DEVELOPMENT AND LICENSE AGREEMENT

Exhibit 10.2

DEVELOPMENT AND LICENSE AGREEMENT

THIS DEVELOPMENT AND LICENSE AGREEMENT, including Attachments and Exhibits attached hereto and incorporated herein by reference , (this “ Agreement ”) is entered into as of the 4th day of September, 2007 (the “ Effective Date ”) by and between UTC Power Corporation , a corporation organized and existing under the laws of the State of Delaware and the successor in interest to UTC Power, LLC, having its principal office at 195 Governor’s Highway, South Windsor, Connecticut (“ UTCP ”) and Capstone Turbine Corporation , a corporation organized and existing under the laws of the State of Delaware and having its principal office at 21211 Nordhoff Street, Chatsworth, California (“ Capstone ”). UTCP and Capstone shall be hereinafter individually referred to as a “ Party ” and collectively referred to as the “ Parties .”

RECITALS

WHEREAS , Capstone designs, develops, manufactures and sells certain MicroTurbine generator systems, controls and accessories; and

WHEREAS , Capstone has established a development program for the commercialization of a 200 kW MicroTurbine generator system meeting the C200 System Specifications (defined below in Article 1 ) and may in the future make changes to such 200 kW MicroTurbine and the C200 System Specifications, pursuant to the terms set forth herein. For the purposes of this Agreement, “ C200 System ” is defined below in Article 1 ; and

WHEREAS , Capstone desires UTCP to invest in Capstone’s C200 System development and commercialization efforts and UTCP is willing to make such investment through cash and in-kind contributions; and

WHEREAS , in exchange for UTCP’s investment in Capstone’s development and commercialization of the C200 System, Capstone is willing to provide UTCP: (1) favorable pricing pursuant to Section 9 of this Agreement and (2) royalty payments for the sale of all other C200 Systems; and

WHEREAS , in exchange for UTCP’s investment in Capstone’s development and commercialization of the C200 System, Capstone is willing to grant UTCP, subject to the terms and conditions of this Agreement, a non-exclusive, perpetual, fully paid up, worldwide license to the C200 System with royalty payments to Capstone, should Capstone fail to complete the Development and Commercialization of the C200 System as stated herein;

NOW, THEREFORE , in consideration of the foregoing, and of the mutual promises, covenants and undertakings contained herein, the Parties hereto agree as follows:

1.                                        Definitions .

1.1                                  “ Affiliate ” shall mean a parent or subsidiary of a corporation or other business entity (e.g., firm, limited liability company, partnership, or joint venture) that directly or indirectly controls or is controlled by a Party, or is under common control with a Party. For the purpose of this definition, “control” means the possession of more than 50% of the voting securities of a Party or to direct or cause the direction of the management and policies of such Party, whether through the ownership of voting securities, by contract or otherwise.

1.2                                  “ Agreement ” shall have the meaning as set forth in the Recitals.

1.3                                  “ C200 Data ” shall have the meaning as set forth in Section 7.1 .

1.4                                  “ C200 Investment ” shall mean the Cash Payment and the value of the In-Kind Services performed by UTCP pursuant to the terms of this Agreement.

1.5                                  “ C200 System ” shall mean a 200 kW MicroTurbine generator system meeting the C200 System Specifications and all engineering supporting documentation, including any future changes to the 200 kW MicroTurbine generator system, the C200 System Specifications, and the engineering supporting documentation.

1.6                                  “ C200 System Specifications ” shall mean the technical specifications of the C200 System as set forth in Attachment A hereto and as amended in writing from time to time pursuant to Section 3.3 below.

1.7                                  “ Capstone ” shall have the meaning as set forth in the Preamble.

1.8                                  “ Cash Payment ” shall have the meaning set forth in Article 4 .

1.9                                  “ Commercialization ” shall have the meaning as set forth in Section 7.2 .

1.10                            “ Confidential Information ” shall have the meaning set forth in Section 10.2 .

1.11                            “ Deliverables ” shall mean the deliverables of Development as set forth in Attachment B .

1.12                            “ Development ” shall mean the work necessary to develop the C200 System in accordance with this Agreement and such that the C200 System meets the then current C200 System Specifications.

1.13                            “ Disclosing Party ” shall have the meaning set forth in Section 10.1 .

