DEVELOPMENT AGREEMENT

1.

Definitions.

a.

Catalyst : Catalyst is a component of the Fuel Cell that helps to initiate and maintain the electrochemical reaction needed to generate electricity. Catalyst is typically precious metals-based but may consist of other low cost materials.

b.

Catalyst Binding : Catalyst Binding means the process used to attach the Catalyst to the Catalyst Support.

c.

Catalyst Support : Catalyst Support is the backing used to support the Catalyst in the context of a Fuel Cell. The Catalyst Support and Catalyst together make up an Electrode.

d.

Electrode : Electrodes consist of a Catalyst and a Catalyst Support. In Fuel Cells, Electrodes are located on either side of a Membrane.

e.

Formulation : Formulation is a prescription of ingredients in fixed proportion; a recipe.

f.

Fuel Cell : A Fuel Cell is an electrochemical device that combines a fuel such as hydrogen, methanol, or others with an oxidant such as oxygen. The result is electricity, heat, and water.

g.

Hoku Membrane ^™ : Hoku Membrane ^™ is defined as all Formulations of the Membranes developed by HOKU for use in an electrochemical device such as a Fuel Cell. The Hoku Membrane ^™ is typically used as a Proton Exchange Membrane in Fuel Cells.

h.

Joint Laboratory : The Joint Laboratory is the laboratory facility that will house the single cell and limited short stack testing associated with Phase I of this Agreement, as indicated in Exhibit A. The Joint Laboratory will be located at the HOKU facilities in Honolulu, Hawaii. Only Research and Development Equipment associated with Phase I of this Agreement will be housed in the Joint Laboratory. This includes, but is not limited, to Single Cell and Stack testing equipment.

i.

Liquid Hoku Membrane ^™ : Liquid Hoku Membrane ^™ is defined as all Formulations of the Liquid Membranes developed by HOKU for use in an electrochemical device such as a Fuel Cell. It is a type of Liquid Membrane or Membrane Paint.

j.

Liquid Membrane : Liquid Membrane (sometimes called Membrane Paint) is used to combine the Catalyst on the Electrode with the Membrane for use in Fuel Cells. This can be painted onto the surface of the Catalyst or the other components of a Fuel Cell as part of the MEA, and can serve to increase Fuel Cell performance.

k.

MEA : MEA stands for Membrane Electrode Assembly and represents a finished product that typically contains Electrodes adhered to both sides of a Membrane. An MEA may also incorporate Liquid Membrane or Membrane Paint.

l.

MEA Assembly Process : MEA Assembly Process pertains to the procedures, the Research and Development Equipment, and the methods entailed in the use of this equipment, that are required to build an MEA.

m.

Membrane : Membranes in the context of Fuel Cells separate the system into two halves and help to initiate and maintain the electrochemical reaction which generates electricity.

n.

Membrane Paint : Membrane Paint has the same meaning as Liquid Membrane (see Liquid Membrane definition).

o.

Production Equipment : Production Equipment includes all equipment required for the fabrication of the Hoku Membrane ^™ in accordance with this Agreement, including but not limited to hot presses, injection molders, and mixers.

p.

Proton Exchange Membrane : A Proton Exchange Membrane is a Membrane utilized in a Proton Exchange Membrane Fuel Cell.

q.

Research and Development Supplies : Research and Development Supplies includes all materials and reagents required to support joint testing in accordance with this Agreement, including but not limited to electrode material, gases, and synthesis chemicals.

r.

Research and Development Equipment : Research and Development Equipment includes all equipment required to support joint testing in accordance with this Agreement including but not limited test stations, MEA assembly equipment, spectrometers, and other testing equipment.

s.

Single Cell : Single Cell is a Fuel Cell that utilizes a single MEA to generate power.

t.

Stack : A Stack is a Fuel Cell that contains two or more Single Cells connected in series. Fuel Cell Stacks are utilized to generate more power than a Single Cell can generate.

2.

Relationship.

a.

The Parties agree to work together to achieve the objectives stated below:

i.

Develop and optimize an MEA Assembly Process incorporating the Hoku Membrane ^™ and the Liquid Hoku Membrane ^™ .

b.

