**Exhibit 10.22**

**PHASE II & PHASE III PURCHASE AGREEMENT**

           1.  Products Covered by      Agreement.  This Agreement concerns the purchase and sale of the PHASE      II and PHASE III PRODUCTS as defined in **Exhibit E** (hereinafter called      "Product"), manufactured to the Specifications.    

            2.   Purchase and Sale of      Product. Seller will, to the extent properly and accurately forecasted and      ordered by Buyer as provided in the next paragraph, use commercially reasonable      efforts to supply the Products to Buyer. Buyer will purchase ninety percent      (90%) of Buyer's and its Affiliates' ("Affiliate" means any company of which      Buyer holds a greater than fifty percent (50%) ownership interest) requirements      for Product. It is understood that Buyer will not purchase [****] from Seller.      [****] Seller understands that Buyer makes no guarantee as to the quantity of      Product it will require, however, Buyer agrees that it will undertake the Phase      II activities set forth in **Exhibit A** ("Phase II Activities").    

            Buyer's initial forecasted annual      requirements will be attached hereto as **Exhibit B** as of September 1,      2001. Buyer agrees to update the annual forecast (four [4] quarters) on a      quarterly basis. Such forecast of such requirements provided to Seller by Buyer      shall be non-binding, and Seller acknowledges that it shall not be entitled to      and shall not rely on such forecasts/estimates as binding commitments unless      they are expressly stated as such by Buyer in writing. Seller shall not be      obligated to supply Buyer with more than one hundred fifty percent (150%) of      the initial projection for a particular quarter, unless agreed to in writing.      Buyer's forecasts and orders shall reflect its good-faith expectations of      customer demand and Buyer shall act in a commercially reasonable manner to      schedule orders to avoid creating production capacity problems for Seller.    

            3.   Exclusive Caterpillar      Rights. For a period of seven (7) years from the Effective Date of this      Agreement, and provided this Agreement has not been terminated, ACTIVE POWER      agrees not to license any PROGRAM INTELLECTUAL PROPERTY nor ACTIVE POWER's      BACKGROUND INTELLECTUAL PROPERTY that is solely developed for a Product, to      [****]. The parties shall review and update **Exhibit C** from time to time      or upon either party's request. Before the end of such seven-year period,      ACTIVE POWER will, at CATERPILLAR's option, discuss the possibility of a      mutually agreeable extension of such FIELD OF USE exclusivity. During such      seven-year period, if any, and provided this Agreement has not been terminated,      ACTIVE POWER shall, at CATERPILLAR's option and provided that CATERPILLAR      [****]. However, nothing contained in this Agreement, shall restrict ACTIVE      POWER with respect to making, using, selling, marketing, licensing or      exploiting products other than Product.    

      [****]    

           4.   Price Containment.      Both Seller and Buyer are committed to controlling and reducing costs, and both      recognize that effective cost control is of the essence to this Agreement.      While this Agreement is in effect, Seller will maintain a cost control and      reduction program with respect to Product, and will review costs on a regular      basis for progress toward the objective of maintaining or reducing Seller's      prices to Buyer. A constant interaction between Buyer's and Seller's      engineering personnel is essential. All documented mutually agreed cost      savings, through the efforts of Buyer or Seller, will be shared on a 50/50      basis. Any cost savings gained without the efforts of Buyer and not mutually      agreed to in writing will be owned by Seller. Any cost increases must be      documented and approved by Buyer.    

            5.   Product Prices. The      OEM Prices and volume earned discounts are as shown in **Exhibit E**. [****]      Seller and Buyer agree to renegotiate prices and discounts as necessary or      appropriate to respond to market conditions. After eighteen (18) months from      the Effective date of this Agreement, **Exhibit E** may    

      **Confidential treatment has been requested for the portions of this      agreement marked by asterisks. Omitted material for which confidential      treatment has been requested has been filed separately with the Securities and      Exchange Commission.**    

      be modified from time to time upon sixty (60) days written notice from      the Seller; provided, however, that Buyer may terminate this Agreement within      thirty (30) days after receipt of notice of such price increase if such      increase is unacceptable to Buyer. Seller agrees and acknowledges that should      such prices exceed the lowest Product prices provided to any other customer of      Seller purchasing Product at similar (or reduced) volume levels and making only      similar or reduced commitments (including, but not limited to, time      commitments), such prices to Buyer shall be automatically adjusted to reflect      any lower pricing provided to such other customers.    