1.14                            “ Dispute ” shall mean any dispute, controversy, claim or disagreement between the Parties hereto arising from, relating to or in connection with the Agreement or other document referred to herein or delivered in connection herewith, or the relationships of the Parties hereunder, including questions regarding the interpretation, meaning or performance of the Agreement, the release of the information in the Escrow Account, and including claims based on contract, tort, common law, equity, statute, regulation, order or otherwise.

1.15                            “ Effective Date ” shall have the meaning as set forth in the Preamble.

1.16                            “ Escrow Account ” shall have the meaning as set forth in Section 7.1 .

1.17                            “ Force Majeure Events ” shall have the meaning as set forth in Section 15.1 .

1.18                            “ In-Kind Services ” shall mean the Development commitments of UTCP as set forth in Attachment D and Attachment E hereto.

1.19                            “ Intellectual Property ” means all: (i) patents, trademarks, service marks, trade names, patent and trademark applications, utility models, rights in licenses, designs, copyrights (including rights in computer software), and all rights or forms of protection of similar nature or having equivalent effect to any of the foregoing which may subsist anywhere in the world; (ii) whether or not registered and including applications for any of the foregoing; (iii) know-how, Project results and Confidential Information, including trade secrets, industrial models, processes, designs, methodologies, computer programs (including all source code) and related documentation, technical information and manufacturing, engineering and technical drawings; and (iv) the C200 Data.

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1.20                            “ Losses ” shall have the meaning set forth in Section 12.1 .

1.21                            “ OEM Agreement ” shall mean the March 23, 2005 OEM Agreement executed by the Parties, or an OEM Agreement executed by the Parties subsequent to that date (whichever is the most recently executed).

1.22                            “ Parties ” or “ Party ” shall have the meaning as set forth in the Preamble.

1.23                            “ Program Task Sheet ” shall have the meaning as set forth in Section 3.4 .

1.24                            “ Project ” shall mean the Development of the C200 System in accordance with this Agreement.

1.25                            “ Project Change ” shall have the meaning set forth in Section 3.3 .

1.26                            “ Project Meeting ” shall have the meaning set forth in Section 3.2 .

1.27                            “ Receiving Party ” shall have the meaning set forth in Section 10.1 .

1.28                            “ Representatives ” shall have the meaning set forth to it in Section 3.1 .

1.29                            “ UTCP ” shall have the meaning as set forth in the Preamble.

1.30                            “ Withdrawal Event ” shall have the meaning as set forth in Section 7.2 .

2.                                        Commitments .

2.1                                  Development Commitments .

2.1.1                         Capstone Development Commitments . Capstone shall conduct the Development in accordance with this Agreement and shall deliver to UTCP the Deliverables as set forth in Attachment B hereto. Any time references concerning the delivery of the Deliverables in Attachment B are estimates only and are subject to change upon written notice by Capstone to UTCP and UTCP’s written approval of any such changes. UTCP’s written approval shall not be unreasonably withheld such that it does not impact Commercialization.

2.1.2                         Capstone Right to Subcontract Development Commitments . Capstone may subcontract any part of the Development to a third party. Capstone shall impose on such third party the same obligations as Capstone owes UTCP hereunder and shall ensure that all such subcontractors comply with and abide by the terms and conditions of this Agreement.

2.1.3                         UTCP Development Commitments and Right to Subcontract Development Commitments . UTCP shall perform all In-Kind Services hereunder, pursuant to the terms of this Agreement, in support of the Development and shall complete such tasks, or cause such tasks to be completed, at UTCP’s sole expense, except as otherwise agreed to by the Parties in writing. UTCP may subcontract any part of the Development to a third party. UTCP shall impose on such third party the same obligations as UTCP owes Capstone hereunder and shall ensure that all such subcontractors comply with and abide by the terms and conditions of this Agreement.

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2.1.4                         Joint Development Commitments . During Development, the Parties shall work jointly to: (i) reduce costs and improve manufacturability of the C200 System by using each Party’s processes to address manufacturing shop floor issues and (ii) facilitate continuous improvement.

2.2                                  Other Capstone Commitments .

2.2.1                         Extension of the OEM Agreement . Capstone agrees to execute an amendment to extend the term of the OEM Agreement as necessary to ensure that the OEM Agreement is in effect for a six (6) month period of time following Commercialization, as defined herein.

