Document:

Unassociated Document

    Exhibit
      10.22

     

    PROMISSORY
      NOTE

     

    FACE
      AMOUNT $1,412,500

    PRICE
      $1,130,000 INTEREST RATE 0% per month 

    NOTE
      NUMBER March-2006-101

    ISSUANCE
      DATE March 23, 2006

    MATURITY
      DATE March 23, 2007

     

    FOR
      VALUE
      RECEIVED, Hybrid Fuel Systems, Inc., a Georgia corporation, and all of its
      subsidiaries (the "Company") (OTC BB: HYFS) hereby promises to pay to the order
      of DUTCHESS PRIVATE EQUITIES FUND, L.P. (collectively, the "Holder") by the
      Maturity Date, or earlier, the Face Amount of One Million Four Hundred and
      Twelve Thousand Five Hundred Dollars ($1,412,500) U.S., (this "Note") in such
      amounts, at such times and on such terms and conditions as are specified herein
      (sometimes hereinafter the Company and the Holder are referred to collectively
      as "the Parties").

     

    Any
      capitalized term not defined in this Note are defined in the Investment
      Agreement for the Equity Line of Credit between Dutchess Private Equities Fund,
      LP (as the "Investor") and the Company (the "Equity Line"), which definitions
      the Company and the Holder incorporate herein by reference.

     

    ARTICLE
      1 Method of Payment

     

    Section
      1.1 Payments made to the Holder by the Company in satisfaction of this Note
      (referred to as a "Payment," or "Payments") shall be drawn from each Put under
      the Equity Line of Credit provided by the Investor to the Company. The Company
      shall make payments to the Holder in the amount of the greater of a) one hundred
      percent (100%) of each Put (as defined in the Investment Agreement between
      the
      Company and the Investor dated November 4, 2005) given to the Investor from
      the
      Company; or, b) one hundred seventeen thousand seven hundred and eight dollars
      and thirty-three cents ($117,708.33) (the "Payment Amount") until the Face
      Amount is paid in full, minus any fees due. The First Payment will be due on
      May
      1, 2006 and each subsequent Payment will be made at the Closing of each Put
      ("Payment Date" or "Payment Dates") until this Note is paid in full, with a
      minimum amount of one hundred seventeen thousand seven hundred and eight dollars
      and thirty-three cents ($117,708.33)per month. Notwithstanding any provision
      to
      the contrary in this Note, the Company may pay in full to the Holder the Face
      Amount, or any balance remaining thereon, in readily available funds at any
      time
      and from time to time without penalty.

     

    Section
      1.2 Payments pursuant to this Note shall be drawn directly from the Closing
      of
      each Put and shall be wired directly to the Holder on the Closing Date and
      shall
      be included in the calculation of the Threshold Amount (as defined in Section
      1.4, below). The Company agrees to fully execute and diligently carry out Puts
      to the Investor, on the terms set forth in the Investment Agreement. The Company
      agrees that the Put Amount shall be for the maximum amount allowed under the
      Investment Agreement. Further, the Company agrees to issue Puts to the Investor
      for the maximum frequency allowed under the Investment Agreement. Failure to
      comply with the terms of the Investment Agreement with respect to the Puts
      will
      result in an Event of Default as defined in this Agreement in Article
      4.

     

    Section
      1.3 In order to assist the Company in meeting its obligations under this Note,
      the Company hereby authorizes the Investor to transfer funds from each Put
      directly to the Holder. A Put shall be deemed closed after the funds are
      transferred to the Holder.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Section
      1.4 After Closing, the Company must make a prepayment to the Holder when the
      aggregate amount of financing ("Financing") received by the Company is in excess
      of one million dollars ($1,000,000) ("Threshold Amount"). The Company agrees
      to
      pay one hundred percent (100%) of any proceeds raised by the Company over the
      Threshold Amount toward the prepayment of the Note, Interest and any penalties
      until the Face Amount is paid in full. The prepayments shall be made to the
      Holder within one (1) business day of the Company's receipt of the Financing.
      Failure to do so will result in an Event of Default. The Threshold Amount shall
      also pertain to any assets sold, transferred or disposed of by the Company
      and
      any cash balances in the Company bank or brokerage accounts at the end of each
      month.

