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Exhibit 10.1

 
EMPLOYMENT AGREEMENT
 
THIS AGREEMENT (the “Agreement”), made in New York, New York as of July 1, 2006,
between Nephros, Inc., a Delaware corporation (the “Company”), and William J.
Fox (“Executive”).
 
WHEREAS, the Company desires to employ Executive as its Executive Chairman, and
Executive desires to accept such employment on the terms and conditions
hereinafter set forth;
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
 
1.     Term.
 
Unless earlier terminated in accordance with Section 4 hereof, the term of this
Agreement shall be the two-year period commencing as of the date hereof and
ending on June 30, 2008 (the “Initial Term”). Thereafter, this Agreement shall
automatically be extended for one or more additional annual periods unless
Executive or the Company gives written notice, no less than sixty (60) days
prior to the end of the Initial Term or any extension thereof (the Initial Term
and any extension, together, the “Term”), of his or its election not to renew
this Agreement (in which case Executive’s employment shall terminate on the date
of expiration of the Term, unless earlier terminated in accordance with Section
4 hereof). In the event that Executive’s employment terminates because the
Company has given written notice to Executive electing not to extend the Term,
Executive shall upon such termination be entitled to receive the compensation
and benefits set forth in Section 5(d) of the Agreement as if Executive’s
employment had been terminated by the Company without Cause (as defined in
Section 4(c) of the Agreement), as of the date of expiration of the Term. In the
event that Executive’s employment terminates because Executive has given written
notice to the Company electing not to extend the Term, Executive shall upon such
termination be entitled to receive the compensation and benefits set forth in
Section 5(b) of the Agreement as if Executive’s employment had been terminated
by Executive without Good Reason (as defined in Section 4(e) of the Agreement),
as of the date of expiration of the Term.
 
2.      Employment.
 
(a)  Employment by the Company; Director. Executive agrees to be employed by the
Company during the Term upon the terms and subject to the conditions set forth
in this Agreement. Executive shall serve as the Executive Chairman of the
Company and shall report to the Board of Directors of the Company (the “Board of
Directors”). Executive agrees to (i) continue to serve as a member of the Board
of Directors if appointed or elected to such position, (ii) resign as a member
of the Board of Directors upon termination of his employment for any reason by
him or the Company and (iii) execute such documents and take such other action
(if any) as may be requested by the Company to give effect to any such
resignation.
 
 

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(b)  Performance of Duties. Throughout the Term, Executive shall faithfully and
diligently perform Executive’s duties in conformity with the directions of the
Company and serve the Company to the best of Executive’s ability. Executive
shall devote the substantial majority of his business time and best efforts to
the business and affairs of the Company. In his capacity as the Executive
Chairman of the Company, Executive shall have such duties and responsibilities
as may be prescribed by the Board of Directors.
 
(c)  Place of Performance. Executive shall be principally based at the Company’s
offices in New York, New York or at such other location in Manhattan or northern
New Jersey as the Company may determine in its sole discretion. Notwithstanding
the foregoing, Executive shall be permitted to work from home on Fridays and
from time to time on such other days as determined by the Company in its sole
discretion. Executive recognizes that his duties will require, at the Company’s
expense, travel to domestic and international locations.
 
3.     Compensation and Benefits.
 
(a)  Base Salary. The Company agrees to pay to Executive a base salary (“Base
Salary”) at the annual rate of $277,500 during the first year of the Term (each
year of the Term, a “Term Year”). On July 1, 2007 and, if applicable, the July 1
of each Term Year thereafter, Executive’s Base Salary shall be increased by an
amount equal to no less than the Base Salary in effect on June 30 of the Term
Year then ended multiplied by the percentage increase, if any, in the CPI as of
June 30 for the Term Year then ended as compared to the CPI as of June 30 for
the year prior to the Term Year then ended. For purposes of this Section 3(a),
“CPI” means the “Consumer Price Index: New York, New York, All Items - Urban
Wage Earners and Clerical Workers,” published by the United States Bureau of
Labor Statistics of the United States Department of Labor. The Compensation
Committee of the Board of Directors may determine in its sole discretion to
further increase the Base Salary. Payments of the Base Salary shall be payable
in equal installments in accordance with the Company’s standard payroll
practices.
 
(b)  Annual Performance Bonus. Executive shall be eligible to receive an annual
cash bonus (the “Performance Bonus”) for each Term Year. The Performance Bonus,
if any, will be based on the extent to which individual and Company-wide
performance goals established by the Board of Directors for each Term Year have
been met. Each Performance Bonus, if any, shall be paid on the September 30
following the completion of the applicable Term Year, provided that if such date
falls on a Saturday or Sunday, such payment shall be made on the first business
day following such date. Except as provided in Sections 5(c)(ii) and 5(d)(ii),
Executive must be employed by the Company on the last day of the applicable Term
Year to be eligible for the Performance Bonus.
 
