10QSB

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2002

Commission file number 0-16416

ELECTROPURE, INC.
(Exact name of registrant as specified in its charter)

California (State or Other Jurisdiction of Incorporation or Organization)	33-0056212 (IRS Employer Identification No.)
23456 South Pointe Drive, Laguna Hills, California (Address of principal executive offices)	92653 (Zip Code)

Registrant's telephone number, including area code: (949) 770-9347

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of Class)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o.

        At May 30, 2002, 11,236,295 shares of the Registrant's common stock were outstanding.

Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)

			April 30, 2002
ASSETS
Current assets:
	Cash		$	31,523
	Trade accounts receivable			14,448
	Inventories			247,735
	Prepaid legal fees			69,375
	Other prepaid expenses			17,007
		Total current assets		380,088
Property, plant and equipment, net				2,758,064
Acquired technology, net of accumulated amortization				31,945
Total assets			$	3,170,097
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Current portion of obligations under capital leases		$	9,796
	Current portion of notes payable to bank			17,333
	Trade accounts payable			109,946
	Accrued payroll			140,508
	Other accrued liabilities			73,700
	Customer deposits			50,374
		Total current liabilities		401,657
Obligations under capital leases, net of current portion				17,244
Note payable to bank, net of current portion				1,340,716
Note payable to shareholder				1,000,000
Total liabilities				2,759,617
Commitments and contingencies				—
Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding at April 30, 2002.				26,000
Shareholders' equity:
	Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at April 30, 2002; liquidation preference of $1,000,000.			250,000
	Series D convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at April 30, 2002; liquidation preference of $500,000.			250,000
	Common stock, $0.01 par value; 20,000,000 shares authorized; 11,236,295 shares issued and outstanding at April 30, 2002.			112,363
	Class B common stock, $0.01 par value; 839,825 shares authorized: 83,983 shares issued and outstanding at April 30, 2002.			840
	Additional paid-in capital			24,851,927
	Prepaid consulting fees			(3,500	)
	Notes receivable on common stock			(31,443	)
	Accumulated deficit			(25,045,707	)
Total shareholders' equity				384,480
Total liabilities and shareholders' equity			$	3,170,097

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

		Three months ended April 30,						Six months ended April 30,
		2002			2001			2002			2001
Net sales		$	246,534		$	218,578		$	784,177		$	342,140
Cost of sales			234,062			290,625			650,750			487,714
	Gross profit (loss)		12,472			(72,047	)		133,427			(145,574	)
Operating costs and expenses:
	Research and development		104,038			95,400			194,033			193,816
	Sales, general and administrative		303,119			206,211			585,428			769,543
	Total operating expenses		407,157			301,611			779,461			963,359
Loss from operations			(394,685	)		(373,658	)		(646,034	)		(1,108,933	)
Other income (expense):
	Interest income		263			1,880			695			4,146
	Interest expense		(55,251	)		(55,969	)		(111,632	)		(60,447	)
	Gain on disposition of assets		—			—			—			161,173
	Sublease income		30,000			—			53,500			—
Other income (expense), net			(5,400	)		(3,000	)		(7,600	)		(5,974	)
Other income (expense), net			(30,388	)		(57,089	)		(65,037	)		98,898
Loss before provision for income taxes			(425,073	)		(430,747	)		(711,071	)		(1,010,035	)
	Provision for income tax		—			—			(1,600	)		(800	)
Net loss		$	(425,073	)	$	(430,747	)	$	(712,671	)	$	(1,010,835	)
Net loss per share, basic and diluted		$	(0.04	)	$	(0.05	)	$	(0.07	)	$	(0.11	)
Shares used in computing basic and diluted net loss per share			11,050,951			9,377,341			10,660,038			9,377,341

