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ForeignCorrupt Practices Act of 1977, and all federal, state, and local laws and regulations applicable toGovernment contractors, including but not limited to such laws and regulations as may relate tocommunications and dealings with Government employees and to the solicitation, disclosure andhandling of information relating to the procurement of goods and services by the Government. SinceSchatz is not a lawyer, MS agrees to provide to him competent counsel to aid him in the dischargeof the responsibility described herein.     Schatz specifically warrants that during his employment by MS, he will maintain eligibilityfor all necessary security clearances with the Unites States Government. In particular, Schatzwarrants that he will maintain eligibility to participate in all aspects of contracting withfederal, state and local governments.**E. Location**     Schatz shall operate out of an office located at his home in Bethesda, Maryland until the timethat MS’s offices in the Washington, D.C. metropolitan area are established. At that time, Schatzshall operate from MS’s offices.**F. Commencement Date**     Schatz’s employment with MS shall commence effective a date to be agreed with the ManagingDirector**IV. COMPENSATION AND RELATED MATTERS****A. Base Salary**     In consideration for Schatz’s performance of the duties and responsibilities set forth in thisAgreement, MS shall pay Schatz a base salary of One Hundred Thirty Thousand U.S. Dollars($130,000.00) per year, payable in equal monthly installments or in such other manner as theparties may mutually agree. The performance by Schatz of his duties and responsibilities hereundershall be subject to periodic review by MS, and his salary as specified in this Section may beincreased or decreased, as necessary, as a result thereof. At any time, Schatz shall be entitled totreat an aggregate decrease in salary of fifteen percent (15%) or more as a termination by MStriggering the provisions of Article V of this agreement.**B. Shares and Share Options**     In further consideration for Schatz’s performance of the duties and responsibilities set forthin this Agreement, MS shall issue Schatz 50,000 fully paid shares at the end of each year ofemployment for the first two years of employment, subject to an annual review of Schatz’sperformance which in the absolute view of the Managing Director is satisfactory in all respect. Inaddition, pursuant to the Metal Storm Limited Employee Option Plan, MS shall grant Schatz 250,000share options, exercisable at a price of not more than A$1.17 (On Dollar and seventeen centsAustralian currency). These options shall vest one year after due date of employment providedSchatz does not leave the employ of MS of his own volition except for illness, and must beexercised by Schatz within four years from the commencement date of employment. In the event thatSchatz’s employment is terminated pursuant to Section V of this Agreement, Schatz shall have 120days from the date of termination in which to exercise any options, provided they are exercisedwithin four years from date of employment.**C. Expenses**     MS shall reimburse Schatz for such reasonable and necessary expenses, including travel andentertainment expenses, actually incurred by him as are directly related to the rendering ofservices in connection with this Agreement. Schatz shall provide appropriate documentation of allreimbursable expenses in accordance with MS’s procedures. MS shall reimburse approved expenseswithin thirty (30) days after submission of the appropriate documentation.**D. Medical and Dental Expenses**
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     MS shall contribute an amount not to exceed Three Thousand Six Hundred U.S. Dollars($3,600.00) per year, payable in equal monthly installments, toward Schatz’s medical and dentalinsurance premiums during the period of his employment and, thereafter, only as may be required bylaw.**E. Vacations**     In addition to all statutory United States holidays, Schatz shall be entitled to fifteen (15)working days vacation in each calendar year to be taken at such time or times as the business of MSpermits.**V. TERMINATION** **1.** **A. Termination by MS**This Agreement may be terminated at the will of MS, with orwithout cause, at any time and for any reason.   **B.****Termination by Schatz**     This Agreement may be terminated by Schatz upon sixty (60) days’ prior written notice by him.Upon termination of this Agreement by Schatz, MS shall pay him his then current annual Base Salarythrough the effective date of such termination.**C. Termination Package**     1. In the event that MS shall terminate Schatz for any reason, other than on account of an actof moral turpitude by him or on account of a serious, intentional breach of this agreement subjectto Schatz’s execution of a Release of all claims against MS surrounding his employment andtermination, MS shall pay Schatz his then current annual Base Salary through the effective date ofsuch termination, plus a payment in an amount equivalent to his, then current, annual Base Salarybut in no event less than his initial annual Base Salary. This amount will be payable in twelve(12) equal monthly installments (“Termination Package”).     2. In the event MS is acquired by or merged into another corporation or entity andSchatz is terminated within one (1) year of such acquisition or merger, Schatz is entitled toreceive a sum equal to twice his then annual Base Salary in a lump sum. If Schatz’s employment isterminated after one (1) year of, but before the expiration of the second year from suchacquisition or merger, Schatz is entitled to receive a sum equal to his then annual Base Salary ina lump sum. There shall be no entitlement under this sub-clause if Schatz’s employment isterminated after the expiration of two (2) years from the acquisition or merger date.