     

    ARTICLE
      2 Collateral

     

    Section
      2.1 The Company does hereby agree to issue to the Holder for use as Collateral
      forty (40) signed Put Notices consistent with the conditions set forth in
      Section 12. In the event, the Holder uses the Collateral in full, the Company
      shall immediately deliver to the Holder additional Put Sheets as requested
      by
      the Holder.

     

    Section
      2.2 Upon the completion of the Company's obligation to the Holder of the Face
      Amount of this Note, the Company will not be under any further obligation to
      complete additional Puts. All remaining Put sheets shall be marked "VOID" by
      the
      Holder and returned to the Company at the Company's request.

     

    ARTICLE
      3 Unpaid Amounts

     

    Section
      3.1 In the event that on the Maturity Date the Company has any remaining amounts
      unpaid on this Note (the "Residual Amount"), the Holder can exercise its right
      to increase the Face Amount by ten percent (10%) as an initial penalty AND
      an
      additional two and one-half percent (2.5%) per month --- paid, pro rata for
      partial periods, compounded daily, as liquidated damages ("Liquidated Damages").
      If a Residual Amount remains, the Company is in Default and the Holder may
      elect
      remedies as set forth in Article 4, below. The Parties acknowledge that
      Liquidated Damages are not interest and should not consititute a
      penalty.

     

    ARTICLE
      4 Defaults and Remedies

     

    Section
      4.1 Events of Default. An "Event of Default" occurs if any one of the following
      occur:

     

    (a)
      The
      Company does not make a Payment within two (2) business days of (i) the Closing
      of a Put; or (ii) a Payment Date; or, (iii) a Residual Amount on the Note exists
      on the Maturity Date; or

     

    (b)
      The
      Company, pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
      defined): (i) commences a voluntary case; (ii) consents to the entry of an
      order
      for relief against it in an involuntary case; (iii) consents to the appointment
      of a Custodian (as hereinafter defined) of the Company or for its property;
      (iv)
      makes an assignment for the benefit of its creditors; or (v) a court of
      competent jurisdiction enters an order or decree under any Bankruptcy Law that:
      (A) is for relief against the Company in an involuntary case; (B) appoints
      a
      Custodian of the Company or for its property; or (C) orders the liquidation
      of
      the Company, and the order or decree remains unstayed and in effect for sixty
      (60) calendar days; or

     

    (c)
      The
      Company's $0.001 par value common stock (the "Common Stock") is suspended or
      is
      no longer listed on any recognized exchange, including an electronic
      over-the-counter bulletin board, for in excess of two (2) consecutive trading
      days; or

     

    (d)
      Either the registration statement for the underlying shares in the Investment
      Agreement is not effective for any reason and is not cured within five (5)
      days;
      or,

     

    (e)
      Any
      of the Company's representations or warranties contained in this Agreement
      were
      false when made; or,

     

    (f)
      The
      Company breaches this Agreement, and such breach, if and only if such breach
      is
      subject to cure, continues for a period of three (3) business days.

     

    As
      used
      in this Section 4.1, the term "Bankruptcy Law" means Title 11 of the United
      States Code or any similar federal or state law for the relief of debtors.
      The
      term "Custodian" means any receiver, trustee, assignee, liquidator or similar
      official under any Bankruptcy Law.

     

    Section
      4.2 Remedies. In the Event of Default, the Holder may elect to garnish Revenue
      from the Company in an amount that will repay the Holder on the schedules
      outlined in this Agreement and fully enforce the Security Agreement dated this
      date between the Holder and the Company.

