<PAGE>   1

                                                                    EXHIBIT 10.1

    **  The items marked by two asterisks have been omitted from this filing
        pursuant to a request for confidential treatment and have been filed
        separately with the Securities and Exchange Commission.


                               ALLIANCE AGREEMENT

This Alliance Agreement ("Agreement") dated August 25, 1997 (the "Effective
Date") by and between Solar Turbines Incorporated, a Delaware corporation whose
principal address is 2200 Pacific Highway, San Diego, California 92186-5376
("Solar") and Capstone Turbine Corporation, a California corporation whose
principal address is 6025 Yolanda Avenue, Tarzana, California 91356
("Capstone").

WHEREAS, Capstone designs, manufactures and distributes turbogenerators
containing Microturbines and has been obtaining primary surface recuperators
(PSRs) from Solar; and

WHEREAS, Solar Designs, manufactures and distributes PSRs for use in turbines
generating various output power levels; and

WHEREAS Capstone desires to develop in cooperation with Solar an assurance of
supply of PSRs at commercially reasonable prices; and

WHEREAS Solar desires to cooperate with Capstone in providing such an assurance
of supply of PSRs; and

WHEREAS Capstone is projecting an increased demand in its needs for PSRs and is
willing to purchase, lease or otherwise provide manufacturing equipment to
Solar for the purpose of assisting Solar in increasing its production levels
and production cost efficiencies with regard to PSRs supplied by Solar to
Capstone; and

WHEREAS Solar is interested in Capstone purchasing, leasing or otherwise
providing manufacturing equipment to assist Solar in increasing its production
levels and achieving greater production cost efficiencies with regard to PSRs
supplied by Solar to Capstone;

NOW THEREFORE, in consideration of the foregoing premises, the terms and
conditions specified herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

DEFINITIONS

"Capstone Special Order PSR" shall mean (i) any PSR manufactured according to
Capstone's requirements and specifications as listed in the attached Exhibit A
to this Agreement including such PSR as may be modified from time to time by **
pursuant to ** any development PSR offered by either party under ** pursuant to
** and accepted by the other party (which such development PSR shall be added
to Exhibit A), including such development PSR as may be modified from time to
time by ** and (iii) any similar PSR capable of direct replacement for the PSRs
identified in Exhibit A to this Agreement,


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<PAGE>   2
as such Exhibit may be amended from time to time by the parties to include
development PSR models.

"Microturbine" shall mean an individual turbogenerator unit generating ** output
power.

"Solar's Houston Facility" shall mean that part of Solar's manufacturing
facility located in Houston, Texas which utilizes Phase II Equipment, as defined
herein, for manufacturing PSRs suitable for use in Microturbines.

"Solar Technology" shall mean all information disclosed by Solar to Capstone
during the term of this Alliance Agreement and relating to the manufacture and
use of PSRs, including for example, but not by way of limitation, trade secrets,
proprietary information, manufacturing drawings, blueprints, specifications,
parts and materials lists, tolerances, preferred vendor lists, test and
performance parameters, and other technical expertise necessary for the
manufacture of PSRs.

"CAPSTONE PATENTS" shall mean patents (i) now or in the future owned or
controlled by Capstone or its subsidiaries, or (ii) under which and to the
extent to which and subject to the conditions under which Capstone or its
subsidiaries may have during the term of this Agreement the right to grant
licenses of the scope granted herein, such patents claiming inventions
substantially based on Solar Technology and being based on patent applications
having an effective filing date during the period starting on the Effective Date
and ending on the termination or expiration of this Agreement.

1.0 SCOPE

1.1 Term of Agreement. This Agreement dated August 25, 1997, (the "Effective
Date"), subject to the conditions set forth below in this Section 1.1, shall
remain in force for a period of ** on which date it will expire unless extended,
canceled or terminated as provided herein. Notwithstanding any provision to the
contrary contained herein, this Agreement shall only become effective when the
parties have agreed upon all Exhibits to this Agreement (and same have been
initialed by both parties). The parties shall meet and confer upon the terms of
a new Alliance Agreement, if any, no later than ** . The provisions of Section
13.1 and 14 shall survive expiration of this Agreement.

1.2 Requirements. During the period ending on the sooner of (i) the ** of the
Effective Date, or (ii) such time as Capstone has committed to ** Capstone
Special Order PSRs under the provisions of Paragraph 9.2, Capstone agrees to
forecast requirements for Capstone Special Order PSRs to Solar as provided for
in Paragraphs 9.1 and 9.2 of this Agreement and to tender purchase orders,
specifying prices specified for in attached Exhibit B as such Exhibit may be
updated and specifying those volumes as forecast in the rolling six month
commitment provided for in Paragraphs 9.1 and 9.2, for ** of Capstone's
anticipated annual requirements for Capstone Special Order PSRs from Solar,
according to the terms and conditions of this Agreement. Authorization from
Capstone to Solar to manufacture Capstone Special Order PSRs will be made in the
form of purchase order(s), revision(s), or release(s).


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<PAGE>   3
1.3  Termination by Solar. Solar may terminate this Agreement, upon ninety (90)
days written notice to Capstone that Solar is ceasing the manufacture of PSRs
other than for Solar or Caterpillar, Inc.; provided that Solar shall make the
full production capacity of the Solar Houston Facility available to Capstone
for the lesser period of (i) twenty-four (24) months from the date of notice
under this Paragraph 1.3 or (ii) until the Technology Transfer to Capstone as
provided for in Paragraph 5.1 of the License Agreement between the parties of
even date herewith is completed, if Capstone elects to exercise the license
rights granted under the License Agreement.

1.4  Termination by Capstone. Capstone may terminate this Agreement upon ninety
(90) days written notice to Solar and payment within 60 days of such notice of
an amount equal to: (i) **

1.5  Capstone shall grant to Solar a non-exclusive, non-transferable,
non-sublicensable, world-wide ** for the duration of this Alliance Agreement.
In the event of a conflict between the terms of a patent license granted under
this Agreement and a patent license granted under the License Agreement between
the parties of even date herewith, the terms of the License Agreement shall
take precedence.

2.0  ANNUAL BUSINESS REVIEWS

Annual business reviews with executive management, representing both Capstone
and Solar, shall be conducted for the purpose of mutual goal-setting and review
of prior year performance to goals and measurements determined under this
Agreement, and will include such other business-related topics as:

- Market overview/forecast
- Technological advancement trends
- Restructures/organizational changes
- Planning to meet contingencies forecast by either party
- Future product prices and price targets
- General business review

For optimum planning, the annual business reviews will take place during the
fourth quarter of each calendar year. Capstone and Solar will set a date for
the meeting allowing at least ** for preparation and travel arrangement
purposes, the specific location and date to be mutually agreed to by both
parties.

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<PAGE>   4

3.0 PROGRAM MANAGERS AND TERMS

3.1 Teams will be formed, with representation form both companies, to encourage
consistency of approach and to achieve the greatest gains in improving quality,
reducing lead times, lowering costs, and meeting delivery schedules. The Teams
will consist of representatives from each company, including the Program Manager
from each company, and representatives from engineering, sales, purchasing,
supplier quality, manufacturing, and ad hoc members.

3.2 Each party hereby designates the individual identified below as its Program
Manager with responsibility for scheduling coordinating, and overseeing the
implementation of the parties' duties and obligations under the provisions of
this Agreement.

Capstone's Program Manager **

Solar's Program Manager **

4.0 PRODUCTIVITY IMPROVEMENTS

4.1 The parties agree to increase the production capacity at Solar's Houston
Facility in two phases as set forth below.

4.2 Phase I Solar agrees to make reasonable efforts to increase the production
capacity from a current level of approximately ** In addition, Solar agrees to
make reasonable additional investments in research of manufacturing technology
with the goal of increasing production capacity of Capstone Special Order PSRs
to be **

4.3 Phase II. In order to assist Solar to increase production of Capstone
Special Order PSRs from approximately ** and to reduce per unit price and to
meet the hours per core targets by the end of the ** Capstone agrees to
purchase, lease or otherwise provide for installation at Solar's Houston
facility high speed, dedicated, automatic machinery and tooling (the "Phase II
Equipment"). The parties will cooperate and work jointly to identify and
evaluate suppliers and equipment for Capstone to purchase, lease or otherwise
provide to Solar.

4.4 A projected installation schedule for Phase II Equipment, including
decisions related to the total cost of Phase II Equipment, the timing of
manufacturing capacity increases, projected manufacturing hours per unit, and
total capacity will be made by mutual agreement between Capstone and Solar
within six months from the Effective Date. Phase II Equipment will be installed
and integrated by Solar with Phase I equipment at ** that one production line,
** is formed. All property made available by Capstone will be identified as and
remain the property of Capstone and Capstone will be responsible for paying all
applicable property and other taxes associated with such property. Capstone will
also be responsible for reimbursing Solar for all


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<PAGE>   5


reasonable maintenance expenses incurred by Solar above normal operating
maintenance requirements and all necessary repair performed on such property.
Each party shall bear the risk of liability arising from injury to that party's
employees or representatives. Solar shall be responsible for damage to Solar's
Houston Facility resulting from the installation or use of the Phase II
Equipment.

4.5 The projected cost of the Phase II Equipment is ** The parties recognize
however, that this is an estimate only. Capstone shall provide cumulatively up
to **, for Phase II Equipment, as needed after consultation and review with
Solar. The parties agree, however, to use reasonable efforts to keep the cost of
the Phase II Equipment to a minimum, consistent with reasonable business
practices and with the goal of achieving increased production capacity and
manufacturing efficiency at Solar's Houston Facility. Notwithstanding any
provision contained in this Agreement to the contrary, Solar does not guarantee
any results whatsoever, whether with regard to an increase in production
capacity or PSRs or with regard to a decrease in per unit prices of PSRs. Each
party to this agreement represents that it is an independent, experienced and
sophisticated business entity. Each party conducts it own investigations and
obtains it own information about business transactions. Each party relies wholly
on its own counsel in making business decisions and assumes all risks with
regard to whether individual investments achieve certain results. Solar may
provide to Capstone, however, certain information regarding Phase II Equipment
performance, reliability, efficacy, suppliers and purchases. Solar assumes no
responsibility regarding the accuracy, sufficiency, or completeness of such
information, except in the case that Solar's conduct in providing inaccurate,
insufficient or incomplete information is intentional or grossly negligent.

4.6 The parties recognize that the availability and performance of Phase II
Equipment sufficient to achieve forecasted volumes ** to reduce per unit price,
and to meet the target manufacturing hours per core for Capstone Special Order
PSRs is uncertain, but that certain milestones will be reached at which point
the parties will be better situated and informed to judge the likelihood of
success. These milestones, when reached, will allow the parties to make go/no-go
decisions with regard to the Phase II effort. Such milestones include:

      (A) On or about **, the parties will have additional information regarding
      the likely cost and performance of certain Phase II Equipment. At that
      point, if Capstone reasonably believes the Phase II Equipment will not
      perform as required to achieve, or will cost cumulatively more than ** to
      achieve forecasted volumes **, to reduce per unit price, and to meet
      the target manufacturing hours per core for Capstone Special Order PSRs,
      Capstone shall have the option to (i) provide additional funding for Phase
      II Equipment; or (ii) provide Solar thirty days advance written notice of
      its intention to withdraw from the Phase II effort, in which case (a)
      Capstone shall be under no obligation to provide any funding for Phase II
      Equipment, (b) Capstone shall be relieved of its obligation under
      Paragraph 1.2 to purchase ** for Capstone Special Order PSRs from Solar,
      but (c) Capstone shall remain obligated to purchase from Solar ** after
      the Effective Date.
<PAGE>   6
     (B) On or about **, the Phase II Equipment will be installed at Solar's
     Houston Facility. At that point, if the Phase II Equipment does not perform
     as required to achieve, or if funding beyond Capstone's cumulative
     commitment of ** is required in order to achieve forecasted volumes **, to
     reduce per unit price, and to meet the target manufacturing hours per core
     for Capstone Special Order PSRs, Capstone shall have the option to (i)
     provide additional funding for Phase II Equipment; or (ii) provide to Solar
     thirty days advance written notice of its intention to withdraw from the
     Phase II effort in which case, (a) Solar shall promptly deliver to a
     destination provided by Capstone, and at Capstone's expense the Phase II
     Equipment, (b) Capstone shall be relieved of its obligation under Paragraph
     1.2 to ** of its annual requirements for Capstone Special Order PSRs from
     Solar, but (c) Capstone shall remain obligated to ** after the Effective
     Date.

