Document:

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                                                                    EXHIBIT 10.1

                                  CONFIDENTIAL

Portions of the Exhibit marked by "&&" have been omitted pursuant to a request
for Confidential Treatment under Rule 406 of the Securities Act of 1933, 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.

                               ALLIANCE AGREEMENT

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

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

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

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

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

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

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

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

DEFINITIONS

"Capstone Special Order PSR" shall mean (i) any PSR manufactured according to
Capstone's requirements and specifications as listed in the attached Exhibit A
to this Agreement including such PSR as may be modified from time to time by
Type 1 DCRs pursuant to Paragraph 8.1, (ii) any development PSR offered by
either party under Type 2 DCRs pursuant to Paragraph 8.1 and accepted by the
other party (which such development PSR shall be added to Exhibit A), including
such development PSR as may be modified from time to time by Type 1 DCRs, and
(iii) any similar PSR capable of direct replacement for the PSRs identified in
Exhibit A to this Agreement,

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

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

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

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

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

1.0 SCOPE

1.1 Term of Agreement. This Agreement dated August 25, 1997, (the "Effective
Date"), subject to the conditions set forth below in this Section 1.1, shall
remain in force for a period of then (10) years until August 24, 2007, on which
date it will expire unless extended, canceled or terminated as provided herein.
Notwithstanding any provision to the contrary contained herein, this Agreement
shall only become effective when the parties have agreed upon all Exhibits to
this Agreement (and same have been initialed by both parties). The parties shall
meet and confer upon the terms of a new Alliance Agreement, if any, no later
than December 1, 2006. The provisions of Section 13.1 and 14 shall survive
expiration of this Agreement.

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

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

1.4  Termination by Capstone. Capstone may terminate this Agreement upon ninety
(90) days written notice to Solar and payment within 60 days of such notice of
an amount equal to: (i) the price paid for Capstone Special Order PSRs (being
determined by the average price paid for each model of Capstone Special Order
PSR purchased by Capstone in the immediately preceding && month period and using
the price as calculated during that immediately preceding && month period);
multiplied by (ii) the shortfall between && and the number of Capstone Special
Order PSRs purchased by Capstone on or before the date of notice under this
Paragraph 1.4; multiplied by (iii) &&

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

2.0  ANNUAL BUSINESS REVIEWS

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

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

For optimum planning, the annual business reviews will take place during the
fourth quarter of each calendar year. Capstone and Solar will set a date for
the meeting allowing at least four (4) weeks for preparation and travel
arrangement purposes, the specific location and date to be mutually agreed to by
both parties.

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3.0 PROGRAM MANAGERS AND TERMS

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

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

Capstone's Program Manager TBD
                           ---

Solar's Program Manager Mike Ward
                        ---------

4.0 PRODUCTIVITY IMPROVEMENTS

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

4.2 Phase I. Solar agrees to make reasonable efforts to increase the production
capacity from a current level of approximately && Capstone Special Order PSRs
per month to approximately && such units per month by the end of the third
quarter, 1998. In addition, Solar agrees to make reasonable additional
investments in research of manufacturing technology with the goal of increasing
production capacity of Capstone Special Order PSRs to be between && and && units
per month.

4.3 Phase II. In order to assist Solar to increase production of Capstone
Special Order PSRs from approximately & & units per month to between & & and & &
units per month and to reduce per unit price and to meet the hours per core
targets by the end of the first quarter, 1999, Capstone agrees to purchase,
lease or otherwise provide for installation at Solar's Houston facility high
speed, dedicated, automatic machinery and tooling (the "Phase II Equipment").
The parties will cooperate and work jointly to identify and evaluate suppliers
and equipment for Capstone to purchase, lease or otherwise provide to Solar.

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

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

4.5 The projected cost of the Phase II Equipment is $8.4 million dollars. The
parties recognize however, that this is an estimate only. Capstone shall provide
cumulatively up to ten million dollars ($10 million), for Phase II Equipment, as
needed after consultation and review with Solar. The parties agree, however, to
use reasonable efforts to keep the cost of the Phase II Equipment to a minimum,
consistent with reasonable business practices and with the goal of achieving
increased production capacity and manufacturing efficiency at Solar's Houston
Facility. Notwithstanding any provision contained in this Agreement to the
contrary, Solar does not guarantee any results whatsoever, whether with regard
to an increase in production capacity or PSRs or with regard to a decrease in
per unit prices of PSRs. Each party to this agreement represents that it is an
independent, experienced and sophisticated business entity. Each party conducts
it own investigations and obtains it own information about business
transactions. Each party relies wholly on its own counsel in making business
decisions and assumes all risks with regard to whether individual investments
achieve certain results. Solar may provide to Capstone, however, certain
information regarding Phase II Equipment performance, reliability, efficacy,
suppliers and purchases. Solar assumes no responsibility regarding the accuracy,
sufficiency, or completeness of such information, except in the case that
Solar's conduct in providing inaccurate, insufficient or incomplete information
is intentional or grossly negligent.

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

      (A) On or about September 1997, the parties will have additional
      information regarding the likely cost and performance of certain Phase II
      Equipment. At that point, if Capstone reasonably believes the Phase II
      Equipment will not perform as required to achieve, or will cost
      cumulatively more than $10 million to achieve forecasted volumes (between
      && to && units per month), to reduce per unit price, and to meet the
      target manufacturing hours per core for Capstone Special Order PSRs,
      Capstone shall have the option to (i) provide additional funding for Phase
      II Equipment; or (ii) provide Solar thirty days advance written notice of
      its intention to withdraw from the Phase II effort, in which case (a)
      Capstone shall be under no obligation to provide any funding for Phase II
      Equipment, (b) Capstone shall be relieved of its obligation under
      Paragraph 1.2 to purchase && of its annual requirements for Capstone
      Special Order PSRs from Solar, but (c) Capstone shall remain obligated to
      purchase from Solar at least && Capstone Special Order PSRs during the
      first eight (8) years after the Effective Date.
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     (B) On or about December 1998, the Phase II Equipment will be installed at
     Solar's Houston Facility. At that point, if the Phase II Equipment does not
     perform as required to achieve, or if funding beyond Capstone's cumulative
     commitment of $10 million is required in order to achieve forecasted
     volumes (between && to && units per month), to reduce per unit price, and
     to meet the target manufacturing hours per core for Capstone Special Order
     PSRs, Capstone shall have the option to (i) provide additional funding for
     Phase II Equipment; or (ii) provide to Solar thirty days advance written
     notice of its intention to withdraw from the Phase II effort in which case,
     (a) Solar shall promptly deliver to a destination provided by Capstone, and
     at Capstone's expense the Phase II Equipment, (b) Capstone shall be
     relieved of its obligation under Paragraph 1.2 to purchase && of its annual
     requirements for Capstone Special Order PSRs from Solar, but (c) Capstone
     shall remain obligated to purchase from Solar at least && Capstone Special
     Order PSRs during the first eight (8) years after the Effective Date.