2.2.2                         Non Compete Provisions . Capstone is prohibited from designing, marketing or selling the C200 System in conjunction with any energy system that would compete with UTCP products in the combined heating, cooling and power market (“the Market”). Capstone is prohibited from collaborating with any third party to design, market, or sell the C200 System in conjunction with any energy system that would compete with UTCP products in the Market. Subject to the foregoing, Capstone may manufacture the C200 System for any third party.

2.2.3                         Assignment of Agreements with Solar Turbines, Incorporated . Upon the occurrence of a Withdrawal Event and UTCP’s request, Capstone shall use its best efforts to assign to UTCP the agreements executed between Capstone and Solar Turbines, Incorporated, as set forth in Section 1 of Attachment H, attached hereto.

2.2.4                         ADG Compatibility. Capstone shall achieve ADG compatibility with respect to the C200 System within twelve (12) months of Commercialization.

3.                                        Project Management .

3.1                                  Project Representatives . Each Party shall appoint an equal number of representatives to facilitate the Development and management of the Project (the “ Representatives ”). A Party may replace a Representative by providing prior notice in writing to the other Party of its intent to replace the applicable Representative. The Parties have appointed their initial respective Representatives as listed in Attachment F hereto.

3.2                                  Project Meetings . At least quarterly, the Parties will conduct face-to-face project meetings (each a “ Project Meeting ”) consistent with the development milestones identified in Attachment B hereto until Commercialization is achieved at Capstone’s development facility. Each Project Meeting shall require attendance of at least the project manager, development and commercial Representatives. During a Project Meeting, the Parties shall address the following:

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3.3.                               Project Changes . If either Party wishes to change the scope of the Project (a “ Project Change ”) as identified by the C200 System Specifications, it shall consult with the other Party in a timely manner so that the Parties can study and estimate the feasibility of such change. A Project Change shall be effective and binding only upon execution of a change order signed by a project manager and a corporate officer of each of the Parties. Prior to Commercialization, as defined within this Agreement, Capstone reserves the right to make commercially reasonable changes to the C200 System Specifications; provided, however, any such change that materially affects the fit, form, function, cost, or Commercialization schedule of the C200 System shall be effective only upon 30 days prior written notice to UTCP and the written approval of UTCP.

3.4                                  In-Kind Services . UTCP shall not provide any In-Kind Services without a “Program Task Sheet” as defined in Attachment G, approved by each of the Parties pursuant to the terms of this Section, setting forth the specific In-Kind Services to be provided, the time and place of such services, the valuation of the work to be provided, the completion date, and such other relevant criteria as may be reasonably specified by the program task sheet, which shall be prepared by Capstone and delivered to UTCP pursuant to Attachment B. Each Program Task Sheet shall be executed by each of the Parties’ respective designees as identified in Attachment F and no In-Kind Services shall be provided except pursuant to the applicable Program Task Sheet. Capstone and UTCP have already identified a list of proposed tasks in Attachment D and Attachment E with task descriptions, deliverables, and estimated costs of $829,900, which UTCP has agreed to support and will be confirmed with Program Task Sheets. The value of UTCP’s In-Kind Services shall be adjusted, pursuant to mutual written agreement of the Parties, based on actual cost of the In-Kind Services.

4.                                        UTCP Obligations . UTCP shall also make the C200 Investment as follows: (i) $12,000,000 in cash pursuant to the Milestone schedule attached hereto as Attachment B (the “ Cash Payment ”). UTCP shall not make any subsequent payments, pursuant to the Milestone schedule set forth in Attachment B, after the initial payment of $1,500,000, until any and all due or previously due Milestones and Deliverables (as set forth within the schedule) have been satisfied and delivered, respectively, as agreed upon by both Parties; and (ii) the provision of In-Kind Services as further described in Section 3.4 above.

5.                                        Purchase of the C200 System . UTCP shall purchase the C200 System in accordance with terms and conditions of the OEM Agreement applicable to equipment purchases only, or, in the event there is no OEM Agreement in effect, terms and conditions that are substantially similar and no less favorable. In addition, UTCP shall provide Capstone twelve (12) month rolling forecasts for its projected C200 System purchases on a monthly basis. C200 System orders shall be accepted by Capstone upon receipt of such orders from UTCP for standard equipment using Capstone’s then current published standard lead times. Subsequent to Commercialization, as defined within this Agreement, Capstone reserves the right to make commercially reasonable changes to the C200 System Specifications; provided, however, any such change that materially affects the fit, form, cost, or function of the C200 System shall be effective only upon 90 days prior written notice to UTCP and the written approval of UTCP.