4.7  Unless otherwise provided for in this Agreement, the Phase II Equipment
shall remain at Solar's Houston Facility during the term of this Agreement.
Upon termination of this Agreement as set forth above, Capstone will offer the
Phase II Equipment to Solar at the fair market value, but if no market exists
for the Phase II Equipment, at a price equivalent to ten percent (10%) over the
salvage value. If Solar elects not to purchase the Phase II Equipment at the
agreed price, Solar shall deliver the Phase II Equipment, at Capstone's
expense, to a destination provided by Capstone.


5.0  SPECIFICATIONS

5.1  The Capstone Special Order PSRs covered by this Agreement shall be
manufactured in accordance with Capstone's interface engineering drawings, and
specifications. In the event Solar is unable to manufacture Capstone Special
Order PSRs as defined, Solar agrees to notify Capstone's Program Manager in
writing. Any and all agreements for deviations or changes shall be made in
writing, signed by Capstone. Capstone and Solar will resolve exceptions or
deviations to their mutual satisfaction prior to the start of manufacture of
any Capstone Special Order PSRs. Capstone's engineering drawings and
specifications define the minimum standard and Solar agrees to meet this
standard. Capstone and Solar agree to main sufficient technical liaison in order
to prevent or eliminate manufacturing and / or quality problems.

5.2  Solar is not offering specific performance guarantees. Solar has used
performance goals, along with the conditions within the turbine provided by
Capstone, together with Solar's design codes and experience to size the
recuperator. Solar will provide recuperators to a specific design that Capstone
has integrated and operated with their turbine and which Capstone has accepted
as the design suited for the proposed application.

5.3  As-new leakage will ** of the recuperator air mass flow at design air side
pressures.

5.4  Solar assumes that the loads and moments at the gas interfaces ** under
any condition, including upset or malfunction.

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<PAGE>   7
6.0  QUALITY

A quality plan will be established by Solar and will be subject to written
approval by Capstone. This program will be consistent with Solar's then
existing ISO 9000 practices.

7.0  ARMS' LENGTH TRANSACTION

The parties to this Agreement specifically intend that neither this Agreement
nor any course of dealings between them shall create fiduciary obligations.
Nothing contained in this Agreement, and no course of dealings between the
parties shall be construed as establishing a partnership, joint venture or
agency between the parties. The rights, duties and obligations of the parties
are to be controlled exclusively by contract. Any obligation or covenant of
good faith and fair dealing, whether express, implied-in-fact or
implied-in-law, is intended to be contractual only. Any disclosure obligations
contained in or arising from this Agreement or course of dealings between the
parties are strictly contractual, and do not create fiduciary obligations. The
parties intend that any disclosures of information, confidential or otherwise,
during the course of business negotiations or dealings shall not be construed
as creating additional disclosure obligations.

8.0  DEVELOPMENT PRODUCTS

8.1  The parties recognize that various **, such as modifications, design
changes, redesigns, and manufacturing process improvements may be made to
Capstone Special Order PSRs during the term of this Agreement.

     A) ** not affecting the form, fit, function, or safety of Capstone
     Special Order PSRs and which ** do not involve or require increased
     technical risk, tooling changes, field retrofit, or more than ** may be
     requested by either party for, approval by the other party, which approval
     shall not be unreasonably withheld. If the non-requesting party approves
     such ** the Capstone Special Order PSRs shall be modified as required to
     incorporate and implement such **

     B) ** relating to new, re-designed, or substantially modified PSRs or **
     which involve or require increased technical risk, tooling changes, field
     retrofit, or more than ** shall be referred to as ** initiated by Solar
     may be disclosed to Capstone at Solar's sole option and discretion for
     possible inclusion of Capstone Special Order PSRs incorporating and
     implementing such ** under the terms of this Agreement. ** initiated by
     Capstone must be promptly disclosed to Solar to allow Solar a right of
     first refusal to manufacture the resulting new Capstone Special Order PSRs
     incorporating and implementing such ** under the provisions of this
     Agreement. If new Capstone Special Order PSRs are agreed upon under the
     terms of this sub-paragraph 8.1 (B), the parties shall add such new
     Capstone Special Order PSRs to this Agreement and update Exhibits A and B
     as provided for in Paragraph 8.2.

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<PAGE>   8
     C) Either party may initiate improvements to the manufacturing process used
     in the production of Capstone Special Order PSRs that do not affect the
     form, fit, function, or safety of Capstone Special Order PSRs (**).
     Neither party is under obligation to disclose ** to the other party. Solar
     shall, however, disclose to Capstone the fact that it is initiating a **
     and will provide Capstone sufficient information regarding the timing of
     the implementation of such ** (including, if appropriate, shipment lots or
     other indicia of Capstone Special Order PSRs impacted by such ** to allow
     Capstone to track and assess the impact, if any, of such ** on the
     quality, reliability, or performance of Capstone Special Order PSRs
     provided by Solar.

8.2  Changes to Exhibits "A" and "B". When mutually beneficial and acceptable,
and as provided under Paragraph 8.1, Capstone Special Order PSRs may be added to
or deleted from Exhibit "A" by written addendum thereto signed by both parties
and such added Capstone Special Order PSRs will then become subject to this
Agreement. Price for the next production period for the new Capstone Special
Order PSRs shall be based upon procedures outlined in Exhibit B. The prices
applicable to each such additional Capstone Special Order PSR shall be subject
to adjustment as provided for in Exhibit B. The pricing terms contained in this
Agreement shall apply to Capstone Special Order PSRs when such Capstone Special
Order PSRs have been released to production or when Solar has begun accepting
Purchase Orders for production-run quantities of such Capstone Special Order
PSRs. The pricing terms contained in this Agreement do not apply to prototypes
for new Capstone Special Order PSRs.

9.0  REQUIREMENTS, FORECAST VOLUME AND TIME FENCE

9.1  On the Effective Date, Capstone shall provide to Solar a forecast
equivalent to ** of Capstone's requirements for Capstone Special Order PSRs for
the ** period commencing ** (the "Forecast")(attached hereto as Exhibit E). Each
month subsequent to ** and until such time as Capstone has forecast requirements
for at least ** Capstone shall update the Forecast to keep the Forecast current
for a ** projected period Solar shall have ** from receipt to accept the
Forecast and updates, or to notify Capstone in writing that it does not accept
the Forecast or updated portion thereof. Solar agrees to accept the Forecast,
and as updated, provided Solar has or reasonably anticipates having sufficient
manufacturing capacity at Solar's Houston Facility to satisfy Capstone's
forecasted requirements. The Forecast is not an authorization to commit funds or
proceed in any way, except to the extent of the ** rolling time fence portion of
the Forecast as specified in Paragraph 9.2.

9.2  The Forecast, and as updated, shall be the basis for a firm requirements
and delivery commitment between the parties. The initial ** commitment period
shall begin ** and each month shall roll forward one additional month to stay
current for ** periods. By the end of ** of each year, or as otherwise agreed
by the parties, Capstone shall tender to Solar ** specifying the price for the
initial ** and the subsequent ** as provided for in Exhibit B and referencing
volumes per

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<PAGE>   9
the ** firm requirements periods falling within the subsequent ** per the terms
of this Paragraph 9.2. Subject to and under the terms and provisions provided
for in this Agreement and the attachments hereto: (i) Capstone shall accept all
Capstone Special Order PSRs meeting Capstone's incoming requirements, timely
shipped pursuant to the ** and (ii) Solar shall provide sufficient Capstone
Special Order PSRs to satisfy ** Notwithstanding the foregoing, in no event
shall Capstone be obligated to purchase more than ** in any given ** and the **
may be adjusted accordingly to reflect **. Capstone may request a schedule
change (for Solar's consideration only) in order to reschedule delivery of
Capstone Special Order PSRs within the ** to Capstone. Any resulting changes
must be mutually agreeable to both parties (but consent by either party shall
not be unreasonably withheld).

9.3 If Capstone has not tendered purchase orders for at least ** on or before
** Capstone's obligations under Paragraph 1.2 shall continue until such time as
Capstone has tendered purchase orders for at least ** but the date by which
Capstone shall have purchased at least ** shall not be executed beyond the **
of the Effective Date.

10.0 INDEPENDENCE OF BUSINESS ACTIVITIES

10.1 While Capstone presently has no intention of manufacturing individual
turbogenerator units generating ** Solar acknowledges that nothing contained in
this Agreement restricts Capstone in any way from manufacturing any size of
turbine engine or turbogenerator units at its sole discretion at any time if
Capstone does not infringe upon Solar's patents or other intellectual property
rights.

10.2 While Solar presently has no intention of manufacturing gas turbine
engines with an output ** Capstone acknowledges that nothing contained in this
Agreement restricts Solar in any way from entering the ** gas turbine market at
its sole discretion at any time if Solar does not infringe upon Capstone's
patents or other intellectual property rights.

11.0 PRICING AND PAYMENT TERMS AND CAPACITY UTILIZATION

11.1 In order to ensure Capstone a firm price for Capstone Special Order PSRs,
while removing the risk to Solar of changes in material and labor costs beyond
Solar's control, prices for Capstone Special Order PSRs will be set, with
allowances for variations in Solar's costs as provided for in Exhibit "B,"
which is incorporated herein by reference. Independent certified public
accountants selected by Capstone and reasonably acceptable to Solar may review
Solar's written documentation concerning manufacturing cost in accordance with
Exhibit B with regard to Capstone Special Order PSRs, provided Capstone
provides three (3) business days notice of such audit and audits at reasonable
business hours. The pricing formula and adjustment provisions of Exhibit B are
premised on the assumption that Capstone's expenditure for Phase II Equipment
as provided for in Section 6 of this Agreement will result in sufficient
manufacturing capacity and

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<PAGE>   10
efficiency at Solar's Houston Facility to meet the target set for Labor Hours
per Recuperator defined in Exhibit B.

11.2  For each additional Capstone Special Order PSR model to be purchased by
Capstone under this Agreement, the parties shall update Exhibits "A" and "B" as
required. The price for the additional Capstone Special Order PSRs shall be
based upon procedures outlined in Exhibit B.

11.3  If during the term of this Agreement Solar sells to a third party
substantially identical PSRs (in number of pieces and parts, geometric
configuration, size and weight, including core to engine attachment hardware
Solar is supplying to Capstone, and material) in quantities comparable to those
being purchased by Capstone, and at a price (taking into account any credits,
rebates, other monetary or non-monetary consideration provided when determining
the price to the third party) less than the then-current price being charged
capstone as provided for in Exhibit B, the price charged to Capstone for those
Capstone Special Order PSRs shall be lowered to the price being charged the
third party.

11.4  Recognizing that costs of raw materials can be a significant component of
the price to Capstone of Capstone Special Order PSRs, Solar agrees to use
reasonable efforts to secure the lowest cost supply of raw materials, provided
such supply satisfies Solar's normal incoming raw materials quality controls.
Solar shall evaluate suppliers of raw materials identified in writing by
Capstone and shall purchase raw materials from those suppliers provided such raw
materials satisfy Solar's normal incoming raw materials quality controls.
Solar's savings in raw material costs shall be reflected in the price of
Capstone Special Order PSRs, as provided for in the pricing provisions of
Exhibit B.

11.5  All purchase orders tendered by Capstone under the terms of this Agreement
shall be subject to and governed by the Terms and Conditions contained in
Exhibit D attached hereto. In the event of a conflict between the terms of this
Agreement and any subsequent transaction between the parties, including purchase
orders and order acknowledgments, the terms of this Agreement shall prevail and
take precedence over such subsequent purchase orders and other form documents.

