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                                                                    EXHIBIT 10.1

                                  CONFIDENTIAL

***PORTIONS OF THE EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE COMPLETE EXHIBIT, INCLUDING THE PORTIONS FOR WHICH CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED, HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.

                              TRANSITION AGREEMENT

      This Transition Agreement ("Agreement") is made effective as of the 2nd
day of August, 2000 (the "Effective Date"), by and between Solar Turbines
Incorporated, a Delaware corporation, whose principal address is 2200 Pacific
Highway, San Diego, California 92101 ("Solar") and Capstone Turbine Corporation,
a California corporation whose principal address is, 21211 Nordhoff Street,
Chatsworth, California 91311-5844 ("Capstone").

                                    Recitals

A.    Solar and Capstone entered into an Alliance Agreement dated August 25,
1997 ("Alliance Agreement"), under which Solar has been supplying certain
primary surface recuperators ("PSRs") for Capstone's Microturbine Generator sets
and Capstone has been purchasing PSRs from Solar. The obligations under the
Alliance Agreement were to remain in effect through August 25, 2007.

B.    On August 25, 1997 Solar and Capstone also entered into a License
Agreement ("License Agreement") under which Solar agreed, upon Capstone's
election, to license Solar Intellectual Property to Capstone to manufacture and
modify PSRs for incorporation into Capstone's Microturbines, all in accordance
with the terms of such License Agreement.

C.    The parties now believe it is in their mutual interest (1) for Capstone to
buy out its obligations under the Alliance Agreement and for Solar to terminate
the supply of PSRs thereunder, and (2) to modify and amend the License Agreement
and have Capstone exercise its rights under such "Amended and Restated License
Agreement."

D.    Capstone believes that it is reasonable and prudent for it to pay Nine
Million, One Hundred Thousand Dollars, U.S. ($9,100,000 USD) for the buyout and
termination of the Alliance Agreement, the modification and amendment of the
License Agreement, the purchase of Machine Tools, and the assistance to be
provided by Solar in transitioning its present manufacturing capabilities for
the PSRs for Capstone Microturbines to Capstone, all pursuant and subject to
this Agreement and the Amended And Restated License Agreement between the
parties of even date herewith (the "Amended and Restated License Agreement")
which define in further detail the transaction contemplated hereby (the
"Transaction").

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      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.    DEFINITIONS.

"Capstone Special Order PSR" shall mean (i) any PSR manufactured according to
Capstone's requirements and specifications, (ii) any development PSR, including
such development PSR as may be modified from time to time, and (iii) any similar
PSR capable of direct replacement for the Capstone Special Order PSR.

"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 which incorporates or is derived from
Solar Intellectual Property, manufactured by or on behalf of Capstone, excluding
PSRs supplied to Capstone by Solar.

"Machine Tools" shall mean the machine tools, equipment and supplies described
on Schedule 1.

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

"Solar Technology" shall mean all information in Solar's possession on the
Effective Date, with the right to disclose to Capstone, and relating to the
manufacture and use of Capstone Special Order PSRs, including for example, but
not by way of limitation, trade secrets, all technology, know-how, training and
transfer to be provided under Paragraph 5.1 of the Amended and Restated License
Agreement, 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 Capstone Special Order PSRs.

"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
where, in the case of both (i) and (ii) based on patent applications having an
effective filing date on or prior to one (1) month after the Effective Date.

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

"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

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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 where,
in the case of both (i) and (ii) based on patent applications having an
effective filing date prior to the termination or expiration of this Agreement

"Subsidiary" shall mean any corporation, company or other entity of which more
than fifty (50%) 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.    TRANSITION FEE AND PROGRESS PAYMENTS.

Capstone agrees to pay Solar a total lump sum of: Nine Million, One Hundred
Thousand Dollars ($9,100,000) (the "Transition Fee") for: (a) the Machine Tools
and Transition Assistance described in Section 2 below; (b) for the
modifications to and execution of the Amended and Restated License Agreement;
and (c) for the mutual termination and release of each party's obligations under
the Alliance Agreement as described below. Capstone agrees to pay Solar the
Transition Fee pursuant to the following payment schedule:

Milestone #1 *** to be paid upon the execution of this Agreement and the Amended
And Restated License Agreement by Capstone and Solar and in consideration for
the Machine Tools.

Milestone #2 *** upon delivery to Capstone of the Solar Technology that is in
tangible form and is related to the manufacture and use of Capstone Special
Order PSRs. The anticipated date for delivery is within *** of the Effective
Date, but may be earlier or later.

Milestone #3 *** upon delivery of *** pursuant to Section 3.3 below. Delivery is
presently scheduled to occur by December 30, 2000.

Milestone #4 *** upon delivery of *** pursuant to Section 6 below, with such
delivery being presently scheduled to occur by ***.

Milestone #5 *** upon completion of the four weeks of technical training
described in Section 5.1B) and availability of the Machine Tools located at
Solar's Turbofab Facility for delivery to Capstone.

Milestone #6 *** upon first article testing of the *** at Capstone's new
location, with such first article testing being presently scheduled to occur by
***.

Milestone #7 *** upon availability of the ***, that is, when Solar no longer
needs to use such *** machines on a full production basis in making the ***
under Capstone Purchase Order 292, as described in Section 6 below.

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Milestone #8 *** upon completion of training on the *** machines at ***, with
such training presently scheduled to occur on or before ***. This training is to
be covered by a separate agreement between Capstone and *** and paid for by
Capstone. Solar will be available for consulting.

Milestone #9 *** upon first successful article testing of the *** at Capstone's
new location, such first successful article testing presently scheduled to occur
by ***.

Capstone shall pay the amount due under Milestone #1 upon the execution of this
Agreement by wire to the Solar account to be advised by Solar. Solar will issue
invoices for each remaining Milestone setting forth the payment dates on which
the Milestone is anticipated to occur and Capstone will make payment thereon
within ten (10) days of the due date.

If Solar remains ready and willing to perform its obligations hereunder and
under the Amended and Restated License Agreement, but is unable to do so through
no fault of its own, for reasons beyond its control or because of decisions or
actions Capstone, then the Milestone payments described above shall be made to
Solar no later than the payment dates described above.

3.    MACHINE TOOLS AND TRANSITION ASSISTANCE.

The Machine Tools and Transition Assistance to be provided by Solar consists of:

      3.1   Transfer of ownership of the Machine Tools. The Machine Tools are
owned by Solar free and clear of all liens and encumbrances. Most of the Machine
Tools are located at Solar's Turbofab Facility in Houston, Texas, while some are
located at the facilities of Solar suppliers who assist with the manufacture of
PSRs. Solar will dismantle the Machine Tools located at its Turbofab Facility
and package them for shipment. Solar will also pay all sales tax, if any are due
on the sale and transfer of the Machine Tools to Capstone. The Transition Fee
does not include and Capstone shall be responsible and pay for: (a)
transportation of the Machine Tools to Capstone; (b) packing of any Machine
Tools or other equipment not located at the Turbofab Facility or other Solar
plant, and (c) the installation, commissioning and/or runoff of the Machine
Tools at the Capstone location. The Machine Tools will be transferred to
Capstone AS IS and without warranty of any kind except to the extent any
manufacturers warranty remains and is assignable to Capstone. Bills of Sale in
the form set forth in Schedule 2 will be provided by Solar to Capstone at the
time of tender of delivery of the Machine Tool(s) to Capstone.