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

5.0  SPECIFICATIONS

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

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

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

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

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6.0  QUALITY

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

7.0  ARMS' LENGTH TRANSACTION

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

8.0  DEVELOPMENT PRODUCTS

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

     A) DCRs not affecting the form, fit, function, or safety of Capstone
     Special Order PSRs and which DCRs do not involve or require increased
     technical risk, tooling changes, field retrofit, or more than 5% part cost
     increase ("Type 1 DCRs") may be requested by either party for, approval by
     the other party, which approval shall not be unreasonably withheld. If the
     non-requesting party approves such Type 1 DCR, the Capstone Special Order
     PSRs shall be modified as required to incorporate and implement such Type 1
     DCR.

     B) DCRs relating to new, re-designed, or substantially modified PSRs or
     DCRs which involve or require increased technical risk, tooling changes,
     field retrofit, or more than 5% part cost increase, shall be referred to as
     "Type 2 DCRs". Type 2 DCRs initiated by Solar may be disclosed to Capstone
     at Solar's sole option and discretion for possible inclusion of Capstone
     Special Order PSRs incorporating and implementing such Type 2 DCRs under
     the terms of this Agreement. Type 2 DCRs initiated by Capstone must be
     promptly disclosed to Solar to allow Solar a right of first refusal to
     manufacture the resulting new Capstone Special Order PSRs incorporating and
     implementing such Type 2 DCRs under the provisions of this Agreement. If
     new Capstone Special Order PSRs are agreed upon under the terms of this
     sub-paragraph 8.1 (B), the parties shall add such new Capstone Special
     Order PSRs to this Agreement and update Exhibits A and B as provided for in
     Paragraph 8.2.

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     C) Either party may initiate improvements to the manufacturing process used
     in the production of Capstone Special Order PSRs that do not affect the
     form, fit, function, or safety of Capstone Special Order PSRs ("Type 3
     DCRs"). Neither party is under obligation to disclose Type 3 DCRs to the
     other party. Solar shall, however, disclose to Capstone the fact that it is
     initiating a Type 3 DCR and will provide Capstone sufficient information
     regarding the timing of the implementation of such Type 3 DCRs (including,
     if appropriate, shipment lots or other indicia of Capstone Special Order
     PSRs impacted by such Type 3 DCRs to allow Capstone to track and assess
     the impact, if any, of such Type 3 DCRs on the quality, reliability, or
     performance of Capstone Special Order PSRs provided by Solar.

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

9.0  REQUIREMENTS, FORECAST VOLUME AND TIME FENCE

9.1  On the Effective Date, Capstone shall provide to Solar a forecast
equivalent to && of Capstone's requirements for Capstone Special Order PSRs for
the twenty-four month period commencing January 1, 1998 (the "Forecast")
(attached hereto as Exhibit E). Each month subsequent to January 1998 and until
such time as Capstone has forecast requirements for at least && Capstone
Special Order PSRs, Capstone shall update the Forecast to keep the Forecast
current for a twenty-four month projected period Solar shall have thirty (30)
days from receipt to accept the Forecast and updates, or to notify Capstone in
writing that it does not accept the Forecast or updated portion thereof. Solar
agrees to accept the Forecast, and as updated, provided Solar has or reasonably
anticipates having sufficient manufacturing capacity at Solar's Houston Facility
to satisfy Capstone's forecasted requirements. The Forecast is not an
authorization to commit funds or proceed in any way, except to the extent of the
six (6) month && rolling time fence portion of the Forecast as specified in
Paragraph 9.2.

9.2  The Forecast, and as updated, shall be the basis for a firm requirements
and delivery commitment between the parties. The initial six (6) month
commitment period shall begin January 1, 1998 and each month shall roll forward
one additional month to stay current for rolling six month periods. By the end
of October of each year, or as otherwise agreed by the parties, Capstone shall
tender to Solar one-year purchase orders specifying the price for the initial
three month period and the subsequent three month period as provided for in
Exhibit B and referencing volumes per

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

9.3 If Capstone has not tendered purchase orders for at least && Capstone
Special Order PSRs on or before December 31, 2002, Capstone's obligations under
Paragraph 1.2 shall continue until such time as Capstone has tendered purchase
orders for at least && Capstone Special Order PSRs but the date by which
Capstone shall have purchased at least && Capstone Special Order PSRs shall not
be executed beyond the eighth year anniversary of the Effective Date.

10.0 INDEPENDENCE OF BUSINESS ACTIVITIES

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

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

11.0 PRICING AND PAYMENT TERMS AND CAPACITY UTILIZATION

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

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

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

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

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

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

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

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12.0 SUPPLIER COST INFORMATION

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

13.0 CONFIDENTIAL INFORMATION AND NOTICES

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

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

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

                Attention:      Paul Craig
                                President and Chief Executive Officer

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

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

                Attention:      Director, Recuperator Business

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

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

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

14.0 GENERAL TERMS AND CONDITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

14.12   Use of Solar PSRs. Subject to the provisions of Paragraph 1.2 regarding
minimum purchase commitments, Capstone is under no
obligation to incorporate only Capstone Special Order PSRs in Microturbines
manufactured and delivered by Capstone.

14.13   Employee Solicitation. For a period of 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.

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

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

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

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

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

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

14.19  No Change in Purchase Order. Notwithstanding any provision contained in
this Agreement to the contrary, no term or provision of this Agreement changes
or in any way modifies the terms of Purchase Order 962295, dated November 7,
1996.