To do so, the Parties shall follow the work plan attached as Exhibit A.

c.

Joint development will commence at the Joint Laboratory located at the HOKU facilities in Honolulu, Hawaii. All work pertaining to Phase I of this Agreement shall be conducted in the Joint Laboratory at the HOKU facilities. No HOKU development activities other than the joint development efforts described in this Agreement shall be held in the Joint Laboratory. SANYO personnel will need to be accompanied by HOKU personnel to enter into any of the HOKU research and development facilities other than the Joint Laboratory. Joint development Phases II and III will be completed at the SANYO facilities in Gunma, Japan. The timing and location of all joint development efforts are described in Exhibit A.

3.

Responsibilities of the Parties.

a.

[ * ] responsibility for all Agreement costs as defined by Exhibit B. Exhibit B describes any and all assignable costs associated with this Agreement. Costs not covered in Exhibit B cannot be charged to the other Party.

b.

Responsibility for the filing of technology patents shall be as follows:

i.

[ * ] shall be responsible for filing any and all patents for technology owned exclusively by [ * ] as defined in Exhibit C.

ii.

[ * ] shall be responsible for filing any and all patents for technology owned exclusively by [ * ] as defined in Exhibit C, and for the specific MEA Assembly Process jointly owned by the Parties in accordance with this Agreement, as defined in Exhibit C.

iii.

Any patents filed by [ * ] for the specific MEA Assembly Process jointly owned by the Parties that refers to the Hoku Membrane ^™ and/or the Liquid Hoku Membrane ^™ , shall be specific to a particular Formulation of the Hoku Membrane ^™ and/or a particular Formulation of the Liquid Hoku Membrane ^™ .

iv.

[ * ] shall file patent applications for the specific MEA Assembly Process owned jointly by the Parties within three months of its discovery or implementation. [ * ] shall file, prosecute, and maintain these patent applications at its sole discretion and at its expense, and at a minimum, in any country where the MEA will be sold. [ * ] will provide [ * ] the documents submitted to or received from the Patent Office for filing, prosecuting, or maintaining such patent applications. After the three months from discovery or implementation, if [ * ] at its sole discretion chooses not to file a patent on a particular technology, [ * ] may file a patent at its sole expense and claim full ownership to that particular technology.

v.

All patents for the specific MEA Assembly Process owned jointly by the Parties, regardless of filing date or country, shall name both HOKU and SANYO as joint developers on the patents, except as described above in 3.b.iv.

vi.

SANYO shall use its best efforts to promote and sell the MEA produced in accordance with the specific MEA Assembly Process jointly owned by the Parties.

c.

Responsibility for defending technology patents shall be as follows:

i.

[ * ] shall be responsible for the legal fees and any other costs associated with maintaining and defending all patents associated with technology owned exclusively by [ * ] .

ii.

[ * ] shall be responsible for the legal fees and any other costs associated with maintaining and defending all patents associated with technology owned exclusively by [ * ] , and for the specific MEA Assembly Process jointly owned by the Parties.

d.

The Parties agree to notify each other immediately if they identify any potential or actual patent infringements.

4.

Rights.

a.

The Parties’ intellectual property rights associated with this Agreement are described in full at Exhibit C.

b.

SANYO shall have the exclusive worldwide right and license to manufacture, market, and sell the MEA produced in accordance with the specific MEA Assembly Process jointly owned by the Parties in accordance with this Agreement. SANYO shall not have the right to develop, reverse engineer, manufacture, market, or sell the Hoku Membrane ^™ , Liquid Hoku Membrane ^™ , or any other technology owned exclusively by HOKU, without written consent by HOKU.

c.

SANYO shall have the right to grant sublicenses with respect to MEA production in accordance with the specific MEA Assembly Process jointly owned by the Parties, including

d.

HOKU maintains the exclusive right to develop, manufacture, market, distribute, and sell the Hoku Membrane ^™ and any and all technologies developed solely by HOKU, which may or may not be included in the MEA produced in accordance with the specific MEA Assembly Process jointly owned by the Parties in accordance with this Agreement.

e.