11.6  Solar shall give first priority of the Solar Houston Facility production
capacity to the manufacture of Capstone Special Order PSRs. "Excess Capacity"
shall be defined as the difference between Capstone's ** for Capstone Special
Order PSRs pursuant to Paragraph 9.2 and the actual production capacity of
Solar's Houston Facility for **. For each ** (i) Capstone shall have the right
of first refusal to have PSRs manufactured using Excess Capacity; (ii) if
Capstone does not exercise its right of first refusal, Solar may use the Excess
Capacity at its sole discretion; provided however that (iii) Capstone will be
given first priority to the Excess Capacity upon sixty days written notice to
Solar. Notwithstanding the foregoing, in no event will Solar manufacture the
identical Capstone Special Order PSRs with the identical part number for sale to
third parties, except third parties designated in writing by Capstone's Program
Manager, as provided for in Paragraph 3.2, but the parties recognize Solar may
sell substantially similar PSRs. Solar agrees not to knowingly sell or repair
Capstone Special Order PSRs to any entity requiring such PSRs to perform service
on Capstone's Microturbines and Solar will not knowingly service Capstone's
aftermarket.

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<PAGE>   11

12.0 SUPPLIER COST INFORMATION

12.1 Solar agrees to provide sufficient cost data to enable Capstone to
understand and verify cost variations associated with development products set
forth in Section 8.0. Capstone may also offer its cost reducing suggestions to
Solar for Solar's consideration.

13.0 CONFIDENTIAL INFORMATION AND NOTICES

13.1 Confidential Information. The parties hereby ratify and incorporate that
certain Nondisclosure Agreement, executed by the parties in June 1996 and
attached hereto as Exhibit "C" (the "Nondisclosure Agreement") as modified in
the License Agreement between the parties of even date herewith.

13.2 Notices. All notices, requests, demands and elections under this Agreement
shall be in writing and shall be deemed to have been duly given (i) when
delivered by hand, (ii) one (1) day after being given to an express courier
with a reliable system for tracking delivery, (iii) when sent by confirmed
facsimile with a copy sent by another means specified herein, or (iv) three (3)
days after the date of mailing by certified or registered mail, return receipt
requested, postage prepaid, and addressed as follows:

        If to Capstone:
                Capstone Turbine Corporation
                6025 Yolanda Avenue
                Tarzana, California 91356

                Attention:      Paul Craig
                                President and Chief Executive Officer

        With a copy to:
                Richard Harroch
                Orrick, Harrington & Sutcliffe
                400 Salsome Street
                San Francisco, CA 94111

        If to Solar:
                Solar Turbines Incorporated
                2200 Pacific Highway
                San Diego, California 92101

                Attention:      Director, Recuperator Business

        With a copy to:
                General Counsel
                Solar Turbines Incorporated
                2200 Pacific Highway
                San Diego, California 92101


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<PAGE>   12
Solar or Capstone may, from time to time, change its address or its designee for
notification purposes by giving the other party prior written notice of the new
address or the new designee and the date upon which the change shall be
effective.

13.3 The terms and conditions of this Agreement are confidential and are
subject to the provisions of the Nondisclosure Agreement, Exhibit C.

14.0 GENERAL TERMS AND CONDITIONS

14.1 Warranty. Solar warrants, that if Capstone shall notify Solar in writing
within the "Warranty Period," as defined herein, that the Products purchased
hereunder are "defective" (defined herein as not of the kind or quality of
materials designated or described in the specifications given to Solar by
capstone in writing or changes approved jointly by Capstone and Solar in
accordance with Section 5.0 of this Agreement, or failing to met the performance
criteria specified in Exhibit D hereto, as such Exhibit may be modified from
time to time by joint agreement of the parties), Solar shall, upon mutual
determination by the parties that such Products were defective, repair or
replace such Products not actually meeting said specifications if such Products
(or representative samples of a common defect and failure documentation
concerning all such Products, as mutually agreed between the parties) are
returned to Solar's facility at Capstone's expense. Solar agrees to work with
Capstone to determine the cause of field problems and defects. "Warranty
Period" shall mean the first period to elapse of (i)  **  from the expiration of
the "inactive" warranty as provided for in Exhibit A, or (ii)  **  from the
expiration of the "active" warranty period as provided for in Exhibit A, or
(iii)  **  from the discovery by Capstone of the defect. Notwithstanding the
foregoing, the Warranty Period may be adjusted to allow Capstone a warranty
period comparable to the warranty period Capstone provides to its customers,
provided that (i) Capstone demonstrates that the defect occurred during the
Warranty Period; and (ii) the adjustment does not result in Solar being held to
a greater warranty standard than Capstone is held to with its own customers.
This warranty shall be valid during the "inactive" or "active" warranty period,
whichever period elapses first and no liability shall arise for defects that
arise after the expiration of the Warranty Period. This warranty is only
applicable if the Product has not been subjected to foreign object damage,
misuse, or detrimental exposure, has not been involved in an accident and has
been transported, stored, installed, used, handled, maintained, repaired or
modified in accordance with the current recommendations of Solar or any
manufacturer of certain components of the Product as stated in its manuals,
bulletins, or other written instructions which have been submitted to Capstone:
provided however, that if Capstone demonstrates that the defect was not caused
by such foreign object damage, misuse, detrimental exposure, or accident, or
failure to transport, store, install, use, handle, maintain, repair, modify in
accordance with recommendations, then the warranty will remain applicable. If
any warranty incidents or claims occur beyond the Warranty Period, both parties
agree to meet and resolve such incidents and claims in a mutually satisfactory
manner. THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR
IMPLIED (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE), AND SOLAR SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES. The liability of Solar resulting from the foregoing warranty shall not
in any case exceed the cost of correcting such defects as provided above. The
foregoing shall constitute the sole remedy of Capstone and the

                                       12
<PAGE>   13
sole liability of Solar for breach of warranty, whether the claim is in
contract, warranty, tort (other than gross negligence or intentional acts),
strict liability, or otherwise. This warranty may be modified during the term
hereof with the mutual written agreement of both parties. Any modifications to
this warranty must be agreed to and signed by the parties.

14.2 Material Breach. If either party materially breaches this Agreement, upon
written notice to the defaulting party specifying such breach, the defaulting
party shall have thirty (30) days after such notice to remedy such breach or to
implement a program, reasonably satisfactory to the party not in default, to
correct such breach. If such material breach remains uncured after thirty (30)
days, either party may initiate the dispute resolution proceedings provided for
in Paragraph 14.3. Notwithstanding the foregoing, Solar may terminate this
Agreement and the License Agreement of even date herewith upon thirty (30) days
written notice to Capstone if Capstone fails to tender **, as provided for in
Paragraphs 1.2 of this Agreement within ** from the Effective Date, provided
however, that Capstone shall have the option to cure such grounds and Solar
shall not terminate this Agreement or the License Agreement on such grounds
provided Capstone either (i) tenders to Solar ** for amounts of Capstone
Special Order PSRs equivalent ** Capstone Special Order PSRs until Capstone
has tendered purchase orders for at least ** or (ii) tenders to Solar an amount
equivalent to ** of the price for Capstone Special Order PSRs determined for the
prior ** multiplied by the shortfall between ** and the ** on or before the date
Capstone receives written notice pursuant to this Paragraph 14.2.

14.3 Dispute Resolution. If a dispute arises under the terms or performance of
this Agreement, unless by mutual consent the parties agree otherwise, the
parties shall resolve such dispute as follows:

     A) the parties' respective Program Managers shall have ten days to attempt
     resolution; if the Program Managers are unable to resolve the dispute
     themselves;

     B) each Program Manager shall present a written statement of the dispute
     and a proposed resolution for consideration at a meeting of a senior
     executive officer from each company the meeting to be held within fifteen
     days from the expiration of the ten day period contemplated in the
     preceding sub-paragraph;

     C) if the senior executive officers cannot resolve the dispute within ten
     days from the meeting date specified in the preceding sub-paragraph, the
     parties agree to submit such dispute to arbitration before a neutral three
     member board of arbitrators under the provisions of Paragraph 14.4.

14.4 Arbitration. Subject to the provisions of Paragraph 14.3 of this Agreement,
any claim or dispute arising hereunder that has not been resolved by the
parties shall be determined by arbitration in accordance with the Commercial
Arbitration Rules then in effect of the American Arbitration Association in San
Diego, California; provided that no demand for arbitration shall be instituted
after the date after which legal proceedings on the same claim would have been
barred by

                                       13
<PAGE>   14
the applicable statute of limitations. The party requesting arbitration shall
appoint one independent neutral arbitrator in writing and the responding party
shall appoint one independent neutral arbitrator in writing within fifteen (15)
days thereafter. The two arbitrators so selected shall then appoint a third
arbitrator within fifteen (15) days thereafter. The award rendered in such
arbitration may provide for equitable remedies, an accounting and/or
reimbursement for attorneys', accountants' or consultants' fees, as the
arbitrators shall see fit. Such award shall be final, and judgment on it may be
entered in or enforced by any court, state, federal or foreign, having
jurisdiction thereover. This provision shall not preclude the impleading or
joining of one of the parties hereto by the other in an action brought by a
third party and all matters with respect thereto shall be decided by the court
or body deciding that action. Any party may apply to an appropriate court of
law for a preliminary injunction, attachment or other similar remedy available
to it in aid of the arbitration proceeding provided for herein. In the
arbitration each party shall be entitled to demand production of documents and
other items from any other party hereto, in accordance with the terms of Rule
34 of the Federal Rules of Civil Procedure. Any disputes concerning such demand
shall be determined by the arbitrator(s), and any such determination shall be
binding on the parties.

14.5 California Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as if made in California
for performance entirely within the State of California.

14.6 Entire Agreement. This Agreement includes Exhibits "A" through "E"
attached hereto and constitutes the entire agreement between the parties with
respect to the subject matter hereof, supersedes all prior oral or written
agreements regarding the subject matter hereof, and cannot be changed except by
a writing signed by both parties.

14.7 Severability. If any provision of this Agreement is held illegal, invalid
or unenforceable under present or future state or federal laws, or rules and
regulations promulgated thereunder, effective during the term hereof, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part thereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision, there shall be automatically
as part of this Agreement a provision similar in terms to such illegal, invalid
or unenforceable provision as may be possible and be legal, valid, and
enforceable.

14.8 Assignment. This Agreement is not assignable or transferable without the
prior written consent of each party, which consent may be withheld for any
reason except that either party may assign or transfer this Agreement to an
affiliated entity without the consent of the other party.

14.9 Independent Research. Nothing in this Agreement shall (a) impose any
restriction on either party from carrying out independent research and
development activities in any field, (b) in relation to the results of any such
independent research and development activities of one party, give rise to any
ownership right or claim by the other party; nor (c) restrict either party in
the exploitation in any manner of the results of tis independent research and
development activities.

                                       14
<PAGE>   15
14.10   No Sharing of Liabilities. Nothing herein shall be construed as
providing for the sharing of profits or losses arising out of the efforts of
the parties. No party shall be liable to the other for any of the costs,
expenses, risks, or liabilities arising out of the other party's efforts in
connection with this Agreement.

14.11   Manufacture of PSRs. Subject to the provisions of Paragraph 11.6
regarding the use of Phase II Equipment, Solar is under no restriction or
obligation to Capstone regarding the manufacture, use or sale of PSRs other
than Capstone Special Order PSRs.

14.12   Use of Solar PSRs. Subject to the provisions of ** Capstone is under no
obligation to incorporate only Capstone Special Order PSRs in Microturbines
manufactured and delivered by Capstone.

14.13   Employee Solicitation. For a period of ** from the date of this
Agreement, Solar and Capstone agree not to solicit for employment purposes, any
employee of the other party who has had access to that other party's
Proprietary Information utilized in implementing this Agreement.

14.14   Jurisdiction. For any matter or claim to be considered by a court under
this Agreement the parties consent to the exclusive jurisdiction of the courts
of the United States of America and the State of California and any subdivision
thereof. Any injunctions, order or judgments entered, issued, or granted from
any courts having jurisdiction hereunder shall be enforceable within the State
of California and in any state or country wherein lie the offices and/or assets
of the party against whom the said injunction, order or judgment is entered.

