<PAGE>

                                                                 EXHIBIT 10.4

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.  THE
COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO THE CONFIDENTIALITY
REQUEST.  OMISSIONS ARE DESIGNATED AS [*****].  A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION



               DEVELOPMENT, MARKETING AND DISTRIBUTION AGREEMENT



                            MATHESON TRI-GAS, INC.

                                      AND

                          PROTON ENERGY SYSTEMS, INC.



                         DATED AS OF NOVEMBER 10, 1999

_____________________________________________________________________________
<PAGE>

               DEVELOPMENT, MARKETING AND DISTRIBUTION AGREEMENT

     This Development, Marketing and Distribution Agreement, dated as of
November 10, 1999 (this "Agreement"), by and between Matheson Tri-Gas, Inc., a
Delaware corporation, with its principal place of business at 959 Route 46 East,
Parsippany, New Jersey 07054 ("Matheson"), and Proton Energy Systems, Inc., a
Delaware corporation, with its principal place of business at 50 Inwood Road,
Rocky Hill, CT 06067 ("Proton", and collectively with Matheson, the "Parties").


                                   RECITALS

     1.   Proton has developed a technology for the generation of hydrogen gas
          (the "Technology");

     2.   Proton desires to design, develop and manufacture the Systems (as
          herein defined) using the Technology, and sell the Systems to Matheson
          for distribution in the Field of Use (as herein defined), all on the
          terms set forth in this Agreement; and

     3.   Matheson desires to select commercial names and design trademarks and
          trade dress for the Systems, and to acquire certain rights to purchase
          and distribute the Systems in the Field of Use (as herein defined),
          all on the terms set forth in this Agreement.

     NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, the Parties agree as follows:


1.   Definitions.
     -----------

     "Bankruptcy", as to a Person, means an occurrence in which (a) a receiver
is appointed for such Person or its property; (b) such Person makes an
assignment for the benefit of its creditors; (c) any proceedings are commenced
by, for or against such Person under any bankruptcy, insolvency or debtor's
relief law; or (d) such Person is liquidated or dissolved.

     "Conference" means the "Pittsburgh Conference" taking place in New Orleans,
LA during calendar year 2000 at which Matheson intends to introduce the Initial
Models of the Systems to the market.

     "Exclusivity Period" means the period during which Matheson has exclusive
rights to sell the Systems as described in Section 2.2(a) hereof.

     "Field of Use" means the worldwide use solely in laboratory applications,
but excluding laboratory applications involving hydrogen generation for fuel
cells, meteorology, transportation, energy production, generation, storage,
transmission, power or other energy-related activity.

                                       1
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

     "Force Majeure Act" means acts of God, floods, fires, explosions, storms,
transportation difficulties, strikes, lockouts, or other industrial
disturbances, wars, or any law, rule or action of any court or instrumentality
of the federal or any state government or any other cause or causes beyond its
reasonable control whether similar or dissimilar to those above stated, provided
only that the same is not willfully done or brought about for the purpose of
excusing failure or omission to perform under this Agreement.

     "Governmental Authority" means any federation, nation, state, sovereign or
government, any federal, supranational, regional, state or local political
subdivision, any governmental or administrative body, instrumentality,
department or agency or any court, administrative hearing body, commission or
other similar dispute resolving panel or body, and any other entity exercising
executive, legislative, judicial, regulatory or administrative functions of a
government; provided, however, that the term "Governmental Authority" shall not
            --------  -------
include any arbitral tribunal chosen pursuant to Section 12 of this Agreement.

     "Initial Models" means the 300 cc/min and 600 cc/min models of the Systems
described in the Specifications.

     "Minimum Purchase Requirements" means (a) from the date of this Agreement
to December 31, 2000, at least [*****] units of the Systems purchased by
Matheson from Proton, (b) during calendar year 2001, at least [*****] units of
the Systems purchased by Matheson from Proton, and (c) during calendar year 2002
and each calendar year thereafter during the term of this Agreement, at least
[*****] units of the Systems purchased by Matheson from Proton; provided,
                                                                --------
however, that if Proton has not made the Initial Models of the Systems
--------
commercially available prior to [*****], so as to allow Matheson to
introduce the Systems to the market at the Conference or if Proton has not made
the Remaining Models of the Systems commercially available prior to [*****],
then so long as such failure is not caused by Matheson, the foregoing
minimum requirements applicable to periods prior to December 31, 2001 (i) shall
cease to be applicable to Matheson and (ii) shall be revised by the Parties in
good faith. If the Parties do not agree on revised minimum requirements in
accordance with the foregoing sentence, the matter may be submitted to binding
arbitration in accordance with Section 12 of this Agreement.

     "Person" means any individual, firm, corporation, partnership, limited
liability company, trust, association or entity of any kind.

     "Plant" shall mean Proton's plant or facility at which manufacture of the
Systems shall occur.  Such plant currently is located at Proton's principal
executive offices in Rocky Hill, Connecticut.

                                       2
<PAGE>

     "Proprietary Information" of a Person means (a) all inventions, designs,
processes, materials, trade secrets, know-how and ideas of such Person,
including without limitation, as applicable, designs, drawings, specifications
and technical information with respect to the Systems and component parts
thereof; (b) non-public financial information concerning such Person; (c) such
Person's research and development, pricing, new product and marketing plans and
customer lists or information, unless and until publicly announced; (d) the
terms and conditions of this Agreement; and (e) any other information designated
as confidential by such Person in writing; provided, that no oral communications
                                           ---------
shall be deemed confidential unless confirmed in writing to be so within twenty
(20) days of the time such information is orally communicated, and provided
                                                                   --------
further, that Proprietary Information shall not include any information that:
--------
(i) is or becomes known to the general public or the industry in which the
Parties hereto do business without fault or breach on the part of the receiving
Person; (ii) the disclosing Person customarily provides to others without
restriction on disclosure; or (iii) the receiving Person obtains from a third
Person without breach of any nondisclosure obligation.