**VI. PROHIBITION ON COMPETITION**     Both during the term of this Agreement and for a period of twelve consecutive months afterSchatz leaves MS’s employment for any reason, with the exception of the “other employment”authorized by MS pursuant to Section VII of this Agreement, Schatz shall not:     1. either directly or indirectly become employed by or in any way aid or associatehimself in any capacity with any business competitor of MS, or competitor of any subsidiarycorporations and affiliated organizations owned or managed by MS, which provides the same servicesor substantially similar services as provided by MS or any subsidiary corporations and affiliatedorganizations owned by, controlled by or managed by MS; or     2. solicit for employment or seek to employ or employ any individual who was anemployee of MS, or any subsidiary corporations and affiliated organizations owned by, managed by orcontrolled by MS, at any time during the twelve (12) consecutive month period immediately precedingSchatz’s cessation of employment with MS, provided however, this prohibition shall not apply ifSchatz recruits a MS employee to a business not in competition with MS.     3. The geographic scope of this non-competition agreement shall include all states
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and/or countries in which MS has a facility or offices, or conducts business, during Schatz’semployment by MS.     4. Schatz acknowledges that a breach of the competition prohibition containedherein may result in irreparable and continuing damage to MS’s business for which there is noadequate remedy at law. Schatz further agrees that in the event of any such breach of suchrestrictions, Schatz shall forfeit any right to a Termination Package, and MS and its successorsand assigns shall be entitled to injunctive relief and to such other appropriate relief as may benecessary.     5. If any provision of this Article is adjudged by a court to be invalid or unenforceable,such a finding will in no way affect the validity or enforceability of any other provision of thisArticle. The parties expressly agree that if a court holds any provision of this Article to beinvalid or unenforceable the court shall have the power to reduce the duration and/or geographicscope of this Article, and/or delete specific words or phrases so that it is enforceable.**VII. OTHER EMPLOYMENT**     A. Schatz agrees not to enter into an employment relationship with any employer other than MSduring the term of his employment with MS unless he first receives express written approval fromMS.**VIII. PROHIBITION ON DISCLOSURE OF CONFIDENTIAL INFORMATION**          **A. Government Confidential Information**          1. Schatz shall not, directly or indirectly, improperly disclose to, solicit orobtain, either from Government officials, other Government contractors or any other individual,information prohibited by law from disclosure including, but not limited to, proprietary or sourceselection information as defined by law and regulation. Schatz shall notify MS immediately if hecomes into possession of proprietary or source selection information of the U.S. Government oranother Company or becomes aware of any possible violation of the federal laws and regulationsprohibiting the disclosure or solicitation of such information.          2. Schatz agrees to comply with all applicable Laws, Executive Orders and otherrequirements governing the use and handling of information subject to the Arms Export Control Actand/or information classified for national security purposes.          **B. MS Confidential Information**          1. Schatz acknowledges that, in connection with his employment, Schatz may be furnished with,or may otherwise receive or have access to, information which relates to the MS’s past, present orfuture materials, products, software, research, development, improvements, inventions, processes,techniques, pricing, designs or other technical data, customer and prospect lists or othercompilations for marketing or development, or regarding administrative, management, financial,marketing or manufacturing activities of the MS or of a third party which provided such items orproprietary information to the MS on a confidential basis. All such items and information,including any materials or documents containing such information, shall be considered by MS andSchatz as proprietary and confidential (collectively, the “Proprietary Information”).          2. Both during and after the terms of this Agreement, Schatz agrees to preserveand protect the confidentiality of the Proprietary Information and all physical forms thereof,whether disclosed to Schatz before this Agreement is executed or afterward. In addition, Schatzshall not (i) disclose or disseminate the Proprietary Information to any third party, without alegitimate need to know, which need to know relates to such third party’s responsibilities inconnection with the business of MS; (ii) copy the Proprietary Information or remove the ProprietaryInformation for MS’s premises without a valid purpose directly related to Schatz’s responsibilitiesin connection with the business of MS; or (iii) use the Proprietary Information for Schatz’s ownbenefit or for the benefit of any third party.          3. Schatz acknowledges and agrees that all Proprietary Information used or
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generated during the course of working for MS is the property of MS. Schatz agrees to deliver to MSall originals and copies of documents and other tangibles (including diskettes and other storagemedia) containing Proprietary Information immediately upon termination of his employment.          