Document:

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                                                                   Exhibit 10.32

                           GENXON MEMBERSHIP TRANSFER
                                      AND
                              SETTLEMENT AGREEMENT

     This GENXON Membership Transfer and Settlement Agreement (the "Agreement")
is made effective as of the 19th day of December, 2001, by and between
Catalytica Energy Systems, Inc., a Delaware corporation ("CESI"), Woodward
Governor Company, a Delaware corporation ("WGC"), and GENXON Power Systems, a
Delaware Limited Liability Company, (the "Company") and has reference to the
following facts:

     Whereas, pursuant to a Limited Liability Operating Agreement dated October
21, 1996 (as amended December 4, 1997 and October 20, 1998, the "Operating
Agreement"), Catalytica Combustion Systems, Inc., a Delaware corporation
("CCSI"), and WGC formed the Company, for the purposes and on the terms set
forth in the Operating Agreement, and,

     Whereas, CESI is a successor-in-interest to CCSI and succeeded to the
ownership of all of CCSI's Units of the Company, and,

     Whereas, CESI and WGC wish to set forth the terms on which WGC will
transfer all of its Units in the Company to CESI and the amendment and
restatement of the Operating Agreement.

     The parties agree as follows:

     1. Definitions. Terms used herein with initial capitalization shall have
        -----------
the meanings assigned to them in the Operating Agreement unless the context
otherwise requires or this Agreement specifies a different definition.

     2. Transfer of Units. Effective upon execution of this Agreement, in
        -----------------
consideration of: (i) the settlement set forth in Section 3 of this Agreement,
(ii) the payment of [$10,000] by CESI to WGC pursuant to Section 4 of this
Agreement, and (iii) the other undertakings set forth in this Agreement, WGC
transfers to CESI 50,000 Units of the Company (being all of the Units of the
Company held by WGC).

     3. Settlement of Glendale Claims. A law suit is currently pending between
        -----------------------------
CCSI, the Company, and the City of Glendale, California ("Glendale") in the
Superior Court of California, for the County of Orange, Case No. 00CC13002 (the
"Litigation). The Litigation arose pursuant to the Technical Services Agreement
between Glendale and CCSI dated September 18, 1996 (the "TSA"). Notwithstanding
the transfer of Units pursuant to this Agreement CESI and WGC desire to share
the burden of the Litigation as set forth below.

<PAGE>

     CESI and WGC agree that CESI alone shall control the Litigation, but shall
in good faith from time to time consult with and keep WGC informed as to the
progress of the Litigation and upon reasonable request provide WGC with copies
of any requested documents, including work product, under the joint defense
privilege. In the event that (i) WGC becomes a party to the Litigation and (ii)
WGC and CESI are represented by separate counsel, any further sharing of the
burden of the Litigation shall then cease at WGC's sole discretion, except as
otherwise thereafter agreed.

     Unless and until WGC becomes a party to the Litigation and is represented
by separate counsel, CESI and WGC each shall bear 50% of the attorneys' fees and
legal costs (including, but not limited to, filing fees, expert fees, transcript
fees, copying costs, electronic evidence discovery costs and all other fees and
costs associated with the Litigation).

     If the Litigation is settled, CESI and WGC each shall bear 50% of up to the
first $3,000,000 of the settlement amount, and CESI shall bear 70% and WGC shall
bear 30% of the settlement amount in excess of $3,000,000.

     If the Litigation is not settled and proceeds to trial with fraud,
intentional or negligent misrepresentation claims, or any other tort claim
related to the formation of the TSA pending against CESI, CESI shall request a
special verdict to apportion any judgment against CESI on a cause-of-action by
cause-of-action basis, and CESI shall bear 100% of any judgment on claims of
fraud, intentional or negligent misrepresentation, or any other tort claim
related to the formation of the TSA against CESI.

     If the Litigation is not settled and proceeds to trial with claims in
addition to or other than claims of the sort addressed in the preceding
paragraph:

          A. In the event of a WGC Claim, WGC shall request a special verdict to
apportion any judgment against WGC on a cause-of-action by cause-of-action basis
and WGC shall bear such portion of any such judgment as such special verdict
shall determine. For these purposes, a "WGC Claim" shall include any claim that
(i) alleges acts or omissions on the part of WGC giving rise to a remedy on
behalf of any party to the Litigation, and (ii) on which a judgment is entered.
For the avoidance of doubt, WGC understands, and CESI confirms, that, as of the
date of this Agreement, there is not any claim pending in the TSA that alleges
acts or omissions relating to the TSA, or otherwise, on the part of WGC.

          B. In the event of a CESI Claim, CESI shall request a special verdict
to apportion any judgment against CESI on a cause-of-action by cause-of-action
basis and CESI shall bear such portion of any such judgment as such special
verdict shall determine. For these purposes, a "CESI Claim" shall include any
claim that (i) alleges acts or omissions on the part of CESI or CCSI giving rise
to a remedy on behalf of any party to the TSA, and (ii) on which a judgment is
entered.

<PAGE>

          C. In the event that any claim or claims in addition to or other than
claims of the sort addressed in the preceding paragraphs A. and B. proceed to
judgment, CESI and WGC each shall bear 50% of up to the first $2,000,000 in any
judgment, and CESI shall bear 60% and WGC shall bear 40% of any judgment in
excess of $2,000,000.