      3.2   Training. The training to be provided to assist Capstone with the
transition is set forth in Paragraph 5.1 B) of the Amended and Restated License
Agreement.

      3.3   Rework of PSRs. Solar shall also rework approximately *** PSRs
recuperators with the scope of such rework limited to the resizing of the inner
cylinder diameter through mechanical expansion to allow the passage of the
existing inner diameter gages, removal of both stub-ducts, welding of new stub
ducts to meet the new stub-duct parameters as outlined

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in Solar drawing 203322 and leak check after rework. If PSRs are found not
re-workable either before or after rework, they will be marked and disposition
will be Capstone's decision. They will not be replaced.

All training, know-how, Solar Technology and other transition assistance
provided by Solar under this Agreement is provided under and subject to the
provisions of the Amended and Restated Licensing Agreement and the Nondisclosure
Agreement attached thereto.

      4.    AMENDED AND RESTATED LICENSE AGREEMENT. The License Agreement has
been amended and modified in the form of the Amended and Restated License
Agreement and shall become effective on the Effective Date as well. The
Transition Fee is due in partial consideration for the modified terms in the
Amended and Restated License Agreement. All Solar Intellectual Property,
training and proprietary information provided by Solar or its employees under
this Agreement or as part of the Transaction shall be covered under and subject
to the terms of the Amended and Restated License Agreement and the Nondisclosure
Agreement attached thereto.

      5.    WARRANTIES ON PSRS. All WARRANTIES, EXPRESS OR IMPLIED, guarantees
or responsibilities Solar may have for the PSRs or work supplied by Solar to
Capstone under the Alliance Agreement, under any purchase orders or hereunder,
except Order 292 (see Section 6 below), shall be deemed TRANSFERRED AND FULLY
ASSIGNED to Capstone upon the transfer of the Machine Tools to Capstone AND
SOLAR SHALL BE AND IS HEREBY RELEASED FROM ANY LIABILITY OR OBLIGATION
THEREFORE. Solar shall however without liability or recourse, offer during the
original warranty period covering the work or PSR, free technical assistance on
warranty repairs. Such technical assistance shall be limited to matters
presently known to and readily available to Solar and freely transferable by
Solar and Solar shall not be required to engage in any independent research or
study in providing such assistance.

      6.    CAPSTONE PURCHASE ORDER 292. Solar shall continue under Capstone
Purchase Order Number 292 ("Order 292") with a goal of completing production of
***, by *** to a modified design as defined in a June 20, 2000 Capstone/Solar
meeting and summarized in Solar drawing 203210 rev C. Under the Order, Solar
also agreed to fabricate additional PSRs from left over materials. Solar shall
perform the Order for the consideration set forth in the Order. The amount due
Solar under Milestone #4, Section 2, is separate from and in addition to the
amount due Solar under Order 292. Solar's warranty responsibility for the PSRs
sold by Solar to Capstone under Capstone PO292 will be limited to a lump-sum
payment of *** per defective core. Thus, Solar's obligations under any and all
warranties provided by Solar under the Order 292 are limited to no more than ***
per core for any and all defect(s) or claim(s) brought under such warranties and
may be fulfilled by the payment of the lesser of such *** per core or the cost
incurred by Capstone in repairing and or replacing the warranted defect under
the terms of the "Warranty" clause in the Order. Capstone shall provide Solar an
accounting of such costs when claiming the *** per core or such lesser amount
due hereunder. Except as stated in this Section 6, SOLAR HAS NO OTHER OBLIGATION
OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT

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LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS OF PURPOSE, WITH RESPECT TO
ANY WARRANTY OR SUCH CLAIMS. Order 292 will remain in effect according to its
terms notwithstanding the termination of the Alliance Agreement under Section 7
below.

7.    TERMINATION OF THE ALLIANCE AGREEMENT. As of the Effective Date, the
rights and obligations under the Alliance Agreement will be deemed automatically
terminated without further act on the part of Solar and/or Capstone.

      7.1   Solar Release. Contemporaneously with the execution of this
Agreement, Solar shall provide to Capstone, in the form attached hereto as
Appendix A, a written release (effective as of the Effective Date) of Capstone
and its affiliates for any actions, claims, lawsuits, causes of action, damages,
judgments, liabilities, costs, and expenses relating to (i) the Alliance
Agreement and any purchase orders issued thereunder (other than Capstone
Purchase Order 292, which shall continue in effect according to its terms) (ii)
Solar's participation in any or all aspects of developing and/or manufacturing
PSRs under the Alliance Agreement, (iii) the termination of the Alliance
Agreement pursuant to this Agreement, (iv) any and all actual, pending,
threatened, or anticipated administrative and/or judicial proceedings relating
to any of the provisions of subparagraphs (i) through (iv) above and all
discussions, meetings, memoranda documents and/or negotiations relating to
subparagraphs (i) through (iv) above. The release shall not excuse any of the
obligations to be performed under this Agreement and under the Amended and
Restated License Agreement.

      7.2   Capstone Release. Contemporaneously with the execution of this
Agreement Capstone shall provide to Solar, in the form attached hereto as
Appendix B, a written release (effective as of the Effective Date) of Solar and
its affiliates for any actions, claims, lawsuits, causes of action, damages,
judgments, liabilities, costs, and expenses relating to (i) the Alliance
Agreement and any purchase orders issued thereunder (other than Capstone
Purchase Order 292 which shall continue in effect according to its terms), (ii)
Solar's participation in any or all aspects of developing and/or manufacturing
PSRs under the Alliance Agreement, (iii) the termination of the Alliance
Agreement pursuant to this Agreement, (iv) any and all actual, pending,
threatened, or anticipated administrative and/or judicial proceedings relating
to any of the provisions of sub-paragraphs (i) through (iv) above and all
discussions, meetings, memoranda, documents and/or negotiations relating to
subparagraphs (i) through (iv) above. The release shall not excuse any of the
obligations to be performed under this Agreement and under the Amended and
Restated License Agreement.

      7.3   Notwithstanding, this Section 7, the provisions of Paragraph 13.1,
Confidential Information, of the Alliance Agreement shall survive its
termination. Said Paragraph 13.1 incorporates by reference a nondisclosure
agreement attached to the Alliance Agreement as Exhibit C (the "Prior
Nondisclosure Agreement"). Upon the Effective Date all Proprietary Information
disclosed under the Prior Nondisclosure Agreement shall be

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subject to the provisions of and covered under the Nondisclosure Agreement
described in Paragraph 8.1 below.

