownership

               (b)  Community Property

               (c)  Joint Tenant with Right of Survivorship (both parties must
                    sign)

               (d)  Partnership*

               (e)  Tenants in Common

               (f)  Corporation*

               (g)  Trust*

               (h)  Other

          *If Preferred Stock is being subscribed for by an entity, the attached
          Certificate of Signatory must also be completed.

          6.4 NASD Affiliation

Is the Subscriber affiliated or associated with an NASD member firm (please
check one):

YES |_|   NO |_|

If Yes, please describe:

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

*If Subscriber is a Registered Representative with an NASD member firm, have the
following acknowledgment signed by the appropriate party:

The Subscriber NASD member firm acknowledges receipt of the notice required by
Article 3, Articles 28(a) and (b) of the Rules of Fair Practice.

- -----------------------------------
Name of NASD Member Firm


By:
   --------------------------------
           Authorized Officer

Date:
     ------------------------------

                                     - 20 -



          6.5 REPRESENTATIONS AND WARRANTIES

               The Subscriber hereby represents and warrants to the Company as
     follows:

               The Subscriber has been informed of the significance to the
     Company of the foregoing representations and answers contained in this
     Confidential Investor Questionnaire and this Agreement.

               The answers to the foregoing questions are true, complete and
     correct and have been provided with the understanding that the Company will
     rely upon them for all purposes, including but not limited to the purpose
     of determining whether the offering in which the Subscriber proposes to
     participate is exempt from registration under federal and state securities
     laws.

               The Subscriber will notify the Company immediately, at any time
     on or prior to the Final Closing Date, in the event that the
     representations and warranties in this Agreement shall cease to be true,
     accurate and complete.

               The Subscriber is able to bear the economic risk of the
     investment and, at the present time, can afford a complete loss of such
     investment.

                                     - 21 -



                                                   [Signature Page]
NUMBER OF SHARES          X $1.25 = $        (the "Purchase Price")
                 --------            -------


- ---------------------------------------   --------------------------------------
Signature                                 Signature (if purchasing jointly)

- ---------------------------------------   --------------------------------------
Name Typed or Printed                     Name Typed or Printed

- ---------------------------------------   --------------------------------------
Address                                   Address

- ---------------------------------------   --------------------------------------
City, State and Zip Code                  City, State and Zip Code

- ---------------------------------------   --------------------------------------
Telephone -- Business                     Telephone -- Business

- ---------------------------------------   --------------------------------------
Telephone -- Residence                    Telephone -- Residence

- ---------------------------------------   --------------------------------------
Telephone -- Business                     Telephone -- Business

- ---------------------------------------   --------------------------------------
Telephone -- Residence                    Telephone -- Residence

- ---------------------------------------   --------------------------------------
Tax ID# or Social Security #              Tax ID or Social Security #

Name in which Securities should be issued :
                                           -------------------------------------

Dated:                    , 1997.
       -------------------

     This Subscription Agreement is agreed to and accepted as of   , 1997.
                                                                 --

                                          NEPHROS, Inc.


                                          By:
                                             -----------------------------------
                                          Name:
                                          Title:

                                     - 22 -



                            CERTIFICATE OF SIGNATORY

                     (To be completed if Preferred Stock is
                       being subscribed for by an entity)

          I,                                 , am the                      of
             -------------------------------          --------------------
                                                                 (the "Entity").
- ----------------------------------------------------------------

          I certify that I am empowered and duly authorized by the Entity to
execute and carry out the terms of the Subscription Agreement and to purchase
and hold the Preferred Stock, and certify further that the Subscription
Agreement has been duly and validly executed on behalf of the Entity and
constitutes a legal and binding obligation of the Entity.

          IN WITNESS WHEREOF, I have set my hand this                     day of
                                                      -------------------
      ,      .
- ------  -----


                                                  ------------------------------
                                                            (Signature)

                                     - 23 -

EX-10.5

                                                                    Exhibit 10.5

                                 PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND IT MAY NOT BE SOLD, TRANSFERRED, PLEDGED
OR HYPOTHECATED UNLESS IT HAS BEEN SO REGISTERED OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.

                                  NEPHROS, INC.
                           NOTE DUE December 26, 2003

$200,000                                                  December 26, 2002

     NEPHROS, INC. (the "Company"), for value received, hereby promises to pay
to Joseph Giamanco (the "Payee" or the "holder"), on December 26, 2003 (the
"Maturity Date"), the principal sum of $200,000 ("two hundred thousand
dollars"), together with interest (as described in Section 1). Payee's address
is 4 White Rock Terrace, Holmdel, NJ 07733.

1.   Interest

     The Company promises to pay interest in the rate described below on the
unpaid principal amount of this promissory note (the "Note"). The interest rate
shall be 7% (seven percent) per annum, calculated quarterly in arrears, from the
date hereof to March 31, 2003; 10% (ten percent) per annum, calculated quarterly
in arrears, from April 1, 2003 to April 30, 2003; and 15% (fifteen percent) per
annum, calculated quarterly in arrears, from May 1, 2003 to the Maturity Date.
The first interest payment date shall be March 31, 2003 and thereafter interest
shall be payable quarterly in arrears.

2.   Prepayment

          (a) Optional Prepayment. At any time upon 5 days prior written notice
to the Payee, this Note may be prepaid by the Company, together with accrued
interest on the portion prepaid, in whole or in part, without penalty or
premium.

          (b) Mandatory Prepayment. The Company shall prepay all of the
principal amount of, together with accrued but unpaid interest on, this Note no
later than thirty days after the consummation of the Company's initial public
offering.

3.   Events of Default and Remedies

          The following shall each constitute an "Event of Default" hereunder:

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

          (b) the Company, pursuant to or within the meaning of any Bankruptcy
Law:

          (i)  commences a voluntary case,



          (ii) consents to the entry of an order for relief against it in an
               involuntary case,

          (iii) consents to the appointment of a Custodian of it or for all or
               substantially all of its property, and such Custodian is not
               discharged within 30 days, or

          (iv) makes a general assignment for the benefit of its creditors;

          (c) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that remains unstayed and in effect for 60 consecutive days
and that:

          (i)  is for relief in any involuntary case against the Company,

          (ii) appoints a Custodian of the Company or for all or substantially
               all of the property of the Company, or

          (iii) orders the liquidation of the Company.

          The term "Bankruptcy Law" means Title 11 of the U.S. Code or any
similar federal, foreign or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, examiner or
similar official under any Bankruptcy Law.

4. If an Event of Default occurs and is continuing for a period of 15 or more
consecutive days, the holder of this Note, by written notice to the Company, may
declare the unpaid principal of and accrued interest on this Note then
outstanding to be due and payable (an "Acceleration"). Upon any such
declaration, such principal and accrued interest shall be due and payable
immediately. The holder of this Note may rescind an Acceleration and its
consequences; provided, however, that no such rescission shall effect any
subsequent Event of Default or impair any right consequent thereto.

5. The holder of this Note may waive an existing Event of Default and its
consequences. Upon any such waiver, such Event of Default shall cease to exist
and shall be deemed to have been cured for every purpose of this Note; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon.

6.   Miscellaneous

     This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of New York applicable to
contracts executed and fully performed within the State of New York.

     No stockholder, director, officer, employee or incorporator, as such, of
the Company shall have any liability for any obligation of the Company under, or
for any claim based on, in respect of or by reason of, this Note. By accepting
the Note, the Payee waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the Note.

     All notices and other communications provided for under or otherwise made
in connection with this Note shall be in writing and mailed for overnight
delivery by recognized overnight courier service or delivered by hand, (i) if to
the Company, at the Company's address

                                        2



at 3960 Broadway, New York, NY 10032, Attention: Norman Barta, or at such other
address as shall be designated by the Company by written notice to the Payee
from time to time, and (ii) if to the Payee, at the Payee's address as set forth
above, or at such other address as shall be designated by the Payee by written
notice to the Company from time to time in accordance with this paragraph. All
such notices and communications shall be effective on the business day following
deposit with the courier service if sent by courier and on the date of delivery
if delivered personally, addressed as aforesaid.

     No failure or delay on the part of the Payee in exercising any right,
power, privilege or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power, privilege or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power, privilege or remedy hereunder. The rights and remedies
provided herein are cumulative, and are not exclusive of any other rights,
powers, privileges or remedies, now or hereafter existing, at law or in equity
or otherwise.

     No amendment, modification or waiver of any provision of this Note nor
consent to any departure by the Company therefrom shall be effective unless the
same shall be in writing and signed by the Company and the Payee, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

     The Company may treat the Payee as the owner of this Note for all purposes.

     The Company hereby waives presentment, demand for payment, notice of
dishonor, notice of protest, and protest, and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this instrument.

     This note may not be negotiated, endorsed, assigned, transferred,
hypothecated or pledged except with the prior written consent of the company.

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed as of the date first above written.

                                                 NEPHROS, INC.


                                                 By: /s/ Norman Barta
                                                     ---------------------------
                                                     Norman Barta, CEO

                                        3



                                 ASSIGNMENT FORM

I or we assign and transfer this Note to:

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee or transferee)

(Insert Social Security or other identifying number of assignee or transferee)
and irrevocably appoint                                                 , agent
                        ------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.

Dated:
      ------------------------------


Signed:
       -----------------------------
(Sign exactly as name appears on the other side of this Note)


Signature Guarantee:
                    ----------------------------------
Participant in a recognized Signature Guarantee Medallion Program (or other
signature guarantor program reasonably acceptable to the Company)

                                        4

EX-10.6

                                                                   Exhibit 10.6

                                 PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND IT MAY NOT BE SOLD, TRANSFERRED, PLEDGED
OR HYPOTHECATED UNLESS IT HAS BEEN SO REGISTERED OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.

                                  NEPHROS, INC.
                           NOTE DUE December 26, 2003

$50,000                                               December 26, 2002

     NEPHROS, INC. (the "Company"), for value received, hereby promises to pay
to George Hatsopoulos (the "Payee" or the "holder"), on December 26, 2003 (the
"Maturity Date"), the principal sum of $50,000 ("fifty thousand dollars"),
together with interest (as described in Section 1). Payee's address is Pharos,
Inc., 85 First Ave., Waltham, MA 02254.

1.   Interest

     The Company promises to pay interest in the rate described below on the
unpaid principal amount of this promissory note (the "Note"). The interest rate
shall be 7% (seven percent) per annum, calculated quarterly in arrears, from the
date hereof to March 31, 2003; 10% (ten percent) per annum, calculated quarterly
in arrears, from April 1, 2003 to April 30, 2003; and 15% (fifteen percent) per
annum, calculated quarterly in arrears, from May 1, 2003 to the Maturity Date.
The first interest payment date shall be March 31, 2003 and thereafter interest
shall be payable quarterly in arrears.

2.   Prepayment

          (a) Optional Prepayment. At any time upon 5 days prior written notice
to the Payee, this Note may be prepaid by the Company, together with accrued
interest on the portion prepaid, in whole or in part, without penalty or
premium.

          (b) Mandatory Prepayment. The Company shall prepay all of the
principal amount of, together with accrued but unpaid interest on, this Note no
later than thirty days after the consummation of the Company's initial public
offering.

3.   Events of Default and Remedies

          The following shall each constitute an "Event of Default" hereunder:

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

          (b) the Company, pursuant to or within the meaning of any Bankruptcy
Law:

          (i)  commences a voluntary case,



          (ii) consents to the entry of an order for relief against it in an
               involuntary case,

          (iii) consents to the appointment of a Custodian of it or for all or
               substantially all of its property, and such Custodian is not
               discharged within 30 days, or

          (iv) makes a general assignment for the benefit of its creditors;

          (c) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that remains unstayed and in effect for 60 consecutive days
and that:

          (i)  is for relief in any involuntary case against the Company,

          (ii) appoints a Custodian of the Company or for all or substantially
               all of the property of the Company, or

          (iii) orders the liquidation of the Company.

          The term "Bankruptcy Law" means Title 11 of the U.S. Code or any
similar federal, foreign or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, examiner or
similar official under any Bankruptcy Law.

4. If an Event of Default occurs and is continuing for a period of 15 or more
consecutive days, the holder of this Note, by written notice to the Company, may
declare the unpaid principal of and accrued interest on this Note then
outstanding to be due and payable (an "Acceleration"). Upon any such
declaration, such principal and accrued interest shall be due and payable
immediately. The holder of this Note may rescind an Acceleration and its
consequences; provided, however, that no such rescission shall effect any
subsequent Event of Default or impair any right consequent thereto.

5. The holder of this Note may waive an existing Event of Default and its
consequences. Upon any such waiver, such Event of Default shall cease to exist
and shall be deemed to have been cured for every purpose of this Note; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon.

6.   Miscellaneous

     This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of New York applicable to
contracts executed and fully performed within the State of New York.

     No stockholder, director, officer, employee or incorporator, as such, of
the Company shall have any liability for any obligation of the Company under, or
for any claim based on, in respect of or by reason of, this Note. By accepting
the Note, the Payee waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the Note.

     All notices and other communications provided for under or otherwise made
in connection with this Note shall be in writing and mailed for overnight
delivery by recognized overnight courier service or delivered by hand, (i) if to
the Company, at the Company's address

                                        2



at 3960 Broadway, New York, NY 10032, Attention: Norman Barta, or at such other
address as shall be designated by the Company by written notice to the Payee
from time to time, and (ii) if to the Payee, at the Payee's address as set forth
above, or at such other address as shall be designated by the Payee by written
notice to the Company from time to time in accordance with this paragraph. All
such notices and communications shall be effective on the business day following
deposit with the courier service if sent by courier and on the date of delivery
if delivered personally, addressed as aforesaid.

     No failure or delay on the part of the Payee in exercising any right,
power, privilege or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power, privilege or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power, privilege or remedy hereunder. The rights and remedies
provided herein are cumulative, and are not exclusive of any other rights,
powers, privileges or remedies, now or hereafter existing, at law or in equity
or otherwise.

     No amendment, modification or waiver of any provision of this Note nor
consent to any departure by the Company therefrom shall be effective unless the
same shall be in writing and signed by the Company and the Payee, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

     The Company may treat the Payee as the owner of this Note for all purposes.

     The Company hereby waives presentment, demand for payment, notice of
dishonor, notice of protest, and protest, and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this instrument.

     This note may not be negotiated, endorsed, assigned, transferred,
hypothecated or pledged except with the prior written consent of the company.

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed as of the date first above written.

                                        NEPHROS, INC.


                                        By: /s/ Norman Barta
                                            ------------------------------------
                                            Norman Barta, CEO

                                        3



                                 ASSIGNMENT FORM

I or we assign and transfer this Note to:

- --------------------------------------------------------------------------

- --------------------------------------------------------------------------
(Print or type name, address and zip code of assignee or transferee)

(Insert Social Security or other identifying number of assignee or transferee)

and irrevocably appoint                                              , agent
                        ---------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.

Dated:
      -----------------------------


Signed:
       ----------------------------
(Sign exactly as name appears on the other side of this Note)


Signature Guarantee:
                    ----------------------------------------------------
Participant in a recognized Signature Guarantee Medallion Program (or other
signature guarantor program reasonably acceptable to the Company)

                                       4

EX-10.7

                                                                    Exhibit 10.7

                              EMPLOYMENT AGREEMENT

          THIS AGREEMENT (the "Agreement"), made in New York, New York as of the
21st day of November, 2002, between Nephros, Inc., a Delaware corporation having
its executive offices and principal place of business at 3960 Broadway, New
York, New York (the "Company"), and Norman J. Barta, an individual currently
residing at 6 Berkeley Place, Fair Lawn, NJ 07410 ("Executive").

     WHEREAS, the Company desires to employ Executive, and Executive desires to
accept such employment on the terms and conditions hereinafter set forth;

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, the Company and Executive agree as follows

          1. Term.

                    The term of this Agreement shall be the three-year period
commencing on the date first above written, and ending three years thereafter
(the "Term").

          2. Employment.

               (a) Employment by the Company. Executive agrees to be employed by
the Company during the Term upon the terms and subject to the conditions set
forth in this Agreement. Executive shall serve as President and Chief Executive
Officer of the Company, reporting to the Board of Directors of the Company (the
"Board") and shall have such duties as may be prescribed by the Board from time
to time and which are commonly performed by CEO/Presidents of similar sized
companies conducting similar business, such as, but not limited to, corporate
planning and oversight of the financial, marketing, research and other vital
functions of the organization.

               (b) Performance of Duties. Throughout the Term, Executive shall
faithfully and diligently perform Executive's duties in conformity with the
directions of the Board and serve the Company to the best of Executive's
ability. Executive shall devote Executive's entire working time to the business
and affairs of the Company, subject to vacations and sick leave in accordance
with Company policy and as otherwise permitted herein.

               (c) Place of Performance. During his employment with the Company,
Executive will work at the Company's offices in New York, New York, as necessary
or appropriate or at such other location in the greater New York City area as
the Company may determine. Throughout the Term, Executive agrees to maintain
Executive's personal residence within reasonable access to Executive's place of
employment. Executive recognizes that his duties will require, from time to time
and at the Company's expense (subject to Section 3(g) below), travel to domestic
and international locations.

          3. Compensation and Benefits.

               (a) Base Salary. The Company agrees to pay to Executive a base
salary ("Base Salary") at the annual rate of $150,000 payable in equal
installments consistent with the Company's payroll practices. On the date that
the initial public offering ("IPO") for the



Company's common stock is offered for sale to the public, Executive's Base
Salary shall increase to $225,000.

               (b) Milestone Bonus. Upon the achievement of any of the
milestones described in this paragraph, the Company shall pay to Executive a
bonus ("Milestone Bonus") equal to 10% of Executive's Base Salary at the time
the milestone is achieved. Executive shall be entitled to a Milestone Bonus upon
the achievement of any one or more of the following:

          (1) MD Diafilter hemodiafiltration device or a related or similar
device is deemed ready to enter a clinical trial by the FDA in the U.S. or an
analogous body outside the U.S., in a region where there exists significant
market opportunity for the sale of such device;

          (2) the completion of the clinical trial, of the device described in
Section 3(b)(1) above in the region described in Section 3(b)(1) above;

          (3) the first regulatory approval, of the device described in Section
3(b)(1) above in the region described in Section 3(b)(1) above;

          (4) a second hemodiafiltration device is deemed ready to enter a
clinical trial by the FDA in the U.S. or an analogous body outside the U.S., in
a region where there exists significant market opportunity for the sale of such
device;

          (5) the completion of the clinical trial of the device described in
Section 3(b)(4) above in the region described in Section 3(b)(4) above;

          (6) the first regulatory approval of the device described in Section
3(b)(4) above in the region described in Section 3(b)(4) above.

          The milestones described in this paragraph may be amended by written
agreement of the parties.

          After the Anniversary Date, as defined in Section 3(d) ("Base Salary
Increase"), at least two realistic milestones shall be added by the Compensation
Committee of the Board, after consultation with Executive, each year and
Executive shall be paid for the achievement of each such milestone an amount to
be determined by the Compensation Committee of the Board, provided that the
total potential payment for milestones (if achieved) each year equals at least
20% of Executive's Base Salary as of the date the milestones are set by the
Compensation Committee of the Board.

               (c) Licensing Bonus. With respect to any licensing agreement or
technology access agreement related to End Stage Renal Disease ("ESRD") therapy
machines and/or filter technology devices (the "Property"), the Company shall
pay to Executive a bonus ("Licensing Bonus") of one percent (1%) of the license
fee or technology access fee due to the Company. Such Licensing Bonus shall be
payable within 10 business days after receipt by the Company of the license fee
or technology access fee, or each installment of the license fee or technology
access fee. The license fee or technology access fee is any fee or payment that
is not tied directly to sales or expressed as a percentage of receipts from
using the Property or as an account per unit produced, also known as a royalty.
Notwithstanding the foregoing, a maximum

                                        2



bonus of Five-Hundred-Thousand US Dollars ($500,000) shall be payable to
Executive with respect to any one licensing or technology access agreement
including renewals and amendments, with an aggregate maximum Licensing Bonus
under this Agreement of Two-Million US Dollars ($2,000,000).

               (d) Base Salary Increase. On March 31, 2004 (the "Anniversary
Date"), the Company shall increase Executive's Base Salary by the dollar amount
of each of the six Milestone Bonuses referred to in Section 3(b)(1)-(6) above
which have been achieved during the period preceding such Anniversary Date.

          During each year that Executive is employed hereunder, on or before
each one-year anniversary of the Anniversary Date (such date, the "Review
Date"), the Compensation Committee of the Board shall review Executive's
performance and shall determine, in its sole discretion, whether to further
increase Executive's Base Salary and any increase shall become effective
beginning on the relevant Review Date.

               (e) Grant of Options and Terms Thereof. The Company has granted
or shall grant to Executive an option (the "Option"), pursuant to the Nephros
2000 Equity Incentive Plan, to purchase shares of the Company's common stock
(the "Option Shares"), subject to vesting and forfeiture as set forth in the
Incentive Stock Option Agreement including any amendments, modifications and
successors thereto, attached hereto as Exhibit A.

               (f) Benefits and Perquisites. Executive shall be entitled to
participate in, to the extent Executive is otherwise eligible under the terms
thereof, the benefit plans and programs, and receive the benefits and
perquisites, generally provided to executives of the same level and
responsibility as Executive, including without limitation family medical
insurance, life insurance and disability insurance (subject to
generally-applicable required employee contributions).

               (g) Travel and Business Expenses. Upon submission of itemized
expense statements in the manner specified by the Company, Executive shall be
entitled to reimbursement for reasonable travel and other reasonable business
expenses duly incurred by Executive in the performance of Executive's duties
under this Agreement in accordance with the policies and procedures established
by the Company from time to time for executives of the same level and
responsibility as Executive.

               (h) No Other Compensation or Benefits; Payment. The compensation
and benefits specified in this Section 3 and in Section 4 of this Agreement
shall be in lieu of any and all other compensation and benefits. Payment of all
compensation and benefits to Executive hereunder shall be made in accordance
with the relevant Company policies in effect from time to time to the extent the
same are consistently applied, including normal payroll practices, and shall be
subject to all applicable employment and withholding taxes and other
withholdings.

               (i) Cessation of Employment. In the event Executive shall cease
to be employed by the Company for any reason, then Executive's compensation and
benefits shall cease on the date of such event, except as otherwise provided
herein or in any applicable employee benefit plan or program.

                                        3



          4. Termination of Employment.

               (a) Termination. The Company may terminate Executive's employment
for Cause (as defined below), in which case the provisions of Section 4(b) of
this Agreement shall apply. The Company may also terminate Executive's
employment in the event of Executive's Disability (as defined below), in which
case the provisions of Section 4(c) of this Agreement shall apply. The Company
may also terminate Executive's employment for any other reason by written notice
to Executive, in which case the provisions of Section 4(d) of this Agreement
shall apply. If Executive's employment is terminated by reason of Executive's
death, retirement or voluntary resignation, the provisions of Section 4(b) of
this Agreement shall apply.

               (b) Termination for Cause; Termination by Reason of Death or
Retirement or Voluntary Resignation. In the event that Executive's employment
hereunder is terminated during the Term (x) by the Company for Cause (as defined
below), (y) by reason of Executive's death, or (z) by reason of Executive's
voluntary resignation or retirement, then the Company shall pay to Executive
only the (i) accrued, but unpaid Base Salary for services rendered through the
date of termination, and (ii) any Milestone Bonuses due and payable under the
terms of this Agreement through such date of termination and those that become
due and payable within 90 days of such date of termination. For purposes of this
Agreement, "Cause" shall mean (i) conviction of any crime (whether or not
involving the Company) constituting a felony in the jurisdiction involved; (ii)
engaging in any act which, in each case, subjects, or if generally known would
subject, the Company to public ridicule or embarrassment; (iii) gross neglect or
misconduct in the performance of Executive's duties hereunder; (iv) willful
failure or refusal to perform such duties as may reasonably be delegated to
Executive; or (v) material breach of any provision of this Agreement by
Executive; provided, however, that with respect to clauses (iii), (iv) or (v),
Executive shall have received written notice from the Company setting forth the
alleged act or failure to act constituting "Cause" hereunder, and Executive
shall not have cured such act or refusal to act within 30 business days of his
actual receipt of notice.

               (c) Disability. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have failed to perform Executive's
duties hereunder on a full time basis for either (i) one hundred twenty (120)
days within any three hundred sixty-five (365) day period, or (ii) ninety (90)
consecutive days, the Company may terminate Executive's employment hereunder for
"Disability". In that event, the Company shall pay to Executive only the
accrued, but unpaid, Base Salary for services rendered through such date of
termination. During any period that Executive fails to perform Executive's
duties hereunder as a result of incapacity due to physical or mental illness (a
"Disability Period"), Executive shall continue to receive the compensation and
benefits provided by Section 3 of this Agreement until Executive's employment
hereunder is terminated; provided, however, that the amount of compensation and
benefits received by Executive during the Disability Period shall be reduced by
the aggregate amounts, if any, payable to Executive under disability benefit
plans and programs of the Company or under the Social Security disability
insurance program.

               (d) Termination By Company For Any Other Reason. In the event
that Executive's employment hereunder is terminated by the Company prior to the
expiration of the Term for any reason other than as provided in Sections 4(b) or
4(c) of this Agreement, then the Company shall pay to Executive:

                                       4



(i) any accrued, but unpaid Base Salary for services rendered through such date
of termination;

(ii) any unpaid Milestone Bonuses due, payable or which accrue on or prior to
the date of termination or within 90 days thereafter;

(iii) any unpaid Licensing Bonuses due and payable to Executive whether payable
as a one-time payment or in installments over a period of years; and Licensing
Bonuses for new licensing agreements or technology access agreements procured by
Executive which are consummated on or prior to the date of termination or within
90 days thereafter. Payments of these Licensing Bonuses due to Executive
hereunder, if any, shall survive cessation or termination of Executive's
employment hereunder; and

(iv) the continued payment of the Base Salary, in the amount as of the date of
termination, for the remainder of the Term, such payments to be made at the
times such Base Salary would have been paid had Executive's employment not
terminated.

     Notwithstanding anything to the contrary contained herein, in the event
that Executive shall breach Sections 5, 6 or 7 of this Agreement at any time, in
addition to any other remedies the Company may have in the event Executive
breaches this Agreement, the Company's obligation under clauses (ii), (iii) and
(iv) of this Section 4(d) shall cease and Executive's rights thereto shall
terminate and shall be forfeited.

               (e) Benefits Following Termination. The benefits to which
Executive (or as applicable, his spouse or estate) may be entitled pursuant to
the plans and programs referred to in Section 3(f) hereof upon termination of
Executive's employment shall be determined and paid in accordance with the terms
of such plans and programs, or as may be required by applicable law.

               (f) Release. Payment made and performance by the Company in
accordance with this Section 4 shall operate to fully discharge and release the
Company and its directors, officers, employees, subsidiaries, affiliates,
stockholders, successors, assigns, agents and representatives from any further
obligation or liability with respect to Executive's employment and termination
of employment. Other than providing the compensation and benefits provided for
in accordance with this Section 4, the Company and its directors, officers,
employees, subsidiaries, affiliates, stockholders, successors, assigns, agents
and representatives shall have no further obligation or liability to Executive
or any other person under this Agreement. Company shall have the right to
condition the payment of any amounts pursuant to this Section 4 (other than
payments required by law) upon the delivery by Executive to the Company of a
release in form and substance satisfactory to the Company of any and all claims
Executive may have against the Company and its directors, officers, employees,
subsidiaries, affiliates, stockholders, successors, assigns, agents and
representatives arising out of or related to Executive's employment by the
Company and the termination of such employment.

          5. Exclusive Employment; Noncompetition.

               (a) No Conflict; No Other Employment. During the period of
Executive's employment with the Company, Executive shall not: (i) engage in any
activity which conflicts or interferes with or derogates from the performance of
Executive's duties

                                        5



hereunder nor shall Executive engage in any other business activity, whether or
not such business activity is pursued for gain or profit, except as approved in
advance in writing by the Board of Directors of the Company; provided, however,
that Executive shall be entitled to manage his personal investments and
otherwise attend to personal affairs, including charitable activities, in a
manner that does not unreasonably interfere with his responsibilities hereunder,
or (ii) accept any other employment, whether as an executive or consultant or in
any other capacity, and whether or not compensated therefor, unless Executive
receives the prior written approval of the Board of Directors of the Company.

               (b) No Competition. Executive recognizes the highly competitive
nature of the Company's business and that Executive's position with the Company
and access to and use of the Company's and its subsidiaries' confidential
records and proprietary information renders Executive special and unique.
Without limiting the generality of the provisions of Section 2(b) or 5(a) of
this Agreement, Executive shall not (i) during the Term and for a period of one
year after the termination of Executive's employment with the Company for any
reason (the "Restricted Period"), directly or indirectly, own, manage, operate,
join, control, participate in, invest in or otherwise be connected or associated
with, in any manner, including as an officer, director, employee, independent
contractor, stockholder, member, partner, consultant, advisor, agent,
proprietor, trustee or investor, any Competing Business located in the United
States; provided, however, that ownership of 5% or less of the stock or other
securities of a corporation, the stock of which is listed on a national
securities exchange or is quoted on The NASDAQ Stock Market, shall not
constitute a breach of this Section 5, so long as Executive does not in fact
have the power to control, or direct the management of, or is not otherwise
associated with, such corporation.

          For purposes hereof, the term "Competing Business" shall mean any
business or venture which, directly or indirectly, engages in developing medical
equipment in the hemodiafiltration realm for use in ESRD chronic therapy.

               (c) No Solicitation of Employment. During the Term and the
Restricted Period, Executive shall not solicit or encourage any employee of the
Company or its subsidiaries to leave the Company or such subsidiary for any
reason, nor assist any business in doing so, nor employ such an employee in a
Competing Business or any other business.

               (d) Customers of the Company and Its Subsidiaries. Executive
shall not, during the Term and the Restricted Period, except as required by the
Company in the performance by Executive of his duties under this Agreement,
directly or indirectly, on behalf of a Competing Business, contact, solicit or
do business with any "customers" (as defined below) of the Company or of any of
its subsidiaries for the purpose of selling or licensing any product, service,
or technology then sold or licensed by the Company or such subsidiary or
proposed to be sold or licensed by the Company or such subsidiary. For the
purposes of the provisions of this Section 5(d), "customer" shall include any
entity that, within two years prior to the termination of Executive's employment
hereunder, purchased or licensed any product, service, or technology from the
Company or a subsidiary of the Company. The term "customer" also includes any
former customer or potential customer of the Company or any of its subsidiaries
which the Company or such subsidiary has solicited within two years prior to the
termination of Executive's employment hereunder for the purpose of selling or
licensing any product, service,

                                        6



or technology then sold or licensed by the Company or such subsidiary or
proposed to be sold or licensed.

               (e) Executive understands that the provisions of this Section 5
may limit his ability to earn a livelihood in a business that competes with the
business of the Company or its subsidiaries, but nevertheless agrees and hereby
acknowledges that the consideration provided under this Agreement is sufficient
to justify the restrictions contained in such provisions. In consideration
thereof and in light of Executive's education, skills and abilities, Executive
agrees that he will not assert in any forum that such provisions prevent him
from earning a living or otherwise are void or unenforceable or should be held
void or unenforceable.

          6. Inventions and Proprietary Property.

               (a) Definition of Proprietary Property. For purposes of this
Agreement, "Proprietary Property" shall mean designs, specifications, ideas,
formulas, discoveries, inventions, improvements, innovations, concepts and other
developments, trade secrets, techniques, methods, know-how, technical and
non-technical data, works of authorship, computer programs, computer algorithms,
computer architecture, mathematical models, drawings, trademarks, copyrights,
customer lists, marketing plans, and all other matters which are legally
protectable or recognized as forms of property, whether or not patentable or
reduced to practice or to a writing.

               (b) Assignment of Proprietary Property to the Company or Its
Subsidiaries. Executive hereby agrees to assign, transfer and set over, and
Executive does hereby assign, transfer and set over, to the Company (or, as
applicable, a subsidiary of the Company), without further compensation, all of
Executive's rights, title and interest in and to any and all Proprietary
Property which Executive, either solely or jointly with others, has conceived,
made or suggested or may hereafter conceive, make or suggest, in the course of
Executive's employment with the Company.

               The assignment of Proprietary Property hereunder includes without
limitation all rights of paternity, integrity, disclosure and withdrawal and any
other rights that may be known as or referred to as moral rights ("Moral
Rights"). To the extent that such Moral Rights cannot be assigned under
applicable law and to the extent the following is allowed by the laws in the
various countries where Moral Rights exist, Executive hereby waives such Moral
Rights and consents to any action of the Company or any subsidiary of the
Company that would violate such Moral Rights in the absence of such consent.
Executive also will endeavor to facilitate such use of any such Moral Rights as
the Company, or, as applicable, a subsidiary of the Company, shall reasonably
instruct, including confirming any such waivers and consents from time to time
as requested by the Company (or, as applicable, a subsidiary of the Company).

               (c) Works for Hire. Executive acknowledges that all original
works of authorship or other creative works which are made by Executive (solely
or jointly with others) within the scope of the employment of Executive by the
Company and which are protectable by copyright are "works made for hire,"
pursuant to United States Copyright Act (17 U.S.C., Section 101). To the extent
such original work of authorship or other creative works are not works made for
hire, Executive hereby assigns to the Company (or, as directed by the Company,
to a subsidiary of the Company) all of the rights comprised in the copyright of
such works.

                                        7



               (d) Disclosure of Proprietary Property and Execution of
Documents. Executive further agrees to promptly disclose to the Company any and
all Proprietary Property which Executive has assigned, transferred and set over
or will assign, transfer and set over as provided in Section 6(b) above, and
Executive agrees to execute, acknowledge and deliver to the Company (or, as
applicable, to a subsidiary of the Company), without additional compensation and
without expense to Executive, any and all instruments reasonably requested, and
to do any and all lawful acts which, in the reasonable judgment of the Company
or its attorneys (or, as applicable, a subsidiary of the Company or its
attorneys) may be required or desirable in order to vest in the Company or such
subsidiary all property rights with respect to such Proprietary Property.

               (e) Enforcement of Proprietary Rights. Executive will assist the
Company (or, as applicable, a subsidiary of the Company) in every proper way to
obtain, assign to the Company (or, as directed by the Company, to a subsidiary),
confirm and from time to time enforce, United States and foreign patent trade
secret, trademark, copyright, mask work, and other intellectual property rights
relating to Proprietary Property in any and all countries. To that end Executive
will execute, verify and deliver such documents and perform such other acts
(including appearances as a witness) as the Company, or, as applicable, a
subsidiary of the Company, may reasonably request for use in applying for,
obtaining, perfecting, evidencing, sustaining and enforcing such proprietary
rights and the assignment of such Proprietary Property. In addition, Executive
will execute, verify and deliver assignments of such Proprietary Property and
all rights therein to the Company, its subsidiary or its or their designee. The
obligation of Executive to assist the Company, or, as applicable, a subsidiary
of the Company, with respect to proprietary rights relating to such Proprietary
Property in any and all countries shall continue beyond the termination of
employment, but the Company, or as applicable, a subsidiary of the Company,
shall compensate Executive at a mutually agreed upon fee, in addition to any
expenses, after such termination.

               In the event the Company, or, as applicable, a subsidiary of the
Company, is unable for any reason, after reasonable effort, to secure the
signature of Executive on any document needed in connection with the actions
specified in the preceding paragraph, Executive hereby irrevocably designates
and appoints the Company and its duly authorized officers and agents as agent
and attorney in fact, which appointment is coupled with an interest, to act for
and on behalf of Executive, to execute, verify and file any such documents and
to do all other lawfully permitted acts to further the purposes of the preceding
paragraph with the same legal force and effect as if executed by Executive.
Executive hereby waives and quitclaims to the Company or, as applicable, a
subsidiary of the Company, any and all claims, of any nature whatsoever, which
Executive now or may hereafter have for infringement of any proprietary rights
assigned hereunder to the Company or such subsidiary.

               (f) Third Party Information. To the extent Executive has or
possesses any Confidential Information (as hereinafter defined) belonging to
Executive or to others, Executive shall not use or disclose to the Company or
its subsidiaries or induce the Company or its subsidiaries to use any such
Confidential Information unless the Company or its subsidiaries have a legal
rights to use such Confidential Information. Executive will promptly advise the
Company in writing if any of Executive's involvement with the Company or any
subsidiary of the Company might result in the possible violation of Executive's
undertakings to others or the use of any Confidential Information of Executive
or of others.

