Document:

Exhibit 10.2

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 30th day of June, 2007 by and between Cyclone Power Technologies, Inc., a Florida corporation (hereinafter called the “Company”), and Harry Schoell (hereinafter called the “Executive”).

1.

Employment.

1.1

Employment and Term.  The Company shall employ the Executive and the Executive shall serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof (the “Effective Date”) and expiring three (3) years from the Effective Date (the “Term”) unless sooner terminated as hereinafter set forth.  The Term of this Agreement shall automatically be extended for successive one (1) year periods, starting on the end of the second anniversary of the Effective Date, unless at least 90 days prior to such anniversary date, either the Board or the Executive gives written notice of his/its desire not to extend the Term hereof for the additional year.

1.2

Duties of Executive.  The Executive shall serve as CEO and President of the Company and shall have powers and authority commensurate with such position, shall diligently perform all services as may be reasonably assigned to him by the Board and shall exercise such power and authority as may from time to time be delegated to him by the Board.  

1.3

Founder’s Status.  Regardless of the termination of this Agreement, the Executive shall at all times be referred to as a “Founder” of the Company in any documents listing his bio, or otherwise warranting such mention.  

2.

Compensation.

2.1

Base Salary.  The Executive shall receive a base salary of $150,000 per annum (the “Base Salary”) during the Term, such Base Salary to be payable in substantially equal installments consistent with the Company’s normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall be subject to annual increases at the discretion of the Board.         

2.2

Deferred Salary.  Until such time that the Company has consistent revenues or has sufficient funding to carry on it operations, the Executive’s Base Salary, or that portion of it that the Executive and the Board reasonably determine, shall be deferred, but shall continue to accrue on the books of the Company.  Terms for repayment of the Executive’s deferred salary shall be reasonably agreed to by the Board and the Executive when the Company has available funds.  

2.3

Benefits.  During the Term of this Agreement, the Executive shall be entitled to insurance programs, sick leave, stock option plans, bonus plans, pension plans and other fringe benefit plans and programs as are from time-to-time established and maintained for the benefit of the Company’s executive officers subject to the provisions of such plans and programs in accordance with the Company’s policies and plans from time to time in effect for executive officers of the Company. 

2.4

Stock Options.  The Executive shall receive options to acquire 500,000 shares of the Company’s common stock, which options shall vest on the following terms and at the following exercise prices: 

							
	Number of Options

	 
	Term

	 
	Vesting

	 
	Exercise Price

	 
	 
	 
	 
	 
	 
	 

	250,000

	 
	10 yrs

	 
	Immediately

	 
	$0.25

	125,000

	 
	10 yrs

	 
	6/30/08

	 
	$0.35

	125,000

	 
	10 yrs

	 
	6/30/09

	 
	$0.45

2.5 

Management Incentives. The Executive shall be eligible to participate in the Company’s Stock Incentive Plan, which shall provide that the management of the Company as a group shall have the right to earn shares of the Company’s common stock equal to an additional 7.5% ownership of the Company, based upon performance and incentive accomplishments set forth therein.   

3.

Expense Reimbursement and Office.

3.1

Expense Reimbursement.  During the Term, the Company shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment.   

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3.2

Working Facilities.  The Company shall furnish the Executive with an office and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder.

4.

Termination.

4.1

Termination for Cause.  Notwithstanding anything contained to the contrary in this Agreement, this Agreement may be terminated by the Company for Cause. As used in this Agreement, “Cause” shall only mean (i) subject to the following sentences, any action or omission of the Executive which constitutes a willful and material breach of this Agreement which is not cured or as to which diligent attempts to cure have not commenced within thirty (30) business days after receipt by the Executive of notice of same, which notice specifies the conduct necessary to cure such breach, (ii) fraud, embezzlement or misappropriation as against the Company or (iii) the conviction of the Executive for any criminal act which reasonably injures the Company. Upon any determination by the Board that Cause exists under clause (i) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and the Executive, but in no event later than ten (10) business days after the Executive’s receipt of the notice contemplated by clause (i).  The Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of the Executive’s employment by reason of such Cause determination shall not be effective until the Executive is afforded such opportunity to appear.  Any termination for Cause pursuant to clause (ii) or (iii) of the first sentence of this Section 4.1 shall be made in writing to the Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination.  