           6.   Product Training and      Support.    

                a. In order      to provide sufficient warranty support for the Product, Buyer's service      training personnel will successfully complete Seller's certified training      course in order to become competent to a level equivalent to Seller's certified      service technicians. Seller shall provide such training for up to five (5)      scheduled classes and for a maximum of ten (10) students per class. Such      training shall be given at Seller's facilities free of charge for the first      five (5) scheduled classes of the term of this Agreement and at Seller's      published prices for any remaining training. Buyer shall be responsible for its      own travel expenses as incurred for such training at Seller's facilities.    

                b. Seller      will provide sales and marketing support to Buyer's key dealers, as requested      and identified by Buyer and agreed to by the Seller.    

           7.   Term. The initial      term of this Agreement shall be seven (7) years, commencing as of January 1,      2000, (the "Effective Date"). This Agreement shall automatically be extended      for additional terms of six (6) months each unless either party gives written      notice to terminate at least three (3) months prior to the end of the initial      term or any additional term, or unless otherwise terminated pursuant to the      provisions hereof.    

           8.   Warranty.    

                 a. Seller      warrants that each Product shall be in conformity with the Specifications and      shall be free from defects in material and workmanship.    

                 b. Except as      provided below, Seller will provide Buyer with the same warranty, under the      same terms and conditions (including, without limitation, disclaimers), as      Buyer provides to its customers procuring electric power generation products      (as attached as **Exhibit F**); provided, however, that Seller's warranty to      Buyer shall be for a one-year period from the date of delivery to the end-user,      notwithstanding any longer warranty period in Buyer's warranty. If Buyer      performs travel labor (up to four hours), Seller shall reimburse such      documented, customary and reasonable expenses incurred by Buyer on behalf of      the Product provided such labor is performed by an employee of Buyer or one of      its dealers that has been competently trained with respect to the Product. A      quarterly written statement of Buyer's actual costs for providing warranty      services to its customers, including notice of specific Product failures, and      summary information on the causes of such failure, will be sent by Buyer to      Seller.    

                c. Within      twelve (12) months from the Effective Date of this Agreement, Buyer shall      inventory and maintain appropriate spares to provide its standard level of      service.    

                d. Claims or      Buyer's "Product Improvement Programs" (PIP), "Product Support Programs" (PSP),      "Extended Warranty" and other policy actions are to be negotiated on a      case-by-case basis by both parties and documented in writing as signed by both      parties. Participation in these programs will be based on an amount mutually      agreed to by Seller and Buyer.    

      2    

           **THE FOREGOING WARRANTIES SHALL BE      SELLER'S SOLE LIABILITY WITH REGARD TO THE PRODUCTS.**

           9.   Indemnification.      Except to the extent covered by the indemnity from Buyer below, Seller agrees      to indemnify, defend, and hold Buyer harmless against and from all claims,      demands, liabilities, loss, damage, cost, and expense, of whatsoever nature      paid to a third party or incurred in the defense (i) arising from a claim that      the Product infringes on intellectual property right of a third party or (ii)      arising from the injury or death of any person or loss or damage to property      directly due to, any defect of design, material, or workmanship of Product or      failure of Product to conform with the Specifications, provided Seller is      promptly notified of any and all such threats, claims or proceedings related      thereto and given reasonable assistance and the opportunity to assume sole      control over defense and settlement; Seller shall not be responsible for any      settlement it does not approve of in writing. The indemnity provided in this      Section shall be Buyer's sole and exclusive remedy for any claim of      infringement related to the Product.    

            Buyer agrees to indemnify, defend, and      hold Seller harmless against and from all claims, demands, liabilities, loss,      damage, cost, and expense, of whatsoever nature paid to a third party or      incurred in the defense of a claim arising on account of Buyer's (i)      misrepresentation of the Product or providing unauthorized representations or      warranties to its customers, (ii) modifications to the Product or (iii)      negligence or other fault of products or services of Buyer.    

