Exhibit 10.3

                        SETTLEMENT AGREEMENT AND RELEASE
                        --------------------------------

     This  Settlement  Agreement  and  Release  (the "Agreement") is dated as of
March  24,  2006  and  is  made by and between ALPHA CAPITAL AKTIENGESELLSCHAFT,
WHALEHAVEN  CAPITAL FUND LIMITED, and ELLIS INTERNATIONAL LTD. (collectively the
"Investors")  and  Hybrid  Fuel Systems, Inc., a Georgia corporation ("Hybrid").

     WHEREAS,  Hybrid,  issued  to  the  Investors  an  aggregate of $600,000.00
principal  amount  promissory notes pursuant to the Subscription Agreement dated
on  or  about  March  31,  2005  (collectively  the  "Debentures");

     WHEREAS,  Hybrid  desires  to  redeem all outstanding Debentures, including
interest  and liquidated damages ("Remaining Debentures") in accordance with the
terms  and  conditions  hereof;  and

     NOW,  THEREFORE,  in  consideration  of the mutual conditions and covenants
contained  in this Agreement, and for other good and valuable consideration, the
sufficiency  and  receipt  of  which  is  hereby  acknowledged,  it  is  hereby
stipulated,  consented  to  and  agreed by and among the Investors and Hybrid as
follows:

1.   (a) On  or  before  March  28,  2006, in full satisfaction of the Remaining
     Debentures  Hybrid  shall  (i)  pay  to  the  Investors  an  aggregate  of
     $541,542.00  (the  "Funds")  as  set  forth  on  Exhibit  A hereto, by wire
     transfer to the bank and account as set forth on Exhibit A hereto, and (ii)
     reduce  the  exercise  price  to  $0.19  per  share for the warrants on the
     attached  Exhibit  B.  Each Investor, individually, hereby agrees that they
     will  not  exercise  or  sell  more  than sixty-seven thousand five hundred
     (67,500) shares underlying the Warrant in any thirty (30) day period unless
     Hybrid's  common stock is trading above forty cents ($0.40) per share. Upon
     receipt  of  the Funds, the Investors shall return, via overnight delivery,
     the  Remaining  Debentures  to  Hybrid.  The  Company  agrees  to  file all
     necessary  paperwork with the SEC, including any post-effective amendments,
     for  the  Investors within seven (7) days. The Company shall agree to abide
     by  all  terms  and  conditions  in  the  original  Warrant with respect to
     registration  and  issuance  of  shares  underlying  the  Warrant.

2.   In consideration  of the foregoing, upon receipt by the Investors, or their
     agent, of the Funds, except in connection with third party indemnification,
     the  Investors  release and discharge Hybrid, Hybrid's officers, directors,
     principals,  control  persons,  past  and  present  employees,  insurers,
     successors,  agents  and assigns ("Hybrid Parties") from all actions, cause
     of  action, suits, debts, dues, sums of money, accounts, reckonings, bonds,
     bills,  specialties,  covenants,  contracts,  controversies,  agreements,
     promises,  variances,  trespasses, damages, judgments, extents, executions,
     claims,  and demands whatsoever, in law, admiralty or equity, which against
     Hybrid Parties ever had, now have or hereafter can, shall or may, have for,
     upon, or by reason of any matter, cause or thing whatsoever, whether or not
     known or unknown, from the beginning of the world to the day of the date of
     this  Release arising under the Debentures and Subscription Agreement dated
     on  or about March 31, 2005. In addition, all security interests, mortgages
     and  other  liens, if any, which Hybrid may have granted to Investors shall
     automatically  be  released  and terminated. Investors authorize Hybrid, or
     its  designees,  to  file  Uniform  Commercial  Code  financing  statement
     amendments  evidencing  the  release and termination of Investor's liens in
     any  assets  or  properties  of  Hybrid.

3.   In consideration  of  the  foregoing,  Hybrid  releases  and  discharges
     Investors,  Investors'  officers,  directors,  principals, control persons,
     past  and  present  employees,  insurers,  successors,  agents  and assigns
     ("Investors  Parties")  from  all  actions,  cause of action, suits, debts,
     dues,  sums  of  money,  accounts,  reckonings,  bonds, bills, specialties,
     covenants,  contracts,  controversies,  agreements,  promises,  variances,
     trespasses,  damages,  judgments,  extents, executions, claims, and demands
     whatsoever,  in  law,  admiralty or equity, which against Investors Parties
     ever  had,  now  have or hereafter can, shall or may, have for, upon, or by
     reason  of  any  matter, cause or thing whatsoever, whether or not known or
     unknown,  from  the  beginning  of the world to the day of the date of this
     Release arising under the Debentures and Subscription Agreement dated on or
     about  March  31,  2005.

4.   Hybrid  and  the  Investors  each  understand and agree that this Agreement
     (including  all  of its terms) is forever deemed confidential between them.
     Except  as required under the statutes, rules or regulations of any federal
     or  state government, government agency or court of competent jurisdiction,
     each  of  Hybrid and the Investors, and their respective counsel, shall not
     disclose or divulge any of the matters underlying this Agreement, or any of
     the  terms  or  substance  of  this  Agreement  to  others.

