Document:

EXECUTION
COPY

AMENDED AND RESTATED EMPLOYMENT
AGREEMENT

AGREEMENT dated as of December  1,
2006 between VINCENT PALAZZOLO, residing at 1595 James Road, Wantagh,
New York 11793 (‘‘Executive’’), and CPI
AEROSTRUCTURES, INC., a New York corporation having its principal
office at 60 Heartland Blvd., Edgewood, New York 11717
(‘‘Company’’);

WHEREAS, Executive has
served as the Company’s Chief Financial Officer pursuant to an
Employment Agreement, dated February  7,  2005
(‘‘Prior Employment Agreement’’);
and

WHEREAS, the Company and Executive desire to amend and
restate the Prior Employment Agreement (as so amended and restated,
this ‘‘Agreement’’) to provide for
continued employment of Executive by the Company for the period and
upon the terms and conditions set forth herein;

IT IS
AGREED:

1.    Employment, Duties and
Acceptance.

1.1    General.    The
Company hereby agrees to the continued employment of Executive as its
Chief Financial Officer (‘‘CFO’’). All of
Executive’s powers and authority in any capacity shall at all
times be subject to the direction and control of the Company’s
Board of Directors. The Board may assign to Executive such management
and supervisory responsibilities and executive duties for the Company
or any subsidiary of the Company, including serving as an executive
officer and/or director of any subsidiary, as are consistent with
Executive’s status as CFO. The Company and Executive acknowledge
that Executive’s primary functions and duties as CFO shall be to
manage and supervise the Company’s financial
operations.

1.2    Full-Time
Position.    Executive accepts such employment and agrees to
devote substantially all of his business time, energies and attention
to the performance of his duties hereunder. Nothing herein shall be
construed as preventing Executive from making and supervising personal
investments, provided they will not interfere with the performance of
Executive’s duties hereunder or violate the provisions of
Section 5.4
hereof.

1.3    Location.    The Company
will maintain its principal executive offices within a 30-mile radius
of its current location in Edgewood, New York. Executive shall
undertake such occasional travel, within or outside the United States,
as is reasonably necessary in the interests of the
Company.

2.    Term.    The term of
Executive’s employment hereunder shall commence on
January  1,  2007 and shall continue until December
31,  2009 (‘‘Term’’) unless
terminated earlier as hereinafter provided in this Agreement, or unless
extended by mutual written agreement of the Company and Executive.
Unless the Company and Executive have otherwise agreed in writing, if
Executive continues to work for the Company after the expiration of the
Term, his employment thereafter shall be under the same terms and
conditions provided for in this Agreement, except that his employment
will be on an ‘‘at will’’ basis and the
provisions of Sections 4.4 and 4.6(c) shall no longer be in
effect.

3.    Compensation and
Benefits.

3.1    Salary.    The
Company shall pay to Executive a salary (‘‘Base
Salary’’) at the annual rate of (i) $200,000 from
January  1,  2007 until December  31,  2007,
(ii) $208,000 from January  1,  2008 until December
31,  2008 and (iii) $216,300 from January  1,  2009
to December  31,  2009. Executive’s compensation
shall be paid in equal, periodic installments in accordance with the
Company’s normal payroll
procedures.

3.2    Bonus.    In addition
to Base Salary, for each of the years ending December  31,
2007, 2008 and 2009, Executive shall be paid a bonus
(‘‘Bonus’’) to be calculated in the manner
set forth on Schedule A annexed hereto. The amount of the
Bonus shall be pro-rated to the date of termination of
Executive’s employment. The Bonus with respect to any year shall
be paid on or prior to April  15 of the following
year.

3.3    Options.

(a)    As additional compensation for Executive entering
into this Agreement and agreeing to be bound by its terms (including
Article 5 hereof) and for the services to be rendered by Executive
hereunder, the Company hereby grants to Executive a ten-year option
(‘‘Option’’) to purchase 25,000 shares of
the Company’s common stock under the Company’s
Performance Equity Plan 2000
(‘Plan’’).

(b)    The Option
shall be evidenced by a Stock Option Agreement in the form attached
hereto as Exhibit A. The Option shall be an incentive option and
shall have an exercise price equal to the closing price of the
Company’s common stock on the date of grant. Except as otherwise
provided in the Stock Option Agreement, the Option will vest in three
equal annual installments commencing on the first anniversary of the
date of grant of such Option and shall expire on the date immediately
preceding the tenth anniversary of the date of grant of such
option.

3.4    Benefits.    Executive
shall be entitled to such medical, life, disability and other benefits
as are generally afforded to other executives of the Company, subject
to applicable waiting periods and other
conditions.

3.5    Vacation.    Executive
shall be entitled to such paid vacation days in each year during the
Term and to a reasonable number of other days off for religious and
personal reasons in accordance with customary Company
policy.

3.6    Automobile.    During the
Term, the Company shall provide a luxury class automobile (reasonably
satisfactory to Executive) for Executive to be used in connection with
the business of the Company. The Company shall reimburse Executive for
all costs associated with the use of such automobile, including lease
and insurance costs, repairs and
maintenance.