            10.   Indemnity      Restrictions. SELLER MAKES NO WARRANTY OR REPRESENTATION WITH RESPECT TO,      (a) determining whether the Product will achieve the results desired by Buyer      or any third person, (b) selecting, procuring, installing, operating and      maintaining complementary equipment to insure correct operation of the Product,      and (c) ensuring the accuracy of any configuration design or implementation      that utilizes the Product. In the event of any alteration or attachment to the      Product not authorized by Seller, Seller shall have no liability or      responsibility to Buyer for: (a) any hardware, software, equipment, or services      provided by any persons other than Seller; (b) the proper functioning of the      Product if the alteration or attachment is the cause of the malfunction; or (c)      damage caused by any alteration or attachment to the Product.    

           11.   Insurance. Seller      agrees to keep in full force and effect, at its sole expense, during the term      of this Agreement and for a period of ten (10) years thereafter, at least the      insurance coverage described below with insurance companies acceptable to      Buyer. The limits set forth are minimum limits and shall not be construed to      limit Seller's liability. All cost and deductible amounts shall be for the sole      account of Seller. All policies required by Buyer pursuant to this Agreement      shall name Buyer as an additional insured (per ISO Endorsement #CG 2026 or its      equivalent) and waive subrogation rights in favor of Caterpillar. All policies      required shall also be designated as primary coverage to any similar coverage      carried by Caterpillar.    

      Seller shall not provide Product hereunder until all insurance as      required hereunder has been obtained, and certificates have been submitted to      and accepted by Buyer.    

      The required coverage shall be: Commercial General Liability Insurance      (Occurrence Coverage) including products, completed operations, contractual      liability coverage of indemnities contained in this contract, with a minimum      combined single limit of liability of five million dollars ($5,000,000) for      each occurrence for bodily injury and property damage. Such policy shall      contain provisions that provide at least thirty (30) days prior written notice      of any cancellation, non-renewal, or reduction in coverage to Buyer. Seller      shall deliver Certificates of Insurance in a form satisfactory to Buyer      evidencing the existence of such policy.    

      3    

           12.   Termination by      Buyer. Buyer may terminate this Agreement at any time, ****in the event:    

                  a.      Quality - Products consistently and materially fail to meet the Specifications      as defined herein or as hereafter agreed to by Buyer and Seller, or fails to      achieve status as a Caterpillar certified supplier within twenty-four (24)      months of the Effective Date of this Agreement.    

                  b.      Delivery - Seller is substantially and continuously failing to meet Buyer's      Firm Orders with respect to mutually agreed shipment dates. Seller shall      provide to Buyer a written schedule of Seller's standard lead times for      delivery of Products from the date Orders are accepted by Seller. Such schedule      for lead times shall be updated by Seller on a regular basis to reflect any      modifications thereto.    

                        c. Competitiveness - Seller fails to be responsive to the      marketplace or fails to remain competitive on a worldwide basis with other      manufacturers of comparable parts in terms of price.    

                        d. Default Generally - Material default by Seller in any material      obligation hereunder owed by Seller to Buyer.    

      Notwithstanding the above, Buyer may terminate pursuant o Subsections      (a), (b), (c) or (d) above only if Seller has failed to cure such default      within sixty (60) days after written notice thereof has been received by      Seller.    

           13.   Termination by      Seller. Seller may terminate this Agreement at any time in the event Buyer      breaches this Agreement and fails to cure such breach within sixty (60) days      (or ten days in the case of non-payment) after written notice thereof has been      received by Buyer.    