4. Schatz agrees and acknowledges that during his employment, MS shall own allrights, including all trade secrets and copyrights, in and to all works created by the Schatz,whether created on or off MS’s premises, including, but not limited to: (i) works that relate to orarise out of MS’s actual or anticipated business; and (ii) works that results from or in any mannerarise out of any task assigned to Schatz or any other employee by MS or work performed by Schatz orany other employee for MS (collectively “Works”). MS shall own such Works whether or not createdoutside normal business hours and regardless of whether MS’s equipment, Schatz’s equipment or theequipment of a third party or entity is used to create the Works. Such Works shall include programcodes and source documentation. To the extent that any such Works do not qualify as works made forhire under U.S. copyright law, this Agreement will constitute an irrevocable assignment by Schatzto MS of the ownership of, and all rights of copyright in, such Works, and Schatz shall, at MS’sexpense, execute any writings to evidence such ownership. MS shall have the right to hold in itsown name all proprietary rights in the Works, including but not limited to, all rights ofcopyright, trade secret, patent and trademark. Schatz agrees to give MS or its designees allassistance required to perfect such rights.          5. Schatz shall, and hereby does, assign to MS his entire right, title andinterest in any invention, technique, software, computer program, process, device, discovery,improvement or know-how, patentable or not, hereafter made or conceived solely or jointly by Schatzat any time during his employment which (i) are created using MS facilities, supplies, informationtrade secrets or time; (ii) relate to MS’s business or actual or anticipated research anddevelopment; or (iii) directly or indirectly result from any work performed by Schatz. Schatz shalldisclose any such invention, technique, process, device, discovery, improvement or know-howpromptly to an officer of MS and Schatz shall, upon request, promptly execute s specific assignmentof title to MS, and do anything else reasonably necessary to enable MS to secure patent, tradesecret or any other proprietary rights protected in the United States or foreign countries.          **IX.**Schatz acknowledges that a breach of this restriction of confidential information mayresult in irreparable and continuing damage to MS’s business for which there is no adequate remedyat law. Schatz further agrees that in the event of any breach of this restriction of disclosure ofconfidential information, Schatz will forfeit any right to a Termination Package, and MS and itssuccessors shall be entitled to injunctive relief and to such other further relief as may beproper. **MISCELLANEOUS**     **A. Return of MS’s Property**          Upon termination of Schatz’s employment with the MS, for any reason, Schatz shall return toMS, in good condition, all property of MS, in whatever format, including without limitation, theoriginals and all copies of any materials which contain, reflect, summarize, describe, analyze orrefer or relate to any items of information listed in Section VII this Agreement. In the event thatsuch items are not so returned, MS will have the right to charge Schatz for all reasonable damages,costs, attorneys’ fees and other expenses incurred in searching for, taking, removing and/orrecovering such property.     **B. Remedy**     1. In the event of any breach of the provisions of this Agreement by Schatz, the partiesacknowledge that MS may suffer irreparable injury and that the injury to MS cannot be reasonably oradequately compensated in damages in any action at law. Accordingly, Schatz acknowledges and agreesthat in such case, MS shall be entitled to injunctive relief, specific performance or otherequitable relief and Schatz hereby expressly agrees and consents to the entry of such order orrelief restraining him from such actions as would constitute a breach of
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any of the provisions of this Agreement. Such relief shall be in addition to any otherremedy to which MS may be entitled at law or in equity.     2. Amendment     Any amendment to this Agreement shall be made in writing and signed by the parties.     **C. Governing Law**     This Agreement shall be governed by the law of the State of Maryland, without regard toconflict of laws principles.     **D. Notices**     All notices under this Agreement shall be in writing and personally delivered or mailed, byregistered or certified mail, to the addresses of the parties first above written, or to such otheraddress as a party may designate by notice delivered in accordance with this Section. Any noticeshall be deemed to have been delivered when served, if personally served, and ten (10) businessdays after mailing, if mailed.     **E. Waivers**     No claim or right arising out of a breach or default under this Agreement can be discharged inwhole or in part by a waiver of that claim or right unless the waiver is supported by considerationand is in writing and executed by the aggrieved party hereto.     **F. Assignment**     The rights and obligations of MS under this Agreement shall be binding upon, and inure to thebenefit of, MS, its successors, affiliates, subsidiaries and assigns. This Agreement and theobligations created hereunder may not be assigned by Schatz.     **G. Partial Invalidity**     If any provision of this Agreement is held to be invalid, void or unenforceable, in whole orin part, then such provision shall be deemed to be modified or restricted to the extent and in themanner necessary to render the same valid and enforceable, or shall be deemed excised from thisAgreement, as the case may require, and this Agreement shall be construed and enforced to themaximum extent permitted by law as if such provision had been originally incorporated herein as somodified or restricted or as if such provision had not been originally incorporated herein, as thecase may be In the event that any provision of this Agreement is held to be invalid, void orunenforceable, the remaining provisions shall continue in full force and effect, without beingimpaired or invalidated in any way.     **H. Entire Agreement**     This Agreement supersedes any other oral or written agreements between the parties and containthe entire agreement between the parties with respect to Schatz’s performance of services for MS.**For****METAL STORM INC.**     **/S/ Wayne A. Downing** **/S/ Arthur D. Schatz**       Director Arthur D. Schatz  Dated: 22 May 2001 Dated: 22 May 2001  
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