Nephros Inc. Reports Third Quarter 2006 Financial Results

NEW YORK, Nov. 15 /PRNewswire-FirstCall/ -- Nephros, Inc. announced today financial results for the three months and nine months ended September 30, 2006.

For the quarter ended September 30, 2006, Nephros reported net revenue of $164,699, attributable to sales of its OLpur(TM) MDHDF products in Europe, compared to $225,248 in the corresponding period of 2005.

Nephros reported a net loss attributable to common stockholders in the third quarter of 2006 of $1,905,528, or $0.15 loss per basic and diluted share, compared to a loss of $1,747,882, or $0.14 loss per basic and diluted share, in the year-earlier period. The average number of basic and diluted common shares for the quarter ended September 30, 2006 was 12,317,992, compared to 12,307,089 for the quarter ended September 30, 2005.

For the nine months ended September 30, 2006, Nephros reported net revenue of $641,115 compared with $2,353,339 in the same period of 2005. All $641,115 of net revenue for the first nine months of 2006 was recognized from product sales. For the first nine months of 2005, net revenue recognized from product sales totaled $603,339. Net revenue for the first nine months of 2005 also included a one-time, upfront fee of $1.75 million resulting from Nephros's license agreement with Asahi Kasei Medical Co., Ltd., the largest filter provider in Japan, entered into on March 2, 2005.

Nephros reported a net loss attributable to common stockholders of $5,758,375, or $0.47 loss per basic and diluted share, for the first nine months of 2006, compared to a loss of $4,173,102, or $0.34 loss per basic and diluted share, in the same period last year. The average number of basic and diluted common shares for the nine months ended September 30, 2006 was 12,316,773 compared to 12,254,753 for the nine months ended September 30, 2005.

As of September 30, 2006, Nephros had cash, cash equivalents and short-term investments of $4,723,957.

"As we announced in October, several recently completed studies in Germany, France, Sweden and Spain have been published, highlighting the superior performance of our MD mid-dilution filter products; the respective scientists will be making several presentations related to some of these studies at the upcoming American Society of Nephrology ("ASN") meeting in San Diego, November 15-18. Nephros will also have a display at the ASN meeting designed to raise awareness of our proprietary mid-dilution technologies within the U.S. Nephrology community. We hope that the positive results from these studies will contribute strongly to the demand for our mid-dilution hemodiafiltration therapy products in Europe and, eventually, the United States. We are also moving ahead with our strategy to be the first to introduce more effective ESRD therapy here in the United States using our H2H(TM) platform, increasing our OLpur(TM) filter sales opportunities accordingly," stated Norman Barta, chief executive officer of Nephros. "In water filtration, our Department of Defense appropriation to pursue ultra reliable technologies for the U.S. Marine Corps represents an exciting new opportunity for our Dual Stage Ultrafilter product. Our DSU pilot program, now at two major hospitals here in New York, is progressing as planned."

About Nephros Inc.

Nephros, Inc., headquartered in New York, is a medical device company developing and marketing products designed to improve the quality of life for the End-Stage Renal Disease (ESRD) patient, while addressing the critical financial and clinical needs of the care provider. Nephros also markets filtration products complimentary to its core ESRD therapy business. ESRD is a disease state characterized by the irreversible loss of kidney function. Nephros believes that its products are designed to remove a range of harmful substances more effectively, and more cost-effectively, than existing ESRD treatment methods; particularly with respect to substances known collectively as "middle molecules," due to their molecular weight, that have been found to contribute to such conditions as dialysis related amyloidosis, carpal tunnel syndrome, degenerative bone disease and ultimately, to mortality in the ESRD patient.

Nephros also markets a line of water filtration products, the Dual Stage Ultrafilter (DSU). The Company's patented dual stage cold sterilization ultrafilter has the capability to filter out bacteria and, due to its exceptional filtration levels, filter out many viruses and parasites. The Company considers the DSU a significant breakthrough in providing affordable and reliable water filtration. The DSU is based on Nephros' proprietary water filtration technology originally designed for use in its H2H machine, and is a complimentary product line to the Company's main focus, the ESRD therapy business.

Forward Looking Statements

This news release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such statements may include statements regarding the efficacy and intended use of Nephros's technologies under development, the timelines for bringing such products to market and the availability of funding sources for continued development of such products and other statements that are not historical facts, including statements which may be preceded by the words "intends," "may," "will," "plans," "expects," "anticipates," "projects," "predicts," "estimates," "aims," "believes," "hopes," "potential" or similar words. For such statements, Nephros claims the protection of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond the control of Nephros. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include the risks that: (i) products that appeared promising to Nephros in research or clinical trials may not demonstrate anticipated efficacy, safety or cost savings in subsequent pre-clinical or clinical trials; (ii) Nephros may not obtain appropriate or necessary governmental approvals to achieve its business plan or effectively market its products; (iii) product orders may be cancelled, patients currently using Nephros's products may cease to do so and patients expected to begin using Nephros's products may not; (iv) Nephros's technology and products may not be accepted in current or future target markets, which could lead to the failure to achieve market penetration of Nephros's products; (v) Nephros may not be able to sell its ESRD or water filtration products at competitive prices or profitably; (vi) Nephros may not be able to satisfy its debt obligations when they become due and payable; (vii) Nephros may not be able to build key relationships with physicians, clinical groups and government agencies, pursue or increase sales opportunities in Europe or elsewhere, or be the first to introduce hemodiafiltration therapy in the United States; and (viii) Nephros may not be able to secure or enforce adequate legal protection, including patent protection, for its products. More detailed information about Nephros and the risk factors that may affect the realization of forward-looking statements is set forth in Nephros's filings with the Securities and Exchange Commission, including Nephros's Annual Report on Form 10-KSB filed with the SEC for the fiscal year ended December 31, 2005 and its Quarterly Report on Form 10-QSB filed with the SEC for the fiscal quarter ended June 30, 2006. Investors and security holders are urged to read those documents free of charge on the SEC's web site at Nephros does not undertake to publicly update or revise its forward-looking statements as a result of new information, future events or otherwise.