                                        8



          7. Confidential Information.

               (a) Existence of Confidential Information. The Company owns and
has developed and compiled, and the Company and its subsidiaries will develop
and compile, certain proprietary techniques and confidential information, which
have and will have great value to their businesses (referred to in this
Agreement, collectively, as "Confidential Information"). Confidential
Information includes not only information disclosed by the Company (or, as
applicable, a subsidiary of the Company) to Executive, but also information
developed or learned by Executive during the course or as a result of employment
with the Company, which information shall be the property of the Company or, as
applicable, such subsidiary. Confidential Information includes all information
that has or could have commercial value or other utility in the business in
which the Company or any of its subsidiaries is engaged or contemplates
engaging, and all information of which the unauthorized disclosure could be
detrimental to the interests of the Company or its subsidiary, whether or not
such information is specifically labeled as Confidential Information by the
Company or such subsidiary. By way of example and without limitation,
Confidential Information includes any and all information developed, obtained,
licensed by or to or owned by the Company or any of its subsidiaries concerning
trade secrets, techniques, know-how (including designs, plans, procedures,
merchandising, marketing, distribution and warehousing know-how, processes, and
research records), software, computer programs and designs, development tools,
all Proprietary Property, and any other intellectual property created, used or
sold (through a license or otherwise) by the Company or any of its subsidiaries,
electronic data information know-how and processes, innovations, discoveries,
improvements, research, development, test results, reports, specifications,
data, formats, marketing data and plans, business plans, strategies, forecasts,
unpublished financial information, orders, agreements and other forms of
documents, price and cost information, merchandising opportunities, expansion
plans, budgets, projections, customer, supplier, licensee, licensor and
subcontractor identities, characteristics, agreements and operating procedures,
and salary, staffing and employment information.

               (b) Protection of Confidential Information. Executive
acknowledges and agrees that in the performance of Executive's duties hereunder,
the Company or a subsidiary of the Company may disclose to and entrust Executive
with Confidential Information which is the exclusive property of the Company or
such subsidiary and which Executive may possess or use only in the performance
of Executive's duties to the Company. Executive also acknowledges that Executive
is aware that the unauthorized disclosure of Confidential Information, among
other things, may be prejudicial to the Company's or its subsidiaries'
interests, an invasion of privacy and an improper disclosure of trade secrets.
Executive shall not, directly or indirectly, use, make available, sell, disclose
or otherwise communicate to any corporation, partnership or other entity,
individual or other third party, other than in the course of Executive's
assigned duties and for the benefit of the Company, any Confidential
Information, either during the Term or thereafter. In the event Executive
desires to publish the results of Executive's work for or experiences with the
Company or its subsidiaries through literature, interviews or speeches,
Executive will submit requests for such interviews or such literature or
speeches to the Board of Directors of the Company at least fourteen (14) days
before any anticipated dissemination of such information for a determination of
whether such disclosure is in the best interests of the Company and its
subsidiaries, including whether such disclosure may impair trade secret status
or constitute an invasion of privacy. Executive agrees not to publish, disclose
or otherwise

                                        9



disseminate such information without the prior written approval of the Board of
Directors of the Company.

               (c) Delivery of Records, Etc. In the event Executive's employment
with the Company ceases for any reason, Executive will not remove from the
Company's premises without its prior written consent any records (written or
electronic), files, drawings, documents, equipment, materials and writings
received from, created for or belonging to the Company or its subsidiaries,
including those which relate to or contain Confidential Information, or any
copies thereof. Upon request or when employment with the Company terminates,
Executive will immediately deliver the same to the Company.

          8. Assignment and Transfer.

               (a) Company. This Agreement shall inure to the benefit of and be
enforceable by, and may be assigned by the Company to, any purchaser of all or
substantially all of the Company's business or assets, any successor to the
Company or any assignee thereof (whether direct or indirect, by purchase,
merger, consolidation or otherwise). As soon as reasonable prior to such an
event (but no later than 31 days prior thereto), the Company shall advise
Executive of this pending occurrence. Executive shall then have 31 days to
discuss, negotiate and confer with any successor entity the terms and conditions
of Executive's continued employment with the successor Company. If Executive,
acting reasonably, is unable to reach an agreement, through good faith
negotiations with any successor to the Company, acting reasonably, Executive may
terminate his employment with the Company and receive the payments and bonuses
outlined in Section 4(d) hereof ("Termination By Company For Any Other Reason").

               (b) Executive. Executive's rights and obligations under this
Agreement shall not be transferable by Executive by assignment or otherwise, and
any purported assignment, transfer or delegation thereof shall be void;
provided, however, that if Executive shall die, all amounts then payable to
Executive hereunder shall be paid in accordance with the terms of this Agreement
to Executive's devisee, legatee or other designee or, if there be no such
designee, to Executive's estate.

          9. Miscellaneous.

               (a) Other Obligations. Executive represents and warrants that
neither Executive's employment with the Company or Executive's performance of
Executive's obligations hereunder will conflict with or violate or otherwise are
inconsistent with any other obligations, legal or otherwise, which Executive may
have. Executive covenants that he shall perform his duties hereunder in a
professional manner and not in conflict or violation, or otherwise inconsistent
with other obligations legal or otherwise, which Executive may have.

               (b) Nondisclosure; Other Employers. Executive will not disclose
to the Company or any of its subsidiaries, or use, or induce the Company or any
of its subsidiaries to use, any proprietary information, trade secrets or
confidential business information of others. Executive represents and warrants
that Executive does not possess any property, proprietary information, trade
secrets and confidential business information belonging to prior employers.

                                       10



               (c) Cooperation. Following termination of employment with the
Company for any reason, Executive shall cooperate with the Company, as requested
by the Company, to effect a transition of Executive's responsibilities and to
ensure that the Company is aware of all matters being handled by Executive.

               (d) No Duty to Mitigate. Executive shall be under no duty to
mitigate any losses or damage to the Company with respect to any amounts payable
pursuant to Section 4 of this Agreement.

               (e) Protection of Reputation. During the Term and thereafter,
Executive agrees that he will take no action which is intended, or would
reasonably be expected, to harm the Company or any of its subsidiaries or its or
their reputations or which would reasonably be expected to lead to unwanted or
unfavorable publicity to the Company or any of its subsidiaries, other than
those required in order to permit Executive to comply with applicable law or
those made in connection with legal or arbitral process. During the Term and
thereafter, the Company agrees that it will take no actions which are intended,
or would reasonably be expected, to harm Executive or his reputation or which
would reasonably be expected to lead to unwanted or unfavorable publicity to the
executive, other than those required in order to permit the Company to comply
with applicable law or those made in connection with legal or arbitral process.
Notwithstanding the foregoing, this paragraph shall not prevent the Company or
Executive from exercising any of their respective rights under this Agreement.

               (f) Governing Law. This Agreement shall be governed by and
construed (both as to validity and performance) and enforced in accordance with
the internal laws of the State of New York applicable to agreements made and to
be performed wholly with such jurisdiction, without regard to principles of the
conflict of laws thereof or where the parties are located at the time a dispute
arises.

               (g) Jurisdiction; Forum.

               (i) All disputes between the parties arising from or in
connection with this Agreement or Executive's employment hereunder, including
those relating to the existence and validity of this Agreement, shall be
submitted to binding arbitration before one arbitrator administered by the
American Arbitration Association ("AAA") under its National Rules for the
Resolution of Employment Disputes at its New York City offices. Judgment upon
the award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. Unless otherwise determined by the arbitrator, as a
consequence of bad faith by either party, the AAA filing fee and AAA hearing fee
shall be divided equally between the parties. Each party shall bear its own
attorneys' fees and costs, provided that in connection with any claims for which
a prevailing party is entitled to recover attorneys' fees or costs pursuant to
statute, the arbitrator shall have the authority to award such fees and costs.

               (ii) Notwithstanding subparagraph (i) above, if a dispute arises
out of or relating to this Agreement, or the breach thereof, the parties hereby
agree first to try in good faith to settle the dispute by mediation administered
by the AAA under its National Rules for the Resolution of Employment Disputes at
its New York City offices, before resorting to arbitration.

                                       11



               (iii) Notwithstanding subparagraphs (i) and (ii) above, the
Company shall be entitled to seek and obtain from a court injunctive or
equitable relief, including without limitation, a temporary restraining order
and/or preliminary injunction, to enforce the terms of Sections 5, 6 or 7 of
this Agreement.

               (iv) Each party hereto consents and submits to the jurisdiction
of any arbitration proceeding commenced in accordance with subparagraph (i)
above in connection with any dispute arising out of or relating to this
Agreement or the Executive's employment or termination hereunder and consents
and submits to the jurisdiction of any state or federal court sitting in the
State, City, and County of New York with respect to any proceeding brought (a)
to enter judgment upon the award rendered by the arbitrator or (b) under
subparagraph (iii) hereof.

               (h) Entire Agreement. This Agreement (including all exhibits
hereto) contains the entire agreement and understanding between the parties
hereto in respect of Executive's employment and supersedes, cancels and annuls
any prior or contemporaneous written or oral agreements, understandings,
commitments and practices between them respecting Executive's employment,
including all prior employment agreements, if any, between the Company and
Executive, which agreement(s) hereby are terminated and shall be of no further
force or effect.

               (i) Amendment. This Agreement may be amended only by a writing
which makes express reference to this Agreement as the subject of such amendment
and which is signed by Executive and, on behalf of the Company, by its duly
authorized officer.

               (j) Severability. If any term, provision, covenant or condition
of this Agreement or part thereof, or the application thereof to any person,
place or circumstance, shall be held to be invalid, unenforceable or void by a
court of competent jurisdiction, the remainder of this Agreement and such term,
provision, covenant or condition shall remain in full force and effect, and any
such invalid, unenforceable or void term, provision, covenant or condition shall
be deemed, without further action on the part of the parties hereto, modified,
amended and limited, and the court shall have the power to modify, to the extent
necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful. In this regard, Executive acknowledges that the
provisions of Sections 5, 6 and 7 of this Agreement are reasonable and necessary
for the protection of the Company.

               (k) Construction. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement. The language in all parts of this Agreement
shall be in all cases construed according to its fair meaning and not strictly
for or against the Company or Executive. The use herein of the word "including,"
when following any general provision, sentence, clause, statement, term or
matter, shall be deemed to mean "including, without limitation." As used herein,
"Company" shall mean the Company and its subsidiaries and any purchaser of,
successor to or assignee (whether direct or indirect, by purchase, merger,
consolidation or otherwise) of all or substantially all of the Company's
business or assets which is obligated to perform this Agreement by operation of
law, agreement or otherwise. As used herein, the words "day" or "days" shall
mean a calendar day or days. As used herein, "Compensation Committee" means the
Compensation Committee of the Board or, if no such committee is then serving, at
least two members of the Board as selected by the Board.

                                       12



               (l) Nonwaiver. Neither any course of dealing nor any failure or
neglect of either party hereto in any instance to exercise any right, power or
privilege hereunder or under law shall constitute a waiver of any other right,
power or privilege or of the same right, power or privilege in any other
instance. All waivers by either party hereto must be contained in a written
instrument signed by the party to be charged and, in the case of the Company, by
its duly authorized officer.

               (m) Remedies for Breach. The parties hereto agree that Executive
is obligated under this Agreement to render personal services during the Term of
a special, unique, unusual, extraordinary and intellectual character, thereby
giving this Agreement special value, and, in the event of a breach or threatened
breach of any covenant of Executive herein, the injury or imminent injury to the
value and the goodwill of the Company's and its subsidiaries' businesses could
not be reasonably or adequately compensated in damages in an action at law.
Accordingly, Executive acknowledges that the Company (and as applicable, one or
more of its subsidiaries) shall be entitled to seek injunctive relief or any
other equitable remedy against Executive in the event of a breach or threatened
breach of Sections 5, 6 or 7 of this Agreement. The rights and remedies of the
Executive and Company are cumulative and shall not be exclusive, and Executive
and Company shall be entitled to pursue all legal and equitable rights and
remedies and to secure performance of the obligations and duties of the other
under this Agreement, and the enforcement of one or more of such rights and
remedies by Executive or Company shall in no way preclude Executive or Company
from pursuing, at the same time or subsequently, any and all other rights and
remedies available to Executive or Company.

               (n) Notices. Any notice, request, consent or approval required or
permitted to be given under this Agreement or pursuant to law shall be
sufficient if in writing, and if and when sent by certified or registered mail,
return receipt requested, with postage prepaid, or by overnight courier, to
Executive's residence, as reflected in the Company's records or as otherwise
designated by Executive with a copy (which shall not constitute notice) to:
Miriam Stern, Esq., 303 East 83rd Street, New York, NY 10028, or to the
Company's principal executive office, attention: Chairman of the Board of
Directors with a copy (which shall not constitute notice) to: Monica Lord, Esq.,
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, NY 10022, as
the case may be. All such notices, requests, consents and approvals shall be
effective upon being deposited in the United States mail. However, the time
period in which a response thereto must be given shall commence to run from the
date of receipt on the return receipt of the notice, request, consent or
approval by the addressee thereof. Rejection or other refusal to accept, or the
inability to deliver because of changed address of which no notice was given as
provided herein, shall be deemed to be receipt of the notice, request, consent
or approval sent.

               (o) Assistance in Proceedings, Etc. Executive shall, without
additional compensation during the Term and with complete reimbursement of
expenses after the expiration of the Term, upon reasonable notice, furnish such
information and proper assistance to the Company as may reasonably be required
by the Company in connection with any legal or quasi-legal proceeding, including
any external or internal investigation, involving the Company or any of its
subsidiaries or in which any of them is, or may become, a party.

               (p) Survival. Cessation or termination of Executive's employment
with the Company shall not result in termination of this Agreement. The
respective obligations

                                       13



of Executive, and rights and benefits afforded to the Company, as provided in
this Agreement, including, without limitation, Sections 5, 6, 7 and 8(o), shall
survive cessation or termination of Executive's employment hereunder.

          IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed on its behalf by an officer thereunto duly authorized and Executive has
duly executed this Agreement, all as of the date and year first written above.

NEPHROS, INC.                             EXECUTIVE


By: /s/ Eric A. Rose, M.D.                /s/ Norman J. Barta
    -----------------------------------   --------------------------------------
    Eric A. Rose, M.D.                        Norman J. Barta
    Chairman of the Board of Directors

                                       14

EX-10.8

                                                                    Exhibit 10.8


[LETTERHEAD OF NEPHROS]


AMENDMENT TO EMPLOYMENT AGREEMENT

This is an AMENDMENT (the "Amendment") to the Employment Agreement between
Nephros, Inc. ("the Company") and Norman J. Barta ("Executive") dated November
21, 2002. This Amendment is dated March 17, 2003, and consists of the following
changes:

Paragraph 3(a), Base Salary, is amended as follows: The Company agrees to pay to
Executive a base salary ("Base Salary") at the annual rate of $150,000 payable
in equal installments consistent with the Company's payroll practices. On April
15, 2003, Executive's Base Salary shall increase to $225,000.

Paragraph 3(d), Base Salary Increase, is amended as follows: On July 31, 2004
(the "Anniversary Date"), the Company shall increase Executive's Base Salary by
the dollar amount of each of the six Milestone Bonuses referred to in Section
3(b)(l)-(6) above which have been achieved during the period preceding such
Anniversary Date.

IN WITNESS WHEREOF, the Company has caused this Amendment to be duly executed on
its behalf by an officer thereunto duly authorized and Executive has duly
executed this Amendment, all as of the date and year noted above.


NEPHROS, INC.                                 EXECUTIVE

By: /s/ Eric A. Rose, MD                      /s/ Norman J. Barta
- ----------------------------------            ----------------------------------
Eric A. Rose, MD                              Norman J. Barta
Chairman of the Board of Directors

EX-10.9

                                                                    Exhibit 10.9

[LETTERHEAD OF NEPHROS]

AMENDMENT TO EMPLOYMENT AGREEMENT

This is an AMENDMENT (the "Amendment") to the Employment Agreement between
Nephros, Inc. ("the Company") and Norman J. Barta ("Executive") dated as of
November 21, 2002 (the "Employment Agreement"). Intending to be legally bound,
the Company and Executive hereby agree as follows:

Paragraph 1 of the Employment Agreement is hereby amended in its entirety to
read as follows:

                  1.   Term.

                       The term of this Agreement shall be the period
           commencing on November 21, 2002, and ending on June 30, 2007 (the
           "Term").

IN WITNESS WHEREOF, the Company has caused this Amendment to be duly executed on
its behalf by its duly authorized agent and Executive has duly executed this
Amendment, all as of May 31, 2004.

NEPHROS, INC.                                   EXECUTIVE


By:  /s/ Eric A. Rose, MD                       /s/ Norman J. Barta
    ------------------------------              --------------------------------
Eric A. Rose, MD                                Norman J. Barta
Chairman of the Board of Directors

EX-10.10

                                                                   Exhibit 10.10

             EMPLOYEE PATENT AND CONFIDENTIAL INFORMATION AGREEMENT

      THIS AGREEMENT ("Agreement") is made by and between NEPHROS, INC.
("Employer") and _____________ ("Employee").

      1.    Definitions.

            a. "Company" - The Employer and any corporation or other business
enterprise directly or indirectly controlling, controlled by or under common
control with Nephros, Inc. or otherwise related by equity ownership to (whether
or not controlling, controlled by, or under common control with) Nephros, Inc.
from time to time, whether before or after the execution of this Agreement.

            b. "Customer" - Customers, clients, licensors, licensees, agents,
consultants, suppliers and contractors of the Company.

            c. "Confidential Information" - All information, whether or not
reduced to writing, possessed by the Company or relating to the business of any
actual or demonstrably anticipated research and development of the Company or
its Customers and which gives the Company or any of its Customers an advantage
over competitors who do not know or use it or is otherwise not generally known
in the trade, including, but not limited to, trade secrets, proprietary
information, customer lists and computer programs and software, and including
information conceived, originated or developed by Employee.

            d. "Inventions" - All discoveries, inventions, improvements,
innovations, ideas, concepts and other developments, including, but not limited
to, computer programs and software, relating to the business or any actual or
demonstrably anticipated research or development of the Company made or
conceived by Employee in whole or in part during any period of employment with
the Company, whether alone or with others, and whether or not patentable or
reduced to practice. [It is understood and acknowledged by the Company and
Employee that for purposes of this Agreement, in accordance with California
Labor Code Sections 2870-2872, "Inventions" shall not be deemed to include an
invention for which no equipment, supplies, facility, or trade secret
information of the Company was used and which was developed entirely on the
Employee's own time, and (a) which does not related (1) to the business of the
Company or (2) to the company's actual or demonstrably anticipated research or
development, or (b) which does not result from any work performed by the
Employee for the Company].

      2.    Consideration. This Agreement is entered in consideration of the
hiring or continued employment of the Employee by the Company.

      3.    Purpose. The purpose of this Agreement is to protect the trade
secrets and other proprietary and confidential information of the Company and
the Company's right to certain inventions by Employee, in order to assure the
Company's ability to continue its business and furnish employment to its
employees and to preserve and protect the secrets of the United States
Government, Customers and others which are entrusted to the Company.



      4.    Confidentiality. The Employee agrees to maintain the confidentiality
of all Confidential Information, both during and subsequent to any periods of
employment with the Company, and Employee will not, without express written
authorization by the Company, directly or indirectly reveal or cause to be
revealed any such Confidential Information to any person other than to Company
employees who are authorized to receive such Confidential Information in order
to perform their duties for the Company, nor will Employee use any such
Confidential Information to the detriment of the Company or its Customers or
other than in the course of his employment with the Company.

      5.    Return of Confidential Material. In the event of the Employees
termination of employment with the Company for any reason whatsoever, the
Employee agrees promptly to deliver to the Company all Confidential Information
and Employee will not take or keep any Confidential Information, whether in its
original form or as copies, upon the termination of his employment.

      6.    Return of Documents. All memoranda notes, notebooks, reports,
drawings, photographs, plans, papers, recordings, tapes, computer discs or other
forms of records made or compiled by or made available to Employee during the
course of his employment, and any abstracts thereof, whether or not they contain
Confidential Information, are and shall be the property of the Company and shall
immediately be delivered by Employee to Company at its request or upon
termination of his employment.

      7.    Assignment of Inventions.

            a. The Employee hereby assigns and transfers to the Company without
further consideration his entire right, title and interest in and to all
Inventions (as defined in this Agreement).

            b. Employee shall disclose any Invention during the period of
employment promptly and fully in writing to Employee's immediate supervisor at
the Company, with a copy to the President of Employer, to enable the Company to
determine whether the Invention is subject to this Agreement, regardless of
whether Employee believes the Invention belongs to him [or is protected by
California Labor Code Section 2870.] To the extent that such Invention may
belong to the Employee, the Company shall protect such disclosures to the same
extent that it protects its own like proprietary information. The Company,
however, shall have no such obligations to the extent such Invention is owned by
the Company.

            c. Employee will, at the Company's request, promptly execute a
written assignment of title to the Company for any Invention required to be
assigned by this Agreement and will preserve any such Invention as Confidential
Information of the Company.

            d. Employee shall, upon request by the Company, assist the Company
or its nominee (at Company's expense) in every reasonable way during and at any
time after Employee's employment to patent and defend the Company's or its
nominee's title to any Inventions in any and all countries, which patents shall
be and remain the sole and exclusive property of the Company or its nominee.

                                       -2-



      8.    Prior Inventions. It is understood that all inventions, if any
patented or unpatented, which Employee made prior to employment by the Company
are excluded from the scope of this Agreement. The Employee warrants that
Employee has inserted in Schedule A attached hereby and made a part hereof a
complete list of all prior inventions of Employee, if any, including numbers of
all patents, and patent applications, and, in the case of unpatented inventions,
a brief description of all such inventions which are not the property of a
previous employer. Employee further warrants that, if no items are on the list,
Employee has had no such prior inventions. IF NO INVENTIONS, SO INDICATE BY YOUR
INITIALS: ____.

      9.    Extension of Obligations and Agreement to Previous and Future
Employment. The Employee understands and agrees that the provisions of this
Agreement extend also to all previous and future periods of Employee's
employment by the Company and this Agreement shall continue to be in full force
and effect without re-execution in the event Employee transfers between
different employers within the Company, whether or not there are periods between
such transfers during which the Employee is not employed by any employer within
the Company.

      10.   Other Obligations. Employee hereby acknowledges that the Company
from time to time may have agreements with other persons or with the United
States Government which impose obligations or restrictions on the Company
regarding inventions made during the course of work thereunder or regarding the
confidential nature of such work. Employee hereby agrees to be bound by all such
obligations and restrictions and to take all actions necessary to discharge the
obligations of the Company thereunder.

      11.   Trade Secrets and Confidential Information of Others. The Employee
represents and warrants that Employee's performance of all the terms of this
Agreement and as an Employee of the Company does not and shall not breach any
agreement to keep in confidence proprietary or confidential information acquired
by the Employee during a period in which Employee was not employed by the
Company, and Employee further represents and warrants that Employee shall not
disclose to the Company, or induce the Company to use, any proprietary or
confidential information belonging to any previous employer or to others.

      12.   Non-limitation of Rights. This Agreement shall not be construed to
limit in any way any "shop rights" or other common law or contractual right of
the Company by virtue of any previous relationship with the Employee.

      13.   Modification. This Agreement may only be modified or terminated by
an instrument in writing, signed by the Employee and the Company.

      14.   Remedies. Employee and Company acknowledge and stipulate that the
covenants and agreements contained in this Agreement are of a special nature and
that any breach, violation or evasion by Employee of the terms of this Agreement
will result in immediate and irreparable injury and harm to the Company, and
will cause damage to the Company in amounts difficult to ascertain. Accordingly,
the Company shall be entitled to the remedies of injunction and specific
performance, or either of such remedies, as well as to all other legal or
equitable remedies to which the Company may be entitled, including, without
limitation, termination of the employment of Employee.

                                       -3-



      15.   Entire Agreement. The Employee hereby acknowledges receipt of a
signed counterpart of this Agreement and acknowledges that it is Employee's
entire Agreement with the Company with respect to the subject matter hereof,
thereby superseding any previous oral or written understanding or agreements
with the Company or any officer or representative of the Company. Nothing in
this Agreement shall be deemed to be a contract of employment for a definite
period of time or limit the right of the Company to terminate the employment of
the Employee, with or without cause.

      16.   Severability. In the event that any paragraph or provision of this
Agreement shall be held to be illegal or unenforceable, such paragraph or
provisions shall be severed or otherwise modified as may best preserve the
intention of the parties hereto, and the Agreement as so modified shall remain
in full force and effect.

      17.   Successors and Assigns. This Agreement shall be binding upon
Employee's heirs, executors, administrators and other legal representatives, and
is for the benefit of the Company, it successors and assigns.

      18.   Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.

      IN WITNESS WHEREOF, the parties hereby set their hands as of this ____ day
of _________, ______, and the Employee has completed Schedule A which is set
forth below.

                                         NEPHROS, INC.
- -----------------------------------      Employer
Employee

Address:                                 By:
                                            ---------------------------------

- -----------------------------------      (Type or Print)
Street                                                  -------------

- -----------------------------------      Title:
City, State or Province, Country                ---------

                                       -4-



                                   SCHEDULE A

      Following is a complete list of all prior inventions of Employee,  if any,
including numbers of all patents, and patent  applications,  and, in the case of
unpatented inventions,  a brief description of all such inventions which are not
the property of a previous employer.

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

                                       -5-

EX-10.11

                                                                   Exhibit 10.11

                            CONFIDENTIALITY AGREEMENT

          CONFIDENTIALITY AGREEMENT (this "Agreement") dated as of
                                                                   -------------
between NEPHROS, INC., a Delaware corporation ("Nephros"), and
                                                               -----------------
                    (the "Recipient") (each a "Party", and collectively, the
- -------------------
"Parties").

          WHEREAS Nephros expects to disclose to the Recipient confidential
information about Nephros' business and technology, the Recipient agrees as
follows:

          1. "Nephros Confidential Information" means, individually and
collectively, any and all information, including, without limitation,
information relating to the dialysis related equipment being developed by
Nephros.

          2. Nephros shall disclose to Recipient only such Nephros Confidential
Information as Nephros, at its sole discretion, considers necessary for
Recipient to function in its defined role.

          3. The Recipient shall maintain Nephros Confidential Information
received pursuant to this Agreement in confidence and not disclose the same to
any third party. Recipient shall use Nephros Confidential Information
exclusively for the purpose of its role at Nephros as defined, and for no other
purpose. The foregoing obligation of confidentiality by Recipient shall not
apply to any information with respect to which the Recipient can demonstrate by
written records that:

               (1) such information was already in the Recipient's possession or
control prior to the earlier of the date of (a) disclosure or (b) first
interaction with Nephros (provided that such information is not subject to
another contractual, legal or fiduciary obligation to Nephros or a third party);
or

               (2) such information was on the date of its disclosure to
Recipient in or thereafter enters the public domain other than as a result of
disclosure by Recipient in breach of this Agreement; or

               (3) becomes available to the Recipient on a non-confidential
basis from a source other than Nephros, provided that such source has the right
to disclose such information and is not prohibited by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
nondisclosure to Nephros or to another third party.

          4. It is understood and agreed that any and all proprietary rights,
including, but not limited to, patent rights, trademarks and other intellectual
property or proprietary rights, in and to the Nephros Confidential Information
disclosed by Nephros to the Recipient shall be and remain the exclusive property
of Nephros. The Nephros Confidential Information will be disclosed to Recipient
with the express understanding that neither Party will be obligated to enter
into any further transaction or other agreement with the other party. In
addition, nothing in this Agreement shall be construed as the granting of a
license by Nephros to the Recipient.

          5. The Agreement set forth herein may be modified, amended or waived
only by separate written agreement of each of the Parties expressly so
modifying, amending or



waiving such Agreement. The waiver by either Party of compliance with any
provision of this Agreement by the other Party shall not operate or be construed
as a waiver of such Party of a provision of this Agreement.

          6. The Recipient may not assign his rights or obligations hereunder.
Nothing in this Agreement shall interfere with Nephros' ability to transfer or
assign its rights under this Agreement.

          7. All obligations of the Parties under this Agreement shall terminate
upon the fifth anniversary of the termination of business relationships between
the Parties.

          8. This letter shall be governed by, and construed in accordance with,
the laws of the State of New York, without reference to the conflict of law
principles of such State to the extent that the laws of any other jurisdiction
would be applicable in lieu thereof. The Parties irrevocably and unconditionally
agree that the exclusive place of jurisdiction for any action, suit or
proceeding ("Actions") relating to this Agreement shall be in the courts of the
United States of America sitting in the City of New York. If such courts shall
not have jurisdiction over the subject matter thereof, in the courts of the
State of New York sitting therein, and each such party hereby irrevocably and
unconditionally agrees to submit to the jurisdiction of such courts for purposes
of any such Actions. Each Party irrevocably and unconditionally waives any
objection it may have to the venue of any Action brought in such courts or to
the convenience of the forum. Final judgment in any such Action shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment, a
certified or true copy of which shall be conclusive evidence of the fact and the
amount of any indebtedness or liability of any party therein described.

          9. In the event that any provision of this Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provision hereof.

          IN WITNESS WHEREOF, the Recipient executes this Agreement as of the
date first set forth above.

                                             RECIPIENT:


                                             -----------------------------------


                                             FOR NEPHROS:


                                             -----------------------------------
                                             Norman J. Barta
                                             Chief Financial Officer

                                      -2-

EX-10.12

                                                                   Exhibit 10.12

                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

          This Settlement Agreement and Mutual Release ("Agreement") is made and
entered into as of the 19th day of June, 2002, by and among Plexus Services
Corp., of 55 Jewelers Park Drive, Neenah, Wisconsin 54957 ("Claimant"), and
Nephros, Inc., of 3960 Broadway, 4th Floor, New York, New York 10032
("Nephros"). As used throughout this Agreement, the term "Parties" refers to the
Claimant and Nephros and the term "Party" refers to any one of the same.

                                    RECITALS

          A. WHEREAS, Claimant and Nephros were engaged in a business
relationship under the terms of that certain Navaho Project Plan Agreement,
dated April 20, 1999, between Nephros and SeaMED Corporation, predecessor in
interest to Claimant (the project contemplated thereby being called herein the
"Navaho Project");

          B. WHEREAS, Claimant has asserted a claim against Nephros in the
amount of $1,832,496.87 (the "Claim");

          C. WHEREAS, Nephros does not dispute the amount of the Claim.

          D. WHEREAS, the Parties have agreed to a manner in which the Claim
will be paid and satisfied by Nephros.

          NOW, THEREFORE, in consideration of the following mutual terms,
covenants and conditions, the Parties, and each of them, do hereby agree as
follows:

          1. Payment. Nephros shall pay the Claimant the sum of $650,000 by wire
transfer in accordance with the schedule set forth below:

          Payment    Due Date

          $300,000   Upon consummation of the first infusion of any capital into
                     Nephros after the date of this Agreement, in whatever form,
                     which results in net cash proceeds to Nephros exceeding
                     $500,000 (the "First Infusion").

          $100,000   No later than six (6) months after the First Infusion.

          $250,000   Upon the consummation of an infusion of capital into
                     Nephros occurring after the First Infusion



                     and on terms materially different from the First Infusion,
                     or characterized by Nephros as a subsequent offering from
                     the First Infusion, in whatever form, which results in net
                     cash proceeds to Nephros of at least $1,250,000 (the
                     "Second Infusion").

          In the event the capital raised by Nephros after the date hereof is
less than the relevant thresholds set forth above, the payment obligation of
Nephros to Claimant shall be to make payment to Claimant in the amount of 20% of
the gross proceeds of any such capital infusion.

          2. Warrant. Simultaneously with its execution and delivery of this
Agreement, Nephros is executing and delivering to Claimant a warrant granting
Claimant the right to purchase 600,000 shares of common stock of Nephros (the
"Stock Purchase Warrant").

          3. Satisfaction of Claim. Upon the execution and delivery of this
Agreement by the Parties, the execution and delivery of the Stock Purchase
Warrant by Nephros, and Nephros's compliance with its payment obligation under
Section 1 hereof, the Claim shall be fully paid and satisfied and Nephros and
all of its successors in interest, and all its agents, officers, directors,
associates, affiliates, employees, representatives, attorneys, heirs, assigns,
and/or their successors in interest, shall be forever released and discharged
from any and all claims, causes of action, liabilities, damages, costs or
demands of whatever character relating to the Claim, the Navaho Project or the
Navaho Project Plan Agreement. Upon Nephros' payment to Claimant of the $300,000
payment referenced above, all right, title and interest to all materials and
other assets, whether tangible or intangible, related to or prepared in
connection with the Navaho Project (including but not limited to molds, computer
and machine hardware and product documentation), and all intellectual property
related thereto, shall automatically, without the necessity of any action by any
Party, be conveyed and transferred to Nephros and Claimant shall,

                                       -2-



promptly upon such payment, cause Nephros, to have sole access to such materials
and other assets, at no additional cost to Nephros. Claimant shall execute any
documentation reasonably requested by Nephros to evidence such conveyance,
transfer and sole access.

          Releases. Except for any and all obligations and/or duties arising out
of this Agreement, each Party does hereby and forever release and discharge the
other Party, and all of its respective successors in interest, and all its
agents, officers, directors, associates, affiliates, employees, representatives,
attorneys, heirs, assigns, and/or their successors in interest, from any and all
claims, causes of action, liabilities, damages or demands of whatever character
which such Party now has, whether known or unknown, against the other Party.

          5. Representations. (a) Nephros hereby represents and warrants that
(i) Nephros has all requisite power and authority to execute and deliver this
Agreement and the Stock Purchase Warrant and to perform its obligations
hereunder and thereunder, (ii) this Agreement and the Stock Purchase Warrant
have been duly and validly executed and delivered by Nephros and constitute
valid and binding obligations of Nephros, enforceable against Nephros in
accordance with their respective terms, and (iii) neither the execution and
delivery of this Agreement or the Stock Purchase Warrant by Nephros, nor the
consummation by Nephros of the transactions contemplated hereby or thereby, will
(a) conflict with or violate any provision of the Charter, By-laws or other
governing documents of Nephros, (b) require on the part of Nephros any filing
with, or approval of, any governmental entity or (c) violate in any material
respect any order, writ, injunction, decree, statute, rule or regulation
applicable to Nephros, or any of its properties or assets.

          (b) Claimant hereby represents and warrants that (i) Claimant has the
requisite power and authority to execute and deliver this Agreement, (ii) this
Agreement has been duly

                                       -3-



and validly executed and delivered by Claimant and constitutes the valid and
binding obligation of Claimant, enforceable against Claimant in accordance with
its terms, (iii) neither the execution and delivery of this Agreement, nor the
consummation by Claimant of the transactions contemplated hereby, will (a)
conflict with or violate any provision of the Charter, By-laws or other
governing documents of Claimant, (b) require on the part of Claimant any filing
with, or approval of, any governmental entity or (c) violate in any material
respect any order, writ, injunction, decree, statute, rule or regulation
applicable to Claimant, or any of its properties or assets, (iv) Claimant owns
the Claim free from any lien or other encumbrance and has not assigned to any
person or entity, in whole or in part, any rights in, or arising out of, the
Claim, the Navaho Project or the Navaho Project Plan Agreement, (v) the Claim is
the only obligation of Nephros or any of its affiliates arising out of the
Navaho Project, and (vi) Claimant is the successor in interest to SeaMED
Corporation as a result of a merger of SeaMED Corporation with and into
Claimant.

          6. Covenants. Each Party covenants to the other that it will use
commercially reasonable efforts to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement. Nephros agrees to provide to Claimant information with respect
to the business and affairs of Nephros similar to that provided to equity
investors in Nephros with investment interests in Nephros comparable to
Claimant's interest (assuming the exercise by Claimant of the Stock Purchase
Warrant). Nephros agrees to use its commercially reasonable best efforts to
obtain the consent of the investor providing the "bridge" financing to permit
Nephros to continue to conduct its operations pending its initial public
offering to permit Claimant to have the right to register the common stock
underlying the Stock Purchase Warrant in a Nephros registration statement (other
than for

                                       -4-



its initial public offering or on Form S-8 or S-4 or similar or successor form),
under customary terms and conditions.

          7. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective agents, employees,
heirs, successors and assigns.

          8. Waiver, Modification and Amendment. No provision hereof may be
waived unless in writing and signed by the Party whose rights are thereby
waived. Waiver of any one provision herein shall not be deemed to be a waiver of
any other provision herein (whether similar or not), nor shall such waiver
constitute a continuing waiver unless otherwise expressly so provided.

          9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York, without giving effect to any choice of law
or conflict of law provision or rule that would cause the application of the
laws of any jurisdictions other than the State of New York..

          10. Severability. In the event that any term or provision of this
Agreement contradicts any term or provision of any other document, instrument or
agreement between the Parties, the terms of this Agreement shall control. If any
provision of this Agreement shall be invalid, illegal or otherwise
unenforceable, such provision shall be severable from all other provisions of
this Agreement, and the validity, legality and enforceability of the remaining
provisions of this Agreement shall not be adversely affected or impaired, and
shall thereby remain in full force and effect.

          11. Entire Agreement. It is expressly understood and agreed that this
Agreement constitutes the entire understanding and agreement between the Parties
hereto, and supersedes and replaces all prior negotiations, agreements or
understandings between the Parties,

                                       -5-



whether written or oral, in each case relating to the subject matter hereof.
This Agreement may not be modified by the Parties except by written instrument
executed by an authorized officer of each Party. Each of the Parties
acknowledges and represents that no other Party or agent or attorney of any
other Party has made a promise, representation, or warranty whatsoever, express
or implied, not contained herein concerning the subject matter of this
Agreement. Each Party acknowledges and represents that it has not executed this
Agreement in reliance upon any promise, representation or warranty whatsoever
not expressly set forth in this Agreement.