6.                                        Intellectual Property Ownership . Subject to the License granted in Article 7 hereof, as between the Parties, Capstone shall own all right title and interest in and to all Intellectual Property relating to the C200 System. Each Party shall own all right title and interest in and to its own Background Intellectual Property.

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7.                                        C200 System License .

7.1                                  Escrow Account .

7.1.1                         Capstone shall select an escrow agent, subject to UTCP’s prior written approval of such escrow agent, and establish and maintain an escrow account within sixty (60) days following the Effective Date of this Agreement (the “ Escrow Account ”) and shall deposit in such Escrow Account all data and information controlled by Capstone relating to the C200 System, including, but not limited to: (i) all design, development, manufacturing, overhaul, repair and maintenance data and information then in its possession or otherwise necessary to design, develop, manufacture, overhaul, repair and maintain the C200 System; and (ii) a written identification of all know-how and trade secrets in its possession or otherwise necessary to design, develop, manufacture, overhaul, repair and maintain the C200 System, which written identification shall include a list of the individuals that possess such information reasonably necessary to practice all such know-how or trade secrets (collectively, the “ C200 Data ”).

7.1.2                         For purposes of Section 7.1, “controlled by” means the possession of the ability to grant a license or sublicense as provided herein without violating terms of any third party agreements. For purposes of Section 7.1, “Third Party Agreements” shall mean any and all such agreements or arrangements that would prevent or in any way limit the deposit of any data or information in the Escrow Account, if such data or information would otherwise be deposited into the Escrow Account and included as C200 Data, but for Capstone’s inability to grant a license or sublicense pursuant to the definition of “controlled by” set forth above (“Third Party Data”). With respect to any Third Party Agreements existing prior to, or as of, the Effective Date, Capstone shall make all commercially reasonable efforts to secure for UTCP a license or sublicense to any Third Party Data; if Capstone is unable to secure such a license or sublicense for UTCP, then Capstone shall set forth, in Attachment H attached hereto: (i) a description of the Third Party Agreement (including the parties and date of execution) and (ii) a description, reasonably acceptable to UTCP, of the Third Party Data and the information relevant to the development of the C200 System (including information on form, fit and function) which shall be deposited in the Escrow Account. With respect to any Third Party Agreement that may come into existence after the Effective Date, Capstone shall make all commercially reasonable efforts to secure for UTCP a license or sublicense to the Third Party Data; if Capstone is unable to secure such a license or sublicense for UTCP, Capstone shall, prior to execution of the Third Party Agreement: (i) provide written notice to UTCP, (ii) provide UTCP with a description, reasonably acceptable to UTCP, of the Third Party Data and information relevant to the development of the C200 System (including information on form, fit and function) which shall be deposited in the Escrow Account, and (iii) obtain UTCP’s written approval of the arrangement.

7.1.3                         Both the records of Capstone and the C200 Data deposited in the Escrow Account shall be subject to inspection and audit by a mutually acceptable third party to determine whether the deposited materials represent the C200 Data to comply with this Section 7.1 . The audit shall be conducted at a time and place reasonably convenient to Capstone, and each Party shall be responsible for fifty percent (50%) of expenses related to the audit. Capstone shall update the Escrow Account at least once every calendar quarter and upon completion of major elements of the continued design, Development and manufacture of the C200 System, upon any material redesign of all or a material portion of the C200 System, or upon the reasonable request of UTCP.