     4. Payment by CESI to WGC. Concurrent with the execution of this Agreement,
        ----------------------
CESI shall make payment to WGC in the amount of US $10,000 (Ten Thousand
Dollars).

     5. Amendment of Operating Agreement. Pursuant to Section 10.3 of the
        --------------------------------
Operating Agreement, the parties agree that the Company shall continue with one
member. CESI is concurrently amending and restating the Operating Agreement by
executing an Amended and Restated Operating Agreement in the form attached as
Exhibit A.

     6. Tax Matters.
        -----------

        6.1 In the event of a third-party claim for taxes, CESI shall permit
WGC to control any audit or proceeding relating to any taxable year or period in
which WGC was a partner in the Company. CESI and WGC shall equally bear the
costs of such audit or proceeding. WGC shall not settle or otherwise compromise
any issue or matter without CESI's prior consent which consent may not be
unreasonably withheld. CESI shall make available or shall cause the Company to
make available such records and materials as WGC may require for the defense of
any audit or proceeding relating to the Company. Each party shall promptly
provide to the other all material correspondence with any tax authority relating
to any such audits or proceedings.

        6.2 WGC shall be permitted to file an amended tax return of the
Company relating to any taxable year or period in which WGC was a partner in the
Company to the extent that the amended tax return relates to or reflects an
adjustment made by the Internal Revenue Service or any other taxing authority.
CESI shall have a reasonable opportunity to review any amended tax return prior
to filing. WGC shall not file an amended tax return that would result in the
imposition of a material tax detriment to CESI without first obtaining CESI's
consent which consent shall not be unreasonably withheld. For these purposes, a
"material tax detriment to CESI" shall mean a federal or state tax liability in
excess of $10,000 determined by reference to CESI's tax position as of the
effective date of this Agreement, which position shall not take into account the
operating result of CESI attributable to any period or portion thereof beginning
after the effective date of this Agreement. If WGC files an amended tax return
that results in the imposition of a material tax detriment to CESI without
CESI's consent, WGC agrees to indemnify CESI against any such tax detriment in
excess of $10,000 in tax liability.

     7. Agreements Terminated.
        ---------------------

        7.1 The GENXON/Catalytica Combustion Systems License Agreement,
effective as of the October 21, 1996, by and between the Company and

<PAGE>

CCSI, is hereby, as of the date of this Agreement, superseded and terminated and
shall be null, void and of no further force and effect.

         7.2 The GENXON/Catalytica Combustion Systems License Agreement,
effective as of October 21, 1996, by and between the Company and WGC, is hereby,
as of the date of this Agreement, superseded and terminated and shall be null,
void and of no further force and effect.

         7.3 The Services Agreement, dated as of October 21, 1996, by and
between CCSI, WGC, and the Company, is hereby, as of the date of this Agreement,
superseded and terminated and shall be null, void and of no further force and
effect.

     8.  Agreements Not Terminated.
         -------------------------

         8.1 The Service Agreement No. 1, dated as of August 10, 2000, by and
between CCSI and WGC shall remain in full force and effect. The parties
acknowledge that, as CCSI's successor-in-interest, CESI is a party to such
agreement in lieu of CCSI.

         8.2 The Supply Agreement, dated as of October 21, 1996, by and between
CCSI, WGC, and the Company shall remain in full force and effect.

     9.  Other Continuing Rights. Notwithstanding this Agreement, including
         -----------------------
Section 7 hereof, the rights of WGC to use the Information (as defined in
Exhibit B attached hereto), shall remain in full force and effect only for and
during the term of the Control Patent Cross-License Agreement (the
"Cross-License Agreement") being executed concurrently with this Agreement by
CESI and WGC. WGC's right to use the Information shall terminate upon the
termination of the Cross-License Agreement. WGC shall not disclose any
Information to any third party, and may use such Information solely for the
purpose of exercising its rights under the Cross-License Agreement. In order to
allow WGC to exercise fully the licenses granted by CESI to WGC in the
Cross-License Agreement, CESI hereby releases WGC from any claims, in the past,
present and future, arising out of or based upon WGC's exposure to any CESI
non-patented or non-patentable technology, information or materials (with the
exception of any breach in the future of confidentiality with respect to the
information identified in Exhibit B) provided to WGC by CESI prior to the
Effective Date, if any.

     10. Consent to Transfers of Units. Pursuant to Sections 7.1(b) and 10.3 of
         -----------------------------
the Operating Agreement, the parties hereby consent to WGC's transfer of its
Units to CESI pursuant to this Agreement.

     11. Miscellaneous.
         -------------

         11.1 This Agreement shall be governed by the laws of the State of
California without regard to principles of conflict of laws.

         11.2 Notices. Any notice required or permitted to be given under this
              -------
Agreement shall be in writing. Notices to a party shall be deemed to have been
duly given upon personal delivery, at the close of business on the fifth day
after being

<PAGE>

deposited in United States mail, registered or certified, postage prepaid, and
addressed to the address provided to the Company for such party, at the close of
business on the first California business day after being deposited in the
United States with a nationally recognized overnight delivery service, with
delivery charges prepaid, and addressed as provided in the preceding clause, or
when actually received by such party by public or private mail, telecopy, telex
or telegram.

          The parties have executed this Agreement as of the date first written
above.

