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
Mark W. Lerner (“Lerner”), as of April 28, 2008 (the “Effective Date”). The
Company and Lerner are referred to herein as the “Parties.” This Agreement
cancels and supersedes all prior agreements relating to Lerner’s employment with
the Company except as provided in this Agreement.

WHEREAS, Lerner is employed as Chief Financial Officer of the Company pursuant
to an Offer of Employment dated March 3, 2006, and effective as of March 6, 2006
(the“Employment Agreement”) under which the Parties agreed to certain terms and
conditions relating to Lerner’s employment with the Company;
 
WHEREAS, because of his employment as an executive of the Company, Lerner 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, Lerner and the Company entered into an Employee Patent and Confidential
Information Agreement dated February 28, 2006 (the “Confidentiality Agreement”);
 
WHEREAS, Lerner and the Company mutually desire to terminate their employment
relationship and Lerner desires to resign his position as Chief Financial
Officer of the Company, and all other director, officer and employee positions,
if any, held by Lerner in the Company or any of its subsidiaries or affiliates
effective as of the Effective Date;
 
WHEREAS, Lerner and the Company mutually desire that, in exchange for
continuation of his current salary and benefits for a period of up to 17 days
following the Effective Date (the “Transition Period”) during which Lerner shall
consult with officers, directors and agents of the Company and otherwise provide
assistance in the Company’s transition to a new Chief Financial Officer as
reasonably requested by the Company (the “Transition Role”);
 
WHEREAS, Lerner acknowledges that the Confidentiality Agreement shall survive
this Agreement; and
 
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 Lerner’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 Lerner’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
Lerner agree as follows:
 
1. End of Lerner’s Employment. The Parties agree that the Employment Agreement
shall terminate on the Effective Date. Lerner’s last day of employment with the
Company will be May 15, 2008, or such earlier date, if any, that the Company may
choose to terminate the Transition Period in the event that the Company
determines in its sole discretion that Lerner’s services in the Transition Role
are not satisfactory (the “Separation Date”). Effective as of the Effective
Date, Lerner hereby resigns his position as Chief Financial Officer 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. On the
Effective Date, Lerner will execute a resignation letter in the form attached
hereto, and provide any other documents, if necessary, to effect his
resignation(s).
 

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2. Certain Payments and Benefits.
 
(a) Accrued Obligations. Within five (5) days following the Separation Date, the
Company shall pay Lerner for all unpaid salary, reimbursement for unpaid
reimbursable company-related expenses for which Lerner has submitted expense
requests and supporting documentation within three (3) days of the Separation
Date, and any accrued but unused vacation through the Separation Date (“Accrued
Obligations”).  Except as stated in this Agreement or as required by law, all
other compensation and benefits which relate to Lerner’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) Separation Payments. The Company will pay Lerner his current base salary for
a period of three months following the Separation Date (the “Separation
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 execution of this
Agreement. The Separation Payments will not be treated as compensation under the
Company’s 401(k) Plan or any other retirement plan.
 
(c) Outplacement Assistance. The Company will reimburse Lerner for up to $5,000
of reasonable expenses for professional outplacement assistance, upon an
accounting therefor. Such outplacement services must commence during the
Separation Period. Any additional professional outplacement assistance shall be
at Lerner's sole expense.
 
(d) Waiver of Additional Compensation or Benefits. Other than the Separation
Payments and other obligations provided for in this Agreement, Lerner 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
Lerner in the Company’s 401(k) Plan, retirement plan and any other plans in
which Lerner participates, including the 401(k) matching payments for
contributions made up to and including the Separation Date, shall be distributed
in accordance with the terms of the plan and applicable law. Lerner 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.
 
3. Press Release. In connection with the termination of Lerner’s employment with
the Company, Lerner 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 Lerner shall not
unreasonably withhold his approval.
 

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4. Mutual Release and Waiver. 
 