     "Purchase Order" means a signed agreement on a standard form between Proton
and Matheson for supply of the Systems.  Such Purchase Order shall designate, at
a minimum, the method of delivery, delivery date and the models and quantity of
Systems ordered.

     "Remaining Models" means the 80 cc/min and 2 liter/min models of the
Systems described in the Specifications.

     "Systems" means the four high purity hydrogen generation products to be
developed by Proton pursuant to this Agreement in accordance with the
Specifications, each having a flow rate capacity of 10 standard cubic feet per
hour ("scfh") or less and bearing the trade dress, commercial names and
trademarks developed, designed, selected and owned by Matheson as hereinafter
provided.

     "Specifications" means the specifications for the Systems set forth in
Schedule 1 hereto.
----------

2.   Appointment.
     -----------

     2.1  Development Responsibilities.  Proton shall design, develop
          -----------------------------
and manufacture the Systems substantially in accordance with the Specifications.
Matheson shall select commercial names and design the trademarks and trade dress
for the Systems, and supply Proton such names, trademarks and trade dress
designs for use in the manufacturing of the Systems.

     2.2  Grant of Rights; Acceptance of Grant. Proton hereby grants to
          ------------------------------------
Matheson (a) the exclusive right during the term of this Agreement to (i)
procure the Systems as manufactured by Proton and to sell, promote, advertise,
exploit, market and distribute the

                                       3
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

Systems in the Field of Use, each upon the terms and conditions set forth
herein; and (ii) make applications with relevant Governmental Authorities for
approval of the Systems as needed; (b) the non-exclusive right to take the
actions described in (a) above outside the Field of Use, subject to any
limitations that Proton may impose due to exclusive rights Proton has granted to
other parties in accordance with the terms hereof, and (c) the right to develop
and solely own a Matheson commercial name/trademark for the Systems and/or
series of Systems.  The rights described in Section 2.2(a) shall be exclusive
only so long as Matheson meets the Minimum Purchase Requirements.  Proton shall
have the right, at any time upon written notice thereof to Matheson, to limit or
terminate the non-exclusive rights described in Section 2.2(b) if and to the
extent that Proton grants exclusive rights to third parties outside the Field of
Use with respect to hydrogen generation products having a flow rate capacity of
10 scfh or less.  Matheson hereby accepts the grants made by Proton under this
Section 2.2.

     2.3  Exclusivity.
          -----------

          2.3.1 Proton shall not at any time, whether during the term of this
Agreement or at any time following termination thereof, sell to third parties
hydrogen generation equipment having the same trade dress as the Systems or
otherwise having an exterior package design which is confusingly similar to that
of the Systems such that a purchaser might reasonably infer that such equipment
is one of the Systems or from the same line of products as the Systems.  Proton
may sell directly or grant exclusive or non-exclusive rights to third parties
outside the Field of Use as to other equipment in the 10 scfh or under size
range.

          2.3.2 During the Exclusivity Period, Proton (a) shall not sell,
market, distribute or sublicense any of the Systems to any Person other than
Matheson, and (b) shall promptly refer and forward to Matheson any inquiries it
receives regarding sales, marketing or distribution of Systems in the Field of
Use.

          2.3.3 Beginning on the date of commercial availability of the
Systems and throughout the term of this Agreement, Matheson will not sell or
distribute any hydrogen generation systems or products having a flow rate
capacity of 10 scfh or less other than the Systems purchased from Proton
pursuant to this Agreement; provided, however, that upon termination of the
                            --------  -------
Exclusivity Period, Matheson may elect to purchase the right to distribute or
sell other hydrogen products having a flow rate capacity of 10 scfh or less by
giving written notice of such election to Proton within sixty (60) days
following the termination of the Exclusivity Period, accompanied by payment in
an amount equal to [*****] for each year that Matheson has satisfied the Minimum
Purchase Requirements prior to the termination of the Exclusivity Period.

                                       4
<PAGE>


               2.3.4     Following the termination of the Exclusivity Period,
Proton shall not grant exclusive rights (but may grant non-exclusive rights) to
any third party in the Field of Use during the term of this Agreement with
respect to the distribution or sale of hydrogen generation systems or products
having a flow rate capacity of 10 scfh or less. In the event that Matheson
ceases to meet the Minimum Purchase Requirements at any time during the term of
this Agreement, and later again meets the Minimum Purchase Requirements, the
rights granted by Proton to Matheson shall again become exclusive only at
Proton's discretion and subject to any rights which Proton may have granted in
the interim.

     2.4       Sub-Distributors.  Matheson may appoint subdistributors, sales
               ----------------
representatives and Persons to sell, promote, advertise, exploit, market or
distribute products containing the Systems in the Field of Use on terms and
conditions consistent with the provisions of this Agreement, provided, that
                                                             --------
Matheson shall at all times remain responsible for the performance of such
Persons, including without limitation those relating to exclusivity and to the
use and disclosure of Proprietary Information.

     2.5       Configuration Changes.  The Parties contemplate that initially
               ---------------------
there will be four (4) different configurations of Systems, as reflected in the
Specifications.  Matheson may request that Proton design and manufacture
additional configurations for purchase by Matheson hereunder, so long as (a)
such additional configuration(s) are for sale and distribution in the Field of
Use and have a flow rate capacity of 10 scfh or less, and (b) Matheson (i)
describes the reason for the additional configuration(s) (e.g., the opportunity
for volume growth, or the minimization of volume decline due to product
obsolescence) and (ii) procures Proton's approval therefor.  If Proton does not
grant such approval, Matheson may pursue other sources to design and manufacture
hydrogen generation systems having the applicable configurations without regard
to any restrictions contained in Section 2.3 of this Agreement; provided that
                                                                --------
Matheson shall not disclose any Proprietary Information of Proton to such other
sources and such other sources shall not use the Technology or any Proprietary
Information of Proton in connection with the design or manufacture of such
equipment or otherwise.