          12. Representations of Authority. The persons signing below each
represent and warrant that they have the authority to enter into this Agreement
on behalf of the Party on whose behalf they so sign.

          13. Rights and Remedies Cumulative. The rights and remedies provided
for in this Agreement or by law shall, to the extent permitted by law, be
cumulative.

          14. Reliance on Own Judgment. The Parties hereto acknowledge and
agree, that in deciding to execute this Agreement, they have relied entirely
upon their own respective judgment and have had adequate time to consider its
terms and effects and to ask questions that they may have of anyone, including
legal counsel of their own choosing. By signing this Agreement, the Parties
hereto further acknowledge that they have been afforded a reasonable and
sufficient period of time to review, for deliberation thereon and or the
negotiations of the terms of this Agreement.

          15. Counterparts. This Agreement may be signed in multiple counterpart
copies, each of which shall constitute an original, with the same force and
effect as if each of the Parties hereto has signed a single instrument.

                                       -6-



          16. Notices. All notices under this Agreement shall be in writing, and
may be delivered by hand, sent by overnight delivery by a nationally recognized
overnight courier service or by registered mail, return receipt requested.
Notices delivered by hand shall be effective upon receipt. Notices sent by
courier or mail shall be deemed received on the date of receipt indicated by the
return verification provided by the U.S. postal service or the records of the
courier service. Notices shall be given or sent to the parties at the addresses
set forth on the first page of this letter agreement, or to such other address
as either party may designate in writing in a notice complying with this Section
16. Notices sent to Claimant shall be addressed to the General Counsel of
Claimant.

          IN WITNESS THEREOF, the undersigned Parties have executed this
Agreement effective as of the date first set forth above.

DATED: June 19, 2002                      Nephros, Inc.


                                          /s/ Norman J. Barta
                                          --------------------------------------
                                          By: Norman J. Barta
                                          Title: President


DATED: June 19, 2002                      Plexus Services Corp.


                                          /s/ Joseph D. Kaufman
                                          --------------------------------------
                                          By: Joseph D. Kaufman
                                          Title: Secretary

                                       -7-

EX-10.13

                                                                   Exhibit 10.13

                              SETTLEMENT AGREEMENT

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

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

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

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

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

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



          3. Exchange of Securities.

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

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

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

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

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

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

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

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

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

                                       -2-



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

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

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

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

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

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

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

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

                                       -3-



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

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

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

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

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

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

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

                                       -4-



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

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

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

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

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE
SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH
APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

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

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

                                       -5-



FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH TRANSFER MAY
ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS
OF OTHER APPLICABLE JURISDICTIONS.

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

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

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

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

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

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

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

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

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

                                       -6-



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

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

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

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

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

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

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

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

                                       -7-



          7. Miscellaneous.

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

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

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

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

               If to the Company:

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

               If to the Holder:

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

                                       -8-



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

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

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

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

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

                                       -9-



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

                                             LANCER OFFSHORE, INC.


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


                                             NEPHROS, INC.


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

                                      -10-

EX-10.14

                                                                   Exhibit 10.14

                              SETTLEMENT AGREEMENT

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

                                        2



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

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

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

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

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

                                        3



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

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.

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

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

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

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

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

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

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

                                        4



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

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

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

          5.   Miscellaneous.

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

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

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

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

                                        5



               If to the Company:

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

               If to Hermitage:

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

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

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

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

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

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

                                        6



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

                                          HERMITAGE CAPITAL CORPORATION


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


                                          NEPHROS, INC.


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

                                        7



                            CERTIFICATE OF SIGNATORY

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

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

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


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

                                        8



                                    EXHIBIT A

                            [Form of Class B Warrant]

EX-10.15

                                                                   Exhibit 10.15

[Logo--AUDUBON BIOMEDICAL SCIENCE AND TECHNOLOGY PARK]
Columbia University Health Sciences Division

                               LICENSE AGREEMENT

     AGREEMENT made as of JULY 1, 2003 between THE TRUSTEES OF COLUMBIA
UNIVERSITY IN THE CITY OF NEW YORK ("Licensor"), having an office c/o Executive
                                     --------
Director, Audubon Research Park, 3960 Broadway, New York, New York 10032 and
NEPHROS, INC. ("Licensee"), having an office at 3960 BROADWAY, NEW YORK, NY
                --------
10032.

                                  WITNESSETH:
                                  ----------

     WHEREAS, Licensee desires to acquire a license to use space at the Audubon
Business and Technology Center in the Mary Woodard Lasker Building (the
"Building"), located at 3960 Broadway in the City, County and State of New York;
 -------
and

     WHEREAS, Licensor is agreeable to granting to Licensee a license to use
space in the Building on the terms and conditions hereinafter set forth.

     NOW, THEREFORE, the parties agree as follows:

     1. LICENSE. Licensor does hereby grant to Licensee a nontransferable
        -------
license to use certain space (the "Licensed Space") on the 4 floor of the
                                   --------------
Building as more particularly shown on Exhibit "A" annexed hereto and made a
                                       ----------
part hereof.

     2. TERM. The term of this Agreement (the "Term") shall commence on the date
        ----                                   ----
hereof (the "Commencement Date"), and shall, unless sooner terminated in
             -----------------
accordance with the terms hereof or pursuant to law, continue until 6/30/04 (the
"Expiration Date").
 ---------------

     3. CONDITION OF PREMISES. Licensee acknowledges that it has inspected the
        ---------------------
Licensed Space and agrees to take the Licensed Space "as is" without any work
being done therein by Licensor, and without any obligation upon Licensor to make
any contribution toward or to assume the performance of any work in order to
prepare the Licensed Space for use by Licensee. Licensee acknowledges that all
materials, fixtures and equipment, if any, which Licensor may elect to make
available for Licensee's use are, and shall be and remain, the property of
Licensor. Licensee acknowledges that Licensor has not made and does not make any
representations or warranties to Licensee, whether directly or indirectly, with
respect to the Licensed Space or the use or proposed use thereof by Licensee.

     4. USE. Licensee shall use the Licensed Space solely as laboratory and
        ---
office space. Prior to taking occupancy of the Licensed Space, Licensee shall
submit to Licensor for approval, Licensee's Regulatory Compliance Plan (the
"Plan") which Plan shall (a) identify those activities of and materials to be
 ----
used by Licensee which are or may be subject to Environmental Legal Requirements
(as hereinafter defined) or other Legal Requirements (as hereinafter defined)
and (b) detail Licensee's plans and procedures for compliance with Environmental
Legal Requirements, Legal Requirements and Insurance Requirements (as
hereinafter defined) as to each specific regulated material and activity. From
time to time, at any time during the Term, Licensee shall revise the Plan to
reflect any changes in its activities, materials, Environmental Legal
Requirements, Legal Requirements, or Insurance Requirements. The Plan and all
such revisions shall be subject to Licensor's prior review and approval.

     5. FEE. (a) Licensee agrees to pay to Licensor as and for the use of the
        ---
Licensed Space during the Term an annual amount (the "License Fee") as set forth
                                                     -------------
on Exhibit "B" annexed hereto and made part hereof. The License Fee shall be
   -----------
paid in monthly installments as set forth on Exhibit B, in advance, on the first
                                             ---------
day of each and every month during the Term, without offset or deduction except
that the first monthly installment shall be paid upon execution hereof. If the
Commencement Date shall occur on a day other than the first day of a calendar
month or if the Expiration Date shall occur on a day other than the last day of
a calendar month, the License Fee for such calendar month shall be appropriately
prorated.

                (b) All other sums of money as shall become due and payable by
Licensee to Licensor hereunder (collectively, "License Consideration") shall be
                                               ---------------------
paid to Licensor within ten (10) days after receipt by Licensee of bills or
notice from Licensor to Licensee identifying the same. If Licensee shall fail to
pay any License Consideration within such ten (10) day period, or shall fail to
pay any installment of the License Fee within ten (10) days after it is
due, such unpaid amounts shall bear interest at the rate per annum equal to the
lesser of (i) two percent (2%) plus the base rate charged by Citibank, N.A. and
in effect during the period such amounts are due and unpaid and (ii) the maximum
rate permitted by law, from the due date of such payment to the date paid to
Licensor.

                (c) If Licensee shall default in performing any term, covenant
or condition of this Agreement which shall involve the expenditure of money by
Licensee to third parties, and such default shall continue beyond applicable
notice and grace period, Licensor may (but shall not be obligated to) make such
payment or, on behalf of Licensee, expend such sum as may be necessary to
perform or fulfill such term, covenant, or condition. All sums so paid or
expended by Licensor shall be deemed to be License Consideration and shall be
payable by Licensee to Licensor in accordance with paragraph 5(b) above. No
such payment or expenditure by Licensor shall be construed as a waiver of
Licensee's default or of Licensee's obligation to perform any term, covenant
or condition of this License Agreement nor shall it affect any other right or
remedy of Licensor under this License Agreement.

     6.  COVENANTS AND WARRANTIES.  Licensee covenants and warrants:
         ------------------------

                (a) at Licensee's sole cost and expense, to keep and maintain
the Licensed Space in good order and condition, to notify Licensor of any needed
repairs, which repairs shall be performed by Licensor at Licensee's sole cost
and expense (unless such repairs are caused by the acts or omissions of Licensor
or are repairs to building systems (i.e. HVAC systems) not caused by the acts or
omissions of Licensee in which event such repairs shall be at Licensors sole
cost and expense) and to quit and surrender the Licensed Space to Licensor upon
the expiration or earlier termination of this Agreement in as good and proper
order and condition as at the Commencement Date, reasonable wear and tear
excepted; provided, however, that this Section 6(a) shall be applicable solely
with respect to the Licensee's use of the Licensed Space and that the cost and
expense of compliance with this Section 6(a) due to factors not related to the
Licensee's use of the Licensed Space will be borne solely by the Licensor.

                (b) at Licensee's sole cost and expense, to comply promptly with
(1) all presently existing or hereafter enacted laws, orders, ordinances, rules,
regulations and requirements of, and to keep in full force and effect all
permits and licenses required pursuant to, all federal, state, municipal and
local governments and their departments, agencies, commissions, boards and
officers or any other body exercising similar jurisdiction and any other
governmental agency having jurisdiction over the Licensed Space (collectively,
"Legal Requirements"); (2) all orders, rules, regulations, requirements and
 ------------------
recommendations of the New York Board of Fire Underwriters or the Insurance
Service Office or any other body exercising the same or similar functions and
having jurisdiction or cognizance of all or any part of the Licensed Space or
the Building (collectively, "Insurance Requirements"); (3) any and all policies
                             ----------------------
and procedures of Licensor (including, without limitation, Licensor's Joint
Radiation Safety Committee and Licensor's Office of Environmental Health and
Safety) governing the use, handling or disposal of Hazardous Materials (as
hereinafter defined) by its tenants, licensees, contractors, employees or
researchers, now or hereafter in effect; and (4) any applicable federal, state
or local statue, code, ordinance, rule or regulation, any judicial or
administrative order or judgment applicable to Licensee or the Licensed Space
and any provision or condition of any permit, license, franchise, concession,
agreement or other authorization binding on Licensee relating to (i) the
protection of the environment, the safety and health of persons (including
employees) or the public welfare, (ii) the actual or potential release,
discharge, disposal or emission (whether past or present) of any Hazardous
Materials or (iii) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, generation or handling of any Hazardous Materials
(collectively, "Environmental Legal Requirements"). The term "Hazardous
                --------------------------------              ---------
Materials" shall mean any flammable, explosive, radioactive, chemical or
- ---------
infectious materials, hazardous (or biohazardous) materials or wastes, medical
wastes, hazardous or toxic substances, pollutants, gas, vapor, radiation,
chemical or related materials, asbestos or any material containing asbestos, or
any other substance or materials as defined in or regulated by any local, state
or federal law or ordinance or regulation promulgated pursuant thereto;

                (c) not to use, except to identify Licensee's address (i) as
part of its mailing address on letterhead and other similar materials or
(ii) for purposes of Licensee's publications, the name of Licensor or Columbia
University or any of its officers, trustees, agents, employees, students or
faculty members for any purpose whatsoever without receiving the prior written
approval of Licensor. Without limiting the generality of the foregoing, Licensee
shall not conduct its operations at the Licensed Space under any name which
includes the word "Columbia", or otherwise hold itself or its business out as
having any affiliation with Licensor or Columbia University or Columbia-
Presbyterian Medical Center;




                (d) to comply strictly with the Plan (as defined in Paragraph 4
hereof);

                (e) not to use or permit the use of biohazardous agents
requiring a degree of containment in excess of that described as National
Institutes of Health Biosafety Level 2, as defined in the U.S. Department of
Health and Human Services, Public Health Service, Centers for Disease Control
and Prevention and National Institutes of Health, Biosafety in Microbiological
                                                  ----------------------------
and Biomedical Laboratories, dated May, 1993 and any updates or revisions
- ---------------------------
thereto (the "DHH Specifications");
              ------------------

                (f) to conduct all scientific research and development
activities in conformity with at least the minimum practices, equipment and
facilities recommended for such activities in the DHH Specifications; and

                (g) not to use or permit the use of any human subjects or
live and whole dead animals (including, without limitation, live and whole dead
mice and rats) on or at the Licensed Space for any research purposes. In the
event that Licensee at any time during the Term shall desire to (a) use or
permit the use of human subjects or live or whole dead animals for research at
the Building or (b) use or permit the use of any of the facilities of Licensor
to house any live or whole dead animals, Licensee shall forward a request with
appropriate back-up documentation, including, without limitation, a detailed
description of Licensee's proposed research, to Licensor at the address set
forth in Paragraph 17 hereof. Upon receipt of such notice and back-up
documentation, Licensor shall review such request, provided, however, that
Licensor shall, in its sole and absolute discretion, have no obligation to
consent to Licensee's request.

        7. INSURANCE. Licensee shall, at Licensee's sole cost and expense,
           ---------
obtain and maintain the following types of insurance in not less than the
indicated amounts with insurance carriers reasonably acceptable to
Licensor and otherwise in compliance with Exhibit "C" annexed hereto and made
                                          -----------
a part hereof:

                (a) Workers' Compensation and Employer's Liability insurance
with respect to all persons employed by Licensee at the Licensed Space with a
limit of liability in accordance with applicable law in the case of
Workers' Compensation and with a limit of liability of not less than the
following in the case of Employer's Liability:

          Bodily Injury by Accident - $100,000 each accident;
          Bodily Injury by Disease - $500,000 policy limit;
          Bodily Injury by Disease - $100,000 each employee;

                (b) Comprehensive General Liability (bodily injury and property
damage) with a combined single limit of liability for bodily injury and property
damage of $2,000,000 per occurrence. Licensor shall be named as an additional
insured under this policy;

                (c) "All Risk" property insurance (including breakage of
glass and water damage) to all property of Licensee, including all
alterations, within the Licensed Space in an amount equal to the replacement
cost of such property; and

                (d) Such different or the same types of insurance set forth
above in such amounts as may from time to time be reasonably required by
Licensor against such other insurable hazards as at the time are commonly
insured against in the case of premises similarly situated.

        8. DAMAGE AND DESTRUCTION. (a) If the Licensed Space or any part
           ----------------------
thereof shall be damaged by fire or other casualty, Licensee shall give
immediate notice thereof to Licensor and this Agreement shall continue in full
force and effect, unless Licensor shall elect to terminate this Agreement as set
forth below. In the event that this Agreement shall not be so terminated,
Licensor shall restore the Licensed Space at Licensor's expense and the Licensee
Fee and License Consideration shall be proportionately abated during the period
in which Licensor is restoring the Licensed Space if all or any portion of the
Licensed Space is unusable by Licensee for the purposes set forth in Paragraph 4
above during such period. Licensee's liability for the full amount of the
Licensee Fee and License Consideration shall resume five (5) days after written
notice from Licensor that the Licensed Space is substantially ready for
Licensee's occupancy.

                (b) In the event that the Licensed Space is rendered wholly or
substantially unusable (whether or not the Licensed Space has been damaged in
whole or in part) by fire or other casualty (of which fact Licensor sha11 be the
sole judge), Licensor may elect to terminate this Agreement by written notice to
Licensee given within sixty (60) days after such fire or casualty, specifying
the date for the expiration of this Agreement which shall be no more than thirty
(30) days after the giving of such notice.

                (c) If Licensor shall fail within thirty (30) days after notice
by Licensee to Licensor of such casualty to restore the damaged portion of the
Licensed Space to substantially the condition existing prior to such casualty,
Licensee may elect to terminate this Agreement by written notice to Licensor
given prior to completion of such restoration, specifying the date for the
expiration of this Agreement, which shall be no more than thirty (30) days after
the giving of such notice.

                (d) Nothing contained herein shall relieve Licensee from
liability that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectible and to the extent permitted by law,
Licensor and Licensee each hereby releases and waives all rights of recovery
against the other or anyone claiming through or under the other, by way of
subrogation or otherwise. The foregoing release and waiver shall be in force
only if both parties' insurance policies contain a clause providing that such a
release or waiver shall not invalidate the insurance and also provide that such
clause can be obtained without additional premium; it being agreed, however,
that the party whose insurance carrier requires such additional premium shall
notify the other party thereof and such other party shall have the right to pay
such additional premium.

                (e) Licensee acknowledges that Licensor will not carry insurance
on the improvements, furniture, furnishings, fixtures and equipment and other
personal property required to be insured by Licensee pursuant to Paragraph 7(a)
above and Licensor will not be obligated to repair any damage thereto or replace
the same.

                (f) Licensee hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this Paragraph 8 shall
govern and control in lieu thereof.

        9.  ALTERATIONS.  Licensee shall not make any improvements, additions,
            -----------
alterations or other changes, except for cosmetic and decorative alterations, to
the Licensed Space, without the prior written consent of Licensor in each
instance.

        10. UTILITIES AND SERVICES.  (a) Licensee shall have 24-hour,
            ----------------------
7-day-a-week access to the Building and passenger elevator service to the
Licensed Space. Freight elevator service shall be available on business days
from 8 a.m. to 4 p.m. If Licensee shall require freight elevator service during
any other time, Licensor shall furnish same provided that Licensee gives
Licensor advance notice and that Licensee pays, on demand, as License
Consideration, Licensor's then established charges therefor.

                (b) Licensor shall provide electric energy to the Licensed
Space. Licensee shall pay Licensor for electricity consumed by Licensee in the
Licensed Space. Licensor will permit the electrical risers, feeders and wiring
in the Building serving the Licensed Space to be used by Licensee for such
purpose to the extent that they are available, suitable, safe and within the
plan and design capacities of the Building. Licensee shall not be required to
pay Licensor more than the amount calculated by applying to the measured demand
and/or usage of electrical current in or furnished to the Building, the average
rate per unit of measurement, inclusive of applicable taxes, surcharges, time of
day and other charges, payable by Licensor for electrical current furnished to
the Licensed Space by the utility company serving the Building. Should any tax
or charge in the nature of a tax be imposed upon Licensor's receipts from the
sale or resale of electrical current to the Licensed Space, then the pro rata
share thereof allocable to the electrical current furnished to the Licensed
Space shall be passed on to and paid by Licensee. Bills for Licensee's usage of
electrical current shall be paid within ten (10) days by Licensee as License
Consideration. If due to any change in Legal Requirements Licensor shall not be
permitted to provide electric energy to the Licensed Space, then this Agreement
shall not be affected and Licensee shall arrange to obtain electric energy
directly from the public utility company furnishing electrical service to the
Building. In such even Licensee shall no longer pay Licensor for electricity
consumed.

                (c) Licensee's use of electrical energy shall never exceed the
capacity of the then existing risers or wiring installation, in each case. In
order to insure that such electrical capacity is not exceeded and to avert
possible adverse effect upon the Building's electrical system, Licensee shall
not, without the prior written consent of Licensor, make or perform or permit
any alteration to wiring installations or other electrical facilities in or
serving the Licensed Space or any additions to the electrical fixtures, machines
or equipment or appliances in the Licensed Space. Licensor shall not be
obligated to consent to any such alteration or installation if, in Licensor's
judgment, the same are unnecessary or will cause permanent damage or injury to
the Building, the Building equipment or the Licensed Space or will cause or
create a hazardous condition or entail excessive or unreasonable alterations,
repairs or expense or interfere with or disturb other tenants or occupants.
Only rigid conduit or such other wiring or conduit as shall not violate Legal
Requirements will be allowed.

                (d) Licensor shall have no liability to Licensee for any loss,
damage or expense which Licensee may sustain or incur by reason of any change,
failure, inadequacy or defect in the supply or



character of the electrical energy or emergency generator back-up power
furnished to the Licensed Space or if the quantity or character of the
electrical energy is no longer available or suitable for Licensee's
requirements, except for any actual damage suffered by Licensee by reason of any
such failure, inadequacy or defect caused by Licensor's gross negligence, and
then only after actual notice thereof.

               (e) Licensor shall make available from the public water supply to
a point or points at or near the Licensed Space selected by Licensor such
quantities of domestic cold and hot water as Licensor, in its sole and absolute
judgment, deems adequate for normal laboratory and ordinary lavatory, cleaning
and drinking purposes. In the event that the Licensee requires hot or cold water
for any purposes other than those specified in the preceding sentence,
including, but not limited to high volume laboratory usage, Licensee shall pay
Licensor, as License Consideration, for water consumed, as shown on separate
submeters for cold and hot water maintained by Licensee, together with all sewer
charges and any other rent, tax, levy or charge based thereon which now or
hereafter is assessed, imposed or a lien upon the Licensed Space or the
Building, as and when bills are rendered. Payment for cold water shall be at the
rate charged by the City for cold water. Payment for hot water shall be at three
(3) times such rate. Licensor shall have no liability to Licensee for any loss,
damage or expense which Licensee may sustain or incur if the quantity or
character of water service changes or is no longer available or suitable for
Licensee's purposes.

               (f) Licensee shall notify Licensor, within ten (1O) days after
the Commencement Date, of the water meter number of each water meter serving the
Licensed Space and whether such meter is for hot water or cold water. If any
such meter is installed subsequent to the taking of possession by Licensee, then
Licensee shall notify Licensor of such information within ten (10) days after
such installation.

               (g) Licensor shall make available to a point or points at or near
the Licensed Space such piping systems, equipment and facilities as Licensor, in
its sole and absolute judgment, deems adequate to provide gas service for normal
laboratory consumption. Licensee shall pay Licensor, as License Consideration,
for any and all gas consumed. Meters may be installed and maintained by
Licensor, at Licensee's sole cost and expense. The rates charged by Licensor to
Licensee for gas consumption shall not exceed the rates charged by the utility
company providing such service. Payment for gas consumed by Licensee in the
Licensed Space shall be made by Licensee as License Consideration within ten
(10) days of Licensor's bill therefor. Licensee shall make no alteration,
addition or repair to the gas connection, installations, equipment and/or
facilities without the prior written consent of Licensor in each instance.
Licensor shall have no liability to Licensee for any loss, damage or expense
which Licensee may sustain or incur if the quantity or character of the gas
service is changed or is no longer available or suitable for Licensee's
requirements.

               (h) Licensor shall, without additional charge to Licensee, supply
hot water for heat, and chilled water for air conditioning and ventilation to
the Licensed Space through existing Building risers, radiators and air handlers
during appropriate seasons as may reasonably be required by Licensee for ambient
heating and cooling seven days a week, 24 hours a day.

               (i) Licensor shall provide cleaning services in accordance with
the specifications annexed hereto as Exhibit D and made a part hereof.
                                     ---------

               (j) Licensor shall supply compressed air and vacuum air to a
point or points near the Licensed Space in quantities which Licensor deems
adequate for normal laboratory purposes. If Licensee shall require additional
compressed air and vacuum air in excess of that which Licensor deems adequate
for the purposes set forth herein, Licensor shall furnish same at Licensor's
then established rates and same shall be payable by Licensee, as License
Consideration, within ten (10) days of Licensor's bill therefor.

               (k) Licensee shall be responsible for the proper storage and
removal from the Licensed Space and the Building and the disposal of all of
Licensee's Hazardous Materials. Licensee shall contract for the disposal of
Hazardous Materials, at Licensee's cost and expense, with vendors approved by
Licensor, in its sole and absolute discretion. In contracting with any such
vendor, Licensor shall endeavor to ensure that Licensee shall receive the
benefit of any volume discount granted to Licensor by such vendor.

     11. NO LIENS. (a) Licensee shall have no power to do any act or to make any
         --------
contract which may create or give rise to any lien, mortgage or other
encumbrance on the estate of Licensor or any interest of Licensor or Licensee in
the Licensed Space or the Building.

               (b) If any lien shall at any time be filed against the Licensed
Space or the Building by reason of any work, labor, services or materials done
for, or supplied to, or claimed to have been done for, or supplied to, Licensee
or anyone holding the Licensed Space through or under Licensee, Licensee shall
cause the same to be discharged of record or adequately bonded (unless otherwise
secured to the satisfaction of Licensor) within twenty (20) business days after
the date Licensee has received notice of the filing of such lien. If Licensee
shall fail to do so, then, Licensor may, but shall not be obligated to, procure
the discharge of the same either by paying the amount claimed to be due, by
deposit in a court of competent jurisdiction or by bonding, and Licensor may
compel the prosecution of an action for the foreclosure of such lien by the
lienor and pay the amount of the judgment, if any, in favor of the lienor with
interest, costs and allowances. Any amount paid or deposited by Licensor for any
such purpose, and all other expenses of Licensor, including reasonable
attorney's fees and disbursements, shall be deemed to be License Consideration
and shall be paid on demand by Licensee.

     12. SUBORDINATION. Licensee acknowledges that this Agreement is subject and
         -------------
subordinate to any and all ground or underlying leases and to all mortgages
which may now or hereafter affect such leases or the Building and to all
renewals, modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages.

     13. NO ASSIGNMENT OR USE BY THIRD PARTIES. Licensee shall not permit the
         -------------------------------------
use or occupancy of all or any part of the Licensed Space by any third party nor
assign its rights nor delegate its duties under this Agreement. For purposes of
this Paragraph 13, a change in control of Licensee shall be deemed an assignment
hereunder. "Change in control" shall be deemed to means a change (by transfer or
            -----------------
otherwise) in either (a) ownership of fifty percent (50%) or more of all of the
voting stock of a corporation of fifty percent (50%)or more of all of the legal
and equitable interest in a partnership or other business entity or (b) the
possession of the power directly or indirectly to direct or cause the direction
of management and policy of a corporation, partnership or other business entity,
whether through the ownership of voting securities, by contract, common
directors or officers, the contractual right to manage the business affairs of
any such corporation, partnership or business entity or otherwise.

     14. BROKERAGE. Licensee represents to Licensor that there is no broker,
         ---------
finder, consultant or similar person acting on behalf of Licensee entitled to a
commission, fee or other compensation in connection with the consummation of
this Agreement and no conversations or prior negotiations were had by Licensee
or anyone acting on behalf of Licensee with any broker, finder, consultant or
similar person concerning the use of the Licensed Space except for such
broker(s), if any, set forth in Exhibit "E" annexed hereto and made a part
                                ----------
hereof. Licensee hereby agrees to pay the commission of any such broker, finder,
consultant or similar person. Licensee shall indemnify and hold Licensor
harmless from and against all liability arising from any claims for brokerage
commissions, finder's fees or other compensation resulting from or arising out
of any alleged conversations, negotiations or actions had by Licensee or anyone
acting on behalf of Licensee with any broker, finder, consultant or similar
person. The provisions of this Paragraph 14 shall survive the termination of
this Agreement.

     15. ACCESS TO THE PREMISES. Licensor and Licensor's agents and employees
         ----------------------
shall have the right to enter the Licensed Space for any reasonable purpose,
including, without limitation, for purposes of inspection and repair and
monitoring Licensee's activities for compliance with the Environmental Legal
Requirements, Legal Requirements, Insurance Requirements and the Plan. Except in
cases of emergency or where required for effective inspection and monitoring for
health and safety purposes, Licensor shall provide Licensee with one (1) day
prior notice of its intention to enter the Licensed Space, which notice may be
given orally or by telephone provided that it shall be followed by written
notice received by License on the same day as such oral or telephone notice.
Licensee shall acknowledge such notice "received" by signing a copy thereof and
returning it to Licensor within twenty-four (24) hours of Licensee's receipt,
and Licensor may enter the Licensed Space upon receipt of such copy acknowledged
by Licensee or upon expiration of such 24-hour period, whichever occurs first.

     16. INDEMNIFICATION. Licensee agrees that Licensee shall make no claim
         ---------------
against Licensor for any injury or damage to Licensee or to any other person(s)
or for any damage to, or loss (by theft or otherwise) of, any property of
Licensee or of any other person unless due to Licensor's gross negligence or
wilful misconduct. Licensee further agrees to indemnify and save Licensor
harmless from and against any and all claims by or on behalf of any person(s),
firm(s) or corporation(s) arising from the conduct or management of or from any
work or thing whatsoever done in, on or about the Licensed Space during the Term
due to or arising from any act or omission or negligence of Licensee or any of
its agents, contractors, servants, employees, licensees or invitees, and to
indemnify and save Licensor harmless from and against any and a11 claims arising
from any condition of the Licensed Space due to or arising from any act or
omission or negligence of Licensee or any of its agents, contractors, servants,
employees, licensees or invitees, and from and against all liabilities, costs
and expenses (including, without limitation, attorneys' fees and disbursements)
incurred in or in connection with any such claim or claims or action or
proceeding brought thereon; and in case any action or proceeding shall be
brought against Licensor by reason of any such claim, Licensee upon notice from
Licensor agrees to resist or defend such action or proceeding and to employ
counsel therefor reasonably



satisfactory to Licensor. The provisions of this Paragraph 16 shall survive the
termination of this Agreement.

     17. NOTICES. All notices, demands or requests made pursuant to, under or by
         -------
virtue of this Agreement must be in writing (whether or not so stated) and sent
either by personal delivery or by nationally recognized overnight courier
service or by certified or registered mail, return receipt requested, postage
prepaid as follows:

To Licensor:   Executive Director
               Audubon Research Park, PH 1525
               630 West 168th Street
               New York, New York 10032

 with a
copy to:       (i) Columbia University
               Office of the General Counsel
               412 Low Memorial Library
               New York, New York 10027
               Attention: Deputy General Counsel

 and to:       (ii) Rosenman & Colin LLP
               575 Madison Avenue
               New York, New York 10022
               Attention: Donald H. Siskind, Esq.

To Licensee:   NEPHROS, INC.
               3960 BROADWAY
               NEW YORK, NY 10032
               Attention: NORMAN BARTA

 with a
copy to:       _______________________
               _______________________
               _______________________
               Attention: ____________

or to such alternative address(es) as may from time to time be designated by
notice given in the manner provided for in this Paragraph 17. Any such notice,
demand or request shall be deemed to have been rendered or given on the date of
delivery, in the case of personal delivery or delivery by overnight courier, or
on the date which is three (3) business days after mailing.

     18. SURRENDER. Upon the termination of this Agreement, Licensee shall
         ---------
peaceably and quietly leave and surrender to Licensor the Licensed Space broom
clean, in good order and condition, ordinary wear and tear excepted.

     19. SELF-HELP. If Licensee shall default in the performance of any
         ---------
covenant, provision, agreement or condition of this Agreement, and such default
shall continue beyond applicable notice and grace period, then Licensor, without
waiving such default and without liability to Licensee, may (but shall not be
obligated), perform the same (and shall have access to the Premises, if
necessary, to do so), including, without limitation, the making of repairs, for
the account and at the expense of Licensee. Any amounts paid by Licensor in
connection with the foregoing, shall be deemed to be License Consideration
payable by Licensee to Licensor within ten (10) days of Licensor's bill
therefor. The rights of Licensor under this Paragraph 19 shall be in addition to
those set forth in Paragraph 5(c).

     20. TERMINATION. (a) Licensor may (but shall not be obligated to) terminate
         -----------
this Agreement upon five (5) days' notice to Licensee if (i) Licensee shall
default in the payment of the Licensee Fee or License Consideration for five (5)
days after the due date thereof, (ii) Licensee shall be in default hereunder
other than a default set forth in subparagraph (i) of this Paragraph 20, which
default shall continue and shall not be cured for thirty (30) days after notice
thereof to Licensee, or (iii) in the case of a default other that a default set
forth in subparagraph (i) of this Paragraph 20 which for causes beyond
Licensee's control cannot with due diligence be cured within such 30-day period,
if Licensee (1) shall not, promptly upon receipt of such notice advise Licensor
of Licensee's intention to institute all steps necessary to cure such default or
(2) shall not institute and thereafter with reasonable diligence prosecute to
completion all steps necessary to cure the same.

               (b) Provided that Licensee shall surrender and deliver possession
of the Licensed Space to Licensor, and shall not be in default beyond applicable
notice and grace period in performing any term, covenant, provision or condition
of this Agreement, Licensee may terminate this Agreement with or without cause
upon not less than sixty (60) days' prior written notice to Licensor.

     21. SECURITY DEPOSIT. (a) Licensee has deposited the sum of $3,750 with
         ----------------
Licensor as security for the full and punctual performance by Licensee of all of
the terms of this Agreement, to be deposited by Licensor in an interest-bearing
account of Licensor's choosing. In the event Licensee defaults in the
performance of any of the terms of this Agreement, Licensor may use or retain
the whole or any part of the security deposited to the extent required for the
payment of any fees or for any sum that Licensor may expend or may be required
to expend by reason of Licensee's default, including any damages or deficiency
in the relicensing or letting of the Licensed Space, whether accruing before or
after summary proceedings or other re-entry by Licensor. In the case of every
such use or retention, Licensee shall, on demand, pay to Licensor the sum so
used or retained which sum shall be added to the security deposited so that the
same shall be replenished to its former amount. In the event any bankruptcy,
insolvency, reorganization or other creditor-debtor proceedings shall be
instituted by or against Licensee, or its successors or assigns, the security
deposited shall be deemed to be applied first to the payment of such fees due
Licensor for all periods prior to the institution of such proceedings and the
balance, if any, of the security deposited may be retained by Licensor in
partial liquidation of Licensor's damages. If Licensee shall fully and
punctually comply with all of the terms of this Agreement, the security
deposited plus any accrued interest thereon (less an amount equal to one percent
per annum on the security deposited not to exceed the amount of any interest
earned on the security deposited for Licensee's administrative costs in
connection with the security deposited) shall be returned to Licensee after the
termination of this Agreement and delivery of exclusive possession of the
Licensed Space to Licensor in compliance with the provisions of this Agreement.

               (b) Any interest accrued with respect to the security deposited
shall be added to and constitute a part of the security deposited to be held and
disposed of by Licensor in accordance with the terms of this Paragraph 21.
Licensor shall not be liable to Licensee for any interest except for such
interest as is actually accrued.

               (c) Licensee shall, concurrently with the execution and delivery
of this Agreement, and thereafter at any time upon request by Licensor, deliver
to Licensor a fully completed Form W-9 (Request for Taxpayer Identification
Number and Certification).

               (d) Licensee shall not assign or encumber or attempt to assign or
encumber the security deposited and neither Licensor nor its successors or
assigns shall be bound by any such assignment, encumbrance or attempted
assignment or encumbrance.

               (e) In the event of a sale or lease of the Building, Licensor
shall have the right to transfer the security deposited to the vendee or lessee
and Licensor shall ipso facto be released by Licensee from all liability for the
                   ---- -----
return of the security deposited provided that the Licensor caused the security
deposit to be transferred to the account of the new Licensor. The provisions
hereof shall apply to every transfer or assignment made of the security
deposited to a new licensor.

               (f) In the event that the License Fee shall increase pursuant to
the terms of this Agreement, the amount of security deposited shall be increased
so that at all times the security deposited (exclusive of interest) shall equal
one-twelfth of the current annual License Fee. Licensee shall immediately
deposit with Licensor the difference between the amount being held by Licensor
as security (exclusive of interest) and the amount required to be deposited
pursuant to this Subparagraph 21(f).

     22. CAPTIONS. The captions of the Paragraphs of this Agreement are inserted
         --------
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Agreement nor the intent of any provision thereof.

     23. RELOCATION. At any time and from time to time during the Term, Licensor
         ----------
shall have the right to relocate Licensee to space in the Building reasonably
comparable in size, location and utility for the purposes specified in Paragraph
4 above, upon not less than sixty (60) days' notice to Licensee.

     24. MISCELLANEOUS. (a) The covenants and agreements contained in this
         -------------
Agreement shall apply to, inure to the benefit of, and be binding upon Licensor
and Licensee and upon their respective successors and permitted assigns.

               (b) This Agreement may not be changed, cancelled or discharged
orally, but only by an agreement in writing and signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought. All
understandings and agreements between Licensor and Licensee are merged in this
Agreement which represents the entire agreement between the parties and which
fully and completely sets forth all terms and conditions of the transactions
embodied in this Agreement.

               (c) If any term or provision of this Agreement or any portion of
a term or provision of this Agreement or the application of any such term or
condition to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected, and each term and provision of
this Agreement shall be valid and be enforced to the fullest extent permitted by
law.

                                        4



                    (d) This Agreement shall be construed in accordance
with, and governed by, the laws of the State of New York applicable to
agreements made and performed in the State of New York.