Upon any termination pursuant to this Section 4.1, the Company shall pay to the Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice.  Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 3.1).

4.2

Termination Without Cause.  The Company shall have the right to terminate the Executive’s employment hereunder for any reason other than as set forth in Section 4.1 upon thirty (30) days written notice to the Executive; provided, however, that the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executive’s Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his Term then in effect, whichever is longer, and (iii) any Performance Bonus that would otherwise be payable to the Executive were he not terminated, during the 12 months following his termination.  Upon termination with cause, all of the Executive’s stock options shall vest immediately. 

4.3

Termination Upon Change in Control.  

(a)

Upon the termination of the Executive’s employment hereunder (i) by the Company other than for “Cause”, as specified in Section 4.1 hereof, or (ii) by the Executive for “Good Reason”, as specified in Section 4.3(c) hereof, within 180 days after the occurrence of a “Change in Control” as specified in Section 4.3(b) hereof, the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executive’s Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his Term then in effect, whichever is longer, and (iii) any Performance Bonus that would otherwise be payable to the Executive were he not terminated, during the 12 months following his termination.  Upon termination upon a change in control, all of the Executive’s stock options shall vest immediately.

(b)

For purposes of this Agreement, a “Change in Control” shall mean:

(i)

The acquisition (other than by the Company), at any time after the date hereof, by any person, entity or “group”, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock or the combined voting power of the Company’s then outstanding voting securities entitled to vote generally in the election of directors (together with such common stock, “Voting Securities”); or

(ii)

The individual(s) who, as of the date hereof, constitute the Board (as of the date hereof the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

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(iii)

Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company’s then outstanding voting securities, (B) a liquidation or dissolution of the Company or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned.

(c)

For purposes of this Agreement, “Good Reason” shall mean:  

(i)

The occurrence of any of the following events which is not consented to in writing by the Executive prior to its occurrence or which is not cured by the Company within thirty (30) days after its receipt of written notice of the Executive’s objection to such occurrence:  (a) the Executive is assigned to any position, duties or responsibilities that are significantly diminished when compared with the position, duties or responsibilities of the Executive on the date of this Agreement, (b) the Executive’s Base Salary or other compensation is reduced or (c) the Executive is requested to engage in conduct that is reasonably likely to result in a violation of law; but excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;

(ii)

Any failure by the Company to comply with any of the provisions of Sections 1.3, 2 or 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;

(iii)

The Company’s requiring the Executive to be based at any office or location other than the Company’s offices in South Florida, except for travel reasonably required in connection with the performance of the Executive’s responsibilities hereunder; or

(iv)

Any purported termination by the Company of the Executive’s employment other than as expressly permitted by this Agreement. 

4.4

Voluntary Resignation.  In the event the Executive resigns as an employee of the Company, he shall be entitled to receive the same payment as if he had been terminated pursuant to Section 4.2 of this Agreement.

4.5

Full Settlement.  In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement.  The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 6 of this Agreement), plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended (the “Code”).

5.

Indemnification.  The Company shall indemnify and hold harmless the Executive from and against any and all claims, damages, expenses (including attorneys' fees) and amounts paid in settlement, litigation, arbitration or otherwise (a “Claim”) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of any threatened, pending or completed Claim to which the Executive was or is a party or is threatened to be made a party by reason of the fact that the Executive is or was an officer, director, employee or agent of the Company or its predecessor company, or is or was serving at the request of the Company, or its predecessor company, as an officer, director, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, or by reason of anything done or not done by the Executive in such capacity or capacities, provided that the Executive acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company or its predecessor company.  Such indemnification shall include, but not be limited to, any Claim made by shareholders of the Company’s predecessor company for demand of the Executive equity holdings in the Company or its predecessor company.

6.

Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without regard to any conflict of law rule or principle that would give effect to the laws of another jurisdiction.  In the event that any dispute shall arise with respect to this Agreement, then such dispute shall be submitted for resolution to arbitration in Broward County, Florida in accordance with the rules of the American Arbitration Association then in effect.  The non-prevailing party in such arbitration shall pay all reasonable fees and expenses of the prevailing party, including fees and expenses of counsel for the prevailing party.

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7.

Notices.  Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the Company’s executive office, or to the last address known for the Executive.  

8.

