SEPARATION AGREEMENT AND RELEASE

This Separation Agreement and Release ( “Agreement” ) is entered into by and between Nephros, Inc., and its affiliates and subsidiaries (the “Company” ), and Norman J. Barta ( “Barta” ), as of September 15, 2008 (the “Effective Date” ). The Company and Barta are referred to herein as the “Parties.”  

WHEREAS , Barta is employed as Chairman, President and Chief Executive Officer of the Company pursuant to an Employment Agreement, dated as of July 1, 2007 (the “Employment Agreement” ), under which the Parties agreed to certain terms and conditions relating to Barta’s employment with the Company;

WHEREAS , because of his employment as an executive of the Company, Barta has obtained intimate and unique knowledge of all aspects of the Company’s business operations, current and future plans, financial plans and other confidential and proprietary information;

WHEREAS , Barta and the Company mutually desire to terminate their employment relationship and Barta desires to resign as a member of the Company’s Board of Directors and to resign his positions as Chairman, President, Chief Executive Officer, Secretary and Treasurer of the Company, and all other director, officer and employee positions (other than the Transition Role, as defined below), if any, held by Barta in the Company or any of its subsidiaries or affiliates effective as of the Effective Date;

WHEREAS , Barta and the Company mutually desire that, Barta shall be employed by the Company in the Transition Role after his termination as an officer, subject the terms and conditions set forth herein;

WHEREAS, the Parties desire to finally, fully and completely resolve all disputes that now or may exist between them, including, but not limited to those concerning Barta’s job performance and activities while employed by the Company and his hiring, employment and termination from the Company, and all disputes over benefits and compensation connected with such employment, and specifically, but not limited to, any disputes arising from the terms of Barta’s employment as set forth in the Employment Agreement.

NOW, THEREFORE , in consideration of the premises and mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Barta agree as follows:

1.   Termination; Transition.

(a) Termination . The Parties agree that the Employment Agreement shall terminate on the Effective Date. Effective as of the Effective Date, Barta hereby resigns his positions as Chairman of the Board, President, Chief Executive Officer, Secretary and Treasurer and all other director, officer, and employee positions with the Company and any of the Company’s subsidiaries or affiliates, other than the Transition Role (as defined below). On the Effective Date, Barta will execute a resignation letter in the form attached hereto as Exhibit A , and provide any other documents, if necessary, to effect his resignation(s).

(b) Transition . The Parties hereby agree that for a period of up to 26 days following the Effective Date (the “Transition Period” ), Barta shall consult as reasonably needed and not necessarily on a full time basis with officers, directors and agents of the Company and otherwise provide assistance in the Company’s transition to a new chief executive officer as reasonably requested by the Company (the “ Transition Role ”); provided, however, that the Company may choose to terminate the Transition Period at any time in the event that Barta does not render the services required by this Section in the Transition Role. During the Transition Period, Barta shall be paid an amount equal to his current pre-Transition Period salary, which shall be paid in the same manner as prior to the Transition Period, and shall be provided with the same benefits as his current pre-Transition Period benefits for the Transition Period. Transition Period payments shall be by wire transfer or direct deposit through the Company’s payroll system to Barta’s account shown therein. Upon at least seven (7) days prior written notice, Barta may elect a different account for the wire transfer or direct deposit. Barta’s last day of employment with the Company in any capacity will not be later than October 10, 2008 (the “Separation Date” ).

2.   Certain Payments and Benefits.

(a)   Accrued Obligations . On or prior to the third day following the Separation Date, Barta shall submit expense requests and supporting documentation for any unpaid reimbursable company-related expenses, and within five (5) days following the Separation Date, the Company shall pay Barta for reimbursement for unpaid reimbursable company-related expenses for which Barta has timely submitted expense requests and supporting documentation, and for all unpaid salary, other earned but unpaid benefits relating to Barta’s employment with the Company, and any accrued but unused vacation through the Separation Date (the “ Accrued Obligations ”).  Except as stated in this Agreement or as required by law, all other compensation and benefits which relate to Barta’s employment with the Company, including any benefits set forth in the Employment Agreement or in any other employee benefit plan, policy or program, except as memorialized in this Agreement, shall cease as of the Separation Date.

(b)   Milestone Bonus payment . Within five (5) days following the Separation Date, the Company shall pay Barta $18,000 in fulfillment of the contractual Milestone Bonus stipulated upon successful completion of the clinical trial of the OLpur ^TM H2H ^TM Hemodiafiltration Module and OLpur ^TM MD220 Hemodiafilter in the United States.