8.    CONFIDENTIAL INFORMATION AND NOTICES.

      8.1   Confidential Information. The parties hereby ratify and incorporate
by reference that certain Nondisclosure Agreement, attached to the Amended and
Restated License Agreement as Exhibit "A" (the "Nondisclosure Agreement"). The
terms and conditions of this Agreement are confidential and are subject to the
provisions of the Nondisclosure Agreement.

      8.2   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
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Ake Almgren
                      President and Chief Executive Officer

      With a copy to:
               Capstone Turbine Corporation
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Jeff Watts
                      Chief Financial Officer

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

               Attention:    Director, Recuperator Business

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.

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9.0   DEFAULT AND DISPUTE RESOLUTION.

      9.1   Default. If either party materially breaches this Agreement or if
Capstone fails to make any payment of Transition Fees under 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 a breach or failure to pay remains uncured after
thirty (30) days either party may initiate the dispute resolution proceedings
provided for in Paragraph 9.2 and 9.3. If Capstone disputes an invoice and
refuses to pay any disputed (invoiced and unpaid) Transition Fees into an escrow
account after written notice from Solar, with a sixty (60) day opportunity to
cure, Solar may on notice to Capstone terminate this Agreement and the Amended
and Restated License Agreement. So long as Capstone pays all of the undisputed
fees and places the disputed amounts in an escrow account which authorizes the
release of such amounts in accordance with any award or resolution under
Paragraph 9.2 and 9.3 Solar may not terminate this Agreement or the Amended and
Restated License Agreement for failure to pay such amount. Such a termination by
Solar will be in addition to any other rights or remedies Solar may have in
equity or at law.

      9.2   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 9.3.

      9.3   Arbitration. Subject to the provisions of Paragraph 9.3 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 the applicable statute of limitations. The party requesting
arbitration shall appoint one independent neutral arbitrator in writing and the

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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 there-over. 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.

      9.4   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.

      9.5   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.

10.   REPRESENTATIONS, WARRANTIES AND DISCLAIMERS.

      10.1  Solar Representations. Solar hereby represents and warrants to
Capstone that:

            (i) it has the full power and authority to execute, deliver any
obligations under this Agreement and the Amended and Restated License Agreement
and to carry out the transactions contemplated thereby;

            (ii) it has duly authorized, executed and delivered this Agreement
and the Amended and Restated License Agreement and this Agreement and the
Amended and Restated License Agreement constitute its legal, valid and binding
obligation, enforceable against it in accordance with the terms thereof;

            (iii) no authorization, consent, approval or order of or notice to
or registration, qualification, declaration or filing with, any governmental
authority is required for its execution, delivery and/or performance of this
Agreement, or the Amended and Restated License Agreement;

            (iv) the execution, delivery and performance by it of this Agreement
and the Amended and Restated License Agreement, and the compliance by it with
the terms and provisions hereof do not conflict with or result in a breach or
violation or constitute a default under (a) any of the terms, conditions or
provisions of its articles of incorporation and by-

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laws and/or any joint development or other agreements or documents between and
among it and any parties now or previously involved in the development and/or
operation of the Turbofab Facility or any successor thereto (b) any applicable
law, rule, regulation, order, writ, injunction, judgment or decree of any court
or governmental agency or authority, or (c) any loan agreement, indenture,
mortgage, contract or other agreement or instrument to which it is a party or by
which it or any of its properties is bound (including, without limitation, those
relating to the Turbofab Facility); nor will any such action result in the
imposition of any lien, mortgage or other encumbrance upon any of its
properties; and

     10.2   Capstone Representations. Capstone hereby represents and warrants to
Solar that:

            (i) it has full power and authority to execute, deliver and perform
its obligations under this Agreement and the Amended and Restated License
Agreement and to carry out the transactions contemplated thereby;

            (ii) it has duly authorized, executed and delivered this Agreement
and the Amended and Restated License Agreement and this Agreement and the
Amended and Restated License Agreement constitute its legal, valid and binding
obligation, enforceable against it in accordance with the terms thereof;

            (iii) no authorization, consent, approval or order of, or notice to
or registration, qualification, declaration or filing with, any governmental
authority is required for its execution, delivery and performance of this
Agreement or the Amended and Restated License Agreement; and

            (iv) the execution, delivery and performance by it of this Agreement
and the Amended and Restated License Agreement, and the compliance by it with
the terms and provisions thereof, do not conflict with or result in a breach or
violation of or constitute a default under any of the terms, conditions or
provisions of (a) its articles of incorporation, or (b) any applicable law,
rule, regulation order, writ, injunction, judgment or decree of any court or
governmental agency or authority, or (c) any loan agreement, indenture,
mortgage, contract or other material agreement or instrument to which it is a
party or by which it or any of its properties is bound; nor will any such action
result in the imposition of any lien, mortgage or other encumbrance upon any of
its properties.

      10.3 Waiver of Incidental and Consequential Damages. 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.

      10.4 Disclaimer. ALL MACHINE TOOLS TRANSFERRED AND RE-WORK OF PSRs (SEE
PARAGRAPH 3.3) UNDER THIS AGREEMENT ARE TRANSFERRED AND PERFORMED "AS IS" AND
SOLAR DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL EXPRESS OR IMPLIED
WARRANTIES WITH RESPECT TO THE TRANSFERRED MACHINE TOOLS AND RE-WORK, 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

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AGREEMENT SHALL BE DEEMED TO CONSTITUTE A REPRESENTATION OR WARRANTY BY SOLAR OF
THE ABILITY OF CAPSTONE TO MANUFACTURE OR SELL PRODUCTS OR PSRs.

      10.5 Indemnity. 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, Machine Tools or PSRs by Capstone, or its
affiliates, subsidiaries or transferees or use by Capstone or its affiliates,
subsidiaries or transferees of any Solar Intellectual Property, Machine Tools or
PSRs 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, Machine Tools or PSRs,
except for claims that are due 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.