(c)  Option. The Company shall grant to Executive an option to purchase 450,000
shares of the common stock of the Company, in accordance with and subject to the
provisions of the Nephros, Inc. 2004 Stock Incentive Plan , as it may be amended
from time to time (the “2004 Stock Incentive Plan”), and a Non-Qualified Stock
Option Agreement in substantially the form attached hereto as Exhibit 1.
 
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(d)  Benefits and Perquisites. Executive shall be entitled to participate in, to
the extent Executive is otherwise eligible under the terms thereof, the benefit
plans and programs, and receive the benefits and perquisites, generally provided
by the Company to senior executives of the Company, including without limitation
family medical insurance (subject to applicable employee contributions).
Executive shall be entitled to receive thirty (30) days of annual paid vacation.
 
(e)  Business Expenses. The Company agrees to reimburse Executive for all
reasonable and necessary travel, business entertainment, professional dues and
fees and other business expenses incurred by Executive in connection with the
performance of his duties under this Agreement. Such reimbursements shall be
made by the Company on a timely basis upon submission by Executive of such
expenses in accordance with the Company’s standard procedures.
 
(f)  Additional Monthly Cash Payment. The Company agrees that it will make an
additional cash payment to Executive of $450 per month (the “Additional Monthly
Payment”) through the Additional Monthly Payment End Date (as defined below) in
connection with payments under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended (“COBRA”), which Executive’s daughter is currently
making. The “Additional Monthly Payment End Date” shall be the earlier of (i)
the date such current COBRA continuation coverage expires and (ii) the date
Executive’s daughter becomes employed with a new employer and is eligible for
coverage under the group benefits plan of the new employer. If during the period
Executive is receiving the Additional Monthly Payment, Executive’s daughter
obtains new employment and becomes eligible for coverage under the group
benefits plan of the new employer, Executive must notify the Company in writing
of such employment and coverage.
 
(g)  No Other Compensation or Benefits; Payment. The compensation and benefits
specified in this Section 3 and in Section 5 of this Agreement shall be in lieu
of any and all other compensation and benefits. Payment of all compensation and
benefits to Executive specified in this Section 3 and in Section 5 of this
Agreement (i) shall be made in accordance with the relevant Company policies in
effect from time to time to the extent the same are consistently applied,
including normal payroll practices, and (ii) shall be subject to all legally
required and customary withholdings.
 
(h)  Cessation of Employment. In the event Executive shall cease to be employed
by the Company for any reason, then Executive’s compensation and benefits shall
cease on the date of such event, except as otherwise specifically provided
herein or in any applicable employee benefit plan or program or as required by
law.
 
4.      Termination of Employment. Executive’s employment hereunder may be
terminated prior to the end of the Term under the following circumstances.
 
(a)  Death. Executive’s employment hereunder shall terminate upon Executive’s
death.
 
(b)  Executive Becoming Totally Disabled. The Company may terminate Executive’s
employment hereunder at any time after Executive becomes “Totally
 
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 Disabled.” For purposes of this Agreement, Executive shall be “Totally
Disabled” in the event Executive is unable to perform the duties and
responsibilities contemplated under this Agreement for a period of 90
consecutive days due to physical or mental incapacity or impairment. During any
period that Executive fails to perform Executive’s duties hereunder as a result
of incapacity due to physical or mental illness (the “Disability Period”),
Executive shall continue to receive the compensation and benefits provided by
Section 3 of this Agreement until Executive’s employment hereunder is
terminated; provided, however, that the amount of base compensation and benefits
received by Executive during the Disability Period shall be reduced by the
aggregate amounts, if any, payable to Executive under any disability benefit
plan or program provided to Executive by the Company.
 
(c)  Termination by the Company for Cause. The Company may terminate Executive’s
employment hereunder for Cause at any time after providing written notice to
Executive. For purposes of this Agreement, the term “Cause” shall mean any of
the following: (i) the neglect or failure or refusal of Executive to perform
Executive’s duties hereunder (other than as a result of total or partial
incapacity due to physical or mental illness); (ii) the engaging by Executive in
gross negligence or misconduct which is injurious to the Company or any of its
affiliates, monetarily or otherwise; (iii) perpetration of an intentional and
knowing fraud against or affecting the Company or any of its affiliates or any
customer, client, agent, or employee thereof; (iv) any willful or intentional
act that could reasonably be expected to injure the reputation, business, or
business relationships of the Company or any of its affiliates or Executive’s
reputation or business relationships; (v) Executive’s material failure to comply
with, and/or a material violation by Executive of, the internal policies of the
Company or any of its affiliates and/or procedures or any laws or regulations
applicable to Executive’s conduct as an employee of the Company; (vi)
Executive’s conviction (including conviction on a nolo contendere plea) of a
felony or any crime involving fraud, dishonesty or moral turpitude; (vii) the
breach of a covenant set forth in Section 6; or (viii) any other material breach
by Executive of this Agreement; provided, however, that, if susceptible of cure,
a termination by the Company under Sections 4(c)(i), 4(c)(v) or 4(c)(viii) shall
be effective only if, within 14 days following delivery of a written notice by
the Company to Executive that the Company is terminating his employment for
Cause, Executive has failed to cure the circumstances giving rise to Cause.
 