3.7    Expenses.    The
Company shall pay or reimburse Executive for all transportation, hotel
and other expenses reasonably incurred by Executive on business trips
and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company
against itemized vouchers submitted with respect to any such expenses
and approved in accordance with customary
procedures.

3.8    Club
Membership.    During the Term, Executive shall be entitled to a
country club membership, as long as the Company maintains a group
membership at such
club.

4.    Termination.

4.1    Death.    If
Executive dies during the Term, Executive’s employment hereunder
shall terminate and the Company shall pay to Executive’s estate
the amount set forth in Section
4.6(a).

4.2    Disability.    The Company,
by written notice to Executive, may terminate Executive’s
employment hereunder if Executive shall fail because of illness or
incapacity to render services of the character contemplated by this
Agreement for six consecutive months. Upon such termination, the
Company shall pay to Executive the amount set forth in Section
4.6(a).

4.3    By Company for
‘‘Cause’’.    The Company, by
written notice to Executive, may terminate Executive’s
employment hereunder for ‘‘Cause’’. As used
herein, ‘‘Cause’’ shall mean: (a) the
refusal or failure by Executive to carry out specific directions of the
Board which are of a material nature and consistent with his status as
CFO (or whichever positions Executive holds at such time), or the
refusal or failure by Executive to perform a material part of
Executive’s duties hereunder; (b) the commission by Executive of
a material breach of any of the provisions of this Agreement; (c) fraud
or dishonest action by Executive in his relations with the Company or
any of its subsidiaries or affiliates
(‘‘dishonest’’ for these purposes shall
mean Executive’s knowingly or recklessly making of a material
misstatement or omission for his personal benefit); or (d) the
conviction of Executive of a felony under federal or state law.
Notwithstanding the foregoing, no ‘‘Cause’’
for termination shall be deemed to exist with respect to
Executive’s acts described in clauses (a) or (b) above, unless
the Company shall have given written notice to Executive specifying the
‘‘Cause’’ with reasonable particularity
and, within thirty calendar days after such notice, Executive shall not
have cured or 

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eliminated the problem or thing giving rise to
such ‘‘Cause;’’ provided, however, no more
than two cure periods need be provided during any twelve-month period.
Upon such termination, the Company shall pay to Executive the amount
set forth in Section 4.6(b).

4.4    By Executive
for ‘‘Good Reason’’.    The
Executive, by written notice to the Company, may terminate
Executive’s employment hereunder if a ‘‘Good
Reason’’ exists. For purposes of this Agreement,
‘‘Good Reason’’ shall mean the occurrence
of any of the following circumstances without the Executive’s
prior written consent: (a) a substantial and material adverse change in
the nature of Executive’s title, duties or responsibilities with
the Company that represents a demotion from his title, duties or
responsibilities as in effect immediately prior to such change; (b)
material breach of this Agreement by the Company; (c) a failure by the
Company to make any payment to Executive when due, unless the payment
is not material and is being contested by the Company, in good faith;
or (d) a liquidation, bankruptcy or receivership of the Company.
Notwithstanding the foregoing, no ‘‘Good
Reason’’ shall be deemed to exist with respect to the
Company’s acts described in clauses (a), (b) or (c) above,
unless Executive shall have given written notice to the Company
specifying the ‘‘Good Reason’’ with
reasonable particularity and, within thirty calendar days after such
notice, the Company shall not have cured or eliminated the problem or
thing giving rise to such ‘‘Good Reason’’;
provided, however, that no more than two cure periods shall be provided
during any twelve-month period of a breach of clauses (a), (b) or (c)
above. Upon such termination, the Company shall pay to Executive the
amount set forth in Section
4.6(c).

4.5    By Company Without
‘‘Cause’’.    The Company may
terminate Executive’s employment hereunder without
‘‘Cause’’ by giving at least 30 days
written notice to Executive. Upon such termination, the Company shall
pay to Executive the amount set forth in Section
4.6(c).

4.6    Compensation Upon
Termination. In the event that Executive’s employment
hereunder is terminated, the Company shall pay to Executive the
following compensation:

(a)    Payment Upon Death
or Disability.    In the event that Executive’s
employment is terminated pursuant to Sections 4.1 or 4.2, the Company
shall no longer be under any obligation to Executive or his legal
representatives pursuant to this Agreement except for: (i) the Base
Salary due Executive pursuant to Section 3.1 hereof through the date of
termination; (ii) any Bonus which would have become payable under
Section 3.2 for the year in which the employment was terminated
prorated by multiplying the full amount of the Bonus by a fraction, the
numerator of which is the number of ‘‘full calendar
months’’ worked by Executive during the year of
termination and the denominator of which is 12 (a ‘‘full
calendar month’’ is a month in which the Executive worked
at least two weeks); (iii) all earned and previously approved but
unpaid Bonuses for any year prior to the year of termination; (iv) all
valid expense reimbursements, and (v) all accrued but unused vacation
pay.