Catalytica Energy Systems, Inc.            Woodward Governor Company

By:     /s/ Craig N. Kitchen               By:     /s/ John A. Halbrook
      -------------------------------            -------------------------------

Name:       Craig N. Kitchen               Name:       John A. Halbrook
      -------------------------------            -------------------------------

Title:      President and CEO              Title:      Chairman and CEO
      -------------------------------            -------------------------------

<PAGE>

                                    EXHIBIT A

                    Amended and Restated Operating Agreement

                                   [attached]

<PAGE>

                                    EXHIBIT B

The "Information" referred to in Section 9 of the Agreement is defined as the
following:

     o    January 21,2000 Memorandum subject heading "Control Strategy for Angle
          Sensor" that provides the specific details on how the regular catalyst
          activity performance measurements will be done using the preburner and
          UV-sensor. This memo also includes a logical flow diagram.

     o    February 26, 2000 Memorandum subject heading "System Control-Initial
          Approach" outlining the general approach to controlling bypass and
          automatically compensate for catalyst aging.

     o    June 19, 2000 Memorandum subject heading "Functional Characterizations
          for Xonon 2.1" that provide specific details on how the bypass valve
          and adaptive control systems should be controlled. The memo also
          includes flow diagrams of a portion of the Xonon 2.0 logic and
          illustrates the changes for the Xonon 2.1 combustor.

     o    August 30, 2000 Power Point presentation titled "Control of a Gas
          Turbine with the Xonon Combustion System - Technology Update with
          Woodward and CDI" containing an overview of the Xonon 2.0 logic and
          the changes for the Xonon 2.1 combustor (bypass control).

     o    August 30, 2000 Memorandum subject heading "Controls Development Test
          Plan" that provides detailed information on the testing planned for
          September, October and November 2000. The memo outlines how the data
          analysis will be performed and in what order and manner the new Xonon
          2.1 logic should be incorporated.

     o    Simulink logic diagram of key areas of the 2.0 and 2.1 logic created
          by Guerry Buehman of CDI (a sub-contractor of CESI).

     o    August 31, 2000 Memorandum subject heading "Analytical Expressions
          Relating Tad and Fuel/Air Ratio" that summarizes the adiabatic
          combustion temperature calculation used in the Xonon 2.0 and 2.1
          control logic.

     o    September 1, 2000 email communication and electronic attachment of
          Simulink version of the 2.1 logic prepared by Guerry Buehman of CDI (a
          sub-contractor of CESI).

<PAGE>

                                   EXHIBIT B
                                  (continued)

     o    September 11, 2000 Memorandum subject heading "Functional
          Characterizations for Xonon 2.1" containing temporary values for the
          look-up tables in the logic.

     o    December 8, 2000 Memorandum subject heading "Tad Compensation for
          Preburner Primary Airflow Calculation" to improve the primary airflow
          calculation.

     o    January 4, 2001 Memorandum subject heading "Revisions - Functional
          Characterizations for Xonon 2.1" that includes updates on how airflow
          is calculated plus utilizes curve-blocks instead of an iterative
          calculation to determine catalyst activity.

     o    January 29, 2001 Memorandum subject heading "0117 SVP Xonon-2.1 Build
          C Air Flow Summary" that details CESI analysis of the air flow
          calculation equation being used in the logic.

     o    March 13, 2001 Memorandum subject heading "Xonon 2.1 Control
          Functions" that summarizes the incremental updates (including bleed
          logic) since the original "Functional Characterizations for Xonon 2.1"
          document was issued.

     o    October 1, 2001 Memorandum subject heading "Control Strategy to
          Minimize Load Oscillations During Unloading Sequence" that summarizes
          the key approaches CESI intends to incorporate into the logic.<PAGE>

                                                                   Exhibit 10.33

                            CONTROL PATENT ASSIGNMENT

                                       AND

                             CROSS-LICENSE AGREEMENT

     This Control Patent Assignment and Cross-License Agreement ("Agreement") is
made effective this 19th day of December, 2001 ("Effective Date") by and between
Woodward Governor Company, a Delaware corporation having a principal place of
business at 5001 N. Second Street, Rockford, Illinois 61125 USA (hereinafter
referred to as "WGC") and Catalytica Energy Systems, Inc., a Delaware
corporation having a principal place of business at 430 Ferguson Drive, Mountain
View, California 94043-5272 (hereinafter referred to as "CESI").

     WHEREAS WGC is the owner of and has the right to assign or grant licenses
to certain patents and patent applications relating to control technology
applicable to catalytic combustion for gas turbine engines;

     WHEREAS WGC desires to assign the 793 Patent as defined herein and to grant
CESI certain exclusive and non-exclusive rights with respect to certain other
WGC patents;

     WHEREAS CESI is the owner of and has the right to grant licenses to certain
patent applications relating to control technology applicable to catalytic
combustion for gas turbine engines; and

     WHEREAS CESI desires to grant WGC certain non-exclusive rights with respect
to CESI's patents;

     NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter expressed, the parties agree as follows:

     1. DEFINITIONS

          1.1  "793 Patent" means U.S. Patent No. 6,095,793, and all United
States patent applications and foreign patent applications claiming priority
from that patent, all patents issuing on any of the foregoing, and all
divisions, continuations, renewals, reissues, reexaminations, and extensions of
any of the foregoing owned by WGC or under which WGC has the right to grant
licenses.

          1.2  "CESI Improvement Patents" means any patents owned or controlled
by CESI covering Improvements.