          25. NO LANDLORD - TENANT RELATIONSHIP.
              ---------------------------------
Licensee hereby acknowledges that Licensee acquires no rights as a tenant of
the Licensed Space and that no landlord-tenant relationship is created hereby.

          26. JURISDICTION. Licensee acknowledges and agrees that all disputes
              ------------
arising, directly or indirectly, out of or relating to this Agreement, and all
actions to enforce this Agreement, may be dealt with and adjudicated in the
state courts of New York or the federal courts sitting in New York, and Licensee
hereby expressly and irrevocably submits the person of Licensee to the
jurisdiction of such courts in any suit, action or proceeding arising, directly
or indirectly, out of or relating to this Agreement and hereby irrevocably
designates the Secretary of State of New York as its agent for service
of process in any such suit, action or proceeding.

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

                              THE TRUSTEES OF COLUMBIA UNIVERSITY IN THE CITY OF
                              NEW YORK, Licensor

                              By: /s/ Kevin Kirby
                                 -----------------------------------------------
                              Title: Kevin Kirby, VP for Administration

                              NEPHROS, INC.                           , Licensee
                              ----------------------------------------


                              By: /s/ Norman J. Barta
                              --------------------------------------------------
                              Title:  CEO




                                   EXHIBIT A
                                   ---------


                        License Agreement by and between
                   the Trustees of Columbia University in the
                       City of New York and NEPHROS, INC.
                                  dated 7/1/02



                                   [GRAPHIC]



                                    EXHIBIT B
                                    ---------

                                   LICENSE FEE
                                   -----------

     The License Fee shall be payable, in advance, commencing on the
Commencement Date and thereafter on the first day of each and every month during
the Term at the rate of $72,427 per anum, payable in equal monthly installments,
                                --- ----
at the rate of $6,035.55 per month.



                         INTERNET ACCESS FEE (optiona1)
                         ------------------------------

     Access to the Internet via the Columbia University Network is $3,075 per
                                                                          ---
annum, payable in equal monthly installments, at the rate of $256.25 per month.
- -----




                                    EXHIBIT C
                                    ---------

                              INSURANCE PROVISIONS

     Reference is made to Paragraph 7 of this Agreement.

     (a) All insurance shall be written in form and substance reasonably
satisfactory to Licensor, and issued by companies licensed to do business in New
York State and authorized to issue such policies. All policies of insurance
procured by Licensee shall contain endorsements providing that (i) such policies
may not be reduced or cancelled (including for non-payment of premium) or
allowed to lapse with respect to Licensor, or materially changed or amended,
except after thirty (30) days' prior notice from the insurance company by
registered mail to Licensee and Licensor at the respective addresses for such
parties set forth in Paragraph 17, and (ii) Licensee shall be solely responsible
for the payment of premiums therefor notwithstanding that Licensor is or may be
named as an additional insured. Upon execution and delivery of this Agreement,
duly executed certificates of all insurance required hereunder, effective as of
the Commencement Date (specifying each of the coverages enumerated in Paragraph
7 and including evidence of the waivers of subrogation required pursuant to
Paragraph (d) of this Exhibit, together with reasonably satisfactory evidence of
payment of the premiums therefor, shall be delivered to Licensor. Certificates
evidencing any endorsements to any such policies shall also be so deposited upon
issuance thereof and a certificate evidencing each renewal or replacement of a
policy shall be so deposited at least twenty (20) days prior to the expiration
of such policy. Notwithstanding the foregoing requirements for delivery of
certificates of insurance, certificates evidencing any endorsements and
certificates of renewals and replacements, in any instance where Licensor shall
so require, an original policy or endorsement or renewal or replacement policy,
as the case may be, shall be delivered in addition to or in place of such
certificate(s). Licensee shall not carry any separate or additional insurance
concurrent in form or contributing in the event of any loss or damage with any
insurance required to be maintained by Licensee under this Agreement. Further,
all policies of insurance procured by Licensee shall be written as primary
policies not contributing with nor in excess of coverage that Licensor may
carry.

     (b) All insurance procured by Licensee under Paragraph 7 and this Exhibit
C, except for the Worker's Compensation and Employer's Liability insurance and
the "all-risk" property insurance, shall name Licensor, Licensee, The City of
Now York (the "City"), The New York City Economic Development Corporation
               ----
("EDC"), The New York State Urban Development Corporation d/b/a Empire State
  ---
Development ("UDC") and any other superior lessor and superior mortgagee as
              ---
additional insureds as their respective interests may appear, and shall contain
an endorsement that each of Licensor, the City, EDC, UDC and any other superior
lessor and superior mortgagee although named as an additional insured,
nevertheless shall be entitled to recover under said policies for any covered
loss or damages occasioned to it, its agents, employees, contractors, directors,
shareholders, partners, trustees and principals (disclosed or undisclosed) by
reason of the negligence or tortious acts of Licensee, its servants, agents,
employees and contractors.

     (c) Licensee covenants that (i) Licensee shall pay all premiums due on
policies required to be maintained by the terms of this Agreement and (ten (10)
days in the event of non-payment of insurance premiums) (ii) Licensee shall not
violate, or permit the violation of, any term or condition of such policies, and
shall maintain the policies in full force and effect throughout the Term.

     (d) Licensee agrees to use its best efforts to include in each of its
insurance policies a waiver of the insurer's right of subrogation against
Licensor, or if such waiver should be unobtainable or unenforceable (i) an
express agreement that such policy shall not be invalidated if the insured
waives or has waived before the casualty the right of recovery against any party
responsible for a casualty covered by the policy or (ii) any other form of
permission for the release of Licensor. If such waiver, agreement or permission
shall not be, or shall cease to be obtainable without additional charge or at
all, Licensee shall so notify Licensor promptly after learning thereof. In such
case, if Licensor shall agree in writing to pay the insurer's additional charge
therefor, such waiver, agreement or permission shall (if obtainable) be included
in the policy. As long as Licensee's casualty insurance policies include the
waiver of subrogation or agreement or permission to release liability referred
to above, Licensee, to the extent that such insurance is in force and
collectible, hereby waives any right of recovery against Licensor, and
Licensor's trustees, officers, employees, agents and contractors, for any loss
occasioned by fire or other insured casualty.

     (e) In the event that this Agreement is renewed beyond the Term, Licensor,
upon notice to Licensee, shall have the right, in its sole discretion, once
annually during the term of such renewal (if such renewal is for longer than one
year), to require Licensee to increase the amount or amounts of any insurance
coverage required hereby to the amount or amounts then being required of tenants
or occupants of buildings owned by Licensor whose space is being used for
purposes similar to the use permitted hereunder.



                                    EXHIBIT D
                                    ---------

                             CLEANING SPECIFICATIONS
                             -----------------------


- --------------------------------------------------------------------------------
GENERAL

a.   Bathrooms and restrooms
     Daily:

     - Wash all mirrors
     - Wash all basins and hardware
     - Wash urinals
     - Wash toilet seats using disinfectant in water
     - Wash toilet bowls
     - Damp-wipe, clean and disinfect all tile surfaces

b.   Dusting
(1)  Daily, Weekly:
     All furniture, business equipment and appliances, windowsills and the like
     will be dusted daily with a chemically treated cloth. Desks and tables not
     cleared of paper and work materials will only be dusted where surface is
     exposed.

(2)  Monthly:
     Pipes, ledges, ceiling, moldings, picture frames and anything decorative
     above hand-high areas will be cleaned.

c.   Dust-mopping floors
(1)  Daily:
     All noncarpeted floor areas will be dust-mopped with a treated yarn dust
     mop. Floor-dusting will be done after furniture has been dusted.

d.   Waste paper
(1)  daily, monthly: Waste baskets to be emptied daily.

e.   Vacuuming
(1)  daily, weekly: All rugs and carpets in office areas, as well as public
     spaces, are to be vacuumed daily in all traffic areas. Corners,
     hard-to-reach places, and areas under desks, tables and chairs will be
     vacuumed weekly, using accessory tools as required.

f.   Carpet cleaning
(1)  semiannually: All carpeted areas in public corridors will be shampooed once
     every six months.



                                    EXHIBIT D
                                    ---------

                             CLEANING SPECIFICATIONS
                             -----------------------


g.   Stairways and landings
(1)  weekly: All stairways and landings will be dust-mopped with a treated yarn
     dust mop daily. Railings, ledges, and equipment will be dusted weekly.
     Spot cleaning of walls and doors will be done weekly; these areas will be
     damp-mopped weekly and scrubbed when necessary.

h.   Wet mopping
(1)  daily, as needed: Floors will be scrubbed or wet-mopped whenever required
     to prevent a build-up of wax.

i.   Tile floors
(1)  Waxing and buffing will only be done on an as-needed basis.

j.   Water coolers or fountains
(1)  daily: Water coolers or fountains will be cleaned and polished daily.

k.   Spot cleaning of vertical surfaces
(1)  Walls and woodwork will be spot-cleaned weekly

l.   Entrance lobby
(1)  daily: The entrance lobby will be cleaned daily. Lobby glass and metal will
     be cleaned and dusted daily. The lobby floor and entranceways will be
     cleaned nightly. Directory board glass will be damp-cleaned and wiped.

m.   Polishing.
(1)  monthly: Door plates, kick plates, and brass and metal fixtures within the
     building will be wiped daily and polished monthly.

n.   Light fixtures-periodically
(1)  annually: the exterior of all light fixtures will be dusted as needed. The
     entire light fixture will be washed annually.

o.   Venetian blinds
(1)  weekly, annually: Venetian blinds will be dusted weekly and washed
     annually.

(p)  Walls, woodwork and partitions
(1)  weekly, quarterly, semi-annually: Finger and hand prints, spots and other
     grimy areas will be removed weekly using a damp cloth or sponge. All walls
     and ceilings will be



                                    EXHIBIT D
                                    ---------

                             CLEANING SPECIFICATIONS
                             -----------------------

     brushed down with an approved wall duster or a vacuum cleaner every three
     months. Partitions of wood or steel will be washed with a neutral soap
     every six months.

q.   Glass partitions and doors,
(1)  weekly: All glass partitions and doors will be damp-cleaned weekly or as
     needed.

r.   HVAC grills
(1)  monthly: All areas around HVAC outlet and return air grill will be cleaned
     once a month.


Window Washing

Inside and outside window washing will be scheduled four times a year
(quarterly). However, first-floor windows will be washed outside once a month,
unless the space is occupied by retail tenants.

Trash Removal
(1)  daily:

a.   Trash will be removed from the premises daily between the hours of 10:00
     p.m. and 7:00 a.m., Monday through Friday.

b.   Trash pickup will be scheduled through the building engineer or management.




                                    EXHIBIT E

                                    BROKER(S)
                                    ---------

     NONE.



                                    EXHIBIT F
                                    ---------


                      AUDUBON BUSINESS & TECHNOLOGY CENTER

                                     NETWORK
                                        &
                                    SERVICES



     Currently, the Audubon building is connected to Columbia Presbyterian
     Medical Center by a microwave antenna running at 10Mbps. There are plans
     for in the near future to be a 100mbps fiber optic connection.

     All floors are equipped with two l0mbpsl6 port hubs which are connected to
     a 10/100mbps switch located in the basement of the building.

     All network lines provided are category 5 plenum cables terminated in an
     RJ45 patch panel in closet.

     Network protocol supported are:

     IP, Novell IPX, Appletalk.

     NETBIOS & NETBUI Are PROHIBITED.


     SERVICES PROVIDED:

     .    Novell & TCP/IP Connectivity

     .    Internet Connectivity via Our domain and DNS "Auduboncenter.org"

     .    e-mail via our own DNS and mail hub

     .    Setup of your own Domain name and e-mail account on our DNS server

     .    Technical consulting and advisement with 3rd party computer LAN
          company.

EX-10.16

                                                                   Exhibit 10.16

                                                             As of        , 2004
                                                                   ---- --

Nephros, Inc.
3960 Broadway
New York, NY 10032

Re: Transmittal Letter Agreement

Dear Norm:

     Enclosed please find the original Nephros, Inc. Convertible Promissory Note
dated April 8, 2002 in the principal amount of $         issued to me by
                                                --------
Nephros. Capitalized terms used but not defined herein shall have the meanings
given them in such Note.

     Pursuant to this Transmittal Letter Agreement, Nephros and I hereby agree
as follows:

     1. Nephros will pay me the amount of accrued interest on the enclosed Note
set forth opposite my name in Schedule I.

     2. In connection with the contemplated conversion of all of the Convertible
Promissory Notes dated April 8, 2002, please issue to me in respect of
conversion of my Note the number of shares of Series C Convertible Preferred
Stock indicated opposite my name in Schedule I.

     3. In connection with warrant rights to purchase           shares of
                                                      ---------
Conversion Stock for $1.00 per share to which my purchase of the Note entitled
me, I hereby elect as follows (check only one box):

[ ] to purchase            shares of Series A Convertible Preferred Stock for
                ----------
$1.00 per share;
[ ] to purchase                   shares of Series A Convertible Preferred Stock
                -----------------
for $1.00 per share, which number of shares must be less than           ; or
                                                              ----------
[ ] to forego my warrant rights to purchase additional shares of Conversion
Stock.

If I have not checked any box, then I shall be deemed to have elected to forego
my warrant rights to purchase additional shares of Conversion Stock.

     4. I acknowledge and agree that the payment of dividends, the issuance of
Series C Convertible Preferred Stock and my right to elect to purchase shares of
Series A Convertible Preferred Stock pursuant to Section 3 hereof shall be in
full satisfaction of all of my rights under the enclosed Note.



     In witness whereof, the undersigned has executed this Transmittal Letter
Agreement as of          , 2004.
                ------ --


                                         ---------------------------------------
                                         [NAME OF SHAREHOLDER]


Accepted and agreed:

NEPHROS, INC.


By:
    ----------------------------------
    Norman J. Barta, President



                                                                      SCHEDULE I

                                                               Shares of Series
                                         Shares of Series C   A Preferred Stock
                Principal      Accrued   Preferred issuable   Purchaseable for
Noteholder   amount of Note   Interest     upon conversion     $1.00 per share
- ----------   --------------   --------   ------------------   -----------------

EX-10.17

                                                                   EXHIBIT 10.17

                              COMMITMENT AGREEMENT

        COMMITMENT AGREEMENT (this "Commitment Agreement"), dated as of May 30,
2003, by and between Ronald Perelman (the "Committed Investor") and Nephros,
Inc., a Delaware corporation (the Company").

                              W I T N E S S E T H:

        WHEREAS, the parties desire that the Company sell an aggregate of
$1,000,000 principal amount of its Senior Convertible Bridge Notes due January
26, 2004 ("Bridge Notes"), (in substantially the form attached hereto as Exhibit
A), which are convertible, under certain circumstances, in whole but not in
part, into shares of Series D Convertible Preferred Stock (the "New Preferred")
of the Company having designations and preferences as set forth therefor in the
form of Amended and Restated Certificate of Incorporation of the Company
attached hereto as Exhibit B (the "Revised Charter") at a price per share equal
to the liquidation preference per share of such New Preferred (the "Equity
Price"), provided that the holder also exercises the right (such right to
convert and exercise, collectively, the "New Preferred Acquisition Option") to
purchase, when and as provided in the Bridge Notes, at the Equity Price per
share, a number of shares of New Preferred equal to the quotient of (i) the
product of the aggregate principal amount of Bridge Notes held by such person
times any amount, at such holder's option, between 9 and 11, divided by (ii) the
Equity Price; and

        WHEREAS, the parties contemplate that, subject to certain conditions,
each of the holders (the "Stockholders") of the Company's common stock,
convertible preferred stock and/or convertible promissory notes will be given
the opportunity to purchase its pro-rata share of the Bridge Notes, based on the
number of shares of common stock outstanding, or issuable, directly or
indirectly, upon conversion of convertible preferred stock and/or convertible
promissory notes, held by such Stockholders (including conversion of dividends
accrued through May 31, 2003 on shares of convertible preferred stock) (the
"Offering"); and

        WHEREAS, the Committed Investor has agreed to purchase (and the Company
has agreed to sell) any Bridge Notes that the Stockholders do not purchase
pursuant to the Offering, so that the aggregate principal amount of Bridge Notes
issued will be $1,000,000, regardless of how many Stockholders elect to purchase
Bridge Notes pursuant to the Offering; and

        WHEREAS, the parties desire to enter into this Commitment Agreement in
order to evidence their respective commitments and obligations;

        NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:



                                    ARTICLE I

                                   DEFINITIONS

        As used herein, the following terms shall have the meanings set forth in
this Article I.

        "Closing" shall mean the closing of the transactions contemplated by
this Commitment Agreement, to occur promptly following the Subscription
Deadline.

        "Material Adverse Effect" shall mean any change or effect that is
materially adverse to the business, operations, properties (including intangible
properties), condition (financial or otherwise) or prospects of the Company.

        "Subscription Deadline" shall mean June 11, 2003, which is the date by
which the Stockholders must make their irrevocable elections whether to purchase
Bridge Notes in the Offering.

        The use in this Agreement of a masculine pronoun in reference to a party
hereto shall be deemed to include the feminine or neuter, and vice versa, as the
context may require.

                                   ARTICLE II

                                   THE CLOSING

        Section 2.01. Closing. Upon the terms and subject to the conditions of
this Commitment Agreement:

        (a) The Committed Investor shall purchase, at the Closing, (i) the
maximum amount of Bridge Notes allocated to it pursuant to the Offering on
account of its status as a Stockholder and (ii) the amount, if any, of the
$1,000,000 principal amount of Bridge Notes offered in the Offering but not
purchased by Stockholders pursuant to the Offering.

        (b) The Committed Investor shall, at or prior to the Closing, in
connection with its purchase of Bridge Notes, execute and deliver a Subscription
Agreement (in substantially the form attached hereto as Exhibit C) and make
payment to the Company by wire transfer of immediately available funds in an
amount equal to the aggregate principal amount of Bridge Notes being purchased
by the Committed Investor.

        (c) At the Closing, the Company shall deliver to the Committed Investor
the Bridge Notes purchased by the Committed Investor pursuant hereto.

        (d) The Closing shall take place at the offices of Kramer Levin Naftalis
& Frankel LLP, 919 Third Avenue, New York, New York, or at such other location
as the parties may agree, promptly following the Subscription Deadline.

        (e) At the Closing, each party to this Commitment Agreement shall
deliver to the other hereto parties such other documents, instruments and
writings as may be required to be

                                        2



delivered in accordance with this Commitment Agreement or as may be reasonably
requested by such other party.

                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        The Company hereby represents and warrants to the Committed Investor as
follows:

        Section 3.01. Organization and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own its properties, to carry on its business as presently
conducted, to enter into and perform this Commitment Agreement and any other
agreements, executed and delivered by the parties at or prior to the Closing
(together, the "Transaction Documents") to which it is a party and to carry out
the transactions contemplated hereby and thereby. The Company is duly licensed
or qualified to do business as a foreign corporation in each jurisdiction
wherein the character of its property, or the nature of the activities presently
conducted by it, makes such qualification necessary, except where the failure to
be so licensed or qualified would not have, or be reasonably likely to have, a
Material Adverse Effect.

        Section 3.02. Authorization and Non-Contravention. The Transaction
Documents to which the Company is party are valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity). The execution, delivery and
performance of the Transaction Documents, the sale and delivery of the Bridge
Notes in accordance with this Commitment Agreement and, if the New Preferred
Acquisition Option is exercised, the issuance of the New Preferred thereupon,
has been duly authorized by all necessary corporate action of the Company and
its stockholders, other than such consents, approvals and/or waivers as are
conditions to the Closing (the "Disclosed Requirements"). Assuming the Disclosed
Requirements are satisfied, the execution, delivery and performance of the
Transaction Documents will not: (i) violate, conflict with or result in a
default under any contract or obligation to which the Company is a party or by
which it or its assets are bound, or any provision of the Revised Charter or
by-laws of the Company, or cause the creation of any lien or encumbrance upon
any of the assets of the Company, except for those which do not, or are not
reasonably likely to, result in a Material Adverse Effect; (ii) violate or
result in a violation of, or constitute a default (whether after the giving of
notice, lapse of time or both) under, any provision of any law, regulation or
rule, or any order of, or any restriction imposed by any court or other
governmental agency applicable to the Company, except for those which do not, or
are not reasonably likely to, result in a Material Adverse Effect; (iii) require
from the Company any notice to, declaration or filing with, or consent or
approval of any governmental authority or other third party other than pursuant
to federal or state securities or blue sky laws or where the failure to do so is
not reasonably likely to result in a Material Adverse Effect; or (iv) accelerate
any obligation under, or give rise to a right

                                        3



of termination of, any agreement, permit, license or authorization to which the
Company is a party or by which it is bound.

        Section 3.03. Authorized and Outstanding Stock. Immediately prior to the
consummation of the transactions to be effected at the Closing, the authorized
capital stock of the Company will consist of (i) 30,000,000 shares of common
stock, par value $.001 per share, of which 5,609,500 shares are issued and
outstanding, and (ii) 10,000,000 shares of preferred stock, par value $.001 per
share, of which (w) 4,500,000 shares have been designated as Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), 4,000,000 of which
are issued and outstanding, (x) 2,333,333 shares have been designated as Series
B Convertible Preferred Stock (the "Series B Preferred Stock"), all of which are
issued and outstanding and (y) 3,140,000 shares have been designated as Series C
Convertible Preferred Stock (the "Series C Preferred Stock"), and the Company
has committed to issue 3,387,550 shares of Series C Preferred Stock. Except as
disclosed in Schedule 3.03, there are no outstanding subscriptions, options,
warrants, commitments, agreements, arrangements or commitments of any kind for
or relating to the issuance, or sale of, or outstanding securities convertible
into or exchangeable for, any shares of capital stock of any class or other
equity interests of the Company. Except as set forth in the Revised Charter or
in Schedule 3.03, the Company has no obligation to purchase, redeem, or
otherwise acquire any of its capital stock or other equity interests in the
Company. After giving effect to the transactions contemplated hereby, all of the
outstanding shares of capital stock of the Company will have been duly and
validly authorized and issued and will be fully paid and non-assessable. The
relative rights, preferences and other terms relating to the New Preferred, upon
filing of the Revised Charter, will be substantially as set forth in the form of
Revised Charter attached hereto as Exhibit B, and such rights and preferences
would be valid and enforceable under Delaware law. Except as pursuant to the
Stockholders' Agreement, dated as of May 17, 2000, by and among the Company and
the stockholders of the Company identified on Annex I thereto, the Company has
not granted any preemptive rights with respect to the issuance or sale of the
Company's capital stock.

        Section 3.04. Subsidiaries. The Company does not own or control,
directly or indirectly, any interest in any other corporation, partnership,
limited liability company, association or other business entity.

        Section 3.05. No Litigation. There is no action, suit, investigation or
proceeding pending against, or to its knowledge, threatened against or
affecting, the Company before any court or arbitrator or any governmental body,
agency or official which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the transactions contemplated by this Commitment
Agreement.

                                   ARTICLE IV

              REPRESENTATIONS AND WARRANTIES OF COMMITTED INVESTOR

        The Committed Investor hereby represents and warrants to the Company as
follows:

                                        4



        Section 4.01. Authority. If a natural person, such Committed Investor is
21 years of age or over; if a corporation, trust, limited liability company,
partnership, unincorporated association or other entity, such Committed Investor
is authorized, empowered and qualified to execute and deliver this Commitment
Agreement and the other Transaction Documents to which such Committed Investor
is a party and to purchase and hold the Bridge Notes to be purchased pursuant
hereto, the New Preferred issuable upon exercise of the New Preferred
Acquisition Option and the Common Stock issuable upon conversion of any such New
Preferred (collectively, the "Subject Securities").

        Section 4.02. Binding; Non-Contravention. The Transaction Documents to
which such Committed Investor is party are valid and binding obligations of such
Committed Investor, enforceable against such Committed Investor in accordance
with their terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity relating to enforceability
(regardless of whether considered in a proceeding at law or in equity). The
execution, delivery and performance of the Transaction Documents will not: (i)
violate, conflict with or result in a default under any provision of the
certificate of incorporation or by-laws (or analogous organizational documents),
if any, of such Committed Investor; or (ii) violate or result in a violation of,
or constitute a default (whether after the giving of notice, lapse of time or
both) under, any provision of any law, regulation or rule, or any order of, or
any restriction imposed by any court or other governmental agency applicable to
such Committed Investor, except for those which do not, or are not reasonably
likely to, adversely affect such Committed Investor's ability to perform its
obligations under this Commitment Agreement and the other Transaction Documents
and to consummate the transactions contemplated hereby and thereby.

        Section 4.03. Accredited Investor. Such Committed Investor is an
"accredited investor," as that term is defined under Rule 501 of Regulation D
under the Securities Act of 1933, as amended (the "Act").

        Section 4.04. Adequate Information. Such Committed Investor has received
and carefully reviewed this Commitment Agreement (together with all Schedules
and Exhibits hereto), the Confidential Information Memorandum prepared by the
Company and each other Transaction Document (collectively, the "Offering
Documents"). Such Committed Investor has consulted its own financial, legal and
tax advisors with respect to the economic, legal and tax consequences of the
purchase of the Bridge Notes pursuant hereto and acquiring, holding, and
disposing of the Subject Securities and has not relied on the Offering
Documents, the Company or any of the Company's officers, directors, affiliates
or professional advisors for advice as to such consequences.

        Section 4.05. Sophistication. Such Committed Investor acknowledges that
it has sufficient knowledge and experience in financial and business matters to
be capable of evaluating the merits and risks of the prospective investment in
the Bridge Notes and of making an informed investment decision with respect
thereto. Such Committed Investor acknowledges that the Offering Documents may
not contain all information that is necessary to make an investment decision
with respect to the Company and the Bridge Notes and that it must rely on its
own examination of the Company and the terms and conditions of the Offering
prior to

                                        5



making any investment decision with respect to the Bridge Notes. Such Committed
Investor further acknowledges that it has been afforded full opportunity to ask
questions and obtain copies of all relevant documents concerning the Company and
the Subject Securities, and all of its questions and requests for documents and
information have been answered to its complete satisfaction.

        Section 4.06. Adequate Means. Such Committed Investor acknowledges that
it has adequate means for providing for its own needs and personal contingencies
and has no need for liquidity in its investment in the Bridge Notes, and is able
to hold the Bridge Notes for an indefinite period of time and to withstand a
complete loss of such investment.

        Section 4.07. No Oral Representations. Such Committed Investor
represents that, in entering into this Commitment Agreement, it is relying
solely on the express representations and warranties of the Company contained in
this Commitment Agreement and that no oral representations or warranties have
been made to it. Such Committed Investor acknowledges that it has been advised
that no person is authorized to give any information, or to make any statement
regarding the Company or the Offering, and that any such information or
statement must not be relied upon as having been authorized by the Company, its
officers, directors, affiliates or professional advisors.

        Section 4.08. Unregistered Securities; No Public Market. Such Committed
Investor understands that none of the Subject Securities have been registered
under the Act by reason of a claimed exemption under the provisions of the Act
which depends, in part, upon such Committed Investor's investment intention.
Such Committed Investor understands and hereby acknowledges that the Company is
under no obligation to register any of the Subject Securities under the Act or
any state securities or "blue sky" laws, although certain investors may have
contractual registration rights. Such Committed Investor acknowledges and agrees
that none of the Subject Securities may be offered for sale, sold or otherwise
transferred except pursuant to an effective registration statement under the Act
and in compliance with applicable securities laws of any state or other
jurisdiction, or pursuant to an opinion of counsel satisfactory to the Company
that such registration is not required. The Company may affix an appropriate
legend to any certificate(s) representing Subject Securities to reflect the
foregoing. In this connection, such Committed Investor hereby represents that it
is acquiring the Bridge Notes for its own account for investment and not with a
view toward the resale or distribution of such Bridge Notes or any other Subject
Securities to others. Such Committed Investor is not acquiring any portion of
the Subject Securities, or any interest therein, on behalf of another person. No
person other than such Committed Investor has any direct or indirect beneficial
interest in the Subject Securities such Committed Investor has agreed to
purchase hereunder. Such Committed Investor, if an entity, was not formed for
the purpose of purchasing the Bridge Notes. Such Committed Investor understands
that there is no public market for any of the Subject Securities and that no
such market may develop. Such Committed Investor understands that even if a
public market develops for any such Subject Securities, Rule 144 under the Act
requires, among other conditions, a one-year holding period prior to the resale
(in limited amounts) of securities acquired in a non-public offering without
having to satisfy the registration requirements under the Act.

                                        6



        Section 4.09. Litigation. There is no action, suit, investigation or
proceeding pending against, or to its knowledge, threatened against or
affecting, such Committed Investor before any court or arbitrator or any
governmental body, agency or official which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay the transactions contemplated by this
Commitment Agreement.

                                    ARTICLE V

                                EQUITY FINANCING

        Section 5.01. Equity Financing Option. The Committed Investor shall have
the right (the "Equity Financing Option"), exercisable at any time prior to the
earlier of (i) 10 days after the Company gives the Committed Investor notice
that it has obtained a CE mark in Europe on its initial product and (ii) January
15, 2004 (such earlier date, the "Expiration Date"), to elect to cause the
Company to issue $10,000,000 to $12,000,000 in aggregate liquidation preference
of New Preferred, pursuant to exercises of the New Preferred Acquisition Options
and/or Section 5.04 hereof.

        Section 5.02. CE Mark Notice. Promptly upon obtaining a CE Mark in
Europe on its initial product, the Company shall provide the Committed Investor
with notice thereof.

        Section 5.03. Equity Financing Option Notice. The Committed Investor may
exercise the Equity Financing Option by providing notice thereof, and signed by
such Committed Investor, to the Company prior to the Expiration Date.

        Section 5.04. Purchases of New Preferred. If the aggregate liquidation
preference of the New Preferred purchased and sold pursuant to exercises of New
Preferred Acquisition Options is less than $10,000,000, then, promptly following
the expiration date of such New Preferred Acquisition Options, the Committed
Investor shall purchase from the Company, and the Company shall sell to such
Committed Investor, in addition to any New Preferred purchased and sold pursuant
to the New Preferred Acquisition Option, a number of shares of New Preferred as
has an aggregate liquidation preference equal to the difference between
$10,000,000 and the aggregate liquidation preference of the New Preferred
actually purchased and sold pursuant to exercises of New Preferred Acquisition
Options.

                                   ARTICLE VI

                                    COVENANTS

        Section 6.01. Covenants of Committed Investor. The Committed Investor
covenants and agrees, subject to the terms and conditions hereof, that it shall
(a) execute and deliver such instruments and take such other actions as the
Company may reasonably require in order to carry out the intent and purpose of
this Commitment Agreement, (b) use its reasonable best efforts to obtain any
consents required herein to be obtained by it, (c) use its reasonable best
efforts to oppose any litigation that seeks to restrain or prohibit the
consummation of the transactions contemplated hereby and (d) use its reasonable
best efforts to cause the conditions to closing set forth in Article VII hereof
to be satisfied.

                                        7



        Section 6.02. Confidential Treatment. (a) The Committed Investor
acknowledges that it has and will receive Confidential Information (as defined
below) of significant value to the Company in connection with the purchase and
ownership of Subject Securities. The Committed Investor shall at all times keep
documents or other materials containing Confidential Information in a secure
place, shall not use the Confidential Information for any purpose other than the
evaluation of its investment in the Company, except as otherwise agreed to in a
writing signed by the Company, and shall not disclose any of the Confidential
Information in any manner whatsoever, in whole or in part, to any person for any
reason or purpose whatsoever except (i) if such Committed Investor is required
by a court of competent jurisdiction to so disclose after notice has been given
to the Company and the Company has had an opportunity to oppose such disclosure
or seek a protective order to the extent practicable, (ii) to employees and
representatives of such Committed Investor, if any, who need to know such
information in connection with such Committed Investor's investment in the
Company ("Necessary Agents") provided that such Committed Investor shall inform
each such Necessary Agent of the confidential nature of such information, obtain
their agreement (the "Necessary Agent Confidentiality Agreement") to hold all
Confidential Information in strict confidence and not to use it for any purpose
other than as permitted hereunder and ensure the performance by each Necessary
Agent of such Necessary Agent Confidentiality Agreement.

        (b) "Confidential Information" means any and all information provided to
the Committed Investor by or on behalf of the Company in connection with the
purchase and ownership of Subject Securities or otherwise, except for
information which such Committed Investor can establish (1) is generally known
to the public other than as a result of the breach by a Committed Investor or
any Affiliate of a Committed Investor of an obligation of confidentiality to the
Company, (2) was known by such Committed Investor (as evidenced by written
records) prior to its receipt by such Committed Investor from the Company or (3)
was disclosed to such Committed Investor by a third party under no obligation of
confidence.

                                   ARTICLE VII

                              CONDITIONS TO CLOSING

        The obligations of each party to be performed at the Closing shall be
subject to the satisfaction or waiver, by the Company and the Committed
Investor, of the following conditions:

        Section 7.01. Approval of New Preferred. The Revised Charter shall have
been approved by all required stockholder votes.

        Section 7.02. Approval by the Holders of Series B Convertible Preferred
Stock. The Company shall have obtained the affirmative consent or approval of at
least two-thirds of the shares of the outstanding Series B Convertible Preferred
Stock, voting separately as a class:

        (a) to enter into the transactions contemplated by the Offering
Documents, including, without limitation, any such transactions which constitute
transactions between the Company and any Affiliate (as defined in the Company's
Revised Charter) of the Company or any subsidiary thereof; and

                                        8



        (b) to incur, approve or authorize the incurrence of the indebtedness
represented by the Bridge Notes.

        Section 7.03. Representations and Warranties. The representations and
warranties of the Committed Investor or the Company, respectively, contained in
this Commitment Agreement shall be true and correct in all material respects as
of the date first above written and as of the date of the Closing.

        Section 7.04. Amendment of Registration Rights Agreement. The
Registration Rights Agreement, dated as of May 17, 2000 among the Company and
the Investor identified therein shall have been amended and restated to read
substantially as set forth in Exhibit D.

        Section 7.05. Waiver of Preemptive Rights. It shall be a condition to
the obligations of the Company to be performed at the Closing that the
preemptive rights of the Stockholders (as defined in the Stockholders Agreement,
dated as of May 17, 2000, among the Company and the Stockholders identified
therein (the "Stockholders Agreement")) pursuant to the Stockholders Agreement
shall have been waived with respect to the Offering.

                                  ARTICLE VIII

                                  MISCELLANEOUS

        Section 8.01. Waivers. Any failure of any of the parties hereto to
comply with any obligation, covenant, agreement or condition herein may be
expressly waived by the party or parties to which such obligation, covenant or
agreement is owed or for whose benefit such condition exists to the extent
permitted under applicable law. Any such waiver shall be in a writing signed by
an officer or agent of the party giving such waiver thereunto duly authorized.
Any waiver or any failure to insist upon strict compliance with any such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.

        Section 8.02. Brokers and Finders; Expenses. Each of the parties hereto
represents and warrants to the others of them that no broker or finder
(including any of its officers, directors or agents) is entitled to any
brokerage or finder's fee or other commission from it based on agreements,
arrangements or undertakings made by it in connection with this Commitment
Agreement or the transactions contemplated hereby. Except as otherwise provided
in this Commitment Agreement, each party shall bear its own costs and expenses
in connection herewith.

        Section 8.03. Notices. Any notice, demand, claim or other communications
under this Commitment Agreement shall be in writing and shall be deemed to have
been given upon personal delivery thereof, or upon receipt thereof if sent by
registered mail, return receipt requested, postage prepaid, or upon confirmation
of delivery thereof by courier service, if sent by recognized overnight courier
service, to the respective address of the parties set forth below (or such other
address as a party may specify by notice given as herein provided):

                                        9



If to the Company, to:

        Nephros, Inc.

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

    with a copy (which shall not constitute notice) to:

        Kramer Levin Naftalis & Frankel LLP
        919 Third Avenue
        New York, New York  10022
        Attention:      Peter G. Smith, Esq. and
                        Monica C. Lord, Esq.

If to the Committed Investor, to the address for such Committed Investor as set
forth on Schedule I.

        Section 8.04. Successors and Assigns. This Commitment Agreement and all
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but
neither this Commitment Agreement nor any of the rights, interests or
obligations hereunder may be assigned by any of the parties hereto without the
prior written consent of the other parties; provided, however, that the
Committed Investor may, without such consent, assign its rights hereunder to any
person or entity controlled by, controlling, or under common control with such
Committed Investor. Any attempted assignment without the aforementioned prior
written consent will be null and void.

        Section 8.05. Headings. The headings of the Articles and Sections of
this Commitment Agreement are inserted for convenience only and shall not affect
the interpretation hereof.

        Section 8.06. Entire Agreement. This Commitment Agreement (including the
Exhibits and Schedules hereto) contains the entire understanding of the parties
hereto with respect to the subject matter hereof. There are no restrictions
promises, representations, warranties, covenants, or undertakings among the
parties relating to the subject matter hereof other than those expressly set
forth or referred to herein. This Commitment Agreement supersedes all prior
agreements and understandings among the parties with respect to the subject
matter hereof.

        Section 8.07. Counterpart. This Commitment Agreement may be executed in
two or more counterparts, and each such counterpart shall be deemed an original
but all such counterparts together shall constitute one and the same agreement.
Delivery of an executed counterpart of this Commitment Agreement by facsimile
shall be equally as effective as delivery of an original executed counterpart of
this Commitment Agreement.