(b)    Payment Upon Termination by the
Company For ‘‘Cause’’.    In the
event that the Company terminates Executive’s employment
hereunder pursuant to Section 4.3, the Company shall have no further
obligations to the Executive hereunder, except for: (i) the Base Salary
due Executive pursuant to Section 3.1 hereof through the date of
termination (ii) all valid expense reimbursements and (ii) all unused
vacation pay through the date of termination required by law to be
paid.

(c)    Payment Upon Termination by Company
Without Cause or by Executive for Good Reason.    In the event
that Executive’s employment is terminated pursuant to Sections
4.4 or 4.5, the Company shall have no further obligations to Executive
hereunder except for: (i) the Base Salary due Executive pursuant to
Section 3.1 hereof through the end of the Term; (ii) all earned and
previously approved but unpaid Bonuses; (iii) all valid expense
reimbursements; and (iv) all accrued but unused vacation
pay.

(d)    Executive shall have no duty to mitigate
awards paid or payable to him pursuant to this Agreement, and any
compensation paid or payable to Executive from sources other than the
Company will not offset or terminate the Company’s obligation to
pay to Executive the full amounts pursuant to this Agreement.

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5.    Protection of Confidential
Information;
Non-Competition.

5.1    Acknowledgment.    Executive
acknowledges that:

(a)    As a result of his current
and prior employment with the Company, Executive has obtained and will
obtain secret and confidential information concerning the business of
the Company and its subsidiaries (referred to collectively in this
Section 5 as the ‘‘Company’’), including,
without limitation, financial information, proprietary rights, trade
secrets and ‘‘know-how,’’ customers and
sources (‘‘Confidential
Information’’).

(b)    The Company will
suffer substantial damage which will be difficult to compute if, during
the period of his employment with the Company or thereafter, Executive
should enter a business competitive with the Company or divulge
Confidential Information.

(c)    The provisions of
this Agreement are reasonable and necessary for the protection of the
business of the
Company.

5.2    Confidentiality.    Executive
agrees that he will not at any time, during the Term or thereafter,
divulge to any person or entity any Confidential Information obtained
or learned by him as a result of his employment with the Company,
except (i) in the course of performing his duties hereunder, (ii) with
the Company’s prior written consent; (iii) to the extent that
any such information is in the public domain other than as a result of
Executive’s breach of any of his obligations hereunder; or (iv)
where required to be disclosed by court order, subpoena or other
government process. If Executive shall be required to make disclosure
pursuant to the provisions of clause (iv) of the preceding sentence,
Executive promptly, but in no event more than 48 hours after learning
of such subpoena, court order, or other government process, shall
notify, confirmed by mail, the Company and, at the Company’s
expense, Executive shall: (a) take all reasonably necessary and lawful
steps required by the Company to defend against the enforcement of such
subpoena, court order or other government process, and (b) permit the
Company to intervene and participate with counsel of its choice in any
proceeding relating to the enforcement
thereof.

5.3    Documents.    Upon
termination of his employment with the Company, Executive will promptly
deliver to the Company all memoranda, notes, records, reports, manuals,
drawings, blueprints and other documents (and all copies thereof)
relating to the business of the Company and all property associated
therewith, which he may then possess or have under his control;
provided, however, that Executive shall be entitled to retain copies of
such documents reasonably necessary to document his financial
relationship with the
Company.

5.4    Non-competition.    During
the Term and for a period of two years thereafter, Executive, without
the prior written permission of the Company, shall not, anywhere in the
world, (i) be employed by, or render any services to, any person, firm
or corporation engaged in the contract production of aircraft parts or
any other business which is directly in competition with any
‘‘material’’ business conducted by the
Company or any of its subsidiaries at the time of termination (as used
herein ‘‘material’’ means a business which
generated at least 10% of the Company’s consolidated
revenues for the last full fiscal year for which audited financial
statements are available) (‘‘Competitive
Business’’); (ii) engage in any Competitive Business for
his or its own account; (iii) be associated with or interested in any
Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee, consultant,
advisor or in any other relationship or capacity; (iv) employ or
retain, or have or cause any other person or entity to employ or
retain, any person who was employed or retained by the Company while
Executive was employed by the Company (other than Executive’s
personal secretary and assistant); or (v) solicit, interfere with, or
endeavor to entice away from the Company, for the benefit of a
Competitive Business, any of its customers or other persons with whom
the Company has a contractual relationship. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from
investing his personal assets in any manner he chooses, provided,
however, that Executive may not, during the period referred to in this
Section 5.4, own more than 4.9% of the equity securities of any
Competitive Business.

