**Exhibit 10.1**

 

Notice:  You should consult with an attorney beforesigning this Agreement.  You have 21 daysfrom the date that you receive this Agreement to consider whether to sign it.  If you sign this Agreement, you will thenhave 7 days following the date that you sign this Agreement to revoke it, andthis Agreement shall not become effective or enforceable until the expirationof the 7-day revocation period.

 

**SEPARATION AGREEMENT**

 

This Separation Agreement (“Agreement”) is between InnovativeSolutions & Support, Inc. (the “Company”) and James Reilly (the “Employee”).  Intending to be legally bound, the Companyand Employee agree as follows:

 

SECTION 1.        Termination; Impact on Current Benefits

 

Employee’s employment with the Company willterminate on February 29, 2008 (“Separation Date”), and the Company’srecords will reflect that Employee’s separation was based on his retirementfrom the Company.  Except as provided inthis Agreement, all wages, benefits, and other compensation will cease as ofthe Separation Date.  Employee’s finalpaycheck will be issued on the next regularly scheduled payday following theSeparation Date and mailed to Employee.

 

SECTION 2.          Severance Pay and Other Benefits

 

a.             Severance Pay

 

Subjectto the conditions set forth in Section 4 of this Agreement, the Company shalldeliver the amount of $200,000.00 (the “Payment”) as described as follows,within 14 days following the Company’s receipt of a signed original of thisAgreement.

 

(i)            The Company will deliver a check made payableto “James Reilly” in the amount of $50,000.00, less all applicable withholdingsand deductions to the law office of Raynes, McCarty, attorney forEmployee.  This sum is being allocated aswages, and the Company will report the payment on a Form W-2 at the appropriatetime.

 

(ii)           The Company will deliver a check made payableto “James Reilly” in the amount of $100,000.00, without any withholdings ordeductions to the law office of Raynes, McCarty.  This sum is being allocated to Employee’sclaim for physical injury and emotional distress, and the Company will reportthe payment on a Form 1099-Misc at the appropriate time.

 

(iii)          The Company will deliver a check made payableto “Raynes, McCarty” in the amount of $50,000.00, without any withholdings ordeductions to the law office of Raynes, McCarty.  This sum is being allocated as attorney’s fees,and the Company will report the payment on a Form 1099-Misc at theappropriate time.

 

Employeeacknowledges that the Payment, as well as the additional consideration describedbelow in the remainder of Section 2, constitutes a complete and finalsettlement of all of Employee’s claims, and that this settlement includeswithout limitation any and all claims for costs or attorneys’ fees.  Employee agrees to pay all federal, state andlocal taxes for which he may be liable based on his receipt of thePayment.  Employee shall indemnify andhold the Company harmless (including reasonable attorney’s fees

 

----

 

incurred)from any liability in connection with the above allocation and/or his failureto pay any required taxes.

 

b.             Additional Payment to Raynes, McCarty

 

TheCompany will pay the amount of $45,000.00 without any withholdings ordeductions to “Raynes, McCarty.”  Thispayment will be made together with the payment described in Section 2(a)(iii),and will be delivered to the law office of Raynes, McCarty.  This sum is being allocated as attorney’sfees, and the Company will report this payment on a Form 1099-Misc at theappropriate time.

 

c.             Stock Options

 

Employeecurrently holds vested and unvested stock options granted pursuant to theCompany’s 1998 Stock Option Plan, as amended (“Plan”), by the committeeappointed by the Company to administer the Plan (“Committee”).  Pursuant to the Committee’s authority toamend any option document under Section 8(j) of the Plan, theCommittee hereby amends the relevant option documents to accelerate the vestingof Employee’s unvested options, such that Employee’s unvested options shallvest in full on the day following the expiration of above-referenced 7-dayrevocation period.  In addition, pursuantto Section 8(e)(ii) of the Plan, the Committee hereby extends theperiod during which Employee may exercise his vested options (including optionspreviously vested and options vested by operation of this Agreement) to February 28,2010, or the expiration of the option term set forth in the applicable optionagreement pursuant to Section 8(e)(i) of the Plan (e.g., 10 yearsfrom the date of grant of the applicable option), whichever is earlier.