(c)   Separation Payments . The Company will pay Barta his current pre-Transition Period base salary for a period of six months following the Separation Date (the “ Severance Period ”), minus normal payroll withholdings and taxes, if applicable ( “Separation Payments” ), payable in accordance with the Company’s normal payroll practices beginning with the first payroll period following the Separation Date. Separation Payments shall be by wire transfer or direct deposit through the Company’s payroll system to Barta’s account shown therein. Upon at least seven (7) days prior written notice, Barta may elect a different account for the wire transfer or direct deposit. Barta shall be entitled to submit a revised and restated IRS Form W-4 and/or New York Form IT-2104 to Company with regard to income tax withholding amounts. The Separation Payments will not be treated as compensation under the Company’s 401(k) Plan or any other retirement plan.

(d)   Benefits . For a period of six (6) months after the Separation Date, Barta shall continue to participate in all employee benefit plans, programs, and arrangements providing health, medical, disability and life insurance benefits in which Barta (or as applicable, his spouse or estate) may be entitled pursuant to the plans and programs of the Company in which Barta was participating prior to the Transition and Severance Periods, the terms of which allow Barta’s continued participation, as if Barta had continued in employment with Company during the Severance Period. Alternatively, if such plans, programs, or arrangements do not allow Barta’s continued participation for the six (6) month period following the Separation Date, if Barta timely elects COBRA continuation coverage or similar continuation coverage provided for under New York or New Jersey law, Company will pay the monthly insurance premiums of such coverage for the levels and types of coverage Barta maintained for Barta’s benefit prior to the Transition and Severance Periods. In any case, at the end of the six (6) month period, Barta may pursue alternative continuation insurance coverage at his own expense. The Company will provide Barta with any notification as required by law with respect to such alternative coverage and reasonable assistance in completing any documents relating to such alternative continuing insurance coverage.

(e)   Options . The parties acknowledge that Barta has been granted certain options (collectively, the “Options”) under equity incentive plans of the Company, including the Amended and Restated Nephros 2000 Equity Incentive Plan and the Nephros, Inc. 2004 Stock Incentive Plan, which are represented by certain Option Agreements (the “Option Agreements”) that will survive the termination of Barta’s employment. Pursuant to the terms of such Option Agreements, 347,221 of shares subject to the Options granted on November 8, 2007 remain unvested as of the Effective Date and shall automatically be cancelled and forfeited by Barta as of the Separation Date. The shares subject to the Options granted on January 24, 2000, December 14, 2004, and November 8, 2007 that vested prior to the Separation Date shall remain exercisable until three months after the Separation Date, in accordance with the terms of the respective Option Agreements. The Option granted on January 30, 2003 shall remain exercisable until nine months after the Separation Date, in accordance with the terms of such Option Agreement.

(f)   Waiver of Additional Compensation or Benefits . Other than the Separation Payments and other obligations provided for in this Agreement, Barta shall not be entitled to any additional compensation, benefits, payments or grants under any benefit plan, severance plan or bonus or incentive program established by the Company or any of the Company’s affiliates. Any vested interest held by Barta in the Company’s 401(k) Plan, retirement plan and any other plans in which Barta participates, including the 401(k) matching payments for contributions made up to and including the Separation Date, shall be maintained and/or distributed at Barta’s direction, e.g., rolled over or otherwise, in accordance with the terms of the plan and applicable law. Barta agrees that the release in Paragraph 4 covers any claims he might have regarding his compensation, bonuses, stock options or grants and any other benefits he may or may not have received during his employment with the Company.

(g)   No Duty to Mitigate . Barta shall be under no duty to mitigate any losses or damage to Company with respect to any amounts payable pursuant to Section 2 of this Agreement, by seeking other employment or otherwise, nor shall the amount of any payments provided under this Section 2 be reduced by any compensation earned by Barta as the result if employment by another employer after the termination of Barta’s employment or otherwise.

(h)   Life InsuranceTransfer . Company shall cooperate with Barta regarding the transfer of ownership to Barta, named beneficiaries, payee addresses, and otherwise under any life insurance policies, more particularly, without limitation, policy number 16-957-587, Plan 75, with ISA Number 97-430-81; provided that Barta assumes all of the Company’s obligations with respect to such policies and the relevant insurer provides the Company with an acknowledgement and/or consent to such assignment and assumption (which may include a release of the Company) in form and substance satisfactory to the Company.