(d)  Termination by the Company Without Cause. The Company may terminate
Executive’s employment hereunder at any time for any reason or no reason by
giving Executive thirty (30) days prior written notice of the termination.
Following any such notice, the Company may reduce or remove any and all of
Executive’s duties, positions and titles with the Company.
 
(e)  Termination by Executive for Good Reason. Executive may terminate his
employment hereunder for Good Reason at any time after providing written notice
to the Company. For purposes of this Agreement, the term “Good Reason” shall
mean any of the following: (i) the Company decreases or fails to pay the
compensation described in Sections 3(a), 3(b) 3(c) or 3(d) (in accordance with,
and subject to, such provisions); (ii) Executive no longer holds the office of
Executive Chairman or an office of equivalent stature, or his functions and/or
duties as Executive Chairman are materially diminished; (iii) Executive’s job
site is relocated to a location outside of Manhattan or northern New Jersey,
unless the parties mutually agree to such relocation; or (iv) a Change in
Control (as such term is defined in the 2004 Stock
 
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Incentive Plan) occurs; provided, however, that a termination by Executive for
Good Reason shall be effective only if, within 14 days following delivery of a
written notice by Executive to the Company that Executive is terminating his
employment for Good Reason, the Company has failed to cure the circumstances
giving rise to Good Reason.
 
(f)  Termination by Executive Without Good Reason. Executive may terminate his
employment hereunder at any time for any reason or no reason by giving the
Company thirty (30) days prior written notice of the termination. Following any
such notice, the Company may reduce or remove any and all of Executive’s duties,
positions and titles with the Company, and any such reduction or removal shall
not constitute Good Reason.
 
5.  Compensation Following Termination Prior to the End of the Term or Upon
Nonrenewal of the Agreement. In the event that Executive’s employment hereunder
is terminated prior to the end of the Term or upon nonrenewal of the Agreement,
Executive shall be entitled only to the following compensation and benefits upon
such termination or nonrenewal:
 
(a)       General. On any termination of Executive’s employment, he shall be
entitled to:
 

(i)  
any accrued but unpaid Base Salary for services rendered through the date of
termination; provided, however, that in the event Executive’s employment is
terminated pursuant to Section 4(b), the amount of Base Salary received by
Executive during the Disability Period shall be reduced by the aggregate
amounts, if any, payable to Executive under any disability benefit plan or
program provided to Executive by the Company;

 

(ii)  
any Performance Bonus not yet paid for any Term Year ending prior to or on the
date of termination of Executive’s employment (payable as and when such bonus
would have been paid had Executive’s employment continued); provided, however,
that no such payment shall be due if Executive’s employment is terminated for
Cause;

 

(iii)  
any vacation accrued to the date of termination;

 

(iv)  
any accrued but unpaid business expenses or monthly cash payments through the
date of termination required to be reimbursed in accordance with Sections 3(e)
and 3(f) of this Agreement, respectively; and

 

(v)  
receive any benefits to which he may be entitled upon termination pursuant to
the plans, programs and agreement referred to in Sections 3(c) and 3(d) hereof
in accordance with the terms of such plans, programs and agreement.

 
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(b)  Termination by the Company for Cause; Termination by Executive Without Good
Reason; Nonrenewal of the Agreement by Executive. In the event that Executive’s
employment is terminated prior to the expiration of the Term by the Company for
Cause pursuant to Section 4(c) or by Executive without Good Reason pursuant to
Section 4(f), or Executive gives written notice of his election not to renew the
Agreement pursuant to Section 1, Executive shall be entitled only to those items
identified in Section 5(a).
 
(c)  Termination by Reason of Death or Executive Becoming Totally Disabled. In
the event that Executive’s employment is terminated prior to the expiration of
the Term by reason of Executive’s death pursuant to Section 4(a) or Executive
becoming Totally Disabled pursuant to Section 4(b), Executive (or his estate, as
the case may be) shall be entitled only to the following:
 

(i)  
those items identified in Section 5(a); and

 

(ii)  
a prorated portion of the Performance Bonus, if any, for the Term Year in which
Executive’s employment terminated, based on the number of days Executive was
employed by the Company in such year (such bonus, if any, to be paid as and when
such bonus would have been paid had Executive’s employment continued).

