RELIABLE POWER SYSTEMS INC
TECHNOLOGY DEVELOPMENT AGREEMENT
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>d92540ex10-1.txt
<DESCRIPTION>TECHNOLOGY DEVELOPMENT AGREEMENT
<TEXT>
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                                                                    EXHIBIT 10.1

                        TECHNOLOGY DEVELOPMENT AGREEMENT

         This Agreement is entered into this 1st day of November, 2001 (the
"Effective Date") by and between Reliable Power Systems, Inc., a Colorado
corporation ("RPSI") and Flywheel Energy Inc., a California corporation
("Developer").

                                    RECITALS

         WHEREAS, RPSI develops total power packages for industrial, commercial
manufacturing, data and telecommunications users that address the growing
problems facing power users from an aging infrastructure, poor quality power,
deregulation and surging global demand (collectively, the "UPS Industry"); and

         WHEREAS, Developer is an engineering firm specializing in the
development of self-contained power units, back-up power units and energy
management devices for one or more industries, including, but not limited to,
the UPS Industry; and

         WHEREAS, RPSI desires to contract with Developer to develop a
continuous power machine for the UPS Industry and Developer desires to accept
this engagement subject to the terms and conditions contained herein.

                                    AGREEMENT

         NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein the parties agree as follows:

         1.   Scope of the Project. The purpose of this Agreement is to set
              forth the terms and conditions under which Developer shall create,
              design and develop a "continuous power machine" for RPSI (the
              "Project").

         2.   Development of the Continuous Power Machine. The continuous power
              machine to be developed under this Project shall be based on
              patentable technology ("CPM"), with the patent rights to such
              technology to be held in the name of Developer (or its designate),
              until such time as such rights are assigned to RPSI pursuant to
              the terms and conditions of this Agreement and as otherwise
              provided in the Exclusive Patent Rights Transfer Agreement, dated
              as of August 29, 2001, (the "Patent Rights Transfer Agreement"),
              which is an exhibit to this Agreement and is incorporated herein
              by this reference.

         3.   Term of Agreement.

              a.   The term of this Agreement (the "Term") shall run
                   concurrently with the development of the CPM, which is the
                   subject matter of the Project and shall begin on the
                   Effective Date and end upon the acceptance by RPSI of the CPM
                   as a product that is generally acceptable for release and
                   sale to the public in the UPS Industry (the "Production
                   Version of the CPM").



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              b.   In the event that the parties agree to extend or expand this
                   Agreement beyond the scope of the Project, such agreement
                   shall be in writing and shall specify the new project(s) that
                   shall be covered hereunder.

              c.   Each party has the right to terminate this Agreement prior to
                   the expiration of the Term only if the other party has
                   materially breached any obligations herein and such breach
                   remains uncured for a period of 30 days after notice thereof
                   is sent to the other party; provided, however, that in the
                   case of RPSI's obligations to reimburse Developer for
                   undisputed expenses that are reasonably and demonstrably
                   incurred under Section 10, a material breach shall have been
                   deemed to occur if RPSI fails to make an expense
                   reimbursement within 15 days after submittal by Developer of
                   the Monthly Expense Report. Upon termination of this
                   Agreement in the event of such material breach, each party
                   shall be released from all obligations and liabilities to the
                   other arising after the date of termination. However, any
                   termination of this Agreement shall not relieve RPSI from the
                   obligation to pay Developer the fees, royalties and stock and
                   stock options for services rendered by Developer and accepted
                   by RPSI prior to receipt of the notice of termination. Upon
                   termination of this Agreement, Developer shall promptly
                   return to RPSI all data, materials and other property of RSPI
                   held by it.

         4.   Exclusivity During the Term. RPSI shall be the exclusive customer
              of Developer during the Term and Developer shall devote itself
              exclusively to the development of the CPM, unless otherwise
              mutually agreed to in writing.

         5.   Acceptance Testing of the CPM. During the Term of this Agreement,
              the parties will negotiate in good faith and jointly agree upon
              and set forth in writing the specifications and acceptance
              criteria for the releases of each of: (i) an "Alpha Version of the
              CPM", (ii) a "Beta Version of the CPM" and (iii) the Production
              Version of the CPM (each, a "Deliverable"). Each Deliverable will
              be subject to acceptance testing to verify that the Deliverable
              satisfies the acceptance criteria ("Acceptance"). In the event
              that any Deliverable fails to conform to the acceptance criteria,
              RPSI will cooperate with Developer in promptly identifying in what
              respects the Deliverable has failed to conform to the acceptance
              criteria and Developer will use its best efforts to promptly
              correct any identified problems so as to facilitate the timely
              re-submittal and Acceptance of the Deliverables.