      10.6 NOTWITHSTANDING ANY PROVISION CONTAINED IN THIS AGREEMENT OR IN THE
AMENDED AND RESTATED LICENSE AGREEMENT TO THE CONTRARY, SOLAR DOES NOT GUARANTEE
ANY RESULTS WHATSOEVER, WHETHER WITH REGARD TO CAPSTONE'S CAPACITY TO
MANUFACTURE OR MAKE PSRs, ANY INCREASE IN OR EQUAL TO SOLAR'S PRODUCTION RATES
OR INCREASE THE PRODUCTION CAPACITY OF 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
ITS OWN INVESTIGATIONS AND OBTAINS ITS OWN INFORMATION ABOUT BUSINESS
TRANSACTIONS. EACH PARTY RELIES WHOLLY ON IT OWN COUNSEL IN MAKING BUSINESS
DECISIONS AND ASSUMES ALL RISKS WITH REGARD TO WHETHER INDIVIDUAL INVESTMENTS
ACHIEVE CERTAIN RESULTS. SOLAR HAS ADVISED CAPSTONE OF THE RISKS OF TRANSFER
CONTEMPLATED BY THIS AGREEMENT AND THE AMENDED AND RESTATED LICENSE AGREEMENT
WITHIN THE TIME FRAMES REQUESTED BY CAPSTONE. SOLAR ASSUMES NO RESPONSIBILITY
REGARDING THE ABILITY OR LIKELIHOOD THAT CAPSTONE WILL BE ABLE TO ASSIMILATE,
USE AND BE SUCCESSFUL WITH MACHINE TOOLS, SOLAR INTELLECTUAL PROPERTY AND ALL
OTHER INFORMATION OR KNOW-HOW TRANSFERRED IN THEIR ATTEMPTS TO MANUFACTURE
AND/OR PRODUCE PSRs FOR CAPSTONE MICROTURBINES. EXCEPT AS SPECIFICALLY PROVIDED
FOR ELSEWHERE HEREUNDER, THERE IS NO GUARANTEE AS TO ACCURACY, SUFFICIENCY, OR
COMPLETENESS OF THE SOLAR INTELLECTUAL PROPERTY OR SUCH INFORMATION, EXCEPT IN
THE CASE THAT SOLAR'S CONDUCT IN PROVIDING INACCURATE, INSUFFICIENT OR
INCOMPLETE INFORMATION IS INTENTIONAL OR GROSSLY NEGLIGENT. SOLAR'S GOAL IS TO,
WITHIN THE SPECIFIC PERFORMANCE OBLIGATIONS OF THIS AGREEMENT AND THE AMENDED
AND RESTATED LICENSE

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AGREEMENT, TRANSFER TO CAPSTONE ITS MANUFACTURING CAPABILITY, AS OF THE
EFFECTIVE DATE, FOR CAPSTONE SPECIAL ORDER PSRs FOR CAPSTONE MICROTURBINES IN
ACCORDANCE THEREWITH.

      10.7 Survival. This Section 10.0 shall survive any expiration or
termination of this Agreement.

11.0  MISCELLANEOUS.

      11.1 Severable Provisions. 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.

      11.2 Assignment. This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of Capstone and Solar and neither party
shall assign this Agreement or any part thereof without the prior written
consent of the other party, which consent may be withheld for any reason except
that it may be assigned by Capstone to a purchaser of substantially all the
assets of Capstone, provided such purchaser is not actively engaged in the
business of manufacturing or selling recuperators, or manufacturing or selling
individual gas turbines of *** or greater output power.

      11.3 No License. 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. Any such rights are granted under and subject to the Amended and
Restated License Agreement.

      11.4 Independent Contractors. This Agreement shall not constitute, create,
give effect to or otherwise imply a teaming, joint venture, 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.

      11.5 Entire Agreement. This Agreement and those documents specifically
referenced herein and constitute the entire agreement between the parties with
respect to the

                                       12
<PAGE>   13

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.

      11.6 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 its independent research and
development activities.

      11.7 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.

      11.8 Employee Solicitation. For a period of three years 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.

      11.9 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.

      11.10 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) 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 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 Paragraph 11.12 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.

      11.11 Public Acknowledgement. Both Solar and Capstone may publicly
acknowledge and announce that they have entered into an agreement for the
transfer and licensing of rights to manufacture PSRs for incorporation into
Capstone's Microturbines.

                                       13
<PAGE>   14

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 this Agreement is an exclusive
agreement.

      11.12 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.

      IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by two authorized and elected officers of each party.

CAPSTONE TURBINE                        SOLAR TURBINES INCORPORATED
CORPORATION
                                        By: /s/  GARY STROUP
                                            ------------------------------------
By: /s/  AKE ALMGREN
    ---------------------------------
                                        Printed
Printed                                 Name:  Gary Stroup
Name: Ake Almgren                              ---------------------------------
                                        Title: President
Title: President & CEO
                                        Date: August 4, 2000
Date: August 7, 2000                          ----------------------------------
      -------------------------------

CAPSTONE TURBINE                        SOLAR TURBINES INCORPORATED
CORPORATION
                                        By: /s/ DAVID W. ESBECK
                                            ------------------------------------
By: /s/ WILLIAM TREECE
    ---------------------------------
                                        Printed
Printed                                 Name: David W. Esbeck
Name: William Treece                          ----------------------------------
      -------------------------------
                                        Title: Vice President
Title: Sr. VP Strategic Technology             ---------------------------------
       ------------------------------
                                        Date: August 4, 2000
Date: August 7, 2000                          ----------------------------------
      -------------------------------

                                       14
<PAGE>   15

                                   APPENDIX A

                                     RELEASE

      This Release is made effective as of August 2, 2000 by Solar Turbines
Incorporated, a corporation organized and existing under the laws of the state
of Delaware ("Solar"), on behalf of itself and each of its predecessors,
successors, parent companies, subsidiaries, affiliates, divisions, assignees,
attorneys and nominees, and all present and former partners, employees,
directors, officers, agents, attorneys, beneficiaries, representatives and
stockholders (the "Releasor") for the benefit of Capstone Turbines Corporation
("Capstone"), and its respective predecessors, successors, parent companies,
subsidiaries, affiliates, divisions, assignees, attorneys and nominees, and all
present and former partners, employees, directors, officers, agents, attorneys,
beneficiaries representatives, and stockholders (the "Releasees"). This Release
is being provided in connection with Paragraph 7 of that certain Transition
Agreement dated August 2, 2000 ("Transition Agreement") between the Releasor and
the Releasees that is being executed contemporaneously herewith. All capitalized
terms used in this Release that are not otherwise defined herein shall have the
same meaning as set forth in the aforesaid Transition Agreement.

      This Release shall be deemed effective and operative automatically and
without any further action on the part of Capstone or Solar.

      The Releasor, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, does hereby release
and forever discharge Releasees of and from any and all manner of claims,
rights, actions, causes of actions, suits, liens, obligations, accounts, debts,
damages (whether general, special, indirect or punitive), demands, agreements
promises, covenants, contracts, judgments, indemnities, guarantees, liabilities,
controversies, costs, expenses and attorneys' or paralegals' or other fees
whatsoever, whether based on contract, tort, statute or other legal or equitable
theory of recovery, whether choate or inchoate, mature or unmatured, contingent
or fixed, liquidated or unliquidated, known or unknown, accrued or unaccrued, or
asserted or unasserted (individually, a "Claim" and collectively, "Claims"), in
connection with, arising out of, or which are in any way related to a (i) the
Alliance Agreement dated August 25, 1997 between Capstone and Solar ("Alliance
Agreement"), (ii) any purchase order issued by Capstone under the Alliance
Agreement (except for Capstone Purchase Order 292, which shall remain in
effect), iii) the termination of the Alliance Agreement pursuant to the
Agreement, (iv) any and all actual, pending, threatened, or anticipated
administrative and/or judicial proceedings relating to any of the provisions of
subparagraphs (i) through (ii) and (iv) hereof, and (v) all discussions,
meetings, memoranda documents and/or negotiations relating to subparagraphs (i)
through (iv) above. This Release shall not in any way excuse or limit any and/or
all obligations to be performed under the Transition Agreement and/or under the
Amended and Restated License Agreement.