5.5    Injunctive
Relief.    If Executive commits a breach, or threatens to commit
a breach, of any of the provisions of Sections 5.2 or 5.4, the Company
shall have the right and remedy to seek to 

4

have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed by Executive that the services being rendered
hereunder to the Company are of a special, unique and extraordinary
character and that any such breach or threatened breach will cause
irreparable injury to the Company and that money damages will not
provide an adequate remedy to the Company. The rights and remedies
enumerated in this Section 5.5 shall be in addition to, and not in lieu
of, any other rights and remedies available to the Company under law or
equity. In connection with any legal action or proceeding arising out
of or relating to this Agreement, the prevailing party in such action
or proceeding shall be entitled to be reimbursed by the other party for
the reasonable attorneys’ fees and costs incurred by the
prevailing
party.

5.6    Modification.    If any
provision of Sections 5.2 or 5.4 is held to be unenforceable because of
the scope, duration or area of its applicability, the tribunal making
such determination shall have the power to modify such scope, duration,
or area, or all of them, and such provision or provisions shall then be
applicable in such modified
form.

5.7    Survival.    The provisions
of this Section 5 shall survive the termination of this Agreement for
any reason, except in the event Executive is terminated by the Company
without ‘‘Cause,’’ or if Executive
terminates this Agreement with ‘‘Good
Reason,’’ in either of which events, clauses (i), (ii)
and (iii) of Section 5.4 shall be null and void and of no further force
or effect. The non-renewal of this Agreement at the end of the Term
shall not be a termination by the Company without
‘‘Cause’’.

6.    Miscellaneous
Provisions.

6.1    Notices.    All
notices provided for in this Agreement shall be in writing, and shall
be deemed to have been duly given when (i) delivered personally to the
party to receive the same, or (ii) when mailed first class postage
prepaid, by certified mail, return receipt requested, addressed to the
party to receive the same at his or its address set forth below, or
such other address as the party to receive the same shall have
specified by written notice given in the manner provided for in this
Section 6.1. All notices shall be deemed to have been given as of the
date of personal delivery or mailing thereof.

If to
Executive:

Vincent Palazzolo
1595 James
Road
Wantagh, New York 11793

If to the
Company:

CPI Aerostructures, Inc.
60 Heartland
Blvd.
Edgewood, New York 11717
Attn:    Edward J.
Fred

With a copy in either case
to:

Graubard Miller

The Chrysler
Building
405 Lexington Avenue
New York, New York
10174
Attn:    David Alan Miller,
Esq.

6.2    Entire Agreement;
Waiver.    This Agreement and the Stock Option Agreement
executed simultaneously herewith set forth the entire agreement of the
parties relating to the employment of Executive and is intended to
supersede all prior negotiations, understandings and agreements. No
provisions of this Agreement or the Stock Option Agreement may be
waived or changed except by a writing by the party against whom such
waiver or change is sought to be enforced. The failure of any party to
require performance of any provision hereof or thereof shall in no
manner affect the right at a later time to enforce such
provision.

5

6.3    Governing
Law.    All questions with respect to the construction of this
Agreement, and the rights and obligations of the parties hereunder,
shall be determined in accordance with the law of the State of New York
applicable to agreements made and to be performed entirely in New
York.

6.4    Binding Effect;
Nonassignability.    This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of the Company. This
Agreement shall not be assignable by Executive, but shall inure to the
benefit of and be binding upon Executive’s heirs and legal
representatives.

6.5    Severability.    Should
any provision of this Agreement become legally unenforceable, no other
provision of this Agreement shall be affected, and this Agreement shall
continue as if the Agreement had been executed absent the unenforceable
provision.

6.6    Section 409A.    This
Agreement is intended to comply with the provisions of Section 409A of
the Internal Revenue Code (‘‘Section
409A’’). To the extent that any payments and/or benefits
provided hereunder are not considered compliant with Section 409A, the
parties agree that the Company shall take all actions necessary to make
such payments and/or benefits become compliant.

IN WITNESS
WHEREOF, the parties have executed this Agreement on the date first
above written.

		CPI AEROSTRUCTURES,
INC.

		/s/ Edward J.
Fred                        

		By:
Edward J. Fred

		Chief Executive
Officer

		/s/ Vincent
Palazzolo                    

		VINCENT
PALAZZOLO

6

SCHEDULE
A

Bonus: Based on our common understanding of the
significance of your participation in the budgeting process of the
Company, your bonus shall be based on specific revenue and earnings
before interest, taxes, depreciation and amortization
(‘‘EBITDA’’) goals, which shall allow you
to earn a target annual bonus equal to forty-five percent (45%)
of your annual base salary if a 10% annual increase is achieved.
The Company’s auditors will determine EBITDA after taking into
account all necessary provisions and the accrual of all bonuses,
including your own bonus, and excluding all extraordinary items.
Twenty-five percent (25%) of the bonus amount will be determined
by revenues (the ‘‘revenue bonus’’) and
seventy-five percent (75%) by EBITDA (the ‘‘EBITDA
bonus’’).