         6.   Ownership of Intellectual Property. RPSI is aware that the sole
              shareholder of Developer as of the Effective Date (the "Sole
              Shareholder") developed the following unique technologies prior to
              this Agreement (collectively, "Prior Technologies"):

              a.   A combination of the Electromagnetic Coupling (Clutch) with
                   the Flywheel ("Electromagnetic Coupling").
              b.   A combination of a Hydraulic Coupling (Clutch) with the
                   Flywheel ("Hydraulic Coupling").


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              c.   A method to oil rotary machinery without using dynamic seals.
              d.   A method to oil rotating machinery continuously using a
                   combination of pumps and gravity flow.
              e.   Using "Gimbals" to align support bearings for rotating a
                   flywheel.
              f.   A method to rotate a flywheel at a high speed and the
                   rotating bearing at half that speed.

              Except for the Prior Technologies, all trademarks, trade secrets,
              copyrights, technology, patents, patent applications, patentable
              technology and any other intellectual property created by
              Developer during the Term of this Agreement (collectively,
              "Intellectual Property"), shall be the sole property of RPSI. By
              signing this Agreement, together with the Patent Rights Transfer
              Agreement, Developer hereby transfers to RPSI all rights that
              Developer may have or acquire in the Intellectual Property
              developed pursuant to this Agreement, except for the Prior
              Technologies. It is agreed that the patent for the "Continuous
              Power Machine" which was submitted to RPSI prior to the Effective
              Date of this Agreement, is considered to be part of the "Prior
              Technologies." To the extent that some or all of the Prior
              Technologies are used in the development of the CPM, Developer
              grants to RPSI a non-exclusive and perpetual license to use the
              embedded Prior Technologies solely in connection with the uses
              contemplated under this Agreement and only so long as such Prior
              Technologies remain embedded in the CPM(s) that Developer designs
              for RPSI hereunder. Developer warrants that this Agreement will
              not conflict with any of Developer's other agreements with any
              third parties, and based solely upon the documentation that
              Developer has provided to RPSI, RPSI is informed and believes that
              Developer's warranty is accurate and true. To the extent that any
              of the Intellectual Property contains material that is proprietary
              to a third party, Developer shall obtain a license from the owner
              permitting the use of such material and granting RPSI the right to
              sub-license its use.

              Developer agrees to sign any documentation reasonably requested by
              RPSI to transfer or vest title to the above-referenced
              Intellectual Property in and to RPSI, except for the Prior
              Technologies. Developer shall require all employees and
              consultants assigned to this Project to execute a written
              agreement transferring all Intellectual Property rights that they
              may acquire while working on the CPM to RPSI. This provision shall
              be interpreted as broadly as possible in favor of RPSI.

              Exceptions. Except for the Prior Technologies, it is the express
              intent of the parties that RPSI shall have the exclusive right to
              all Intellectual Property created by Developer under this
              Agreement, including without limitation, any Intellectual Property
              which is developed or discovered by Developer during the Term of
              this Agreement, regardless of whether or not the Intellectual
              Property is related to or incorporated into the CPM; provided
              that, any ASSIGNMENT OF INTELLECTUAL PROPERTY REQUIRED BY THIS
              AGREEMENT DOES NOT APPLY TO AN INVENTION FOR WHICH NO EQUIPMENT,
              SUPPLIES, FACILITY OR TRADE SECRET INFORMATION OF RPSI WAS USED
              AND WHICH WAS DEVELOPED ENTIRELY ON SOLE SHAREHOLDER'S OWN TIME,
              UNLESS: (a) THE INVENTION RELATES (i) DIRECTLY TO THE BUSINESS OF
              RPSI


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              OR (II) TO RPSI'S ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR
              DEVELOPMENT OR (b) THE INVENTION RESULTS FROM ANY WORK PERFORMED
              BY THE SOLE SHAREHOLDER OR DEVELOPER'S OTHER EMPLOYEES FOR RPSI.