 
(d)       Termination by the Company Without Cause; Termination by Executive for
Good Reason; Nonrenewal of the Agreement by the Company. In the event that
Executive’s employment is terminated prior to the expiration of the Term by the
Company without Cause pursuant to Section 4(d) or by Executive for Good Reason
pursuant to Section 4(e), or the Company gives written notice of its election
not to renew the Agreement pursuant to Section 1, Executive shall be entitled
only to the following:
 

(i)  
those items identified in Section 5(a);

 

(ii)  
a prorated portion of the Performance Bonus, if any, for the Term Year in which
Executive’s employment terminated, based on the number of days Executive was
employed by the Company in such year (such bonus, if any, to be paid as and when
such bonus would have been paid had Executive’s employment continued) (it being
understood by the parties that in the event Executive’s employment terminates
because of the Company giving written notice of its election not to renew the
Agreement pursuant to Section 1, no Performance Bonus shall be due pursuant to
this Section 5(d)(ii), and the only Performance Bonus due shall be pursuant to
Section 5(a)(ii) of the Agreement); and

 

(iii)  
the continued payment of the Base Salary (as determined pursuant to Section
3(a)) for twelve months (such sums to be paid at the times and in the amounts
such Base Salary

 
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would have been paid had Executive’s employment not terminated); provided,
however, that if necessary to comply with Section 409A(a)(2)(B)(i) of the
Internal Revenue Code of 1986, as amended (the “Code”), and applicable
administrative guidance and regulations, the payment of such sums shall be made
as follows: (A) no payments shall be made for a six-month period following the
date of termination, (B) an amount equal to six months of Base Salary shall be
paid in a lump sum six months following the date of termination, and (C) during
the period beginning six months following the date of termination through the
remainder of the twelve-month period, payment of the Base Salary shall be made
at the times and in the amounts such Base Salary would have been paid had
Executive’s employment not terminated.
 
(e)  Effect of Material Breach of Section 6 on Compensation and Benefits
Following Termination of Employment Pursuant to Section 5. If, at the time of
termination of Executive’s employment for any reason prior to the expiration of
the Term or any time thereafter, Executive is in material breach of any covenant
contained in Section 6 hereof, Executive (or his estate, as applicable) shall
not be entitled to any payment (or if payments have commenced, any continued
payment) under Sections 5(c)(ii), 5(d)(ii) or 5(d)(iii), provided that the
Company shall provide written notice to Executive generally describing such
material breach.
 
(f)  No Further Liability; Release. Payment made and performance by the Company
in accordance with this Section 5 shall operate to fully discharge and release
the Company and its directors, officers, employees, affiliates, stockholders,
successors, assigns, agents and representatives from any further obligation or
liability with respect to Executive’s employment and termination of employment.
Other than providing the compensation and benefits provided for in accordance
with this Section 5, the Company and its directors, officers, employees,
affiliates, stockholders, successors, assigns, agents and representatives shall
have no further obligation or liability to Executive or any other person under
this Agreement. The payment of any amounts pursuant to this Section 5 (other
than payments required by law) is expressly conditioned upon the delivery by
Executive to the Company of a release in form and substance reasonably
satisfactory to the Company of any and all claims Executive may have against the
Company and its directors, officers, employees, affiliates, stockholders,
successors, assigns, agents and representatives arising out of or related to
Executive’s employment by the Company and the termination of such employment.
 
6.      Exclusive Employment; Noncompetition; Nonsolicitation; Nondisclosure of
Proprietary Information; Surrender of Records; Inventions and Patents.
 
6.1     No Conflict; No Other Employment. During the period of Executive’s
employment with the Company, Executive shall not, except as expressly provided
in the last sentence of this Section 6.1: (i) engage in any activity which
conflicts or interferes with or derogates from the performance of Executive’s
duties hereunder nor shall Executive engage in
 
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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 Company
(through the Chairman of the Compensation Committee of the Board of Directors or
the Lead Director of the Company), or (ii) accept or engage in any other
employment, whether as an employee or consultant or in any other capacity, and
whether or not compensated therefor. Notwithstanding the foregoing, Executive
may undertake the following activities during his employment with the Company,
provided they do not conflict or unreasonably interfere with his
responsibilities and obligations hereunder (including, without limitation, under
Sections 2(a), 2(b), 6.2, 6.3, 6.4 or 6.5 of the Agreement) (a) manage his
personal investments and otherwise attend to personal affairs, including
charitable, social and political activities, (b) serve as a member on the boards
of directors and advisory boards of those entities he currently serves
(Executive to provide a written list of such entities to the Company
simultaneously with the parties’ execution of this Agreement), as well as
additional boards of directors and advisory groups, provided that Executive has
provided written notice to the Company of such appointment or election prior to
commencement of such service, and (c) provide consulting services to other
entities, provided that such consulting engagement(s) are approved in advance in
writing by the Company (the response to such request to be furnished by the
Chairman of the Compensation Committee of the Board of Directors or the Lead
Director of the Company no later than two weeks of receipt by each of them of
Executive’s written request to provide such consulting services).
 