(a) By Lerner. 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 Lerner, Lerner, 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 Lerner’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. Lerner further agrees that Lerner will not
file or permit to be filed on Lerner’s behalf any such claim. Notwithstanding
the preceding sentence or any other provision of this Agreement, this release is
not intended to interfere with Lerner’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, Lerner hereby waives the right to recover in any
proceeding Lerner 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
Lerner’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
Lerner 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. Lerner does not release his
right to enforce the terms of this Agreement. Lerner 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, including Lerner’s promises to comply with the provisions of the
Confidentiality Agreement, on behalf of itself and all of its subsidiaries, and
their present and former agents, employees, officers, directors, attorneys,
stockholders, plan fiduciaries, successors and assigns, irrevocably and
unconditionally releases, waives, and forever discharges, Lerner and his heirs,
executors, successors and assigns (the “Lerner Released Parties”), from any and
all claims, demands, actions, causes of action, costs, fees, and all liability
whatsoever, whether known or unknown, fixed or contingent, which the Company
has, had, or may have against the Lerner Released Parties relating to or arising
out of Lerner’s employment with the Company or its affiliates or the termination
of that employment or any circumstances related thereto, that do not relate to
or arise out of Lerner’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 Lerner’s
employment or retirement as Chief Financial Officer of the Company.
 

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5. Return of the Company Property. Within seven (7) days of the Separation Date,
Lerner shall, to the extent not previously returned or delivered: (a) return all
equipment, records, files, programs or other materials and property in his
possession which belongs to the Company or any one or more of its affiliates,
including, without limitation, all, computer access codes, Blackberries, credit
cards, keys and access cards; and (b) deliver all original and copies of notes,
materials, records, plans, technical data or other documents, files or programs
(whether stored in paper form, computer form, digital form, electronically or
otherwise), other than this Agreement and copies of this Agreement, that relate
or refer to (1) the Company or any one or more of its affiliates, or (2) the
Company or any one or more of the Company’s affiliates’ financial statements,
business contacts, and sales. By signing this Agreement, Lerner represents and
warrants that he has not retained and has or will timely return and deliver all
the items described or referenced in subsections (a) or (b) above; and, that
should he later discover additional items described or referenced in subsections
(a) or (b) above, he will promptly notify the Company and return/deliver such
items to the Company. Before Lerner returns any computers, Blackberry, personal
digital assistant or other electronic storage device, Lerner may delete any
personal information.
 
6. Material Breach of Agreement. In the event Lerner knowingly fails to
materially fulfill any of his obligations in this Agreement or under the
Confidentiality Agreement during the Separation Period, or Lerner or anyone
acting on his behalf brings suit against the Company seeking to declare any term
of this Agreement void or unenforceable and if one or more material terms of
this Agreement are ruled by a court or arbitrator to be void or unenforceable or
subject to reduction or modification, then the Company shall be entitled to
(i) terminate the Agreement, (ii) terminate any remaining Separation Payments
set forth in Section 2, and Lerner will not be entitled to receive any remaining
Separation Payments, (iii) recover Separation Payments and all other benefits
set forth in Section 2 already paid to Lerner upon court order, (iv) recover
attorneys’ fees, expenses and costs the Company incurs in any such action,
and/or (v) recover any and all other relief and damages to which the Company may
be entitled at law or in equity as a result of a breach of this Agreement.
 
7. Mutual Non-Disparagement.
 
(a) Lerner agrees that he will not, directly or indirectly, disclose,
communicate, or publish any disparaging information concerning the Company, its
affiliates, its officers and directors, its customers or clients, operations,
technology, proprietary or technical information, or software whatsoever, or
cause others to disclose, communicate, or publish any disparaging information
concerning the same. Lerner further agrees that he will not disclose, directly
or indirectly, communicate, or publish any disparaging information concerning
the terms of his employment with the Company, any other circumstance that arose
from his employment with the Company or separation from employment, or any
action or event that occurred during his employment with the Company, or cause
others to disclose, communicate, or publish any disparaging information
concerning the same;
 
(b) The Company, including its officers and directors, agrees that it will not,
directly or indirectly, disclose, communicate, or publish any disparaging
information concerning Lerner, or cause others to disclose, communicate, or
publish any disparaging information concerning the same. the Company further
agrees that it will not disclose, directly or indirectly, communicate, or
publish any disparaging information concerning the terms of Lerner’s employment
with the Company or separation from employment, any other circumstance that
arose from Lerner’s employment with the Company, or any action or event that
occurred during Lerner’s employment with the Company, or cause others to
disclose, communicate, or publish any disparaging information concerning the
same.
 