                                       10



        Section 8.08. Governing Law. This Commitment Agreement and the legal
relations between the parties hereto shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without giving
effect to the provisions, principles or policies thereof respecting conflict or
choice of laws.

        Section 8.09. Survival. The representations and warranties of the
parties hereto shall survive only until the Closing but not thereafter.

                                       11



        IN WITNESS WHEREOF, the parties hereto have caused this Commitment
Agreement to be duly executed by their duly authorized officers, partners or
agents, as of the day and year first above written.

                                               NEPHROS, INC.

                                                 By:  /s/ Norman J. Barta
                                                     --------------------------
                                                     Name: Norman J. Barta
                                                     Title:  President and CEO

                                                      /s/ Ronald Perelman
                                                     --------------------------
                                                     Ronald Perelman

                                       12



                                   SCHEDULE I
                       (Commitment Portions and Addresses)

Committed Investor     Address                      Commitment Portion
- ------------------     ------------------------     -------------------
Ronald Perelman        35 East 62nd Street                100%
                       New York, New York 10021

                                       13



                                  SCHEDULE 3.03
                     (Obligations to Issue or Redeem Stock)

                 Class                                              Shares
    ------------------------------------------------------------------------
    Common Stock Outstanding                                       5,609,500
    Preferred Series A Outstanding                                 4,000,000
    Preferred Series B Outstanding                                 2,333,333
    Preferred Series C Outstanding (including
     convertible shares)                                           3,387,550
    Warrants Outstanding                                             725,000
    Options Allocated                                              4,056,500
    Options Unallocated                                              943,500
                                                                  ----------
    Total Shares                                                  21,055,383
                                                                  ----------

                                       14



                                    EXHIBIT A
                              (Form of Bridge Note)

                                       15



                                    EXHIBIT B
           (Form of Amended and Restated Certificate of Incorporation)

                                       16



                                    EXHIBIT C
                        (Form of Subscription Agreement)

                                       17

EX-10.18

                                                                  Exhibit 10.18

                                                                  EXECUTION COPY

                                  NEPHROS, INC.

                                    [FORM OF]

                             SUBSCRIPTION AGREEMENT

To: Nephros, Inc.

From:
      ------------------

     The undersigned acknowledges receipt and review of a Confidential
Information Memorandum dated May 30, 2003 and a Supplement thereto, dated June
9, 2003 (collectively, the "Information Memorandum") prepared by Nephros, Inc.
(the "Company"), a copy of the Commitment Agreement among the Company and Ronald
Perelman (the "Committed Investor"), dated as of May 30, 2003 (the "Commitment
Agreement"), a form of the Company's Senior Convertible Bridge Notes due 2004
(the "Bridge Notes") a copy of the proposed Amended and Restated Certificate of
Incorporation of the Company (the "Revised Charter"), a copy of the Proposed
Amended and Restated Registration Rights Agreement (the "Registration Rights
Agreement"), a letter from Dr. Eric Rose and Norman Barta, dated May 30, 2003
(the "Prior Letter"), a letter from Norman Barta, dated June 5, 2003 (the
"Update Letter"), a letter from Norman Barta, dated June 9, 2003 (the "Current
Letter") and this Subscription Agreement (the "Subscription Agreement" and,
together with the above-referenced Information Memorandum, Commitment Agreement,
Bridge Notes, Revised Charter, Registration Rights Agreement, Prior Letter,
Update Letter and Current Letter, the "Offering Documents") in connection with
the Company's offering (the "Offering"), at face value, of an aggregate of
$1,000,000 principal amount of its Bridge Notes, which Bridge Notes, among other
things, entitle the holder thereof under certain circumstances to the right, but
not the obligation, to convert all of such holder's Bridge Notes into the number
of whole shares of Series D Convertible Preferred Stock of the Company to be
established upon filing of the Revised Charter (the "New Preferred") that have
an aggregate liquidation preference equal to the principal amount of such Bridge
Notes; provided that such holder also purchases, when and as provided in the
Bridge Notes, a number of additional shares of New Preferred having an aggregate
liquidation preference equal to any amount, at such holder's option, between 9
and 11 times the principal amount of such holder's Bridge Notes (such conversion
and purchase, collectively, the "Equity Financing"). The undersigned understands
that the right to convert the Bridge Notes and purchase New Preferred in the
Equity Financing may only be exercised if the Committed Investor elects to
proceed with the Equity Financing, pursuant to the Commitment Agreement. The
undersigned further understands that the New Preferred will be convertible into
shares of common stock of the Company at an initial conversion price per share
equal to the quotient of $15,000,000 (subject to adjustment under certain
circumstances) divided by the number of shares of common stock of the Company
outstanding or issuable upon conversion, exercise or exchange of any outstanding
securities (other than Bridge Notes), in each case, immediately prior to the
initial issuance of such New Preferred.

     To complete this Subscription Agreement, please read it carefully and then
complete the section under the caption "Subscription Form" below, sign the
signature page at the place provided and return this entire document and a check
for your pro-rata share (as indicated on the Subscription Form, below) of the
$1,000,000 bridge loan to Nephros, Inc. no later than June 16, 2003 (the
"Subscription Deadline") using the enclosed pre-addressed, postage-paid
envelope.

                                       -1-



                                                                  EXECUTION COPY

As time is of the essence, Nephros will not necessarily consider any
Subscription Agreements received by it after such date.

     Each stockholder that wishes to purchase Bridge Notes pursuant to this
Offering must indicate option (i) under the caption "Subscription Form" below.
Any Stockholder that does not indicate any option under the caption
"Subscription Form" or that does not return a Subscription Agreement to the
Company by the Subscription Deadline will be deemed to have elected not to
invest any amounts in the Offering. Please note that if you choose not to invest
in the Offering, your ownership interest in the Company may be diluted and you
will not be eligible to acquire shares of New Preferred in the Equity Financing
and, accordingly, will suffer further dilution if the Equity Financing is
consummated.

     If a natural person, the undersigned is 21 years of age or over; if a
corporation, trust, limited liability company, partnership, unincorporated
association or other entity, the undersigned is authorized, empowered and
qualified to execute and deliver this Subscription Agreement and the other
Offering Documents to which the undersigned is a party and to purchase and hold
the Bridge Notes to be purchased pursuant hereto, the New Preferred issuable
pursuant to the Equity Financing and the Common Stock issuable upon conversion
of any such New Preferred (collectively, the "Subject Securities").

     The Offering Documents to which the undersigned is party are valid and
binding obligations of the undersigned, enforceable against the undersigned in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity relating to enforceability
(regardless of whether considered in a proceeding at law or in equity). The
execution, delivery and performance of the Offering Documents will not: (i)
violate, conflict with or result in a default under any provision of the
Certificate or By-Laws (or analogous organizational documents), if any, of the
undersigned; or (ii) violate or result in a violation of, or constitute a
default (whether after the giving of notice, lapse of time or both) under, any
provision of any law, regulation or rule, or any order of, or any restriction
imposed by any court or other governmental agency applicable to the undersigned,
except for those which do not, or are not reasonably likely to, adversely affect
the undersigned's ability to perform its obligations under this Subscription
Agreement and the other Offering Documents and to consummate the transactions
contemplated hereby and thereby.

     The undersigned is an "accredited investor," as that term is defined under
Rule 501 of Regulation D under the Securities Act of 1933, as amended (the
"Act")./1/

     The undersigned has received and carefully reviewed the Offering Documents.
The undersigned has consulted its own financial, legal and tax advisors with
respect to the economic, legal and tax consequences of the purchase of the
Bridge Notes pursuant hereto and acquiring, holding, and disposing of the
Subject Securities and has not relied on the Offering Documents, the Company or
any of the Company's officers, directors, affiliates or professional advisors
for advice as to such consequences.

- ----------
/1/  See Exhibit A hereto.

                                       -2-



                                                                  EXECUTION COPY

     The undersigned acknowledges that it has sufficient knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of the prospective investment in the Subject Securities and of
making an informed investment decision with respect thereto. It acknowledges
that the Offering Documents may not contain all information that is necessary to
make an investment decision with respect to the Company and the Subject
Securities and that it must rely on its own examination of the Company and the
terms and conditions of the Offering prior to making any investment decision
with respect to the Subject Securities. The undersigned further acknowledges
that it has been afforded full opportunity to ask questions and obtain copies of
all relevant documents concerning the Company and the Subject Securities, and
all of its questions and requests for documents and information have been
answered to its complete satisfaction.

     The undersigned acknowledges that it has adequate means for providing for
its own needs and personal contingencies and has no need for liquidity in its
investment in the Bridge Notes, and is able to hold the Bridge Notes and the
other Subject Securities for an indefinite period of time and to withstand a
complete loss of such investment.

     The undersigned is not subscribing for Bridge 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, any seminar or meeting, or any solicitation of a
subscription by a person not previously known to the undersigned in connection
with investments in securities generally.

     The undersigned represents that in making this subscription to purchase
Bridge Notes, no oral representations or warranties have been made to it. The
undersigned acknowledges that it has been advised that no person is authorized
to give any information, or to make any statement regarding the Company or the
Offering, and that any such information or statement must not be relied upon as
having been authorized by the Company, its officers, directors, affiliates or
professional advisors.

     The undersigned understands that none of the Subject Securities have been
registered under the Act by reason of a claimed exemption under the provisions
of the Act which depends, in part, upon the undersigned's investment intention.
The undersigned understands and hereby acknowledges that the Company is under no
obligation to register any of the Subject Securities under the Act or any state
securities or "blue sky" laws, although certain investors may have contractual
registration rights. The undersigned acknowledges and agrees that none of the
Subject Securities may be offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the Act and in compliance
with applicable securities laws of any state or other jurisdiction, or pursuant
to an opinion of counsel satisfactory to the Company that such registration is
not required. The Company may affix an appropriate legend to any certificate(s)
representing Subject Securities to reflect the foregoing. In this connection,
the undersigned hereby represents that the undersigned is acquiring the Bridge
Notes for the undersigned's own account for investment and not with a view
toward the resale or distribution of such Bridge Notes or any other Subject
Securities to others. The undersigned is not acquiring any portion of the
Subject Securities, or any interest therein, on behalf of another person. No
person other than the undersigned has any direct or indirect beneficial interest
in the Subject Securities subscribed for hereunder by the undersigned. The
undersigned, if an entity, was not formed for the purpose of purchasing the
Bridge Notes.

                                       -3-



                                                                  EXECUTION COPY

     The undersigned understands that there is no public market for any of the
Subject Securities and that no such market may develop. The undersigned
understands that even if a public market develops for any such Subject
Securities, Rule 144 under the Act requires, among other conditions, a one-year
holding period prior to the resale (in limited amounts) of securities acquired
in a non-public offering without having to satisfy the registration requirements
under the Act. The undersigned agrees to hold the Company and its stockholders,
officers, employees, controlling persons and agents and their respective heirs,
representatives, successors and assigns harmless and to indemnify them against
all liabilities, costs and expenses incurred by them as a result of, (i) any
misrepresentation made by the undersigned contained in this Subscription
Agreement, (ii) any sale or distribution by the undersigned in violation of the
Act or any applicable state securities or "blue sky" laws or (iii) any untrue
statement of a material fact made by the undersigned and contained herein or
omission to state herein a material fact necessary in order to make the
statements contained herein, in light of the circumstances under which they were
made, not misleading.

     The undersigned has been advised that no federal or state agency has made
any finding or determination as to the fairness of the Offering or any
recommendation or endorsement of the Offering.

     There is no action, suit, investigation or proceeding pending against, or
to its knowledge, threatened against or affecting, the undersigned before any
court or arbitrator or any governmental body, agency or official which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the
transactions contemplated by this Subscription Agreement.

     Unless otherwise indicated on a separate sheet of paper that details any
such affiliation submitted by the undersigned to the Company along with this
completed Subscription Agreement, the undersigned is not affiliated directly or
indirectly with a member broker-dealer firm of the National Association of
Securities Dealers, Inc. as an employee, officer, director, partner or
shareholder or as a relative or member of the same household of an employee,
director, partner or shareholder of an NASD member broker-dealer firm.

     The undersigned, if not already a Stockholder (as defined in the Voting
Agreement, dated as of May 17, 2000, among the Company and the Stockholders
identified therein (the "Voting Agreement")), hereby agrees to be bound by and
to comply with all applicable provisions of the Voting Agreement as a
Stockholder thereunder. The undersigned, if already a Stockholder, hereby agrees
that each purchaser of Bridge Notes may become joined as a party to the Voting
Agreement as a Stockholder thereunder.

                                       -4-



                                                                  EXECUTION COPY

                                    EXHIBIT A

     The term "accredited investors" is defined in Rule 501(a) promulgated under
the Act. The term "accredited investor" includes:

     (i)  A natural person who had an individual income/2/ in excess of $200,000
          (or a joint income with his or her spouse of $300,000) in each of the
          two most recent years and reasonably expect to reach the same income
          level in the current year; and

     (ii) A natural person who has an individual net worth/3/ (or joint net
          worth with his or her spouse) in excess of $1,000,000 (inclusive of
          the value of such person's home, home furnishings and automobiles).

     (iii) A bank, as defined in Section 3(a)(2) of the Act, whether acting in
          its individual or fiduciary capacity.

     (iv) 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.

     (v)  A broker-dealer registered pursuant to Section 15 of the Securities
          Exchange Act of 1934, as amended.

     (vi) An insurance company as defined in Section 2(13) of the Act.

     (vii) An investment company registered under the Investment Company Act of
          1940, as amended.

     (viii) A business development company as defined in Section 2(a)(48) of the
          Investment Company Act of 1940, as amended.

     (ix) 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.

     (x)  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, with total
          assets in excess of $5,000,000.

     (xi) An employee benefit plan within the meaning of the Employment
          Retirement Income Security Act of 1974, as amended ("ERISA"), if the
          investment decision with respect to this investment is made by a plan
          fiduciary, as defined in Section 3(21) of such Act, 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.

     (xii) A private business development company as defined in Section
          202(a)(22) of the Investment Advisors Act of 1940, as amended.

     (xiii) A corporation, partnership, organization described in Section
          501(c)(3) of the Internal Revenue Code of 1986, as amended, or a
          Massachusetts or similar business trust, not formed for the specific
          purpose of acquiring the Bridge Notes, with total assets in excess of
          $5,000,000.

     (xiv) A trust with total assets in excess of $5,000,000, not formed for the
          specific purpose of acquiring the Bridge Notes, whose purchase is
          directed by a sophisticated person as described in Rule 506(b)(2)(ii).

     (xv) An entity in which all of the equity owners are accredited investors.

- ----------
/2/ The term "income" is not limited to "adjusted gross income" as that term is
defined for federal income tax purposes but rather includes certain items of
income which are deducted in computing "adjusted gross income" as well as income
which is currently distributed but otherwise exempt from taxation. For investors
who are salaried employees, the gross salary of such investor, minus any
significant expenses personally incurred by such investor in connection with
earning such salary, plus any income from any other source, including unearned
income, is a fair measure of such investor's "income" for purposes hereof. For
investors who are self-employed, "income" is generally construed to mean total
revenues received by such investor during the calendar year minus significant
expenses incurred in connection with earning such revenues.

/3/ The term "net worth" means the excess of total assets at fair market value
(including principal residence) over total liabilities.



                                                                  EXECUTION COPY

                                SUBSCRIPTION FORM

     The undersigned understands that an election to purchase Bridge Notes
hereby will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Offering. The
undersigned has completed, executed and delivered this Subscription Agreement to
indicate the action the undersigned desires to take with respect to the
Offering.

     The enclosed check and the undersigned's signature below constitutes the
undersigned's irrevocable election, and the undersigned's agreement to perform
in accordance with the undersigned's election (check one)

     (i) to invest an amount equal to the undersigned's pro-rata share (in
- -----
accordance with the undersigned's share of the 16,346,544 shares of common stock
outstanding and issuable upon conversion, directly or indirectly, of convertible
preferred stock and convertible promissory notes of the Company) of the
$1,000,000 Offering

(i.e., to invest $               = the undersigned's shares
                 ---------------   ------------------------ x $1,000,000).
                                          16,346,544

     (ii) not to invest any amounts in the Offering.
- -----

     All authority conferred or agreed to be conferred by this Subscription
Agreement shall survive the death or incapacity of the undersigned, and every
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, trustees in bankruptcy, legal representatives,
successors and assigns of the undersigned.

     This Subscription Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.

                      [Signature Page Follows Immediately]



                                                                  EXECUTION COPY

     IN WITNESS WHEREOF, the undersigned has duly executed this Subscription
Agreement or caused this Subscription Agreement to be duly executed by its duly
authorized officers or representatives, as of the date indicated below.

                                         STOCKHOLDER:
- ---------------
DATE

                                         [If an Entity]

                                         ---------------------------------------
                                         [Entity name]


                                         By:
                                             -----------------------------------
                                             Name:
                                             Title:

                                         [If an individual]


                                         ---------------------------------------
                                         [Individual's signature]

                                         ---------------------------------------
                                         Name:


Accepted and Agreed

NEPHROS, INC.


By:
    ----------------------------------
    Name:
    Title:

                                           [Signature page to Subscription Form]

EX-10.19

                                       1


                                                                   Exhibit 10.19

                        CONFIDENTIAL TREATMENT REQUESTED
                        --------------------------------

INFORMATION FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED IS OMITTED AND
IS IDENTIFIED BY THREE ASTERISKS, AS FOLLOWS "* * *", AN UNREDACTED VERSION OF
THIS DOCUMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.

                                SUPPLY AGREEMENT
                                ----------------

NEPHROS, Inc., a company organized and existing under the laws of the State of
Delaware, having offices at 3960 Broadway, New York, NY 10032, USA and at 1st
Floor, Suite 5, The Avenue, Beacon Court, Sandyford, Dublin 18, Ireland
(hereinafter referred to as "NEPHROS")

and

Membrana GmbH, a company organized and existing under the laws of Germany having
offices at Oehder Str. 28, D-42289 Wuppertal, Germany (hereinafter referred to
as "Membrana")

WHEREAS, Membrana is engaged, inter alia, in the manufacture and sale of
membranes for medical applications, in particular capillary membranes for
hemodialysis, and is interested in selling such membranes to NEPHROS;

WHEREAS, NEPHROS is a medical products company and is engaged, inter alia, in
the hemodialysis business and intends to manufacture
hemodialyzers/hemodiafilters with capillary membranes and, therefore, is
interested in purchasing capillary membranes from Membrana for incorporation
into such dialyzers.

NOW, THEREFORE, the parties hereto hereby agree to the following:

Article 1:  Scope of the Agreement
- ----------------------------------

This Agreement shall govern all deliveries from Membrana to NEPHROS of all blood
contacting capillary membrane types for dialysis that Membrana can, during the
term of this Agreement make, including, without limitation DIAPES HF800* or
DIAPES HF800XP capillary membranes as specified in Sheet no. 079/0107/000
attached hereto as Annex I (hereinafter referred to as "DIAPES") and the DIAPES
Capillary Membrane Primary Bundles as specified in Sheet no. 079/0000/000
attached hereto as Annex II and set forth below ("Primary Bundles"). (The use of
marketing or labelling materials containing the DIAPES(R) name by Nephros is not
allowed in Japan)

Article 2:  Specification of Primary Bundles
- --------------------------------------------

Membrana shall produce Primary Bundles for NEPHROS from DIAPES according to the
specifications listed below:

                                      * * *

The parties may agree in writing to modify the above specifications and/or add
additional specifications, according to NEPHROS's needs and Membrana's
capabilities. In case of a


                                       2


switch to a new specification, unless otherwise agreed to in writing by
Membrana, NEPHROS shall purchase all bundles with the former specification, if
any, which NEPHROS had ordered and, at the time of the switch, are still in
stock at Membrana.

If dialysis membrane types other than, or in addition to, DIAPES HF800* or
DIAPES HF800XP will be supplied by Membrana to NEPHROS then a signed supplement
will be added to this Agreement before the first shipment of such membranes (any
such membranes, together with DIAPES HF800* and Primary Bundles are referred to
herein collectively as "Product").

Article 3: Prices
- -----------------

3.1 The prices for Products containing DIAPES shall be as follows:

     The parties agree on the following volume-discounted price schedule for the
     purchase of quantities of Product per calendar year. If any incomplete
     calendar year constitutes a portion of the term (any "Incomplete Year") of
     this Agreement, then, for such Incomplete Year, each of the volume
     thresholds set forth below shall be prorated by multiplying it by a
     fraction, the numerator of which is the number of days included in such
     Incomplete Year, and the denominator of which is 365.

           --------------------------------   ---------------------------
            Annual Volume, (Calendar Year)           Average Price
               Km of membrane (millions)               [Euro/km]
           --------------------------------   ---------------------------

                         * * *                           * * *

     For purposes of calculating prices under this table "volume" will be
     calculated as the sum of kilometres of DIAPES ordered by NEPHROS from
     Membrana through purchase orders issued for delivery during the calendar
     year indicated by the purchase order due date. Each Product delivery will
     be included in the "volume" quantity for one calendar year only. Any
     quantities of Product not delivered in the calendar year indicated by the
     purchase order due date will be deemed delivered on the due date solely for
     purposes of calculating annual volume, and shall be delivered as soon as
     possible in the next calendar year, using the original purchase order
     number.

     The final price for annual volumes that fall between these listed values is
     calculated via linear interpolation of the average prices of the
     immediately lower and higher price levels, rounding volumes to the closest
     1,000 kilometres. The resulting price will be rounded to two decimal places
     (i.e., hundredths of Euro).

     Example:
     annual volume = * * *
     actual price = * * *

     At the conclusion of the calendar year, when all purchase orders have been
     placed, the cumulative annual volume will be determined. If NEPHROS's total
     kilometres of DIAPES purchased for the year exceed the amount used to set
     the invoice price for that year, then Membrana shall pay NEPHROS a refund
     so that NEPHROS's total purchase expenditure is made equal to the
     expenditure that would have occurred if the price for the actual volume had
     been invoiced all year. Such payment shall be made by January 31 of the
     following year. Conversely, if NEPHROS's total kilometres of membrane
     purchased are less than the quantity used to set the invoice price, then
     NEPHROS shall pay Membrana a refund so that NEPHROS's total purchase
     expenditure is made equal to the expenditure that would have occurred if
     the price for


                                       3


     the actual volume had been invoiced all year. Such payment shall be made by
     January 31 of the following year.
             --

3.2 Each year in * * * NEPHROS and Membrana shall reach an agreement on invoice
price for the following year. Such invoice price shall be set according to the
pricing table set forth above in paragraph 3.1, and the volume reasonably and
jointly expected for the following year.

The prices have to be understood as ex works Wuppertal, packing included.

3.3 If NEPHROS exercises the * * *, the form of which is attached hereto as
Annex III, then the prices and price adjustment provisions set forth in this
Article 3 shall only apply to purchases in calendar year 2004 to the extent that
they yield a price per kilometre that is less than * * *.

3.4 Each month NEPHROS shall provide Membrana with a non-binding forecast
indicating its expected requirements of Products for the three months following
the month for which orders have been placed.

3.5 The delivered volume per bundle type may exceed or fall below the
ordered/confirmed amount by * * *.


Article 4: Payment and Delivery Terms
- -------------------------------------

4.1  NEPHROS shall send the purchase order at least * * * weeks before shipment
     date, indicating the membrane type, bundle specification, number of
     bundles, and the requested shipping date.

     Membrana will send NEPHROS an order confirmation indicating the details of
     the relevant order and providing a definite date of shipment. Any
     deviations from this confirmation will be communicated to NEPHROS as soon
     as they become known.

4.2  Membrana will invoice NEPHROS at time of shipment, consistent with ex-works
     Wuppertal terms.

4.3  NEPHROS shall effect the payment of the purchase price in Euro by * * *,
     net. Payment shall be made by wire transfer to Membrana's account * * *, or
     as otherwise specified by Membrana from time to time.

Article 5: Quality Data & Technical & Scientific Support
- -------------------------------------------------------

With each shipment, Membrana shall provide to both NEPHROS and the "ship-to"
location the `QC Data List' and the `Attachment to MQ-Specification' as given in
ANNEX IV. At NEPHROS's request, Membrana shall provide NEPHROS with technical
and scientific information about each Product, including such information
regarding the membrane types used.

Article 6: This article intentionally blank.
- --------------------------------------------

Article 7: * * *
- ----------

Article 8: Confidentiality
- --------------------------

Each of Membrana and NEPHROS (in such capacity, the "Receiving Party") shall
keep


                                       4


strictly confidential any information disclosed by the other (in such
capacity, the "Disclosing Party") during the term of this Agreement which is
confidential by nature or expressly marked as confidential (collectively,
"Confidential Information"), and shall include, without limitation all purchase
orders, prices, quantities and membrane specifications. The Receiving Party
shall at all times keep documents or other materials containing Confidential
Information of the Disclosing Party in a secure place, shall not use such
Confidential Information for any purpose other than its performance under, and
its evaluation of the relationship created by, this Agreement, except as
otherwise agreed to in writing, and shall not disclose any of the Confidential
Information of the Disclosing Party in any manner whatsoever, in whole or in
part, for any reason or purpose whatsoever except if such Receiving Party is
required by a court of competent jurisdiction to so disclose after notice has
been given to the Disclosing Party and the Disclosing Party has had an
opportunity to oppose such disclosure or seek a protective order to the extent
practicable. Notwithstanding the foregoing, "Confidential Information" shall not
include anything the Receiving Party can establish (1) is generally known to the
public other than as a result of the breach by the Receiving Party or any
affiliate of the Receiving Party of an obligation of confidentiality to the
Disclosing Party, (2) was known by the Receiving Party (as evidenced by written
records) prior to its receipt by the Receiving Party from the Disclosing Party,
(3) was disclosed to the Receiving Party by a third party under no obligation of
confidence, or (4) was developed by the Receiving Party independently of any
disclosure made by the Disclosing Party to the Receiving Party, provided, that
the Receiving Party shall have the burden of showing that such information was
developed independently of any disclosure by the Disclosing Party.

Article 9: Term
- ---------------

9.1 This Agreement shall enter into force upon signature of the last signing
party (the "Effective Date") and shall remain in force until terminated in
accordance with this Article 9.

9.2 Either NEPHROS or Membrana (in such capacity, the "Terminator") may
terminate this Agreement by notice to the other (in such capacity, the
"Terminatee") upon the occurrence of any of the following:

     (a)  the Terminatee fails to perform any covenant or agreement contained
          herein in any material respect and such failure is not curable or if
          curable is not cured within 30 days of notice from the Terminator;

     (b)  A petition for an order of relief under any bankruptcy, insolvency, or
          reorganization statute is filed against the Terminatee and is not
          discharged or dismissed or stayed within 60 days thereafter or a
          custodian, receiver or trustee is appointed for the Terminatee or
          substantially all of its business or assets, or the Terminatee ceases
          business, makes a general assignment for the benefit of creditors,
          resolves to go into voluntary liquidation or is adjudicated a bankrupt
          or otherwise seeks relief pursuant to any bankruptcy, insolvency or
          reorganization statute or proceeding.

9.3 On or after the fourth anniversary of the Effective Date, either NEPHROS or
Membrana may terminate this Agreement at any time, with or without cause, upon
months] advance written notice to the other.

9.4 Termination of this Agreement will not affect any purchase orders existing
on the date of termination, which will continue to be governed by this
Agreement. Furthermore, Articles 6, 8 and 10 shall survive any termination of
this Agreement.


                                       5


Article 10: Choice of Law, Arbitration
- --------------------------------------

All disputes arising in connection with the present contract shall be finally
resolved by arbitration in New York, New York before a single arbitrator in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrator shall be final, binding and conclusive on
the parties and the arbitrator shall have the power to award costs and expenses.
Any such decision may be entered in any court of competent jurisdiction.

Article 11: Miscellaneous
- -------------------------

11.1 Except as otherwise provided for this agreement, Membrana's General
     Conditions of Sale (the "General Conditions"), enclosed as Annex V, shall
     apply. Without limiting the generality of the foregoing: Sections V.2.,
     VII.2., and Article XI of the General Conditions shall not apply to this
     Agreement; the references to the "Buyer" in Sections VIII.1(c) and VIII.3
     of the General Conditions shall be deemed to include any of NEPHROS's
     distributors or customers and any end-user of NEPHROS's products; and the
     limitation of liability contained in Section VIII.4 of the General
     Conditions shall not apply to damages that are brought about by wilful
     intent or gross negligence.

11.2 If any provision of this agreement should become invalid this shall in no
     way interfere with the validity of the remaining provisions. The parties
     will then replace the provision declared invalid by another provision
     coming the closest possible to the provision declared invalid.

11.3 All notices, certificates, acknowledgments, consent, approvals and other
     communications hereunder shall be in writing and shall be mailed by
     certified U.S. mail or German equivalent, sent through an international
     overnight delivery service or delivered by personal delivery to any party
     hereto at its address as set forth in the preamble to this Agreement.
     Delivery of any notice, certificate, acknowledgment, consent, approval or
     other communication hereunder shall be effective upon actual receipt
     thereof.

11.4 The rights and obligations under this Agreement shall not be assignable
     without the prior written consent of the other party.

11.5 Any modifications of this Agreement must be made in writing.

11.6 This Agreement constitutes the entire agreement between NEPHROS and
     Membrana and supersedes any previous agreement between the parties relating
     to the subject matter of this agreement.


                                       6


     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the respective dates set forth below.


New York, December 17, 2003           Wuppertal,  December 16, 2003
          -----------------                       -----------------

NEPHROS, INC.                         Membrana GmbH


By: /s/ Norman J. Barta              By:  /s/ Ulf Seidel
    ---------------------------           ------------------------------
     Name:  Norman J. Barta               Name:  Dr. Ulf Seidel
     Title: CEO                           Title:  VP Sales and Marketing Medical



                                     By:  /s/ Anthony Mancusi
                                          ------------------------------

                                          Name:  Dr. Anthony Mancusi
                                          Title: Key Account Manager, Americas


                                       7


                                     ANNEX I
                                     -------
                                DIAPES Data Sheet

                                      * * *


                                       8


                                    ANNEX II
                                    --------
                           Primary Bundles Data Sheet

                                      * * *


                                       9


                                    ANNEX III
                                    ---------
                                      * * *


                                       10


                                    ANNEX IV
                                    --------
                  QC Data List & Attachment to MQ-Specification

                                      * * *


                                       11

                                    ANNEX V
                                    -------

                   General Conditions of Sale of Membrana GmbH


                 I. Exclusive validity of our conditions of sale

All of our quotations and tenders are based on our General Conditions of Sale.
We accept purchase orders exclusively on these terms. General terms and
conditions of the purchaser or agreements deviating from our Commercial Code
shall be binding on us only if we expressly recognise them in writing. With the
placing of an order or the acceptance of work of services the purchaser
recognises the validity of our General Terms and Conditions not only for the
business transaction in question, but also for all future business transactions.

                             II. Area of application

Our General Terms and Conditions shall apply only to legal transactions with
companies in the sense of the German Civil Code.

                                  III. Delivery

1.   As soon as the goods leave our works or our warehouse or are made available
     to the Buyer ready for shipping in a manner establishing default in
     acceptance, all transport risks shall pass to the Buyer.

2.   Periods and deadlines agreed upon for our services and work shall only be
     deemed to be binding, if they are expressly designated as such by us. A
     delivery period or a delivery date shall be deemed to have been adhered to,
     if the goods have left our works or our sales warehouse by the expiry of
     the period.

3.   Force Majeure and other obstructions which are beyond our control such as
     war, mobilisation, fire, strike and lockout and suchlike shall exempt us,
     for the duration of such disturbance and its consequences, from the
     obligation to deliver. Should such circumstances occur, after we have
     defaulted, the consequences of default shall remain excluded for the
     duration of their effectiveness. If the delivery period agreed upon is
     exceeded by more than two months, the Buyer and the Seller shall be
     entitled to cancel the part of the contract not performed.



4.   The Buyer must, if the delivery period is exceeded, set a reasonable
     extension of the period in writing. If we have not performed the work or
     service within this additional period, the Buyer shall be entitled to
     cancel the contract.

5.   From the exceeding of a period for performance or a performance date or
     from performance default the Buyer shall not be entitled to derive any
     claims for damages against us, unless the exceeding of the period or
     deadline is due to wilful intent or gross negligence on the part of one of
     our statutory representative or of one of our vicarious agents.

6.   We shall be entitled to effect part deliveries and to invoice each part
     delivery in itself, as far as a part delivery is tolerable for the Buyer.
     The re-sale of the goods delivered using decorative and packaging material
     owned by us shall require our prior written consent.

7.   Seller may deliver against any order an excess or deficiency of up to 10 %
     of the quantity ordered. The quantity actually delivered will be invoiced.

                                   IV. Payment

1.   Besides the prices agreed, the Buyer must pay the statutory value-added or
     turnover tax at the currently applicable rate.

2.   Retention of due payments or offsetting shall be possible only on the basis
     of claims of the purchaser which have been the subject of non-appealable
     court decisions or have been recognised by us in writing.

3.   All costs arising in connection with the contract in the country of the
     Buyer including fees and taxes which were not known at the time of the
     conclusion of the contract shall be borne by the Buyer.

4.   If, after the conclusion of the contract, circumstances come to our
     knowledge which appear to make the credit worthiness of the purchaser
     doubtful, we can, at our discretion, demand cash in advance or provision of
     securities.

5.   In case of late payment by Buyer, Buyer shall, without prejudice to any
     other right of Seller, be liable to pay interest at a yearly rate of 8 % in
     excess of the basic interest rate (Euribor).



                              V. Retention of title

1.   The goods supplied by us shall remain our property up to the complete
     settlement of all of our receivables from the reciprocal business
     relationship including any possible current account balance. The goods may
     not be pledged to others or transferred as security.

2.   Should we as a result of a combination of the goods supplied by us with the
     goods of the purchaser not acquire co-ownership, but lose our property, the
     ownership or co-ownership of the Buyer of the new item shall immediately
     pass to us upon its creation. All expectant rights which could lead to such
     an acquisition of ownership or co-ownership by the Buyer, are now already
     assigned to us by the latter. Any possible transfer necessary by us for the
     acquisition of the ownership or co-ownership shall be replaced by the
     agreement that the party ordering a goods preserves the item for us like a
     borrower, or, if the party ordering a good does not own the item, by the
     assignment of the entitlement to surrender against the owner to us already
     agreed hereby. The ownership or co-ownership arising for us is to be
     treated legally like the original goods. Otherwise the goods supplied by us
     and subject to retention of title are also to be treated with care.

3.   If the Buyer, despite default, does not pay or if the Buyer threatens to
     become insolvent, the Buyer must, at our request, surrender the goods
     subject to retention of title for our free disposal. The taking-back of
     goods subject to retention of title does not constitute any cancellation of
     the contract.

4.   All receivables of the Buyer from re-sale of goods of which we have
     ownership or co-ownership (goods subject to retention of title) shall
     already pass to us upon the conclusion of the transaction of sale. This
     shall apply whether the goods are sold to one or to several customers. The
     purchaser must collect the receivables assigned. We can revoke this
     authority, if the purchaser does not punctually meet one of his obligations
     towards us or if circumstances come to our knowledge which make our rights
     appear threatened.

5.   We undertake, at the request of the Buyer, to release the securities (goods
     and accounts receivable) to which we are entitled according to the above
     rules at our discretion, if their value exceeds the claims to be secured by
     more than 20 %. For the valuation of the security their realisable value
     (securing value) is decisive.

6.   If our retention of title loses its validity in the case of supplies abroad
     or for other reasons, the purchaser shall be obliged to grant to us without
     delay security for the items supplied or



     any other security for our accounts receivable which will be effective
     according to the law applicable in each case and come as close as possible
     to the retention of title according to German law.

7.   The Buyer shall be obliged to insure the goods subject to retention of
     title with the due care and diligence of a prudent businessman and on
     request to provide evidence to the effect that this insurance has been
     taken out. The Buyer already now assigns to us his claims under this
     insurance by way of security.

                                  VI. INCOTERMS

The usual commercial terms such as FOB and CIF shall apply in accordance with
the INCOTERMS of the International Chamber of Commerce in the version as of the
conclusion of the contract.

                         VII. Claims concerning defects

1.   Notices of defects must be sent in writing at the latest within 30 days of
     receipt of the goods - in the case of hidden defects without delay after
     their discovery - stating the invoice and packaging unit. Deviations with
     regard to the raw or colour shade of the goods supplied shall not be deemed
     to be defects, unless they lead to a considerable deterioration in the
     usability of the products made therefrom.

2.   In the case of notices of defects sent in good time and justifiably we
     shall, at our discretion, have the right to reduce the purchase price by a
     reasonable amount or to supply a replacement. In the event of a failed
     delivery of replacement the purchaser shall have the choice between repeat
     delivery of a replacement, reasonable reduction of the price and returning
     of the goods after the refunding of the purchase price. Defects in one part
     of our performance shall not entitle the Buyer to complain about the
     performance as a whole.

3.   If the Buyer wishes to further process the goods despite identifiable
     defects, he shall give us an opportunity to make comments in good time
     prior to this.