     2.6       No Implied Rights.  Except as is explicitly set forth in Section
               -----------------
2.1, nothing in this Agreement shall be construed as granting Matheson any
rights in or to any intellectual property of Proton or of restricting Proton's
rights with respect to its intellectual property, including, but not limited to,
Proton's right to grant exclusive or non-exclusive rights to third parties
outside the Field of Use as to other equipment in the 10 scfh or under size
range. Furthermore, nothing herein shall be construed as granting Matheson
rights in or to any improvements to the Systems.

3.   Purchases and Purchase Order Procedure.
     --------------------------------------

                                       5
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

     3.1       Orders and Forecasts.  On or before December 31, 1999 and not
               --------------------
less than fifteen days prior to the first day of each calendar quarter
thereafter, (15 March, 15 June, 15 September, 15 December) Matheson shall submit
to Proton the following:

               (a)  A firm, irrevocable written Purchase Order for the Systems
                    to be purchased by Matheson each month during the subject
                    calendar quarter specifying the quantities of each model of
                    the Systems to be purchased. All such Purchase Orders shall
                    be for at least [*****] of the quantities listed in the
                    Forecast submitted during the preceding quarter, and during
                    the Exclusivity Period all such Purchase Orders shall cover
                    a minimum of [*****] of the then applicable annual Minimum
                    Purchase Requirements. Proton shall not be required to
                    accept or fill (a) any Purchase Order to the extent such
                    Purchase Order exceeds (i) [*****]of the quantities
                    estimated in the Forecast for the subject quarter submitted
                    by Matheson prior to the beginning of the calendar quarter
                    then ended, or (ii) [*****] of the largest quantities
                    purchased by Matheson during any previous calendar quarter
                    during the term of this Agreement; or (b) any supplemental
                    or additional Purchase Order which is submitted during any
                    quarter after the initial purchase order for the subject
                    quarter is placed. In no event shall Proton be required to
                    accept or fill any Purchase Order submitted by Matheson
                    pursuant to this Agreement unless all amounts payable to
                    Proton hereunder have been paid in full when due. This
                    Agreement and the terms and conditions hereof shall prevail
                    over any inconsistent or additional terms set forth in any
                    Purchase Order.

               (b)  With the submission of each Purchase Order, Matheson shall
                    provide a quarterly written forecast of Systems required
                    ("Forecast") for the subsequent three calendar quarters
                    following the purchase order period. Such Forecast shall
                    indicate the number of units required by System type for
                    each quarter. At any time during the term of this Agreement,
                    if Matheson plans to place Purchase Orders for the Systems
                    in quantities which vary significantly from those set forth
                    in its most recent Forecast, then Matheson shall use
                    reasonable efforts to update such Forecast sufficiently in
                    advance to enable Proton to timely fill all purchase orders
                    placed. Each Forecast shall supersede the terms of the prior
                    Forecast, provided, that no Forecast shall vary the terms of
                              --------
                    any purchase order without the written consent of Proton
                    (which consent shall not be unreasonably withheld).

                                       6
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

     3.2       Shipment Dates.  Systems purchased by Matheson hereunder shall be
               --------------
shipped and delivered to Matheson on a monthly basis on or before the last day
of each calendar month in accordance with the provisions of Section 3.4 below.
Proton will use best efforts to meet the shipment dates for each accepted
Purchase Order, but will not be liable for failure to do so (a) due to a Force
Majeure Act or (b) so long as Matheson is not in compliance with Section 4.3
relating to payment of the purchase price, or (c) to the extent the quantities
of the Systems requested in such Purchase Order exceed [*****] of the Forecast
for the subject month submitted by Matheson prior to the end of the previous
calendar quarter or [*****] of the largest quantity of Products purchased by
Matheson during any previous calendar quarter.

     3.3       Packaging and Shipment; Risk of Loss.  Proton will package the
               ------------------------------------
Systems using packaging materials supplied by Matheson and ship the Systems in
accordance with Matheson's reasonable shipping instructions, which shall provide
for shipping in a manner consistent with industry practices.  Matheson shall
provide, at its sole cost and expense, all packaging materials for all Systems
covered by each Purchase Order, which packaging materials (including, without
limitation, product manuals and literature to be included with each unit) shall
be delivered to the Plant (or such other location as Proton may designate in
writing) at least thirty (30) days prior to the delivery date for such Systems
as specified in the applicable Purchase Order.  All shipments of the Systems
will be F.O.B. Proton's Plant or such other location as Proton may elect as
specified in Proton's order acceptance.  Proton will ship the Systems to
Matheson to such reasonable locations as are designated in writing by Matheson
to Proton and in the manner designated by Matheson.  The risk of loss of or
damage to any Systems ordered by Matheson and shipped by Proton will pass to
Matheson upon Proton's tender of delivery to the carrier for shipment.

     3.4       Shipment and Claim Expenses.  Matheson shall pay all costs of
               ---------------------------
packaging materials, transportation, insurance, duties, taxes, export and import
fees, customs brokerage and similar charges.  Matheson, at its expense, shall
make and negotiate any claims against any carrier, insurer, customs broker,
freight forwarder or customs collector.  Proton shall use reasonable efforts to
cooperate in any such claim, at Matheson's cost and expense.