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8. Not An Admission of Wrongdoing. This Agreement shall not in any way be
construed as an admission by any party of any acts of wrongdoing, violation of
any statute, law or legal or contractual right.
 
9. Voluntary Execution of the Agreement. Lerner and the Company represent and
agree that they have had an opportunity to review all aspects of this Agreement,
and that they fully understand all the provisions of the Agreement and are
voluntarily entering into this Separation Agreement and the General Release.
Lerner further represents that he has not transferred or assigned to any person
or entity any claim involving the Company or any portion thereof or interest
therein.
 
10. Confidentiality of Agreement. The Company and Lerner agree to keep
confidential the specific terms of this Agreement and shall not disclose same to
any person except that Lerner may inform (i) his spouse and his financial, tax,
professional, pastoral and legal advisors of the contents or terms of this
Agreement, and (ii) prospective employers of the relevant terms of this
Agreement. Lerner agrees to keep confidential Lerner’s separation from
employment from the Company and the circumstances relating to his separation
until it is disclosed to the general public, and until such time, Lerner will
only discuss his separation from employment with his spouse and his financial,
tax and legal advisors or as otherwise directed by the Company or its agents.
Before sharing the Agreement or its terms with his spouse or his financial, tax
and legal advisors, Lerner agrees to notify them of this confidentiality
requirement. If Lerner or the Company is required to disclose the Agreement to
others by legal process, the party so ordered shall to the extent practical
under the circumstances first give notice to the other parties in order that
such other party may have an opportunity to seek a protective order. The Company
and Lerner shall cooperate with each other, should either decide to seek a
protective order with all costs and expenses being borne by the party seeking
such order. This Agreement may be disclosed or appended as an exhibit to any
securities filing required to be made by the Company or its affiliates.
 
11. Binding Effect. This Agreement shall be binding upon the Company and upon
Lerner and his heirs, administrators, representatives, executors, successors and
assigns. In the event of Lerner’s death, this Agreement shall operate in favor
of his estate and all payments, obligations and consideration will continue to
be performed in favor of his estate.
 
12. Severability. Should any provision of this Agreement be declared or
determined to be illegal or invalid by any government agency or court of
competent jurisdiction, the validity of the remaining parts, terms or provisions
of this Agreement shall not be affected and such provisions shall remain in full
force and effect.
 
13. Entire Agreement. This Agreement sets forth the entire agreement between the
parties, and fully supersedes any and all prior agreements, understandings, or
representations between the parties pertaining to Lerner’s employment with the
Company, the subject matter of this Agreement or any other term or condition of
the relationship between the Company and Lerner including the Employment
Agreement; except that the provisions of the Confidentiality Agreement shall
survive this Agreement. Lerner represents and acknowledges that in executing
this Agreement, he does not rely, and has not relied, upon any representation(s)
by the Company or its agents except as expressly contained in this Agreement.
 

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14. Knowing and Voluntary Waiver. Lerner, by Lerner’s free and voluntary act of
signing below, (i) acknowledges that he has been given a period of twenty-one
(21) days to consider whether to agree to the terms contained herein, (ii)
acknowledges that he has been advised to consult with an attorney prior to
executing this Agreement, (iii) acknowledges that he understands that this
Agreement specifically releases and waives all rights and claims he may have
under the Age Discrimination in Employment Act, as amended, prior to the date on
which he signs this Agreement, and (iv) agrees to all of the terms of this
Agreement and intends to be legally bound thereby. The parties hereto
acknowledge and agree that each party has reviewed and negotiated the terms and
provisions of this Agreement and has contributed to its preparation (with advice
of counsel). Accordingly, the rule of construction to the effect that
ambiguities are resolved against the drafting party shall not be employed in the
interpretation of this Agreement. Rather, the terms of this Agreement shall be
construed fairly as to both parties hereto and not in favor of or against either
party, regardless of which party generally was responsible for the preparation
of this Agreement.
 