<PAGE>

          1.3  "CESI Patents" means all United States patents and foreign
patents that CESI owns or under which CESI has the right to grant licenses
during the term of this Agreement that contain inventions useful for control
technology applicable to catalytic combustion for gas turbine engines. A list
setting forth CESI Patents issued as of the Effective Date and pending patent
applications (which if issued would be expected by CESI to become CESI Patents
within the scope of this definition) is attached hereto as Exhibit D.
                                                           ---------

          1.4  "Field" means (a) gas turbine engines equipped with one or more
Xonon Systems, and (b) control systems for such gas turbine engines.

          1.5  "Improvements" means any and all improvements, modifications,
enhancements, and refinements, whether patentable or unpatentable, in control
technology for catalytic combustion for gas turbine engines.

          1.6  "Payment and Royalty Termination Date" means 11:59pm Central Time
on December 31, 2014.

          1.7  "Sales" means all amounts invoiced on sales of WGC Control
Systems not used primarily for developmental, research or test purposes.

          1.8  "WGC Control System" means a WGC-provided control system for a
Xonon System.

          1.9  "WGC Improvement Patents" means any patents owned or controlled
by WGC covering Improvements.

          1.10 "WGC Patents" means all United States patents and foreign
patents, excluding the 793 Patent, that WGC owns or under which WGC has the
right to grant licenses during the term of this Agreement that cover inventions
in control technology applicable to catalytic combustion for gas turbine engines
that would be infringed by the practice of the inventions of the 793 Patent or
WGC Improvement Patents.

          1.11 "Xonon Control System" means a control system for a Xonon
System-equipped gas turbine that, but for the license grant herein, would
otherwise infringe a valid enforceable claim of the 793 Patent or WGC
Improvement Patents.

          1.12 "Xonon System" means a CESI catalytic combustion system for a gas
turbine engine.

     2. ASSIGNMENT AND LICENSE GRANT TO CESI

          2.1  793 Patent. WGC hereby assigns to CESI the entire right, title
               ----------
and interest in and to the 793 Patent. WGC has executed the short-form
assignment document attached hereto as Exhibit B, which CESI may file with the
                                       ---------
United States Patent and Trademark Office to record the assignment. WGC agrees
to execute

<PAGE>

customary assignment forms in order for CESI to record the assignment of pending
foreign applications of the 793 Patent in the applicable foreign jurisdictions
at CESI's request. WGC has listed on Exhibit C all payments required to be made,
                                     ---------
documents required to be submitted and all other actions required to be taken
within the 60-day period following the Effective Date in order to maintain the
793 Patent. WGC agrees to deliver promptly the attorney files for the 793 Patent
to the attorney or agent designated by CESI at CESI's request.

          2.2 WGC Improvement Patents. Subject to the qualifications and
              -----------------------
reservations set forth herein, WGC hereby grants CESI a worldwide, exclusive,
perpetual, irrevocable license, with rights to sub-license as herein set forth,
under the WGC Improvement Patents to practice the methods described therein and
to make, use, import, offer for sale and sell products in the Field. The
worldwide exclusive, perpetual, irrevocable license of the previous sentence
includes a non-exclusive license, with rights to sub-license as herein set
forth, under any WGC Patents, limited to the extent that the WGC Patent would be
infringed by operation under the grant in the previous sentence or operation
under the 793 Patent in the Field. WGC reserves the right under the WGC
Improvement Patents to make, use, import, offer for sale, and sell, WGC Control
Systems.

          2.3 Payments to WGC. CESI shall make payments to WGC in accordance
              ---------------
with the XONON MODULE PAYMENT TERMS attached hereto as Exhibit A. Such payments
                                                       ---------
are consideration for the assignment of the 793 Patent and for information
shared and assistance rendered to CESI prior to the Effective Date pertaining to
control systems. CESI and WGC agree that the payments shall continue at the rate
set forth in the XONON MODULE PAYMENT TERMS irrespective of whether a WGC patent
application issues that becomes a WGC Improvement Patent or whether the 793
Patent or any patent assigned to CESI hereunder is declared invalid. CESI's
payment obligations commence upon the Effective Date of this Agreement and will
terminate on the Payment and Royalty Termination Date, or until the cumulative
payments, royalties, license fees and license royalties and sub-license fees and
sub-license royalties paid to WGC hereunder total US $15,000,000 (Fifteen
Million US Dollars), whichever occurs first.

          2.4 License and Sub-Licenses. CESI may grant sub-licenses under
              ------------------------
Section 2.2 only as described in this Section 2.4. Prior to granting a
sub-license under Section 2.2 or a license under the 793 Patent to gas turbine
manufacturers and third party controls systems manufacturers for the sole
purpose of such sub-licensees or licensees developing, manufacturing, selling,
offering for sale, using, importing or servicing a control system for
Xonon-equipped gas turbines (each such sub-license or license, a "Control System
License," and each such sub-licensee or licensee, a "Control System Licensee"),
CESI shall first use reasonable efforts to make the potential Control System
Licensee aware of the benefits of purchasing such controls systems from WGC.
Each Control System License must be subject to the following conditions:

               2.4.1 the Control System Licensee may not sub-license any rights
granted under a Control System License to this Agreement; and

<PAGE>

               2.4.2 the Control System License will only apply to control
systems, or components thereof, for use with Xonon Systems.