14.15   Conflict Provision. In the event of conflict of any provision of this
Agreement and any transaction, including purchase orders from Capstone and
accepted by Solar, the provisions of this Agreement shall prevail.

14.16   Headings. The section headings used in this Agreement are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.

14.17   Interpretation. Each party to this Agreement has had the opportunity to
review the Agreement with legal counsel. This Agreement shall not be construed
or interpreted against either party on the basis that such party drafted or
authored a particular provision, parts of, or the entirety of this Agreement.

14.18   Force Majeure. Neither party to this Agreement shall be liable for any
default or delay in the performance of its obligations under this Agreement
(except for the duty to pay for services rendered or Product received) if and
to the extent such default or delay is caused, directly or indirectly, by fire,
flood, earthquake, elements of nature or acts of God, riots, civil disorders,
rebellions or revolutions, or any other cause beyond the reasonable control of
such party (including the inability to receive raw materials from a supplier),
provided the non-performing party is without fault in causing such default or
delay, and such default or delay could not have been prevented by reasonable
precautions nor reasonably be circumvented by the nonperforming party through
the use

                                       15
<PAGE>   16
of alternate sources, work-around plans or other means. In such event, the
non-performing party shall be excused from any further performance or observance
of the obligation(s) so affected for as long as such circumstances prevail and
such party continues to use reasonable efforts to recommence performance or
observance of the obligations so affected for as long as such circumstances
prevail. Notwithstanding the foregoing, a party shall not be entitled to the
benefits of this Section 14.18 unless any party so delayed in its performance
promptly notifies the party to whom performance is due by telephone, radio,
messenger or other available means (to be confirmed in writing within two (2)
working days of the inception of such delay) and describe at reasonable level of
detail the circumstances causing such delay.

14.19  No Change in Purchase Order. Notwithstanding any provision contained in
this Agreement to the contrary, no term or provision of this Agreement changes
or in any way modifies the terms of **.

14.20  Public Acknowledgement. Both Solar and Capstone may publicly acknowledge
and announce that they have entered into an Alliance Agreement for the purchase
and development of PSRs for incorporation into Capstone's Microturbines.
Notwithstanding the foregoing, Capstone agrees that it will not advertise, or
otherwise indicate that any Capstone Special Order PSRs are sponsored, endorsed,
or otherwise guaranteed by Solar or that the Alliance Agreement between Capstone
and Solar is an exclusive agreement.

14.21  Rights. Each and every right, power, and remedy herein specifically
given to either party or otherwise in this Agreement shall be cumulative and
shall be in addition to every other right, power, and remedy herein specifically
given or now or hereafter existing at law, in equity or by statute, and the
exercise or the beginning of the exercise of any power or remedy shall not be
construed to be a waiver of the right to exercise at the same time or
thereafter any such right, power, or remedy.

15.0  COVENANTS

Capstone and Solar represent and warrant that the execution, delivery and
performance of this Agreement has been duly authorized by all necessary
corporate action on the part of Capstone and Solar, respectively, and that this
Agreement constitutes a legal, valid and binding obligation, enforceable in
accordance with its terms.

IN WITNESS WHEREOF, Capstone and Solar have executed this Agreement on the date
set forth below to be effective as of the time set forth in Section 1.1 of this
Agreement.

SOLAR TURBINES INCORPORATED               CAPSTONE TURBINE CORPORATION



By: /s/ DAVID W. ESBECK                   By: /s/ PAUL CRAIG
   ---------------------------               ----------------------------------
    David W. Esbeck                         Paul Craig
    Vice President, Engineering             President & Chief Executive Officer


Dated: 22 Aug 97                          Dated:  August 25, 1997
      ------------------------                  -------------------------------


                                       16

<PAGE>   17

EXHIBIT A -- PRODUCTS COVERED BY AGREEMENT

<TABLE>
<CAPTION>
                                                                        ACTIVE
                                                INACTIVE                WARRANTY
SELLER'S P/N    SPECIFICATION   DESCRIPTION     WARRANTY PERIOD         PERIOD
--------------------------------------------------------------------------------------
<S>             <C>             <C>             <C>                     <C>
203210-100      TBD             Recuperator     **                      **
                                Assembly        from date of ship-      from first use
                                **              ment of the Product     by Capstone's
                                                by Solar                Customers
</TABLE>


/s/ PAUL CRAIG                          August 25, 1997
------------------------------          -----------------------
CAPSTONE TURBINE CORPORATION            DATE


/s/                                     8/22/97
------------------------------          -----------------------
SOLAR TURBINES INCORPORATED             DATE



                                       17
<PAGE>   18
EXHIBIT B - PRICING BASIS

                                      [**]

/s/ PAUL CRAIG                                August 25, 1997
-------------------------------               ------------------------
CAPSTONE TURBINE CORPORATION

/s/                                           22 Aug. 97
-------------------------------               ------------------------
SOLAR TURBINES INCORPORATED

                                       18
<PAGE>   19
                                                                       EXHIBIT B

MANUFACTURING HOURS PER CORE - TARGET
--------------------------------------------------------------------------------

                                      [**]



--------------------------------------------------------------------------------
[SOLAR TURBINES LOGO]         Company Confidential
<PAGE>   20
EXHIBIT C

NON DISCLOSURE AGREEMENT




                                       19
<PAGE>   21
                            NONDISCLOSURE AGREEMENT

This Nondisclosure Agreement ("Agreement") is made effective as of June 1, 1996
by and between Solar Turbines Incorporated, a Delaware corporation having its
principal office in San Diego, California ("Solar") and Capstone Turbine Corp.,
a Delaware corporation having its principal office in Tarzana, California
("Capstone").

     WHEREAS, Solar is engaged in the business of designing, manufacturing and
selling industrial turbomachinery, including gas turbine engines and related
systems ("Solar Products"). Solar has developed certain unique primary surface
recuperator and interconnection (interface) technology ("Solar Recuperator
Technology") which it owns and may apply to the design and application of
recuperators; and

     WHEREAS, Capstone is actively engaged in the development of gas turbines
and recuperated gas turbines in the ** and

     WHEREAS, Capstone is actively engaged in the development of major
components of both gas turbines and recuperated gas turbines in this size
range; and

     WHEREAS, these components include turbines, compressors, air bearings,
combustors, permanent magnet alternators, electronic convertors, and
recuperators ("Capstone Products"); and

     WHEREAS, Solar owns and has the unencumbered right to disclose to Capstone
certain proprietary information relating to the Solar Recuperator Technology
and Solar Products and Capstone owns and has the unencumbered right to disclose
to Solar certain proprietary information relating to Capstone Products
(collectively, such information from each party is referred to herein as
"Proprietary Information"); and

     WHEREAS, each party desires to disclose Proprietary Information to the
other party for the limited purpose of evaluating whether the parties may
desire to work together on projects relating to Solar Recuperator Technology,
Capstone Products, Solar Products and other matters, and should a purchase
order issue or contract to be entered into, then for work or services performed
thereunder; and

     WHEREAS, Solar and Capstone executed a Nondisclosure Agreement, dated July
11, 1994, when Capstone was operating under the name "NoMac Energy Systems,
Inc."; and

                                      -1-
<PAGE>   22
     WHEREAS, the previous Nondisclosure Agreement between the parties, dated
July 11, 1994, is terminated effective May 31, 1996 and this Agreement shall
become effective June 1, 1996; and

     WHEREAS, as used herein, "Party", "receiving party" and "disclosing party"
means each and every party who may receive or disclose Proprietary Information
regardless of the use of the singular rather than the plural form "parties".

     NOW, THEREFORE, in consideration of the foregoing premises, the following
promises, covenants and undertakings, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
intending to be legally bound, the parties agree as follows:

     1.   Each Party will use its best efforts to keep in confidence, and not
use or disclose to any person or persons, proprietary information disclosed to
it under this Agreement.

          Each Party recognizes that any disclosure of proprietary information
would substantially injure the disclosing Party's business, impair its
investments and goodwill and jeopardize its relationships with its buyers and
customers. In order to protect such proprietary information, the Parties agree:

          (a)  to hold all proprietary information in safekeeping and in strict
confidence and not to disclose proprietary information to any third parties or
permit use of all such information to the disadvantage of the disclosing Party;

          (b)  to treat all proprietary information with at least the same
degree of care with which each treats and protects its own proprietary
information which it does not wish to disclose to third parties, which in any
event shall be reasonable under the circumstances;

          (c)  to limit the access of all proprietary information to only those
employees within its organization who require the proprietary information in
performing the limited purpose of this Agreement, and to inform each of its
employees of the provisions of this agreement; and

          (d)  to use proprietary information only to the extent necessary for
performing the limited purposes of this Agreement.

     2.   Exceptions. The restrictions contained in Section 1 shall not apply to
any proprietary information if the same is:

          (a)  in the public domain at the time of disclosure, or is
subsequently made


                                      -2-
<PAGE>   23
available by the disclosing Party to the general public without restriction;

          (b)  known by the receiving Party at the time of disclosure, as
evidenced by appropriate documentation, or independently developed, as evidenced
by appropriate documentation, by the receiving Party;

          (c)  used or disclosed with the prior written approval of the
disclosing Party;

          (d)  becomes known to the receiving Party without similar restrictions
as to its use or disclosure from a source other than the disclosing Party;

          (e)  used or disclosed after a period of ten (10) years from the date
of termination of this Agreement;

          (f)  becomes known pursuant to judicial action or Governmental
regulations or requirements, provided that the recipient of such data shall have
notified the other Party.

     3.   Neither the execution of this Agreement, nor the furnishing of any
materials hereunder, shall be construed as granting, either expressly or by
implication, estoppel or otherwise, any license under any invention or patent
now or hereafter owned by or controlled by the Party furnishing the materials.

     4.   No rights or obligations other than those expressly recited herein are
to be implied by this Agreement with respect to patents, inventions and data. In
providing data pursuant to this Agreement, the Party providing the data makes no
representation, either expressed or implied, as to adequacy, sufficiency, or
freedom from fault of such data and incurs no responsibility nor obligation
whatsoever by reason thereof; and the furnishing of such data shall not convey
any rights or license with respect to such data.

     5.   Nothing in this Agreement shall grant to either Party the right to
make commitments of any kind for or on behalf of the other Party without the
prior written consent of the other Party.

     6.   If a contractual relationship results from discussions between Solar
and Capstone, the contract or purchase order will authorize Solar to disclose
information to other parties which have a need to know after Solar ensures that
a nondisclosure agreement such as this Agreement is in place with such parties.
Similarly, such contract or purchase order will authorize Capstone to disclose
information to other parties which have a need to know after Capstone ensures
that a nondisclosure agreement such as this Agreement is in place with such
parties.

     7.   This Agreement may be terminated (a) by either Party giving thirty
(30) days



                                      -3-

<PAGE>   24
written notice of its intention to terminate to the other Party; or (b) the
Agreement shall automatically terminate ** from the date of acceptance;
provided, however, that when the Agreement terminates, the obligations not to
use and not to disclose proprietary information exchanged hereunder shall
continue for the period specified hereinabove.

     8.   All modifications to this Agreement shall be in writing and signed by
duly authorized representatives of both corporations.

     9.   All notices and information shall be addressed as follows:

          If to Capstone:

          Capstone Turbine Corp.
          6025 Yolanda Avenue
          Tarzana, CA 91356

          Attention: R. James Wensley
                     President and Chief Executive Officer

          With a copy to:

          Richard Harroch
          Orrick, Harrington & Sutcliffe
          400 Salsome Street
          San Francisco, CA 94111

          If to Solar:

          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101

          Attention: Manager, Recuperator Programs

          With a copy to:

          General Counsel
          Legal Department
          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101



                                      -4-
<PAGE>   25
     10.  Return of Proprietary Information. All proprietary information
disclosed to the receiving Party shall remain the property of the disclosing
Party within thirty (30) days of any termination of this Agreement or upon
request at any time by the disclosing Party, the receiving Party agrees to
immediately return all proprietary information and all copies to the disclosing
Party with a written statement that the foregoing has been accomplished.