      TO THE EXTENT THAT SECTION 1542 OF THE CALIFORNIA CIVIL CODE IS APPLICABLE
TO THE RELEASES CONTAINED HEREIN, EACH PARTY

                                       15
<PAGE>   16

HERETO EXPRESSLY WAIVES ANY AND ALL RIGHTS AND BENEFITS OTHERWISE CONFERRED BY
THE PROVISIONS OF THAT SECTION TO THE FULL EXTENT THAT THEY MAY WAIVE ALL SUCH
RIGHTS AND BENEFITS PERTAINING TO THE MATTERS RELEASED HEREIN AND ACKNOWLEDGES
THAT IT IS FAMILIAR WITH THE SECTION, WHICH PROVIDES AS FOLLOWS:

      "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
      KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
      RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
      SETTLEMENT WITH THE DEBTOR."

      The Releasor warrants and represents to the Releasees that (i) it has read
and reviewed the terms and conditions hereof, (ii) it understands, acknowledges
and accepts its duties and obligations hereunder; (iii) it has been represented
by counsel in all matters relating to this Release, including the preparation
and execution hereof; (iv) it has full legal and corporate authority to enter
into this Release and assume the duties and obligations imposed upon it
hereunder; and (v) it shall execute promptly such documents as may be reasonably
requested by the Releasees to confirm the Releasor's obligations hereunder.

      This Release may be amended or modified only by a written instrument
executed by the Parties hereto.

      This Release shall be governed by and construed in accordance with the
laws of the State of California.

      IN WITNESS WHEREOF, Solar Turbines Incorporated has executed this Release
as of the date first written above.

                                        Solar Turbines Incorporated

                                        By: /s/  GARY STROUP
                                            ------------------------------------

                                        Title: President
                                               ---------------------------------

                                       16
<PAGE>   17

                                   APPENDIX B

                                     RELEASE

      This Release is made effective as of August 2, 2000, by Capstone Turbines
Corporation, a corporation organized and existing under the laws of the State of
California ("Capstone"), on behalf of itself and each of its predecessors,
successors, parent companies, subsidiaries, affiliates, divisions, assignees,
attorneys and nominees, and all present and former partners, employees,
directors, officers, agents, attorneys, beneficiaries, representatives and
stockholders (the "Releasor") for the benefit of Solar Turbines Incorporated
("Solar"), a corporation organized and existing under the laws of the state of
Delaware, and its respective predecessors, successors, parent companies,
subsidiaries, affiliates, divisions, assignees, attorneys and nominees, and all
present and former partners, employees, directors, officers, agents, attorneys,
beneficiaries, representatives, and stockholders (the "Releasees"). This Release
is being provided in connection with Paragraph 7 of that certain Transition
Agreement dated August 2, 2000 ("Transition Agreement") between the Releasor and
the Releasees that is being executed contemporaneously herewith. All capitalized
terms used in this Release that are not otherwise defined herein shall have the
same meaning as set forth in the aforesaid Transition Agreement.

      This Release shall be deemed effective and operative automatically and
without any further action on the part of Capstone or Solar.

      The Releasor, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, does hereby release
and forever discharge Releasees of and from any and all manner of claims,
rights, actions, causes of actions, suits, liens, obligations, accounts, debts,
damages (whether general, special, indirect or punitive), demands, agreements
promises, covenants, contracts, judgments, indemnities, guarantees, liabilities,
controversies, costs, expenses and attorneys' or paralegals' or other fees
whatsoever, whether based on contract, tort, statute or other legal or equitable
theory of recovery, whether choate or inchoate, mature or unmatured, contingent
or fixed, liquidated or unliquidated, known or unknown, accrued or unaccrued, or
asserted or unasserted (individually, a "Claim" and collectively, "Claims"), in
connection with, arising out of, or which are in any way related to a (i) the
Alliance Agreement dated August 25, 1997 between Capstone and Solar ("Alliance
Agreement"), (ii) any purchase order issued by Capstone under the Alliance
Agreement (except for Capstone Purchase Order 292, which shall remain in
effect), iii) the termination of the Alliance Agreement pursuant to the
Agreement, (iv) any and all actual, pending, threatened, or anticipated
administrative and/or judicial proceedings relating to any of the provisions of
subparagraphs (i) through (ii) and (iv) hereof, and (v) all discussions,
meetings, memoranda documents and/or negotiations relating to subparagraphs (i)
through (iv) above. This Release shall not in any way excuse and/or limit any
and/or all obligations to be performed under the Transition Agreement and/or the
Amended and Restated License Agreement.

      TO THE EXTENT THAT SECTION 1542 OF THE CALIFORNIA CIVIL CODE IS APPLICABLE
TO THE RELEASES CONTAINED HEREIN, EACH PARTY

                                       17
<PAGE>   18

HERETO EXPRESSLY WAIVES ANY AND ALL RIGHTS AND BENEFITS OTHERWISE CONFERRED BY
THE PROVISIONS OF THAT SECTION TO THE FULL EXTENT THAT THEY MAY WAIVE ALL SUCH
RIGHTS AND BENEFITS PERTAINING TO THE MATTERS RELEASED HEREIN AND ACKNOWLEDGES
THAT IT IS FAMILIAR WITH THE SECTION, WHICH PROVIDES AS FOLLOWS:

      "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
      KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
      RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
      SETTLEMENT WITH THE DEBTOR."

      The Releasor warrants and represents to the Releasees that (i) it has read
and reviewed the terms and conditions hereof; (ii) it understands, acknowledges
and accepts its duties and obligations hereunder; (iii) it has been represented
by counsel in all matters relating to this Release, including the preparation
and execution hereof; (iv) it has full legal and corporate authority to enter
into this Release and assume the duties and obligations imposed upon it
hereunder; and (v) it shall execute promptly such documents as may be reasonably
requested by the Releasees to confirm the Releasor's obligations hereunder.

      This Release may be amended or modified only by a written instrument
executed by the Parties hereto.

      This Release shall be governed by and construed in accordance with the
laws of the State of California.

      WHEREFORE, Capstone Turbines Corporation has executed this Release as of
the date first written above.