     All  inquiries,  if  any,  regarding  the  other  party's performance shall
     be  responded  to promptly. Each party shall furnish the other party with a
     written  copy  of each and every written response; or, if such response was
     oral  the  date,  time  and  person  to  whom  a  response  was  given.

5.   All parties  acknowledge  and  represent  that:  (a)  they  have  read  the
     Agreement; (b) they clearly understand the Agreement and each of its terms;
     (c)  they fully and unconditionally consent to the terms of this Agreement;
     (d) they have had the benefit and advice of counsel of their own selection;
     (e)  they have executed this Agreement, freely, with knowledge, and without
     influence  or  duress;  (f)  they  have  not  relied  upon  any  other
     representations,  either  written or oral, express or implied, made to them
     by  any  person; and (g) the consideration received by them has been actual
     and  adequate.

6.   This Agreement  contains  the entire agreement and understanding concerning
     the  subject  matter hereof between the parties and supersedes and replaces
     all prior negotiations, proposed agreement and agreements, written or oral.
     Each  of  the  parties  hereto acknowledges that neither any of the parties
     hereto,  nor  agents or counsel of any other party whomsoever, has made any
     promise,  representation  or  warranty  whatsoever, express or implied, not
     contained  herein  concerning  the  subject hereto, to induce it to execute
     this Agreement and acknowledges ands warrants that it is not executing this
     Agreement  in  reliance  on  any  promise,  representation  or warranty not
     contained  herein.

7.   This Agreement  may  not  be modified or amended in any manner except by an
     instrument  in  writing  specifically  stating  that  it  is  a supplement,
     modification  or  amendment  to  the  Agreement  and  signed by each of the
     parties  hereto.

8.   Should  any provision of this Agreement be declared or be determined by any
     court  or  tribunal to be illegal or invalid, the validity of the remaining
     parts,  terms  or provisions shall not be affected thereby and said illegal
     or  invalid  part,  term or provision shall be severed and deemed not to be
     part  of  this  Agreement.

9.   This Agreement  shall  be  governed by and construed in accordance with the
     laws of the State of New York, without regard to principles of conflicts of
     laws.  Any  action brought by either party against the other concerning the
     transactions  contemplated  by  this Agreement shall be brought only in the
     state  courts  of New York or in the federal courts located in the state of
     New  York.  Both  parties  and the individuals executing this Agreement and
     other  agreements  on  behalf  of  the  Company  agree  to  submit  to  the
     jurisdiction  of  such courts and waive trial by jury. The prevailing party
     shall be entitled to recover from the other party its reasonable attorney's
     fees  and  costs.

10.  This Agreement  may  be  executed  in counterparts, each of which, when all
     parties  have  executed  at  least one such counterpart, shall be deemed an
     original, with the same force and effect as if all signatures were appended
     to  one  instrument, but all of which together shall constitute one and the
     same  Agreement.

11.  Immediately  upon  receipt of the funds, Grushko & Mittman is instructed to
     wire  the  balances  to  the  Investors.

<PAGE>

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date  first  indicated  above.

ALPHA  CAPITAL  AKTIENGESELLSCHAFT
By:  /s/  Konrad  Ackerman
     ---------------------
Name:   Konrad  Ackerman
Title:  Director


WHALEHAVEN  CAPITAL  FUND  LIMITED
By:  /s/  Evan  Schemenauer
     ----------------------
Name:   Evan  Schemenauer
Title:  Chief  Operating  Officer

ELLIS  INTERNATIONAL  LTD.
By:  /s/  Wilhelm  Unger
     -------------------
Name:   Wilhelm  Unger
Title:


HYBRID  FUEL  SYSTEMS,  INC.


By:  /s/  Mark  Clancy
     -----------------
Name:   Mark  Clancy
Title:  Chief  Executive  Officer



<PAGE>
<TABLE>

                                    EXHIBIT A

                                 ALLOCATIONS AND
                            WIRE TRANSFER INSRUCTIONS
<CAPTION>
<S>                                   <C>                           <C>
  INVESTOR                            BANK  ACCOUNT                 AMOUNT
  --------------------------------    -------------------------     -----------
  ALPHA CAPITAL AKTIENGESELLSCHAFT    C/O GRUSHKO & MITTMAN P.C     $199,500.00
  --------------------------------    -------------------------     -----------
  WHALEHAVEN CAPITAL FUND LIMITED     C/O GRUSHKO & MITTMAN P.C     $313,500.00
  --------------------------------    -------------------------     -----------
  ELLIS INTERNATIONAL LTD.            C/O GRUSHKO & MITTMAN P.C     $ 28,542.00
  --------------------------------    -------------------------     -----------

                                                          TOTAL     $541,542.00
                                                          -----     -----------
</TABLE>

<PAGE>

<TABLE>
                                    EXHIBIT B
<CAPTION>
<S>                                   <C>          <C>        <C>
PRIVATE  WARRANTS                                  ISSUED     EXPIRATION
-----------------                                  ------     ----------

  ALPHA  CAPITAL  AKTIENGESELLSCHAFT
  WHALEHAVEN  CAPITAL  FUND  LIMITED
  ELLIS  INTERNATIONAL  LTD.
                                       Total     1,600,000
</TABLE>