     11.  Notification and Injunctive Relief. If either Party, inadvertently or
otherwise, makes an unauthorized disclosure of the other Party's proprietary
information to a third party, the violating Party shall immediately take every
reasonable action to recover the improperly disclosed proprietary information,
execute a retroactive protective agreement with the unauthorized third party
if possible and immediately notify the Party whose data was improperly
disclosed ("Injured Party") and provide complete information about the
unauthorized disclosure and the corrective measures being taken. The Parties
agree that monetary damages are inadequate for any material breach involving an
unauthorized disclosure when the injured Party reasonably believes said breach
will cause it to suffer significant business harm. If the Injured Party
believes, based on the facts, it will suffer material harm from the
unauthorized disclosure and the corrective measures being taken by the
violating Party are inadequate to mitigate the harm, the Parties agree the
Injured Party shall be entitled to prompt injunctive relief. Both Parties'
other legal and equitable remedies and defenses remain unchanged by this
provision.

     12.  Each Party reserves the right to change its designation of authorized
representative, should circumstances so require, and to notify the other Party,
in writing of any such changes.

     13.  (a)  All technical information and ideas relating to any proprietary
information disclosed hereunder shall be in writing and will be identified, in
writing, as being proprietary information.

          (b)  Oral communications which are considered proprietary by the
originating Party and so identified shall be reduced to writing within thirty
(30) days and shall contain a notice thereon to the effect that any disclosure
and use shall be subject to the terms and conditions of this present Agreement.
Such orally disclosed information shall be given the protection afforded
proprietary information hereunder during such thirty (30) day period.

          (c)  All copies of proprietary information shall contain a similar
identification.

     14.  This Agreement shall be governed by and construed in accordance with
the laws of the State of California as if made in California for performance
entirely within the State of California.



                                      -5-
<PAGE>   26
     15.  This Agreement constitutes the entire agreement between the Parties
with respect to the subject matter hereof, supersedes all prior oral or written
agreements regarding the subject matter hereof, and cannot be changed or
terminated except by a writing signed by both Parties.

     16.  If any provision of this Agreement is held illegal, invalid or
unenforceable under present or future state or federal laws, or rules and
regulations promulgated thereunder, effective during the term hereof, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision, there shall be automatically
as part of this Agreement a provision similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.

     17.  This Agreement is not assignable or transferable without the prior
written consent of each Party, which consent may be withheld for any reason.

     18.  Nothing herein shall be construed as a grant of a license or
conveyance of any rights under any discoveries, inventions, patents, trade
secrets, copyrights, industrial property rights or know-how belonging to any
Party hereto.

     19.  This Agreement shall not constitute, create, give effect to or
otherwise imply a teaming, joint venture, leader-follower or other formal
business relationship. Further, nothing herein shall be construed as providing
for the sharing of profits or losses arising out of the efforts of the Parties.
No Party shall be liable to the other for any of the costs, expenses, risks, or
liabilities arising out of the other Party's efforts in connection with this
Agreement.

     20.  Each Party to this Agreement has had the opportunity to review the
Agreement with legal counsel. This Agreement shall not be construed or
interpreted against either Party on the basis that such Party drafted or
authorized a particular provision, parts of, or the entirety of this Agreement.

                                      -6-


<PAGE>   27
     IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representatives.



CAPSTONE TURBINE CORP.                  SOLAR TURBINES INCORPORATED



By: /s/ R. James Wensley                By: /s/ David Esbeck
   --------------------------              --------------------------

Printed                                 Printed
Name:    R. James Wensley               Name:     David Esbeck
   --------------------------              --------------------------

Title:  President                       Title: V.P. Engineering
   --------------------------              --------------------------

Date:  June 13, 1996                    Date: June 6, 1996
   --------------------------              --------------------------



                                      -7-

<PAGE>   28
                                   EXHIBIT D
                  TERMS OF SALE - PRIMARY SURFACE RECUPERATOR


                                       **













                                       20
<PAGE>   29
 8.  Setoff. In addition to any right of setoff provided by law, all amounts due
Seller shall be considered net of indebtedness of Seller to Buyer and its
subsidiaries and affiliates, Buyer may deduct any amount due or to become due
from Seller to Buyer and its subsidiaries and affiliates from any sums due or to
become due from Buyer or its subsidiaries and affiliates to Seller.

 9.  Patent Indemnification. If any claim or action, based solely on the
Capstone Special Order PSR, is brought against Capstone, based upon an
allegation that sales or use of the Capstone Special Order PSR by Capstone
within Capstone's Microturbine, infringes any patent rights of any third party,
Solar shall defend Capstone against any and all liability, claims and expenses
arising out of any such claim or action, provided that Capstone (i) gives Solar
prompt notice of such claim or action; (ii) cooperates with Solar, at Solar's
expense, in the defense of such claim or action, and (iii) gives Solar the right
to control the defense and settlement of any such claim or action as long as
such settlement does not adversely affect Capstone's rights under this
Agreement.

10. Compliance with Laws. In connection with manufacturing of goods or the
furnishing of services hereunder, Seller shall comply with the Fair Labor
Standards Act of 1938, as amended, all Occupational Health and Safety Act
regulations, and any other federal, state or local law or regulation respecting
manufacture, assembly, labeling, purchasing, or sale of goods in connection with
this order. Seller shall indemnify and hold Buyer harmless against all expenses,
claims, liabilities, or damage resulting from violation by Seller of any such
law or regulation.


/s/ Paul Craig                        August 25, 1997
----------------------------          -----------------------
CAPSTONE TURBINE CORPORATION          DATE


/s/                                   22 Aug. '97
----------------------------          -----------------------
SOLAR TURBINES INCORPORATED           DATE



                                       21
<PAGE>   30
                         EXHIBIT E - CAPSTONE FORECAST


                        Recuperator Deliveries by Month


<TABLE>
<CAPTION>
                                                PSRs RECEIVED
                   MONTH       SHIP PLAN           FROM SOLAR
                   -----       ---------           ----------
                   <S>         <C>              <C>

                    **             **                  **
</TABLE>

/s/ PAUL CRAIG                               August 25, 1997
----------------------------                 ---------------
CAPSTONE TURBINE CORPORATION                 DATE

/s/                                          8/27/97
----------------------------                 ---------------
SOLAR TURBINES INCORPORATED                  DATE
<PAGE>   31
                               LICENSE AGREEMENT

This License Agreement ("Agreement") is effective as of August 25, 1997 (the
"Effective Date") by and between Solar Turbines Incorporated, a Delaware
corporation whose principal address is 2200 Pacific Highway, San Diego,
California 92186-5376 ("Solar") and Capstone Turbine Corporation, a California
corporation whose principal address is 6025 Yolanda Avenue, Tarzana, California
91356 ("Capstone").

WHEREAS, Solar owns certain intellectual property related to the design, use
and manufacture of primary surface recuperators (PSRs); and

WHEREAS, Capstone currently manufactures and sells Microturbines incorporating
PSRs designed by and purchased from Solar; and

WHEREAS, Capstone desires to have a license to Solar's Intellectual Property (as
defined below) to manufacture and modify PSRs for incorporation into Capstone's
Microturbines; and

WHEREAS, Solar is willing to grant Capstone a license to such Intellectual
Property on the following terms and conditions;

NOW, THEREFORE, in consideration of the foregoing premises, the terms and
conditions specified herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

1.0  DEFINITIONS

1.1  "Capstone Special Order PSR" shall mean (i) any PSR manufactured according
to Capstone's requirements and specifications as listed in the attached Exhibit
A to this Agreement including such PSR as may be modified from time to time,
(ii) any development PSR (which such development PSR shall be added to Exhibit
A), including such development PSR as may be modified from time to time, and
(iii) any similar PSR capable of direct replacement for the PSRs identified in
Exhibit A to this Agreement, as such Exhibit may be amended from time to time by
the parties to include development PSR models.

1.2  "Licensed Product" shall mean (i) PSRs incorporating Solar Intellectual
Property and manufactured by or on behalf of Capstone for use in Microturbines,
excluding PSRs supplied to Capstone by Solar, and (ii) any modification,
improvement, or derivation of Capstone Special Order PSRs manufactured by or on
behalf of Capstone, excluding PSRs supplied to Capstone by Solar.

1.3  "Microturbine" shall mean an individual turbogenerator unit   **   output
power.

                                       1



<PAGE>   32

1.4 "Solar's Houston Facility" shall mean that part of the Solar manufacturing
facility located in Houston, Texas which utilizes the Phase II Equipment (as
defined in the Alliance Agreement of even date herewith) for manufacturing PSRs
suitable for use in Microturbines.

1.5 "Solar Technology" shall mean all information in Solar's possession on the
Election Date (as defined in Paragraph 2.1), with the right to disclose to
Capstone, and relating to the manufacture and use of PSRs, including for
example, but not by way of limitations, trade secrets, proprietary information,
manufacturing drawings, blueprints, specifications, parts and materials lists,
tolerances, preferred vendor lists, test and performance parameters, and other
technical expertise necessary for the manufacture of PSRs.

1.6 "Solar Patents" shall mean patents (i) now or in the future owned or
controlled by Solar or its subsidiaries, or (ii) under which and to the extent
to which and subject to the conditions under which Solar or its Subsidiaries may
have during the term of this Agreement, the right to grant licenses of the scope
granted herein, such patents relating to the design, manufacture, or use of PSRs
and based on patent applications having an effective filing date on or prior to
one (1) month after the Election Date, as defined in Paragraph 2.1.

1.7  "Solar Intellectual Property" shall mean Solar Technology and Solar
Patents.

1.8 "Capstone Patents" shall mean patents (i) now or in the future owned or
controlled by Capstone or its Subsidiaries, or (ii) under which and to the
extent to which and subject to the conditions under which Capstone or its
subsidiaries may have during the term of this Agreement the right to grant
licenses of the scope granted herein, such patents claiming inventions
substantially based on Solar Technology and being based on patent applications
having an effective filing date during the period starting on the Effective
Date pursuant to Paragraph 2.1 and ending on the termination or expiration of
this Agreement.

1.9 "Subsidiary" shall mean any corporation, company or other entity of which
one hundred percent (100%) of the outstanding shares of stock entitled to vote
for the election of directors is now or hereafter owned or controlled by either
party hereto, directly or indirectly, except that Caterpillar Inc., parent of
Solar, is included within the definition of "Subsidiary."

2.0 EXERCISE OF LICENSE RIGHTS

2.1 The license rights granted under this License Agreement are conditioned
upon, and do not become effective until, Capstone provides written notice to
Solar of Capstone's election to exercise the rights granted hereunder.
Capstone's right to provide such written notice to Solar is unconditional. In
no event, however, shall the date upon which Capstone provides such written
notice to Solar (the "Election Date") occur later than ** of the Effective Date.

2.2 Upon election of the license rights granted by Solar hereunder, Capstone
may announce and/or publicize that Licensed Products included in Capstone's
Microturbines and sold by or on behalf of Capstone are manufactured pursuant to
license rights granted to Capstone by Solar.




                                       2


<PAGE>   33
3.0 GRANT

3.1 Subject to and in consideration of the undertakings by Capstone set forth in
Section 4.0 of this License Agreement, and upon exercise of the license rights
pursuant to Paragraph 2.1 of this License Agreement, Solar hereby agrees to
grant Capstone, a ** license under Solar Intellectual Property, as defined in
Section 1.0 of this License Agreement (i) to make, use, sell, lease or otherwise
dispose of Licensed Product incorporated into Microturbines made, used, sold,
leased or otherwise disposed of by Capstone, individually or as incorporated
into larger turbogenerator systems; (ii) to make, use, sell, lease or otherwise
dispose of Licensed Product as spares for or for repair and/or maintenance of
such Microturbines and (iii) to use and modify Solar Intellectual Property for
the design and manufacture of Licensed Product for use in Microturbines.

3.2 The rights to make granted to Capstone under Paragraph 3.1 include the
right for Capstone to have Licensed Product made by a third party, only if (i)
Capstone first offers to Solar a right of first refusal to produce the
quantities concerned and Solar declines such right or (ii) Solar informs
Capstone in writing that it has discontinued manufacture of Capstone Special
Order PSRs.