3.   Press Release . In connection with the termination of Barta’s employment with the Company, Barta hereby agrees to the Company’s issuance of a press release, and internal communications and external communications regarding his separation from his employment; provided that the Parties shall mutually approve the language of any press release; provided further that Barta shall not unreasonably withhold his approval or that Company shall not unreasonably propose and impose language for the press release and other communications on Barta. Any such announcements or statements shall not contain any disparaging statements about Barta. The Company agrees to include a favorable quote from the lead director of the Board of Directors concerning Barta in any press release and other communications issued relating to Barta’s resignation.

4.   Mutual Release and Waiver.  

(a)   By Barta . In consideration of the payments and other consideration provided for in this Agreement, that being good and valuable consideration, the receipt, adequacy and sufficiency of which are acknowledged by Barta, Barta, on his own behalf and on behalf of his agents, administrators, representatives, executors, successors, heirs, devisees and assigns (collectively, the “ Releasing Parties ” ) hereby fully releases, remises, acquits and forever discharges the Company and all of its affiliates, and each of their respective past, present and future officers, directors, shareholders, equity holders, members, partners, agents, employees, consultants, independent contractors, attorneys, advisers, successors and assigns (collectively, the “ Released Parties ” ), jointly and severally, from any and all claims, rights, demands, debts, obligations, losses, causes of action, suits, controversies, setoffs, affirmative defenses, counterclaims, third party actions, damages, penalties, costs, expenses, attorneys’ fees, liabilities and indemnities of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, accrued or unaccrued, whether at law, equity, administrative, statutory or otherwise, and whether for injunctive relief, back pay, fringe benefits, reinstatement, reemployment, or compensatory, punitive or any other kind of damages, which any of the Releasing Parties ever have had in the past or presently have against the Released Parties, and each of them, arising from or relating to Barta’s employment with the Company or its affiliates or the termination of that employment or any circumstances related thereto, or any other matter, cause or thing whatsoever, including without limitation all claims arising under or relating to employment, employment contracts (including the Employment Agreement), employee benefits or purported employment discrimination or violations of civil rights of whatever kind or nature, including without limitation all claims arising under the Age Discrimination in Employment Act ( “ ADEA ” ), the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the Equal Pay Act of 1963, the Rehabilitation Act of 1973, Title VII of the United States Civil Rights Act of 1964, 42 U.S.C. § 1981, the Civil Rights Act of 1991, the Civil Rights Acts of 1866 and/or 1871, the Sarbanes-Oxley Act, the New York State Labor Laws or any other applicable federal, state or local employment discrimination statute, law or ordinance, including, without limitation, any workers’ compensation or disability claims under any such laws, claims for wrongful discharge, breach of express or implied contract or implied covenant of good faith and fair dealing, and any other claims arising under state or federal law, as well as any expenses, costs or attorneys’ fees. Barta further agrees that Barta will not file or permit to be filed on Barta’s behalf any such claim. Notwithstanding the preceding sentence or any other provision of this Agreement, this release is not intended to interfere with Barta’s right to file a charge with the Equal Employment Opportunity Commission (the “ EEOC ” ) in connection with any claim he believes he may have against the Company or its affiliates. However, by executing this Agreement, Barta hereby waives the right to recover in any proceeding Barta may bring before the EEOC or any state human rights commission or in any proceeding brought by the EEOC or any state human rights commission on Barta’s behalf. This release shall not apply to any of the Company’s obligations under this Agreement, or any vested 401(k), retirement plan, health, medical or dental insurance or continuing benefits or perquisites to which Barta is entitled under this Agreement or any tax qualified pension plan of the Company or its affiliates, COBRA continuation coverage benefits or any other similar benefits required to be provided by statute. Barta does not release his right to enforce the terms of this Agreement. Barta acknowledges that certain of the payments and benefits provided for in Section 2 of this Agreement constitute good and valuable consideration for the release contained in this Section 4.