           14.   Licenses. As between      the parties, Seller shall own all rights, title and interest in and to the      Product except as otherwise provided in the "Phase II Development and Phase III      Feasibility Study Agreement" and the "Phase III Development Agreement." In the      event that this Agreement is terminated by Buyer pursuant to Section 12(b) and      only while Buyer remains in full compliance with the provisions of this      Agreement prior to termination and following termination as such surviving      provisions shall apply, Seller hereby grants to Buyer, effective as of such      termination date, a nonexclusive, worldwide, royalty-bearing license (including      the right to sublicense to Buyer's Affiliates) to make, have made, use and/or      sell Product. The foregoing license shall only be effective for the eighteen      (18) months beginning with the date of termination, and Buyer shall pay a      royalty of one thousand two hundred fifty dollars ($1,250) per delivered      megajoule per published rating by Seller for each Phase II Product. The same      shall apply to Phase III Product, except that Buyer shall pay a royalty of      thirteen dollars ($13) per kVA for each Phase III Product.    

      Each of Buyer and Seller grant to the other party an irrevocable,      perpetual, nonexclusive, worldwide, royalty-free license (including the right      to sublicense to such other party's Affiliates) to make, have made, use, sell      and otherwise exploit during and/or after the term of this Agreement any      modifications, improvements, inventions, know-how, ideas or suggestions made      with respect to the other party's Confidential Information by such party's      employees who have had access to such Confidential Information. If something      ceases to be considered Confidential Information, licenses granted with respect      thereto while such information was deemed Confidential Information, will be      unaffected.    

           15.   Parts Support.      During the term of this Agreement or following any termination hereof, other      than termination by Seller due to a breach by Buyer, Seller shall provide, or      at its option cause to be provided, such quantities of parts to Buyer as Buyer      may request from time to time for a period of five (5) years from the date of      the last customer shipment made by Seller under this Agreement of the      applicable Product release, at a price not to exceed Seller's then-current      prices provided to other customers under    

      4    

      similar terms and conditions, provided such parts are reasonably and      commercially available to Seller. If for any reason Seller is unable to provide      parts to Buyer pursuant to its obligations under this Section 15, Seller grants      to Buyer a nonexclusive, perpetual, worldwide royalty bearing license to make,      have made, use and/or sell such parts utilizing Seller's proprietary designs.      The foregoing license is subject to a royalty of six percent (6%) of the      applicable price set forth in Seller's most current Catalog Spares Pricing      List.    

           16.   Use of Other Supply      Sources. Nothing in this Agreement shall prevent Buyer from seeking other      sources for alternatives to the Product to the extent Seller's production      capacity continuously and substantially fails to meet Buyer's Firm Orders.    

           17.   Change in Ownership and      Control. During the life of this Agreement, if there is a change in the      ownership and control of either party, the other party shall have the option of      terminating this Agreement immediately by giving written notice thereof within      ten (10) days of being notified of the occurrence of such change of control;      provided that if a party provides advance notice of a bona fide proposed change      of control (including the identity of the principal owners after such change of      control occurs) the other party will within ten (10) days provide written      notification to the first party as to whether it will exercise such termination      right if the change of control occurs. For purposes of this Section 17, a      change in the ownership and control of either Buyer or Seller or a parent      company of either party shall be deemed to have occurred if and only if and      when any one or more persons (excluding existing investors) acting in concert      individually or jointly is or becomes a beneficial owner, directly or      indirectly, of securities representing more than fifty percent (50%) of the      combined voting power of all then outstanding securities of Seller or Buyer or      the parent company of either party.    

           18.   Shipping      Instructions/Terms and Conditions. Orders will be placed under Buyer's      blanket purchase order(s). This Agreement shall supersede Buyer's standard      purchase order terms (other than the terms under the following sections: "Work      on Buyer's Premises" and "Property Furnished to Seller by Buyer", which terms      shall be deemed to be incorporated herein by reference and made a part hereof)      or any terms stated in any acknowledgment forms or other forms utilized by      Seller or Buyer. Such orders shall specify the quantity, part number and      description, unit price, requested ship date, destination, and Buyer's freight      carrier and account number with the carrier. Orders shall be subject to      acceptance by Seller ("Firm Orders"). No modification to this Agreement will be      stated on an order. All Products shall be shipped F.O.B. Seller's facility in      Austin, Texas. Title and risk of loss to Product shall pass to Buyer upon      delivery to the carrier at the F.O.B. point. Buyer shall designate a carrier.      Any special freight charges shall be Seller's responsibility if necessary to      meet not more than one hundred fifteen percent (115%) of Buyer's projected      quarterly requirements.    