3.3 Capstone hereby grants and agrees to grant to Solar a non-exclusive,
non-tranferable, non-sublicensable except as provided herein, royalty-free
world-wide license under Capstone Patents to make, use, sell, lease or
otherwise dispose of PSRs.

4.0 CONSIDERATION

4.1 Capstone shall pay to Solar a royalty for each Licensed Product
manufactured pursuant to the license grants in Section 3.0 and shipped by
Capstone under this Agreement in accordance with the Royalty Payment Schedule
attached hereto as Exhibit "B". Such Licensed Product is delivered on an
ex-works or FOB basis to any third party, whether an independent third party or
a Capstone affiliate.

4.2 If, on the thirtieth (30th) month anniversary of the Election Date, the
total cumulative amount of royalties paid to Solar under Paragraph 4.1 does not
equal or exceed ** Capstone shall deliver to Solar a Lump Sum Royalty
equivalent to the shortfall between the total cumulative amount of royalties
paid to Solar by the 30th month anniversary of the Election Date and **. The
Lump Sum Royalty shall be paid to Solar within thirty (30) days of the 30th
month anniversary of the Election Date. The Lump Sum Royalty shall then be
credited toward Capstone's on-going royalty obligations until such time as
Capstone's total cumulative royalties paid Solar shall have exceeded **, after
which time, Capstone shall continue to pay royalties to Solar under the
provisions of Paragraph 4.1.


                                       3

<PAGE>   34
5.0  PRODUCT-KNOW-HOW AND TECHNOLOGY TRANSFER

5.1  To enable Capstone to manufacture Licensed Product under the provisions of
Section 3, Solar undertakes that upon notice of Capstone's election to exercise
the rights granted by this Agreement pursuant to Paragraph 2.1, Solar shall:

        A) Promptly transfer to Capstone, starting within thirty (30) days from
        the Election Date, all Solar Technology that is in tangible form
        related to the manufacture and use of Capstone Special Order PSRs; and

        B) Provide Capstone with technical assistance (including but not
        limited to technical expertise, repair and maintenance of equipment and
        tooling, employee training, consulting services including the temporary
        assignment of Solar engineers selected by Solar for time periods
        reasonably chosen by Solar and having relevant qualifications and
        experience to a facility designated by Capstone) for ** Capstone has
        the obligation to apply appropriate and qualified resources to the task
        of transferring Solar Technology. Solar also will cooperate with and
        actively assist Capstone in procuring equipment and tooling for
        manufacturing Licensed Product from Solar or Solar's suppliers,
        including suppliers identified on Solar's preferred vendor lists during
        the term of this Agreement. Capstone agrees not to sell such tooling
        and equipment containing Solar Technology to a third party.

        C) Provide access to a reasonable number of Capstone engineers to
        Solar's Houston Facility during ** to afford Capstone the opportunity
        to increase knowledge about PSR manufacturing sufficient for a
        reasonable person to implement the license granted under Section 3.0,
        and afford Capstone not only the opportunity to participate in
        decisions concerning production capacity but also to gain sufficient
        knowledge to estimate for itself the cost of manufacturing PSRs. Solar
        Technology will have been considered completely transferred to Capstone
        if, after a production run by Capstone ** of the PSRs pass final
        pressure check and Capstone's labor hours per PSR are within ** of the
        Election Date actuals.

        D) In the event of a dispute regarding the timeliness or sufficiency of
        information or assistance provided by Solar to Capstone under this
        Paragraph 5.1, the parties will attempt to resolve such dispute under
        the dispute resolution provisions of Paragraph 14.4. During the
        pendency of such dispute resolution proceedings, any and all royalties
        becoming due and payable to Solar shall be placed in an escrow account
        until such time as the dispute is resolved. If the dispute requires
        arbitration, the Arbitrators shall include in their judgment a
        determination as to how the escrowed royalties should be disbursed,
        including awarding the full amount of the escrowed royalties to one or
        the other party or, if appropriate, a pro-rata disbursement of the
        royalties to one or the other party or, if appropriate, a pro-rata
        disbursement of the royalties to both Solar and Capstone.

        E) Solar is not required to transfer any detailed knowledge of the
        Solar Patents other than that information which is publicly known or
        that information that is necessary to comply with the requirements of
        this Paragraph 5.1 or to manufacture Capstone Special Order PSRs.



                                       4
<PAGE>   35
5.3  Capstone shall own all rights in any inventions (whether or not
patentable) and in any patents thereon relating to improvements to Solar
Technology made by Capstone employees.

5.4  Each party hereby designates the individual identified below as its
Program Manager with responsibility for scheduling, coordinating and overseeing
the implementation of the party's duties and obligations under the provisions
of this Agreement.

     Capstone's Program Manager: **

     Solar's Program Manager: **

6.0  RECORDS AND AUDIT

6.1  Capstone agrees to render to Solar within thirty (30) days following March
31, June 30, September 30, and December 31 of each year, a quarterly statement
setting forth the number of Licensed Products upon which royalties are to be
paid under the provisions of Paragraph 4.1, and an electronic fund transfer to
Solar for the royalty due. All such reports are to be mailed to Solar to the
attention of the persons specified in and in the manner specified in Paragraph
14.2.

6.2  Capstone agrees to keep and maintain a set of accounting records in
accordance with GAAP for a period of ** after any period during which royalties
are due, which records shall be in sufficient detail to enable Solar to audit
Capstone's determination of the royalties payable under the license and to
verify compliance with other terms of the license relevant to royalty payment.

6.3  Capstone agrees to keep regular books of account which shall be open to
all reasonable business hours for inspection by independent certified public
accountants selected by Solar and reasonably acceptable to Capstone. Audit
personnel may review Capstone's accounting firms' work papers and discuss with
the firm the result of any audit including, but not limited to: the basis of
judgments reached and the appropriateness of royalty payments made, provided,
however, Solar provides three (3) business days notice of such audit. In
addition, Solar may have such an audit performed at any time within one (1)
year following termination of this Agreement. Any audit expenses incurred shall
be borne by Solar, except if the results of the audit reveal ** then Capstone
shall reimburse Solar for all such audit costs.

6.4  If Capstone fails to make any required payment under this Section 6.0 on
or before the required date, interest equal to ** of the amount otherwise due
shall be paid by Capstone for each month or portion thereof that the payment is
late. If such interest rate exceeds the maximum legal rate in such jurisdiction
where a claim therefor is being asserted, the interest rate shall be reduced to
such maximum legal rate permitted in such jurisdiction.



                                       5



<PAGE>   36
7.0  TERM AND TERMINATION

7.1  Unless sooner terminated as provided for by this Agreement, this Agreement
shall remain in force and effect for a period of ** whichever period ends
sooner. The licenses granted in Section 3.0 to each party shall be paid up for
the life of Capstone Patents and Solar Intellectual Property at the expiration,
not the termination of this Agreement.

7.2  Termination or expiration of this Agreement shall not affect Capstone's
obligations to make payments and reports as provided herein with respect to
Licensed Product shipped or otherwise disposed of prior to termination or
expiration of this Agreement, and all provisions of this Agreement pertaining
to such reports and payments shall survive such termination or expiration and
continue in full force and effect.

7.3  If either party materially breaches this Agreement, upon written notice to
the defaulting party specifying such breach, the defaulting party shall have
thirty (30) days after such notice to remedy such breach or to implement a
program, reasonably satisfactory to the party not in default, to correct such
breach. If such material breach remains uncured after thirty (30) days either
party may initiate the dispute resolution proceedings provided for in Paragraph
14.4. However, if Capstone refuses to pay undisputed royalties when due after
written notice from Solar with a thirty (30) day opportunity to cure, Solar may
give Capstone written notice of termination of this Agreement.

7.4  In the event Solar provides Capstone written notice that Solar is ceasing
the manufacture of PSRs other for Solar or Caterpillar, Inc., or other events
have occurred that would inhibit the effective transfer of technology from
Solar to Capstone shall have ** in which to elect to exercise the rights
granted under this Agreement per the provisions of Section 2.0. If Capstone
does not elect to exercise the rights within ** this License Agreement may be
terminated by Solar. If Capstone elects to exercise the rights granted under
this Agreement within ** Solar shall fully cooperate and assist in the Product
Know-How and Technology Transfer provided for in Section 5.0 and the other
obligations provided for in this Agreement and the Product Know-How and
Technology Transfer obligations under Section 5.0 of this Agreement shall begin
** after Capstone elects to exercise the rights.

8.0  WARRANTIES AND DISCLAIMERS

8.1  Each party represents and warrants that it has the right and power to
enter into this Agreement. Solar represents and warrants that it has the
authority and right to grant the licenses and rights granted herein, and
further that it has no knowledge of any patents, or other impediments to
Capstone's quiet enjoyment of the benefits of the licenses granted by Solar.

8.2  Neither party shall be liable to the other for any lost profits, lost
revenues, losses or indirect, incidental, consequential, special or exemplary
damages arising out of entry into or performance or lack of performance under
this Agreement.



                                       6

<PAGE>   37
8.3  Nothing in this Agreement shall be construed as

          A) a requirement that either party shall file or prosecute any patent
          application, secure any patent, maintain any patent in force, or
          notify the other party of any action or failure to act with respect to
          any patent application; or

          B) granting by implication estoppel or otherwise, any license or
          rights under patents of either party beyond those licenses or rights
          expressly granted under this Agreement; or

          C) an obligation to furnish any technical information other than
          specified under this Agreement.

8.4  ALL SOLAR TECHNOLOGY TRANSFERRED UNDER THIS AGREEMENT IS TRANSFERRED "AS
IS" AND THE TRANSFEROR DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL EXPRESS
OR IMPLIED WARRANTIES WITH RESPECT TO THE TRANSFERRED TECHNOLOGY, INCLUDING
WITHOUT LIMITATION ANY WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, OR WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR
TRADE PRACTICE. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO CONSTITUTE A
REPRESENTATION OR WARRANTY BY SOLAR OF THE ABILITY OF CAPSTONE TO MANUFACTURE
OR SELL PRODUCTS.

8.5  Nothing in this Agreement shall (a) impose any restriction on either party
from carrying out independent research and development activities in any field,
(b) in relation to the results of any such independent research and development
activities of one party, give rise to any ownership right or claim by the other
party; nor (c) restrict either party in the exploitation in any manner of the
results of its independent research and development activities.

8.6  This Section 8.0 shall survive any expiration or termination of this
Agreement.

8.7  Neither Solar nor Capstone make and each hereby disclaims any and all
expenses or implied, warranties as to the validity or enforceability of any
Solar Patents and/or Capstone Patents, respectively.

9.0  PROPRIETARY INFORMATION

9.1  Confidential Information. The parties hereby ratify and incorporate that
certain Nondisclosure Agreement, executed by the parties in June 1996 (the
"Nondisclosure Agreement") and attached hereto as Exhibit "C" in the Alliance
Agreement as modified by this Agreement, to wit:

          The first sentence of section 1 of the Nondisclosure Agreement is
          amended to read as follows: "Each Party will use its best efforts to
          keep in confidence, and not use or disclose to any person or persons,
          proprietary information disclosed to it under this Agreement, except
          for the manufacture and ale of Capstone Special Order PSRs under the
          Alliance



                                       7
<PAGE>   38
        Agreement between the parties dated August 25, 1997 and for the
        manufacture and sale of Licensed Product under the License Agreement
        between the parties dated August 25, 1997"

        Section 2(e) of the Nondisclosure Agreement is amended to read as
        follows: "use or disclosed after a period of ten (10) years from the
        date of the disclosure;"

        Section 7 of the Nondisclosure Agreement is amended to read as follows:
        "This Agreement may be terminated (a) by either Party giving thirty
        (30) days written notice of its intention to terminate to the other
        Party; or (b) the Agreement shall automatically terminate twelve (12)
        years from August 25, 1997; provided, however, that when the Agreement
        terminates, the obligations not to use and not to disclose proprietary
        information exchanged hereunder shall continue for the period specified
        hereinabove."