Lerner understands and acknowledges that he has seven (7) days after he executes
this Agreement to revoke the release of his claims under the ADEA. During this
seven-day revocation period, Lerner may revoke his agreement to release claims
under the ADEA by indicating in writing to the Company his intention to revoke.
If Lerner exercises his right to revoke such release, he shall forfeit his right
to receive any of the payments or benefits provided for herein, and to the
extent such payments or benefits have already been made, Lerner agrees that he
will immediately reimburse the Company for the amounts of such payments and
benefits.
 
15. Notices. All notices and other communications hereunder will be in writing.
Any notice or other communication hereunder shall be deemed duly given if it is
sent by registered or certified mail, return receipt requested, postage prepaid,
and addressed to the intended recipient as set forth:
 
If to Lerner:

Mark W. Lerner
23 White Deer Lane
West Harrison, NY 10604

If to the Company:

Nephros, Inc.
ATTN: President and CEO
3960 Broadway
New York, NY 10032

Any party may send any notice or other communication hereunder to the intended
recipient at the address set forth using any other means (including personal
delivery, expedited courier, messenger services, fax, ordinary mail or
electronic mail), but no such notice or other communication shall be deemed to
have been duly given unless and until it is actually received by the intended
recipient. Any party may change the address to which notices and other
communications are to be delivered by giving the other party notice.

16. Governing Law. This Agreement shall in all respects be interpreted,
enforced, and governed under the laws of the State of New York. The Company and
Lerner agree that the language on this Agreement shall, in all cases, be
construed as a whole, according to its fair meaning, and not strictly for, or
against, any of the parties. Venue of any litigation arising from this Agreement
shall be in a court of competent jurisdiction in New York County, New York.
 
17. Counterparts. This Agreement may be executed in counterparts, each of which
when executed and delivered (which deliveries may be by facsimile) shall be
deemed an original and all of which together shall constitute one and the same
instrument.
 

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18. No Assignment Of Claims. Lerner represents and agrees that he has not
transferred or assigned, to any person or entity, any claim involving the
Company, or any portion thereof or interest therein.
 
19. No Waiver. This Agreement may not be waived, modified, amended,
supplemented, canceled or discharged, except by written agreement of the Company
and Lerner. Failure to exercise and/or delay in exercising any right, power or
privilege in this Agreement shall not operate as a waiver. No waiver of any
breach of any provision shall be deemed to be a waiver of any preceding or
succeeding breach of the same or any other provision, nor shall any waiver be
implied from any course of dealing between or among the Company and Lerner.
 
20. Acknowledgments by the Company. The Company acknowledges that (i) this
Agreement is not an employment contract as defined in 11 U.S.C. § 548; (ii) the
Company and Lerner are entering into this Agreement in good faith and in the
ordinary course of business; and (iii) by entering into this Agreement, the
Company does not intend to hinder, delay, or defraud any creditors of either the
Company or both.
 
[Remainder of Page Intentionally Left Blank]

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I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THE FOREGOING AGREEMENT,
THAT I UNDERSTAND ALL OF ITS TERMS AND THAT I AM RELEASING CLAIMS AND
THAT I AM ENTERING INTO IT VOLUNTARILY.

AGREED TO BY:
 
/s/ Mark W. Lerner
 
May 7, 2008
Mark W. Lerner
 
Date

 
STATE OF NEW YORK

COUNTY OF NEW YORK

Before me, a Notary Public, on this day personally appeared MARK W. LERNER,
known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledges to me that he has executed this Agreement on behalf
of himself and his heirs, for the purposes and consideration therein expressed.

Given under my hand and seal of office this 7th day of May, 2008.
 

/s/
Notary Public in and for the State of New York

(PERSONALIZED SEAL)
 

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NEPHROS, INC.
 
By:           /s/ Norman J. Barta

Title:        President and Chief Executive Officer

Date:        May 7, 2008
 
STATE OF NEW YORK

COUNTY OF NEW YORK

Before me, a Notary Public, on this day personally appeared NORMAN J. BARTA,
known to me to be the person and officer whose name is subscribed to the
foregoing instrument and acknowledged to me that the same was the act of
NEPHROS, INC., and that he has executed the same on behalf of said corporation
for the purposes and consideration therein expressed, and in the capacity
therein stated.

Given under my hand and seal of office this 7th day of May, 2008.
 
/s/
Notary Public in and for the State of New York

(PERSONALIZED SEAL)

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