     

    For
      EACH
      AND EVERY Event of Default, as outlined in this Agreement, the Holder can
      exercise its right to increase the Face Amount of the Note by ten percent (10%)
      as an initial penalty. In addition, the Holder may elect to increase the Face
      Amount of the Note by two and one-half percent (2.5%) as Liquidated Damages,
      compounded daily. The Parties acknowledge that Liquidated Damages are not
      interest under the terms of this Agreement, and shall not constitute a
      penalty.

     

    In
      the
      event of a Default hereunder, the Holder, at its sole election, shall have
      the
      right, but not the obligation, to either:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    a)
      Switch
      the Residual Amount to a three-year ("Convertible Maturity Date"), eighteen
      percent (18%) interest bearing convertible debenture at the terms described
      hereinafter (the "Convertible Debenture"). In the event of Default, the
      Convertible Debenture shall be considered closed ("Convertible Closing Date"),
      as of the date of the Event of Default. If the Holder chooses to convert the
      Residual Amount to a Convertible Debenture, the Company shall have twenty (20)
      business days after notice of default from the Holder (the "Notice of
      Convertible Debenture") to file a registration statement covering an amount
      of
      shares equal to three hundred percent (300%) of the Residual Amount. Such
      registration statement shall be declared effective under the Securities Act
      of
      1933, as amended (the "Securities Act"), by the Securities and Exchange
      Commission (the "Commission") within sixty (60) business days of the Convertible
      Closing Date. In the event the Company does not file such registration statement
      within twenty (20) business days of the Holder's request, or such registration
      statement is not declared by the Commission to be effective under the Securities
      Act within the time period described above the Residual Amount shall increase
      by
      five thousand dollars ($5,000) per day. In the event the Company is given the
      option for accelerated effectiveness of the registration statement, the Company
      will cause such registration statement to be declared effective as soon as
      reasonably practicable and will not take any action to delay the registration
      to
      become effective. In the event that the Company is given the option for
      accelerated effectiveness of the registration statement, but chooses not to
      cause such registration statement to be declared effective on such accelerated
      basis, the Residual Amount shall increase by five thousand dollars ($5,000)
      per
      day commencing on the earliest date as of which such registration statement
      would have been declared to be effective if subject to accelerated
      effectiveness; or

     

    b)
      The
      Holder may increase the Payment Amount described under Article 1 to fulfill
      the
      repayment of the Residual Amount. The Company shall provide full cooperation
      to
      the Holder in directing funds owed to the Holder on any Put made by the Company
      to the Investor. The Company agrees to diligently carry out the terms outlined
      in the Investment Agreement for delivery of any such shares. In the event the
      Company is not diligently fulfilling its obligation to direct funds owed to
      the
      Holder from Puts to the Investor, as reasonably determined by the Holder, the
      Holder may, after giving the Company two (2) business days advance notice to
      cure the same, elect to increase the Face Amount of the Note by 2.5% each day,
      compounded daily, in additional to and on top of additional remedies available
      to the Holder under this Note.

     

    Section
      4.3 Conversion Privilege

     

    (a)
      The
      Holder shall have the right to convert the Convertible Debenture into shares
      of
      Common Stock at any time following the Convertible Closing Date and before
      the
      close of business on the Convertible Maturity Date. The number of shares of
      Common Stock issuable upon the conversion of the Convertible Debenture shall
      be
      determined pursuant to Section 4.4, but the number of shares issuable shall
      be
      rounded up to the nearest whole share.

     

    (b)
      The
      Holder may convert the Convertible Debenture in whole or in part, at any time
      and from time to time.

     

    (c)
      In
      the event all or any portion of the Convertible Debenture remains outstanding
      on
      the Convertible Maturity Date (the "Debenture Residual Amount"), the unconverted
      portion of such Convertible Debenture will automatically be converted into
      shares of Common Stock on such date in the manner set forth in

     

    Section
      4.4.

     

    Section
      4.4 Conversion Procedure.