EBITDA Bonus

1.    At
100% of EBITDA target (i.e., 10% growth), your EBITDA
bonus will equal 100% of 75% of 45% of base
salary.

2.    Should EBITDA fall short or exceed EBITDA
target, your EBITDA bonus will decrease or increase based on the grid,
below. For example, if there is a 50% increase in EBITDA, the
EBITDA bonus would equal 150% of 75% of 45% of
base salary; and if there is a 10% decrease in EBITDA, the
EBITDA bonus would equal 25% of 75% of 45% of base
salary.

3.    If the decrease in EBITDA is 15% or
more, no EBITDA bonus will be paid.

4.    Notwithstanding the
foregoing, if EBITDA for the year preceding the year for which the
EBITDA bonus is to be determined is less than $1  million, then
the EBITDA bonus will be calculated by comparing the current
year’s EBITDA to the EBITDA of the first preceding year in which
EBITDA was in excess of $2 million.

Revenue
Bonus

1.    At 100% of revenue target (i.e.,
10% growth), your revenue bonus will equal 100% of
25% of 45% of base salary.

2.    Should revenue
fall short or exceed revenue target, your revenue bonus will decrease
or increase based on the grid, below. For example, if there is a
50% increase in revenue, the revenue bonus would equal
150% of 25% of 45% of base salary; and if there is
a 10% decrease in revenue, the revenue bonus would equal
25% of 25% of 45% of base
salary.

3.    If the decrease in revenue is 15% or
more, no revenue bonus will be
paid.

General

1.    Both bonuses will be adjusted pro
rata if EBITDA and/or revenues fall in between two grid
percentages.

2.    The first $75,000 of bonus would be paid
in cash. The balance would be paid half in cash and half in shares of
the Company’s common stock, valued at the VWAP for the five
trading days ending two days before issuance. They will be issued under
the Company’s Performance Equity Plan 2000.

3.    The
Company and executive to mutually agree on how to handle all
acquisitions.

7

Grid

				
	Growth			Bonus
	Decrease
greater than 15%			No bonus
	Decrease
10%			75% Decrease
	Decrease
5%			50%
Decrease
	Flat			25%
Decrease
	Increase 5%			10%
Decrease
	Increase 10%			Baseline
bonus
	Increase 15%			5%
Increase
	Increase 25%			10%
Increase
	Increase 50%			50%
Increase
	Increase 100% or
greater			75%
Increase
	

8EXECUTION
COPY

STOCK OPTION AGREEMENT

AGREEMENT, dated
December  1,  2006, by and between CPI Aerostructures,
Inc., a New York corporation (‘‘Company’’)
with principal offices located at 60 Heartland Blvd., Edgewood, New
York 11717, and Vincent Palazzolo
(‘‘Employee’’) residing at 1595 James Road,
Wantagh, New York 11793.

WHEREAS, pursuant to the terms and
conditions of the Company’s Performance Equity Plan 2000
(‘‘Plan’’), the Board of Directors of the
Company authorized the grant to the Employee of an option
(‘‘Option’’) to purchase an aggregate of
25,000 shares of the authorized but unissued common stock of the
Company, $.001 par value (‘‘Common
Stock’’), conditioned upon the Employee’s
acceptance thereof upon the terms and conditions set forth in this
Agreement and subject to the terms of the Plan (capitalized terms used
herein and not otherwise defined have the meanings set forth in the
Plan); and

WHEREAS, the Employee desires to acquire the Option on
the terms and conditions set forth in this Agreement and subject to the
terms of the Plan;

IT IS AGREED:

1.    Grant of
Stock Option.    The Company hereby grants to the Employee the
right and option to purchase all or any part of an aggregate of 25,000
shares of the Common Stock (‘‘Option
Shares’’) on the terms and conditions set forth herein
and subject to the provisions of the
Plan.

2.    Incentive Stock Option.    The Option
represented hereby is intended to be an Option that qualifies as an
‘‘Incentive Stock Option’’ under Section
422 of the Internal Revenue Code of 1986, as
amended.

3.    Exercise Price.    The exercise
price (‘‘Exercise Price’’) of the Option is
$6.75 per share, subject to adjustment as hereinafter
provided.

4.    Exercisability.    Subject to the
terms and conditions of the Plan and this Agreement, this Option is
exercisable as to 8,333 of the Option Shares on November
30,  2007, 8,333 of the Option Shares on November
30,  2008 and 8,334 of the Option Shares on November
30,  2009. After a portion of the Option becomes exercisable, it
shall remain exercisable until the close of business on November
30,  2016 (‘‘Exercise
Period’’).

5.    Effect of Termination of
Employment.

5.1    Termination Due to
Death.    If Employee’s employment by the Company
terminates by reason of death, the Option may thereafter be exercised
by the legal representative of the estate or by the legatee of the
Employee under the will of the Employee, for a period of 12 months from
the date of such death or until the expiration of the Exercise Period,
whichever period is shorter.

5.2    Termination
Due to Disability.    If Employee’s employment by the
Company terminates by reason of physical of mental impairment as
determined under procedures established by the Committee for purposes
of the Plan (‘‘Disability’’), the Option
may thereafter be exercised by the Employee or legal representative for
a period of 12 months from the date of such termination or until the
expiration of the Exercise Period, whichever period is
shorter.