4.   Claims of the purchaser based on defects shall be subject to the statute of
     limitations 12 months after the delivery of the goods.

5.   Our warranties shall expire, if the goods are modified by others, moreover,
     our warranty shall expire, if the Buyer does not follow our instructions
     for use.



                                 VIII. Liability

1.   For consequences

     a)   of errors which occur during contract negotiations, in particular for
          the consequences of inadequate or incorrect advice given to the Buyer,

     b)   the violation of non-essential contractual duties (subsidiary duties),
          for example a consulting or protection obligation,

     c)   an unlawful act, unless it consists of injury for life and limb or the
          impairing of the health of the Buyer, we shall only accept liability
          if these consequences are due to wilful intent or gross negligence of
          one of our statutory representatives or one of our vicarious agents.

2.   Should the Buyer suffer disadvantages as a result of the fact that we
     violate non-essential contractual obligations (subsidiary obligations), for
     example a consulting or protection obligation, we shall likewise only
     accept liability if these consequences are due to wilful intent or gross
     negligence of one of our statutory representatives or one of our vicarious
     agents.

3.   For consequences, as long as they do not consist of injury of life and limb
     or the impairing of the health of the Buyer, or unlawful acts which one of
     our statutory representatives or one of our vicarious agents commit, we
     shall only accept liability if these consequences were brought about by
     wilful intent or gross negligence.

4.   Where Seller gives technical advice to Buyer with respect to the processing
     or treatment of the goods, it is agreed that such advice is given without
     any liability on Seller's part.

                       IX. Make-up and packaging material

If the Buyer does not return decorative and packaging material which remains our
property within a time limit to be determined by us on the terms and conditions
laid down and in a state capable of being used we shall be entitled to invoice
the Buyer for the replacement price and to demand immediate payment for it. If
the Buyer provides evidence of damage considerably below the replacement price,
only this is to be refunded.



                               X. Marks and signs

Marks and signs under which the goods are supplied must not be used for the
products produces therefrom without our prior written consent.

                              XI. Other provisions

1.   The sales contract shall be subject to German law. The use of the
     Convention of the United Nations of 11.04.1980 concerning contracts on
     international purchase of goods shall be excluded.

2.   The exclusive venue for all disputes about and resulting from the contract
     shall be Wuppertal. We shall, however, have the right to sue the Buyer at
     any other venue applicable to him.

3.   Should any provision of this contract be or become ineffective, or should a
     gap emerge in this contract, the effectiveness of the remaining provisions
     shall not be affected by this.

4.   In place of the ineffective provisions or in order to fill the gap a
     reasonable provision shall be inserted which, as far as legally possible,
     comes as close as possible to what the parties concluding the contract
     wanted or would have wanted according to the sense and purpose of the
     contract, if they had considered the point.

EX-10.20

                                                                   Exhibit 10.20

[LETTERHEAD OF NEPHROS]

June 7, 2004

Mr. Marc Panoff
65 Rockledge Drive
Suffern, NY  10901

RE: Employment Offer

Dear Marc:

     We are pleased to confirm our employment offer to you for the position of
Chief Financial Officer reporting to the Chief Executive Officer and the Board
of Directors. You will be paid a bi-weekly salary at an initial annual rate of
$140,000 and will be considered for a possible merit increase in connection with
your performance review, which will be performed prior to January 1, 2005.

     In addition, you will be eligible to receive a bonus of up to 20% of your
base salary for achievement of performance objectives, subject to approval of
the Chief Executive Officer and the Compensation Committee of the Board of
Directors; this bonus can be increased above 20% at the discretion of the Chief
Executive Officer and the Compensation Committee of the Board of Directors, in
keeping with Company policy. You will also receive a grant of 200,000 stock
options, subject to the approval of the Compensation Committee of the Board of
Directors, which shall be governed by the terms of Nephros Inc.'s stock option
plan. Your grant will be addressed at the next meeting of the Compensation and
Audit Committees of the Board of Directors after your start date at Nephros.
While the Company will present an option exercise price of $0.68 per share in
requesting the grant, this pricing is subject to the approval of both the
Compensation and Audit Committees of the Board of Directors.

     As an employee of Nephros working more than 20 hrs/week, you will be
entitled to the following employee benefits:

..       Guardian Healthcare Plan - 20% Premium Employee Paid
..       Guardian Dental Plan - 20% Premium Employee Paid
..       Life Insurance - Up to 100% of Base Salary - Company Paid
..       Long Term Disability Plan - Company Paid
..       401(k) Savings Plan
..       Paid Holidays - Six (6) Designated Holidays and Four (4) Floating
        Holidays
..       Vacation -Ten (10) Days Paid Vacation
..       Parking and Commuter Tolls - Company Paid
..       Sick Days - as reasonably required



Mr. Marc Panoff
June 7, 2004
Page 2

     The term of your employment will commence on July 12, 2004 and will end on
July 31, 2006, or such later date to which the term may be extended by joint
agreement between you and Nephros.

     Nephros may terminate your employment for Cause (as defined below), in
which case the provisions of paragraph (a) below shall apply. Nephros may also
terminate your employment in the event of your Disability (as defined below), in
which case the provisions of paragraph (b) below shall apply. Nephros may also
terminate your employment for any other reason by written notice to you, in
which case the provisions of paragraph (c) below shall apply. If your employment
is terminated by reason of your death, retirement or voluntary resignation, then
the provisions of paragraph (a) below shall apply. Nephros may terminate your
employment at the end of the term hereof by not jointly agreeing with you to
extend the term, in which case paragraph (d) below shall apply.

          (a)  In the event that your employment hereunder is terminated during
     the term (x) by Nephros for Cause (as defined below), (y) by reason of your
     death, or (z) by reason of your voluntary resignation or retirement, then
     Nephros shall pay to you only your accrued but unpaid base salary for
     services rendered through the date of termination. For purposes of this
     agreement, "Cause" shall mean (i) conviction of any crime (whether or not
     involving Nephros) constituting a felony in the jurisdiction involved; (ii)
     engaging in any act which, in each case, subjects, or if generally known
     would subject, Nephros to public ridicule or embarrassment; (iii) gross
     neglect or misconduct in the performance of your duties hereunder; (iv)
     willful failure or refusal to perform such duties as may reasonably be
     delegated to you commensurate with your position; or (v) material breach by
     you of any provision of this agreement or of a Confidentiality or
     Assignment of Invention Agreement; provided, however, that with respect to
     clauses (iii), (iv) or (v), if susceptible of cure, you shall have received
     written notice from Nephros setting forth the alleged act or failure to act
     constituting "Cause" hereunder, and you shall not have cured such act or
     refusal to act within 30 business days of you receipt of such notice.

          (b)  If, as a result of your incapacity due to physical or mental
     illness, you shall have failed to perform your duties hereunder on a full
     time basis for either (i) one hundred twenty (120) days within any three
     hundred sixty-five (365) day period, or (ii) ninety (90) consecutive days,
     then Nephros may terminate your employment hereunder for "Disability". In
     that event, Nephros shall pay to you only your accrued but unpaid base
     salary for services rendered through such date of termination. During any
     period that you fail to perform your duties hereunder as a result of
     incapacity due to physical or mental illness (a "Disability Period"), you
     shall continue to receive the compensation and benefits provided by this
     agreement until your employment hereunder is terminated; provided, however,
     that the amount of compensation and benefits received by you during the
     Disability Period shall be reduced by the aggregate amounts, if any,
     payable to you under disability benefit plans and programs of Nephros or
     under the Social Security disability insurance program.



Mr. Marc Panoff
June 7, 2004
Page 3

          (c)  In the event that your employment hereunder is terminated by
     Nephros prior to the expiration of the term for any reason other than as
     provided in paragraphs (a) or (b) above, then Nephros shall pay to you:

               (i)     any accrued but unpaid base salary for services rendered
               through such date of termination;

               (ii)    any unpaid bonuses due or payable on or prior to the date
               of termination or within 90 days thereafter; and

               (iii)   the continued payment of your base salary, in the amount
               as of the date of termination, for the remainder of the term and
               any Sundown Period (as defined in paragraph (d), below), such
               payments to be made at the times such base salary would have been
               paid had your employment not terminated.

          (d)  If, on or prior to six months before the date of expiration of
     the term of your employment hereunder, Nephros fails to either (i) offer to
     extend such term for at least six months or (ii) notify you that it will
     terminate your employment hereunder, then Nephros shall continue to pay you
     your base salary, in the amount as of the date of termination of your
     employment hereunder, until the earlier of (x) six months following the
     date Nephros notifies you that it will terminate your employment hereunder
     and (y) six months following the end of the term of your employment
     hereunder (the period, if any, from the end of the term of your employment
     hereunder until the earlier such date is referred to herein as the "Sundown
     Period")

     Notwithstanding anything to the contrary contained herein, in the event
that you breach the Confidentiality or Assignment of Invention Agreements at any
time, in addition to any other remedies Nephros may have therefor, Nephros 's
obligation under clauses (ii) and (iii) of paragraph (c) above or under
paragraph (d) above shall cease and your rights thereto shall terminate and
shall be forfeited.

     Other than providing the compensation provided for in this agreement, upon
termination of your employment, Nephros and its directors, officers, employees,
subsidiaries, affiliates, stockholders, successors, assigns, agents and
representatives shall have no further obligation or liability to you or any
other person under this agreement. The payment of any amounts pursuant to this
agreement (other than any payments required by law) is expressly conditioned
upon the delivery by you to Nephros of a release in form and substance
satisfactory to Nephros of any and all claims you may have against Nephros and
its directors, officers, employees, subsidiaries, affiliates, stockholders,
successors, assigns, agents and representatives arising out of or related to
your employment by Nephros and the termination of such employment.

     Your rights and obligations hereunder may not be assigned. Nephros may
assign its rights, together with its obligations, hereunder (i) to any affiliate
or (ii) to third parties in connection with any sale, transfer or other
disposition of all or substantially all of its business or assets; in any event
the obligations of Nephros hereunder shall be binding on its successors or
assigns, whether by merger, consolidation or acquisition of all or substantially
all of its business or assets.

     By accepting this position, you acknowledge that there is no other
agreement to which you are a party that would prevent you from accepting this
position on the terms and within the timeframe



Mr. Marc Panoff
June 7, 2004
Page 4

indicated herein. As a condition of your employment at Nephros, you will be
required to sign Confidentiality and Assignment of Invention Agreements.

     If you have any questions regarding the details of this offer, please call
me at (212) 781-5113. Please indicate your formal acceptance of this employment
offer by counter-signing this agreement and returning to me at our New York
offices.

     I look forward to having you join us.

     Best regards,

/s/ Norman J. Barta


                                      Employment Offer Accepted


                                       /s/ Marc Panoff
                                      ------------------------------------
                                      Signatre            Date   6/16/04

EX-10.21

                                                                   Exhibit 10.21

                        CONFIDENTIAL TREATMENT REQUESTED
                        --------------------------------

INFORMATION FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED IS OMITTED AND
IS IDENTIFIED BY THREE ASTERISKS, AS FOLLOWS "* * *", AN UNREDACTED VERSION OF
THIS DOCUMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.

                       MANUFACTURING AND SUPPLY AGREEMENT

     This manufacturing and supply agreement is dated 12 May, 2003, and is
between NEPHROS, INC., a Delaware corporation ("Nephros") and MEDICA s.r.l., an
                                                -------
Italian company ("Medica").
                  ------

     Nephros sells systems it has developed for treating end-stage renal
disease. One component of these systems is the MD 190 hemodiafiltration
cartridge (the "Cartridge").
                ---------

     Nephros and Medica wish for Medica to manufacture Cartridges for Nephros,
using fiber provided by a supplier designated by Nephros, and ship them to
purchasers designated by Nephros.

     The parties therefore agree as follows:

                                   Article 1
                                SALE AND PURCHASE

     1.1   Supply of Cartridge. Subject to the terms of this agreement, Medica
           -------------------
shall manufacture, in such quantities as Nephros orders, the Cartridge.

     1.2   Nephros Exclusive Purchaser. Medica may not without the prior written
           ---------------------------
consent of Nephros provide Cartridges to any Person other than Nephros.

     1.3   Medica Exclusivity. Nephros shall purchase from Medica no less than
           ------------------
* * * of the Cartridges directly marketed by Nephros in the first * * *
following regulatory approval of the Cartridge in Europe ("the approval"); no
                                                           ------------
less than * * * of the Cartridges directly marketed by Nephros in * * *
following the approval; and no less than * * * of the Cartridges directly
marketed by Nephros in * * * following the approval. Medica will also be given
first consideration in good faith for the manufacture of Cartridges not directly
marketed by Nephros. For purposes of this Section 1.3, Nephros will be deemed to
have purchased from Medica any Cartridges that it purchases from any Person
other than Medica to replace Cartridges ordered from Medica that constitute
"Default Cartridges" under the terms of this agreement.
 ------------------

                                    Article 2
                                    FORECASTS

     2.1   Rolling Forecasts. (a) On or prior to the Forecast Initiation Date
           -----------------
("FID"), as specified in Schedule 3.1, Nephros shall deliver to Medica a
  ---
forecast of how many Cartridges it



will purchase for delivery in each of the nine consecutive months beginning one
month following the FID. On or prior to one month following the FID, Nephros
shall deliver to Medica a forecast of how many Cartridges it will purchase for
delivery in each of the nine consecutive months beginning two months following
the FID. On or prior to the first day of each subsequent month, Nephros shall
deliver to Medica an update to its previously submitted forecast of its expected
purchases of Cartridges (each forecast delivered pursuant to this Section
2.1(a), a "Rolling Forecast"). Each such update must consist of a repetition of
           ----------------
the eight later months of the immediately preceding Rolling Forecast along with
a forecast for the month subsequent to the last month in the previous Rolling
Forecast.

           (b)   Nephros may not revise in any subsequent Rolling Forecast the
forecast for months 2 and 3 in any Rolling Forecast (month 1 being the earliest
month in any Rolling Forecast). Nephros may revise in any subsequent Rolling
Forecast the forecast for any other month in any Rolling Forecast.

           (c)   The forecast for any month specified in any Rolling Forecast
may not be less than the total number of Cartridges for which Nephros, prior to
delivery of that Rolling Forecast to Medics in accordance with Section 2.1(a),
has submitted purchase orders in accordance with Section 3.2 specifying a
delivery date in that month.

                                   Article 3
                          ORDERS, SHIPMENT, AND PAYMENT

     3.1   Price. The price paid by Nephros for any given shipment of Cartridges
           -----
is as stated in Schedule 3.1.
                ------------

     3.2   Purchase Orders. (a) Each purchase order that Nephros places for
           ---------------
Cartridges must be in the form attached as Exhibit A and must specify (1) how
                                           ---------
many Cartridges are desired, (2) the one or more places to which, and the manner
and date by which, delivery is to be made, and (3) the applicable price per
Cartridge. Nephros shall deliver all purchase orders by facsimile, or by one of
the means specified in Section 14.8 for giving notice, to Medica at the
following address and facsimile number or as otherwise instructed by Medics:

     Medica s.r.l.
     Via Degli Artigiani, 6
     41036 Medolla (MO) Italy
     Attention:        Daniele Giubertoni
                       MKTG & sales Manager
     Facsimile:        39-0535-52605
     E-mail:           sales@medica.it

           (b)   Nephros shall order for delivery in any given month an
aggregate number of Cartridges equal to at least 90% of the final amount
forecast for that month in the Rolling Forecasts (that quantity, the "Final
Forecast Quantity"). Nephros may order for delivery in any given Quarter an
aggregate quantity of Cartridge not exceeding 110% of the Final Forecast
                                                          --------------
Quantity. Only with Medica's written consent may Nephros order for delivery in
- --------
any given Quarter an aggregate number of Cartridges exceeding 110% of the Final
Forecast Quantity.

                                        2



           (c)   Nephros shall deliver each purchase order for quantities of the
Cartridge at least 60 days in advance of the delivery date specified in that
purchase order.

           (d)   If Nephros delivers any purchase order with less lead time than
is required under Section 3.2(c), then Medica shall use commercially reasonable
efforts to fill that purchase order but will not be liable to Nephros if despite
those best efforts they fail to do so.

           (e)   Medica shall acknowledge and accept in writing (by fax, email,
or other means of correspondence, tbd) on behalf of Medica any purchase order
that Nephros places for Cartridges. Any such purchase order will be deemed
accepted by Medica if Medica does not reject it by written notice to Nephros
delivered within seven Business Days of Medica's receiving that purchase order.
Medica may not reject any purchase order that complies with the provisions of
this Article 3. If the terms of any purchase order are inconsistent with the
terms of this agreement, the terms of this agreement will control.

           (f)   If it notifies Medica no later than 30 days prior to the date
of delivery specified in any purchase order, Nephros may elect, with respect to
some or all of the Cartridges ordered in that purchase order, to postpone that
date of delivery to a date that is a number of days after the date of delivery
specified in that purchase order equal to the number of days between the date
that purchase order was delivered to Medica and the delivery date specified in
that purchase order. Nephros may not further postpone delivery of any Cartridges
the delivery of which was previously postponed. For purposes of determining
Nephros's compliance with its obligations under Section 3.2(b), Nephros will be
deemed to have purchased in the month of the original date of delivery any
Cartridges the delivery of which was postponed in accordance with this Section
3.2(f).

     3.3   Delivery. Each shipment of Cartridges will be delivered by Medica FOB
           --------
the applicable Medica manufacturing facility or retained in Medica's warehouse
facility, in accordance with Nephros instructions for each shipment. Subject to
Section 3.2(f), Medica shall deliver by the delivery date specified in a
purchase order all of the Cartridges specified in that purchase order. Nephros
is only required to pay for Cartridges actually delivered. Medica shall make
shipping arrangements with carriers designated in writing by Nephros from the
FOB point to points specified by Nephros, under the agreements that Nephros has
with those carriers.

           3.3.1 Customer Delivery. For cartridges retained in the Medica
                 -----------------
warehouse, Medica shall deliver these Cartridges, FOB the warehouse, in
quantities and to addresses specified in writing (by fax, email, or other means
of correspondence, tbd) by Nephros, in order to fulfill individual Nephros
customer orders. Medica will confirm these orders for delivery in writing (by
fax, email, or other means of correspondence, tbd), and will notify Nephros upon
successful delivery of the Cartridges to the customer locations specified.

     3.4   Freight, Insurance, and Taxes. Nephros shall pay all freight,
           -----------------------------
insurance, duties, and other fees (except tax on income to Medica) incurred in
connection with sale and shipment of Cartridges under this agreement.

           3.4.1 Delivery to European Community customer. Nephros will create a
                 ---------------------------------------
European business location holding a V.A.T. registration number ("Nephros
Europe"). Medica

                                        3



will invoice all deliveries for European customers to Nephros Europe, which will
also provide the payment.

     3.5   Delay in Delivery. If for any reason other than an Event of Force
           -----------------
Majeure Medica delivers any shipment of Cartridges later than the date of
delivery set out in the Purchase Order, Nephros will be entitled to the
following as an alternative, in its sole discretion, to its rights under Section
3.6 and Section 13.2(a)(7):

     (1)   a 5% reduction in the price of each Cartridge in the shipment if the
           shipment is delivered more than 14 days but less than 21 days late;

     (2)   a 10% reduction in the price of each Cartridge in the shipment if the
           shipment is delivered more than 21 days late.

     3.6   Delivery Default Rights. If more than 28 days have passed since the
           -----------------------
delivery date for any Cartridges and Medica has, for any reason other than an
Event of Force Majeure, failed to deliver those Cartridges, then, in addition to
any other remedies it might have under this agreement or by law, Nephros may
cancel that purchase order or the portion thereof relating to those cartridges,
as applicable, and those Cartridges will constitute Default Cartridges for
purposes of Section 1.3.

     3.7   Invoices and Payment Terms. On delivery by Medica of a shipment of
           --------------------------
Cartridges in accordance with Section 3.3, Medica shall issue to Nephros an
invoice for that shipment stating a price consistent with the terms of this
agreement. Nephros shall pay each such invoice in full within 45 Calendar Days
from the date of invoice, unless Nephros has rejected the shipment in question
in accordance with Section 4.2. If Nephros pays an invoice before Nephros
examines the shipment as provided in Section 4.2 and thereafter determines that
one or more Cartridges do not meet the Specifications, Medica shall reimburse
Nephros, by wire transfer, the purchase price of the nonconforming Cartridges
within 14 Calendar Days of Nephros notifying Medica of that nonconformity.

                                   Article 4
                            QUALITY OF THE CARTRIDGE

     4.1   Conformity with Specifications. Any Cartridges that Medica
           ------------------------------
manufactures under this agreement must (1) conform to the specifications in
Schedule 4.1 (the "Specifications") and (2) be manufactured, labeled, packaged,
- ------------       --------------
stored, and tested (while in the possession of, stored by, or under the control
of Medica) in accordance with cGMP.

     4.2   Conditions to Rejection. In order to be entitled to reject any
           -----------------------
Cartridge, Nephros must notify Medica of any failure of the Cartridge to meet
the Specifications or otherwise comply with this agreement.

     4.3   Rejection. (a) Nephros may reject any Cartridge that does not meet
           ---------
the Specifications or otherwise comply with this agreement (any such Cartridge,
a "Nonconforming Cartridge"). If Medica accepts that Nephros was entitled to
   -----------------------
reject that Cartridge, Medica shall within 14 Calendar Days after Medica
receives notice under Section 4.2 replace the Nonconforming Cartridge at no
additional cost to Nephros (if Nephros has paid for the

                                        4



Nonconforming Cartridge and Medica has not reimbursed Nephros the purchase
price) or for payment consistent with Section 3.7 (if Nephros has not paid for
the Nonconforming Cartridge or if Medica has reimbursed Nephros the purchase
price).

           (b)   If Medica does not agree that one or more Cartridges constitute
Nonconforming Cartridges, the Joint Review Committee, consisting of Quality
Assurance representatives from both companies, must consider the matter. If
after consideration by the Joint Review Committee the parties are unable to
reach agreement within 45 Calendar Days after the date Medica received notice
from Nephros under Section 4.2, they shall submit the dispute to arbitration in
accordance with Section 14.5.

     4.4   Nonconformity Default Rights. If for any reason other than an Event
           ----------------------------
of Force Majeure Medica (1) fails to replace any Nonconforming Cartridge as
required by Section 4.3 or (2) fails to replace any Nonconforming Cartridge
within 10 Business Days after a dispute regarding whether any rejected quantity
of Cartridge constitutes Nonconforming Cartridge is decided in Nephros's favor,
then, in addition to any other remedies it might have under this agreement or by
law, Nephros may cancel that purchase order or the portion thereof relating to
those cartridges, as applicable, and those Cartridges will constitute Default
Cartridges for purposes of Section 1.3.

     4.5   Acceptance of Cartridges. If Nephros does not notify Medica that one
           ------------------------
or more Cartridges do not meet the Specifications or otherwise fail to comply
with this agreement, those Cartridges will be deemed to have been accepted by
Nephros as being fully compliant with the Specifications and this agreement.

                                   Article 5
                               PRODUCTION PROCESS

     5.1   Joint Review Committee. The parties shall establish and hold meetings
           ----------------------
of a Joint Review Committee annually.

     5.2   Material Review Board (MRB): Activities and trending resulting from
           ---------------------------
materials, components and/or finished product manufactured for or under the
auspices of Nephros shall be reported to Nephros Quality Assurance on a monthly
basis. If such product and/or materials are involved in an external complaint or
vigilance report this shall be reported to Nephros in a timely manner.

     5.3   Yields: Medica product yields for Nephros Products shall be reported
           ------
to Nephros Quality Assurance and R&D on a quarterly basis.

     5.4   Process Development. Medica shall use commercially reasonable efforts
           -------------------
to develop technical know-how that would permit them to manufacture the
Cartridge less expensively and shall no less than semiannually furnish the Joint
Review Committee with a detailed report as to their progress in this area.
Nephros and Medica shall at the time of each report determine jointly the
actions to be taken with respect to these findings.

                                        5



     5.5   Fiber. (a) In manufacturing Cartridges, Medica shall use fiber
           -----
supplied by Membrana Gmbh, a German company ("Membrana"), or other fiber
                                              --------
suppliers as specified by Nephros.

           (b)   It is a condition of Medica's ability to timely deliver the
Cartridges ordered in any purchase order that Nephros Europe causes Membrana, or
another fiber supplier as specified by Nephros, to deliver to Medica, at
Nephros' cost and no later than 60 days prior to the delivery date specified in
the purchase order, a sufficient quantity of fiber conforming to the
Specifications to permit Medica to manufacture those Cartridges.

           (c)   Medica shall store any fiber supplied by Membrana in accordance
with guidelines supplied to Medica by Nephros or Membrana.

           (d)   If with respect to the Cartridges ordered in any given Year the
fiber wastage (including without limitation as a result of use of fiber in
Nonconforming Cartridges) exceeds 5%, then promptly after the end of that Year
Medica shall reimburse Nephros half of the cost to Nephros (including any
freight, insurance, and sales taxes and other duties, fees, and expenses) of the
quantity of fiber represented by that excess wastage.

     5.6   Equipment Supplied by Nephros. Nephros shall supply to Medica, for
           -----------------------------
use by Medica in performing its obligations under this agreement, the equipment
listed in Schedule 5.6. Nephros will retain title to that equipment and any
          ------------
other equipment that it supplies to Medica in the future for use by Medica in
performing its obligations under this agreement.

     5.7   Inventory of Raw Materials and Spare Parts. Medica shall at all times
           ------------------------------------------
manage their inventories of raw materials so as to enable Medica to meet
Nephros's demand as specified in the Rolling Forecasts. Medica shall also
maintain, consistent with the manufacturer's recommendations, an inventory of
spare parts of all equipment they use to manufacture the Cartridge.

     5.8   Sample Storage. Medica shall store no less than two Nephros product
           --------------
samples from each sterilization lot for the purpose of potential clinical or
regulatory investigations. Samples are to be stored in a controlled
(warehouse-condition-equivalent) environment for at least one (l) year beyond
their labeled expiration date.

                                   Article 6
                                 QUALITY SYSTEM

     6.1   General Quality Statement: Nephros product shall be manufactured,
           -------------------------
assembled and tested in compliance with Medica's internal quality system,
Nephros supplied specifications and documentation, and to relevant ISO, EN and
FDA standards, guidelines, and regulations.

     6.2   Quality System Changes: Any changes to the status of the Medica
           ----------------------
Quality System shall be reported to Nephros Quality Assurance and Executive
Management within 72 hours. Status changes may include, but not be limited to
the following:

           a)    ISO Certifications or CE Marking status changes

                                        6



           b)    Process or material failures, including significant vendor
                 related failures or relevant vendor terminations due to quality
                 related issues

           c)    Direct manufacturing process or materials changes

           d)    Specification changes for supplemental manufacturing processes,
                 equipment, or materials

     6.3   Vendor Quality: The quality ratings of vendors that supply materials
           --------------
used in the manufacture/assembly and/or testing of Nephros product shall be
reported to Nephros quality in a manner consistent with the Medica quality
system. Any corrective actions, regulatory holds, suspensions, or terminations
of vendors related to Nephros product shall be reported to Nephros Quality
Assurance in a timely manner.

     6.4   Vigilance System. Medica shall handle any and all international
           ----------------
product complaints and vigilance reporting that results from the use of Nephros
product. A monthly trending report shall be issued to Nephros Quality Assurance
detailing the aforementioned complaints and vigilance incidents and corrective
action activities. The following statements outline the responsibilities for the
handling and reporting of complaints and vigilance reportable incidents:

           a)    All vigilance reports shall be communicated to Nephros Quality
                 Assurance within 24 to 48 hours of evaluation and confirmation.

           b)    All individual complaints shall be communicated to Nephros for
                 evaluation and confirmation.

           c)    Complaints shall be evaluated for confirmation both by Medica
                 upon receipt and by Nephros following communication from
                 Medica.

           d)    Complaint investigations shall be a shared process between
                 Medica (QA, Manufacturing, and Engineering) and Nephros (QA and
                 R&D).

           e)    All investigation reports shall be issued jointly and in a
                 timely manner to satisfy the requirements for vigilance
                 reporting (when necessary).

           f)    Medica will serve as the Authorized Representative for
                 Complaint and Vigilance handling and reporting for Nephros

                 a.   The Medica name shall appear in small print on the Nephros
                      product label as contact information regarding complaint
                      and vigilance reporting.

           g)    When a complaint is determined to be a vigilance reportable
                 event then Medica shall be responsible for administering and
                 reporting Nephros product related vigilance incidents to the
                 necessary competent authorities within 10 days or as outlined
                 in the Medica Quality System.

                                        7



           h)    Any vigilance reportable complaint shall be forwarded to Medica
                 for reporting to the appropriate Competent Authority.

           i)    Medica shall copy Nephros Quality Assurance within 24-48 hours
                 on all and any vigilance reporting, including health outcome,
                 relationship between the incidents, and timeliness of reporting
                 the vigilance incident to the Competent Authorities.

                                   Article 7
                           OTHER OBLIGATIONS OF MEDICA

     7.1   Debarment Certification. Medica may not knowingly, after due inquiry,
           -----------------------
employ, contract with, or retain any Person directly or indirectly in connection
with its manufacture of Cartridges if that Person has been debarred by the FDA
under 21 U.S.C. 335a(k) (Section 306, Federal Food, Drug and Cosmetic Act). On
written request from Nephros, Medica shall within 10 Business Days provide
Nephros written confirmation that they have complied with the foregoing
obligation.

     7.2   Permits and Certifications. Medica currently has all Permits and
           --------------------------
Certifications necessary to enable it to perform all its obligations under this
agreement. At all times during the term of this agreement Medica shall maintain
those Permits and secure any additional Permits that become necessary.

     7.3   Manufacturing Problems. Medica shall promptly notify Nephros if it
           ----------------------
experiences any significant problems in manufacturing Cartridges, shall use
commercially reasonable efforts to resolve those problems, and shall keep
Nephros informed of the status of those efforts.

     7.4   Insurance. (a) Medica shall at its cost obtain and maintain one or
           ---------
more insurance policies providing coverage of at least Euro 5,000,000 in the
aggregate that cover Medica for fire, theft, fidelity, product liability, and
any and all potential claims, suits, losses, expenses, or damages arising out of
Medica's obligations under this agreement. At Nephros's request to Medica from
time to time, Medica shall furnish Nephros with certification of insurance
evidencing that insurance and shall provide at least 30 Business Days prior
written notice to Nephros of any cancellation of or decrease in the dollar
amount of coverage provided by any such policy.

           (b)   Nephros shall at its cost obtain and maintain product-liability
insurance coverage in the amount of $5,000,000 in relation to the Cartridge. At
the request of Medica from time to time, Nephros shall furnish Medica with
certification of insurance evidencing that insurance and shall provide at least
30 Business Days prior written notice to Medica of any cancellation of or
decrease in the amount of coverage provided by any such policy.

                                   Article 8
                              INSPECTIONS; RECORDS

     8.1   Notification of Inquiries and Inspections. Medica shall notify
           -----------------------------------------
Nephros within seven Business Days of any written or oral inquiries,
notifications, or inspection activity by any Governmental Authority in regard to
Medica's manufacture of Cartridges. Medica shall permit

                                        8



up to two individuals selected by Nephros to attend any such inspections and
shall provide Nephros with an accurate and reasonably complete description of
any such inquiries, notifications, or inspections. Medica shall also furnish to
Nephros (1) within three Business Days after receipt any report or
correspondence issued by any Governmental Authority in connection with any such
inquiries, notifications, or inspections, and (2) not later than ten Business
Days prior to the time Medica proposes to send it, a copy of any proposed
response or explanation relating to any such inquiries, notifications, or
inspections or any report or correspondence issued by any Governmental Authority
in connection therewith (each, a "Proposed Response"), in each case redacted of
                                  -----------------
trade secrets or other confidential or proprietary information of Medica that
are unrelated to Medica's obligations under this agreement or are unrelated to
manufacture of Cartridges. Medica shall discuss with Nephros any Proposed
Response and shall incorporate in that Proposed Response any reasonable comments
provided by Nephros with respect to that Proposed Response. After filing a
response with any Governmental Authority, Medica shall within 5 Business Days
notify Nephros of any further contacts with that Governmental Authority with
respect to that response.

     8.2   Access to Medica Facilities and Records. Medica shall at Nephros's
           ---------------------------------------
request give Nephros and any designee of Nephros reasonable access to Medica's
facilities, procedures, and books and records, including Medica's protocols,
standard operating procedures (SOPs), equipment specifications, and
manufacturing records, for purposes of (1) observing manufacturing operations
and (2) auditing and inspecting Medica's facilities for compliance with
applicable Laws and the terms of this agreement. Nephros acknowledges that it
and its designee may be permitted only to review, rather than obtain copies of,
certain proprietary documents of Medica; Medica shall at Nephros's request
provide Nephros with a copy of any other document that Nephros requests.

     8.3   Records. Medica shall maintain all records necessary to evidence
           -------
compliance with all applicable Laws and other requirements of applicable
Governmental Authorities relating to the manufacture of the Cartridge. Medica
shall also maintain records with respect to its costs, obligations, and
performance under this agreement. All such records shall be maintained for a
period of not less than two years from the date of expiration of each Cartridge
batch to which those records pertain, or such longer period as may be required
by Law or cGMPs.

                                   Article 9
                                CARTRIDGE RECALLS

     9.1   Cartridge Recalls. If any Governmental Authority withdraws its
           -----------------
approval to sell the Cartridge in any country or issues a directive or request
that some or all Cartridges be recalled for safety reasons relating to the
Cartridge or Nephros reasonably determines that some or all Cartridges should be
recalled, and if that recall is due to any reason other than Medica having
manufactured Cartridge that fails to conform to the Specifications or that was
not manufactured in accordance with any applicable Laws, Nephros shall pay all
costs, including Medica's reasonable out-of-pocket expenses, associated with
that recall.

     9.2   Notice of Events that May Lead to Cartridge Recall. Medica, on the
           --------------------------------------------------
one hand, and Nephros, on the other hand, shall keep each other fully and
promptly informed of any notification, event, or other information, whether
received directly or indirectly, that might affect

                                        9



the marketability, safety or effectiveness of the Cartridge or might result in a
recall of any Cartridges by any Governmental Authority.

     9.3   Recall Due to Breach By Medica. If there occurs any Cartridge recall
           ------------------------------
that is due to Medica having manufactured one or more Cartridges that fail to
conform to the Specifications or that were not manufactured in accordance with
any applicable Laws, Medica will be responsible for the costs of that recall,
Medica shall promptly, at the election of Nephros, compensate Nephros for the
Cartridge so recalled by either replacing without charge Cartridges recalled or
refunding Nephros the price paid by Nephros to Medica for the Cartridges
recalled, plus freight, insurance, sales taxes, and other duties, fees, and
expenses paid by Nephros.

     9.4   Definition of Recall. For purposes of this Article 8, "recall" means
           --------------------
any action by Nephros or any of its Affiliates, or either Medica or any of its
Affiliates, to recover title or possession or halt distribution or use of any
Cartridges sold or shipped to any other Persons. The term "recall" also applies
                                                           ------
to Cartridge that would have been subject to recall if it had been sold or
shipped.

                                   Article 10
                PUBLICITY; CONFIDENTIALITY; INTELLECTUAL PROPERTY

     10.1  Publicity. (a) Except as required by Law or the standards of any
           ---------
securities or regulatory authority, including without limitation the National
Association of Securities Dealers, Medica and Nephros may not make any official
press release, announcement, or other formal publicity relating to the
transactions that are the subject of this agreement without first obtaining in
each case the prior written consent of Nephros and Medica, respectively (which
consent may not be unreasonably withheld). If any party is required to file this
agreement with the Securities and Exchange Commission or another applicable
securities regulatory authority, that party must seek confidential treatment for
any provisions of this agreement that either party believes would disclose trade
secrets, confidential commercial, or financial information and thereby impair
the value of the contractual rights represented by this agreement or provide
detailed commercial and financial information to competitors or other Persons.
Except as required by Law or the standards of any securities regulatory
authority, Medica and Nephros may not use the name Nephros and Medica,
respectively, or any director, officer or employee thereof or any adaptation
thereof without the prior written approval of Nephros and Medica, respectively.

           (b)   Medica shall send to Nephros for its approval at least 30
Business Days before it is filed or submitted any publication, abstract, or
patent application resulting from this agreement. The authorship on any
publication or abstract will be determined by agreement of the parties or as
deemed scientifically appropriate. Any publication resulting from this agreement
will be delayed or prohibited if, in Nephros' reasonable opinion, delay or
prohibition is required in order to file or procure patent application or rights
protection in respect of any invention or discovery arising from this agreement.
Publication by Medica of any information relating to the Cartridge is subject to
the provisions of Section 10.2.

     10.2  Confidentiality. (a) It is contemplated that Medica may from time to
           ---------------
time disclose Confidential Information to Nephros, or vice versa. Medica shall
take all reasonable steps to prevent disclosure of Nephros

                                       10



Confidential Information and not to use any Nephros Confidential Information,
and Nephros shall take all reasonable steps to prevent disclosure of Medica
Confidential Information and not to use any Medica Confidential Information, in
either case except for the limited purposes set forth in this agreement.