     3.5       Verification and Delivery.  Matheson (or Matheson's agent) shall,
               -------------------------
within five (5) business days after delivery of Systems, inspect the Systems. In
the event that either Matheson or Matheson's agent shall determine that a batch
is deficient, Matheson shall deliver to Proton a written report (a "Non-
Conformity Report") notifying Proton of any non-fulfillment of any of the terms
of a Purchase Order or the Specifications.  The failure of Matheson to deliver a
Non-Conformity Report to Proton within five (5) business days after the delivery
of the Systems shall be deemed to be an irrevocable acceptance by Matheson of
the Systems so delivered by Proton.  Upon receipt by Proton of a Non-Conformity
Report, Proton shall within five (5) business days of such receipt investigate
the alleged non-conformity.  If Proton agrees that the

                                       7
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

material supplied fails to conform to the terms of this Agreement, Proton shall
repair or replace the non-conforming Systems within fifteen (15) business days
after its receipt of the Non-Conformity Report.  If Proton shall disagree with
Matheson's Non-Conformity Report, the matter shall be resolved in accordance
with Section 12 hereof.

     3.6       Delays.  Reasonably promptly after Proton becomes aware of a
               ------
possible delay in shipment of Systems, it shall (a) notify Matheson in writing
as to such delay and the cause thereof, (b) inform Matheson of the measures it
will initiate in order to minimize the delay and (c) state a revised delivery
date.  At that time, Matheson will advise Proton of the quantity of Systems
required by expedited delivery in order for Matheson to meet its commitments to
customers, and Proton shall, at its sole expense, use commercially reasonable
efforts to arrange for such expedited delivery.  To the extent that Matheson's
notice to Proton shall not require such expedited delivery, any Systems not
delivered on an expedited basis may be delivered in accordance with the regular
shipment instructions applicable to Purchase Orders.  Nothing in this Section
shall be construed as a cure for, an acceptance of any cure for, or a waiver of
any breach by Proton of this Agreement.

4.   Prices.
     ------

     4.1        Purchase Price.  The prices of the Systems sold to Matheson
                --------------
hereunder shall be as follows:

                    4.1.1. Initial Prices. The initial prices of the Systems
                           --------------
sold to Matheson hereunder (the "Initial Price") shall be as set forth on
Schedule 2 attached hereto, which prices shall be subject to adjustment as
provided in Section 4.1.2 below.

                    4.1.2. Price Increases. Proton shall have the right, on
                           ---------------
[*****] basis effective as of [*****] during the Exclusivity Period, to increase
the prices of any or all models of the Systems sold to Matheson hereunder.
Proton shall give written notice to Matheson of any price increases effected
hereunder at least [*****] prior to the date on which such price increases are
to become effective. If any proposed price increase is unacceptable to Matheson,
Matheson shall so notify Proton in writing (the "Price Increase Rejection
Notice") within [*****] following its receipt of notice of the proposed increase
from Proton, and the Parties shall negotiate with one another to attempt to
establish mutually agreeable pricing for the Systems. If the Parties are unable
to agree upon pricing within [*****] following Proton's receipt of the Price
Increase Rejection Notice from Matheson, either Party may terminate this
Agreement effective as of December 31 of the subject year by giving written
notice of termination to the other Party at least forty-five (45) days prior to
the effective date of termination.

                                       8
<PAGE>

     4.2  Payment of Purchase Price.  Payment of the purchase price for Systems
          -------------------------
delivered by Proton shall be net cash thirty (30) days after the date of the
invoice therefor.  All payments shall be in United States dollars unless the
Parties agree in writing to the contrary.

5.   Obligations of Proton.
     ---------------------

     5.1  Regulatory.  Proton shall manufacture the Systems in accordance with
          ----------
all applicable laws, rules and requirements of Governmental Authorities of the
United States.

     5.2  Insurance.  During the term of this Agreement, to the fullest extent
          ---------
permitted by law, Proton shall maintain, at its own expense, with a responsible
insurance carrier, a product liability insurance policy with respect to the
Systems and the manufacturing thereof, in an amount of not less than
US$1,000,000 for each occurrence of death or bodily injury, with deductibles of
not more than US$100,000 per occurrence. Matheson shall be named an additional
insured under such policy, and such policy shall contain a provision requiring
at least fifteen (15) days prior written notice to Matheson prior to any
termination, expiration or material reduction in coverage of such policy. From
time to time upon reasonable request by Matheson, Proton will promptly furnish
or cause to be furnished to Matheson evidence in form and substance reasonably
satisfactory to Matheson of the maintenance of the insurance required by this
Section.

6.   Obligations of Matheson.
     -----------------------

     6.1  Conduct of Business.  In order that the relationship contemplated by
          -------------------
this Agreement shall be mutually advantageous, and in recognition of the
particular expertise and commitment necessary to market Systems properly,
Matheson covenants and agrees with Proton as follows:

          6.1.1     Matheson shall (a) avoid deceptive, misleading or unethical
practices that are or might be detrimental to Proton or the public; (b) make no
false or misleading representations with regard to Proton or the Systems; (c)
not publish or employ or cooperate in the publication or employment of any
misleading or deceptive advertising material; (d) make no representations or
guarantees to customers or to the trade with respect to the specifications,
features or capabilities of the Systems that are inconsistent with the
literature distributed or approved by Proton; and (e) not knowingly sell the
Systems to any organization that engages in illegal or deceptive trade practices
with respect to the Systems.

          6.1.2     Matheson shall comply in all material respects with all
applicable laws and regulations in performing its duties hereunder and in any of
its dealings with respect to the Systems and be solely responsible for all
expenses and claims relating to such compliance.