Entire Agreement.  This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company with respect to such subject matter.  

9.

Benefits; Binding Effect.  This Agreement shall be for the benefit of and binding upon the parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns.  Notwithstanding the foregoing, neither party may assign its rights or benefits hereunder without the prior written consent of the other party hereto.

10.

Severability.  The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted.  If such invalidity is caused by duration, geographic scope or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.

11.

Waivers.  The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.

12.

Damages.  Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement.

13.

No Third Party Beneficiary.  Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of the Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement.

(Signatures on following page)

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

CYCLONE POWER TECHNOLOGIES, INC.

By: /s/ Frankie Fruge                                 

Name: Frankie Fruge 

Title: COO

EXECUTIVE

/s/ Harry Schoell                                        

Harry Schoell

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Further Terms and Conditions of Employment

The following terms and conditions are applicable to all of the Company's employees, and by accepting employment, you (referred to herein as "Employee") agree to be bound by these terms and conditions, as well as the terms and conditions separately agreed between you and the Company regarding duties, compensation, benefits, etc.  These terms are not intended to limit the Company's rights under general principles of law regarding the matters described below.  Employee and the Company agree that if the terms contained herein conflict with the terms of the employment agreement to which this is annexed, the employment agreement shall govern.   

 

1.       Disclosure of Information.

1.1

In the course of Employee's employment hereunder, Employee will receive, contribute to the production of, or become privy to the Company's Confidential Information (as hereinafter defined).

1.2

Employee agrees that during Employee’s employment by Company and for a period of three (3) years thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal, report, publish, copy, duplicate, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employee’s work for Company.  Employee agrees that during Employee’s employment by Company and in perpetuity thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal report, publish, copy, duplicate, disclose, transfer or otherwise misappropriate any Confidential Information to any person or entity, or utilize such Confidential Information for any purpose, except within the course of Employee’s employment with Company.

1.3

All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any form or media in any way incorporating or reflecting any Confidential Information of Company shall belong exclusively to Company.  Upon termination of his employment for any reason, or at any time Company may request prior thereto, Employee shall immediately surrender and turn over to Company any of Company’s property whatsoever and all Confidential Information of Company, whether the same be in writing, print, copy, audio or video tape, computer program or disc, picture, or any other medium whatsoever, and whether appearing in original documents, summaries, excerpts, abstracts or other formats, and shall provide Company with all information necessary to access and use said Confidential Information.  Employee shall have no right to retain any originals or copies of the foregoing for any reason whatsoever after termination of his employment hereunder without the express prior written consent of Company and, upon termination, Employee shall certify in writing that he no longer possesses and has not distributed or retained any Confidential Information of Company or any of Company’s property whatsoever.

1.4

Notwithstanding the terms of this Agreement, the obligation of Employee to protect the confidentiality of any Confidential Information shall terminate as to any information or materials which:  (i) are, or become, public knowledge through no act or failure to act of Employee; (ii) are publicly disclosed by the proprietor thereof; (iii) are lawfully obtained without obligations of confidentiality by Employee from a third party after reasonable inquiry regarding the authority of such third party to possess and divulge the same; (iv) are independently developed by Employee from sources or through persons that Employee can demonstrate had no access to Confidential Information; or (v) are lawfully known by Employee at the time of disclosure other than by reason of discussions with or disclosures by Company.

1.5

As used in this Agreement, “Confidential Information” means information or material, whether oral or written, that is proprietary to Company or designated (either expressly or by virtue of the manner in which such information or material is traditionally treated in business settings) as Confidential Information by Company and not generally known by non-Company personnel, which Employee may develop or which Employee may receive, obtain knowledge of or become privy to through or as a result of Employee’s relationship with Company (including information conceived, originated, discovered or developed in whole or in part by Employee).  “Confidential Information” includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing): trade secrets, discoveries, ideas, concepts, software in various stages of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, development, processes, procedures, “know-how”, marketing techniques and materials, marketing and development plans, names of employees and information related to them, customer names, contacts, and other information related to customers, price lists, pricing policies, and financial data, information and projections.  “Confidential Information” also includes any information described above which Company obtains from another party and which Company treats as proprietary or designates as “Confidential Information”, whether or not owned or developed by Company.  Information that is publicly known and that is generally employed by the trade or generic information or knowledge which Employee would have learned in the course of similar work elsewhere in the trade is not intended to and shall be deemed not to be a part of the “Confidential Information”.