 

d.             Medical Benefits Continuation

 

ShouldEmployee elect medical benefits continuation under COBRA, the Company willcontinue to pay its regular employer contributions toward Employee’s medicalinsurance through August 31, 2009. Employee will be responsible for paying his regular share of the medicalcare premium.  All COBRA benefits areavailable only during the time that Employee is not eligible for comparablehealth coverage through another employer. Should Employee obtain such coverage, it is Employee’s obligation toimmediately notify the Company.

 

SECTION 3.          Consulting Services

 

For a 12-month period beginning March 1, 2008,Employee will serve as a consultant to the Company.  Employee agrees that he shall make and holdhimself available to the Company, and the Company shall engage the consultingservices of Employee upon reasonable notice to Employee and during normalbusiness hours, to perform such duties as are assigned to him by the Company.

 

a.             In consideration of Employee’s consultingservices, the Company shall pay him a fee of $50,000.00, to be paid in 12 equalmonthly payments beginning March 31, 2008.

 

b.             Upon presentation by Employee of an invoiceaccompanied by supporting documents reasonably satisfactory to the Company, theCompany shall reimburse him for reasonable expenses incurred by him andapproved in advance by the Company in connection with Employee’s performance ofconsulting services.

 

2

----

 

c.             Employee hereby agrees that in performingconsulting services for the Company, he shall act in the capacity of anindependent contractor with respect to the Company and not as an employee oragent of the Company.  Employee shall notrepresent to any person or entity that he is an employee or agent of theCompany and shall have no authority to bind the Company in any respect.  Employee shall pay all federal, state andlocal taxes that shall become due on any money paid to Employee by the Companyfor consulting services under the Agreement. Employee hereby acknowledges and agrees that, except as set forth in Section 2(d) hereof,he is not entitled or eligible to participate in or receive coverage under anyof the Company’s employee benefit plans, fringe benefit programs, groupinsurance arrangements or similar programs. As an independent contractor, Employee shall accept any directionsissued by the Company pertaining to the goals to be attained and the results tobe achieved, but shall be solely responsible for the manner and hours in whichthe services under this Agreement are performed.

 

d.             This Section 3 shall terminate at theend of the 12-month consulting term.  IfEmployee dies or becomes disabled (as determined by the Company in good faith)during the consulting term, Section 3 of this Agreement shallautomatically be terminated, and the Company’s sole obligation under thisAgreement shall be to pay Employee (or his beneficiaries) for any servicespreviously provided.

 

e.             The services to be provided by Employee underSection 3 of this Agreement shall be provided personally by Employee.  Employee may not assign any rights orperformance obligations under this Agreement to any other party without theprior express written consent of the Company. Any attempt to make such an assignment without the prior express writtenconsent of the Company shall be void and of no effect. of this Agreement

 

SECTION 4.          Conditions on Receipt of Benefits

 

Employee will not receive (or, as the case may be,continue to receive) the benefits described in Section 2 or the consultingarrangement described in Section 3 above unless Employee signs, and doesnot revoke, this Agreement.

 

SECTION 5.          General Release of Legal Claims and Promise Not to Sue

 

a.             Release of All Legal Claims

 

Inexchange for the benefits described in Section 2 of this Agreement, Employeehereby releases (on behalf of Employee and Employee’s heirs, beneficiaries,estate, legal representatives, and otherwise) the Company and the other “ReleasedParties” (as defined below) from all legal claims and causes of action that Employeehas, may have, or may claim to have against the Company or any of the otherReleased Parties (whether known or unknown; accrued or unaccrued; federal,state, local, or otherwise) arising at any time up to and including the datethat Employee signs this Agreement (collectively “Claims”).  This general release covers and includes, andtherefore releases, all Claims arising from or relating to Employee’semployment with the Company, the termination of Employee’s employment with theCompany, and any act or omission provided for or authorized by thisAgreement.  Among the specific Claimsthat Employee is releasing by signing this Agreement are (without limitation)the following: all Claims arising under