                                       9
<PAGE>

     6.2  Packaging Materials.  Matheson shall ensure that any and all packaging
          -------------------
materials, commercial names, trademarks and trade dress designs supplied by it
pursuant to this Agreement comply in all material respects with all applicable
laws and regulations and do not violate or infringe upon the proprietary rights
of any person or entity.

7.   Proprietary Rights.
     ------------------

     7.1  General.   The Parties hereto acknowledge that (a) other than as
          -------
otherwise expressly provided in subsection (b), Proton will own all intellectual
property rights in and to the Technology, the Systems and the design of the
Systems, including, without limitation, all know-how, trade secrets, inventions,
discoveries, improvements, patent rights and other proprietary rights therein in
their entirety, and (b) Matheson will own the commercial names, trademarks and
trade dress of the Systems as developed by Matheson (excluding the Proton name,
logo and any Proton trademark, which shall remain the sole and exclusive
property of Proton).

     7.2  Intellectual Property Protection.   In the event that either Party
          --------------------------------
determines to apply for patent, trademark or other protection as to its
intellectual property resulting from or relating to this Agreement, the other
Party agrees to use reasonable efforts to cooperate with the other Party in
connection therewith. Each Party shall give the other Party all reasonable
assistance in obtaining such proprietary rights protection and in preparing and
prosecuting any patent, copyright or other filing or application made by the
other Party, and shall cause to be executed assignments and all other
instruments and documents as the other Party may consider necessary or
appropriate to carry out the intent of this section.

     7.3  Return of Materials.  Upon expiration or termination of this
          -------------------
Agreement, each Party shall promptly return all materials provided by the other
Party and any copies thereof that contain or are related to the other Party's
intellectual property

     7.4  Infringement Claims.
          -------------------

          a.   Generally.  Each Party shall notify the other upon learning of
               ----------
any potential or actual infringement or misappropriation by any third party of
any patent, copyright or other proprietary right that forms part of the
technology applicable to the design, development, manufacture or
commercialization of the Systems, and shall provide each other with any
available evidence in their possession of such infringement or misappropriation.
The Parties may, upon mutual agreement, jointly pursue an action relating to the
foregoing, and in such case shall jointly take all reasonable steps necessary to
enjoin and prevent such infringement or misappropriation including the
institution and maintenance of legal or equitable proceedings, and shall
promptly execute all papers and perform such other acts as may be reasonably
required to join in any such suit, action or proceeding; provided, however, that
                                                         --------  -------
a Party may, at its option, be

                                      10
<PAGE>

represented by counsel of its choice.  In the event that the Parties do not
agree to pursue such action jointly, each Party shall provide all reasonable
non-monetary cooperation, assistance and information requested by the other
Party in support of such action, at the expense of the requesting Party.  Any
amount recovered by a Party individually pursuing such suit, action or
proceeding shall inure solely to the benefit of such Party.

          b.   Third Party Infringement Claims. Each Party agrees to promptly
               -------------------------------
notify the other Party upon becoming aware of any suit, action or proceeding
brought against it by any third party which is based on a claim that the Systems
infringe any patent, copyright or other proprietary right.  The Parties may,
upon mutual agreement, cooperate in the defense against such suit, action or
proceeding, and in such case shall promptly execute all papers and perform such
other acts as may be reasonably required to join in such defense.  In the event
the Parties do not agree to pursue the defense of such claim jointly, each Party
shall provide all reasonable non-monetary cooperation, assistance and
information requested by the other Party in support thereof, at the expense of
the requesting Party.

8.   Representations and Warranties.   Each Party hereto represents and
     ------------------------------
warrants that (a) all corporate or other action on its part necessary for the
authorization, execution, delivery, and performance of all its obligations under
this Agreement has been taken; (b) this Agreement constitutes a valid and
legally binding obligation of such Party, legally enforceable against such Party
in accordance with its terms; and (c) the execution, delivery and performance of
this Agreement by such Party will not result in any violation of, be in conflict
with, or constitute a default under any terms or provisions of (i) its
organizational documents; (ii) any judgment, decree or order to which it is a
Party; (iii) any agreement, contract, understanding, indenture or other
instrument to which it is a Party; or (iv) any statute, rule or governmental
regulation applicable to such Party.

9.   Warranty and Indemnification.
     ----------------------------

     9.1  Limited Warranty.  Proton warrants that the Systems sold and purchased
          ----------------
hereunder shall conform in all material respects to the Specifications for one
(1) year from the date of Matheson's delivery of the Systems to its customers,
so long as Matheson has delivered the applicable Systems to such customer within
three (3) months of delivery by Proton to Matheson thereof (the foregoing, the
"Warranty Period"). Matheson's exclusive remedy in the event that any System
does not conform to the foregoing warranty shall be repair or replacement, at
Proton's sole option, of the subject System. The foregoing warranty shall be
conditioned upon and subject to the end-user installing and maintaining the
Systems in accordance with all applicable manufacturer instructions and
recommendations, and shall not be applicable to any System that has been
damaged, misused, abused, altered, improperly installed or used in a manner
contrary to manufacturer instructions or recommendations. PROTON MAKES NO

                                      11
<PAGE>

REPRESENTATION OR WARRANTY WITH RESPECT TO THE SYSTEMS OTHER THAN THOSE
EXPRESSLY SET FORTH IN THIS SECTION.  THE WARRANTIES STATED IN THIS SECTION ARE
EXPRESSLY IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.  NEITHER PARTY SHALL BE LIABLE FOR ANY INCIDENTAL,
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF
ANTICIPATED PROFITS OR BENEFITS, DIRECTLY OR INDIRECTLY, ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE SUPPLY OF SYSTEMS OR SERVICES, INCLUDING
REPAIRS, HEREUNDER.  PROTON'S TOTAL LIABILITY (WHETHER IN CONTRACT, TORT,
PRODUCT LIABILITY OR OTHERWISE) ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, EXCEED (1) IN THE CASE OF PRODUCTS
LIABILITY CLAIMS, THE AMOUNT OF PROTON'S INSURANCE COVERAGE FOR SUCH CLAIMS, OR
(2) IN THE CASE OF ANY OTHER CLAIM OF ANY NATURE WHATSOEVER, THE AGGREGATE
AMOUNT PAID TO PROTON HEREUNDER.