         7.   Developer's Right to Use the Intellectual Property. In the event
              that RPSI does not begin the marketing and sale of the
              Intellectual Property as a CPM or other marketable product within
              18 months after Acceptance of the Production Version of the CPM,
              then Developer shall have the right to market the Intellectual
              Property; provided that, RPSI shall be entitled to receive a
              royalty of 2.5% of the "net sales price" on all CPMs (or other
              products) sold by Developer at any time. For purposes of this
              Agreement, "net sales price" shall be the gross purchase price for
              the product as identified in the purchase order, less any
              applicable taxes and freight paid by Developer.

         8.   Disclosure Re: Prior Technologies. RPSI will not disclose or
              advertise the Prior Technologies, without a written consent from
              Sole Shareholder, which shall not be unreasonably withheld if such
              Prior Technologies are used in the design of the CPM under this
              Agreement. Notwithstanding the foregoing, Sole Shareholder and
              Developer are aware of RPSI's agreement with Perfect Power/On-line
              Power (the "Perfect Power Agreement") regarding the marketing and
              sale of the "Seamless Power Machines" ("SPMs"), and nothing herein
              shall be deemed to prevent the marketing, sale and distribution by
              RPSI of a "Continuous Power Machine" or the SPMs under the terms
              of the Perfect Power Agreement.

         9.   Monthly Design Work Fee. During the Term of this Agreement, RPSI
              shall pay Developer a monthly fee of $15,000 per month. This fee
              shall be deposited directly into an account designated by
              Developer. Direct deposit shall occur on the 15th day of each
              month, or the Friday immediately before the 15th day of the month
              if the 15th day of the month occurs on a Saturday or Sunday. In
              the event that Developer begins this contract on any day other
              than on the first day of a month, the initial direct deposit shall
              be a pro rata portion to reflect the number of weekdays that will
              be worked during the initial month.

         10.  Expenses for the Project. RPSI shall open a checking account with
              a balance of $50,000 to cover expenses associated with the Project
              (the "Expense Account"). Developer shall be given signature
              authority over the Expense Account and shall have the right to
              incur reasonable and necessary expenses associated with the
              development of the CPM. Within five days of the last business day
              of each month, Developer shall submit to RPSI a detailed report of
              all expenses incurred by it ("Monthly Expense Reports"). RPSI's
              President and Chief Technology Officer, David Mazur ("RPSI's
              President & CTO"), shall review the Monthly Expense Reports and,
              to the extent acceptable to RPSI, will deposit within one week of
              receipt thereof, sufficient funds into the Expense Account to
              cover the prior month's approved expenses. Notwithstanding RPSI's
              right to approve expenses, it is understood by the parties that
              such expenses shall include rent for a facility with approximately
              8,000 square feet and 800-amp service, reasonable office support
              equipment,



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              computers, printers, fax machines and other necessary supplies for
              this effort. All supplies, office equipment, computers, tools and
              machinery purchased by Developer with funds supplied by RPSI,
              shall be the property of RPSI at the completion of the Project.
              The Sole Shareholder, on behalf of Developer, shall personally
              indemnify RPSI in the event that any funds are misappropriated
              from the above-referenced checking account.

         11.  Car Allowance. During the Term of this Agreement, Developer shall
              have car allowance equal to $700 per month, which shall be payable
              by RPSI concurrently with the Monthly Design Work Fee set forth in
              Section 9.

         12.  Royalties to Developer.

              a.   Royalties on CPM Products. Upon Acceptance of the Production
                   Version of the CPM, Developer (or its designate) shall be
                   entitled to receive a royalty of 6% of the "net sales price"
                   on all CPMs (or other similar products), which are sold by
                   RPSI to customers in the UPS Industry, using the Intellectual
                   Property that is created pursuant to this Project
                   (collectively, "CPM Products"). Developer shall be entitled
                   to receive such royalties on CPM Products, for as long as
                   such CPM Products are sold by RPSI to any third parties,
                   whether such sales are made directly to the customer, or such
                   sales are subject to a distributor or OEM relationship or
                   otherwise.

              b.   Royalties on Other Products Developed by RPSI. Upon
                   Acceptance of the Production Version of the CPM, to the
                   extent that RPSI applies the Intellectual Property to the
                   development of new products other than the CPM that may be
                   marketed and sold outside of the UPS Industry ("New
                   Products"), Developer (or its designate) shall be entitled to
                   receive a royalty of 2.5% of the "net sale price" on all New
                   Products sold by RPSI. Developer shall be entitled to receive
                   such royalties on New Products, for as long as such New
                   Products are sold by RPSI to any third parties, whether such
                   sales are made directly to the customer, or such sales are
                   subject to a distributor or OEM relationship or otherwise.