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

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

15.0  COVENANTS

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

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

SOLAR TURBINES INCORPORATED               CAPSTONE TURBINE CORPORATION

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

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

                                       16

<PAGE>   17

EXHIBIT A -- PRODUCTS COVERED BY AGREEMENT

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

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

/s/ DAVID W. ESBECK                     8/22/97
------------------------------          -----------------------
SOLAR TURBINES INCORPORATED             DATE

                                       17
<PAGE>   18
EXHIBIT B - PRICING BASIS

1. Selling Price is direct labor rate (as defined below), overhead (as defined
below), actual material cost including scrap, and mark-up (as defined below).

2. Direct labor rate to be used for each && month production period is the
weighted average for the previous && months prior to the quarterly business
meeting or a mutually agreed rate.

3. Overhead burden rate, expressed in percent of labor rate, to be used for
each && month production period is the weighted average for the previous &&
months prior to the quarterly business meeting or a mutually agreed rate
(currently estimated at &&.

4. The selling price will be adjusted each succeeding period for savings or
increases in previous period price.

5. At each quarterly business meeting to be held January, April, July, and
October each year, actual costs (material, labor, and overhead) and hours per
core required to manufacture Capstone Special Order PSRs during the preceding
period will be reviewed. A weighted average of these factors for the prior &&
months preceding the meeting will be used in the pricing formula to set the
next period price, minus or plus preceding period savings or increases. Every
effort will be made in setting the next period price to minimize pricing
formula corrections.

6. Solar's mark-up is && and includes:
     profit
     warranty & policy
     product maintenance technical support
     SG&A
     interest

7. Formula is
&&

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

/s/ DAVID W. ESBECK                           22 Aug. 97
-------------------------------               ------------------------
SOLAR TURBINES INCORPORATED

                                       18
<PAGE>   19
                                                                       EXHIBIT B

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

Hours per Core                       [&&]

                           Units per Month Production
--------------------------------------------------------------------------------
[SOLAR TURBINES LOGO]         Company Confidential
<PAGE>   20
EXHIBIT C

NON DISCLOSURE AGREEMENT

                                       19
<PAGE>   21
                            NONDISCLOSURE AGREEMENT

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

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

     WHEREAS, Capstone is actively engaged in the development of gas turbines
and recuperated gas turbines in the six to && kilowatt size range; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -3-

<PAGE>   24
written notice of its intention to terminate to the other Party; or (b) the
Agreement shall automatically terminate three (3) years from the date of
acceptance; provided, however, that when the Agreement terminates, the
obligations not to use and not to disclose proprietary information exchanged
hereunder shall continue for the period specified hereinabove.

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

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

          If to Capstone:

          Capstone Turbine Corp.
          6025 Yolanda Avenue
          Tarzana, CA 91356

          Attention: R. James Wensley
                     President and Chief Executive Officer

          With a copy to:

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

          If to Solar:

          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101

          Attention: Manager, Recuperator Programs

          With a copy to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -6-

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

CAPSTONE TURBINE CORP.                  SOLAR TURBINES INCORPORATED

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

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

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

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

                                      -7-

<PAGE>   28
                                   EXHIBIT D
                  TERMS OF SALE - PRIMARY SURFACE RECUPERATOR
--------------------------------------------------------------------------------
The terms of sale include, but are not limited to the following:

1.   The recuperator will be factory tested for pressure and leakage at ambient
temperature prior to shipment.

2.   Solar will retain ownership of all tooling paid by Solar.

3.   Solar will ship PSRs via a mutually agreed shipment plan. Payment terms
are net && days from invoice.

4.   Shipping terms are ex works, Solar's Houston Facility. All sales shall be
governed by and construed in accordance with the laws of the State of California
as if made in California for performance entirely within the State of
California.

5.   Inspection. Buyer may inspect the goods ordered hereunder during any stage
of their manufacture, construction, preparation, delivery or completion. Goods
may be rejected for defects or defaults revealed by inspection, analysis or
subsequent manufacturing operations even though such goods may have previously
been accepted.

6.   Shipment. Buyer shall have the right to specify the carrier and/or the
method of transportation to be used in conveying any part of the goods covered
herein. A packing slip shall accompany each shipment.

7.   Alternative Transportation. If Seller's acts or omissions result in
Seller's failure to meet Buyer's delivery requirements as previously agreed to
in paragraph 3, and Buyer requires a more expeditious method of transportation
for the goods than the transportation method originally specified by Buyer,
Seller shall, at Buyer's option, (i) promptly reimburse Buyer the difference in
cost between the more expeditious method and the original method, (ii) allow
Buyer to reduce its payment of Seller's invoices by such a difference, or (iii)
ship the goods as expeditiously as possible at Seller's expense and invoice
Buyer for the amount which Buyer would have paid for normal shipment.

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

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

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

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

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

                                       21
<PAGE>   30
                         EXHIBIT E - CAPSTONE FORECAST

                        Recuperator Deliveries by Month

<TABLE>
<CAPTION>
                                                PSRs RECEIVED
                  MONTH        SHIP PLAN           FROM SOLAR
                  -----        ---------           ----------
                  <S>          <C>              <C>
                  Jan-98           &&                  &&
                  Feb-98
                  Mar-98
                  Apr-98
                  May-98
                  Jun-98
                  Jul-98
                  Aug-98
                  Sep-98
                  Oct-98
                  Nov-98
                  Dec-98
</TABLE>

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

/s/ DAVID ESBECK                             8/27/97
----------------------------                 ---------------
SOLAR TURBINES INCORPORATED                  DATE
<PAGE>   31
                                  CONFIDENTIAL

Portions of the Exhibit marked by "&&" have been omitted pursuant to a request
for Confidential Treatment under Rule 406 of the Securities Act of 1933, 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.

                               LICENSE AGREEMENT

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

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

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

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

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

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

1.0  DEFINITIONS

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

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

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

                                       1

<PAGE>   32

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

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

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

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

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

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

2.0 EXERCISE OF LICENSE RIGHTS

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

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

                                       2

<PAGE>   33
3.0 GRANT

3.1 Subject to and in consideration of the undertakings by Capstone set forth in
Section 4.0 of this License Agreement, and upon exercise of the license rights
pursuant to Paragraph 2.1 of this License Agreement, Solar hereby agrees to
grant 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 made by a third party, only if (i)
Capstone first offers to Solar a right of first refusal to produce the
quantities concerned and Solar declines such right or (ii) Solar informs
Capstone in writing that it has discontinued manufacture of Capstone Special
Order PSRs.