(b)   By the Company . In consideration of the mutual promises contained in this Agreement, that being good and valuable consideration, the receipt, adequacy, and sufficiency which are acknowledged by the Company, on behalf of itself and all of its subsidiaries, and their present and former representatives, agents, employees, officers, directors, attorneys, stockholders, plan fiduciaries, successors and assigns, irrevocably and unconditionally releases, waives, and forever discharges, Barta and his heirs, executors, successors and assigns (the “ Barta Released Parties ”), jointly and severally, from any and all claims, rights, demands, debts, obligations, losses, causes of action, suits, controversies, setoffs, affirmative defenses, counterclaims, third party actions, damages, penalties, costs, expenses, attorneys’ fees, liabilities and indemnities of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, accrued or unaccrued, whether at law, equity, administrative, statutory or otherwise, and whether for injunctive relief, or compensatory, punitive or any other kind of damages, which any of the Released Parties ever have had in the past or presently have against the Barta Released Parties, and each of them, arising from or relating to Barta’s employment with the Company or its affiliates or the termination of that employment or any circumstances related thereto, or any other matter, cause or thing whatsoever, including without limitation all claims arising under or relating to employment, employment contracts (including the Employment Agreement), that do not relate to or arise out of Barta’s gross negligence or intentional misconduct. This Agreement includes, without limitation, claims at law or equity or sounding in contract (express or implied) or tort, claims arising under any federal, state or local laws, or any other statutory or common law claims related to Barta’s employment or retirement as Chairman, Chief Executive Officer, Secretary, and Treasurer of the Company.

5.   Exclusive Employment; Noncompetition .

(a)   No Conflict; No Other Employment . Until the Separation Date, Barta shall not: (i) engage in any activity which conflicts or interferes with or derogates from the performance of Barta’s duties hereunder nor shall Barta 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 Barta 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 Barta receives the prior written approval of the Board of Directors of the Company.

(b)   No Competition . Barta acknowledges and recognizes the highly competitive nature of the Company’s business and that access to the Company’s confidential records and proprietary information renders him special and unique within the Company’s industry. In consideration of the termination of the Employment Agreement (which includes restrictions substantially similar to those provided by this Section 5) and the payment by the Company to Barta of amounts that may hereafter be paid to Barta pursuant to this Agreement and other obligations undertaken by the Company hereunder, Barta agrees that during (i) his employment with the Company and (ii) the period beginning on the Separation Date and ending on the last day of the Severance Period, Barta shall not, directly or indirectly, engage (as owner, investor, partner, stockholder, employer, employee, consultant, advisor, director or otherwise) in any Competing Business, provided that the provisions of this Section 5(b) will not be deemed breached merely because Barta owns less than 1% of the outstanding common stock of a publicly-traded company. Additionally, the Company, upon sixty (60) days written notice to Barta shall have the option subject to Barta’s mutual approval, which shall not be unreasonably withheld, to extend the No Competition Period for an additional six months in return for a six (6) month extension of the Severance Period in consideration for continued Separation Payments under Section 2(c) hereof and continued welfare coverage under Section 2(d) hereof during such extended Severance Period. For purposes of this Agreement, “Competing Business” shall mean (i) any business in which the Company is engaged as of the Effective Date in the geographic locations set forth on Schedule A hereto, including without limitation with regard to the businesses of (A) the development of medical equipment in the hemodiafiltration realm for use in ESRD chronic therapy, and (B) the development of cold water purification systems.

(c)   Non-Solicitation . In further consideration of the termination of the Employment Agreement (which includes restrictions substantially similar to those provided by this Section 5) and the payment by the Company to Barta of amounts that may hereafter be paid to Barta pursuant to this Agreement and other obligations undertaken by the Company hereunder, Barta agrees that until the end of the Severance Period, he shall not, directly or indirectly, (i) solicit, encourage or attempt to solicit or encourage any of the employees, agents, consultants or representatives of the Company or any of its affiliates to terminate his, her, or its relationship with the Company or such affiliate; (ii) solicit, encourage or attempt to solicit or encourage any of the employees of the Company or any of its affiliates to become employees or consultants of any other person or entity; (iii) solicit, encourage or attempt to solicit or encourage any of the consultants of the Company or any of its affiliates to become employees or consultants of any other person or entity, provided that the restriction in this clause (iii) shall not apply if (A) such solicitation, encouragement or attempt to solicit or encourage is in connection with a business which is not a Competing Business and (B) the consultant’s rendering of services for the other person or entity will not interfere with the consultant’s rendering of services to the Company; (iv) solicit or attempt to solicit any customer, vendor or distributor of the Company or any of its affiliates with respect to any product or service being furnished, made, sold or leased by the Company or such affiliate, provided that the restriction in this clause (iv) shall not apply if such solicitation or attempt to solicit is (A) in connection with a business which is not a Competing Business and (B) do