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2.

Agreement Not to Solicit Customers.  Employee agrees that during his employment by Company and for a period of one (1) year following termination of such employment for any reason whatsoever, Employee shall not, either directly or indirectly, on his own behalf or in the service of or on behalf of others actively solicit, or attempt to solicit, initiate contact with, or call upon any clients or actively sought prospective clients of Company with whom Employee had material contact during his employment with Company, for the purpose of soliciting, selling, diverting to or otherwise providing services on behalf of any business entity  which engages in the business of oil and gas exploration, unless agreed to in writing by both parties.

2.1

Material Contact.  For purposes of this Agreement, “material contact” exists between Employee and each client or actively sought prospective client of Company with whom Employee personally interacts on behalf of Company, whether such interaction is conducted in person, in writing, by telephone or by other form of communication.

3.

Agreement Not to Solicit Employees.  Employee agrees that during his employment by Company and for a period of two (2) years following termination of such employment for any reason, he will not, either directly or indirectly, on his own behalf or in the service of, or on behalf of others, actively encourage or induce the voluntary termination of, or recruit or hire, or attempt to recruit or hire, any person(s) then employed by or associated with Company as an employee, independent contractor or consultant, whether or not such recruit or hiree is a full-time, part-time or temporary employee, independent contractor or consultant of said entities, and whether or not such employment is for a determined period or is at-will, for the purpose of employment, consultancy, or serving as an independent contractor for, directly or indirectly, any business entity which  engages in the business of design, manufacture and sale of information security technology.

4.

Work Product.   

4.1

Employee agrees that any inventions, ideas, Confidential Information, or copyrightable or patentable subject matter in whole or in part conceived or made by employee during or after the term of his employment with Company which are made through the use of any of Company’s Confidential Information or any of Company’s equipment, facilities or time, or which result from any work performed by Employee for Company (collectively, “Work Product”), shall belong exclusively to Company and shall be considered part of the Confidential Information (as the case may be) for purposes of this Agreement.

4.2

Company, its designees, and its assigns shall have the right to use and/or to apply for patents, copyrights or other statutory or common law protections for such Work Product in any and all countries.  Employee shall provide reasonable assistance to Company (at Company’s expense) to obtain and from time to time enforce patents, copyrights, and other statutory or common law protections for such Work Product in any and all countries.  To that end, Employee shall execute, during and after his engagement with Company, all documents reasonably related to the application, procurement, and enforcement of patents, copyrights, and other statutory or common law protections, as Company or its counsel may request, together with any assignments thereof to Company or its designee.

4.3

All copyrightable subject matter generated or developed by Employee under this Agreement shall be deemed to be work made for hire, and exclusively the Company shall upon creation, own all such copyrightable subject matter.  In the event that any such copyrightable subject matter may not be considered work made for hire, then to the fullest extent permitted by law, Employee hereby assigns to Company or its designee all ownership of all copyrights in all such copyrightable subject matter, and Company or its designee shall have the right to obtain and hold in its own name copyrights, registrations and similar protections related thereto to the extent available.

5.

Conflicts of Interest.     During the term of his employment Employee shall not engage in activities or practices involving any possible conflict of interest.  These activities or practices may subject Employee to disciplinary action, up to and including termination of employment.  Employee should avoid at all times the appearance of, as well as an actual, conflict of interest.  

5.1

Conflicts of interest activities or practices include, but are not limited to: engaging in business conduct that is damaging to the reputation of the Company, accepting outside employment in any organization that does business with the Company or is a competitor of the Company, investing or having a financial interest in a private company which does business with the Company or having stock ownership in a publicly traded company which does business with the Company if the relationship(s) may influence Employee’s business decisions (this applies to Employee and to close relatives and is applicable at the time of hire and at any time during the course of employment).  If an individual does own stock in a company that does business with the Company, the relationship should be disclosed upon employment and all significant business dealings with that company will be reviewed.

 5.2

Employee may not accept gifts from any person or company doing or seeking to do business with the Company. Employees are allowed to accept advertising novelties and other gifts of nominal value. 

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5.3 

Employee may not give, offer, or promise, directly or indirectly, anything of value to any representative of any company doing business with the Company.