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7.2                                  Escrow Account Release Conditions . Upon the occurrence of any of the following events and ten (10) days prior written notice to Capstone, (each, a “ Withdrawal Event ”) UTCP shall have the right to access the Escrow Account and receive copies of all C200 Data deposited therein:

(i)                                      Failure by Capstone, to complete, or take reasonable action to complete, the Development, commercialization and product readiness of the C200 System; including, but not limited to, the failure by Capstone to make significant capital investment in, or establish, manufacturing facilities and equipment for the C200 System (collectively, “ Commercialization ”) by February 28, 2009. If Capstone fails to meet this Commercialization deadline, Capstone shall be granted a six (6) month grace period in which to cure such failure. If Capstone fails to achieve Commercialization of the C200 System during the six (6) month grace period, the cure period shall be extended for six (6) months during which time Capstone shall pay to UTCP liquidated damages of $25,000 per week until Commercialization is achieved or the cure period expires, whichever occurs first. UTCP shall have the right to access the Escrow Account only upon the expiration of the cure period; provided, however, if the delay in Commercialization is caused by UTCP’s failure to timely deliver the In-Kind Services in accordance with the applicable agreed upon Program Task Sheet, Capstone’s supply issues out of Capstone’s reasonable control or other issues out of Capstone’s reasonable control, or if UTCP fails to make timely Cash Payments pursuant to the terms of this Agreement, all deadlines shall be extended on a day-for-day basis for the period of such delay and the Parties’ rights shall remain intact;

(ii)                                   Capstone fails to take reasonable actions to fulfill UTCP purchase orders made in accordance with Article 5 above. Capstone shall be provided a reasonable time to respond to any material changes to the (12) month rolling forecast in accordance with Article 5 above. Capstone shall communicate product requirement changes to UTCP with (90) days advanced written notice.

(iii)                                Capstone voluntarily or involuntarily transfers all or substantially all of its assets or business or all or substantially all of the assets necessary for the continued delivery of the C200 System to UTCP to any third party, including through any merger or acquisition, and such third party is incapable or unwilling to fulfill Capstone’s obligations to UTCP related to the C200 System, including delivery of C200 equipment to meet UTCP C200 System order forecast, in accordance with this Agreement.

7.3                                  Standby License .

7.3.1                         License Grant . Upon the occurrence of a Withdrawal Event, Capstone shall grant to UTCP, its successors and assigns, a perpetual, fully paid up, worldwide license to all C200 Data either then deposited in the Escrow Account or otherwise necessary for the exercise of the rights and purposes set forth in this Agreement, as well as all intellectual property rights pertaining to such C200 Data:

(i)                                      To make, or have made, use, sell, or have sold, to end-use customers the C200 System (and any spare parts thereof) in conjunction with any energy systems and excluding the right to make, use or sell individual components of the C200 System separate from an integrated energy system;

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(ii)                                   To provide, or cause to be provided, all services associated with the installation, maintenance, repair and overhaul of the C200 System in conjunction with energy systems.

Such license to the C200 Data shall be non-exclusive; provided, Capstone shall be prohibited from granting to a third party a license to the C200 Data for the specific purposes set forth above that would compete with UTCP products in the Market. Subject to the provisions of Section 2.2.2, the grant of this license shall not prohibit Capstone or its successors and assigns from: (i) marketing, manufacturing and selling the C200 System, or (ii) granting Licenses to other third parties for purposes other than any of the purposes set forth within this section 7.3.1.

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7.3.2                         Standby License Fees . In connection with the grant of the foregoing license in Section 7.3 hereof, UTCP shall pay to Capstone, or its successor, a royalty equal to three percent (3%) of the C200 System burdened manufacturing cost for all C200 Systems sold by UTCP or its Affiliates as part of any energy system.

7.3.3                         Termination of License . UTCP’s right to withdraw the C200 Data and obtain a license to the C200 Data shall terminate if the Parties mutually agree in writing either: to a proposed alternative product or to product obsolescence. Once the C200 Data has been withdrawn, this Section 7.3.3 shall have no force and effect.

8.                                        UTCP Royalties .

8.1                                  Upon the sale of each C200 System by Capstone to an entity other than UTCP or its Affiliates, Capstone shall pay to UTCP a royalty equal to ten percent (10%) of the sale price of each such third party C200 System until the aggregate cash value of UTCP’s C200 Investment has been recovered by UTCP and, thereafter, the royalty shall be reduced to five percent (5%) of the sale price.

8.2                                  All royalties shall be paid to UTCP on a quarterly basis and are due when Capstone recognizes such revenue for a sale of a C200 System or when a C200 System is delivered to a party leasing a C200 System from Capstone.

9.                                        C200 System Discounts . With respect to all sales of the C200 System to UTCP by Capstone, UTCP shall receive: (i) a discount of 25% less (or 30% less in the event the C200 System fails to receive CARB 2007 Certification) than the advertised list price