5.3    Termination by the Company
Without Cause or by Employee for ‘‘Good
Reason’’.    Subject to Section 5.5, if
Employee’s employment is terminated by the Company without
‘‘Cause’’ (as defined in Section 4.3 of the
Employment Agreement between the Company and Employee, dated as of
December  1,  2006 (‘‘Employment
Agreement’’)) or by Employee for ‘‘Good
Reason’’ (as defined in the Employment Agreement), the
portion of the Option, if any, that was exercisable as of the date of
termination of employment may thereafter be exercised for a period of
three months from the date of such termination or until the expiration
of the Exercise Period, whichever is shorter.

5.4    Other
Termination.

(a)    If Employee’s
employment is terminated for any reason other than (i) death, (ii)
Disability, (iii) without Cause by the Company or (v) by Employee for
‘‘Good Reason’’, the Option shall expire on
the date of termination of employment.

(b)    In the
event the Employee’s employment is terminated by the Company for
Cause, the Board of Directors, in its sole discretion, may annul any
award granted hereunder and require the Employee to return to the
Company the economic benefit of any Option Shares purchased hereunder
by the Employee within the 12 month period prior to the date of
termination. In such event, the Employee hereby agrees to remit to the
Company, in cash, an amount equal to the difference between the Fair
Market Value of the Option Shares on the date of termination (or the
sales price of such Shares if the Option Shares were sold during such
12 month period) and the Exercise Price of such
Shares.

5.5    Competing With the
Company.    If Employee’s employment with the Company or
a Subsidiary is terminated for any reason whatsoever, and within 12
months after the date thereof such Employee either (i) accepts
employment with any competitor of, or otherwise engages in competition
with, the Company or any of its Subsidiaries, (ii) solicits any
customers or employees of the Company or any of its Subsidiaries to do
business with or render services to the Employee or any business with
which the Employee becomes affiliated or to which the Employee renders
services or (iii) uses or discloses to anyone outside the Company any
confidential information or material of the Company or any of its
Subsidiaries in violation of the Company’s policies or any
agreement between the Employee and the Company or any of its
Subsidiaries, the Committee, in its sole discretion, may require such
Employee to return to the Company the economic value of any award that
was realized or obtained by such Employee at any time during the period
beginning on the date that is 12 months prior to the date such
Employee’s employment with the Company is terminated. In such
event, Employee agrees to remit the economic value to the Company in
accordance with Section 5.4(b).

6.    Withholding
Tax.    Not later than the date as of which an amount first
becomes includible in the gross income of the Employee for Federal
income tax purposes with respect to the Option, the Employee shall pay
to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any
kind required by law to be withheld or paid with respect to such amount
(‘‘Withholding Tax’’). The obligations of
the Company under the Plan and pursuant to this Agreement shall be
conditional upon such payment or arrangements with the Company and the
Company shall, to the extent permitted by law, have the right to deduct
any Withholding Taxes from any payment of any kind otherwise due to the
Employee from the
Company.

7.    Adjustments.    In the event of any
change in the shares of Common Stock of the Company as a whole
occurring as the result of a common stock split, or reverse split,
common stock dividend payable on shares of Common Stock, combination or
exchange of shares, or other extraordinary or unusual event occurring
after the grant of the Option, the Board of Directors shall determine,
in its sole discretion, whether such change equitably requires an
adjustment in the terms of this Option or the aggregate number of
shares reserved for issuance under the Plan. Any such adjustments will
be made by the Board of Directors, whose determination will be final,
binding and conclusive.

8.    Method of
Exercise.

8.1    Notice to the
Company.    The Option shall be exercised in whole or in part
(but in no case may this Option be exercised as to less than 100 shares
of Common Stock at any one time) by written notice in substantially the
form attached hereto as Exhibit A directed to the Company at its
principal place of business accompanied by full payment as hereinafter
provided of the exercise price for the number of Option Shares
specified in the notice and of the Withholding Taxes, if
any.

8.2    Delivery of Option
Shares.    The Company shall deliver a certificate for the
Option Shares to the Employee as soon as practicable after payment
therefor.

2

8.3    Payment of Purchase
Price.

8.3.1    Cash Payment.    The
Employee shall make cash payments by wire transfer, certified or bank
check or personal check, in each case payable to the order of the
Company; the Company shall not be required to deliver certificates for
Option Shares until the Company has confirmed the receipt of good and
available funds in payment of the purchase price
thereof.

8.3.2    Cashless
Payment.    Provided that prior approval of the Company has been
obtained, the Employee may use Common Stock of the Company owned by him
or her to pay the purchase price for the Option Shares by delivery of
stock certificates in negotiable form which are effective to transfer
good and valid title thereto to the Company, free of any liens or
encumbrances. Shares of Common Stock used for this purpose shall be
valued at the Fair Market Value.