          2.5 Nomination Process. Prior to granting a Control System License to
              ------------------
any third party control systems manufacturer:

               2.5.1 CESI shall provide WGC with a letter from a gas turbine
manufacturer nominating that third party control systems manufacturer to provide
controls systems for that gas turbine manufacturer; and

               2.5.2 such Control System License will only apply to controls
systems provided by the nominated third party controls systems manufacturer to
that gas turbine manufacturer.

          2.6 Control System License Fees. For each gas turbine manufacturer and
              ---------------------------
third party controls systems manufacturer to whom CESI grants a Control System
License, CESI will pay to WGC the sum of US $50,000 (Fifty Thousand US Dollars)
upon the execution of that Control System License, plus a running payment of US
$3,000 for each sale of a Xonon Control System under license. For the avoidance
of doubt, where CESI has paid the US $50,000 Control System License fee for a
particular gas turbine manufacturer or third party controls systems, no further
license or sub-license fees will be required for additional Control System
Licenses granted to that particular gas turbine manufacturer or third party
controls systems manufacturer or to its affiliates, but running payments will
continue to apply for such additional Control System Licenses.

          2.7 Notification. WGC shall notify CESI when a WGC Patent issues which
              ------------
would be expected by WGC to become a WGC Improvement Patent. The notification
shall occur within 2 months after a patent issues.

     3. GRANT TO WGC.

          3.1 CESI Patents and CESI Improvement Patents. Subject to the
              -----------------------------------------
qualifications and reservations set forth herein, CESI hereby grants WGC a
worldwide, non-exclusive, perpetual, irrevocable license, with rights to
sub-license as herein set forth, under the CESI Patents and CESI Improvement
Patents to practice the methods described therein and to make, use, import,
offer for sale and sell products in the Field.

          3.2 793 Patent. CESI hereby grants WGC a worldwide, non-exclusive,
              ----------
royalty-free, perpetual, irrevocable license, with rights to sub-license as
herein set forth, under the 793 Patent to practice the methods described therein
and to make, use, import, offer for sale and sell products in the Field. If CESI
decides not to pay maintenance fees for the 793 Patent, CESI shall notify WGC
and offer WGC the option of paying such maintenance fees on CESI's behalf prior
to the time such fees are due. In the event WGC elects to exercise such option
and pays such maintenance fees, the amount of such fees paid by WGC will be
counted towards WGC's US $2.0 million payment cap to CESI described in Section
3.3 below.

<PAGE>

          3.3 Payments to CESI.
              ----------------

               3.3.1 In consideration for information shared and assistance
rendered to WGC prior to the Effective Date pertaining to catalytic combustion,
the licenses granted herein, and other consideration, the receipt and
sufficiency of which is hereby acknowledged, WGC shall make payments to CESI
calculated on the basis of an amount equal to one percent of the Sales of WGC
Control Systems installed in conjunction with the installation of XONON
catalytic modules for both new and retrofit turbines. Such payments will apply
from the Effective Date of this Agreement through the Payment and Royalty
Termination Date, or until CESI has received total payments of US $2.0 million
(Two Million US Dollars), whichever occurs first.

               3.3.2 Payments accrue when a WGC Control System is sold by WGC to
a third party. A WGC Control System is deemed sold at the earliest of: the time
of first invoicing, or if not invoiced, at the time of first shipment, delivery
or other transfer to a third party, or the time when first put to use
controlling a gas turbine on an end user site.

               3.3.3 Payments are due on a quarterly basis, except that the
first payment period commences on the Effective Date and will conclude at the
end of the current calendar quarter, (each such payment period, a "Quarter").
The payments due in relation to each payment period will be due and payable
within forty-five (45) days from the conclusion of each payment period.

          3.4 Statements. WGC agrees to furnish a written report to CESI with
              ----------
each payment setting forth the number of WGC Control Systems sold during the
preceding Quarter and the payments due thereon.

          3.5 Audit. WGC agrees to keep accurate records documenting the
              -----
manufacture and sale of products so that the payments payable under the
provisions of this Agreement may be determined. WGC also agrees to permit its
records to be examined from time to time until one (1) year after the expiration
of its obligation to make payments, at the sole expense of CESI, by a recognized
Certified Public Accountant firm reasonably acceptable to WGC. The examination
period should be at reasonable intervals, during business hours, to the extent
necessary to verify the reports and payment required hereunder. The records
shall be kept for a period of 5 years from the date of the transactions
described herein.

          3.6 Notification. CESI shall notify WGC when a CESI patent issues
              ------------
which would be expected by CESI to become a CESI Improvement Patent. The
notification shall occur within 2 months after a patent issues.

     4. CONFIDENTIALITY

          4.1 Confidential Information. During the Term, and for a period of ten
              ------------------------
years thereafter, except as provided herein, each party shall maintain in
confidence, and shall not use for any purpose or disclose to any third party,
information disclosed by the

<PAGE>

other party in writing and marked "Confidential" or that is disclosed orally and
confirmed in writing as confidential within forty-five (45) days following such
disclosure (collectively, "Confidential Information"). Each party may disclose
the other's Confidential Information to employees or agents requiring access
thereto solely for purposes of performing such party's obligations or exercising
its rights granted under this Agreement; provided that prior to making such
disclosures, each such employee or agent shall be apprised of the duty and
obligation to maintain Confidential Information in confidence and not to use
such information for any purpose other than in accordance with the terms and
conditions of this Agreement. As required, each party agrees to take all steps
necessary to ensure that its affiliates, employees and associates will comply
with the confidentiality terms and conditions of this Section 4.