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

4.0 CONSIDERATION

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

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

                                       3

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

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

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

        B) Provide Capstone with technical assistance (including but not limited
        to technical expertise, repair and maintenance of equipment and tooling,
        employee training, consulting services including the temporary
        assignment of Solar engineers selected by Solar for time periods
        reasonably chosen by Solar and having relevant qualifications and
        experience to a facility designated by Capstone) for an eighteen (18)
        month period. Capstone has the obligation to apply appropriate and
        qualified resources to the task of transferring Solar Technology. Solar
        also will cooperate with and actively assist Capstone in procuring
        equipment and tooling for manufacturing Licensed Product from Solar or
        Solar's suppliers, including suppliers identified on Solar's preferred
        vendor lists during the term of this Agreement. Capstone agrees not to
        sell such tooling and equipment containing Solar Technology to a third
        party.

        C) Provide access to a reasonable number of Capstone engineers to
        Solar's Houston Facility during an eighteen (18) month period to afford
        Capstone the opportunity to increase knowledge about PSR manufacturing
        sufficient for a reasonable person to implement the license granted
        under Section 3.0, and afford Capstone not only the opportunity to
        participate in decisions concerning production capacity but also to gain
        sufficient knowledge to estimate for itself the cost of manufacturing
        PSRs. Solar Technology will have been considered completely transferred
        to Capstone if, after a production run by Capstone of && of the PSRs
        pass final pressure check and Capstone's labor hours per PSR are within
        && of the Election Date actuals.

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

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

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

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

     Capstone's Program Manager: TBD
                                 ---

     Solar's Program Manager: Mike Ward
                              ---------

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

                                       5

<PAGE>   36
7.0  TERM AND TERMINATION

7.1  Unless sooner terminated as provided for by this Agreement, this Agreement
shall remain in force and effect for a period of seventeen (17) years from the
Election Date or twenty seven (27) years from the Effective Date, whichever
period ends sooner. The licenses granted in Section 3.0 to each party shall be
paid up for the life of Capstone Patents and Solar Intellectual Property at the
expiration, not the termination of this Agreement.

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

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

7.4  In the event Solar provides Capstone written notice that Solar is ceasing
the manufacture of PSRs other for Solar or Caterpillar, Inc., or other events
have occurred that would inhibit the effective transfer of technology from Solar
to Capstone. Capstone shall have ninety (90) days in which to elect to exercise
the rights granted under this Agreement per the provisions of Section 2.0. If
Capstone does not elect to exercise the rights within ninety days && this
License Agreement may be terminated by Solar. If Capstone elects to exercise the
rights granted under this Agreement within ninety days, Solar shall fully
cooperate and assist in the Product Know-How and Technology Transfer provided
for in Section 5.0 and the other obligations provided for in this Agreement and
the Product Know-How and Technology Transfer obligations under Section 5.0 of
this Agreement shall begin one hundred eighty (180) days after Capstone elects
to exercise the rights.

8.0  WARRANTIES AND DISCLAIMERS

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

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

                                       6

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

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

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

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

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

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

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

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

9.0  PROPRIETARY INFORMATION

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

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

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

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

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

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

10.0 TRADEMARKS

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

11.0 EXPORT OF TECHNICAL DATA

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

12.0 THIRD PARTY INFRINGEMENT

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

                                       8
<PAGE>   39
13.0 INDEMNIFICATION

13.1 If any claim or action is brought against Capstone based upon an allegation
that use of the Solar Technology by Capstone within the scope of the license
grant of Section 3.0 infringes any patent rights of any third party, Solar shall
defend Capstone against any and all liability, claims and expenses arising out
of any such claim or action, up to a limit of fifty percent (50%) of the
royalties paid by Capstone at the time the claim or action is brought, provided
that Capstone (i) gives Solar prompt notice of such claim or action; (ii)
cooperates with Solar, at Solar's expense, in the defense of such claim or
action, and (iii) gives Solar the right to control the defense and settlement of
any such claim or action as long as such settlement does not adversely affect
Capstone's rights under this Agreement.

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

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

13.4 Capstone agrees to defend, indemnify and hold Solar, its directors,
officers, and employees harmless against all liabilities, demands, damages,
expenses, or losses arising out of the manufacture, design, use, or sale of any
Licensed Product by Capstone or its affiliates, subsidiaries or transferees or
use by Capstone or its affiliates, subsidiaries or transferees of any Solar
Intellectual Property, or out of any manufacture, design, use, sale, or other
disposition by Capstone, its affiliates, subsidiaries or transferees of product
incorporating such Licensed Product or Solar Intellectual Property, except for
claims that are attributable to Solar's gross negligence or intentional
misconduct, provided that Solar (i) gives Capstone prompt notice of such claim
or action; (ii) cooperates with Capstone, at Capstone's expense, in the defense
of such claim or action, and (iii) gives Capstone the right to control the
defense and settlement of any such claim or action as long as such settlement
does not adversely affect Solar. After the Election Date, Capstone at Solar's
written request, must demonstrate that Capstone has adequate means of financial
assurance, up to $10 million with regard to its indemnity of Solar under this
paragraph 13.4. 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 all
successors and assigns of Capstone and Solar although neither party shall
assign this Agreement or any part thereof without the prior written consent of
the other party except (i) that it may be assigned by either party to a
Subsidiary of the assigning party without the other party's consent; and (ii)
that it may be assigned to a purchaser of substantially all the assets of
Capstone, provided such purchaser is not actively engaged in the business of
manufacturing or selling PSRs, or manufacturing or selling individual gas
turbines of 500kW or greater output power. Notwithstanding any provision

                                       9
<PAGE>   40

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

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

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

          Attn:  Paul Craig
                 President and Chief Executive Officer

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

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

          Attn: Director, Recuperator Business

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

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

                                       10

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

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

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

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

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

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

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

                                       11
<PAGE>   42

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

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

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

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

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

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

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

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

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

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

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

CAPSTONE TURBINE CORPORATION                 SOLAR TURBINES INCORPORATED

By: /s/ PAUL CRAIG                      By: /s/ DAVID ESBECK

Title: CEO/President                    Title: Vice President, Engineering

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

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

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

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

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

                                       14
<PAGE>   45
EXHIBIT B - ROYALTY RATES

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

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

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

                                       15
<PAGE>   46
EXHIBIT C

NON DISCLOSURE AGREEMENT
<PAGE>   47
                            NONDISCLOSURE AGREEMENT

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

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

     WHEREAS, Capstone is actively engaged in the development of gas turbines
and recuperated gas turbines in the six to && kilowatt size range; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -3-

<PAGE>   50
written notice of its intention to terminate to the other Party; or (b) the
Agreement shall automatically terminate three (3) years from the date of
acceptance; provided, however, that when the Agreement terminates, the
obligations not to use and not to disclose proprietary information exchanged
hereunder shall continue for the period specified hereinabove.