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Six months ended April 30,
		2002			2001
Cash flows from operating activities:
Net loss		$	(712,671	)	$	(1,010,835	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation		98,443			93,818
	Amortization		20,000			20,000
	Issuance of shares for services		19,150			—
	Issuance of options and warrants for services		72,200			141,735
	Issuance of warrants to majority shareholder as compensation		—			115,000
	Interest paid with common stock		40,000			—
	Interest on notes receivable for common stock		(695	)		(1,084	)
(Increase) decrease in assets:
	Trade accounts receivable		26,048			47,237
	Prepaid legal and other expenses		60,094			100
	Inventories		(37,051	)		9,767
	Assets held for sale		—			52,163
Increase (decrease) in liabilities:
	Trade accounts payable		(86,898	)		20,080
	Customer deposits		(50,526	)		25,535
	Accrued payroll and other liabilities		13,550			24,425
Net cash used in operating activities			(538,356	)		(462,059	)
Cash flows from investing activities
	Purchase of property, plant and equipment		(11,341	)		(2,379,946	)
Net cash used in investing activities			(11,341	)		(2,379,946	)
Cash flows from financing activities:
	Principal payments on notes payable		(12,456	)		10,934
	Proceeds from the issuance of notes payable		—			1,375,000
	Cash deposit on building purchase received		—			15,000
	Proceeds from issuance of common stock		550,000			—
	Proceeds from issuance of Series D preferred stock		—			400,000
	Proceeds from issuance of note payable to a related party		—			1,000,000
Net cash provided by financing activities			537,544			2,800,934
Net (decrease) in cash			(12,153	)		(41,071	)
Cash at beginning of period			43,676			180,918
Cash at end of period		$	31,523		$	139,847

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.    Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements include all adjustments which management believes are necessary for a fair presentation of the Company's financial position at April 30, 2002 and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

        The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended October 31, 2001, included in our Annual Report on Form 10-KSB.

        Certain amounts presented within the 2001 financial statements have been reclassified in order to conform to the 2002 financial statement presentation.

2.    Securities Transactions

Private Placement Offering—Common Stock and Warrants

        On November 1, 2001, we sold 200,000 shares of Common Stock and warrants to purchase 50,000 shares of common stock to Anthony M. Frank, our largest shareholder, for net proceeds of $100,000. The warrants are exercisable at $0.51 per share and expire on November 1, 2004.

        In January 2002, Mr. Frank purchased a total of 714,286 shares of common stock and warrants to purchase 100,000 shares of common stock for net proceeds of $300,000. The warrants are exercisable at $0.42 per share and expire in January 2005.

        On March 15, 2002, Mr. Frank purchased an additional 300,000 shares of common stock and warrants to purchase 50,000 shares of common stock for net proceeds of $150,000. The warrants are exercisable at $0.50 per share and expire in March 2005.

Common Stock Issued for Debt

        On January 2, 2002, we issued 47,619 shares of common stock, with a fair market value of $0.42 per share, in payment of $20,000 in accrued interest on a loan due to Anthony M. Frank.

        On April 3, 2002, we issued an additional 44,445 shares of common stock, with a fair market value of $0.45 per share, in payment of $20,000 in interest accrued on the above loan through March 31, 2002.

Common Shares Issued for Services

        On April 25, 2002, we issued 10,000 shares of common stock, valued at $4,800, in consideration for services rendered by a real estate broker in relation to refinancing the building we purchased in fiscal 2001.

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Warrants Issued to Consultants

        In March 2002, we issued warrants to purchase 25,000 shares of common stock to one individual for consulting services. The warrants are exercisable at $0.40 per share and expire in April 2007. The fair value of the consulting services is being charged to expense over the life of the contract. A consulting expense of $1,875 relating to these services was recognized for the six months ended April 30, 2002.

3.    Loss Per Common Share

        In accordance with the disclosure requirements of SFAS No. 128, Earnings Per Share, a reconciliation of the numerator and denominator of the basic and diluted loss per share calculation and the computations of net loss per common share for the periods ended April 30, 2002 and 2001 are as follows:

		Three months ended April 30,						Six months ended April 30,
		2002			2001			2002			2001
Net loss available to common shareholders:
	Net loss	$	(425,073	)	$	(430,747	)	$	(712,671	)	$	(1,010,835	)
Net loss available to common shareholders:		$	(425,073	)	$	(430,747	)	$	(712,671	)	$	(1,010,835	)
	Weighted average shares outstanding		11,050,951			9,377,341			10,660,038			9,377,341
Basic and diluted net loss per common share		$	(0.04	)	$	(0.05	)	$	(0.07	)	$	(0.11	)