          4.2 Exceptions. Confidential Information shall not include information
              ----------
that the receiving party shows by competent written proof:

          (i)   was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure by the other party;

          (ii)  was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving party by the other
party;

          (iii) became generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement;

          (iv)  was disclosed to the receiving party, other than under an
obligation of confidentiality to a third party, by a third party who had no
obligation to the disclosing party not to disclose such information to others;

          (v)   was approved for release by written authorization of the
disclosing party; or

          (vi)  is independently developed by employees or contractors of the
receiving party or any of its affiliates without using any of the other party's
Confidential Information.

          4.3 Permitted Usage. The receiving party may disclose Confidential
              ---------------
Information of the disclosing party solely to the extent such disclosure (i) is
necessary within the scope of a license or sub-license permitted hereunder, or
(ii) is required by applicable law, regulation or valid order of a governmental
agency or a court of competent jurisdiction; provided that if a party is
required to make any such disclosure of the other party's Confidential
Information, it will give reasonable advance written notice to the latter party
of such required disclosure, will only make such disclosure as is required and
will use its best efforts to secure, or to assist the other party in obtaining,
a protective order or confidential treatment of such Confidential Information
prior to its disclosure. Further, a party may disclose the existence and terms
of this Agreement to existing or potential investors or acquirers or merger
partners, or to professional advisors

<PAGE>

(e.g., attorneys, accountants and prospective investment bankers) involved in
such activities, for the limited purpose of evaluating such investment or
transaction and under appropriate conditions of confidentiality.

          4.4 Confidential Terms. Except as expressly provided herein, each
              ------------------
party agrees not to disclose any financial terms of this Agreement to any third
party without the consent of the other party, except as required by securities
or other applicable laws, and, subject to reasonable conditions of
confidentiality, to prospective and other investors, professional advisors and
others with whom such party has or is considering a business relationship.

     5. COVENANT AND RELEASE OF CLAIMS.

          5.1 CESI and WGC mutually covenant that they will not initiate,
directly or indirectly, any legal action or any proceeding before a patent
office that seeks to contest the validity or that seeks to reduce the scope of
protection of any patent covered by this Agreement.

          5.2 In order to allow CESI to exercise fully the licenses granted by
WGC to CESI herein, WGC hereby releases CESI from any claims, in the past,
present and future, arising out of or based upon CESI's exposure to any WGC
non-patented or non-patentable technology, information or materials provided to
CESI by WGC prior to the Effective Date, if any.

     6. WARRANTIES

          6.1 Authority. Each party warrants that it has the right to make the
              ---------
assignment and the license grants, as applicable, hereunder.

          6.2 Execution. Each party represents and warrants that all actions
              ---------
necessary for entering into this Agreement have been taken.

          6.3 Limitation. THE WARRANTIES PROVIDED IN THIS SECTION ARE LIMITED
              ----------
WARRANTIES AND THEY ARE THE ONLY WARRANTIES MADE BETWEEN THE PARTIES. NEITHER
PARTY MAKES NOR RECEIVES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, AND ALL
WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY
EXCLUDED. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE ENTITLED TO RECOVER FROM
THE OTHER PARTY ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES, OR
LOST PROFITS OR REVENUES, WHETHER IN CONTRACT OR IN TORT INCLUDING NEGLIGENCE,
EVEN IF THE PARTY HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EACH
PARTY ACKNOWLEDGES THAT THE FOREGOING WAIVER SERVES AS A MATERIAL INDUCEMENT FOR
IT TO ENTER INTO THIS AGREEMENT.

     7. INDEMNIFICATION.

<PAGE>

     Each party ("Indemnifying Party") agrees to defend, indemnify and hold
harmless the other party ("Indemnified Party") from all damages, losses, costs
and expenses, including reasonable attorney's fees, arising out of any claims of
such personal injury, death, property damage, promotion, marketing or
modifications based on the use of products produced and sold by the Indemnifying
Party, provided that the Indemnified Party gives the Indemnifying Party prompt
written notice of and sole control over the defense and resolution of any such
claims. The City of Glendale, California dispute that is ongoing as of the date
of this Agreement is expressly excluded from this Section 7.

     8. TERMINATION

          8.1 Term. This Agreement will terminate upon the expiration of the
              ----
last to expire of the patents included within the license grants herein, unless
sooner terminated as provided below.

          8.2 For Breach. Any breach by one of the parties of the obligations
              ----------
resulting from this Agreement, shall permit the other party to terminate this
Agreement, such termination becoming effective sixty (60) days after notice by
registered mail to the defaulting party; subject however, to the right of the
defaulting party to cure said default within said sixty (60) day period.

          8.3 Covenant.
              --------

               8.3.1 Any breach by CESI of the covenant in Section 5.1 will
immediately cause the license granted in Section 2.2 to become a non-exclusive
license for the Field. All other rights and obligations shall remain the same.
This Section 8.3.1 states CESI's sole liability and WGC's sole remedy for a
breach by CESI of Section 5.1.

               8.3.2 Any breach by WGC of the covenant in Section 5.1 will
immediately terminate WGC's right to sub-license the license granted in Section
3.1. All other rights and obligations shall remain the same. This Section 8.3.2
states WGC's sole liability and CESI's sole remedy for a breach by WGC of
Section 5.1.