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

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

          If to Capstone:

          Capstone Turbine Corp.
          6025 Yolanda Avenue
          Tarzana, CA 91358

          Attention:     R. James Wensley
                         President and Chief Executive Officer

          With a copy to:

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

          If to Solar:

          Solar Turbines Incorporated
          2200 Pacific Highway
          San Diego, CA 92101

          Attention:     Manager, Recuperator Programs

          With a copy to:

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

                                      -4-

<PAGE>   51

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CAPSTONE TURBINE CORP.                          SOLAR TURBINES INCORPORATED

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

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

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

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

                                      -7-<PAGE>   1
                                                                     Exhibit 4.2

                            WESTLINKS RESOURCES LTD.

                                      AND

                             SPENCER EDWARDS, INC.

                                REPRESENTATIVE'S

                               WARRANT AGREEMENT

     REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______________ , 2000 by
and between WESTLINKS RESOURCES LTD., (the "Company") and SPENCER EDWARDS, INC.
("Representative").

                                  WITNESSETH:

     WHEREAS, the Company proposes to issue to the Representative 100,000
warrants (each a "Representative's Warrant") each to purchase one share of the
Company's no par value common stock, (the "Common Stock").

     WHEREAS, the Representative has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _______________ , 2000 by and
between the Representative and the Company, to act as the Representative in
connection with the Company's proposed public offering (the "Public Offering")
of 1,000,000 shares of Common Stock and 1,000,000 common stock purchase warrants
(the "Offering Securities"); and

     WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Firm Closing Date (as such term is defined in
the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of, the Representative's compensation in
connection with the Representative's acting as the Representative pursuant to
the Underwriting Agreement;

     NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of One Hundred Dollars ($100.00), the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

     1.  Grant.  The Holder (as defined in Section 3 below) is hereby granted
the right to purchase, at any time from _______________ , 2001 until 5:00 p.m.,
New York time, _______________ , 2005, up to 100,000 shares of Common Stock, at
an initial purchase price (subject to adjustment as provided in Section 8
hereof) of $________ per share of Common Stock subject to the terms and
conditions of this Agreement. The securities issuable upon exercise of the
Representative's Warrant are sometimes referred to herein as the
"Representative's Securities."

                                       1
<PAGE>   2

     2.  Warrant Certificates. The warrant certificate (the "Representative's
Warrant Certificate") to be delivered pursuant to this Agreement shall be in the
form set forth in the attached Warrant Certificate and is made a part hereof,
with such appropriate insertions, omissions, substitutions, and other variations
as required or permitted by this Agreement.

     3.  Exercise of Representative's Warrant.

         (a)  The Representative's Warrant is exercisable during the term set
forth in Section 1 hereof payable by certified or cashier's check or money order
in lawful money of the United States. Upon surrender of the Representative's
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Representative's Securities (and such other amounts, if any, arising pursuant to
Section 4 hereof) at the Company's principal office, the registered holder of a
Representative's Warrant Certificate ("Holder" or "Holders") shall be entitled
to receive a certificate or certificates for the Representative's Securities so
purchased. The purchase rights represented by each Representative's Warrant
Certificate are exercisable at the option of the Holder or Holders thereof, in
whole or in part as to Representative's Securities. The Representative's Warrant
may be exercised to purchase all or any part of the Representative's Securities
represented thereby. In the case of the purchase of less than all the
Representative's Securities purchasable on the exercise of the Representative's
Warrant represented by a Representative's Warrant Certificate, the Company shall
cancel the Representative's Warrant Certificate represented thereby upon the
surrender thereof and shall execute and deliver a new Representative's Warrant
Certificate of like tenor for the balance of the Representative's Securities
purchasable thereunder.

         (b)  In lieu of the payment of cash upon exercise of the
Representative's Warrant as provided in Section 3(a), the Holder may exercise
the Representative's Warrant by surrendering the Representative's Warrant
Certificate at the principal office of the Company, accompanied by a notice
stating (i) the Holder's intent to effect such exercise by an exchange, (ii) the
Common Stock to be issued upon the exchange, (iii) whether Representative's
Warrants are to be surrendered in connection with the exchange, and (iv) the
date on which the Holder requests that such exchange is to occur. The Purchase
Price for the Representative's Securities to be acquired in the exchange shall
be paid by the surrender as indicated in the notice, of Representative's
Warrants, having a "Value", as defined below, equal to the Purchase Price.
"Value" as to each Representative's Warrant shall mean the difference between
the "Market Price", as hereinafter defined, of a share of Common Stock and the
then Purchase Price for a share of Common Stock.

         By way of example of the application of the formula, assume that the
Market Price of the Common Stock is $8.00, the Purchase Price of the
Representative's Warrant is $6.00. On such assumptions, the Value of a
Representative's Warrant is $2.00 ($8.00-$6.00) and

                                       2
<PAGE>   3

therefore for each three (3) Representative's Warrants surrendered, the Holder
could acquire one (1) share of Common Stock in the exchange. Notwithstanding the
example, the Holder shall not be limited to exchanging Representative's Warrants
for Common Stock.

     The Warrant Exchange shall take place on the date specified in the notice
or if the date the notice is received by the Company is later than the date
specified in the notice, on the date the notice is received by the Company.

     4.  Issuance of Certificates. Upon the exercise of the Representative's
Warrant and payment of the Purchase Price therefor, the issuance of certificates
representing the Representative's Securities or other securities, properties or
rights underlying such Representative's Warrant, shall be made forthwith (and in
any event within five (5) business days thereafter) without further charge to
the Holder thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Representative's Warrant Certificates and the certificates representing the
Representative's Securities or other securities, property or rights (if such
property or rights are represented by certificates) shall be executed on behalf
of the Company by the manual or facsimile signature of the then present Chairman
or Vice Chairman of the Board of Directors or President or Vice President of the
Company, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the
Company. The Representative's Warrant Certificates shall be dated the date of
issuance thereof by the Company upon initial issuance, transfer or exchange.