8.3.3    Payment of Withholding Tax.    Any
required Withholding Tax may be paid in cash or with Common Stock in
accordance with Sections 8.3.1 and
8.3.2.

9.    Transfer.    The Option Shares shall
not be transferable by the Employee other than by will or by the laws
of descent and distribution, and the Option shall be exercisable,
during the Employee’s lifetime, only by the Employee (or in the
event of legal incapacity or incompetency, the Employee’s
guardian or legal representative).

10.    Company
Representations.    The Company hereby represents and warrants
to the Employee that:

(i)    the Company, by
appropriate and all required action, is duly authorized to enter into
this Agreement and consummate all of the transactions contemplated
hereunder; and

(ii)    the Option Shares, when
issued and delivered by the Company to the Employee in accordance with
the terms and conditions hereof, will be duly and validly issued and
fully paid and non-assessable.

11.    Employee
Representations.    The Employee hereby represents and warrants
to the Company that:

(i)    he is acquiring the
Option and shall acquire the Option Shares for his own account and not
with a view towards the distribution
thereof;

(ii)    he has received a copy of the Plan
as in effect as of the date of this
Agreement;

(iii)    he has received a copy of all
reports and documents required to be filed by the Company with the
Securities and Exchange Commission pursuant to the Exchange Act, within
the last 24 months and all reports issued by the Company to its
stockholders;

(iv)    he understands that he must
bear the economic risk of the investment in the Option Shares, which
cannot be sold by him unless they are registered under the Securities
Act of 1933 (‘‘1933 Act’’) or an exemption
therefrom is available thereunder and that the Company is under no
obligation to register the Option Shares for sale under the 1933
Act;

(v)    in his position with the Company, he has
had both the opportunity to ask questions and receive answers from the
officers and directors of the Company and all persons acting on its
behalf concerning the terms and conditions of the offer made hereunder
and to obtain any additional information to the extent the Company
possesses or may possess such information or can acquire it without
unreasonable effort or expense necessary to verify the accuracy of the
information obtained pursuant to clause (iii)
above;

(vi)    he is aware that the Company shall
place stop transfer orders with its transfer agent against the transfer
of the Option Shares in the absence of registration under the 1933 Act
or an exemption therefrom as provided
herein;

(vii)    if, at the time of issuance of the
Option Shares, the issuance of such shares have not been registered
under the 1933 Act, the certificates evidencing the Option Shares shall
bear the following legend:

3

‘‘The shares
represented by this certificate have been acquired for investment and
have not been registered under the Securities Act of 1933. The shares
may not be sold or transferred in the absence of such registration or
an exemption therefrom under said Act.’’

;
and

(viii)    he is aware of and understands that he
is subject to the Company’s Insider Trading Policy and has
received a copy of such policy as of the date of this
Agreement.

12.    Restriction on Transfer of Option
Shares.    Anything in this Agreement to the contrary
notwithstanding, the Employee hereby agrees that he shall not sell,
transfer by any means or otherwise dispose of the Option Shares
acquired by him without registration under the 1933 Act, or in the
event that they are not so registered, unless (i) an exemption from the
1933 Act registration requirements is available thereunder, (ii) the
Employee has furnished the Company with notice of such proposed
transfer and the Company’s legal counsel, in its reasonable
opinion, shall deem such proposed transfer to be so exempt, and (iii)
such transfer is in compliance with the Company’s Insider
Trading Policy, as in effect at such
time.

13.    Miscellaneous.

13.1    Notices.    All
notices, requests, deliveries, payments, demands and other
communications which are required or permitted to be given under this
Agreement shall be in writing and shall be either delivered personally
or sent by registered or certified mail, or by private courier to the
parties at their respective addresses set forth herein, or to such
other address as either party shall have specified by notice in writing
to the other. Notice shall be deemed duly given hereunder when
delivered or mailed as provided
herein.

13.2    Conflicts with the
Plan.    In the event of a conflict between the provisions of
the Plan and the provisions of this Agreement, the provisions of the
Plan shall in all respects be
controlling.

13.3    Employee and Stockholder
Rights.    The Employee shall not have any of the rights of a
stockholder with respect to the Option Shares until such shares have
been issued after the due exercise of the Option. Nothing contained in
this Agreement shall be deemed to confer upon Employee any right to
continued employment with the Company or any subsidiary thereof, nor
shall it interfere in any way with the right of the Company to
terminate Employee, who understands that he is an
employee-at-will.

13.4    Waiver.    The
waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.

13.5    Entire
Agreement.    This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof. This
Agreement may not be amended except by writing executed by the Employee
and the Company.

13.6    Binding Effect;
Successors.    This Agreement shall inure to the benefit of and
be binding upon the parties hereto and, to the extent not prohibited
herein, their respective heirs, successors, assigns and
representatives. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto and as
provided above, their respective heirs, successors, assigns and
representatives any rights, remedies, obligations or
liabilities.

13.7    Governing
Law.    This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (without regard to
choice of law
provisions).