           (b)   A party receiving Confidential Information may disclose it to
those of its Representatives who need to review that Confidential Information in
connection with that party's performance of its obligations and evaluation of
its rights under this agreement. Any party who so discloses any Confidential
Information pursuant to this Section 10.2(b) shall (1) inform those Persons of
the confidential nature of that Confidential Information, and (2) direct those
Persons to keep that Confidential Information confidential.

           (c)   The provisions of this Section 10.2 will survive termination or
expiration of this agreement and will continue for a period of 5 years from the
date of that termination or expiration.

     10.3  Pre-existing and Independently Developed Intellectual Property.
           --------------------------------------------------------------
Nothing in this agreement affects the ownership by any party of any Intellectual
Property owned or in the possession of that party on the date of this agreement
or Intellectual Property developed independently of this agreement or without
reference to any of the Confidential Information or Intellectual Property of
Medica (in the case of Nephros) or Nephros (in the case of Medica).

     10.4  Ownership. (a) Except as specified elsewhere in Section 10.4, all
           ---------
rights in patents, inventions, processes, discoveries, and other research
materials and any other novel or valuable information reflected in any medium
that arise or are created during the course of this agreement are the property
of the creating party.

           (b)   Intellectual Property, whether or not patentable, that arises
in connection with this agreement and is made solely by an employee or agent of
Nephros and without reference to any Confidential Information or Intellectual
Property disclosed by Medica will be owned by Nephros (that Intellectual
Property, "Nephros Inventions").
           ------------------

           (c)   Intellectual Property, whether or not patentable, that arises
in connection with this agreement and is made solely by an employee or agent of
a party with reference to Confidential Information or Intellectual Property of
Medica (in the case of Nephros) or Nephros (in the case of Medica) or is made
jointly by employees or agents of Nephros and Medica will be jointly owned (that
Intellectual Property, "Joint Inventions").
                        ----------------

           (d)   Intellectual Property, whether or not patentable, that arises
under this agreement and is made solely by an employee or agent of Medica and
without reference to any Confidential Information or Intellectual Property
disclosed by Nephros will be owned by Medica (that Intellectual Property,
"Medica Inventions").
 -----------------

           (e)   Inventorship will be determined according to applicable patent
law.

           (f)   Medica and Nephros shall promptly disclose to each other in
writing each invention and discovery conceived or reduced to practice in
connection with this agreement.

                                       11



           (g)   Intellectual Property arising in connection with this agreement
and in the possession of a party other than the party that owns that
Intellectual Property will be treated as having been disclosed to that party by
the party that owns that Intellectual Property and will constitute Confidential
Information of the party that owns that Intellectual Property.

           (h)   Neither joint owner of any Joint Invention may sublicense that
Joint Invention without the written consent of the other joint owner, which no
joint owner may unreasonably withhold or delay.

     10.5  Limited License. Medica and Nephros each grants the other a limited,
           ---------------
non-exclusive, royalty-free license to its Intellectual Property (whether
pre-existing or arising in connection with this agreement) to the extent
necessary to permit it to carry out its obligations under this agreement. Any
such license will expire upon termination of this agreement and will not be
transferable or sublicensable.

     10.6  Maintenance of Patents. (a) Nephros shall file, prosecute and
           ----------------------
maintain patent applications and resulting patents, if any, on Nephros
Inventions and on any Joint Inventions insofar as they do not relate to
manufacture of the Cartridge.

           (b)   Medica shall file, prosecute and maintain patent applications
and resulting patents, if any, on Medica Inventions or on any Joint Inventions
relating to manufacture of the Cartridge.

           (c)   Medica, on the one hand, and Nephros, on the other hand, shall
share equally reasonable patent expenses for any Joint Invention, and shall
promptly reimburse the filing party upon presentation of an invoice by the
filing party.

           (d)   The non-filing party is entitled to review and comment in a
timely manner on any such patent filings (applications and response to office
actions) prior to submission to the relevant patent offices. Each party is
responsible for filing, prosecuting, and maintaining patent applications and
resulting patents on any invention owned solely by it.

     10.7  Reservation of All Other Rights. Except as expressly set forth in
           -------------------------------
this agreement, nothing contained herein may be construed as doing the
following:

     (1)   giving Medica any rights to any Intellectual Property of Nephros or
           any other proprietary technology of Nephros (whether pre-existing
           Intellectual Property or Intellectual Property arising in connection
           with this agreement), including without limitation any of Nephros'
           patent rights relating to the design, development, testing, use, and
           sale of the Cartridge; or

     (2)   giving Nephros any rights to any Intellectual Property of Medica or
           any other proprietary technology of Medica (whether pre-existing
           Intellectual Property or Intellectual Property arising in connection
           with this agreement).

                                       12



                                   Article 11
                                 REPRESENTATIONS

     11.1  Representations of Medica.  Medica represents to Nephros as follows:
           -------------------------

           (a)   Medica is a corporation validly existing under the laws of its
jurisdiction of organization with the power to own all of its properties and
assets and to carry on its business as it is currently being conducted.

           (b)   Medica has the power to execute and deliver this agreement and
to perform its obligations under this agreement.

           (c)   Medica's Chief Executive Officer, or Amministratore Unico (AU),
has duly authorized Medica to execute and deliver this agreement and perform its
obligations under this agreement, and no other corporate proceedings of Medica
are necessary with respect thereto.

           (d)   This agreement constitutes its valid and binding obligation,
enforceable in accordance with its terms, except as enforceability is limited by
(A) any applicable bankruptcy, insolvency, reorganization, moratorium or similar
law affecting creditors' rights generally, or (B) general principles of equity,
whether considered in a proceeding in equity or at law.

           (e)   Medica is not required to obtain the Consent of any Person,
including the Consent of any party to any Contract to which it is a party, in
connection with execution and delivery of this agreement and performance of its
obligations under this agreement.

           (f)   Medica is the rightful owner or licensee of any Intellectual
Property that it may use in performing its obligations under this agreement.

           (g)   Medica's execution and delivery of this agreement and
performance of its obligations under this agreement do not (A) violate any
provision of its articles of incorporation or by-laws, as applicable, as
currently in effect, (B) conflict with, result in a breach of, constitute a
default under (or an event which, with notice or lapse of time or both, would
constitute a default under), accelerate the performance required by, result in
the creation of any Lien upon any of its properties or assets under, or create
in any party the right to accelerate, terminate, modify, or cancel, or require
any notice under, any Contract to which it is a party or by which any of its
properties or assets are bound, or (C) violate any Law or Order currently in
effect to which it is subject.

     11.2  Representations of Nephros.  Nephros represents to Medica as follows:
           --------------------------

           (a)   Nephros is a corporation validly existing and in good standing
under the law of the State of Delaware with the power to own all of its
properties and assets and to carry on its business as it is currently being
conducted.

           (b)   Nephros has the power to execute and deliver this agreement and
to perform its obligations under this agreement.

                                       13



           (c) Nephros' board of directors has duly authorized Nephros to
execute and deliver this agreement and perform its obligations under this
agreement, and no other corporate proceedings of Nephros are necessary with
respect thereto.

           (d) This agreement constitutes the valid and binding obligation of
Nephros, enforceable in accordance with its terms, except as enforceability is
limited by (A) any applicable bankruptcy, insolvency, reorganization, moratorium
or similar law affecting creditors' rights generally, or (B) general principles
of equity, whether considered in a proceeding in equity or at law.

           (e) Nephros' execution and delivery of this agreement and performance
of its obligations under this agreement do not (A) violate any provision of
Nephros' articles of incorporation or by-laws as currently in effect, or (B)
violate any Law or Order currently in effect to which Nephros is subject.

                                   Article 12
                                 INDEMNIFICATION

     12.1  Indemnification.  (a)  Medica shall indemnify Nephros, each Affiliate
           ---------------
of Nephros, each Representative of Nephros, and the heirs, executors,
successors, and assigns of any of the foregoing, against the following
Indemnifiable Losses:

     (1)   Indemnifiable Losses arising out of breach by Medica of any of its
           obligations under this agreement;

     (2)   Indemnifiable Losses arising out of any inaccuracy in any
           representations of Medica contained in this agreement;

     (3)   Indemnifiable Losses arising out of any claim that any Intellectual
           Property of Medica employed by Medica under this agreement conflicts
           with the Intellectual Property Rights of any other Person; and

     (4)   Indemnifiable Losses arising out of any Cartridges that have been
           manufactured by Medica under this agreement, on condition that those
           Indemnifiable Losses are due to breach by Medica of any of its
           obligations under this agreement or the negligence or willful
           misconduct of Medica or any of its agents or Representatives.

           (b)   Nephros shall indemnify each Medica Entity, each Affiliate of
each Medica Entity, each Representative of each Medica Entity, and the heirs,
executors, successors, and assigns of any of the foregoing, against the
following Indemnifiable Losses:

     (1)   Indemnifiable Losses arising out of breach by Nephros of any of its
           obligations under this agreement;

     (2)   Indemnifiable Losses arising out of any inaccuracy in any
           representations of Nephros contained in this agreement;

                                       14



     (3)   Indemnifiable Losses arising out of any claim that any Intellectual
           Property of Nephros required to manufacture the Cartridge conflicts
           with the Intellectual Property Rights of any other Person; and

     (4)   Indemnifiable Losses arising out of any Cartridges that have been
           manufactured by Medica under this agreement, unless those
           Indemnifiable Losses are due to breach by Medica of any of its
           obligations under this agreement or the negligence or willful
           misconduct of Medica or its agents or Representatives.

     12.2  Procedures Relating to Indemnification.  (a) In order to be entitled
           --------------------------------------
to indemnification under this Article 11 in connection with a claim made by any
Person against any other Person with respect to which that other Person (an
"Indemnified Party") is entitled to indemnification pursuant to this Article 11
 -----------------
(any such claim, a "Third Party Claim"), that Indemnified Party must do the
                    -----------------
following:

     (1)   notify the Person or Persons obligated to indemnify it (the
           "Indemnifying Party") in writing, and in reasonable detail, of that
            ------------------
           Third Party Claim as soon as possible but in any event within 10
           Business Days after receipt of notice of that Third Party Claim,
           except that any failure to give any such notification will only
           affect the Indemnifying Party's obligation to indemnify the
           Indemnified Party if the Indemnifying Party has been prejudiced as a
           result of that failure; and

     (2)   deliver to the Indemnifying Party as soon as possible but in any
           event within 10 Business Days after the Indemnified Party receives a
           copy of all notices and documents (including court papers) delivered
           to that Indemnified Party relating to that Third Party Claim.

           (b)   In the event of a Third Party Claim against one or more
Indemnified Parties, the Indemnifying Party may participate in the defense of
that Third Party Claim and, if it so chooses, assume at its expense the defense
of that Third Party Claim with counsel selected by the Indemnifying Party and
reasonably satisfactory to the Indemnified Party. If the Indemnifying Party so
elects to assume the defense of a Third Party Claim, the Indemnifying Party will
not be liable to the Indemnified Party for any legal expenses subsequently
incurred by the Indemnified Party in connection with the defense of that Third
Party Claim, except that if, under applicable standards of professional conduct,
there exists a conflict on any significant issue between the Indemnified Party
and the Indemnifying Party in connection with that Third Party Claim, the
Indemnifying Party shall pay the reasonable fees and expenses of one additional
counsel to act with respect to that issue to the extent necessary to resolve
that conflict. If the Indemnifying Party assumes defense of any Third Party
Claim, the Indemnified Party will be entitled to participate in the defense of
that Third Party Claim and to employ counsel, at its own expense, separate from
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party will be entitled to control that defense. The Indemnifying
Party will be liable for the fees and expenses of counsel employed by the
Indemnified Party for any period during which the Indemnifying Party did not
assume the defense of any Third Party Claim (other than during any period in
which the Indemnified Party failed to give notice of the Third Party Claim as
provided above and a reasonable period after such notice). If the Indemnifying
Party chooses to defend or prosecute a Third Party Claim, all the parties shall
cooperate in the defense

                                       15



or prosecution of that Third Party Claim, including by retaining and providing
to the Indemnifying Party records and information reasonably relevant to that
Third Party Claim, and making employees available on a reasonably convenient
basis. If the Indemnifying Party chooses to defend or prosecute any Third Party
Claim, the Indemnified Party will agree to any settlement, compromise or
discharge of that Third Party Claim that the Indemnifying Party recommends,
except that the Indemnifying Party may not without the Indemnified Party's prior
written consent agree to entry of any judgment or enter into any settlement that
provides for injunctive or other non-monetary relief affecting the Indemnified
Party or that does not include as an unconditional term that each claimant or
plaintiff give to the Indemnified Party a release from all liability with
respect to that Third Party Claim. Whether or not the Indemnifying Party has
assumed the defense of a Third Party Claim, the Indemnified Party shall not
admit any liability with respect to, or settle, compromise or discharge, that
Third Party Claim without the Indemnifying Party's prior written consent.

           (c)   In order for any Indemnified Party to be entitled to any
indemnification under this agreement in respect of a claim that does not involve
a Third Party Claim (a "Claim"), the Indemnified Party must reasonably promptly
                        -----
notify the Indemnifying Party of that Claim, and describe in reasonable detail
the basis for that Claim, except that any failure to give any such notification
will only affect the Indemnifying Party's obligation to indemnify the
Indemnified Party if the Indemnifying Party has been prejudiced as a result of
that failure. If the Indemnifying Party does not dispute that the Indemnified
Party is entitled to indemnification with respect to that Claim by notice to the
Indemnified Party prior to the expiration of a 30-Business-Day period following
receipt by the Indemnifying Party of notice of that Claim from the Indemnified
Party, that Claim will be conclusively deemed a liability of the Indemnifying
Party and the Indemnifying Party shall pay the amount of that liability to the
Indemnified Party on demand or, in the case of any notice in which the amount of
the Claim (or any portion thereof) is estimated, on such later date as the
amount of the Claim (or any portion thereof) becomes finally determined. If the
Indemnifying Party has timely disputed its liability with respect to the Claim,
the Indemnifying Party and the Indemnified Party shall proceed in good faith to
negotiate a resolution of the Claim and, if the Claim is not resolved through
negotiations within 60 Business Days following receipt by the Indemnifying Party
of notice of that Claim from the Indemnified Party, the Indemnified Party may
take the dispute to arbitration pursuant to Section 14.5.

     12.3  No Liability for Consequential Damages.  No party will be liable to
           --------------------------------------
any other for any indirect, consequential, or special damages or for loss of
profits. This limitation does not, however, apply to any obligation of either
party to indemnify the other in connection with any Third Party Claim. This
Section 12.3 does not apply to any liability of a party in respect of death or
personal injury arising out of the negligence or willful misconduct of that
party or its agents or Representatives.

     12.4  Limitation on Indemnification. (a) Each party's exclusive remedy with
           -----------------------------
respect to any Claims will be under the indemnification provisions of this
Article 12.

           (a)   The liability of Medica, on the one hand, and Nephros, on the
other hand, under this Article 12 will not exceed the purchase value of any
quantities of the Cartridge that are the subject of any Claim or Third Party
Claim.

                                       16



                                   Article 13
                              TERM AND TERMINATION

     13.1  Term. The term of this agreement is three years from and including
           ----
the date of this agreement, with automatic renewal for additional successive
one-year terms unless no later than 90 days prior to the end of the initial term
or any one-year renewal term either party notifies the other that it wishes to
terminate this Agreement effective the end of the initial term or that one-year
renewal term, as applicable.

     13.2  Termination.  (a)  This agreement may be terminated as follows:
           -----------

     (1)   by Nephros upon 10 Business Days' written notice to Medica if any
           representation made in this agreement by Medica was materially
           inaccurate when made and either (1) that inaccuracy has contributed
           to Nephros's incurring Indemnifiable Losses or (2) Medica fails to
           take action to render the inaccurate representation accurate as if it
           were made on the day Nephros would otherwise be entitled to terminate
           this agreement under this Section 13.2(a)(l);

     (2)   by Medica upon 10 Business Days' written notice to Nephros if any
           representation made in this agreement by Nephros was materially
           inaccurate when made and either (1) that inaccuracy has contributed
           to either or both Medica Entities' incurring Indemnifiable Losses or
           (2) Nephros fails to take action to render the inaccurate
           representation accurate as if it were made on the day Medica would
           otherwise be entitled to terminate this agreement pursuant to this
           Section 13.2(a)(2);

     (3)   by Nephros immediately if Medica has breached any of its material
           obligations under this agreement and, if it is curable, has not cured
           that breach prior to expiration of a 45-Business-Day period from the
           date of breach;

     (4)   by Medica immediately if Nephros has breached any of its material
           obligations under this agreement and, if it is curable, has not cured
           that breach prior to expiration of a 45-Business-Day period from the
           date of breach;

     (5)   by Nephros immediately if there occurs an Event of Insolvency with
           respect to Medica;

     (6)   by Medica immediately if there occurs an Event of Insolvency with
           respect to Nephros;

     (7)   by Nephros, if for any reason other than an Event of Force Majeure
           Medica fails to deliver within 40 days after the required delivery
           date, or on more than two occasions in any 90-day period fails to
           deliver within 20 Business Days after the required delivery day, any
           shipment of Cartridge it is required to deliver pursuant to Section
           3.2, Section 4.2, or Section 9.3;

     (8)   by Medica or Nephros on 15 Business Days' prior written notice to
           Nephros or Medica, respectively, if due to an Event of Force Majeure
           (A) Nephros or

                                       17



           (B) Medica or both of them, respectively, is prevented from
           performing an obligation under this agreement for more than 60 days,
           unless prior to the end of the 15-Business-Day period the Event of
           Force Majeure ceases to exist and the party prevented from performing
           resumes performance under this agreement and notifies the party
           giving the notice of termination;

           (b)   The parties may terminate this agreement at any time by written
agreement.

     13.3  Effect of Termination.  (a) Expiration of the term of this agreement
           ---------------------
and termination under 13.2 will have one or more of the following consequences
according to the table set out below:

A.   Nephros shall pay to Medica, and Medica shall pay to Nephros, all amounts
     payable up to the date of termination but not yet paid.

B.   Nephros shall purchase and Medica shall manufacture and deliver to Nephros
     consistent with the terms of this agreement all Cartridges ordered by
     Nephros but not yet delivered to Nephros.

C.   Nephros shall pay Medica an amount equal to the purchase price of any
     Cartridges manufactured in connection with purchase orders that remain open
     on the date of termination of this agreement and Medica shall deliver to
     Nephros pursuant to Section 3.2 those Cartridges.

     ---------------------------------------------------------------------------
      Grounds for Termination      Consequences
     ---------------------------------------------------------------------------
      Expiration under 13.1        A
     ---------------------------------------------------------------------------
      13.2(a)(1)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(2)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(3)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(4)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(5)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(6)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(7)                   A and, at Nephros' option, either B or C
     ---------------------------------------------------------------------------
      13.2(a)(8)                   AB
     ---------------------------------------------------------------------------
      13.2(b)                      A
     ---------------------------------------------------------------------------

           (b)   Upon any termination (including expiration) of this agreement,
each party shall return to the other party all documents and other tangible
items it or its employees or agents have received or created pursuant to this
agreement pertaining, referring, or relating to Confidential Information of the
other party.

                                       18



          (c)  Termination of this agreement will not affect rights and
obligations of either party that may have accrued prior to the date of
termination or any obligation contained in Sections 10.1 and 10.2, Article 122,
Article 133, and Sections 14.3, 14.4, and 14.5.

                                   Article 14
                                  MISCELLANEOUS

     14.1 Definitions. When used in this agreement, the following terms have the
          -----------
following meanings:

     "Affiliate" means, with respect to any given Person, any other Person at
      ---------
the time directly or indirectly controlling, controlled by or under common
control with that Person, or (2) any director, officer or employee of that
Person. For purposes of this Agreement, "control" means the possession, directly
                                         -------
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through ownership of voting securities, by
contract or otherwise.

     "Business Day" means any Monday, Tuesday, Wednesday, Thursday, or Friday
      ------------
that is not a day on which banking institutions in the State of New York are
authorized by law, regulation or executive order to close.

     "cGMPs" means current Good Manufacturing Practices (as provided for,
      -----
respectively, in the Rules Governing Medicinal Products in the European
Community Volume 4 (Guide to Good Manufacturing Practice for Medicinal Products)
and by the FDA as set out in 21 C.F.R. 210 and 21 C.F.R. 211, as amended from
time to time).

     "Confidential Information" means all data, specifications, training, and
      ------------------------
any other know-how related to the design, development, manufacture, or
performance of the Cartridge, as well as all other information and data provided
by either party to the other party pursuant to this agreement in written or
other tangible medium and marked as confidential, or if disclosed orally or
displayed, confirmed in writing within 30 Business Days after disclosure and
marked as confidential, except that the term "Confidential Information" does not
include the following:

     (1)  information that is or becomes generally available to the public other
          than as a result of a breach of this agreement by the receiving party
          or its Representatives;

     (2)  information that was within the receiving party's possession or
          knowledge prior to its being furnished to the receiving party by or on
          behalf of the disclosing party, on condition that the source of that
          information was not bound by a confidentiality agreement with or other
          contractual, legal or fiduciary obligation of confidentiality to the
          disclosing party or any other Person with respect to that information;

     (3)  information that is or becomes available to the receiving party on a
          non-confidential basis from a source other than the disclosing party
          or any of its Representatives, on condition that that source was not
          bound by a confidentiality agreement with or other contractual, legal
          or fiduciary obligation of

                                       19



          confidentiality to the disclosing party or any other Person with
          respect to that information; or

     (4)  information that is independently developed by the receiving party
          without use of Confidential Information and otherwise in a manner not
          inconsistent with this letter agreement.

     "Consent" means any approval, consent, ratification, filing, declaration,
      -------
registration, waiver, or other authorization.

     "Contract" means any oral or written agreement, contract, obligation,
      --------
promise, arrangement, or undertaking that is legally binding.

     "Event of Insolvency" with respect to any Person means any of the
      -------------------
following:

     (1)  the institution by that Person of proceedings under the United States
          Bankruptcy Code, or any other applicable U.S. federal or state Law or
          any applicable foreign Law seeking an order for relief;

     (2)  the consent of that Person to the institution of bankruptcy or
          insolvency proceedings against that Person;

     (3)  the filing by that Person of a petition seeking reorganization or
          release under the Federal Bankruptcy Reform Act or any other
          applicable U.S. federal or state Law or applicable foreign Law, or the
          consent by that Person to the filing of any such petition or to the
          appointment of a receiver, liquidator, assignee, trustee, sequestrator
          (or other similar official) of that Person or of any substantial part
          of the property of that Person;

     (4)  the making by that Person of an assignment for the benefit of
          creditors;

     (5)  admission by that Person of its inability to pay its debts generally
          as they become due;

     (6)  the entry of a decree or order by a court having jurisdiction
          adjudging that Person bankrupt or insolvent, or approving as properly
          filed a petition seeking reorganization, arrangement, adjustment or
          composition of or in respect of that Person under the U.S. Bankruptcy
          Code or any other applicable U.S. federal or state Law or any
          applicable foreign Law, or appointing a receiver, liquidator,
          assignee, trustee, sequestrator (or other similar official) of that
          Person, or of any substantial part of the property of that Person, or
          ordering the winding up or liquidation of the affairs of that Person,
          and (A) that Person consents to that decree or order or (B) that
          decree or order remains unstayed and in effect for more than 60
          consecutive days.

     "FDA" means the U.S. Food and Drug Administration.
      ---

     "FOB" means "Free on Board," as that term is defined in INCOTERMS 2000.
      ---

                                       20




     "Governmental Authority" means any (1) nation, state, county, city, town,
      ----------------------
village, district, or other jurisdiction of any nature, (2) federal, state,
local, municipal, or other government, whether U.S. of foreign, (3) governmental
or quasi-governmental authority of any nature (including any governmental
agency, branch, department, official, or entity and any court or other tribunal,
including an arbitral tribunal), (4) multi-national organization or body
including the EU and notified bodies, or (5) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police,
regulatory, or taxing power of any nature.

     "Indemnifiable Losses" means all losses, liabilities, taxes, damages,
      --------------------
deficiencies, obligations, fines, expenses, claims, demands, actions, suits,
proceedings, judgments or settlements, whether or not resulting from Third Party
Claims, incurred or suffered by an Indemnified Party, including interest and
penalties with respect thereto and out-of-pocket expenses and reasonable
attorneys' and accountants' and experts' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of the Indemnified Party's rights hereunder, net of any amounts
recovered or recoverable under any insurance policy.

     "Intellectual Property" means, with respect to any Person, all trademarks,
      ---------------------
patents, copyrights, and any applications for registration thereof, and trade
secrets of that Person, whether owned, used, or licensed by that Person as
licensee or licensor.

     "Law" means any federal, state, local, municipal, foreign, international,
      ---
multinational, or other administrative order, constitution, law, ordinance,
principle of common law, regulation, statute, or treaty.

     "Lien" means any charge, claim, community property interest, condition,
      ----
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.

     "Month" means any of the twelve months of a year.
      -----

     "Order" means any award, decision, injunction, judgment, order, ruling,
      -----
subpoena, or verdict of any court, arbitral tribunal, administrative agency, or
other Governmental Authority.

     "Person" means any individual, corporation (including any non-profit
      ------
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, Governmental
Authority or other entity.

     "Representative" means, with respect to a particular Person, any director,
      --------------
officer, employee, agent, consultant, advisor, or other representative of that
Person, including legal counsel, accountants, and financial advisors.

     "Year" means (1) the period commencing with the date of this agreement and
      ----
ending on December 31, 2003, (2) any subsequent 12-month period commencing on
January 1st and ending on December 31st, and (3) the period beginning January
1st of the year in which this agreement expires or is terminated and ending on
the date this agreement expires or is terminated.

                                       21




     14.2  Further Assurances. At any time or from time to time from the date of
           ------------------
this agreement, Medica, on the one hand, and Nephros, on the other hand, shall
at the request, and at the expense, of the other do the following:

     (1)   to the extent consistent with this agreement deliver to the other
           such records, data, or other documents requested by the other; and

     (2)   take or cause to be taken all such other actions as are reasonably
           necessary or desirable in order to permit the other to obtain the
           full benefits of this agreement.

     14.3  Governing Law. This agreement is governed by the laws of the State of
           -------------
New York without giving effect to principles of conflict of laws.

     14.4  Dispute Resolution. The parties shall attempt in good faith to
           ------------------
resolve any controversy or claim that may arise concerning their respective
rights and obligations under this agreement. If they are unable to do so within
30 Business Days from the date that controversy or claim arose, they shall refer
the controversy or claim to the AU of Medica and the CEO of Nephros, who shall
meet in person or telephonically within 20 Business Days of being requested to
do so and shall in good faith attempt to resolve the dispute. If the controversy
or claim cannot then be resolved, the parties hereby agree first to try in good
faith to settle the dispute by mediation administered by the American
Arbitration Association at its New York City offices before resorting to
arbitration.

     14.5  Arbitration. Any controversy or claim arising out of or relating to
           -----------
this agreement or the applicability of this Section 14.5 that is not resolved
pursuant to Section 14.4 will be determined by arbitration in accordance with
the International Arbitration Rules of the American Arbitration Association.
Unless the parties agree otherwise the number of arbitrators will be three, each
of whom will be appointed by the American Arbitration Association. One
arbitrator must be a lawyer, the second must be an expert in financial matters,
and the third must have expertise in the manufacture of hemodialysis products.
The place of arbitration will be New York, New York, U.S.A. The language of the
arbitration will be English. Prior to the commencement of hearings, each of the
arbitrators appointed must provide an oath or undertaking of impartiality.
Judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The cost of any such arbitration will be divided
equally between Nephros, on the one hand, and Medica, on the other hand, with
each party bearing its own attorneys' fees and costs.

     14.6  Force Majeure. (a) No party will be responsible to the other under
           -------------
this agreement for failure or delay in performing any obligations under this
agreement, other than payment obligations, due to factors beyond its control,
including without limitation any war, fire, earthquake, or other natural
catastrophe, or any act of God, but excluding labor disputes involving all or
any part of the work force of that party (each such factor, an "Event of Force
                                                                --------------
Majeure"). Upon the occurrence of an Event of Force Majeure, the party failing
- -------
or delaying performance shall promptly notify the other party in writing,
setting forth the nature of the occurrence, its expected duration, and how that
party's performance is affected. Any party subject to an Event of Force Majeure
shall use commercially reasonable efforts to resume performing its obligations
under this agreement as soon as practicable. Except as provided in

                                       22



Section 14.6(b), if an Event of Force Majeure occurs, the affected party will be
excused from performing and the time for performance will be extended as long as
that party is unable to perform as result of the Event of Force Majeure.

           (b)  If any Event of Force Majeure prevents Medica from delivering
any shipment of Cartridges for more than 30 Business Days beyond the scheduled
delivery date, then Nephros may cancel its order without incurring any liability
to Medica with respect thereto and those Cartridges will constitute Default
Cartridges for purposes of Section 1.3.

     14.7  Assignment. This agreement inures to the benefit of and is binding
           ----------
upon the successors and assignees of the parties. Neither party may assign any
of its rights or obligations under this agreement without the prior written
consent of the other, which the other party may not unreasonably withhold,
except that Nephros may upon giving written notice to Medica assign or transfer
its rights and obligations under this agreement to an Affiliate of Nephros or a
successor to all or substantially all of its assets or business relating to this
agreement, whether by sale, merger, operation of law, or otherwise.

     14.8  Notices. (a) Every notice or other communication required or
           -------
contemplated by this agreement must be in writing and sent by one of the
following methods:

     (1)   personal delivery, in which case delivery will be deemed to occur the
           day of delivery;

     (2)   by a recognized overnight delivery service such as Federal Express or
           DHL Worldwide Express, in which case delivery will be deemed to occur
           the day of delivery.

           (b)  In each case, a notice or other communication sent to a party
must be directed to the address for that party set forth below, or to another
address designated by that party by written notice. All notices to be given by a
Medica Entity may be given on its behalf by the other Medica Entity following
consultation between Medica.

     if to Nephros:
     Nephros, Inc.
     3960 Broadway
     New York, NY 10032
     Attention:    Norman Barta

     with a copy to:
     Kramer Levin Naftalis & Frankel LLP
     919 Third Avenue
     New York, NY 10022-3852
     Attention:    Richard Marlin, Esq.

                                       23



     if to Medica:
     Medica s.r.l.
     Via Degli Artigiani, 6
     41036 Medolla (MO) Italy
     Attention:    Luciano Fecondini

     14.9  Severability. If any provision of this agreement is held
           ------------
unenforceable by any court of competent jurisdiction, all other provisions of
this agreement will remain effective. If any provision of this agreement is held
to be unenforceable only in part or degree, it will remain effective to the
extent not held unenforceable.

     14.10 Entire Agreement. This agreement constitutes the entire agreement of
           ----------------
the parties pertaining to the subject matter of this agreement. It supersedes
all prior agreements of the parties, whether oral or written, pertaining to the
subject matter of this agreement.

     14.11 Amendment. This agreement may not be amended except by an instrument
           ---------
in writing signed on behalf of both parties.

     14.12 Independent Contractor. Nothing in this agreement creates, or will be
           ----------------------
deemed to create, a partnership or the relationship of principal and agent or
employer and employee between the parties. Each party agrees to perform under
this agreement solely as an independent contractor.

     14.13 Counterparts. This agreement may be executed in counterparts, each of
           ------------
which is an original and all of which together constitute one and the same
instrument.

     The undersigned are executing this agreement on the date stated in the
introductory clause.

                                         NEPHROS, INC.


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

                                         MEDICA s.r.l.


                                         By:   /s/ Luciano Fecondini
                                              ----------------------------------
                                               Name: Luciano Fecondini
                                               Title: Amministratore Unico

                                       24



               Manufacturing and Supply Agreement: Nephros/Medica

            Schedule 3.1: Forecast Initiation Date and Price Schedule

Forecast Initiation Date: July 1, 2003

Price Schedule: in EURO (Euro)

                                      * * *

                                       25



                         Exhibit A: Purchase Order Form

                                       26



                       Schedule 4.1: Filter Specifications

The MD 190 filter is to be produced in accordance with Medica procedure M12.301
as per Medica Bill of Material M.07492.

                    Schedule 5.6: Nephros-Supplied Equipment

Equipment Pack A: * * *

Equipment Pack B: * * *

Equipment Pack C: * * *

Equipment Pack D: * * *

                                       27

EX-10.22

                                                                   Exhibit 10.22

                                LICENSE AGREEMENT

                AGREEMENT made as of July 1, 2004 between THE TRUSTEES OF
        COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK ("Licensor"), having an
        office c/o Executive Director, Audubon Research Park, 3960 Broadway, New
        York, New York 10032 and Nephros, Inc. ("Licensee"), having an office at
        3960 Broadway, New York, NY 10032.

                                   WITNESSETH:

                WHEREAS, Licensee desires to acquire a license to use space at
        the Audubon Business and Technology Center in the Mary Woodard Lasker
        Building (the "Building"), located at 3960 Broadway in the City, County
        and State of New York; and

                WHEREAS, Licensor is agreeable to granting to Licensee a license
        to use space in the Building on the terms and conditions hereinafter set
        forth.

                NOW, THEREFORE, the parties agree as follows:

        1.      LICENSE. Licensor does hereby grant to Licensee a
nontransferable license to use certain space (the "Licensed Space") on the 3&4th
floor of the Building as more particularly shown on Exhibit "A" annexed hereto
and made a part hereof.

        2.      TERM. The term of this Agreement (the "Term") shall commence on
the date hereof (the "Commencement Date"), and shall, unless sooner terminated
in accordance with the terms hereof or pursuant to law, continue until 6/30/05
(the "Expiration Date").

        3.      CONDITION OF PREMISES. Licensee acknowledges that it has
inspected the Licensed Space and agrees to take the Licensed Space "as is"
without any work being done therein by Licensor, and without any obligation upon
Licensor to make any contribution toward or to assume the performance of any
work in order to prepare the Licensed Space for use by Licensee. Licensee
acknowledges that all materials, fixtures and equipment, if any, which Licensor
may elect to make available for Licensee's use are, and shall be and remain, the
property of Licensor. Licensee acknowledges that Licensor has not made and does
not make any representations or warranties to Licensee, whether directly or
indirectly, with respect to the Licensed Space or the use or proposed use
thereof by Licensee.

        4.      USE. Licensee shall use the Licensed Space solely as laboratory
and office space. Prior to taking occupancy of the Licensed Space, Licensee
shall submit to Licensor for approval, Licensee's Regulatory Compliance Plan
(the "Plan") which Plan shall (a) identify those activities of and materials to
be used by Licensee which are or may be subject to Environmental Legal
Requirements (as hereinafter defined) or other Legal Requirements (as
hereinafter defined) and (b) detail Licensee's plans and procedures for
compliance with Environmental Legal Requirements, Legal Requirements and
Insurance Requirements (as hereinafter defined) as to each specific regulated
material and activity. From time to time, at any time during the Term, Licensee
shall revise the Plan to reflect any changes in its activities, materials,
Environmental Legal Requirements, Legal Requirements or Insurance Requirements.
The Plan and all such revisions shall be subject to Licensor's prior review and
approval.

        5.      FEE. (a) Licensee agrees to pay to Licensor as and for the use
of the Licensed Space during the Term an annual amount (the "License Fee") as
set forth on Exhibit "B" annexed hereto and made a part hereof. The License Fee
shall be paid in monthly installments as set forth on Exhibit B, in advance, on
the first day of each and every month during the Term, without offset or
deduction except that the first monthly installment shall be paid upon execution
hereof. If the Commencement Date shall occur on a day other than the first day
of a calendar month or if the Expiration Date shall occur on a day other than
the last day of a calendar month, the License Fee for such calendar month shall
be appropriately prorated.

                     (b) All other sums of money as shall become due and payable
by Licensee to Licensor hereunder (collectively, "License Consideration") shall
be paid to Licensor within ten (10) days after receipt by Licensee of bills or
notice from Licensor to Licensee identifying the same. If Licensee shall fail to
pay any License Consideration within such ten (10) day period, or shall fail to
pay any installment of the License Fee within ten (10) days after it is due,
such unpaid amounts shall bear interest at the rate per annum equal to the
lesser of (i) two percent (2%) plus the base rate charged by Citibank, N.A. and
in effect during the period such amounts are due and unpaid and (ii) the maximum
rate permitted by law, from the due date of such payment to the date paid to
Licensor.

                     (c) If Licensee shall default in performing any term,
covenant or condition of this Agreement which shall involve the expenditure of
money by Licensee to third parties, and such default shall continue beyond
applicable notice and grace period, Licensor may (but shall not be obligated to)
make such payment or, on behalf of Licensee, expend such sum as may be necessary
to perform or fulfill such term, covenant or condition. All sums so paid or
expended by Licensor shall be deemed to be License Consideration and shall be
payable by Licensee to Licensor in accordance with Paragraph 5(b) above. No such
payment or expenditure by Licensor shall be construed as a waiver of Licensee's
default or of Licensee's obligation to perform any term, covenant or condition
of this License Agreement nor shall it affect any other right or remedy of
Licensor under this License Agreement.