     

    (a)
      The
      Holder may elect to convert the Residual Amount in whole or in part any time
      and
      from time to time following the Convertible Closing Date. Such conversion shall
      be effectuated by providing the Company, or its attorney, with that portion
      of
      the Convertible Debenture to be converted together with a facsimile or original
      of the signed notice of conversion (the "Notice of Conversion"). The date on
      which the Notice of Conversion is effective ("Conversion Date") shall be deemed
      to be the date on which the Holder has delivered to the Company a facsimile
      or
      original of the signed Notice of Conversion, as long as the original Convertible
      Debenture(s) to be converted are received by the Company within five (5)
      business days thereafter. When the Convertible Debenture has been provided
      to
      the Company, the Holder can elect to either reissue the Convertible Debenture,
      or continually convert the existing Debenture. Any Notice of Conversion faxed
      by
      the Holder to the Company on a particular day shall be deemed to have been
      received no later than the previous business day (receipt being via a
      confirmation of the time such facsimile to the Company is
      received).

     

    (b)
      Common Stock to be Issued. Upon the conversion of any Convertible Debentures
      by
      the Holder, the Company shall instruct its transfer agent to issue stock
      certificates without restrictive legends or stop transfer instructions, if,
      at
      that time, the aforementioned registration statement described in Section 4.2
      has been declared effective (or with proper restrictive legends if the
      registration statement has not as yet been declared effective), in such
      denominations representing the number of shares of Common Stock issuable upon
      such conversion. In the event that the Debenture is deemed saleable under Rule
      144 of the Securities Exchange Act of 1933, the Company shall, upon a Notice
      of
      Conversion, instruct the transfer agent to issue free trading certificates
      without restrictive legends, subject to other applicable securities laws. The
      Company is responsible to for all costs associated with the issuance of the
      shares, including but not limited to the opinion letter, FedEx of the
      certificates and any other costs that arise. The Company shall act as registrar
      of the Shares of Common Stock to be issued and shall maintain an appropriate
      ledger containing the necessary information with respect to each Convertible
      Debenture. The Company warrants that no instructions have been given or will
      be
      given to the transfer agent which limit, or otherwise prevent resale and that
      the Common Stock shall otherwise be freely resold, except as may be set forth
      herein or subject to applicable law.

     

    (c)
      Conversion Rate. The Holder is entitled to convert the Debenture Residual
      Amount, plus accrued interest and penalties, anytime following the Convertible
      Closing Date, at the lesser of either (i) fifty percent (50%) of the lowest
      closing bid price during the fifteen (15) trading days immediately preceding
      the
      Convertible Maturity Date, or (ii) 100% of the lowest bid price for the twenty
      (20) trading days immediately preceding
      the Convertible Closing Date ("Fixed Conversion Price"). No fractional shares
      or
      scrip representing fractions of shares will be issued on conversion, but the
      number of shares issuable shall be rounded up to the nearest whole
      share.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (d)
      Nothing contained in the Convertible Debenture shall be deemed to establish
      or
      require the Company to pay interest to the Holder at a rate in excess of the
      maximum rate permitted by applicable law. In the event that the rate of interest
      required to be paid exceeds the maximum rate permitted by governing law, the
      rate of interest required to be paid thereunder shall be automatically reduced
      to the maximum rate permitted under the governing law and such excess shall
      be
      returned with reasonable promptness by the Holder to the Company. In the event
      this Section 4.4(d) applies, the Parties agree that the terms of this Note
      shall
      remain in full force and effect except as is necessary to make the interest
      rate
      comply with applicable law.

     

    (e)
      The
      Holder shall be treated as a shareholder of record on the date the Company
      is
      required to issue the Common Stock to the Holder. If prior to the issuance
      of
      stock certificates, the Holder designates another person as the entity in the
      name of which the stock certificates requesting the Convertible Debenture are
      to
      be issued, the Holder shall provide to the Company evidence that either no
      tax
      shall be due and payable as a result of such transfer or that the applicable
      tax
      has been paid by the Holder or such person. If the Holder converts any part
      of
      the Convertible Debentures, or will be, the Company shall issue to the Holder
      a
      new Convertible Debenture equal to the unconverted amount, immediately upon
      request by the Holder.