        The following securities and contingently issuable shares are excluded in the calculation of diluted shares outstanding as their effects would be antidilutive for the periods ended April 30, 2002 and April 30, 2001 as follows:

	2002	2001
Stock options and warrants	6,732,703	5,731,327
Convertible preferred stock	500,000	500,000
Contingently issuable common shares	516,479	516,479

4.    Business Segments

        We have two reportable segments: water purification ("EDI/Membrane"), (formerly reported separately under "EDI" and "Membrane") and fluid monitoring ("MI", a start up segment). The EDI segment produces water treatment modules for sale to manufacturers of high purity water treatment systems. The Membrane segment formerly produced ion exchange membranes for outside customers for use in electrodialysis, electrodeionization, electrodeposition and general electrochemical separations. The MI segment is developing technology that is anticipated to enable real time identification of contamination in fluids.

        Reportable segments are strategic business units that offer different products, are managed separately, and require different technology and marketing strategies. The accounting policies of the segments are those described in the summary of significant accounting policies in our audited financial statement included in our annual report on Form 10-KSB. We evaluate performance based on results from operations before income taxes and interest, net, excluding nonrecurring gains and losses.

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Business Segment Information:

		Three months ended April 30,						Six months ended April 30,
		2002			2001			2002			2001
Revenues:
	EDI/Membrane	$	246,534		$	218,578		$	784,177		$	342,140
	MI		—			—			—			—
Total revenues		$	246,534		$	218,578		$	784,177		$	342,140
Operating Income (Loss):
	EDI/Membrane	$	(88,015	)	$	(192,993	)	$	(62,547	)	$	(457,912	)
	MI		(102,235	)		(102,193	)		(190,381	)		(196,289	)
	Corporate		(204,435	)		(78,472	)		(393,106	)		(454,732	)
Total operating loss		$	(394,685	)	$	(373,658	)	$	(646,034	)	$	(1,108,933	)
Depreciation and Amortization:
	EDI/Membrane	$	37,275		$	34,148		$	79,731		$	71,674
	MI		955			1,439			2,082			2,752
	Corporate		17,338			28,073			36,630			39,392
Total depreciation and amortization		$	55,568		$	63,660		$	118,443		$	113,818
Expenditures for Long Lived Assets:
	EDI/Membrane	$	6,980		$	7,502		$	11,341		$	16,633
	MI		—			1,220			—			7,381
	Corporate		—			—			—			2,355,932
Total expenditures for long lived assets		$	6,980		$	8,722		$	11,341		$	2,379,946
GEOGRAPHIC INFORMATION:
Revenues
	United States	$	106,629		$	30,427		$	386,470		$	52,860
	Japan		5,450			41,240			100,025			77,240
	Luxembourg		—			34,553			54,000			45,934
	Germany		15,672			36,578			37,772			49,841
	Ireland		9,600			36,322			9,600			39,522
	Other foreign countries		109,183			39,458			196,310			76,743
Total revenues		$	246,534		$	218,578		$	784,177		$	342,140
					April 30, 2002			October 31, 2001
Identifiable Assets:
	EDI/Membrane				$	608,462		$	709,589
	MI					11,101			13,183
	Corporate					2,550,534			2,615,941
Total identifiable assets					$	3,170,097		$	3,338,713

5.    Subsequent Events

        On May 3, 2002, we borrowed $150,000 from our major shareholder for 60 days at 8% interest. Principal and accrued interest on the loan will be repaid from the proceeds of a loan to be secured from refinancing our building. We anticipate the building loan to be consummated by early June 2002.

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PART I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Certain of the statements contained herein, other than statements of historical fact, are forward-looking statements. Such forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results we expect. Potential risks and uncertainties that could affect our future operating results include, without limitation, economic, competitive and legislative developments.

Results of Operations

        References to fiscal 2001 and fiscal 2002 are for the six months ended April 30, 2001 and 2002, respectively.

        Net sales increased in fiscal 2002 by $442,037 as compared to fiscal 2001 which reflects the strong demand for our EDI products and an increased penetration of the expanding ultrapure water market. For the three months ended April 30, 2002, net sales increased by $27,956 over the comparable prior year period. Sales revenues were lower by 54% during the last three months of the quarter ended April 30, 2002 as compared to the first three months. We believe that the decrease results from the fiscal or quarterly budgeting cycles of the end-user of our products coupled with a general economic downturn.