 

(i)            anylaw prohibiting discrimination on the basis of any protected characteristic(such as age, race, sex, national origin, religion, and disability status),including

 

3

----

 

(butnot limited to) all claims arising under the Age Discrimination in EmploymentAct (“ADEA”), Title VII of the Civil Rights Act of 1964, the Americans withDisabilities Act, and any similar state and local laws, including (but notlimited to) the Pennsylvania Human Relations Act;

 

(ii)           anylaw governing the payment of wages or the provision of employee benefits,including (but not limited to) Employee Retirement Income Security Act;

 

(iii)          thecommon law of any jurisdiction, including (but not limited to) all Claims forbreach of contract, wrongful termination or discharge, infliction of emotionaldistress, fraud, negligence, and defamation; and

 

(iv)          anyother law (or cause of action), whether federal, state, or local, governing theemployment relationship, including (without limitation) the Family and MedicalLeave Act.

 

b.             Definition of Released Parties

 

“ReleasedParties” means:  (i) the Company; (ii) theCompany’s past, present, and future parents, subsidiaries, and affiliates; (iii) eachof the foregoing entities’/persons’ successors and assigns; (iv) each ofthe foregoing entities’/persons’ owners, shareholders, officers, directors,managers, employees, agents, insurers, representatives, and benefit plans(including such plan’s fiduciaries, administrators, insurers, trustees, and thelike); and (v) all persons/entities claimed to be jointly or severallyliable with any of the foregoing entities/persons or through/by which any suchentities/persons have acted with respect to Employee.

 

c.             No Pending Charges/Complaints; Promise Not toSue

 

Employeerepresents and warrants that he has not filed any complaints or charges againstany of the Released Parties with any state or federal court or agency.  Employee promises not to file, cause to befiled, join, or accept any relief in, any lawsuit against the Company or any ofthe other Released Parties pleading, raising, or asserting any claims releasedby this Agreement.  If Employee breachesthis promise, Employee will reimburse the Company (and the other applicableReleased Parties) for all attorneys’ fees and costs (or the applicable portionthereof) incurred in defending against any such released claims.  While this Agreement will serve to releaseany ADEA claims referenced in Section 4(a) above, the attorneys’fees/cost shifting provision set forth in this Section 4(c) will notapply to any claims challenging the validity of this Agreement under theADEA.  Employee further agrees not toseek re-employment from the Company and he releases any Claims based on thedenial of re-employment.

 

d.             Adequacy of Benefits

 

Employeeagrees that (i) the benefits described in Section 2 of this Agreementare adequate consideration for Employee’s promises in this Agreement, and (ii) thebenefits described in Section 2 of this Agreement are benefits to which Employeewould not be entitled if Employee did not sign this Agreement.

 

4

----

 

SECTION 6.           Confidentiality

 

a.             Employee will keep the terms of thisAgreement strictly confidential.  Employeewill not discuss with, or disclose to, any person or entity (including anycurrent or former Company employee) the terms of this Agreement, unlessrequired by law, as discussed more fully in Section 6(b).  However, Employee may discuss the terms ofthis Agreement with Employee’s spouse, and for purposes of obtainingprofessional advice only, Employee’s lawyer or tax advisor, if Employee’s spouse,lawyer or tax advisor first agrees to keep the terms confidential as acondition of receipt.

 

b.             Employeemay disclose the terms of this Agreement under valid order of any court oradministrative agency of competent jurisdiction, provided, however, that:

 

(i)            Employeeshall not seek such an order or encourage or aid any other person or entity inseeking such an order;

 

(ii)           inthe event Employee receives a request, inquiry, subpoena or order seeking suchdisclosure, within three business days of such receipt (or within such shortertime period as necessary to allow adequate time to protect the confidentialityagreed to in this Agreement) Employee shall notify the Company by writtennotice delivered by hand or by telecopy and shall deliver a copy of suchrequest, inquiry, subpoena or order to the Company; and

 

(iii)          ifthe Company so requests, Employee shall cooperate, at the Company’s expense, tooppose any effort to require disclosure of the terms of this Agreement.