6.2     Noncompetition; Nonsolicitation.
 
(a)       Executive 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 payment by the Company to Executive of amounts
that may hereafter be paid to Executive pursuant to this Agreement (including,
without limitation, pursuant to Sections 3 and 5 hereof) and other obligations
undertaken by the Company hereunder, Executive agrees that during (i) his
employment with the Company and (ii) the period beginning on the date of
termination of employment for any reason and ending one year after the date of
termination of employment (the “Post-Employment Period”), Executive 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 6.2(a) will not be deemed
breached merely because Executive owns less than 1% of the outstanding common
stock of a publicly-traded company. For purposes of this Agreement, “Competing
Business” shall mean (i) any business in which the Company is currently engaged
anywhere in the world, including but not limited to (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; and (ii)
any other business which the Company engages in anywhere in the world during
Executive’s employment with the Company, provided that, solely for purposes of
this clause (ii), such business represents more than 5% of the Company’s net
sales or net income (as determined in accordance with generally accepted
accounting principles) for the preceding twelve-month period.
 
(b)     In further consideration of the payment by the Company to Executive of
amounts that may hereafter be paid to Executive pursuant to this Agreement
(including, without limitation, pursuant to Sections 3 and 5 hereof) and other
obligations
 
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 undertaken by the Company hereunder, Executive agrees that during his
employment and the Post-Employment 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) does not interfere with, or conflict with, the interests of the
Company or any of its affiliates; or (v) persuade or seek to persuade any
customer of the Company or any affiliate to cease to do business or to reduce
the amount of business which any customer has customarily done or contemplates
doing with the Company or such affiliate, whether or not the relationship
between the Company or its affiliate and such customer was originally
established in whole or in part through Executive’s efforts. For purposes of
this Section 6.2(b) only, the terms “customer,” “vendor” and “distributor” shall
mean a customer, vendor or distributor who has done business with the Company or
any of its affiliates within twelve months preceding the termination of
Executive’s employment.
 
(c)    During Executive’s employment with the Company and during the
Post-Employment Period, Executive agrees that upon the earlier of Executive’s
(i) negotiating with any Competitor (as defined below) concerning the possible
employment of Executive by the Competitor, (ii) receiving an offer of employment
from a Competitor, or (iii) becoming employed by a Competitor, Executive will
(A) immediately provide written notice to the Company of such circumstances and
(B) provide copies of Section 6 of this Agreement to the Competitor. Executive
further agrees that the Company may provide notice to a Competitor of
Executive’s obligations under this Agreement, including without limitation
Executive’s obligations pursuant to Section 6 hereof. For purposes of this
Agreement, “Competitor” shall mean any entity (other than the Company or any of
its affiliates) that engages, directly or indirectly, in any Competing Business.
 
(d)  Executive understands that the provisions of this Section 6.2 may limit his
ability to earn a livelihood in a business similar to the business of the
Company or its affiliates but nevertheless agrees and hereby acknowledges that
the consideration provided under this Agreement, including any amounts or
benefits provided under Sections 3 and 5 hereof and other obligations undertaken
by the Company hereunder, is sufficient to justify the restrictions contained in
such provisions. In consideration thereof and in light of Executive’s education,
skills and abilities, Executive agrees that he will not assert in any forum that
such provisions prevent him from earning a living or otherwise are void or
unenforceable or should be held void or unenforceable.
 
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6.3    Proprietary Information. Executive acknowledges that during the course of
his employment with the Company he will necessarily have access to and make use
of proprietary information and confidential records of the Company and its
affiliates. Executive covenants that he shall not during the Term or at any time
thereafter, directly or indirectly, use for his own purpose or for the benefit
of any person or entity other than the Company, nor otherwise disclose, any
proprietary information to any individual or entity, unless such disclosure has
been authorized in writing by the Company or is otherwise required by law.
Executive acknowledges and understands that the term “proprietary information”
includes, but is not limited to: (a) the software products, programs,
applications, and processes utilized by the Company or any of its affiliates;
(b) the name and/or address of any customer or vendor of the Company or any of
its affiliates or any information concerning the transactions or relations of
any customer or vendor of the Company or any of its affiliates with the Company
or such affiliate or any of its or their partners, principals, directors,
officers or agents; (c) any information concerning any product, technology, or
procedure employed by the Company or any of its affiliates but not generally
known to its or their customers, vendors or competitors, or under development by
or being tested by the Company or any of its affiliates but not at the time
offered generally to customers or vendors; (d) any information relating to the
computer software, computer systems, pricing or marketing methods, sales
margins, cost of goods, cost of material, capital structure, operating results,
borrowing arrangements or business plans of the Company or any of its
affiliates; (e) any information which is generally regarded as confidential or
proprietary in any line of business engaged in by the Company or any of its
affiliates; (f) any business plans, budgets, advertising or marketing plans; (g)
any information contained in any of the written or oral policies and procedures
or manuals of the Company or any of its affiliates; (h) any information
belonging to customers or vendors of the Company or any of its affiliates or any
other person or entity which the Company or any of its affiliates has agreed to
hold in confidence; (i) any inventions, innovations or improvements covered by
this Agreement; and (j) all written, graphic and other material relating to any
of the foregoing. Executive acknowledges and understands that information that
is not novel or copyrighted or patented may nonetheless be proprietary
information. The term “proprietary information” shall not include information
generally available to and known by the public or information that is or becomes
available to Executive on a non-confidential basis from a source other than the
Company, any of its affiliates, or the directors, officers, employees, partners,
principals or agents of the Company or any of its affiliates (other than as a
result of a breach of any obligation of confidentiality).
 