        Cost of sales consists primarily of purchased materials, labor and overhead (including depreciation) associated with product manufacturing, royalty costs, warranties and sustaining engineering expenses pertaining to products sold. Cost of sales as a percentage of sales decreased to 83% from 143% for the six months ended April 30, 2002 and 2001, respectively. This decrease is predominantly due to increased unit sales volume, which allowed for fixed costs to be allocated over a higher number of EDI products produced. The three months ended April 30, 2002 showed less of a dramatic decrease from 133% for the comparable period in fiscal 2001 to 95% in 2002 since we did not experience a sustained growth in sales volume during the current three month period. Cost of sales in fiscal 2001 was adversely impacted by expenses related to the underutilization of manufacturing capacity.

        Research and development expenses for the three and six month periods ended April 30, 2002 increased by $8,638 and $217, respectively, compared to fiscal 2001. These expenses primarily arise from the program, which we initiated in December 1997, to develop the micro imaging technology for detecting and identifying contaminants in fluids. The increase in research and development expense in fiscal 2002 primarily reflects expenses associated with intellectual property patent filings.

        Sales, general and administrative expenses decreased by $184,115 for the six months ended April 30, 2002 as compared to the same period in 2001. This reflects a decrease in financing expense of issuing options and warrants as compensation and from a reduction in consulting expenses compared to the prior year period. During the three months ended April 30, 2002, sales and general and administrative expenses increased by $96,908 compared to the prior year period due mainly from an increase in legal, accounting and consulting expenses as well as expenses associated with property taxes and depreciation of the building we purchased in 2001.

        Interest income is generated from short-term investments and decreased by $1,617 and $3,451 for the three and six months ended April 30, 2002, respectively, as compared to the prior year periods. These decreases reflect a reduction in working capital available for investment purposes. Interest expense for the six months ended April 30, 2002 increased by $51,185 and decreased by $718 for the three months ended April 30, 2002, respectively, compared to the prior period primarily due to financing activities relating to the purchase of our building in January 2001.

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        Components of other income (expense), other than interest, decreased by $109,299 for the six months ended April 30, 2002 compared to the prior year period. The decrease consisted primarily of the $161,173 net gain on sale of hydro components assets in November 2000, partially offset by income from sublease of the building we purchased in January 2001.

        We recorded the minimum state income tax provision in fiscal 2002 and 2001 as we had cumulative net operating losses in all tax jurisdictions.

Liquidity and Capital Resources

        At April 30, 2002, we had a working capital deficit of $21,569. This represents a working capital decrease of $61,149 compared to that reported at October 31, 2001. The decrease primarily reflects a decrease in accounts receivables principally due to a reduction in sales volume experienced during the three months ended April 30, 2002 from the prior quarter. Cash from the sale of common stock during the six months ended April 30, 2002 provided $550,000 in net proceeds which was utilized, in part, to increase inventories and reduce accounts payable and other current liabilities.

        Our principal sources of working capital are cash generated from operations and from the sale of securities by private placement. During the six months ended April 30, 2002, we received $550,000 in proceeds from the issuance of 1,214,286 shares of common stock and warrants to purchase 200,000 shares of common stock.

        Shipments of EDI products are made as promptly as possible after receipt of firm purchase orders in accordance with delivery requirements stipulated by the customer. As of April 30, 2002, we had accepted firm orders for delivery of unshipped EDI modules valued at over $76,000.

Plan of Operation

        We are currently in the process of refinancing the building we purchased in January 2001 to both reduce the interest rate on the mortgage and to secure additional working capital. The loan will be guaranteed by our major shareholder and we anticipate concluding the refinancing arrangements by early June 2002.

        In the opinion of management, available funds, funds anticipated to be realized on the refinancing of our building, and proceeds to be realized from the sale of EDI products currently on order, are expected to satisfy our working capital requirements through September 2002. Our independent auditor has included an explanatory paragraph in its report on the financial statements for the year ended October 31, 2001 which raises substantial doubt about our ability to continue as a going concern.