     9.2  Indemnification
          ---------------

          9.2.1     Proton. Except as otherwise provided in this Agreement and
                    ------
subject to the provisions of Section 9.1 hereof, Proton agrees to defend,
indemnify and hold Matheson, Matheson's affiliates and their employees and
agents, harmless from and against (a) all claims, demands, actions, lawsuits,
losses, damages, costs or expenses (including reasonable attorneys' fees) (any
of the foregoing, "Losses") arising out of, or in connection with, or resulting
from (i) the breach by Proton of its obligations under this Agreement, or (ii)
Proton's actions relating to the manufacture or supply by Proton of Systems
hereunder; and (b) all Losses relating to product liability claims arising out
of, or in connection with, or resulting from defects in the Systems or the
manufacture and supply by Proton of Systems, so long as any such Losses referred
to in this clause (b) do not arise due to acts or omissions of Matheson,
including any modifications made by Matheson to the Systems. Except as expressly
provided herein, Proton shall not be liable to Matheson for damage to property
or injury to persons resulting from any action or failure to act by Matheson or
its employees and agents.

          9.2.2     Matheson. Matheson agrees to defend, indemnify and hold
                    --------
Proton, Proton's affiliates and their employees and agents, harmless from and
against all claims, demands, actions, lawsuits, losses, damages, costs or
expenses (including reasonable attorneys' fees) arising out of, or in connection
with, or resulting from (a) the breach by Matheson of its obligations under this
Agreement, or (b) Matheson's actions relating to the supply of packaging for or
purchase, shipment, distribution, sale or use of the Systems or the provision of
non-warranty repairs or technical support pursuant to Section 9.4 below.

                                      12
<PAGE>

          9.2.3     Procedure. A Party or any of its affiliates or their
                    ---------
employees or agents (the "Indemnitee") that intends to claim indemnification
under this Agreement shall promptly notify in writing the other Party (the
"Indemnitor") of any loss, claim, damage, liability or action in respect of
which the Indemnitee intends to claim such indemnification, and the Indemnitor
may assume the defense thereof with counsel selected by Indemnitor and
reasonably satisfactory to the Indemnitee, provided, however, that an Indemnitee
                                           --------  -------
shall have the right to retain its own counsel with fees and expenses to be paid
by the Indemnitor, if representation of such Indemnitee by the counsel retained
by the Indemnitor would be inappropriate due to actual or potential differing
interest between such Indemnitee and any other Party represented by such counsel
in such proceeding. The indemnity agreement provided for in this Section 9 shall
not apply to amounts paid in settlement of any loss, claim, damage, liability or
action if such settlement of any loss, claim, damage, liability or action if
such settlement is effected, without the consent of the Indemnitor, which
consent shall not be withheld or delayed unreasonably. The failure to deliver
notice to the Indemnitor within reasonable time after the commencement of any
such action, if materially prejudicial to its ability to defend such action,
shall relieve the Indemnitor of any liability to the Indemnitee under this
Section 9, but the omission so to deliver notice to the Indemnitor will not
relieve it of any liability that it may have to the Indemnitee otherwise than
under this Section 9. The Indemnitee under this Section 9, its employees and
agents, shall cooperate fully with the Indemnitor and its legal representatives
in the investigation and defense of any action, claim or liability covered by
this indemnification.

     9.3  Warranty Procedures. All Systems returned to Matheson for warranty
          -------------------
repairs during the Warranty Period shall be inspected by Matheson to verify the
warranty claim, and upon verification of the warranty claim by Matheson returned
to Proton, F.O.B. Proton's Plant, for warranty service. Subject to the
provisions of Proton's product warranty set forth in Section 9.1, all Systems
returned to Proton by Matheson with valid warranty claims shall be repaired or
replaced (at Proton's sole option and expense) by Proton, and the repaired or
replaced System shall be returned to Matheson F.O.B. Matheson's plant in
Montgomeryville, PA.

     9.4  Non-Warranty Repairs and Technical Support. Matheson will operate a
          -------------------------------------------
System repair facility for Systems returned after the expiration of the
foregoing Warranty Period or which are otherwise not eligible for warranty
service. Proton will make parts available for sale to Matheson for all repairs.
Proton shall provide up to one day per year of training for Matheson repair
personnel, at Matheson's location, so that Matheson can perform such repairs.
Matheson will operate an end-user support mechanism to support technical
inquiries by end-users into operating instructions and to diagnose and solve
operating difficulties by telephone. Proton shall make available to Matheson
backup technical support from time to time to the extent reasonably required by
Matheson to perform its end user support function described in the preceding
sentence.

                                      13
<PAGE>

10.  Confidentiality.
     ---------------

     10.1 Mutual.  During the term of this Agreement, it is contemplated
          -------
that each Party may receive Proprietary Information from the other Party.
Accordingly, each Party will treat and safeguard Proprietary Information of the
other Party with the same standard of care (but at least a reasonable standard
of care) that it employs for its own Proprietary Information and shall not,
without the prior written approval of the other Party, (a) disclose any
Proprietary Information to a third party, (b) use Proprietary Information in any
way for the benefit of any third parties (other than use that is consistent with
the terms of this Agreement) and/or (c) use Proprietary Information in any way
other than to perform under this Agreement.  Each Party will limit access to
Proprietary Information to only those employees who have a need to know such
Proprietary Information.