 

SECTION 7.           Non-Disparagement

 

Employee agrees not toengage in any conduct, or make any statements or representations, thatdisparage, demean or impugn the Company or any of its officers, directors, ormanagement employees.  The Company agreesnot to engage in any conduct, or make any statements or representations, thatdisparage, demean, or impugn Employee.

 

SECTION 8.           Confidential Information

 

a.             Employee agrees not to, at any time, use ordisclose (on Employee’s, or anyone else’s, behalf) Company’s “ConfidentialInformation” (as defined below), through any medium of communication, to anyperson or entity.  As used herein,Confidential Information shall mean all confidential, proprietary, ornon-public information (in whatever form) in any way relating to the businessof Company, including, but not limited to business techniques, know-how,designs, methods, processes, Intellectual Property (as defined below),strategies, and the like relating to or concerning Company’s financial matters,marketing, investments, budgets, business plans, marketing plans, developmentactivities, personnel matters, contracts/agreements, prospectivecontracts/agreements, business contacts, clients/customers, prospectiveclients/customers, products, and the like, irrespective of whether any of theforegoing items constitutes a trade secret under any applicable law.  This Section 8 shall apply toConfidential Information obtained, learned, or discovered by Employee bothduring the time period of his employment and the time period during which heprovides consulting services to the Company.

 

5

----

 

b.             Employee represents that Employee has notretained any Confidential Information in any form.

 

SECTION 9.          No Admission of Liability

 

Employee and the Company agree that this Agreementis made in compromise of disputed claims and to avoid the expense andinconvenience of litigation and is not, and is not to be construed as, afinding or admission of fault or wrongdoing by either party.

 

SECTION 10.        Miscellaneous

 

a.             Severability

 

Ifany provision of this Agreement is found to be invalid, it will be severed, andit will not affect the validity of any other provision of this Agreement.

 

b.             Enforcement; Assignability

 

Eachof the Released Parties may enforce this Agreement.  The Company may assign freely its rightsunder this Agreement.

 

c.             Amendment

 

Noamendment, modification or waiver of any provision of this Agreement shall bevalid, binding or enforceable, unless it is in writing and signed by the partyagainst whom it is to be charged.  Nowaiver by either party hereto of any breach by the other party of any conditionor provision of this Agreement to be performed by such other party shall bedeemed a waiver of a similar or dissimilar condition or provision at the sameor any prior or subsequent time.

 

d.             Complete Agreement

 

Thisis the complete agreement between Employee and the Company with respect to itssubject matter.  All prior agreementsbetween the Company and Employee are terminated, without regard to theirsubject matter.

 

e.             Choice of Law

 

ThisAgreement will be governed by the substantive laws of the Commonwealth of Pennsylvania,without regard to any contrary conflict of laws principles, unless federal lawapplies.

 

f.              No Additional Compensation

 

Employeeagrees that Employee is not entitled to receive (and releases under Section 5of this Agreement any Claims relating to) any wages, payments, benefits, orother compensation from the Company other than: (i) the benefits described in Section 2 of this Agreement; (ii) theconsulting arrangement described in Section 3; (iii) Employee’ssalary earned through the Separation Date; and (iv) any 401(k) benefits.

 

**Employee acknowledges that he has carefully read and understands thisAgreement.  This Agreement releases alllegal claims that Employee may have against the Company (and the other**

 

6

----

 

**Released Parties) as more fully described above.  Employee agrees that he signs this Agreementfreely, knowingly, and voluntarily. Employee is not relying upon any promises not set forth above inentering into this Agreement.**

 

Intending to be legally bound, Employee signs below.

 
| /s/ James Reilly                                    |   | March 25,2008  |
|-----------------------------------------------------|--------|---------------------|
| James  Reilly                                       |   | DATE                |
|                                                |   |                |
|                                                |   |                |
| Innovative  Solutions & Support, Inc. |   |                |
|                                                |   |                |
| /s/  Raymond J. Wilson                              |   | April 2,  2008 |
| By:  Raymond J. Wilson                              |   | DATE                |

 

7

----