          8.4 Effect of Termination. In the event of termination pursuant to
              ---------------------
Section 8.2, the following provisions will survive termination of this
Agreement: Sections 1, 2.3, 3.2, 3.3, 3.4, 3.5, 4, 5, 6, 7, 8.4, 10, 11, 12, 14,
15, 16, 17, 18 and 19, and any sub-license grants made prior to termination,
provided the applicable fees continue to be paid under Section 2.6.

     9. PATENT INFRINGEMENT

          9.1 Notice. Each party shall promptly notify the other party of any
              ------
actual infringement of any patent of the other party licensed or assigned herein
of which it becomes aware.

          9.2 Infringement of 793 Patent. In the event CESI becomes aware of
              --------------------------
infringement of the 793 Patent, CESI shall have sole discretion over whether and
how

<PAGE>

CESI deals with said infringement. If CESI decides not to initiate proceedings
to prevent said infringement, CESI agrees to notify WGC. In the event that CESI
decides not to initiate proceedings and WGC, in accordance with its business
judgment, desires to initiate proceedings to prevent infringement of the 793
Patent, CESI and WGC agree to initiate proceedings and cooperate fully in any
action at law at WGC's sole expense, and any recovery with respect to such
WGC-initiated proceedings shall first be distributed to WGC to reimburse its
fees and expenses, with any remaining recovery distributed to both parties
equally.

     10. ASSIGNMENT

     A party may assign this Agreement in connection with its merger,
reorganization or sale of all or substantially all of its equity or assets
relating to this Agreement. Otherwise, neither party may assign this Agreement
without the prior written consent of the other party.

     11. NOTICES

     All notices required pursuant to, or in operation hereunder, and any notice
that shall affect the rights or relationships of the parties hereto under this
Agreement, shall be in writing and shall be given by mailing the same by
registered mail:

         If to CESI, to:

         Patrick T. Conroy
         Senior Vice President
         Catalytica Energy Systems, Inc.
         430 Ferguson Drive
         Mountain View, CA 94043-5272 USA

         If to WGC, to:

         Stephen P. Carter
         Vice President, Chief Financial Officer and Treasurer
         Woodward Governor Company
         5001 N. Second Street
         Rockford, IL 61125 USA

         With a copy to:

         Robert Reuterfors
         General Counsel
         Woodward Governor Company
         5001 N. Second Street
         Rockford, IL 61125 USA

<PAGE>

     12. WAIVER and MODIFICATIONS

     No waiver, modification or cancellation of any term or condition of this
Agreement shall be effective unless executed in writing by the parties. No
written waiver shall excuse the performance of any act other than those
specifically referred to therein and shall not be deemed or construed to be a
waiver of such terms or conditions for the future or any subsequent breach
thereof.

     13. MARKING

     Each party shall mark all products manufactured and distributed by it that
to its knowledge incorporate inventions of the other party's patents licensed
hereunder with identification, either by fixing thereon the word "patent" or the
abbreviation "pat.", together with the number of the patent, or when, from the
character of the article, this cannot be done, by fixing to it, or to the
package wherein one or more of them is contained, a label containing a like
notice.

     14. INVALID or UNENFORCEABLE

     If any provision or any separable portion of any provision of this
Agreement is determined to be invalid or unenforceable, or is prohibited by the
governing law as defined in Section 17, this Agreement shall be considered
divisible as to such provision or such portion of any provision, and such
provision or portion shall be inoperative and shall not be part of the
consideration between the parties hereto. The remaining provisions and portions
of this Agreement, however, shall be valid and binding and of like effect as
though such invalid, unenforceable or prohibited provision or portion of
provision was not included herein.

     15. NO JOINT VENTURE

     Nothing in this Agreement shall be construed to place the parties in the
relationship of partners or joint venturers, and the parties shall have no power
to obligate or bind the other in any manner whatsoever.

     16. HEADINGS

     Any headings and section titles are for the convenience of reference only
and shall not define, limit, or extend the scope or intent of this Agreement or
any provision thereof.

     17. GOVERNING LAW

     This agreement and its provisions and performance shall be interpreted and
governed in accordance with the laws of the United States of America and the
State of California, without reference to conflicts of laws provisions. The
state and federal courts located in the County of Santa Clara or the Northern
District of California will have exclusive jurisdiction over any action
initiated by WGC involving disputes arising out of

<PAGE>

this Agreement. The state and federal courts located in the County of Winnebago
or the Northern District of Illinois will have exclusive jurisdiction over any
action initiated by CESI involving disputes arising out of this Agreement.

     18. ENTIRE AGREEMENT

     This Agreement is the sole and entire agreement and supersedes all previous
agreements and understandings between the parties with respect to the subject
matter hereof. Any modifications of, or amendments to this Agreement, shall be
mutually agreed upon by the parties in writing.

     19. COUNTERPARTS

     This Agreement may be executed in counterparts, each of which will be
deemed an original and all of which together will constitute one and the same
instruments.

     IN WITNESS THEREOF, the parties hereto have executed this Agreement this
19th day of December 2001.

     WITNESS:                            WOODWARD GOVERNOR COMPANY

      /s/ illegible                       /s/ illegible
     -------------------------------     -------------------------------

     WITNESS:                            CATALYTICA ENERGY SYSTEMS, INC.

      /s/ illegible                       /s/ illegible
     -------------------------------     -------------------------------

<PAGE>

                                    EXHIBIT A

                           XONON MODULE PAYMENT TERMS

     1. DEFINITIONS

          (a) "Actual Shipments" means the time of first shipment, delivery or
other transfer to a third party.