                                        Capstone Turbine Corporation

                                        By: /s/  AKE ALMGREN
                                            ------------------------------------

                                        Title: President & CEO
                                               ---------------------------------

                                       18
<PAGE>   19

                                   SCHEDULE 1

                              List of Machine Tools

                                       ***

                                       19
<PAGE>   20

                                   SCHEDULE 2

                                  Bill of Sale

KNOW BY ALL THESE PRESENTS;

      That for and in consideration of, good and valuable consideration, the
receipt of which is hereby acknowledged, the undersigned Solar Turbines
Incorporated, a Delaware corporation ("Solar") effective as of the _______ day
of _________, 2000, hereby sells, assigns and transfers to Capstone Turbine
Corporation, a California corporation ("Capstone"), all Solar's right, title and
interest in and to the machine tools described in the list below hereto
("machine tools"), to have and to hold the machine tools and each part thereof,
for Capstone's own use and benefit forever. Solar hereby warrants to Capstone
that the machine tools and all components of the Machine Tools transferred
hereby shall be as of the transfer date, owned by Solar and are held free and
clear of any mortgage, pledge, lien, charge, encumbrance, lease, or security
interest except liens created by or existing by or through Capstone, if any, and
that Solar has full right, title and authority as to all persons to sell the
same aforesaid; and Solar hereby covenants with Capstone that, to the extent of
the foregoing warranty, Solar will warrant and defend the same and all
components thereof against the claims and demands of all persons. IN WITNESS
WHEREOF, Solar has caused this instrument to be executed by its duly authorized
officer and its seal to be affixed hereto this _____ day of _______ 2000.

                                        Solar Turbines Incorporated

                                        By:
                                           -------------------------------------

                                        Title:
                                              ----------------------------------

LIST OF MACHINE TOOLS COVERED BY THIS BILL OF SALE:

                                       20<PAGE>   1

                                                                    EXHIBIT 10.2

                                  CONFIDENTIAL

***PORTIONS OF THE EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE COMPLETE EXHIBIT, INCLUDING THE PORTIONS FOR WHICH CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED, HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.

                     AMENDED AND RESTATED LICENSE AGREEMENT

This Amended and Restated License Agreement ("Agreement") is made effective as
of August 2, 2000 (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 21211 Nordhoff
Street, Chatsworth, California 91311-5844 ("Capstone");

WHEREAS, Solar and Capstone entered into a License Agreement dated August 25,
1997 ("Prior License Agreement") and desire, pursuant to this Agreement and that
Transition Agreement dated August 2, 2000 between the parties (the "Transition
Agreement"), to amend and restate that Prior License Agreement so that it, as of
the Effective Date, is superceded and replaced by this Agreement; and

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, (ii) any development PSR,
including such

<PAGE>   2

development PSR as may be modified from time to time, and (iii) any similar PSR
capable of direct replacement for the Capstone Special Order PSR.

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 which incorporates or
is derived from Solar Intellectual Property, manufactured by or on behalf of
Capstone, excluding PSRs supplied to Capstone by Solar.

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

1.4   "Solar Technology" shall mean all information in Solar's possession on the
Effective Date, with the right to disclose to Capstone, and relating to the
manufacture and use of Capstone Special Order PSRs, including for example, but
not by way of limitation, trade secrets, all technology, know-how, training and
transfer to be provided under Paragraph 5.1 of this Agreement, 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
Capstone Special Order PSRs.

1.5   "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 where, in the case of both (i) and (ii) based on patent applications having
an effective filing date on or prior to one (1) month after the Effective Date,
as defined above.

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

1.7   "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 where, in the case of both (i) and
(ii) based on patent applications having an effective filing date prior to the
termination or expiration of this Agreement.

1.8   "Subsidiary" shall mean any corporation, company or other entity of which
more than fifty percent (50%) 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
<PAGE>   3

1.9   "Transition Fee" shall mean the "Transition Fee" as defined under the
Transition Agreement.

2.0   EXERCISE OF LICENSE RIGHTS

2.1   The license rights granted under this License Agreement become effective
on the Effective Date.

2.2   Upon the Effective Date, Capstone may announce and/or publicize that
Licensed Products included in Capstone's Microturbines and sold by or on behalf
of Capstone are (or will be) manufactured pursuant to license rights granted to
Capstone by Solar. 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 this Agreement is
an exclusive agreement.

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, Solar hereby does grant to Capstone, a
non-exclusive, non-transferable, non-sublicensable, except as otherwise provided
herein, world-wide, royalty bearing 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, or parts or components thereof,
made by a third party for Capstone, only if Capstone first obtains Solar's
written consent to do so and first offers to Solar a right of first refusal to
produce the quantities concerned on the same terms and conditions as the third
party and Solar declines such right. Solar shall not unreasonably withhold,
delay, or condition such consent but Solar may, in any event, withhold its
consent if the third party competes with Solar in the turbomachinery business
and/or the recuperator business. In addition if Capstone discloses Solar
Technology to a third party in connection with its exercise of rights to have
Licensed Product or parts or components made by such third party under this
Paragraph 3.2, then Capstone shall first obtain the written agreement of said
third party to protect the Solar Technology according to provisions equivalent
to the Nondisclosure Agreement attached hereto as Exhibit A. Upon request,
Capstone shall provide to Solar copies of any such agreements by third parties.

3.3   Capstone hereby grants and agrees to grant to Solar a non-exclusive,
non-transferable, non-sublicensable except as provided herein, royalty-free
worldwide license

                                       3
<PAGE>   4

under Capstone Patents having a filing date within five (5) years of the
Effective Date 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 Paragraph 3.1 and shipped by
Capstone under this Agreement in accordance with the following schedule:

***

Such Licensed Product shall be considered as shipped by Capstone when such
Licensed Product is delivered as if on an ex-works or FOB basis to any third
party, whether an independent third party or a Capstone affiliate.

5.0   PRODUCT-KNOW-HOW AND TECHNOLOGY TRANSFER

5.1   To enable Capstone to manufacture Licensed Product under the provisions of
Paragraph 3.1, Solar shall:

      A) Promptly transfer to Capstone, starting within sixty (60) days from the
      Effective Date, all Solar Technology that is in tangible form related to
      the manufacture and use of Capstone Special Order PSRs; and

      B) Provide Capstone training in the overall Solar Technology to make and
      manufacture the Capstone Special Order PSR. Solar will provide four (4)
      weeks of such technical training at its Turbofab facility in the operation
      and maintenance of the *** machines, and the assembly of *** assemblies.
      Solar will accompany Capstone to its three major suppliers *** to effect
      the start of technology transfer and supplier introductions. Capstone will
      enter into a nondisclosure agreement with each such supplier in accordance
      with Paragraph 3.2. Capstone will be responsible to make its own
      arrangements with machine suppliers for training on machines not located
      at Solar. Solar will schedule these transfers as reasonably requested by
      Capstone but in any event prior to December 2000. Capstone has the
      obligation to apply appropriate and qualified resources and employees to
      the task of transferring such Solar Technology and to meeting the goal
      described in C) and D) below. As part of the technology transfer, Capstone
      will be provided both a current machine and raw material suppliers list.
      Capstone agrees that it shall not sell or transfer such tooling and
      equipment containing Solar Technology to a third party except as permitted
      by Section 14.1 hereof.