              c.   Royalties on the Seamless Power Machines. In consideration
                   for Developer's agreement to develop the CPM exclusively
                   under this Agreement and to agree that RPSI shall be its
                   exclusive customer during the Term, for a period of 24 months
                   from the Effective Date, Developer shall be entitled to
                   receive a royalty of 1.25% of the "net sales price" on all
                   SPMs sold by RSPI under the Perfect Power Agreement. In the
                   event of an uncured material breach of this Agreement by
                   Developer which results in the termination of this Agreement
                   prior to Acceptance of the Production Version of the CPM, any
                   remaining royalties payments under this Section shall
                   terminate upon the termination date of the Agreement

              d.   Definition of Net Sales Price. For purposes of this Agreement
                   "net sales price" shall be the purchase price for the
                   specific product at




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                   issue as identified in the purchase order, less freight and
                   taxes (or tariffs) paid by RPSI associated specifically with
                   the sale of the specific product at issue. For purposes of
                   clarification, the taxes and/or tarriffs to be subtracted
                   from the purchase order to arrive at the "net sales price"
                   shall not include taxes that RPSI pays in order to operate
                   its business (e.g., income taxes and/or employment taxes).

              e.   Royalties shall be payable monthly in arrears on or before
                   the 15th day of the month following the month in which
                   revenue is collected by RPSI for the sale of the applicable
                   product.

         13.  Issuance of Stock and Stock Options.

              a.   Stock Options. As an additional inducement for Developer to
                   enter into this Agreement, RPSI hereby grants to Developer an
                   option to grant 200,000 shares of the common stock of RPSI at
                   an exercise price of $1.00, which options shall vest upon the
                   occurrence of the following events: (i) 66,667 shares shall
                   vest upon Acceptance of the Alpha Version of the CPM; (ii)
                   66,667 shares shall vest upon Acceptance of the Beta Version
                   of the CPM; and (iii) 66,666 shares shall vest upon the
                   successful installation of the first Production Version of
                   the CPM. As provided in Section 5 above, the parties will
                   mutually agree upon the specifications and acceptance
                   criteria for each of the Alpha, Beta and Production Versions
                   of the CPMs.

              b.   Bonus Options. In accordance with Section 15 below, it is
                   anticipated by the parties that the Alpha Version of the CPM
                   and the Beta Version of the CPM will be completed within 14
                   months of the time that the Expense Account is funded by
                   Developer. In the event that Acceptance of the Alpha Version
                   of the CPM occurs prior to 14-month proposed schedule, RPSI
                   shall grant to Developer an option to purchase an additional
                   15,000 shares of RPSI common stock per month for each month
                   of early completion (or a pro rata amount for each partial
                   month of early completion) (the "Bonus Options"). The Bonus
                   Options shall vest immediately upon their date of grant and
                   shall have an exercise price equal to the fair market value
                   of the common stock on the date of the grant.

              c.   All stock options issued pursuant to this Agreement shall be
                   exercisable for a period of 10 years. At the request of
                   Developer, RPSI shall issue the options in the name of
                   Developer or its Sole Shareholder.

         14.  Proposed CPM Specifications and Estimated Timeline. It is
              anticipated that the initial CPM will be a 75 KW unit, which may
              be powered by either a natural gas or diesel engine (the "75 KW
              Unit") and will take approximately 14 months to complete.
              Developer will prepare the specifications of the CPM with the
              input of RPSI's President & CTO and such engineers as RPSI assigns
              to the Project and the parties will mutually agree upon the
              acceptance criteria in accordance with Section 5. Developer shall
              endeavor to incorporate the concepts and ideas



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              proposed by RPSI in the CPM design, so long such ideas shall not
              infringe upon any other third party patents. Additionally,
              Developer will incorporate a one megawatt unit into its
              development plans (the "1 Megawatt Unit"). It is anticipated that
              the 1 Megawatt Unit will take an additional eight months to
              complete after the completion of the 75KW Unit. After the
              execution of this Agreement, the parties will work in good faith
              to develop a schedule of milestones for the development of the
              CPMs, which the parties will endeavor in good faith to achieve.