           19.   Inspection. Product      is subject to Buyer's inspection, testing and approval. Buyer, at its option,      may reject or refuse to accept any Product which does not meet the requirements      of the warranty set forth herein. Buyer's right to reject shall expire one (1)      year after the date of shipment. Prior to returning any Product, Buyer shall      notify Seller of its intent to reject, and Seller may within thirty (30) days      correct any such defect. Items rejected by Buyer will be returned to Seller at      Seller's expense, and Seller agrees to refund to Buyer any payments (including      but not limited to shipment expense) made by Buyer for such Product. Payment by      Buyer for any Product shall not be deemed an acceptance thereof. Acceptance of      any Product shall not relieve Seller from any of its obligations,      representations or warranties hereunder or with respect thereto.    

            20.   Prices and      Payments. Prices set forth in **Exhibit E** do not include installation,      freight and handling charges, or applicable taxes, and Buyer shall be      responsible for all such charges and taxes with respect to the Products and the      shipment thereof. All payments shall be made by Buyer in accordance with the      terms of Buyer's then-current standard settlement schedule. All payments due      hereunder shall be    

      5    

      paid to Seller in United States dollars in the United States. Unless      Buyer furnishes a proper exemption certificate, Buyer shall be charged for all      taxes, however designated, levied or based on this Agreement or the Product.    

           21.   Force Majeure.      Neither Buyer nor Seller shall be liable for any delay in or failure of      performance of their respective obligations hereunder if such performance is      rendered impossible or impracticable by reason of fire, explosion, earthquake,      accident, breakdown, strike, drought, embargo, war, riot, act of God or public      enemy, an act of governmental authority, agency or entity, shortage of raw      materials, or other contingency, delay, failure or cause, beyond the reasonable      control of the part whose performance is affected, irrespective of whether such      contingency is specified herein or is presently occurring or anticipated by      either party. Upon the occurrence of any event covered by this provision,      Seller and Buyer shall make every effort to continue to maintain as much as      possible the supplier-customer relationship established under this Agreement.      However, in the event Buyer or Seller is unable to meet its obligations      hereunder because of the conditions described above and such inability      continued for a period of two (2) months, the other party shall have the right      to terminate this Agreement upon thirty (30) days prior written notice.    

           22.   Assignment/Applicable      Law. Except to an entity that acquires all or substantially all the      business or assets of a party, this Agreement is not assignable by either party      without the written consent of the other party and will be governed by and      construed in accordance with the laws of the State of New York without regard      to the conflict of laws provisions thereof.    

           23.   Entire Agreement.      This Agreement and the Exhibits hereto constitute the entire agreement and      understanding between the parties with respect to the subject matters herein      and therein, and supersede and replace any prior agreements and understandings      whether oral or written, between them with respect to such matters. Without      limiting the generality of the foregoing, it is understood that this Agreement      supersedes and replaces the Phase II Purchase Agreement which superseded and      replaced the Phase II Purchase Agreement Terms and Conditions attached as      **Exhibit B** to the Phase II Development and Phase III Feasibility Study      Agreement dated as of January 22, 1999. Any additional or different terms of      any related purchase order, confirmation, acknowledgment, shipping instruction      form or similar form of Buyer or Seller even if signed by the parties after the      date hereof, shall have no force or effect.    

           24.   Waiver. The      provisions of this Agreement may be waived, altered, amended, or repealed in      whole or in part only upon the written consent of all parties to this      Agreement. The waiver by either party of any breach of this Agreement shall not      be deemed or construed as a waiver of any other breach, whether prior,      subsequent or contemporaneous, of this Agreement.    

           25.   Severability.      Invalidation of any of the provisions contained herein, or the application of      such invalidation thereof to any person, by legislation, judgment or court      order shall in no way affect any of the other provisions hereof or the      application thereof to any other person, and the same shall remain in full      force and effect, unless enforcement as so modified would be unreasonable or      grossly inequitable under all the circumstances or would frustrate the purposes      hereof.    