NEPHROS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents $923,957 $746,581 Short-term investments 3,800,000 4,500,000 Accounts receivable, less allowances: 2006: $37,157; 2005: $18,697 472,944 244,100 Inventory 463,442 814,548 Prepaid expenses and other current assets 380,905 358,306 Total current assets 6,041,248 6,663,535 Property and equipment, net 943,061 1,143,309 Other assets 17,732 17,731 Total assets $7,002,041 $7,824,575 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $762,261 $766,158 Accrued expenses 273,020 451,109 Accrued severance expense - 318,250 Note payable - short-term portion 379,751 295,838 Total current liabilities 1,415,032 1,831,355 Convertible notes payable 5,210,860 - Accrued interest-convertible notes 103,430 - Note payable - long-term portion 184,025 613,727 Total liabilities 6,913,347 2,445,082 Stockholders' equity: Common stock 12,318 12,313 Additional paid-in capital 53,114,329 54,848,711 Deferred compensation - (2,189,511) Accumulated other comprehensive loss (36,694) (49,137) Accumulated deficit (53,001,259) (47,242,883) Total stockholders' equity 88,694 5,379,493 Total liabilities and stockholders' equity $7,002,041 $7,824,575 NEPHROS, INC. AND SUBSIDIARY Unaudited Consolidated Statements of Operations Three Months Ended Nine Months Ended September 30 September 30 2006 2005 2006 2005 Contract revenues $- $- $- $1,750,000 Net product revenues 164,699 225,248 641,115 603,339 Net revenues 164,699 225,248 641,115 2,353,339 Cost of goods sold 202,839 151,646 810,677 400,695 Gross (loss) profit (38,140) 73,602 (169,562) 1,952,644 Operating expenses: Research and development 544,505 401,873 1,444,281 1,415,584 Depreciation expense 64,223 75,345 224,250 230,050 Selling, general and administrative 1,256,354 1,404,660 3,965,817 4,658,975 Total operating expenses 1,865,082 1,881,878 5,634,348 6,304,609 Loss from operations (1,903,222) (1,808,276) (5,803,910) (4,351,965) Interest income 116,014 60,394 163,855 178,863 Interest expense 113,494 - 113,494 - Other expense 4,826 - 4,826 - Net loss $(1,905,528) $(1,747,882) $(5,758,375) $(4,173,102) Basic and diluted net loss per common shares $(0.15) $(0.14) $(0.47) $(0.34) Shares used in computing basic and diluted net loss per common share 12,317,992 12,307,089 12,316,773 12,254,753 NEPHROS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended September 30, 2006 2005 Operating activities: Net loss $(5,758,375) $(4,173,102) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 224,250 229,828 Loss on disposal of equipment 24,293 - Amortization of debt discount 3,939 - Noncash stock-based compensation 453,693 326,458 (Increase) decrease in operating assets: Accounts receivable (181,076) (54,813) Inventory 387,087 184,445 Prepaid expenses and other current assets (490) (248,800) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses (614,736) 267,987 Accrued severance expense (335,402) - Accrued interest-convertible notes 103,430 - Deferred revenue - (64,058) Net cash used in operating activities (5,693,387) (3,532,055) Investing activities Purchase of property and equipment (32,776) (228,990) Purchase of short-term investments (3,000,000) - Repayments of short-term investments 3,700,000 - Net cash provided by (used in) investing activities 667,224 (228,990) Financing activities Proceeds from private placement of common stock - 955,521 Proceeds from private placement of convertible notes 5,206,921 - Adjustment to proceeds from IPO of common stock - 44,361 Proceeds from exercise of stock options 1,441 1,439 Net cash provided by financing activities 5,208,362 1,001,321 Effect of exchange rates on cash (4,824) (130,514) Net increase (decrease) in cash and cash equivalents 177,375 (2,890,238) Cash and cash equivalents, beginning of period 746,581 3,719,181 Cash and cash equivalents, end of period $923,957 $828,943 Supplemental disclosure of cash flow information Cash paid for taxes $32,283 $11,630 Contact: Mark Lerner, CFO Paul Henning Nephros, Inc. Cameron Associates Tel: 212-781-5113 (212) 245-8800 X 221

Nephros, Inc.

CONTACT: Mark Lerner, CFO, Nephros, Inc., +1-212-781-5113; or PaulHenning, of Cameron Associates for Nephros, Inc., +1-212-245-8800 X 221

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