     10.2 General.  Each Party acknowledges and agrees that all manuals,
          --------
drawings, blueprints, letters, notes, notebooks, reports, books, procedures,
forms, documents, records, papers or copies thereof pertaining to the business
of the other Party are and will be deemed to be Proprietary Information
hereunder and the exclusive property of such Party, and as such, each Party
hereby agrees to surrender to the other, upon written request, all such
information and copies thereof including related papers, documents and
electronic media. Although this Section shall cover information learned or
received by a Party until the effective date of termination of this Agreement,
all duties of confidentiality and non-use shall extend until five (5) years
after the effective date of termination. Each Party hereby acknowledges and
agrees that the breach of any obligations under this Section cannot readily or
adequately be compensated, and will cause the other Party irreparable injury.
Each Party will, therefore, be entitled to injunctive and other equitable relief
to prevent or enjoin any violation of this Section by the other Party, in
addition to all other rights or remedies available at law or in equity.

11.  Term and Termination.
     --------------------

     11.1 Term.  Unless earlier terminated in accordance with Section 11.2 or
          ----
Section 4.1.2, the initial term of this Agreement shall commence on the date
hereof and shall terminate (a) so long as Proton owns or controls no United
States patent that would be infringed by the manufacture, use or sale of a
System at the end of fifteen (15) years following the effective date of this
Agreement, on the fifteen (15) year anniversary of this Agreement, and (b) if
Proton owns or controls any United States patent(s) that would be infringed by
the manufacture, use or sale of a System at the end of fifteen (15) years
following the effective date of this Agreement, on the expiration or abandonment
of all Proton patents that would be infringed by the manufacture, use or sale of
a System. The term shall be automatically renewed for successive one (1) year
terms unless at least one hundred and twenty (120) days prior to the end of the
initial term or any renewal term either Party notifies the other in writing that
it wishes to terminate the Agreement.

                                      14
<PAGE>

     11.2 Early Termination.  Proton may terminate this Agreement if Matheson
          -----------------
defaults in any payment due to Proton and such default continues unremedied for
a period of ten (10) days after written notice thereof to Matheson. Either Party
may terminate this Agreement if the other Party: (a) makes a material
misrepresentation, or fails to perform any material obligation, warranty, duty
or responsibility, or is in default with respect to any material term or
condition undertaken by it under this Agreement and such failure or default
continues unremedied for a period of thirty (30) days after notification in
writing by the terminating Party; or (b) enters into Bankruptcy.

     11.3 Survival.  Upon termination of this Agreement in accordance with this
          --------
Section 11, the provisions of Sections 4 (as to payments owing in respect of
periods prior to such termination), 7, 8, 9, 10, 11.3, 11.4, 12 and 13 of this
Agreement shall survive in accordance with their terms.

     11.4 Actions Upon Termination.  Upon termination of this Agreement for any
          ------------------------
reason, Matheson shall purchase all of Proton's then existing inventory of the
Systems at the purchase price for such Systems then in effect pursuant to
Section 4 hereof, and shall have the right to continue to distribute and sell
the Systems until its inventory of Systems purchased from Proton is exhausted.
Other than as provided herein, the termination of this Agreement for any reason
shall be without prejudice to any rights, liabilities or obligations which have
arisen or accrued prior to such termination. The termination of this Agreement
for any reason shall automatically accelerate the due date of all invoices for
all Systems, and all such invoices shall be and become immediately due and
payable.

12.  Dispute Resolution.  In the event of a dispute between the Parties
     ------------------
regarding the performances of either Party under this Agreement, the Parties
will use their good faith efforts to resolve such dispute. If, after twenty (20)
days, the Parties are unable to reach agreement despite their good faith efforts
to do so, either Party may submit the dispute to binding arbitration in Boston,
Massachusetts. Any such arbitration will be conducted in accordance with the
rules of the Commercial Arbitration Rules of the American Arbitration
Association. Any such arbitration shall be conducted by a panel of three (3)
arbitrators having expertise in the industry in which the Parties do business.
The Parties shall each select one (1) arbitrator with such expertise, and the
two arbitrators so selected shall select the third arbitrator. Any such
arbitration shall be conducted in the English language. The decision of the
arbitrators shall be final and binding upon the Parties and, to the fullest
extent permitted by law, may be confirmed in a court of competent jurisdiction.

13.  Miscellaneous.
     -------------

                                      15
<PAGE>

     13.1      Governing Law.  This Agreement shall be governed by and construed
                ------------
and enforced in accordance with the internal laws of the State of Connecticut
without regard to principles of conflicts of laws that would require the
application of the laws of another jurisdiction.

     13.2      Notices.  All notices and other communications hereunder and all
               -------
legal process in regard hereto shall be validly given, made or served if in
writing, (a) on the date delivered, if delivered personally (by courier service
or otherwise) or via facsimile with a copy sent by registered mail, (b) three
(3) business days after the date sent, if sent by internationally recognized
overnight courier service, or (c) five (5) days after the date sent, if mailed
by first-class registered mail, postage-prepaid and return receipt requested, to
the address of the Party to receive such notice or other communication set forth
below, or at such other address as a Party may from time to time advise the
other Party pursuant to this Section:

          If to Matheson:     Matheson Tri-Gas, Inc.
                              166 Keystone Drive
                              Montgomeryville, PA  18936
                              Attention:  Kim Jolley-Souders,
                              Equipment Product Manager
                              Phone:  (215) 648-4024
                              Facsimile:  (215) 641-0656

               with a copy to:
                              Kelley Drye & Warren LLP
                              101 Park Avenue
                              New York, NY  10178
                              Attention:  Richard Lury, Esq.
                              Phone:  (212) 808-7800
                              Facsimile:  (212) 808-7897