This Agreement does not preclude SANYO from working alone or with a third party to develop a different MEA Assembly Process from the specific MEA Assembly Process jointly owned by the Parties in accordance with this Agreement (“SANYO MEA Assembly Process”), or from manufacturing, marketing, and selling MEAs that are produced in accordance with this SANYO MEA Assembly Process. The SANYO MEA Assembly Process must be based on technology owned exclusively by SANYO. The SANYO MEA Assembly Process may not be based on technology owned exclusively by HOKU.

f.

This Agreement does not preclude HOKU from working alone or with a third party to develop a different MEA Assembly Process from the specific MEA Assembly Process jointly owned by the Parties in accordance with this Agreement (“HOKU MEA Assembly Process”), or from manufacturing, marketing, and selling MEAs that are produced in accordance with this HOKU MEA Assembly Process. The HOKU MEA Assembly Process must be based on technology owned exclusively by HOKU. The HOKU MEA Assembly Process may not be based on technology owned exclusively by SANYO.

g.

The Parties agree to allow each other to use the others’ name for purposes of furthering their business and developing business partnerships with other companies or corporations. This includes, but is not limited to, press releases, media quotes and paid advertising. Each Party agrees to seek and receive from the other Party prior approval for any use of the other Party’s name.

5.

Compensation.

a.

In exchange for the rights acquired by SANYO and described in Section 4 above, SANYO agrees to the following:

i.

Cash payment of two million five hundred thousand US dollars ($2,500,000) to HOKU as detailed in Exhibit D. Cash Payment is defined as a development fee being paid to HOKU by SANYO.

ii.

The Parties agree to discuss an equity investment in HOKU by SANYO in the amount of at least one million US dollars ($1,000,000). The Parties Agree to put forth its best efforts to execute this equity investment by April 15, 2003. Both Parties agree that not doing so would negatively affect the chances of a successful business outcome with respect to this Agreement.

iii.

The dates listed in Exhibit D are dates agreed upon by the Parties. Cash payments associated with a milestone are indicated as such in Exhibit D.

b.

[*]

6.

Equipment and Resources.

a.

[ * ] shall identify and purchase all reasonable Research and Development Equipment, except for the equipment identified in Section 6.b. below, to complete Phase I of this Agreement. Equipment described in this section will be housed at the Joint Laboratory in Honolulu, Hawaii.

b.

[ * ] shall provide all essential equipment pertaining to MEA assembly and test cells for use in Phase I of this Agreement, and pay any shipping costs required to relocate this equipment from the [ * ] facilities to the Joint Laboratory in Honolulu, Hawaii.

c.

[ * ] shall identify and make available, or purchase, all reasonable Research and Development Equipment required to complete Phases II and III of this Agreement. This equipment will be housed at the SANYO facilities in Gunma, Japan.

d.

All equipment purchased by [ * ] in accordance with this Agreement and described above at 6.b. and 6.c. shall belong to [ * ] regardless of the outcome of this Agreement.

e.

All equipment purchased by [ * ] in accordance with this Agreement and described above at 6.a. shall belong to [ * ] regardless of the outcome of this Agreement.

7.

Confidential Information.

a.

The term “Confidential Information” shall include all confidential or proprietary information and data furnished by either Party to the other, whether in oral, written, graphic or machine-readable form, including but not limited to, product or sample product, designs, procedures, formulas, discoveries, inventions, improvements, concepts, and ideas, except such information and data as the parties agree in writing is not proprietary or confidential. Confidential Information should be marked as “Confidential” or “Proprietary” or such similar wording at the time of disclosure by the disclosing party (the “Disclosing Party”) or orally identified as such at the time of disclosure by the Disclosing Party to the other party (the “Receiving Party”).

b.

“Confidential Information” shall not include any information or data furnished by the Disclosing Party that (a) was in the public domain at the time it was communicated to the Receiving Party; (b) entered the public domain subsequent to the time it was communicated to the Receiving Party through no fault of the Receiving Party; (c) was in the Receiving Party’s possession free of any obligation of confidence at the time it was communicated to the Receiving Party; (d) was rightfully communicated to the Receiving Party free of any obligation of confidence subsequent to the time it was communicated by the Disclosing Party to the Receiving Party.

8.

Confidential Inform