6.4    Confidentiality and Surrender of Records. Executive shall not during the
Term or at any time thereafter (irrespective of the circumstances under which
Executive’s employment by the Company terminates), except as required by law,
directly or indirectly publish, make known or in any fashion disclose any
confidential records to, or permit any inspection or copying of confidential
records by, any individual or entity other than in the course of such
individual’s or entity’s employment or retention by the Company. Upon
termination of employment for any reason or upon request by the Company,
Executive shall deliver promptly to the Company all property and records of the
Company or any of its affiliates, including, without limitation, all
confidential records. For purposes hereof, “confidential records” means all
correspondence, reports, memoranda, files, manuals, books, lists, financial,
operating or marketing records, magnetic tape, or electronic or other media or
equipment of any kind which may be in Executive’s possession or under his
control or accessible to him which contain any proprietary information. All
property and records of the Company and any of its
 
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 affiliates (including, without limitation, all confidential records) shall be
and remain the sole property of the Company or such affiliate during the Term
and thereafter.
 
6.5    Inventions and Patents. All inventions, innovations or improvements
(including policies, procedures, products, improvements, software, ideas and
discoveries, whether patent, copyright, trademark, service mark, or otherwise)
conceived or made by Executive, either alone or jointly with others, in the
course of his employment by the Company, belong to the Company. Executive will
promptly disclose in writing such inventions, innovations or improvements to the
Company and perform all actions reasonably requested by the Company to establish
and confirm such ownership by the Company, including, but not limited to,
cooperating with and assisting the Company in obtaining patents, copyrights,
trademarks, or service marks for the Company in the United States and in foreign
countries.
 
6.6    Enforcement. Executive acknowledges and agrees that, by virtue of his
position, his services and access to and use of confidential records and
proprietary information, any violation by him of any of the undertakings
contained in this Section 6 would cause the Company and/or its affiliates
immediate, substantial and irreparable injury for which it or they have no
adequate remedy at law. Accordingly, Executive agrees and consents to the entry
of an injunction or other equitable relief by a court of competent jurisdiction
restraining any violation or threatened violation of any undertaking contained
in this Section 6. Executive waives posting by the Company or its affiliates of
any bond otherwise necessary to secure such injunction or other equitable
relief. Rights and remedies provided for in this Section 6 are cumulative and
shall be in addition to rights and remedies otherwise available to the parties
hereunder or under any other agreement or applicable law.
 
7.  Key Man Insurance. Executive recognizes and acknowledges that the Company or
its affiliates may seek and purchase one or more policies providing key man life
insurance with respect to Executive, the proceeds of which would be payable to
the Company or such affiliate. Executive hereby consents to the Company or its
affiliates seeking and purchasing such insurance and will provide such
information, undergo such medical examinations (at the Company’s expense),
execute such documents, and otherwise take any and all actions reasonably
necessary or desirable in order for the Company or its affiliates to seek,
purchase, and maintain in full force and effect such policy or policies.
 
8.     Assignment and Transfer.
 
(a)  Company. This Agreement shall inure to the benefit of and be enforceable
by, and may be assigned by the Company without Executive’s consent to, any
purchaser of all or substantially all of the Company’s business or assets, or to
any successor to the Company or any assignee thereof (whether direct or
indirect, by purchase, merger, consolidation or otherwise).
 
(b)  Executive. The parties hereto agree that Executive is obligated under this
Agreement to render personal services during the Term of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
special value. Executive’s rights and obligations under this Agreement shall not
be transferable by Executive by assignment or otherwise, and any purported
assignment, transfer or delegation thereof shall be
 
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void; provided, however, that if Executive shall die, all amounts then payable
to Executive hereunder shall be paid in accordance with the terms of this
Agreement to Executive’s estate.
 
9.     Miscellaneous.
 
(a)       Other Obligations. Executive represents and warrants that neither
Executive’s employment with the Company nor Executive’s performance of
Executive’s obligations hereunder will conflict with or violate or otherwise are
inconsistent with any other obligations, legal or otherwise, which Executive may
have. Executive covenants that he shall perform his duties hereunder in a
professional manner and not in conflict or violation, or otherwise inconsistent
with other obligations legal or otherwise, which Executive may have.
 