9.2 Nothing in this Agreement shall be construed as obligating either party to
disclose proprietary information to the other party or as granting to or
conferring upon the other party, expressly or impliedly, any rights or licenses
to the party's proprietary information other than those rights specifically
granted in this Agreement.

10.0 TRADEMARKS

10.1 Capstone agrees that it will not advertise, or otherwise indicate, that
any Capstone Special Order PSRs or Licensed Product are sponsored, endorsed, or
otherwise guaranteed by Solar, and shall not designate, identify or otherwise
label any Capstone Special Order PSRs or Licensed Product with any trademark,
registered or unregistered, presently owned or hereafter acquired by Solar in
any country, nor with any translations thereof, nor words or marks confusingly
similar thereto.

11.0 EXPORT OF TECHNICAL DATA

11.1 Both parties shall adhere to the U.S. Export Administration Laws and
Regulations and shall not export or re-export any technical data or the direct
product of such technical data to any proscribed country listed in the U.S.
Export Administration Regulations or other Government Regulations unless
properly authorized by the U.S. Government.

12.0 THIRD PARTY INFRINGEMENT

12.1 Upon demonstration by Capstone of evidence of infringement of any Solar
Patent by a third party, the parties shall promptly discuss what action, if
any, shall be taken, including (i) institution of an action by Solar to enjoin
or preclude such infringement; (ii) licensing of such third party for value; or
(iii) an equitable adjustment of the royalty payments due under this Agreement.





                                       8
<PAGE>   39
13.0 INDEMNIFICATION

13.1 If any claim or action is brought against Capstone based upon an
allegation that use of the Solar Technology by Capstone within the scope of the
license grant of Section 3.0 infringes any patent rights of any third party,
Solar shall defend Capstone against any and all liability, claims and expenses
arising out of any such claim or action, up to a limit of ** of the royalties
paid by Capstone at the time the claim or action is brought, provided that
Capstone (i) gives Solar prompt notice of such claim or action; (ii) cooperates
with Solar, at Solar's expense, in the defense of such claim or action, and
(iii) gives Solar the right to control the defense and settlement of any such
claim or action as long as such settlement does not adversely affect Capstone's
rights under this Agreement.

13.2 Solar shall have no liability for any claim based on infringement or
violation of any third party patent rights arising from the design,
manufacture, use or sale by Capstone or such design, manufacture, use or sale
authorized by Capstone of any Licensed Product if such infringement or
violation would have occurred without the use of, Solar Technology provided to
Capstone under this Agreement.

13.3 The terms and conditions of this Agreement are confidential and subject to
the terms of the Nondisclosure Agreement, Exhibit C.

13.4 Capstone agrees to defend, indemnify and hold Solar, its directors,
officers, and employees harmless against all liabilities, demands, damages,
expenses, or losses arising out of the manufacture, design, use, or sale of any
Licensed Product by Capstone or its affiliates, subsidiaries or transferees or
use by Capstone or its affiliates, subsidiaries or transferees of any Solar
Intellectual Property, or out of any manufacture, design, use, sale, or other
disposition by Capstone, its affiliates, subsidiaries or transferees of product
incorporating such Licensed Product or Solar Intellectual Property, except for
claims that are attributable to Solar's gross negligence or intentional
misconduct, provided that Solar (i) gives Capstone prompt notice of such claim
or action; (ii) cooperates with Capstone, at Capstone's expense, in the defense
of such claim or action, and (iii) gives Capstone the right to control the
defense and settlement of any such claim or action as long as such settlement
does not adversely affect Solar. After the Election Date, Capstone at Solar's
written request, must demonstrate that Capstone has adequate means of financial
assurance, up to ** with regard to its indemnity of Solar under this paragraph
13.4. The maximum cumulative liability of Capstone under this paragraph is ** .

14.0 GENERAL TERMS AND CONDITIONS

14.1 This Agreement shall inure to the benefit of and be binding upon all
successors and assigns of Capstone and Solar although neither party shall
assign this Agreement or any part thereof without the prior written consent of
the other party except (i) that it may be assigned by either party to a
Subsidiary of the assigning party without the other party's consent; and (ii)
that it may be assigned to a purchaser of substantially all the assets of
Capstone, provided such purchaser is not actively engaged in the business of
manufacturing or selling PSRs, or manufacturing or selling individual gas
turbines ** or greater output power. Notwithstanding any provision




                                       9
<PAGE>   40

contained in this Agreement to the contrary, Capstone may only sublicense a
party other than a Subsidiary with Solar's prior written consent, and in all
events, each sublicense, if granted, shall provide Solar with all rights and
benefits it has under this Agreement against such sublicensee. Notwithstanding
any provision contained in this Agreement to the contrary, in the event Solar
assigns or sublicenses this Agreement to a third party, Solar shall remain
responsible for full performance of the obligations of such assignee or
sublicensee arising under this Agreement.

14.2 Notices. All notices, requests, demands and elections under this
Agreement, other than routine operational communications, shall be in writing
and shall be deemed to have been duly given (i) when delivered by hand, (ii)
one (1) day after being given to an express courier with a reliable system for
tracking delivery, (iii) when sent by confirmed facsimile with a copy sent by
another means specified herein, or (iv) three (3) days after the date of
mailing by certified or registered mail, return receipt requested, postage
prepaid, and addressed as follows:

     To Capstone:
          Capstone Turbine Corporation
          6025 Yolanda Avenue
          Tarzana, CA 91356

          Attn:  Paul Craig
                 President and Chief Executive Officer

     With a copy to:
          Richard Harroch
          Orrick, Herrington & Sutcliff
          400 Sansome Street
          San Francisco, CA 94111

     To Solar:
          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, California 92138-5376

          Attn: Director, Recuperator Business

     With a copy to:
          General Counsel
          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, California 92186

Solar or Capstone may, from time to time, change its address or its designee
for notification purposes by giving the other party prior written notice of the
new address or the new designee and the date upon which the change shall be
effective.


                                       10

<PAGE>   41
14.3  Nothing herein contained shall be deemed to create an agency, joint
venture or partnership relationship between the parties hereto.

14.4  If a dispute arises under the terms or performance of this Agreement,
unless by mutual consent the parties agree otherwise, the parties shall resolve
such dispute as follows:

A)    the parties' respective Program Managers, as provided for in Paragraph
      5.4, shall have ten days to attempt resolution; if the Program Managers
      are unable to resolve the dispute themselves;

B)    each Program Manager shall present a written statement of the dispute and
      a proposed resolution for consideration at a meeting of a senior executive
      officer from each company the meeting to be held within fifteen days from
      the expiration of the ten day period contemplated in the preceding
      sub-paragraph; and

C)    if the senior executive officers cannot resolve the dispute within ten
      days from the meeting date specified in the preceding sub-paragraph, the
      parties agree to submit such dispute to arbitration before a neutral three
      member board of arbitrators under the provisions of Paragraph 14.5.

14.5  Subject to the provisions of Paragraph 14.4 of this Agreement, any claim
or dispute arising hereunder that has not been resolved by the parties shall be
determined by arbitration in accordance with the Commercial Arbitration Rules
then in effect of the American Arbitration Association in San Diego,
California; provided that no demand for arbitration shall be instituted after
the date after which legal proceedings on the same claim would have been barred
by the applicable statute of limitations. The party requesting arbitration
shall appoint one independent, neutral arbitrator in writing and the responding
party shall appoint one independent, neutral arbitrator in writing within
fifteen (15) days thereafter. The two arbitrators so selected shall then
appoint a third arbitrator within fifteen (15) days thereafter. The award
rendered in such arbitration may provide for equitable remedies, an accounting
and/or reimbursement for attorneys', accountants' or consultants' fees, as the
arbitrators shall see fit. Such award shall be final, and judgment on it may be
entered in or enforced by any court, state, federal or foreign, having
jurisdiction thereover. This provision shall not preclude the impleading or
joining of one of the parties hereto by the other in an action brought by a
third party and all matters with respect thereto shall be decided by the court
or body deciding that action. Any party may apply to an appropriate court of
law for a preliminary injunction, attachment or other similar remedy available
to it in aid of the arbitration proceeding provided for herein. In the
arbitration each party shall be entitled to demand production of documents and
other items from any other party hereto, in accordance with the terms of Rule
34 of the Federal Rules of Civil Procedure. Any disputes concerning such demand
shall be determined by the arbitrator(s), and any such determination shall be
binding on the parties.

14.6  For a period of ** from the Election Date, Solar and Capstone agree not to
solicit for employment purposes, any employee of the other party who has had
access to that other party's proprietary information utilized in implementing
this Agreement.


                                       11
<PAGE>   42

14.7 This Agreement shall be governed by and construed in accordance with the
laws of the State of California as if made in California for performance
entirely within the State of California.

14.8 This Agreement including Exhibits A through C constitute the entire
agreement between the parties with respect to the subject matter hereof,
supersedes all prior oral or written agreements regarding the subject matter
hereof, and cannot be changed or terminated except by a writing signed by both
parties.

14.9 For any matter or claim to be considered by a court under this Agreement
the parties consent to the exclusive jurisdiction of the courts of the United
States of America and the State of California and any subdivision thereof. Any
injunctions, orders, or judgments entered, issued, or granted from any courts
having jurisdiction hereunder shall be enforceable in the State of California
and in any state or country wherein lie the offices and/or assets of the party
against whom the said injunction, order or judgment is entered.

14.10 If any provision of this Agreement is held illegal, invalid or
unenforceable under present or future state or federal laws, or rules and
regulations promulgated thereunder, effective during the term hereof, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision, there shall be automatically
as part of this Agreement a provision similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.

14.11 Nothing herein shall be construed as providing for the sharing of profits
or losses arising out of the efforts of the parties. No party shall be liable
to the other for any of the costs, expenses, risks, or liabilities arising out
of the other party's efforts in connection with this Agreement.

14.12 Each party to this Agreement has had the opportunity to review the
Agreement with legal counsel. This Agreement shall not be construed or
interpreted against either party on the basis that such party drafted or
authored a particular provision, parts of, or the entirety of this Agreement.

14.13 The section headings used in this Agreement are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.

14.14 Each and every right, power, and remedy herein specifically given to
either party or otherwise in this Agreement shall be cumulative and shall be in
addition to every other right, power, and remedy herein specifically given or
now or hereafter existing at law, in equity or by statute, and the exercise or
the beginning of the exercise of any power or remedy shall not be construed to
be a waiver of the right to exercise at the same time or thereafter any such
right, power, or remedy.

14.15 Neither party to this Agreement shall be liable for any default or delay
in the performance of its obligations under this Agreement (except for the duty
to pay for royalties hereunder) if and to the extent such default or delay is
caused, directly or indirectly, by fire, flood, earthquake, elements


                                       12
<PAGE>   43
of nature or acts of God, riots, civil disorders, rebellions or revolutions, or
any other cause beyond the reasonable control of such party (including the
inability to receive raw materials from a supplier), provided the
non-performing party is without fault in causing such default or delay, and
such default or delay could not have been prevented by reasonable precautions
nor reasonably be circumvented by the non-performing party through the use of
alternate sources, work-around plans or other means. In such event, the
non-performing party shall be excused from any further performance or
observance of the obligation(s) so affected for as long as such circumstances
prevail and such party continues to use reasonable efforts to recommence
performance or observance of the obligations so affected for as long as such
circumstances prevail. Notwithstanding the foregoing, a party shall not be
entitled to the benefits of this Section 14.15 unless any party so delayed in
its performance promptly notifies the party to whom performance is due by
telephone, radio, messenger or other available means (to be confirmed in
writing within two (2) working days of the inception of such delay) and
describe at a reasonable level of detail the circumstances causing such delay.

IN WITNESS WHEREOF, the parties caused this Agreement to be duly executed on
the day and year indicated below to be effective as of the date indicated above.