      C) Solar will use commercially reasonable efforts to complete the
      knowledge transfer by June 2001. Solar Technology will have been
      considered completely transferred to Capstone after each class of
      equipment listed below has been operated successfully to within *** of
      stated production rates in D) below and for a period equal to that
      required to support the completion of *** PSRs. Additional Solar

                                       4
<PAGE>   5

      consulting at Capstone is available for $1000 per day for a period of five
      (5) years following the Effective Date.

      D)

<TABLE>
<CAPTION>
       MACHINE CENTER                  PRODUCTION RATE
       --------------------------------------------------------------
<S>                                    <C>
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
       ***                             ***
       --------------------------------------------------------------
</TABLE>

      E) 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. If Capstone disputes an
      invoice for a Milestone related to this Paragraph 5.1 and refuses to pay
      any disputed (invoiced and unpaid) Transition Fee into an escrow account
      after written notice from Solar, with a sixty (60) day opportunity to
      cure, Solar may on notice to Capstone terminate this Agreement and the
      Transition Agreement. So long as Capstone pays all of the undisputed fees
      and places the disputed amounts in an escrow account which authorizes the
      release of such amounts in accordance with any award or resolution under
      Paragraph 14.4 Solar may not terminate this Agreement or the Transition
      Agreement for failure to pay such amount. Such a termination by Solar will
      be in addition to any other rights or remedies Solar may have in equity or
      at law.

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

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 solely by Capstone employees.

                                       5
<PAGE>   6

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 three (3) years 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 at
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 an under reporting of
royalties due Solar of five percent (5%) or more, 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 one percent (1%) 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.

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 seventeen (17) years from the
Effective Date. The licenses granted in Section 3.0 to each party shall be paid
up for the life of Capstone Patents

                                       6
<PAGE>   7

and Solar Intellectual Property upon the expiration, but 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 or if Capstone fails to
make any payment of Transition Fees under the Transition 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 or failure of Capstone to pay any
Transition Fees remains uncured after thirty (30) days the nondefaulting party
may initiate the dispute resolution proceedings provided for in Paragraph 14.4
and 14.5. However, if Capstone disputes an invoice and refuses to pay any
disputed (invoiced and unpaid) Transition Fee into an escrow account after
written notice from Solar, with a sixty (60) day opportunity to cure, Solar may
on notice to Capstone terminate this Agreement and the Transition Agreement. So
long as Capstone pays all of the undisputed Transition Fees and places the
disputed amounts of any Transition Fee in an escrow account which authorizes the
release of such amounts in accordance with any award or resolution under
Paragraph 14.4 Solar may not terminate this Agreement or the Transition
Agreement for failure to pay such amount. Such a termination by Solar will be in
addition to any other rights or remedies Solar may have in equity or at law.

8.0   WARRANTIES AND DISCLAIMERS

8.1   Each party represents and warrants that it has the right and power to
enter into this Agreement. Each party represents, warrants, and agrees that it
will cooperate and utilize commercially reasonable efforts to fulfill its
obligations under 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, intellectual property, 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.

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

                                       7
<PAGE>   8

      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   EXCEPT AS PROVIDED IN THE LAST SENTENCE OF PARAGRAPH 8.1, 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
express or implied, warranties as to the validity or enforceability of any Solar
Patents and/or Capstone Patents, respectively.

9.0   PROPRIETARY INFORMATION

9.1   The parties hereby ratify and incorporate that certain Nondisclosure
Agreement, dated August 2, 2000 ("Nondisclosure Agreement") attached hereto as
Exhibit "A". Certain proprietary information was disclosed subject to that
certain Nondisclosure Agreement dated June 1, 1996 between the parties which was
Exhibit C to that certain Alliance Agreement dated August 25, 1997 between the
parties. All such proprietary information disclosed thereunder, hereunder and
under the Transition Agreement shall be deemed as of the Effective Date covered
under and subject to the terms of the Nondisclosure Agreement attached hereto as
Exhibit A.

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 implied, any rights or licenses to
the party's proprietary information other than those rights specifically granted
in this Agreement.

                                       8
<PAGE>   9

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 (unlicensed) 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.

13.0  INDEMNIFICATION

13.1   If any claim or action is brought against Capstone based upon an
allegation that use of the Solar Intellectual Property 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 fifty
percent (50%) of the Transition Fees and 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 Intellectual Property 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.

                                       9
<PAGE>   10

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, or based on obligations which remain with Solar under Paragraph
13.1, 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. The maximum cumulative liability of Capstone under this
paragraph is thirty five million dollars ($35,000,000).

14.0  GENERAL TERMS AND CONDITIONS

14.1   This Agreement shall inure to the benefit of and be binding upon the
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 which shall not be unreasonably withheld, delayed, or conditioned,
except (i) that it may be assigned by either party to a wholly owned subsidiary
of the assigning party without the other party's consent; and (ii) that it may
be assigned to a purchaser or transferor of substantially all the assets of
Capstone or Solar, provided such purchaser is not actively engaged in the
business of manufacturing or selling PSRs, or manufacturing or selling
individual gas turbines of *** or greater output power. Notwithstanding any
provision contained in this Agreement to the contrary, Capstone may only
sublicense a party, other than a wholly owned subsidiary, with Solar's prior
written consent. In all events, as to each and every assignment made and each
sublicense, if granted, such assignment and/or sublicense shall provide Solar
with all rights and benefits it has under this Agreement against such assignee
and/or sublicensee and impose on such assignee and/or licensee all of the
obligations under this Agreement. Notwithstanding any provision contained in
this Agreement to the contrary, in the event Solar or Capstone assigns or
sublicenses this Agreement to a third party, Solar and/or Capstone, as the case
may be, 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:

                                       10
<PAGE>   11

      To Capstone:
               Capstone Turbine Corporation
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Ake Almgren
                      President and Chief Executive Officer

      With a copy to:
               Capstone Turbine Corporation
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Jeff Watts
                      Chief Financial Officer

      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.

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

                                       11
<PAGE>   12

      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. 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 three years from the Effective 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.

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 Exhibit A constitute the entire agreement
between the parties with respect to the subject matter hereof, and as of the
Effective Date 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.

                                       12
<PAGE>   13

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 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

                                       13
<PAGE>   14

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 by
their duly authorized officers on the day and year indicated below to be
effective as of the date indicated above.