        In May 2000, we appointed an exclusive representative to sell our EDI products to original equipment manufacturers (OEM's) in Belgium, Luxembourg, Germany, Austria, Switzerland, France, Spain, Portugal, Italy, Greece, Hungary, Bulgaria, Romania, Czech Republic, Slovakia, Poland, Denmark, Norway, Sweden, and Finland. The arrangement also provides that this representative may sell EDI products to both end-users and OEM's located in The Netherlands. The appointment provides that our representative receive a commission on all EDI orders in the stated territories. We currently have a similar business arrangement with a second company granting non-exclusive commissionable sales rights in the Northeast United States. Agreements appointing sales representatives for Mexico and the People's Republic of China expired in April 2002.

        Currently, we are seeking working capital through manufacturing arrangements, strategic partnerships, loans and/or the sale of private placement securities so that we may expand our EDI marketing efforts and further the MIT research program. This approach is intended to optimize the value of our EDI technology and the MIT System as we discuss licensing and/or joint venture arrangements with potential candidates. The implementation of these strategies will be dependent upon our ability to secure sufficient working capital in a timely manner.

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        We will be required to raise substantial amounts of new financing in the form of additional equity investments, loan financings, or from strategic partnerships, to carry out our business objectives. There can be no assurance that we will be able to obtain additional financing on terms that are acceptable to us and at the time required by us, or at all. Further, any financing may cause dilution of the interests of our current shareholders. If we are unable to obtain additional equity or loan financing, our financial condition and results of operations will be materially adversely affected. Moreover, estimates of our cash requirements to carry out our current business objectives are based upon various assumptions, including assumptions as to our revenues, net income or loss and other factors, and there can be no assurance that these assumptions will prove to be accurate or that unbudgeted costs will not be incurred. Future events, including the problems, delays, expenses and difficulties frequently encountered by similarly situated companies, as well as changes in economic, regulatory or competitive conditions, may lead to cost increases that could have a material adverse effect on us and our plans. If we are not successful in obtaining loans or equity financing for future developments, it is unlikely that we will have sufficient cash to continue to conduct operations, particularly research and development programs, as currently planned. We believe that in order to raise needed capital, we may be required to issue debt at significantly higher interest rates or equity securities at selling prices that are significantly lower than the current market price of our common stock.

        No assurances can be given that currently available funds will satisfy our working capital needs for the period estimated, or that we can obtain additional working capital through the sale of common stock or other securities, the issuance of indebtedness or otherwise or on terms acceptable to us. Further, no assurances can be given that any such equity financing will not result in a further substantial dilution to the existing shareholders or will be on terms satisfactory to us.

PART II—OTHER INFORMATION

Item 1 omitted as not applicable.

Item 2. Changes in Securities

Common Stock and Warrants Issued in Private Placement Transactions

        In November 2001, we sold 200,000 shares of common stock and warrants to purchase 50,000 shares of common stock to our largest shareholder for net proceeds of $100,000. The warrants are exercisable at $0.51 per share and expire in November 2004.

        In January 2002, we sold an additional 714,286 shares of common stock and warrants to purchase 100,000 shares of common stock to our largest shareholder for proceeds of $300,000. The warrants are exercisable at $0.42 per share and expire in January 2005.

        On March 15, 2002, we sold 300,000 shares of common stock and warrants to purchase 50,000 shares of common stock to the same major shareholder for proceeds of $150,000. The warrants are exercisable at $0.50 per share and expire in March 2005.

Common Stock Issued for Debt

        In January and April 2002, we issued 47,619 and 44,445 shares of common stock, respectively, to our largest shareholder in payment of a total of $40,000 in interest accrued on a $1 million loan we received in January 2001.

Common Stock Issued for Services

        On April 25, 2002, we issued 10,000 shares of common stock for services rendered by a real estate broker in connection with the refinancing of our building.

10

Warrants Issued to Non-Employee

        On March 1, 2002, we granted warrants to purchase 25,000 shares of common stock at $0.40 per share to a consultant for services to be rendered. The warrants vest in annual increments over a four-year period commencing on the date of grant and they expire on March 1, 2007.

        All of these securities issuances were in private direct transactions, exempt under Section 4(2) of the Securities Act of 1933 or Regulation D promulgated thereunder.