CAPSTONE TURBINE CORPORATION                 SOLAR TURBINES INCORPORATED

By: /s/ PAUL CRAIG                      By: /s/

Title: CEO/President                    Title: Vice President, Engineering

Date: August 25, 1997                   Date: 22 Aug '97


                                       13
<PAGE>   44
EXHIBIT A - PRODUCTS COVERED BY AGREEMENT

<TABLE>
<CAPTION>
SELLER'S P/N        SPECIFICATION       DESCRIPTION
------------------------------------------------------------
<S>                 <C>                 <C>
203210-100          TBD                 Recuperator
                                        Assembly
                                        **
</TABLE>


/s/ PAUL CRAIG                          August 25, 1997
----------------------------            ---------------
CAPSTONE TURBINE CORPORATION            DATE


/s/ DWE                                 22 Aug '97
----------------------------            ----------
SOLAR TURBINES INCORPORATED             DATE


                                       14
<PAGE>   45
EXHIBIT B - ROYALTY RATES

<TABLE>
<CAPTION>
                                             CUMULATIVE PRODUCTION (UNITS) FOR
ROYALTY/LICENSED PRODUCT (PER UNIT)          CAPSTONE SPECIAL ORDER PSRS
--------------------------------------------------------------------------------
<S>                                          <C>
[**]                                         [**]
</TABLE>



/s/ PAUL CRAIG                          August 25, 1997
----------------------------            ---------------
CAPSTONE TURBINE CORPORATION            DATE


/s/ DWE                                 22 Aug '97
----------------------------            ----------
SOLAR TURBINES INCORPORATED             DATE


                                       15
<PAGE>   46
EXHIBIT C

NON DISCLOSURE AGREEMENT
<PAGE>   47
                            NONDISCLOSURE AGREEMENT

This Nondisclosure Agreement ("Agreement") is made effective as of June 1, 1996
by and between Solar Turbines Incorporated, a Delaware corporation having its
principal office in San Diego, California ("Solar") and Capstone Turbine Corp.,
a Delaware corporation having its principal office in Tarzana, California
("Capstone").

     WHEREAS, Solar is engaged in the business of designing, manufacturing and
selling industrial turbomachinery, including gas turbine engines and related
systems ("Solar Products"). Solar has developed certain unique primary surface
recuperator and interconnection (interface) technology ("Solar Recuperator
Technology") which it owns and may apply to the design and application of
recuperators; and

     WHEREAS, Capstone is actively engaged in the development of gas turbines
and recuperated gas turbines in the ** and

     WHEREAS, Capstone is actively engaged in the development of major
components of both gas turbines and recuperated gas turbines in this size
range; and

     WHEREAS, these components include turbines, compressors, air bearings,
combustors, permanent magnet alternators, electronic convertors, and
recuperators ("Capstone Products"); and

     WHEREAS, Solar owns and has the unencumbered right to disclose to Capstone
certain proprietary information relating to the Solar Recuperator Technology
and Solar Products and Capstone owns and has the unencumbered right to disclose
to Solar certain proprietary information relating to Capstone Products
(collectively, such information from each party is referred to herein as
"Proprietary Information"); and

     WHEREAS, each party desires to disclose Proprietary Information to the
other party for the limited purpose of evaluating whether the parties may
desire to work together on projects relating to Solar Recuperator Technology,
Capstone Products, Solar Products and other matters, and should a purchase
order issue or contract be entered into, then for work or services performed
thereunder; and

     WHEREAS, Solar and Capstone executed a Nondisclosure Agreement, dated July
11, 1994, when Capstone was operating under the name "NoMac Energy Systems,
Inc."; and




                                      -1-
<PAGE>   48
     WHEREAS, the previous Nondisclosure Agreement between the parties, dated
July 11, 1994, is terminated effective May 31, 1996 and this Agreement shall
become effective June 1, 1996; and

     WHEREAS, as used herein, "Party", "receiving party" and "disclosing party"
means each and every party who may receive or disclose Proprietary Information
regardless of the use of the singular rather than the plural form "parties".

     NOW, THEREFORE, in consideration of the foregoing premises, the following
promises, covenants and undertakings, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
intending to be legally bound, the parties agree as follows:

     1.   Each Party will use its best efforts to keep in confidence, and not
use or disclose to any person or persons, proprietary information disclosed to
it under this Agreement.

          Each Party recognizes that any disclosure of proprietary information
would substantially injure the disclosing Party's business, impair its
investments and goodwill and jeopardize its relationships with its buyers and
customers. In order to protect such proprietary information, the Parties agree:

          (a)  to hold all proprietary information in safekeeping and in strict
confidence and not to disclose proprietary information to any third parties or
permit use of all such information to the disadvantage of the disclosing Party;

          (b)  to treat all proprietary information with at least the same
degree of care with which each treats and protects its own proprietary
information which it does not wish to disclose to third parties, which in any
event shall be reasonable under the circumstances;

          (c)  to limit the access of all proprietary information to only those
employees within its organization who require the proprietary information in
performing the limited purpose of this Agreement, and to inform each of its
employees of the provisions of this agreement; and

          (d)  to use proprietary information only to the extent necessary for
performing the limited purposes of this Agreement.

     2.   Exceptions. The restrictions contained in Section 1 shall not apply
to any proprietary information if the same is:

          (a)  in the public domain at the time of disclosure, or is
subsequently made



                                      -2-
<PAGE>   49
available by the disclosing Party to the general public with restriction;

          (b)    known by the receiving Party at the time of disclosure, as
evidenced by appropriate documentation, or independently developed, as
evidenced by appropriate documentation, by the receiving Party;

          (c)    used or disclosed with the prior written approval of the
disclosing Party;

          (d)    becomes known to the receiving Party without similar
restrictions as to its use or disclosure from a source other than the
disclosing Party;

          (e)    used or disclosed after a period of ten (10) years from the
date of termination of this Agreement;

          (f)    becomes known pursuant to judicial action or Governmental
regulations or requirements, provided that the recipient of such data shall
have notified the other Party.

     3.   Neither the execution of this Agreement, nor the furnishing of any
materials hereunder, shall be construed as granting, either expressly or by
implication, estoppel or otherwise, any license under any invention or patent
now or hereafter owned by or controlled by the Party furnishing the materials.

     4.   No rights or obligations other than those expressly recited herein
are to be implied by this Agreement with respect to patents, inventions and
data. In providing data pursuant to this Agreement, the Party providing the
data makes no representation, either expressed or implied, as to adequacy,
sufficiency, or freedom from fault of such data and incurs no responsibility
nor obligation whatsoever by reason thereof; and the furnishing of such data
shall not convey any rights or license with respect to such data.

     5.   Nothing in this Agreement shall grant to either Party the right to
make commitments of any kind for or on behalf of the other Party without the
prior written consent of the other Party.

     6.   Nothing in this Agreement shall grant to either Party the right to
make commitments of any kind for or on behalf of the other Party without the
prior written consent of the other Party.

     6.   If a contractual relationship results from discussions between Solar
and Capstone, the contract or purchase order will authorize Solar to disclose
information to other parties which have a need to know after Solar ensures that
a nondisclosure agreement such as this Agreement is in place with such parties.
Similarly, such contract or purchase order will authorize Capstone to disclose
information to other parties which have a need to know after Capstone ensures
that a nondisclosure agreement such as this Agreement is in place with such
parties.

     7.   This Agreement may be terminated (a) by either Party giving thirty
(30) days



                                      -3-

<PAGE>   50
written notice of its intention to terminate to the other Party; or (b) the
Agreement shall automatically terminate ** from the date of acceptance;
provided, however, that when the Agreement terminates, the obligations not to
use and not to disclose proprietary information exchanged hereunder shall
continue for the period specified hereinabove.

     8.   All modifications to this Agreement shall be in writing and signed by
duly authorized representatives of both corporations.

     9.   All notices and information shall be addressed as follows:

          If to Capstone:

          Capstone Turbine Corp.
          6025 Yolanda Avenue
          Tarzana, CA 91358

          Attention:     R. James Wensley
                         President and Chief Executive Officer

          With a copy to:

          Richard Harroch
          Orrick, Harrington & Sutcliffe
          400 Salsome Street
          San Francisco, CA 94111

          If to Solar:

          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101

          Attention:     Manager, Recuperator Programs

          With a copy to:

          General Counsel
          Legal Department
          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101



                                      -4-

<PAGE>   51

     10. Return of Proprietary Information. All proprietary information
disclosed to the receiving Party shall remain the property of the disclosing
Party within thirty (30) days of any termination of this Agreement or upon
request at any time by the disclosing Party, the receiving Party agrees to
immediately return all proprietary information and all copies to the disclosing
Party with a written statement that the foregoing has been accomplished.

     11. Notification and Injunctive Relief. If either Party, inadvertently or
otherwise, makes an unauthorized disclosure of the other Party's proprietary
information to a third party, the violating Party shall immediately take every
reasonable action to recover the improperly disclosed proprietary information,
execute a retroactive protective agreement with the unauthorized third party if
possible and immediately notify the Party whose data was improperly disclosed
("Injured Party") and provide complete information about the unauthorized
disclosure and the corrective measures being taken. The Parties agree that
monetary damages are inadequate for any material breach involving an
unauthorized disclosure when the Injured Party reasonably believes said breach
will cause it to suffer significant business harm. If the Injured Party
believes, based on the facts, it will suffer material harm from the
unauthorized disclosure and the corrective measures being taken by the
violating Party are inadequate to mitigate this harm, the Parties agree the
Injured Party shall be entitled to prompt injunctive relief. Both Parties'
other legal and equitable remedies and defenses remain unchanged by this
provision.

     12.  Each Party reserves the right to change its designation of authorized
representative, should circumstances so require, and to notify the other Party,
in writing, of any such changes.

     13.  (a)  All technical information and ideas relating to any proprietary
information disclosed hereunder shall be in writing and will be identified, in
writing, as being proprietary information.

          (b)  Oral communications which are considered proprietary by the
originating Party and so identified shall be reduced to writing within thirty
(30) days and shall contain a notice thereon to the effect that any disclosure
and use shall be subject to the terms and conditions of this present Agreement.
Such orally disclosed information shall be given the protection afforded
proprietary information hereunder during such thirty (30) day period.

          (c)  All copies of proprietary information shall contain a similar
identification.

     14.  This Agreement shall be governed by and construed in accordance with
the laws of the State of California as if made in California for performance
entirely within the State of California.


                                      -5-
<PAGE>   52
     15.  This Agreement constitutes the entire agreement between the Parties
with respect to the subject matter hereof, supersedes all prior oral or written
agreements regarding the subject matter hereof, and cannot be changed or
terminated except by a writing signed by both Parties.

     16.  If any provision of this Agreement is held illegal, invalid or
unenforceable under present or future state or federal laws, or rules and
regulations promulgated thereunder, effective during the term hereof, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision, there shall be automatically
as part of this Agreement a provision similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.

     17.  This Agreement is not assignable or transferable without the prior
written consent of each Party, which consent may be withheld for any reason.

     18.  Nothing herein shall be construed as a grant of a license or
conveyance of any rights under any discoveries, inventions, patents, trade
secrets, copyrights, industrial property rights or know-how belonging to any
Party hereto.

     19.  This Agreement shall not constitute, create, give effect to or
otherwise imply a teaming, joint venture, leader-follower or other formal
business relationship. Further, nothing herein shall be construed as providing
for the sharing of profits or losses arising out of the efforts of the Parties.
No Party shall be liable to the other for any of the costs, expenses, risks, or
liabilities arising out of the other Party's efforts in connection with this
Agreement.

     20.  Each Party to this Agreement has had the opportunity to review the
Agreement with legal counsel. This Agreement shall not be construed or
interpreted against either Party on the basis that such Party drafted or
authorized a particular provision, parts of, or the entirety of this Agreement.


                                      -6-
<PAGE>   53
     IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representatives.



CAPSTONE TURBINE CORP.                          SOLAR TURBINES INCORPORATED

By:   /s/ R. JAMES WENSLEY                  By:   /s/ DAVID ESBECK
    ------------------------------              -------------------------------

Printed                                     Printed
Name:    R. James Wensley                   Name:    David Esbeck
      ----------------------------                -----------------------------

Title:   President                          Title:   V.P. Engineering
       ---------------------------                 ----------------------------

Date:    June 13, 1996                      Date:   June 6, 1996
      ----------------------------                -----------------------------













                                      -7-