(b)       Nondisclosure; Other Employers. Executive will not disclose to the
Company, use, or induce the Company to use, any proprietary information, trade
secrets or confidential business information of others. Executive represents and
warrants that Executive does not possess any property, proprietary information,
trade secrets and confidential business information belonging to any prior
employers.
 
(c)       Cooperation. Following termination of employment with the Company for
any reason, Executive shall cooperate with the Company, as requested by the
Company, to effect a transition of Executive’s responsibilities and to ensure
that the Company is aware of all matters being handled by Executive. The Company
shall reimburse Executive’s reasonable out-of-pocket expenses incurred in
connection with the obligations in this Section 9(c).
 
(d)       Mitigation. Executive shall not be required to mitigate damages or the
amount of any payment provided to him under Section 5 of this Agreement by
seeking other employment or otherwise, nor shall the amount of any payments
provided to Executive under Section 5 be reduced by any compensation earned by
Executive as the result of employment by another employer after the termination
of Executive’s employment or otherwise.
 
(e)       Protection of Reputation. During the Term and thereafter, Executive
agrees that he will take no action which is intended, or would reasonably be
expected, to harm the Company or any of its affiliates or its or their
reputation or which would reasonably be expected to lead to unwanted or
unfavorable publicity to the Company or its affiliates. Nothing herein shall
prevent Executive from making any truthful statement in connection with any
legal proceeding or investigation by the Company or any governmental authority.
 
(f)       Governing Law. This Agreement shall be governed by and construed (both
as to validity and performance) and enforced in accordance with the internal
laws of the State of New York applicable to agreements made and to be performed
wholly within such jurisdiction, without regard to the principles of conflicts
of law or where the parties are located at the time a dispute arises.
 
(g)          Arbitration.
 

(i)  
General. Executive and the Company specifically, knowingly, and voluntarily
agree that they shall use final

 
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and binding arbitration to resolve any dispute (an “Arbitrable Dispute”) between
Executive, on the one hand, and the Company (or any affiliate of the Company),
on the other hand. This arbitration agreement applies to all matters relating to
this Agreement and Executive’s employment with and/or termination of employment
from the Company, including without limitation disputes about the validity,
interpretation, or effect of this Agreement, or alleged violations of it, any
payments due hereunder and all claims arising out of any alleged discrimination,
harassment or retaliation, including, but not limited to, those covered by Title
VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in
Employment Act of 1967, as amended, and the Americans With Disabilities Act or
any other federal, state or local law relating to discrimination in employment.
 
 

(ii)  
Injunctive Relief. Notwithstanding anything to the contrary contained herein,
the Company and any affiliate of the Company (if applicable) shall have the
right to seek injunctive or other equitable relief from a court of competent
jurisdiction to enforce Section 6 of this Agreement. For purposes of seeking
enforcement of Section 6, the Company and Executive hereby consent to the
jurisdiction of any state or federal court sitting in the City, County and State
of New York.

 

(iii)  
The Arbitration. Any arbitration pursuant to this Section 9(g) will take place
in New York, New York, under the auspices of the American Arbitration
Association, in accordance with the Employment Arbitration Rules and Mediation
Procedures of the American Arbitration Association then in effect, and before a
panel of three arbitrators selected in accordance with such rules. Judgment upon
the award rendered by the arbitrators may be entered in any state or federal
court sitting in the City, County and State of New York.

 

(iv)  
Fees and Expenses. In any arbitration pursuant to this Section 9(g), except as
otherwise required by law, each party shall be responsible for the fees and
expenses of its own attorneys and witnesses, and the fees and expenses of the
arbitrators shall be divided equally between the Company, on the one hand, and
Executive, on the other hand.

 
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(v)  
Exclusive Forum. Except as permitted by Section 9(g)(ii) hereof, arbitration in
the manner described in this Section 9(g) shall be the exclusive forum for any
Arbitrable Dispute. Except as permitted by Section 9(g)(ii), should Executive or
the Company attempt to resolve an Arbitrable Dispute by any method other than
arbitration pursuant to this Section 9(g), the responding party shall be
entitled to recover from the initiating party all damages, expenses, and
attorneys’ fees incurred as a result of that breach.

 
(h)  Entire Agreement. This Agreement (including the plans and agreement
referenced in Sections 3(c) and 3(d)) contains the entire agreement and
understanding between the parties hereto in respect of Executive’s employment
and supersedes, cancels and annuls any prior or contemporaneous written or oral
agreements, understandings, commitments and practices between them respecting
Executive’s employment, including all prior employment agreements between the
Company and Executive, which agreement(s) hereby are terminated and shall be of
no further force or effect.
 