Items 3 through 5 omitted as not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits:

10.10.AG	Stock Purchase Agreement with Anthony M. Frank—11/01/01*
10.10.AH	Debt Conversion Agreement with Anthony M. Frank—01/02/02*
10.10.AI	Stock Purchase Agreement with Anthony M. Frank—01/02/02*
10.10.AJ	Stock Purchase Agreement with Anthony M. Frank—01/15/02*
10.10.AK	Stock Purchase Agreement with Anthony M. Frank—03/15/02**
10.10.AL	Debt Conversion Agreement with Anthony M. Frank—04/03/02**
10.10.AM	8% Sixty-Day Term Note—Anthony M. Frank—05/03/02

*

Previously filed on January 29, 2002 in connection with Registration's Form 10-KSB for the fiscal year ended October 31, 2001.

**

Previously filed in connection with Amendment No. 14 to Schedule 13D filed on April 16, 2002 on behalf of Anthony M. Frank.

(b)

Report on Form 8-K.

        None

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SIGNATURES

        Pursuant to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 30, 2002	ELECTROPURE, INC.
	By:	/s/  CATHERINE PATTERSON Catherine Patterson (Secretary and Chief Financial Officer with responsibility to sign on behalf of Registrant as a duly authorized officer and principal financial officer)

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Electropure, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited)
Electropure, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Electropure, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
PART I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

PART II—OTHER INFORMATION

Item 1 omitted as not applicable.
Item 2. Changes in Securities
Items 3 through 5 omitted as not applicable.
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EX-10.10AM

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EXHIBIT 10.10.AM

8% SIXTY-DAY TERM NOTE

$150,000 May 3, 2002

ELECTROPURE, INC., a California corporation, (the "Company"), for the value received, hereby unconditionally and absolutely promises to pay to the order of ANTHONY M. FRANK, TTEE, ANTHONY M. FRANK DEFINED BENEFIT PENSION PLAN, UNDER AGREEMENT DATED 12/01/98, FBO: SHIRLEY M. PEGG, or holder (collectively, the "Holder"), upon presentation and surrender of this Note at its office at 23456 South Pointe Drive, Laguna Hills, California 92653, or such other place as the Company may, from time to time, designate, the sum of One Hundred Fifty Thousand ($150,000), in lawful money of the United States, on July 3, 2002, or if such day is not a regular business day, then on the next business day thereafter (the "Maturity Date").

1.    PAYMENTS AND PREPAYMENTS.

        (a)  All payments and prepayments of principal and interest shall be made in immediately available funds on or before the Maturity Date to the Holder at 101 Montgomery, San Francisco, California 94104.

        (b)  The unpaid principal amount of the Note from time to time outstanding shall bear interest from the date of this Note at the rate of Eight Percent (8%) per annum until paid. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days.

        (c)  The Company may prepay at any time in advance of the Maturity Date all or any part of this Note, plus accrued interest on the portion of the principal being prepaid. Interest on the portion of the Note prepaid shall cease to accrue on and after the date of such prepayment.

2.    NOTICES TO NOTEHOLDER.

        So long as this Note shall be outstanding, if the Company (i) shall pay any dividend or make any distribution upon the Company Stock or (ii) shall effect a capital reorganization, reclassification of capital stock, consolidation or merger with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend or distribution, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up.

3.    EVENTS OF DEFAULT.    If one or more of the following described events shall occur (each an "Event of Default"):

        (a)  The Company shall fail to pay the principal of, or interest on, this Note within five (5) days after the Holder has given written notice to the Company that the same has become due; or

        (b)  The Company shall fail to perform or observe any of the provisions contained in any Section of this Note and such failure shall continue for more than thirty (30) days after the Holder has given written notice to the Company; or

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        (c)  Any material representation or warranty made in writing by or on behalf of the Company in this Note shall prove to have been false or incorrect in any material respect, or omits to state a material fact required to be stated therein in order to make the statements contained therein, in the light of the circumstances under which made, not misleading, on the date as of which made, and the Company shall have failed to cure such false or incorrect statement within thirty (30) days after the Holder has given written notice to Borrower; or

        (d)  The Company shall be adjudicated a bankrupt or insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Company shall apply for or consent to the appointment of a receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Company and such appointment shall continue undischarged for a period of thirty (30) days; or the Company shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Company and shall remain undismissed for a period of ninety (90) days; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Company and such judgment, writ, or similar process shall not be released, vacated or fully bonded within ninety (90) days after its issue or levy; or

        (e)  The Company shall be enjoined, restrained or in any way prevented by a court order from continuing to conduct all or any material part of its business affairs;

        (f)    Any suit, action or other proceeding (judicial or administrative) commenced against the Company, or with respect to any assets of the Company, shall threaten to have a material adverse effect on their future operations, including, without limitation a final judgment or settlement in excess of $25,000 in excess of insurance shall be entered in, or agreed to in respect of any such suit, action or proceeding.