            26.   Counterparts.      Section headings contained herein are for ease of reference only and shall not      be given substantive effect.**** This Agreement may be signed in one or more      counterparts, each to be effective as an original.    

      6    

           27.   Limitation of      Liability. NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,      INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE SUBJECT MATTER OF THIS      AGREEMENT, OR BUYER'S COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES.    

           28.   Confidential      Information.    

                        a. In connection with work under this Agreement, a party ("TRANSMITTING PARTY")      may deliver PROPRIETARY INFORMATION relating directly to the business or      technology of the other party ("RECEIVING PARTY"). The RECEIVING PARTY may not      use the PROPRIETARY INFORMATION except as necessary to perform its obligations      under this Agreement, will protect the confidentiality of the PROPRIETARY      INFORMATION with at least the same degree of care as it protects its own      confidential information, and will not disclose any such PROPRIETARY      INFORMATION without the express written consent of the TRANSMITTING PARTY.      "PROPRIETARY INFORMATION" includes any process, system, formula, pattern,      model, device compilation, or other information: (i) not known by the RECEIVING      PARTY prior to this Agreement or known by the RECEIVING PARTY prior to this      Agreement but having restriction on its use or disclosure; and (ii) not      generally known by others (unless so know through some fault of the RECEIVING      PARTY). PROPRIETARY INFORMATION does not include knowledge, skills or      information which is generally known in Seller's or Buyer's trade or      profession.    

                  b.      Each party agrees that it will neither (i) disclose to the other party or any      of its employees information in confidence belonging to a third party; nor (ii)      knowingly, in the performance of the work hereunder, produce anything that      embodies information under confidential restriction, or is covered by a patent,      patent application, copyright, trade secret, or other intellectual property      right owned by a third party.    

                        c. Nothing in this Agreement shall be construed as preventing either party from      independent development, provided that PROPRIETARY INFORMATION is handled in      accordance with paragraph 28(a).    

                        d. Should the RECEIVING PARTY be required to disclose PROPRIETARY      INFORMATION by governmental or judicial order, the RECEIVING PARTY will give      the TRANSMITTING PARTY prompt notice of any such order and will comply with any      protective order imposed on such disclosure.    

           29.   Compliance with      Laws. Both parties represent that they have complied, and during the      performance of this Agreement, will continue to comply with the provisions of      all applicable laws and regulations from which liability may accrue to the      other party for any violation thereof.    

           30.   Confidentiality.      Except with respect to potential investors and/or acquirers, the terms of this      Agreement as well as its existence shall be kept confidential and not disclosed      by either party without the express written consent of the other party.    

      [Signature page follows.]    

      7    

      The parties have caused this Agreement to be signed in duplicate by their      duly-authorized representatives.    

**EXHIBIT A**

**PHASE II & PHASE III MARKETING ACTIVITIES**

- Buyer will conduct a product launch with appropriate marketing        subsidiaries and dealers.
-  Buyer will create appropriate sales binder for above training or        launch.
-  Buyer will effect pricing and price list literature for the program        for all appropriate worldwide marketing subsidiaries and dealers.
-  Buyer will announce product to dealers. 
- Buyer will effect a Caterpillar Product News announcement.
- Buyer will create product brochures for product promotion.
- Buyer will create product specification sheets. 
- Buyer will enter appropriate performance and specifications into its        online Technical Marketing Information (TMI) systems.
- Buyer will make adequate technical drawings available to its        dealers.
- Buyer will effect a public product announcement of the phase II        product that will include reference to the new Caterpillar UPS product and its        use of the Active Power flywheel energy storage system.
- Buyer will create a product promotional video. 
- Buyer will include the product where appropriate in its        marketing/specification software.
-  Buyer will promote the product internally to its worldwide marketing        subsidiaries. 
- Buyer will effect the above in all languages deemed appropriate by        Buyer.

> 
        Implementation of the foregoing Marketing Activities is dependent upon        Buyer receiving adequate product and technical information from Seller      

**EXHIBIT B**

**Forecast (to be provided as of September 1, 2001)**