          (b) "Commercial Customer" means any customer other than a customer
that is sold a Module Set at a price below the Commercial Price of the Module
Set.

          (c) "Commercial Price" means the total net sales price of the sale of
a Xonon Module Set for Commercial Service, less offsets, customary trade
discounts, and freight allowances and refundable core charges.

          (d) "Commercial Service" means all module sets not used for
developmental, research, or test purposes.

          (e) "Commercial Spare" means a Module Set sold as a spare Xonon Module
Set for Commercial Service.

          (f) "Xonon Module Set" means the complete set of Xonon catalyst
modules required to operate all combustion components on a single gas turbine.

     2. PAYMENTS

          (a) CESI will make payment to WGC calculated based on Actual Shipments
to a Commercial Customer of Xonon Module Sets for Commercial Service or as a
Commercial Spare at the following rates:

Gas Turbine Nameplate Rating                         Payment per Module Set
---------------------------------------------------------------------------
l MW < Rating < 15 MW                                         $5,000
l5MW < Rating < 60MW                                          $10,000
Rating > 60 MW                                                $15,000

          (b) The payments shall be due on a quarterly basis, except that the
first payment period shall commence on the Effective Date and shall conclude at
the end of the current calendar quarter. The payments due in relation to each
payment period shall be due and be payable within forty-five (45) days from the
conclusion of each payment period.

<PAGE>

     3. STATEMENTS

          (a) CESI agrees to furnish a written report to WGC with each payment
setting forth the number of Xonon Module Sets sold by or for CESI during the
preceding Quarter and the payments due thereon and setting forth the number of
Xonon Module Sets sold at Commercial Prices as Commercial Spares.

     4. AUDIT

          (a) CESI agrees to keep accurate records documenting the manufacture
and sale of Xonon Module Sets so that the payments payable under the provisions
of this Agreement may be determined. CESI also agrees to permit its records to
be examined from time to time until one (1) year after the expiration of its
obligation to pay royalties, at the sole expense of WGC, by a recognized
Certified Public Accountant firm reasonably acceptable to CESI. The examination
period should be at reasonable intervals, during business hours, to the extent
necessary to verify the reports and payment required hereunder. The records
shall be kept for a period of 5 years from the date of the transactions
described herein.

<PAGE>

                                    EXHIBIT B

                          [attached on following page]

<PAGE>

                          SHORT-FORM PATENT ASSIGNMENT

     WHEREAS, Catalytica Energy Systems, Inc. ("Assignee"), having a place of
business at 430 Ferguson Drive, Mountain view, California 94043-5272, desires to
acquire right, title and interest from Woodward Governor Company ("Assignor"),
having a place of business at 5001 N. Second Street, Rockford, Illinois 61125,
to:

                              U.S. Patent 6,095,793
   (Dynamic control system and method for catalytic combustion process and gas
                         turbine engine utilizing same)

                                (the "Patent");

     NOW, THEREFORE, for good and valuable consideration acknowledged by
Assignor to have been received in full from Assignee:

     1. Assignor hereby assigns to Assignee all right, title and interest in and
to (a) the Patent; (b) all rights to apply for foreign patents on the inventions
described in the Patent, including all priority rights under all available
international treaties, agreements and conventions for the protection of
intellectual property; (c) every reissue or extension of the Patent; and (d) all
causes of action and rights of recovery for past infringement of the Patent.

     2. Assignor shall cooperate with Assignee to enable Assignee to enjoy to
the fullest extent the right, title and interest herein conveyed in the United
States and foreign countries. Such cooperation by the Assignor will include
prompt production of pertinent facts and documents, giving of testimony,
execution of petitions, oaths, specifications, declarations or other papers, and
other assistance all to the extent necessary or desirable (a) for perfecting in
Assignee the right, title and interest herein conveyed; (b) for filing and
prosecuting applications for reissuance of any Patent; (c) priority proceedings
involving the Patent; and (d) for legal proceedings involving the Patent and any
applications therefor and any patents granted thereon, including without
limitation reissues and reexaminations, opposition proceedings, cancellation
proceedings, priority contests, public use proceedings, infringement actions and
court actions.

     3. The terms and covenants of this assignment shall inure to the benefit of
Assignee, its successors, assigns and other legal representatives, and shall be
binding upon the Assignor, its successors, assigns and other legal
representatives.

     IN WITNESS WHEREOF, Assignor has executed and delivered this instrument to
Assignee as of the date written below.

                                    ASSIGNOR

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

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

                                    Date:
                                         ---------------------------------------

<PAGE>

                                   EXHIBIT C

         Actions Required in Next 60 days for Maintenance of 793 Patent

     1. Due Date: January 11, 2002

        Hong Kong: If protection in Hong Kong desired, must file a Request to
        Record a Designated Patent Application based on EPO patent application
        number 99948302.7.

     2. Due Date: January 12, 2002

        European Patent Office (EPO): supplementary partial European search
        report issued indicating a Lack of Unity of Invention. Additional
        search fee required by January 12 if search is to be performed for the
        invention not searched.

<PAGE>

                                   EXHIBIT D

              Issued CESI Patents and Pending Patent Applications

     Issued CESI Patent Numbers:  None
     --------------------------

     Pending Patent Application Numbers:  60/262,282
     ----------------------------------
                                          60/315,872

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