13.8    Headings.    The
headings contained herein are for the sole purpose of convenience of
reference, and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this
Agreement.

13.9    Section 409A.    The
Option granted hereunder is intended to be exempt from the provisions
of Section 409A of the Internal Revenue Code of 1986, as amended
(‘‘Section 409A’’). To the extent that the
Options or any payments or benefits provided hereunder are considered
deferred compensation subject to Section 409A, the Company intends for
this Agreement and the 

4

Option to comply with the standards for
nonqualified deferred compensation established by Section 409A (the
‘‘409A Standards’’). Notwithstanding
anything herein to the contrary, to the extent that any terms of this
Agreement or the Option would subject the Employee to gross income
inclusion, interest or an additional tax pursuant to Section 409A,
those terms are to that extent superseded by the 409A Standards. The
Company reserves the right to amend the Option granted hereunder to
cause such Option to comply with or be exempt from Section
409A.

IN WITNESS WHEREOF, the parties hereto have signed this
Agreement on the day and year first above:

CPI
AEROSTRUCTURES, INC.

By:    /s/ Edward J.
Fred                

Name:    Edward J.
Fred
Title:      Chief Executive
Officer

EMPLOYEE

/s/ Vincent
Palazzolo               

VINCENT
PALAZZOLO

5

EXHIBIT A

FORM OF NOTICE OF
EXERCISE OF
OPTION

                                    

            DATE

CPI
AEROSTRUCTURES, INC.
60 Heartland Blvd.
Edgewood, New York
11717
Attention: Board of Directors

Re:    Purchase of
Option Shares

Gentlemen:

In accordance with my
Stock Option Agreement dated as of December  1,  2006 with
CPI Aerostructures, Inc. (‘‘Company’’), I
hereby irrevocably elect to exercise the right to purchase
                     shares of the
Company’s common stock, par value $.001 per share
(‘‘Common Stock’’), which are being
purchased for investment and not for resale.

As payment for my
shares, enclosed is (check and complete applicable
box[es]):

			
		 	a [personal
check] [certified check] [bank check] payable
to the order of ‘‘CPI Aerostructures,
Inc.’’ in the sum of
$                    ;

			
		 	confirmation
of wire transfer in the amount of
$                                ;
and/or

			
		 	with the consent of the Company,
a certificate for
                         shares of the
Company's Common Stock, free and clear of any encumbrances, duly
endorsed, having a Fair Market Value (as such term is defined in the
Performance Equity Plan 2000 of
$                    .

I hereby
represent and warrant to, and agree with, the Company
that:

(i)    I am acquiring the Option Shares for my own
account, for investment, and not with a view towards the distribution
thereof;

(ii)    I have received a copy of the Plan and all
reports and documents required to be filed by the Company with the
Commission pursuant to the Exchange Act within the last 24 months and
all reports issued by the Company to its
stockholders;

(iii)    I understand that I must bear the
economic risk of the investment in the Option Shares, which cannot be
sold by me unless they are registered under the Securities Act of 1933
(‘‘1933 Act’’) or an exemption therefrom is
available thereunder and that the Company is under no obligation to
register the Option Shares for sale under the 1933
Act;

(iv)    I agree that I will not sell, transfer by any
means or otherwise dispose of the Option Shares acquired by me hereby
except in accordance with Company’s policy, if any, regarding
the sale and disposition of securities owned by employees and/or
directors of the Company;

(v)    in my position with the
Company, I have had both the opportunity to ask questions and receive
answers from the officers and directors of the Company and all persons
acting on its behalf concerning the terms and conditions of the offer
made hereunder and to obtain any additional information to the extent
the Company possesses or may possess such information or can acquire it
without unreasonable effort or expense necessary to verify the accuracy
of the information obtained pursuant to clause (ii)
above;

(vi)    my rights with respect to the Option Shares
shall, in all respects, be subject to the terms and conditions of the
Company’s Performance Equity Plan 2000 and the
Ageement;

(vii)    I am aware that the Company shall place
stop transfer orders with its transfer agent against the transfer of
the Option Shares in the absence of registration under the 1933 Act or
an exemption therefrom as provided herein;

6

(viii)    if, at the time of issuance
of the Option Shares, the issuance of such shares have not been
registered under the 1933 Act, the certificates evidencing the Option
Shares shall bear the following
legend:

‘‘The shares represented by this
certificate have been acquired for investment and have not been
registered under the Securities Act of 1933. The shares may not be sold
or transferred in the absence of such registration or an exemption
therefrom under said Act.’’

;
and

(ix)    I am aware of and understand that I am subject to
the Company’s Insider Trading Policy and have received a copy of
such policy as of the date of this Agreement.

Kindly
forward to me my certificate at your earliest
convenience.

Very truly
yours,

                                                                                                                                                

(Signature)                                                                    (Address)

                                                                                                                                                

(Print
Name)

                                                                                                                                                

                                                                            (Social
Security Number)

7

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