CAPSTONE TURBINE CORPORATION            SOLAR TURBINES INCORPORATED

By: /s/ AKE ALMGREN                     By: /s/ GARY STROUP
    ---------------------------------       ------------------------------------

Title: President & CEO                  Title: President
       ------------------------------          --------------------------------

Date: August 7, 2000                    Date: August 3, 2000
      -------------------------------         ----------------------------------

CAPSTONE TURBINE CORPORATION            SOLAR TURBINES INCORPORATED

By: /s/ WILLIAM TREECE                  By: /s/ DAVID W. ESBECK
    ---------------------------------       ------------------------------------

Title: Sr. VP Strategic Technology      Title: Vice President
       ------------------------------          ---------------------------------

Date: August 7, 2000                    Date: August 4, 2000
      -------------------------------         ----------------------------------

                                       14
<PAGE>   15

                                    EXHIBIT A

                             NONDISCLOSURE AGREEMENT

This Nondisclosure Agreement ("Agreement") is made effective as of August 2,
2000 by and between Solar Turbines Incorporated, a Delaware corporation having
its principal office in San Diego, California ("Solar") and Capstone Turbine
Corp., a California corporation having its principal office in Woodland Hills,
California ("Capstone").

      WHEREAS, Solar and Capstone entered into an Alliance Agreement dated
August 25, 1997 ("Alliance Agreement"), under which Solar has been supplying
certain primary surface recuperators ("PSRs") for Capstone's Microturbine
Generator sets and Capstone has been purchasing PSRs from Solar.

      WHEREAS, on August 25, 1997 Solar and Capstone also entered into a License
Agreement ("License Agreement") under which Solar agreed, upon Capstone's
election, to license Solar Intellectual Property (as defined therein) to
Capstone to manufacture and modify PSRs for incorporation into Capstone's
Microturbines, all in accordance with the terms of such License Agreement.

      WHEREAS, Capstone agreed to pay Solar certain Transition Fees pursuant to
that certain Transition Agreement dated August 2, 2000 between the parties
("Transition Agreement") for the buyout and termination of the Alliance
Agreement, the modification and amendment of the License Agreement and the
assistance to be provided by Solar in transitioning its present manufacturing
capabilities for PSRs for Capstone Microturbines to Capstone, all pursuant and
subject to the Transition Agreement and the Amended And Restated License
Agreement between the parties of even date herewith (the "Amended and Restated
License Agreement") which define in further detail the transaction contemplated
thereby (the "Transaction").

      WHEREAS, Solar has agreed to share and disclose certain proprietary
information and Solar Technology (collectively the "Solar Technology"
hereunder), as defined in the Amended and Restated License Agreement, to
Capstone as part of and in furtherance of the Transaction.

      WHEREAS, certain proprietary information was disclosed under the Alliance
Agreement subject to that certain Nondisclosure Agreement dated June 1, 1996
between the parties which was Exhibit C to the Alliance Agreement ("Prior
Nondisclosure Agreement").

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

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

                                       15
<PAGE>   16

compressors, air bearings, combustors, permanent magnet alternators, electronic
convertors and recuperators and has the right to disclose certain proprietary
information related thereto ("Capstone Proprietary Information").

      WHEREAS, the parties agree that all proprietary information disclosed
under each of the above described Prior Nondisclosure Agreements and the Solar
Technology (as defined in the Amended and Restated Licensing Agreement) and the
Capstone Proprietary Information (as defined just above), collectively, shall be
referred to herein as "proprietary information" and be subject to this
Agreement.

      WHEREAS, each party desires to disclose such proprietary information to
the other party for the limited purposes authorized under and in furtherance of
the Transaction and, as to the Solar Technology and Solar proprietary
information, subject to the terms of the Amended and Restated Licensing
Agreement.

      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
disclose to any person or persons or use for purposes other than as allowed
under the Amended and Restated License Agreement, proprietary information
disclosed to it under this Agreement.

            Each Party recognizes that any disclosure of proprietary information
received by it from the other 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,
each Party agrees:

            (a) to hold all proprietary information disclosed to it in
safekeeping and in strict confidence and not to disclose such 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 disclosed to it with at
least the same degree of care with which each treats and protects its own
proprietary information which 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 disclosed to
it to only those employees within its organization who require such proprietary
information in performing the limited purpose of this Agreement, and to inform
each of its employees of the provisions of this agreement; and

                                       16
<PAGE>   17

            (d) to use proprietary information disclosed to it 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 lime of disclosure, or is
subsequently made 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
proprietary information. In providing data pursuant to this Agreement, the Party
providing the proprietary information makes no representation, either expressed
or implied, as to adequacy, sufficiency, or freedom from fault of such
proprietary information and incurs no responsibility nor obligation whatsoever
by reason thereof; and the furnishing of such proprietary information shall not
convey any rights or license with respect to such proprietary information.

      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

                                       17
<PAGE>   18

as this Agreement is in place with such parties. Similarly, such contract or
purchase order will authorize Capstone, subject to the provision of Paragraph
3.2 of the Amended and Restated License Agreement, 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 for breach of the
terms hereof or of the License Agreement or Transition Agreement upon giving
sixty (60) written notice of its intention to terminate to the other Party
unless the defaulting party cures each and every breach within such cure period;
or (b) the Agreement shall automatically expire ten (10) years from the
Effective Date 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.
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Ake Almgren
                      President and Chief Executive Officer

               With a copy to:

               Capstone Turbine Corp.
               21211 Nordhoff Street
               Chatsworth, California 91311-5844

               Attn:  Jeff Watts
                      Chief Financial Officer

               If to Solar:

               Solar Turbines Incorporated
               2200 Pacific Highway
               San Diego, CA  92101

               Attn:  Director, Recuperator Business

                                       18
<PAGE>   19

               With a copy to:

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

      10. Return of Proprietary information. All proprietary information
disclosed to the receiving Party shall remain the property of the disclosing
Party and within thirty (30) days of any termination of this Agreement in
accordance with Paragraph 7 above, 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.

                                       19
<PAGE>   20

      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.

      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

                                       20
<PAGE>   21

      IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized officers.

CAPSTONE TURBINE CORPORATION            SOLAR TURBINES INCORPORATED

By: /s/ AKE ALMGREN                     By: /s/ GARY STROUP
    ---------------------------------       ------------------------------------

Title: President & CEO                  Title: President
       ------------------------------          --------------------------------

Date: August 7, 2000                    Date: August 3, 2000
      -------------------------------         ----------------------------------

CAPSTONE TURBINE CORPORATION            SOLAR TURBINES INCORPORATED

By: /s/ WILLIAM TREECE                  By: /s/ DAVID W. ESBECK
    ---------------------------------       ------------------------------------

Title: Sr. VP Strategic Technology      Title: Vice President
       ------------------------------          ---------------------------------

Date: August 7, 2000                    Date: August 4, 2000
      -------------------------------         ----------------------------------

                                       21

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