         15.  Compliance with Obligations. Each of the parties will comply with
              its obligations under this Agreement on a timely basis. Neither
              party will be liable for any delays, costs increases or other
              consequences resulting from the other party's wrongful acts or
              omissions, or caused by the negligence or willful misconduct of
              the other party. Any deadline adversely affected by a party's
              wrongful acts or omissions, or caused by the negligence or willful
              misconduct of such party, will be automatically extended by an
              amount of time reasonably required to compensate for such delay.
              Except as such delay may be excused in accordance with this
              Section, and except as otherwise mutually agreed to by the
              parties, the failure by Developer to complete the Production
              Version of the CPM within 22 months after the Expense Account has
              been funded shall be deemed to constitute a material breach of
              this Agreement by Developer.

         16.  Estimated Budget. Developer has estimated that it will cost
              approximately $975,700 to build the first prototype of the 75 KW
              Unit and approximately $400,000 - $500,000 additionally to build
              the 1 Megawatt Unit. Developer shall provide an initial budget to
              RPSI's President & CTO for his review and approval, and shall
              provide RPSI with updated budgets at least every three months.

         17.  Independent Contractor. Developer acknowledges that it will act as
              an independent contractor. As an independent contractor, Developer
              is not entitled to workers' compensation benefits and is obligated
              to pay federal and state income tax on any moneys earned under
              this Agreement.

         18.  Developer's Staff. Developer shall assign at least two full-time
              engineers and sufficient support staff to the Project so that it
              may be completed in a timely fashion. The costs of these
              individuals have been incorporated into the budget and will be
              paid by RPSI. Additionally, it is anticipated that Developer will
              hire two technicians to assist with the Project. The costs of
              these technicians have been factored into the budget and will be
              paid by Developer. If additional staff is necessary, Developer
              will consult with RPSI so that funds can be made available for
              their compensation.

         19.  Employment Agreements. Developer shall enter into a binding
              employment agreement with its principal owner, Sole Shareholder
              (the "Sole Shareholder's Employment Agreement"). The Sole
              Shareholder's Employment Agreement shall require Sole Shareholder
              to devote his full-time working efforts to the CPM project, and
              shall prohibit Sole Shareholder from working on any other project
              until Acceptance of the Production Version of the CPM, or until
              this Agreement is otherwise




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              terminated. Notwithstanding the foregoing, during the Term, RPSI's
              President & CTO, on behalf of RPSI, may release the Sole
              Shareholder from this requirement for all or a portion of the
              Term. In addition, Developer shall enter into consulting or
              employment agreements with any individuals or entities that are
              assigned by Developer to the Project. Each of the Sole
              Shareholder's Employment Agreement, as well as any additional
              employment and/or consulting agreements that are relevant to this
              Project shall contain an unconditional assignment of any
              Intellectual Property developed by the Sole Shareholder and/or
              such employees and consultants. Nothing in this Section shall be
              deemed to apply to the Prior Technologies, which shall be governed
              in their entirety by the terms and conditions of Section 6.

         20.  Confidentiality Agreement. The parties agree to enter into a
              mutually acceptable confidentiality agreement to protect their
              respective confidential and proprietary information.

         21.  Mutual Indemnification. Each party will indemnify, defend and hold
              harmless the other party, its affiliates and their respective
              shareholders, partners, members, directors, officers, authorized
              representatives, employees, agents, successor and permitted
              assigns from any and all third party claims, losses and threatened
              losses arising from or in connection with, or based upon a
              material breach of this Agreement by the party obligated to
              indemnify the other party.

         22.  Governing Law. This Agreement shall be governed by the laws of the
              state of Colorado.

         23.  Non-Waivers. No express or implied waiver by either party of any
              event of default hereunder will in any way be, or be construed as,
              a waiver of any future or subsequent event of default.

         24.  Survival. Any and all obligations under this Agreement which, by
              their very nature should reasonably survive the termination or
              expiration of this Agreement, will so survive.



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         25.  Entire Agreement. This Agreement, together with the Patent Rights
              Transfer Agreement, contains the entire agreement between the
              parties. The parties agree that in entering into this Agreement,
              they have not relied upon any representations, warranties,
              promises and/or conditions made by the other party that are not
              expressly set forth herein.

                                          RELIABLE POWER SYSTEMS, INC.

                                          By:
                                             -----------------------------------
                                             David Mazur, President & CTO


                                          FLYWHEEL ENERGY INC.

                                          By:
                                             -----------------------------------
                                             Abraham Liran, President
                                             and Sole Shareholder





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