     5.  Restriction On Transfer of Representative's Warrant. The Holder of a
Representative's Warrant Certificate (and its Permitted Transferee, as defined
below), by its acceptance thereof, covenants and agrees that until
_______________ , 2005, the Representative's Warrant may not be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, except to officers and partners of the Representatives (but not
directors), or any Public Offering selling group member and their respective
officers and partners, ("Permitted Transferees"). Thereafter the
Representative's Warrant may be transferred, assigned, hypothecated or otherwise
disposed of in compliance with applicable law.

     6.  Purchase Price.

         (a) Initial and Adjusted Purchase Price. Except as otherwise provided
in Section 8 hereof, the initial purchase price of the Representative's
Securities is set forth in

                                       3
<PAGE>   4
Section 1. The adjusted purchase price shall be the price which shall result
from time to time from any and all adjustments of the initial purchase price in
accordance with the provisions of Section 8 hereof.

         (b)  Purchase Price. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon the
context.

     7.  Registration Rights.

         (a)  Registration Under the Securities Act of 1933 as amended ("Act").
The Representative's Warrant may have not been registered under the Act. The
Representative's Warrant Certificates may bear the following legend:

         "The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and may not be offered
for sale or sold except pursuant to (i) an effective registration statement
under the Act, or (ii) an opinion of counsel, if such opinion and counsel shall
be reasonably satisfactory to counsel to the issuer, that an exemption from
registration under the Act is available."

         (b)  Demand Registration. (1) At any time commencing on the first
anniversary of and expiring on the fifth anniversary of the effective date of
the Company's Registration Statement relating to the Public Offering (the
"Effective Date"), the Holders of a Majority (as hereinafter defined) in
interest of the Representative's Warrant, or the Majority in interest of the
Representative's Securities (assuming the exercise of all of the
Representative's Warrant) shall have the right, exercisable by written notice to
the Company, to have the Company prepare and file with the U.S. Securities and
Exchange Commission (the "Commission"), on one (1) occasion, a registration
statement on Form S-1 or SB-2 or other appropriate form, and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale, of the
Representative's Securities by such Holders and any other Holders of the
Representative's Warrant and/or the Representative's Securities who notify the
Company within fifteen (15) business days after receipt of the notice described
in Section 7(b)(2).

              (2)  The Company covenants and agrees to give written notice of
any registration request under this Section 7(b) by any Holders to all other
registered Holders of the Representative's Warrant and the Representative's
Securities within ten (10) calendar days from the date of the receipt of any
such registration request.

              (3)  For purposes of this Agreement, the term "Majority" in
reference to the Holders of the Representative's Warrant or Representative's
Securities, shall mean in excess of fifty percent (50%) of the then outstanding
Representative's Warrant or

                                       4
<PAGE>   5
Representative's Securities that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith, or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.

              (4)  The Company shall have no obligation to prepare and file a
registration statement pursuant to this Section 7(b) if, within twenty (20) days
after the Company receives such a demand for registration, the Company agrees,
or insiders who own individually more than 5% of the Company's outstanding
Common Stock agree, to purchase the Holder's Warrants and/or Warrant Shares from
the requesting Holders at a price equal to the difference between the Exercise
Price then in effect and the then current market price of the Company's Common
Stock. The market price of the Company's Common Stock shall be the average of
the closing asked prices for the Company's Common Stock during the ten (10)
business days period preceding such request.

         (c)  Piggyback Registration. (1) If, at any time within the period
commencing on the first anniversary and expiring on the sixth anniversary of the
Effective Date, the Company should file a registration statement with the
Commission under the Act (other than in connection with a merger or other
business combination transaction or pursuant to Form S-8), it will give written
notice at least twenty (20) calendar days prior to the filing of each such
registration statement to the Representative and to all other Holders of the
Representative's Warrant and/or the Representative's Securities of its intention
to do so. If a Representative or other Holders of the Representative's Warrant
and/or the Representative's Securities notify the Company within fifteen (15)
calendar days after receipt of any such notice of its or their desire to include
any Representative's Securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of the Representative's
Warrant and/or Representative's Securities the opportunity to have any such
Representative's Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7(c)(1) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c)(1) (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but prior to the effective date thereof.

              (2)  If the managing underwriter of an offering to which the above
piggyback rights apply, in good faith and for valid business reasons, objects to
such rights, such objection shall preclude such inclusion.

         (d)  Covenants of the Company With Respect to Registration. In
connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:

                                       5
<PAGE>   6
              (1)  The Company shall use its best efforts to file a registration
statement within thirty (30) calendar days of receipt of any demand therefor
pursuant to Section 7(b); provided, however, that the Company shall not be
required to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-K or Form 10-Q (or Form 10-KSB or Form 10-QSB), as the case may be.
The Company shall use its best efforts to have any registration statement
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Representative's Securities such number of prospectuses as
shall reasonably be requested.

              (2)  The Company shall maintain the effectiveness of the
registration statement for a period of time equal to the lesser of 9 months or
until such time as all of the Warrant Shares have been sold pursuant to the
registration statement.

              (3)  The Company shall pay all costs (excluding fees and expenses
of Holders' counsel and any underwriting discounts or selling fees, expenses or
commissions), fees and expenses in connection with any registration statement
filed pursuant to Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses.

              (4)  The Company will use its best efforts to qualify or register
the Representative's Securities included in a registration statement for
offering and sale under the securities or blue sky laws of such states as
reasonably are requested by the Holders, provided that the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.

              (5)  The Company shall indemnify the Holders of the
Representative's Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement, but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Representative contained in Section 8 of the Underwriting Agreement.

              (6)  The Holders of the Representative's Securities to be sold
pursuant to a registration statement, and their successors and assigns, shall
indemnify the Company, its officers and directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 8 of the Underwriting Agreement pursuant to which the
Representative has agreed to indemnify the Company.

                                       6
<PAGE>   7
              (7)   Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Representative's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof,
provided that such Holders have made arrangements reasonably satisfactory to the
Company to pay the exercise price from the proceeds of such offering.