        6.      COVENANTS AND WARRANTIES. Licensee covenants and warrants:

                     (a) at Licensee's sole cost and expense, to keep and
maintain the Licensed Space in good order and condition, to notify Licensor of
any needed repairs, which repairs shall be performed by Licensor at Licensee's
sole cost and expense (Rider 6(a), and to quit and surrender the Licensed Space
to Licensor upon the expiration or earlier termination of this Agreement in as
good and proper order and condition as at the Commencement Date, reasonable wear
and tear excepted; (Rider 6(b)

                     (b) at Licensee's sole cost and expense, to comply promptly
with (1) all presently existing or hereafter enacted laws, orders, ordinances,
rules, regulations and requirements of, and to keep in full force and effect all
permits and licenses required pursuant to, all federal, state, municipal and
local governments and their departments, agencies, commissions, boards and
officers or any other body exercising similar jurisdiction and any other
governmental agency having jurisdiction over the Licensed Space (collectively,
"Legal Requirements"); (2) all orders, rules, regulations, requirements and
recommendations of the New York Board of Fire Underwriters or the Insurance
Service Office or any other body exercising the same or similar functions and
having jurisdiction or cognizance of all or any part of the Licensed Space or
the Building (collectively, "Insurance Requirements"); (3) any and all policies
and procedures of Licensor (including, without limitation, Licensor's Joint
Radiation Safety Committee and Licensor's Office of Environmental Health and
Safety) governing the use, handling or disposal of Hazardous Materials (as
hereinafter defined) by its tenants, licensees, contractors, employees or
researchers, now or hereafter in effect, and (4) any applicable federal, state
or local statute, code, ordinance, rule or regulation, any judicial or
administrative order or judgment applicable to Licensee or the Licensed Space
and any provision or condition of any permit, license, franchise, concession,
agreement or other authorization binding on Licensee relating to (i) the
protection of the environment, the safety and health of persons (including
employees) or the public welfare, (ii) the actual or potential release,
discharge, disposal or emission (whether past or present) of any Hazardous
Materials or (iii) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, generation or handling of any Hazardous Materials
(collectively, "Environmental Legal Requirements"). The term "Hazardous
Materials" shall mean any flammable, explosive, radioactive, chemical or
infectious materials, hazardous (or biohazardous) materials or wastes, medical
wastes, hazardous or toxic substances, pollutants, gas, vapor, radiation,
chemical or related materials, asbestos or any material containing asbestos, or
any other substance or materials as defined in or regulated by any local, state
or federal law or ordinance or regulation promulgated pursuant thereto;

                     (c) not to use, except to identify Licensee's address (i)
as part of its mailing address on letterhead and other similar materials or (ii)
for purposes of Licensee's publications, the name of Licensor or Columbia
University or any of its officers, trustees, agents, employees, students or
faculty members for any purpose whatsoever without receiving the prior written
approval of Licensor. Without limiting



the generality of the foregoing, Licensee shall not conduct its operations at
the Licensed Space under any name which includes the word "Columbia", or
otherwise hold itself or its business out as having any affiliation with
Licensor or Columbia University or Columbia-Presbyterian Medical Center;

                     (d) to comply strictly with the Plan (as defined in
Paragraph 4 hereof);

                     (e) not to use or permit the use of biohazardous agents
requiring a degree of containment in excess of that described as National
Institutes of Health Biosafety Level 2, as defined in the U.S. Department of
Health and Human Services, Public Health Service, Centers for Disease Control
and Prevention and National Institutes of Health, Biosafety in Microbiological
and Biomedical Laboratories, dated May, 1993 and any updates or revisions
thereto (the "DHH Specifications");

                     (f) to conduct all scientific research and development
activities in conformity with at least the minimum practices, equipment and
facilities recommended for such activities in the DHH Specifications; and

                     (g) not to use or permit the use of any human subjects or
live and whole dead animals (including, without limitation, live and whole dead
mice and rats) on or at the Licensed Space for any research purposes. In the
event that Licensee at any time during the Term shall desire to (a) use or
permit the use of human subjects or live or whole dead animals for research at
the Building or (b) use or permit the use of any of the facilities of Licensor
to house any live or whole dead animals, Licensee shall forward a request with
appropriate back-up documentation, including, without limitation, a detailed
description of Licensee's proposed research, to Licensor at the address set
forth in Paragraph 17 hereof. Upon receipt of such notice and back-up
documentation, Licensor shall review such request, provided, however, that
Licensor shall, in its sole and absolute discretion, have no obligation to
consent to Licensee's request.

        7.      INSURANCE. Licensee shall, at Licensee's sole cost and expense,
obtain and maintain the following types of insurance in not less than the
indicated amounts with insurance carriers reasonably acceptable to Licensor and
otherwise in compliance with Exhibit "C" annexed hereto and made a part hereof:

                     (a) Workers' Compensation and Employer's Liability
insurance with respect to all persons employed by Licensee at the Licensed Space
with a limit of liability in accordance with applicable law in the case of
Workers' Compensation and with a limit of liability of not less than the
following in the case of Employer's Liability:

        Bodily Injury by Accident - $100,000 each accident;
        Bodily Injury by Disease - $500,000 policy limit;
        Bodily Injury by Disease - $100,000 each employee;

                     (b) Comprehensive General Liability (bodily injury and
property damage) with a combined single limit of liability for bodily injury and
property damage of $2,000,000 per occurrence. Licensor shall be named as an
additional insured under this policy;

                     (c) "All Risk" property insurance (including breakage of
glass and water damage) to all property of Licensee, including all alterations,
within the Licensed Space in an amount equal to the replacement cost of such
property; and

                     (d) Such different or the same types of insurance set forth
above in such amounts as may from time to time be reasonably required by
Licensor against such other insurable hazards as at the time are commonly
insured against in the case of premises similarly situated.

        8.      DAMAGE AND DESTRUCTION. (a) If the Licensed Space or any part
thereof shall be damaged by fire or other casualty, Licensee shall give
immediate notice thereof to Licensor and this Agreement shall continue in full
force and effect, unless Licensor shall elect to terminate this Agreement as set
forth below. In the event that this Agreement shall not be so terminated,
Licensor shall restore the Licensed Space at Licensor's expense and the Licensee
Fee and License Consideration shall be proportionately abated during the period
in which Licensor is restoring the Licensed Space if all or any portion of the
Licensed Space is unusable by Licensee for the purposes set forth in Paragraph 4
above during such period. Licensee's liability for the full amount of the
Licensee Fee and License Consideration shall resume five (5) days after written
notice from Licensor that the Licensed Space is substantially ready for
Licensee's occupancy.

                     (b) In the event that the Licensed Space is rendered wholly
or substantially unusable (whether or not the Licensed Space has been damaged in
whole or in part) by fire or other casualty (of which fact Licensor shall be the
sole judge), Licensor may elect to terminate this Agreement by written notice to
Licensee given within sixty (60) days after such fire or casualty, specifying
the date for the expiration of this Agreement, which shall be no more than
thirty (30) days after the giving of such notice.

                     (c) If Licensor shall fail within thirty (30) days after
notice by Licensee to Licensor of such casualty to restore the damaged portion
of the Licensed Space to substantially the condition existing prior to such
casualty, Licensee may elect to terminate this Agreement by written notice to
Licensor given prior to completion of such restoration, specifying the date for
the expiration of this Agreement, which shall be no more than thirty (30) days
after the giving of such notice.

                     (d) Nothing contained herein shall relieve Licensee from
liability that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectible and to the extent permitted by law,
Licensor and Licensee each hereby releases and waives all rights of recovery
against the other or anyone claiming through or under the other, by way of
subrogation or otherwise. The foregoing release and waiver shall be in force
only if both parties' insurance policies contain a clause providing that such a
release or waiver shall not invalidate the insurance and also provided that such
clause can be obtained without additional premium; it being agreed, however,
that the party whose insurance carrier requires such additional premium shall
notify the other party thereof and such other party shall have the right to pay
such additional premium.

                     (e) Licensee acknowledges that Licensor will not carry
insurance on the improvements, furniture, furnishings, fixtures and equipment
and other personal property required to be insured by Licensee pursuant to
Paragraph 7(a) above and Licensor will not be obligated to repair any damage
thereto or replace the same.

                     (f) Licensee hereby waives the provisions of Section 227 of
the Real Property Law and agrees that the provisions of this Paragraph 8 shall
govern and control in lieu thereof.

        9.      ALTERATIONS. Licensee shall not make any improvements,
additions, alterations or other changes, except for cosmetic and decorative
alterations, to the Licensed Space, without the prior written consent of
Licensor in each instance.

        10.     UTILITIES AND SERVICES. (a) Licensee shall have 24-hour,
7-day-a-week access to the Building and passenger elevator service to the
Licensed Space. Freight elevator service shall be available on business days
from 8 a.m. to 4 p.m. If Licensee shall require freight elevator service during
any other time, Licensor shall furnish same provided that Licensee gives
Licensor advance notice and that Licensee pays, on demand, as License
Consideration, Licensor's then established charges therefor.

                     (b) Licensor shall provide electric energy to the Licensed
Space. Licensee shall pay Licensor for electricity consumed by Licensee in the
Licensed Space. Licensor will permit the electrical risers, feeders and wiring
in the Building serving the Licensed Space to be used by Licensee for such
purpose to the extent that they are available, suitable, safe and within the
plan and design capacities of the Building. Licensee shall not be required to
pay Licensor more than the amount calculated by applying to the measured demand
and/or usage of electrical current in or furnished to the Building, the average
rate per unit of measurement, inclusive of applicable taxes, surcharges, time of
day and other charges, payable by Licensor for electrical current furnished to
the Licensed Space by the utility company serving the Building. Should any tax
or charge in the nature of a tax be imposed upon Licensor's receipts from the
sale or resale of electrical current to the Licensed Space, then the pro rata
share thereof allocable to the electrical current furnished to the Licensed
Space shall be passed on to and paid by Licensee. Bills for Licensee's usage of
electrical current shall be paid within ten (10) days by Licensee as License
Consideration. If due to any change in Legal Requirements Licensor shall not be
permitted to provide electric energy to the Licensed Space, then this Agreement
shall not be affected and Licensee shall arrange to obtain electric energy
directly from the public utility company furnishing electrical service to the
Building. In such event Licensee shall no longer pay Licensor for electricity
consumed.

                     (c) Licensee's use of electrical energy shall never exceed
the capacity of the then existing risers or wiring installation, in each case.
In order to insure that such electrical capacity is not exceeded and to avert
possible adverse effect upon the Building's electrical system, Licensee shall
not, without the prior written consent of Licensor, make or perform or permit
any alteration to wiring installations or other electrical facilities in or
serving the Licensed Space or any additions to the electrical fixtures, machines
or equipment or appliances in the Licensed Space. Licensor shall not be
obligated to consent to any such alteration or installation if, in Licensor's
judgment, the same are unnecessary or will cause permanent damage or injury to
the Building, the Building equipment

                                        2



or the Licensed Space or will cause or create a hazardous condition or entail
excessive or unreasonable alterations, repairs or expense or interfere with or
disturb other tenants or occupants. Only rigid conduit or such other wiring or
conduit as shall not violate Legal Requirements will be allowed.

                     (d) Licensor shall have no liability to Licensee for any
loss, damage or expense which Licensee may sustain or incur by reason of any
change, failure, inadequacy or defect in the supply or character of the
electrical energy or emergency generator back-up power furnished to the Licensed
Space or if the quantity or character of the electrical energy is no longer
available or suitable for Licensee's requirements, except for any actual damage
suffered by Licensee by reason of any such failure, inadequacy or defect caused
by Licensor's gross negligence, and then only after actual notice thereof.

                     (e) Licensor shall make available from the public water
supply to a point or points at or near the Licensed Space selected by Licensor
such quantities of domestic cold and hot water as Licensor, in its sole and
absolute judgment, deems adequate for normal laboratory and ordinary lavatory,
cleaning and drinking purposes. In the event that the Licensee requires hot or
cold water for any purposes other than those specified in the preceding
sentence, including, but not limited to high volume laboratory usage, Licensee
shall pay Licensor, as License Consideration, for water consumed, as shown on
separate submeters for cold and hot water maintained by Licensee, together with
all sewer charges and any other rent, tax, levy or charge based thereon which
now or hereafter is assessed, imposed or a lien upon the Licensed Space or the
Building, as and when bills are rendered. Payment for cold water shall be at the
rate charged by the City for cold water. Payment for hot water shall be at three
(3) times such rate. Licensor shall have no liability to Licensee for any loss,
damage or expense which Licensee may sustain or incur if the quantity or
character of water service changes or is no longer available or suitable for
Licensee's purposes.

                     (f) Licensee shall notify Licensor, within ten (10) days
after the Commencement Date, of the water meter number of each water meter
serving the Licensed Space and whether such meter is for hot water or cold
water. If any such meter is installed subsequent to the taking of possession by
Licensee, then Licensee shall notify Licensor of such information within ten
(10) days after such installation.

                     (g) Licensor shall make available to a point or points at
or near the Licensed Space such piping, systems, equipment and facilities as
Licensor, in its sole and absolute judgment, deems adequate to provide gas
service for normal laboratory consumption. Licensee shall pay Licensor, as
License Consideration, for any and all gas consumed. Meters may be installed and
maintained by Licensor, at Licensee's sole cost and expense. The rates charged
by Licensor to Licensee for gas consumption shall not exceed the rates charged
by the utility company providing such service. Payment for gas consumed by
Licensee in the Licensed Space shall be made by Licensee as License
Consideration within ten (10) days of Licensor's bill therefor. Licensee shall
make no alteration, addition or repair to the gas connection, installations,
equipment and/or facilities without the prior written consent of Licensor in
each instance. Licensor shall have no liability to Licensee for any loss, damage
or expense which Licensee may sustain or incur if the quantity or character of
the gas service is changed or is no longer available or suitable for Licensee's
requirements.

                     (h) Licensor shall, without additional charge to Licensee,
supply hot water for heat, and chilled water for air conditioning and
ventilation to the Licensed Space through existing Building risers, radiators
and air handlers during appropriate seasons as may reasonably be required by
Licensee for ambient heating and cooling seven days a week, 24 hours a day.

                     (i) Licensor shall provide cleaning services in accordance
with the specifications annexed hereto as Exhibit D and made a part hereof.

                     (j) Licensor shall supply compressed air and vacuum air to
a point or points near the Licensed Space in quantities which Licensor deems
adequate for normal laboratory purposes. If Licensee shall require additional
compressed air and vacuum air in excess of that which Licensor deems adequate
for the purposes set forth herein, Licensor shall furnish same at Licensor's
then established rates and same shall be payable by Licensee, as License
Consideration, within ten (10) days of Licensor's bill therefor.

                     (k) Licensee shall be responsible for the proper storage
and removal from the Licensed Space and the Building and the disposal of all of
Licensee's Hazardous Materials. Licensee shall contract for the disposal of
Hazardous Materials, at Licensee's cost and expense, with vendors approved by
Licensor, in its sole and absolute discretion. In contracting with any such
vendor, Licensor shall endeavor to ensure that Licensee shall receive the
benefit of any volume discount granted to Licensor by such vendor.

        11.     NO LIENS. (a) Licensee shall have no power to do any act or to
make any contract which may create or give rise to any lien, mortgage or other
encumbrance on the estate of Licensor or any interest of Licensor or Licensee in
the Licensed Space or the Building.

                     (b) If any lien shall at any time be filed against the
Licensed Space or the Building by reason of any work, labor, services or
materials done for, or supplied to, or claimed to have been done for, or
supplied to, Licensee or anyone holding the Licensed Space through or under
Licensee, Licensee shall cause the same to be discharged of record or adequately
bonded (unless otherwise secured to the satisfaction of Licensor) within twenty
(20) business days after the date Licensee has received notice of the filing of
such lien. If Licensee shall fail to do so, then, Licensor may, but shall not be
obligated to, procure the discharge of the same either by paying the amount
claimed to be due, by deposit in a court of competent jurisdiction or by
bonding, and Licensor may compel the prosecution of an action for the
foreclosure of such lien by the lienor and pay the amount of the judgment, if
any, in favor of the lienor with interest, costs and allowances. Any amount paid
or deposited by Licensor for any such purpose, and all other expenses of
Licensor, including reasonable attorney's fees and disbursements, shall be
deemed to be License Consideration and shall be paid on demand by Licensee.

        12.     SUBORDINATION. Licensee acknowledges that this Agreement is
subject and subordinate to any and all ground or underlying leases and to all
mortgages which may now or hereafter affect such leases or the Building and to
all renewals, modifications, consolidations, replacements and extensions of any
such underlying leases and mortgages.

        13.     NO ASSIGNMENT OR USE BY THIRD PARTIES. Licensee shall not permit
the use or occupancy of all or any part of the Licensed Space by any third party
nor assign its rights nor delegate its duties under this Agreement. For purposes
of this Paragraph 13, a change in control of Licensee shall be deemed an
assignment hereunder. "Change in control" shall be deemed to mean a change (by
transfer or otherwise) in either (a) ownership of fifty percent (50%) or more of
all of the voting stock of a corporation or fifty percent (50%) or more of all
of the legal and equitable interest in a partnership or other business entity or
(b) the possession of the power directly or indirectly to direct or cause the
direction of management and policy of a corporation, partnership or other
business entity, whether through the ownership of voting securities, by
contract, common directors or officers, the contractual right to manage the
business affairs of any such corporation, partnership or business entity, or
otherwise.

        14.     BROKERAGE. Licensee represents to Licensor that there is no
broker, finder, consultant or similar person acting on behalf of Licensee
entitled to a commission, fee or other compensation in connection with the
consummation of this Agreement and no conversations or prior negotiations were
had by Licensee or anyone acting on behalf of Licensee with any broker, finder,
consultant or similar person concerning the use of the Licensed Space except for
such broker(s), if any, set forth in Exhibit "E" annexed hereto and made a part
hereof. Licensee hereby agrees to pay the commission of any such broker, finder,
consultant or similar person. Licensee shall indemnify and hold Licensor
harmless from and against all liability arising from any claims for brokerage
commissions, finder's fees or other compensation resulting from or arising out
of any alleged conversations, negotiations or actions had by Licensee or anyone
acting on behalf of Licensee with any broker, finder, consultant or similar
person. The provisions of this Paragraph 14 shall survive the termination of
this Agreement.

        15.     ACCESS TO THE PREMISES. Licensor and Licensor's agents and
employees shall have the right to enter the Licensed Space for any reasonable
purpose, including, without limitation, for purposes of inspection and repair
and monitoring Licensee's activities for compliance with the Environmental Legal
Requirements, Legal Requirements, Insurance Requirements and the Plan. Except in
cases of emergency or where required for effective inspection and monitoring for
health and safety purposes, Licensor shall provide Licensee with one (1) day
prior notice of its intention to enter the Licensed Space, which notice may be
given orally or by telephone provided that it shall be followed by written
notice received by Licensee on the same day as such oral or telephone notice.
Licensee shall acknowledge such notice "received" by signing a copy thereof and
returning it to Licensor within twenty-four (24) hours of Licensee's receipt,
and Licensor may enter the Licensed Space upon receipt of such copy acknowledged
by Licensee or upon expiration of such 24-hour period, whichever occurs first.

        16.     INDEMNIFICATION. Licensee agrees that Licensee shall make no
claim against Licensor for any injury or damage to Licensee or to any other
person(s) or for any damage to, or loss (by theft or otherwise) of, any property
of Licensee or of any other person. (Rider 16a) Licensee further agrees to
indemnify and save Licensor harmless from and against any and all claims by or
on behalf of any person(s), firm(s) or corporation(s) arising from the conduct
or management of or from any work or thing whatsoever done in, on or about the
Licensed Space during the Term (Rider 16(b), and to indemnify and save Licensor
harmless from and against any and all claims arising from any condition of the
Licensed

                                        3



Space due to or arising from any act or omission or negligence of Licensee or
any of its agents, contractors, servants, employees, licensees or invitees, and
from and against all liabilities, costs and expenses (including, without
limitation, attorneys' fees and disbursements) incurred in or in connection with
any such claim or claims or action or proceeding brought thereon; and in case
any action or proceeding shall be brought against Licensor by reason of any such
claim, Licensee upon notice from Licensor agrees to resist or defend such action
or proceeding and to employ counsel therefor reasonably satisfactory to
Licensor. The provisions of this Paragraph 16 shall survive the termination of
this Agreement.

        17.     NOTICES. All notices, demands or requests made pursuant to,
under or by virtue of this Agreement must be in writing (whether or not so
stated) and sent either by personal delivery or by nationally recognized
overnight courier service or by certified or registered mail, return receipt
requested, postage prepaid as follows:

To Licensor:        Executive Director
                    Audubon Research Park, PH 1525
                    630 West 168th Street
                    New York, New York 10032

    with a
   copy to:         (i) Columbia University
                    Office of the General Counsel
                    412 Low Memorial Library
                    New York, New York  10027
                    Attention:  Deputy General Counsel

     and to:        (ii) Rosenman & Colin LLP
                    575 Madison Avenue
                    New York, New York 10022
                    Attention:  Donald H. Siskind, Esq.

To Licensee:        Nephros, Inc.
                    3960 Broadway, 4th Floor
                    New York, NY   10032
                    Attention: Norman Barta

    with a
   copy to:         ------------------------------
                    ------------------------------
                    ------------------------------
                    Attention:
                              --------------------

or to such alternative address(es) as may from time to time be designated by
notice given in the manner provided for in this Paragraph 17. Any such notice,
demand or request shall be deemed to have been rendered or given on the date of
delivery, in the case of personal delivery or delivery by overnight courier, or
on the date which is three (3) business days after mailing.

        18.     SURRENDER. Upon the termination of this Agreement, Licensee
shall peaceably and quietly leave and surrender to Licensor the Licensed Space
broom clean, in good order and condition, ordinary wear and tear excepted.

        19.     SELF-HELP. If Licensee shall default in the performance of any
covenant, provision, agreement or condition of this Agreement, and such default
shall continue beyond applicable notice and grace period, then Licensor, without
waiving such default and without liability to Licensee, may (but shall not be
obligated), perform the same (and shall have access to the Premises, if
necessary, to do so), including, without limitation, the making of repairs, for
the account and at the expense of Licensee. Any amounts paid by Licensor in
connection with the foregoing, shall be deemed to be License Consideration
payable by Licensee to Licensor within ten (10) days of Licensor's bill
therefor. The rights of Licensor under this Paragraph 19 shall be in addition to
those set forth in Paragraph 5(c).

        20.     TERMINATION. (a) Licensor may (but shall not be obligated to)
terminate this Agreement upon five (5) days' notice to Licensee if (i) Licensee
shall default in the payment of the Licensee Fee or License Consideration for
five (5) days after the due date thereof, (ii) Licensee shall be in default
hereunder other than a default set forth in subparagraph (i) of this Paragraph
20, which default shall continue and shall not be cured for thirty (30) days
after notice thereof to Licensee, or (iii) in the case of a default other that a
default set forth in subparagraph (i) of this Paragraph 20 which for causes
beyond Licensee's control cannot with due diligence be cured within such 30-day
period, if Licensee (1) shall not, promptly upon receipt of such notice advise
Licensor of Licensee's intention to institute all steps necessary to cure such
default or (2) shall not institute and thereafter with reasonable diligence
prosecute to completion all steps necessary to cure the same.

                     (b) Provided that Licensee shall surrender and deliver
possession of the Licensed Space to Licensor, and shall not be in default beyond
applicable notice and grace period in performing any term, covenant, provision
or condition of this Agreement, Licensee may terminate this Agreement with or
without cause upon not less than sixty (60) days' prior written notice to
Licensor.

        21.     SECURITY DEPOSIT. (a) Licensee has deposited the sum of $
17,021.74 with Licensor as security for the full and punctual performance by
Licensee of all of the terms of this Agreement, to be deposited by Licensor in
an interest-bearing account of Licensor's choosing. In the event Licensee
defaults in the performance of any of the terms of this Agreement, Licensor may
use or retain the whole or any part of the security deposited to the extent
required for the payment of any fees or for any sum that Licensor may expend or
may be required to expend by reason of Licensee's default, including any damages
or deficiency in the relicensing or letting of the Licensed Space, whether
accruing before or after summary proceedings or other re-entry by Licensor. In
the case of every such use or retention, Licensee shall, on demand, pay to
Licensor the sum so used or retained which sum shall be added to the security
deposited so that the same shall be replenished to its former amount. In the
event any bankruptcy, insolvency, reorganization or other creditor-debtor
proceedings shall be instituted by or against Licensee, or its successors or
assigns, the security deposited shall be deemed to be applied first to the
payment of such fees due Licensor for all periods prior to the institution of
such proceedings and the balance, if any, of the security deposited may be
retained by Licensor in partial liquidation of Licensor's damages. If Licensee
shall fully and punctually comply with all of the terms of this Agreement, the
security deposited plus any accrued interest thereon (less an amount equal to
one percent per annum on the security deposited not to exceed the amount of any
interest earned on the security deposited for Licensee's administrative costs in
connection with the security deposited) shall be returned to Licensee after the
termination of this Agreement and delivery of exclusive possession of the
Licensed Space to Licensor in compliance with the provisions of this Agreement.

                     (b) Any interest accrued with respect to the security
deposited shall be added to and constitute a part of the security deposited to
be held and disposed of by Licensor in accordance with the terms of this
Paragraph 21. Licensor shall not be liable to Licensee for any interest except
for such interest as is actually accrued.

                     (c) Licensee shall, concurrently with the execution and
delivery of this Agreement, and thereafter at any time upon request by Licensor,
deliver to Licensor a fully completed Form W-9 (Request for Taxpayer
Identification Number and Certification).

                     (d) Licensee shall not assign or encumber or attempt to
assign or encumber the security deposited and neither Licensor nor its
successors or assigns shall be bound by any such assignment, encumbrance or
attempted assignment or encumbrance.

                     (e) In the event of a sale or lease of the Building,
Licensor shall have the right to transfer the security deposited to the vendee
or lessee and Licensor shall ipso facto be released by Licensee from all
liability for the return of the security deposited and Licensee shall look
solely to the new licensor for the return of the security deposited. The
provisions hereof shall apply to every transfer or assignment made of the
security deposited to a new licensor.

                     (f) In the event that the License Fee shall increase
pursuant to the terms of this Agreement, the amount of security deposited shall
be increased so that at all times the security deposited (exclusive of interest)
shall equal one-sixth of the current annual License Fee. Licensee shall
immediately deposit with Licensor the difference between the amount being held
by Licensor as security (exclusive of interest) and the amount required to be
deposited pursuant to this Subparagraph 21(f).

        22.     CAPTIONS. The captions of the Paragraphs of this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit or describe the scope of this Agreement nor the intent of any provision
thereof.

        23.     RELOCATION. At any time and from time to time during the Term,
Licensor shall have the right to relocate Licensee to space in the Building
reasonably comparable in size, location and utility for the purposes specified
in Paragraph 4 above, upon not less than sixty (60) days' notice to Licensee.

        24.     MISCELLANEOUS. (a) The covenants and agreements contained in
this Agreement shall apply to, inure to the benefit of, and be binding upon
Licensor and Licensee and upon their respective successors and permitted
assigns.

                     (b) This Agreement may not be changed, cancelled or
discharged orally, but only by an agreement in writing and signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought. All understandings and agreements between Licensor and Licensee are
merged in this Agreement which represents the entire agreement between the
parties and which fully and completely sets forth all terms and conditions of
the transactions embodied in this Agreement.

                                        4



                     (c) If any term or provision of this Agreement or any
portion of a term or provision of this Agreement or the application of any such
term or condition to any person or circumstance shall, to any extent, be invalid
or unenforceable, the remainder of this Agreement, or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected, and each term and
provision of this Agreement shall be valid and be enforced to the fullest extent
permitted by law.

                     (d) This Agreement shall be construed in accordance with,
and governed by, the laws of the State of New York applicable to agreements made
and performed in the State of New York.

        25.     NO LANDLORD - TENANT RELATIONSHIP. Licensee hereby acknowledges
that Licensee acquires no rights as a tenant of the Licensed Space and that no
landlord-tenant relationship is created hereby.

        26.     JURISDICTION. Licensee acknowledges and agrees that all disputes
arising, directly or indirectly, out of or relating to this Agreement, and all
actions to enforce this Agreement, may be dealt with and adjudicated in the
state courts of New York or the federal courts sitting in New York, and Licensee
hereby expressly and irrevocably submits the person of Licensee to the
jurisdiction of such courts in any suit, action or proceeding arising, directly
or indirectly, out of or relating to this Agreement and hereby irrevocably
designates the Secretary of State of New York as its agent for service of
process in any such suit, action or proceeding.

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

                              THE TRUSTEES OF COLUMBIA UNIVERSITY IN THE CITY OF
                              NEW YORK, Licensor

                              By: /S/ Kevin E. Kirby
                                 -----------------------------------------------
                              Title: Kevin E. Kirby, VP for Administration

                              Nephros, Inc., Licensee

                              By: /S/ Norman J. Barta
                                 -----------------------------------------------
                              Title: CEO

                                        5



                    Rider to License Agreement by and between
                   The Trustees of Columbia University in the
                       City of New York and Nephros, Inc.
                                  Dated 7/1/04

Rider 6(a)

        (unless such repairs are caused by the acts or omissions of Licensor or
are repairs to building systems (i.e.HVAC) systems) not caused by the acts or
omissions of Licensee in which event such repairs shall be at Licensor's sole
cost and expense).

Rider 6(b)

        Provided, however, that this Section 6(a) shall be applicable solely
with respect to the Licensee's use of the Licensed Space and thatd the cost and
expense of compliance with this Section 6(a) due to factors not related to the
Licensee's use of the Licensed Space will be borne solely by the Licensor.

Rider 16(a)

        Unless due to Licensor's gross negligence or willful misconduct

Rider 16(b)

        due to or arising out from any act or omission or negligence of Licensee
or any of its agents, contractors, servants, employees, licensees or invitees,

Rider 21(e)

        Provided that the Licensor caused the security deposit to be transferred
to the account of the new Licensor.

Rider C-1

        (ten (10) days in the event of non-payment of insurance premiums)



                                    EXHIBIT B

                                   LICENSE FEE

                The License Fee shall be payable, in advance, commencing on the
Commencement Date and thereafter on the first day of each and every month during
the Term at the rate of $ 102,130.38 per annum, payable in equal monthly
installments, at the rate of $8,510.87 per month.

                         INTERNET ACCESS FEE (optional)

                Access to the Internet via the Columbia University Network is
$3,942.00 per annum, payable in equal monthly installments, at the rate of
$328.50 per month.



                                    EXHIBIT C

                              INSURANCE PROVISIONS

                Reference is made to Paragraph 7 of this Agreement.

                (a) All insurance shall be written in form and substance
reasonably satisfactory to Licensor, and issued by companies licensed to do
business in New York State and authorized to issue such policies. All policies
of insurance procured by Licensee shall contain endorsements providing that (i)
such policies may not be reduced or cancelled (including for non-payment of
premium) or allowed to lapse with respect to Licensor, or materially changed or
amended, except after thirty (30) days' (Rider C-1) prior notice from the
insurance company by registered mail to Licensee and Licensor at the respective
addresses for such parties set forth in Paragraph 17, and (ii) Licensee shall be
solely responsible for the payment of premiums therefor notwithstanding that
Licensor is or may be named as an additional insured. Upon execution and
delivery of this Agreement, duly executed certificates of all insurance required
hereunder, effective as of the Commencement Date (specifying each of the
coverages enumerated in Paragraph 7 and including evidence of the waivers of
subrogation required pursuant to Paragraph (d) of this Exhibit, together with
reasonably satisfactory evidence of payment of the premiums therefor, shall be
delivered to Licensor. Certificates evidencing any endorsements to any such
policies shall also be so deposited upon issuance thereof and a certificate
evidencing each renewal or replacement of a policy shall be so deposited at
least twenty (20) days prior to the expiration of such policy. Notwithstanding
the foregoing requirements for delivery of certificates of insurance,
certificates evidencing any endorsements and certificates of renewals and
replacements, in any instance where Licensor shall so require, an original
policy or endorsement or renewal or replacement policy, as the case may be,
shall be delivered in addition to or in place of such certificate(s). Licensee
shall not carry any separate or additional insurance concurrent in form or
contributing in the event of any loss or damage with any insurance required to
be maintained by Licensee under this Agreement. Further, all policies of
insurance procured by Licensee shall be written as primary policies not
contributing with nor in excess of coverage that Licensor may carry.

                (b) All insurance procured by Licensee under Paragraph 7 and
this Exhibit C, except for the Worker's Compensation and Employer's Liability
insurance and the "all-risk" property insurance, shall name Licensor, Licensee,
The City of New York (the "City"), The New York City Economic Development
Corporation ("EDC"), The New York State Urban Development Corporation d/b/a
Empire State Development ("UDC") and any other superior lessor and superior
mortgagee as additional insureds as their respective interests may appear, and
shall contain an endorsement that each of Licensor, the City, EDC, UDC and any
other superior lessor and superior mortgagee although named as an additional
insured, nevertheless shall be entitled to recover under said policies for any
covered loss or damages occasioned to it, its agents, employees, contractors,
directors, shareholders, partners, trustees and principals (disclosed or
undisclosed) by reason of the negligence or tortious acts of Licensee, its
servants, agents, employees and contractors.

                (c) Licensee covenants that (i) Licensee shall pay all premiums
due on policies required to be maintained by the terms of this Agreement and
(ii) Licensee shall not violate, or permit the violation of, any term or
condition of such policies, and shall maintain the policies in full force and
effect throughout the Term.

                (d) Licensee agrees to use its best efforts to include in each
of its insurance policies a waiver of the insurer's right of subrogation against
Licensor, or if such waiver should be unobtainable or unenforceable (i) an
express agreement that such policy shall not be invalidated if the insured
waives or has waived before the casualty the right of recovery against any party
responsible for a casualty covered by the policy or (ii) any other form of
permission for the release of Licensor. If such waiver, agreement or permission
shall not be, or shall cease to be obtainable without additional charge or at
all, Licensee shall so notify Licensor promptly after learning thereof. In such
case, if Licensor shall agree in writing to pay the insurer's additional charge
therefor, such waiver, agreement or permission shall (if obtainable) be included
in the policy. As long as Licensee's casualty insurance policies include the
waiver of subrogation or agreement or permission to release liability referred
to above, Licensee, to the extent that such insurance is in force and
collectible, hereby waives any right of recovery against Licensor, and
Licensor's trustees, officers, employees, agents and contractors, for any loss
occasioned by fire or other insured casualty.

                (e) In the event that this Agreement is renewed beyond the Term,
Licensor, upon notice to Licensee, shall have the right, in its sole discretion,
once annually during the term of such renewal (if such renewal is for longer
than one year), to require Licensee to increase the amount or amounts of any
insurance coverage required hereby to the amount or amounts then being required
of tenants or occupants of buildings owned by Licensor whose space is being used
for purposes similar to the use permitted hereunder.



                                    EXHIBIT D

                             CLEANING SPECIFICATIONS



                                    EXHIBIT E

                                    BROKER(S)

None.



                                    Exhibit F

                               Network & Services

Currently, the Audubon building is connected to Columbia Presbyterian Medical
Center by a microwave antenna running at 10mbps. There are plans for in the near
future to be a 100 mbps.

All floors are equipped with two 10mbps 6 port hubs which are connected to a
10/100 mbps switch located in the basement of the building.

All network lines provided are category 5 plenum cables terminated in an RJ45
panel in the closet.

Network protocol supported are:

IP, Novell IPX, Appletalk.

NETBIOS & NETBUI are PROHIBITED.

SERVICES PROVIDED:

        .       Novell & TCP/IP Connectivity

        .       Internet Connectivity via Our domain and DNS "Auduboncenter.org"

        .       e-mail via your own Domain name and e-mail account on our DNS
                Server

        .       Techncical consulting and advisement with 3rd party computer LAN
                company.

EX-21.1

                                                                    Exhibit 21.1

                                  Nephros, Inc.
                         Subsidiaries of the Registrant

Name                              Jursidiction     Percentage Equity
- ----                              ------------     -----------------

Nephros International Limited        Ireland             100%

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated April 28, 2004, accompanying the consolidated financial statements of Nephros, Inc. and Subsidiary as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, which is included in this Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption “Summary Financial Data”, “Selected Financial Data” and “Experts.”

/S/    GRANT THORNTON LLP

New York, New York

July 14, 2004

EX-99.1

                                                                    Exhibit 99.1

                Consent of Person Nominated to Become a Director

                  I, Howard Davis, hereby consent to being named as a nominee to
the board of directors of Nephros, Inc. in the Registration Statement on Form
S-1 and any and all amendments and supplements thereto to be filed with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to this Registration Statement.


July 14, 2004

                                                     /s/ Howard Davis
                                                     ---------------------------
                                                     Howard Davis

EX-99.2

                                                                    Exhibit 99.2

                Consent of Person Nominated to Become a Director

          I, William J. Fox, hereby consent to being named as a nominee to the
board of directors of Nephros, Inc. in the Registration Statement on Form S-1
and any and all amendments and supplements thereto to be filed with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to this Registration Statement.


July 12, 2004

                                         /s/ William J. Fox
                                         --------------------------
                                         William J. Fox