          If to Proton:       Proton Energy Systems, Inc.
                              50 Inwood Road
                              Rocky Hill, CT  06067
                              Attention:  Walter W. Schroeder, President
                              Phone:   860-571-6533
                              Facsimile:   860-571-6505

               with a copy to:
                              Duane, Morris & Heckscher LLP
                              One International Place, 14/th/ Floor
                              Boston, MA  02110

                                      16
<PAGE>

                              Attention:  Dana C. Blakslee, Esq.
                              Phone:  617-598-3100
                              Facsimile:  617-598-3101

     13.3      Entire Agreement.  This Agreement (including all attachments
               ----------------
hereto) is the entire agreement between the Parties and supersedes all prior
agreements, written or oral, and all past dealings with respect to the subject
matter of this Agreement.

     13.4      Waivers and Amendments.  This Agreement may be amended, modified,
               ----------------------
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the Parties, or, in the
case of a waiver, by the Party waiving compliance.  No Purchase Order submitted
hereunder shall be deemed to modify, amend or supplement the provisions of this
Agreement unless such Purchase Order is signed by an authorized representative
of both Parties and specifically references this Agreement and the Sections
hereof being amended.  No delay on the part of either Party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of either Party of any right, power or privilege
hereunder, nor any single or partial exercise of any right, power or privilege
hereunder, preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies which
either Party may otherwise have at law or in equity.  The rights and remedies of
either Party based upon, arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the act,
omission, occurrence or other state of facts upon which any claim of any such
inaccuracy or breach is based may also be the subject matter of any other
representation, warranty, covenant or agreement contained in this Agreement (or
in any other agreement between the Parties) as to which there is no inaccuracy
or breach.

     13.5      Independent Contractor .  The relationship of the Parties hereto
               -----------------------
for the term of this Agreement shall be that of independent contractors. Neither
Proton nor Matheson will have, nor will either represent that it has, any power,
right or authority to bind the other or any of its affiliates, or to assume or
create any obligation or responsibility, express or implied, on behalf of the
other or in the other's name. Nothing in this Agreement shall be construed as
constituting the Parties hereto as partners or as creating the relationships of
employer/employee, franchisor/franchisee, or principal/agent between the
Parties.

     13.6      Severability.  If any provision of this Agreement is held to be
               ------------
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.

                                      17
<PAGE>

     13.7      Assignment.  This Agreement may not be assigned by either Party
               ----------
without the written consent of the other Party; provided, however, that either
                                                --------  -------
Party may, without the consent of the other Party, assign its rights and
obligations hereunder to any successor by way of merger, consolidation or
acquisition of all or substantially all of the assets of such Party so long as
such successor shall agree to be bound by all of the terms and provisions
hereof. Any purported assignment in violation of this Section shall be void and
of no force or effect.

     13.8      Counterparts.  This Agreement may be executed in two (2) or more
               ------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

     13.9      Force Majeure.  No liability or loss of rights hereunder shall
               -------------
result to either Party from delay or failure in performance (other than payment)
caused by a Force Majeure Act. The Party claiming the benefit of this provision
shall give prompt notice to the other of the occurrence of a Force Majeure Act
and shall keep the other Party advised generally concerning the progress of the
Force Majeure Act, it being understood that neither Party shall be required to
disclose any Proprietary Information in the course of advising the other
hereunder. The settlement of strikes or lockouts shall be entirely within the
discretion of the Party having the difficulty and the above requirements that
any Force Majeure Act shall be remedied with all reasonable dispatch, shall not
require the settlement of strikes or lockouts by acceding to the demands of the
opposing Party when such course is inadvisable in the discretion of the Party
having the difficulty.

     13.10     Headings.  The headings in this Agreement are for reference
               --------
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.

     13.11     Third Party Beneficiaries. No third parties shall be entitled to
               -------------------------
the benefit of this Agreement.

                                      18
<PAGE>

     IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized officers as of the date first written above.


          MATHESON TRI-GAS, INC.


          By: /s/ Robert G. Mueller  11/12/99
             --------------------------------------------
             Name:   Robert G. Mueller
             Title:  Vice President, Marketing
                     Specialty Gas Division


          PROTON ENERGY SYSTEMS, INC.


          By: /s/ Walter W. Schroeder
             --------------------------------------------
             Name:   Walter W. Schroeder
             Title:  President & CEO

                                      19
<PAGE>

                                  Schedule 1
                                  ----------

                                Specifications
                                --------------



Attached 6 pages:

     .  H-GC Laboratory use Hydrogen Generator, 300 & 600 sccm rate
          Author: Larry Moulthrop
          Date: Oct 14, 1999
          Pages: 2
     .  H-GC Laboratory use Hydrogen Generator, 2000 sccm rate
          Author: Larry Moulthrop
          Date: Oct 14, 1999
          Pages: 2
     .  H-GC Laboratory use Hydrogen Generator, 80 sccm rate
          Author: Larry Moulthrop
          Date: Oct 14, 1999
          Pages: 2
<PAGE>

*****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.*****

                                  Schedule 2
                                  ----------


                                    Pricing
                                    -------

     Following are the initial prices, subject to potential increases as
described in the Agreement to which this Schedule is attached or increases due
to changes in the Specifications:


     Systems                             Selling Price per System
     -------                             ------------------------
     [*****]                             [*****]
     [*****]                             [*****]
     [*****]                             [*****]
     [*****]                             [*****]

                                      ii