              (8)   The Company shall furnish to each Representative for the
offering, if any, such documents as such Representative may reasonably require.

              (9)   The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.

              (10)  The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence described below and
any managing Representative copies of all correspondence between the Commission
and the Company, its counsel or auditors with respect to the registration
statement and permit each Holder and Representative to do such investigation,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the National Association of
Securities Dealers, Inc. ("NASD"). Such investigation shall include access to
books, records and properties and opportunities to discuss the business of the
Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.

              (11)  The Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by Holders holding a
Majority of the Representative's Securities requested to be included in such
underwriting, provided, however that such managing underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have piggyback rights, the Company shall have the sole
right to select the managing underwriter or underwriters. Such underwriting
agreement shall be satisfactory in form and substance to the Company, a Majority
of such Holders (in respect of a registration under Section 7(b) only) and such
managing underwriter, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Representative's Securities.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.

                                       7
<PAGE>   8
     8.  Adjustments to Purchase Price and Number of Securities.

         (a)  Computation of Adjusted Purchase Price. Except as hereinafter
provided, in case the Company shall at any time after the date hereof issue or
sell any shares of Common Stock (other than the issuances referred to in Section
8(g) hereof), including shares held in the Company's treasury, for a
consideration per share less than the "Market Price" (as defined in Section
8(a)(6) hereof) per share of Common Stock on the date immediately prior to the
issuance or sale of such shares, or without consideration, then forthwith upon
any such issuance or sale, the Purchase Price of the Common Stock shall (until
another such issuance or sale) be reduced to the price (calculated to the
nearest full cent) determined by dividing (i) the sum of (x) the total number of
shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the Purchase Price in effect immediately prior to such issue or
sale, and (y) the consideration, if any, received by the Company upon such issue
or sale, by (ii) the total number of shares of Stock outstanding immediately
after such issue or sale provided, however, that in no event shall the Purchase
Price be adjusted pursuant to this computation to an amount in excess of the
Purchase Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock, as provided by
Section 8(c) hereof.

         For the purposes of this Section 8, the term "Purchase Price" shall
mean the Purchase Price of the Common Stock forming a part of the
Representative's Securities set forth in Section 6 hereof, as adjusted from time
to time pursuant to the provisions of this Section 8.

         For the purposes of any computation to be made in accordance with this
Section 8(a), the following provisions shall be applicable:

              (1)  In case of the issuance or sale of shares of Common Stock (or
of other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the amount of
cash received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to Representatives or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by Representatives or dealers or others
performing similar services, or any expenses incurred in connection therewith.

              (2)  In case of the issuance or sale (otherwise than as a dividend
or other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale

                                       8
<PAGE>   9
of shares of Common Stock) for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash shall
be deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Company.

              (3)  Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.

              (4)   The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in Section 8(a)(2).

              (5)  The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares of Common Stock issued
or issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.

              (6)  As used herein in the phrase "Market Price" at any date shall
be deemed to be the last reported sale price, or, in the case no such reported
sale takes place on such day, the average of the last reported sales prices for
the last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average closing bid price as furnished by the
NASD through the NASD Automated Quotation System ("NASDAQ") or similar
organization if NASDAQ is no longer reporting such information, or if the Common
Stock is not quoted on NASDAQ, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.

         (b)  Options, Rights, Warrant and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed to all the stockholders of the Company and
Holders of Representative's Warrant pursuant to Section 8(i) hereof, if the
Company shall at any time after the date hereof issue options, rights or
warrants to purchase shares of Common Stock, or issue any securities convertible
into or exchangeable for shares of Common Stock (other than the issuances
referred to in Section 8(g) hereof), (i) for a consideration per share less than
the Market Price (including the issuance thereof without consideration such as
by way of dividend or other distribution), or (ii) without consideration, the
Purchase Price in effect immediately prior to the issuance of such

                                       9
<PAGE>   10
options, rights or warrants, or such convertible or exchangeable securities, as
the case may be, shall be reduced to a price determined by making a computation
in accordance with the provisions of Section 8(a) hereof, provided that:

              (1)  The aggregate maximum number of shares of Common Stock
issuable or that may become issuable under such options, rights or warrants
(assuming exercise in full even if not then currently exercisable or currently
exercisable in full) shall be deemed to be issued and outstanding at the time
such options, rights or warrants were issued, and for a consideration equal to
the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration (determined in the same
manner as consideration received on the issue or sale of shares in accordance
with the terms of the Representative's Warrant), if any, received by the Company
for such options, rights or warrants; provided, however, that upon the
expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this Section 8(b)(1) (and for
the purposes of Section 8(a)(5) hereof) shall be reduced by such number of
shares as to which options, warrants and/or rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding, and the Purchase Price then in effect shall forthwith
be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not be expired or terminated unexercised.

              (2)  The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities (assuming conversion or exchange in full even if not then currently
convertible or exchangeable in full) shall be deemed to be issued and
outstanding at the time of issuance of such securities, and for a consideration
equal to the consideration (determined in the same manner as consideration
received on the issue or sale of shares of Common Stock in accordance with the
terms of the Representative's Warrant) received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason or redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this Section 8(b)(2) (and for the purpose of Section 8(a)(5) hereof) shall be
reduced by such number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding and the Purchase Price then in
effect shall forthwith be readjusted and thereafter be the price which it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued or issuable upon the conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.

                                       10
<PAGE>   11
              (3)  If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in Section 8(b)(1), or in
the price per share at which the securities referred to in Section 8(b)(2) are
convertible or exchangeable, and if a change in the Purchase Price has not
occurred by reason of the event giving rise to the change in the price per share
of such other options, rights, warrants, or convertible or exchangeable
securities, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, the shall be deemed
to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.

         (c)  Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Purchase Price
shall forthwith be proportionately decreased in the case of a subdivision or
increased in the case of combination.

         (d)  Adjustment in Number of Securities. Upon each adjustment of the
Purchase Price pursuant to the provisions of this Section 8, the number of
Representative's Securities issuable upon the exercise of the Representative's
Warrant shall be adjusted to the nearest whole share by multiplying a number
equal to the Purchase Price in effect immediately prior to such adjustment by
the number of Representative's Securities issuable upon exercise of the
Representative's Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Purchase Price.