5.4 

Employee may not select vendors on the basis of anything other than the merit of their products or services or prices for such products or services. 

5.5

Discussing company information with the press without prior authorization from management is also a conflict of interest.

5.6

This entire Section 5 shall specifically exclude any and all dealings, employment, ownership or other activity performed for or on behalf of Schoell Marine. 

EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THESE TERMS AND CONDITIONS OF EMPLOYMENT AND AGREES THAT THESE TERMS AND CONDITIONS ARE NECESSARY FOR THE REASONABLE AND PROPER PROTECTION OF THE COMPANY'S BUSINESS.  EMPLOYEE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS ADVISED HIM THAT HE IS ENTITLED TO HAVE THIS AGREEMENT REVIEWED BY AN ATTORNEY OF HIS SELECTION PRIOR TO SIGNING, AND HE HAS EITHER DONE SO OR ELECTED TO FOREGO THAT RIGHT.

/s/  Harry Schoell                         

Harry Schoell

8Exhibit 10.3

Exhibit 10.3

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Cyclone Power Technologies, Inc.
COMMON STOCK PURCHASE WARRANT
Issue Date: July 30, 2009
CYCLONE POWER TECHNOLOGIES, INC, a corporation organized and existing under the laws of the State of Florida (the “Company”), hereby certifies that, for value received, PHOENIX POWER GROUP

  , LLC

, a limited liability company organized and existing under the laws of the State of Tennessee,

 or assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Release Date (as defined below) and at anytime or from time to time before 5:00 p.m. EST through the close of business on the date which is Twenty-Four (24) Months following the Release Date (such date being the “Expiration Date”),

  the number of

 fully paid and nonassessable shares of Common Stock, $0.001 par value per share

  (the “Common Stock”)

, equal to Two Percent (2%) of the total issued and outstanding shares of Common Stock on a fully-diluted basis (assuming the exercise of all options, warrants, or any other securities convertible or exchangeable into Common Stock) at the time of exercise, at the price of $.19 per share (the “Exercise Price”). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein.
As used herein, the term “Common Stock” includes (i) the Company’s Common Stock, par value $0.001 per share; and (ii) any other securities into which or for which any of the securities described in the preceding clause (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
As used herein, “Release Date” shall be the day that the first two (2) Prototype Cyclone Mark V engines (as such terms are defined in

  that certain

 Systems Application License Agreement

  between the Company and Holder

, dated as of July 30, 2009) are delivered to the Holder.
1.

Procedure for Exercise.
1.1.

Exercise.  To exercise this Warrant in whole or in part, the Holder shall deliver to the Company, (a) this Warrant, (b) a written notice of such Holder’s election to exercise this Warrant (the “Exercise Notice”), which notice shall specify the number of shares of Common Stock to be purchased, the denominations of the share certificate or share certificates desired and the name or names in which such certificates are to be registered, and (c) payment of the Exercise Price with respect to such shares.  Payment may be made in cash, wire transfer, or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price for the number of shares of Common Stock specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder (or its designee, as set forth in the Exercise Notice) shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or other securities) determined as provided herein.  Upon exercise in whole or in part, this Warrant shall terminate.

1.2.

Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder (or its designee) as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within five (5) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock to which such Holder (or its designee) shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value (defined as the average closing market price on the previous five trading days) of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

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  1.3.

Number of Exercises

.. The Holder may exercise this Warrant in whole or in part; however, only one exercise shall be allowable. Should the Holder transfer this Warrant to multiple parties allowable hereunder, all such parties must exercise their rights at the same time.  Should the Holder(s) choose to exercise this Warrant for less than the total number of shares allowable, then the balance of such shares shall be forfeited. Upon exercise in whole or in part, this Warrant shall terminate.

2.

Anti-dilution Provisions.  It is intended that this Warrant and the right to acquire two percent (2%) of the Common Stock at the Exercise Price will be non-dilutable and have anti-dilution protection until the sooner of the exercise hereof or the Expiration Date.  In furtherance thereof, the Company agrees as follows:

2.1.