(i)  Amendment. This Agreement may be amended only by a writing which makes
express reference to this Agreement as the subject of such amendment and which
is signed by Executive and, on behalf of the Company, by its duly authorized
officer.
 
(j)  Severability. If any provision of this Agreement or the application of any
such provision to any party or circumstances shall be determined by any court of
competent jurisdiction or arbitration panel to be invalid or unenforceable to
any extent, the remainder of this Agreement, or the application of such
provision to such person or circumstances other than those to which it is so
determined to be invalid or unenforceable, shall not be affected thereby, and
each provision hereof shall be enforced to the fullest extent permitted by law.
If any provision of this Agreement, or any part thereof, is held to be invalid
or unenforceable because of the scope or duration of or the area covered by such
provision, the parties hereto agree that the court or arbitration panel making
such determination shall reduce the scope, duration and/or area of such
provision (and shall substitute appropriate provisions for any such invalid or
unenforceable provisions) in order to make such provision enforceable to the
fullest extent permitted by law and/or shall delete specific words and phrases,
and such modified provision shall then be enforceable and shall be enforced. The
parties hereto recognize that if, in any judicial or arbitral proceeding, a
court or arbitration panel shall refuse to enforce any of the separate covenants
contained in this Agreement, then that invalid or unenforceable covenant
contained in this Agreement shall be deemed eliminated from these provisions to
the extent necessary to permit the remaining separate covenants to be enforced.
In the event that any court or arbitration panel determines that the time period
or the area, or both, are unreasonable and that any of the covenants is to that
extent invalid or unenforceable, the parties hereto agree that such covenants
will remain in full force and effect, first, for the greatest time period, and
second, in the greatest geographical area that would not render them
unenforceable.
 
(k)  Construction. The headings and captions of this Agreement are provided for
convenience only and are intended to have no effect in construing or
interpreting this Agreement. The language in all parts of this Agreement shall
be in all cases construed
 
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according to its fair meaning and not strictly for or against the Company or
Executive. As used herein, the words “day” or “days” shall mean a calendar day
or days.
 
(l)  Nonwaiver. Neither any course of dealing nor any failure or neglect of
either party hereto in any instance to exercise any right, power or privilege
hereunder or under law shall constitute a waiver of any other right, power or
privilege or of the same right, power or privilege in any other instance. All
waivers by either party hereto must be contained in a written instrument signed
by the party to be charged and, in the case of the Company, by its duly
authorized officer.
 
(m)  Notices. Any notice required or permitted hereunder shall be in writing and
shall be sufficiently given if personally delivered or if sent by registered or
certified mail, postage prepaid, with return receipt requested, addressed: (i)
in the case of the Company, to Nephros, Inc., 3960 Broadway, New York, New York
10032, attn.: (a) Chairman of the Compensation Committee of the Board of
Directors and (b) Lead Director, with a copy to Kramer Levin Naftalis & Frankel
LLP, 1177 Avenue of the Americas, New York, New York 10036, attn.: Kevin B.
Leblang, Esq.; and (ii) in the case of Executive, to Executive’s last known
address as reflected in the Company’s records, or to such other address as
Executive shall designate by written notice to the Company. Except as otherwise
provided in Section 6.1 of this Agreement, any notice given hereunder shall be
deemed to have been given at the time of receipt thereof by the person to whom
such notice is given if personally delivered or at the time of mailing if sent
by registered or certified mail.
 
(n)  Assistance in Proceedings, Etc. Executive shall, without additional
compensation, during and after the Term, upon reasonable notice, furnish such
information and proper assistance to the Company as may reasonably be required
by the Company in connection with any legal or quasi-legal proceeding, including
any external or internal investigation, involving the Company or any of its
affiliates. The Company shall reimburse Executive’s reasonable out-of-pocket
expenses incurred in connection with the obligations in this Section 9(n).
 
(o)  Survival. Cessation or termination of Executive’s employment with the
Company shall not result in termination of this Agreement. The respective
obligations of Executive and the Company as provided in Sections 5, 6, 8 and 9
of this Agreement shall survive cessation or termination of Executive’s
employment hereunder.
 
(p)  Section 409A of the Code. The Company makes no representations regarding
the tax implications of the compensation and benefits to be paid to Executive
under this Agreement, including, without limitation, under Section 409A of the
Code. Executive and the Company agree that in the event the Company reasonably
determines that the terms hereof would result in Executive being subject to tax
under Section 409A of the Code, Executive and the Company shall negotiate in
good faith to amend this Agreement to the extent necessary to prevent the
assessment of any such tax, including by delaying the payment dates of any
amounts hereunder.
 
 
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IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement
on August 2, 2006, to be deemed effective as of the date first written above.
 

 
NEPHROS, INC.                                                       EXECUTIVE:

 
By:  /s/ Norman J. Barta                           /s/ William J.
Fox            
Name:  Norman J. Barta
   Title:  President and Chief Executive Officer
 
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