         (e)  Definition of Common Stock. For the purpose of this Agreement, the
term "Common Stock" shall mean the class of stock designated as Common Stock in
the Certificate of Incorporation, of the Company as it may be amended as of the
date hereof.

         (f)  Reclassification, Merger or Consolidation. The Company will not
merge, reorganize or take any other action which would terminate the
Representative's Warrant without first making adequate provision for the
Representative's Warrant. In case of any reclassification or change of the
outstanding shares of Common Stock issuable upon exercise of the outstanding
warrants (other than a change in par value to no par value, or from nor par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company with, or
merger of the Company into, another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which does not
result in any reclassification or change of the outstanding Common Stock except
a change as a result of a subdivision or combination of such shares or a change
in par value, as aforesaid), or in the case of a sale or conveyance to another
corporation or other entity of the property of the

                                       11
<PAGE>   12
Company as an entirety or substantially as an entirety, the Holders of each
Representative's Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Representative's Warrant) to
purchase, upon exercise of such Representative's Warrant, the kind and number of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holders were the owner of the shares of Common Stock underlying the
Representative's Warrant immediately prior to any such events at a price equal
to the product of (x) the number of shares issuable upon exercise of the
Representative's Warrant and (y) the Purchase Price in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance, as if such Holders had exercised the Representative's
Warrant. In the event of a consolidation, merger, sale or conveyance of
property, the corporation formed by such consolidation or merger, or acquiring
such property, shall execute and deliver to the Holders a supplemental
Representative's warrant agreement to such effect. Such supplemental
Representative's warrant agreement shall provide for adjustments which shall be
identical to the adjustment provided for in this Section 8. The provisions of
this Section 8(f) shall similarly apply to successive consolidations or mergers.

         (g)  No Adjustment of Purchase Price in Certain Cases. No adjustment of
the Purchase Price shall be made:

              (1)  Upon the issuance or sale of (i) the Representative's Warrant
or the securities underlying the Representative's Warrant, (ii) the securities
sold pursuant to the Public Offering (including those sold upon exercise of the
Representative's over-allotment option), or (iii) the shares issuable pursuant
to the options, warrants, rights, stock purchase agreements or convertible or
exchangeable securities outstanding or in effect on the date hereof or pursuant
to any compensatory stock plan as described in the prospectus relating to the
Public Offering, or (iv) "restricted securities" as that term is defined in Rule
144 promulgated under the Securities Act of 1933, as amended, for not less than
50% of Market Price.

              (2)  If the amount of said adjustments shall aggregate less than
two ($.02) cents for one (1) share of Common Stock; provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall aggregate at least two ($.02) cents for one (1) share of Common Stock. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any warrant or warrants held by them.

     9.  Exchange and Replacement of Warrant Certificates. Each Representative's
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holders at the principal executive office of the Company, for
a new Representative's Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Representative's
Securities in such denominations as shall be designated by the Holders thereof
at the time of such surrender.

                                       12
<PAGE>   13
     10.  Loss, Theft, etc. of Certificates Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Representative's Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Representative's Warrant
Certificates, if mutilated, the Company will make and deliver a new
Representative's Warrant Certificate of like tenor, in lieu thereof.

     11.  Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Representative's Warrant, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests; provided, however, that if a
Holder exercises all Representative's Warrant held of record by such Holder the
fractional interests shall be eliminated by rounding any fraction to the nearest
whole number of shares of Common Stock or other securities, properties or
rights.

     12.  Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Representative's Warrant,
such number of shares of Common Stock or other securities and properties or
rights as shall be issuable upon the exercise thereof. The Company covenants and
agrees that, upon exercise of Representative's Warrant and payment of the
Purchase Price therefor, all the shares of Common Stock issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the
Representative's Warrant shall be outstanding, the Company shall use its best
efforts to cause the Common Stock to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed or quoted.

     13.  Notices to Representative's Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Representative's Warrant and their exercise, any
of the following events shall occur:

         (a)  the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or

                                       13
<PAGE>   14
         (b)  the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

         (c)  a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) calendar days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.

     14.  Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or five days after being mailed by registered or certified mail,
return receipt requested:

         (a)  If to the registered Holders of the Representative's Warrant, to
the address of such Holders as shown on the books of the Company; or

         (b)  If to the Company to the address shown in the Underwriting
Agreement or to such other address as the Company may designate by notice to the
Holders.

     15.  Supplements and Amendments. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
Holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provision in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or desirable and
which the

                                       14
<PAGE>   15
Company and the Representative deem shall not adversely affect the interests of
the Holders of Representative's Warrant Certificates.

     16.  Successors. All the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Representative, the
Holders and their respective successors and assigns hereunder.

     17.  Termination. This Agreement shall terminate at the close of business
five years from the date hereof. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on the expiration of any applicable statue of limitations.

     18.  Governing Law; Submission to Jurisdiction. This Agreement and each
Representative's Warrant Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of Colorado and for all purposes shall
be construed in accordance with the laws of said state without giving effect to
the rules of said state governing the conflicts of laws.

     19.  Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. This Agreement may not be modified or amended
except by a writing duly signed by the Company and the Holders of a Majority in
Interest of the Representative's Securities (for this purpose, treating all then
outstanding Representative's Warrants as if they had been exercised).

     20.  Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.

     21.  Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.

     22.  Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holders of the Representative's Warrant
Certificates or Representative's Securities any legal or equitable right, remedy
or claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holders of
the Representative's Warrant Certificates or Representative's Securities.

     23.  Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.

                                       15
<PAGE>   16
     24.  Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, the Representative and their respective successors and
assigns and the Holders from time to time of the Representative's Warrant
Certificates or any of them.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.

                                    WESTLINKS RESOURCES LTD.

                                    By:
                                        -------------------------------------
                                        Chief Executive Officer

                                    SPENCER EDWARDS, INC., for itself and as
                                    Representative of the Several Underwriters
                                    listed On Schedule A

                                    By:
                                        -------------------------------------
                                        Chief Executive Officer

                                       16
<PAGE>   17

                                   SCHEDULE A

                                       TO

                       REPRESENTATIVE'S WARRANT AGREEMENT

                                    BETWEEN

                            WESTLINKS RESOURCES LTD.

                                      AND

                          NEIDIGER TUCKER BRUNER, INC.

REPRESENTATIVE

Spencer Edwards, Inc.

UNDERWRITERS:

                                       17

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