Common Stock Reorganization. In the event that the Company shall (a)  subdivide its outstanding shares of Common Stock into a greater number of shares of the Commons Stock, or (b) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock (any such event being herein called a “Common Stock Reorganization”), then, on the occurrence of each such Common Stock Reorganization, the number of shares of Common Stock that the Holder shall thereafter be entitled to receive, on the exercise hereof as provided in Section 1, shall be increased or decreased accordingly. As the number of shares issuable by the Warrant is a percentage of the total issued and outstanding shares at such time on a fully diluted basis, such adjustment shall occur automatically upon the combination or division of the Company’s Common Stock. Upon such a Common Stock Reorganization, the Exercise Price for the Warrant shall be similarly adjusted to account for the greater or lesser number of shares of Common Stock then outstanding.

2.2.

Reorganization, Consolidation, Merger, Etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company (any such event being called a “Capital Reorganization”), then, in each such case, as a condition to the consummation of such Capital Reorganization, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such Capital Reorganization or the effective date of such Capital Reorganization, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such Capital Reorganization, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in this Article 2.
2.3.

Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall, upon exercise of this Warrant, at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of this Warrant pursuant to Section 2.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in Broward County, Florida as trustee for the Holder of this Warrant (the “Trustee”).
2.4.

Continuation of Terms. Upon any

  Capital Reorganization

 (and any dissolution following any transfer) referred to in this

  Article

 2, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such

  Capital Reorganization

 or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section

  5.

 In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this

  Article

 2, then, upon exercise of this Warrant, the Company’s securities and property (including cash, where applicable) receivable by the Holder of this Warrant will be delivered to the Holder or the Trustee as contemplated by Section 2.3.
2.5.

Proceedings Prior to Any Action Requiring Adjustment.  As a condition precedent to the taking of any action which would require an adjustment pursuant to this Article 2, the Company shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable all shares of Common Stock which Holder is entitled to receive upon exercise thereof.

2

2.6.

Notice of Adjustment.  Not less than ten (10) nor more than thirty (30) days prior to the record date or effective date, as the case may be, of any action which requires or might require an adjustment or readjustment pursuant to this Article 2, the Company shall give notice to Holder of such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof.  If the required adjustment is not determinable at the time of such notice, the Company shall give notice to Holder of such adjustment and computation promptly after such adjustment becomes determinable.

3.

Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company

  has duly reserved and

 will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, shares of Common Stock from time to time issuable on the exercise of this Warrant.

4.

Registration Rights.

4.1.

Incidental “Piggy Back” Registration.  

(a)

If Company at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar forms) for the account of Harry Schoell, Frankie Frugie or any other executive officers or directors of the Company (such shares being held by such affiliates of the Company being referred to as the “Other Shares”), it will each such time give prompt written notice to Holder of its intention to do so and of Holder’s rights under this Section 4.1.  Upon the written request of Holder made within ten (10) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by Holder and the intended method of disposition thereof), Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which Company has been so requested to register by Holder thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which Company proposes to register;

provided

 that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, Company shall determine for any reason either not to register or to delay registration of such securities, Company may, at its election, give written notice of such determination to Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such Other Shares. Company will pay all Registration Expenses in connection with each registration of Registrable Securities pursuant to this Section 4.1.

(b)

If Company at any time proposes to register any of the Other Shares under the Securities Act as contemplated by Section 4.1 and such securities are to be distributed by or through one or more underwriters, Company will, if requested by Holder as provided in this Section 4.1, use its best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by Holder among the securities to be distributed by such underwriters,

provided

 that if the managing underwriter of such underwritten offering shall inform Company and Holder requesting such registration and all other holders of any Other Shares of Common Stock which shall have exercised, in respect of such underwritten offering, registration rights comparable to the rights under this Section 4.1 of its belief that inclusion in such distribution of all or a specified number of such securities proposed to be distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such letter to state the basis of such belief and the approximate number of such Registrable Securities and such Other Shares proposed so to be registered which may be distributed without such effect), then Company may, upon written notice to all holders of such Registrable Securities and holders of such Other Shares, reduce

pro

rata

 (if and to be extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities and Other Shares the registration of which shall have been requested by each holder thereof so that the resultant aggregate number of such Registrable Securities and Other Shares so included in such registration, together with the number of securities to be included in such registration for the account of Company, shall be equal to the number of shares stated in such managing underwriter’s letter.

4.2.

Indemnification.