        THEN, or at any time thereafter, and in each and every case:

        (1)  Where the Company is in default under the provisions of Section 3(d) hereof, the entire unpaid principal amount of the Note, all interest accrued and unpaid thereon, and all other amounts payable to the Holder hereunder shall automatically become and be forthwith due and payable without offset or counterclaim of any kind and without presentment, demand, protest or notice of any kind, and without regard to the running of the statute of limitations, all of which are hereby expressly waived by the Company; and

        (2)  In any other case referred to in this Section 3, the Holder may, by written notice to the Company, as the case may be, declare the entire unpaid principal amount of this Note, all interest accrued and unpaid hereon, and all other amounts payable hereunder to be forthwith due and payable, whereupon the same shall become immediately due and payable, without offset or counterclaim of any kind and without presentment, demand, or protest, and without regard to the running of any statutes of limitation, all of which are hereby expressly waived by the Company.

        Any declaration made pursuant to Section 3(2) hereof is subject to the condition that, if at any time after the principal of this Note shall have become due and payable, and before any judgment or decree for the payment of the moneys so due, or any thereof, shall have been entered, all arrears of principal and interest upon this Note (except that principal of this Note which by such declaration shall have become payable) shall have been duly paid, and every Event of Default shall have been made good, waived or cured, then and in every such case the Holder shall be deemed to have rescinded and annulled such declaration and its consequences; but no such rescission or annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon.

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4.    CORPORATE OBLIGATION.    It is expressly understood that this Note is solely a corporate obligation of the Company and that any and all personal liability, either at common law or in equity, or by constitution or statute, of, and any and all rights and claims against, every stockholder, officer, or director, as such, past, present or future, are expressly waived and released by the Holder as a part of the consideration for the issuance hereof.

5.    AUTHORIZATION; NO CONFLICT.    The borrowings hereunder, the execution and delivery of the Note and the performance by the Company of its obligations under this Agreement and the Note are within the corporate powers of the Company, have been authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required) and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or of any agreement binding upon the Company.

6.    TRANSFER.    Subject to the appropriate provisions hereof, this Note or any portion of the principal amount hereof (or any remaining balance if any pre-payments have occurred pursuant to Section 1 hereof) is transferable on the records of the Company upon presentation of this Note, properly endorsed, at its principal office; upon such presentation and transfer a new Note or Notes will be issued. For the purposes of payment and all other purposes, the Company shall deem and treat the person in whose name this Note is registered as the absolute owner hereof and the Company shall not be affected by any notice to the contrary.

7.    MISCELLANEOUS.

        (a)  Notwithstanding the foregoing, the Company promises to pay interest after maturity (whether by acceleration or otherwise, and before as well as after judgment) at the same rate as above provided prior to maturity on balances, if any, then outstanding.

        (b)  Interest under this Note shall be computed on the basis of a thirty (30) day month and a year of 360 days for the actual number of days elapsed.

        IN WITNESS WHEREOF, the Company has caused this Note to be executed in Laguna Hills, California as of the day and year first above written.

COMPANY:	HOLDER:
ELECTROPURE, INC.	ANTHONY M. FRANK, TTEE, ANTHONY M. FRANK DEFINED BENEFIT PENSION PLAN UNDER AGREEMENT DATED 12-01-98, FBO: SHIRLEY M. PEGG

By	/s/ Catherine Patterson	By	/s/ Anthony M. Frank
	Catherine Patterson, Secretary		Anthony M. Frank
	23456 South Pointe Drive Laguna Hills, CA 92653		101 Montgomery San Francisco, CA 94104

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8% SIXTY-DAY TERM NOTE