(a)

Company agrees to indemnify and hold harmless Holder whose Registrable Securities are covered by any registration statement, its directors and officers and each other person, if any, who controls Holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which any such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether

3

commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and Company will reimburse each such indemnified party for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to Company by or on behalf of such holder specifically for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by Holder.

(b)

Holder agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 4.2) Company, each director of Company, each officer of Company and each other person, if any, who controls Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereof, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to Company by or on behalf of Holder specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement.  In addition, if requested to do so by such person, Holder shall indemnify any underwriter of such offering and each other person, if any, who controls any such underwriter within the meaning of the Securities Act in substantially the same manner and to substantially the same extent as the indemnity herein provided to Company and each other indemnified party herein described.  Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller.

4.3.

Definitions Used in Article 4.  Unless otherwise defined herein, the following terms used in this Article 4 shall have the meanings specified below:

“Commission” means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act.

“Registrable Securities” means any shares of the Company Common Stock which have been duly exercised pursuant to this Warrant, and are still held by the original Holders thereof, or their duly authorized assignees.

 “Securities Act” means the Securities Act of 1933, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.  Reference to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar Federal statute

..
5.

Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered Holder hereof (a “Transferor”) in whole or in part only to a subsidiary or affiliated company, or owner, of the Holder. On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor’s counsel (at the Company’s expense) that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.

6.

Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.

4

7.

Warrant Agent. The Company may, by written notice to the Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 5, and replacing this Warrant pursuant to Section 6, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
8.

Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
9.

Notices, Etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, untilHolder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company.
10.

Representation Regarding Transferability.  The Company herein represents and warrants that, other than restrictions imposed by any applicable federal or state securities laws, there are no, and will be no, restrictions imposed upon the transferability of the Common Stock with may be purchased pursuant to the terms of this Warrant, including, but not limited to, a shareholders’ agreement among the shareholders of the Company.

11.

Severability.  In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.  The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

12.

Section Headings.  The section headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant.

13.

Right to Specific Performance.  The Company acknowledges and agrees that in the event of any breach of the foregoing covenants and agreements, the Holder would be irreparably harmed and could not be made whole only by the award of monetary damages.  Accordingly, the Company agrees that the Holder, in addition to any other remedy to which the Holder may be entitled at law or equity, will be entitled to seek and obtain an award of specific performance of any of the foregoing covenants and agreements.

14.

Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of Florida without regard to principles of conflicts of laws.

IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.

			
	 
	CYCLONE POWER TECHNOLOGIES, INC.

	 
	 
	 

	 
	 
	 

	 
	By:

	/s/ Harry Schoell

	 
	 
	Harry Schoell, Chairman and CEO

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	PHOENIX POWER GROUP

,

 LLC

	 
	 
	 

	 
	 
	 

	 
	By:

	Thomas V. Thillen

	 
	 
	Thomas V. Thillen, President

5

Exhibit A

FORM OF SUBSCRIPTION
(Signed Only on Exercise of Warrant)

Cyclone Power Technologies, Inc.
601 NE 26th Court
Pompano Beach, FL 33064  

Ladies and Gentlemen:

The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to purchase         shares of the Common Stock covered by such Warrant.
The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $              .
The undersigned requests that the certificates for such shares be issued in the name of, and delivered to                       whose address is                                                                .
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an exemption from registration under the Securities Act.

		
	 
	Signature of Warrant Holder:

	 
	 

	 
	 

	 
	 

	 
	Address:

	 
	 

	 
	Date:

6

Exhibit B

FORM OF TRANSFEROR ENDORSEMENT
(Signed Only on Transfer of Warrant)

For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Cyclone Power Technologies, Inc. (the “Company”) into which the within Warrant relates specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of the Company with full power of substitution in the premises.

							
	Transferees

	 
	Address

	 
	Percentage

Transferred

	 
	Number

Transferred

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

	 
	 
	 
	 
	 
	 
	 

			
	Dated:                    

	 
	 

	 
	 
	 

	 
	 
	(Signature must conform to name of holder as specified on the face of the Warrant)

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	 
	SIGNED IN THE PRESENCE OF:

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	 
	(Name)

	ACCEPTED AND AGREED:

	 
	 

	 
	 
	 

	[TRANSFEREE]

	 
	 

	 
	 
	 

	 
	 
	 

	(Name)

	 
	 

7

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