     

    (f)
      Within three (3) business days after receipt of the documentation referred
      to in
      this Section, the Company shall deliver a certificate, for the number of shares
      of Common Stock issuable upon the conversion. In the event the Company does
      not
      make delivery of the Common Stock as instructed by Holder within five (5)
      business days after the Conversion Date, the Company shall pay to the Holder
      an
      additional one percent (1%) per day in cash of the full dollar value of the
      Debenture Residual Amount then remaining after conversion, compounded
      daily.

     

    (g)
      The
      Company shall at all times reserve (or make alternative written arrangements
      for
      reservation or contribution of shares) and have available all Common Stock
      necessary to meet conversion of the Convertible Debentures by the Holder of
      the
      entire amount of Convertible Debentures then outstanding. If, at any time,
      the
      Holder submits a Notice of Conversion and the Company does not have sufficient
      authorized but unissued shares of Common Stock (or alternative shares of Common
      Stock as may be contributed by stockholders of the Company) available to effect,
      in full, a conversion of the Convertible Debentures (a "Conversion Default,"
      the
      date of such default being referred to herein as the "Conversion Default Date"),
      the Company shall issue to the Holder all of the shares of Common Stock which
      are available. Any Convertible Debentures, or any portion thereof, which cannot
      be converted due to the Compnay's lack of sufficient authorized common stock
      (the "Unconverted Debentures"), may be deemed null and void upon written notice
      sent by the Holder to the Company. The Company shall provide notice of such
      Conversion Default ("Notice of Conversion Default") to the Holder, by facsimile,
      within one (1) business days of such default.

     

    (h)
      The
      Company agrees to pay the Holder payments for a Conversion Default ("Conversion
      Default Payments") in the amount of (N/365) multiplied by .24 multiplied by
      the
      initial issuance price of the outstanding or tendered but not converted
      Convertible Debentures held by the Holder where N = the number of days from
      the
      Conversion Default Date to the date (the "Authorization Date") that the Company
      authorizes a sufficient number of shares of Common Stock to effect conversion
      of
      all remaining Convertible Debentures. The Company shall send notice
      ("Authorization Notice") to the Holder that additional shares of Common Stock
      have been authorized, the Authorization Date, and the amount of Holder's accrued
      Conversion Default Payments. The accrued Conversion Default shall be paid in
      cash or shall be convertible into Common Stock at the conversion rate set forth
      in the first sentence of this paragraph, upon written notice sent by the Holder
      to the Company, which Conversion Default shall be payable as
      follows:

     

    (i)
      in
      the event the Holder elects to take such payment in cash, cash payment shall
      be
      made to the Holder within five (5) business days, or (ii) in the event Holder
      elects to take such payment in stock, the Holder may convert at the conversion
      rate set forth in the first sentence of this paragraph until the expiration
      of
      the conversion period.

     

    (i)
      The
      Company acknowledges that its failure to maintain a sufficient number of
      authorized but unissued shares of Common Stock to effect in full a conversion
      of
      the Convertible Debentures in full will cause the Holder to suffer irreparable
      harm, and that the actual damages to the Holder will be difficult to ascertain.
      Accordingly, the parties agree that it is appropriate to include in this
      Agreement a provision for liquidated damages. The Parties acknowledge and agree
      that the liquidated damages provision set forth in this section represents
      the
      parties' good faith effort to quantify such damages and, as such, agree that
      the
      form and amount of such liquidated damages are reasonable, and under the
      circumstances, do not constitute a penalty. The payment of liquidated damages
      shall not relieve the Company from its obligations to deliver the Common Stock
      pursuant to the terms of this Convertible Debenture.

     

    (j)
      If,
      by the third (3rd) business day after the Conversion Date, any portion of the
      shares of the Convertible Debentures have not been delivered to the Holder
      and
      the Holder purchases, in an open market transaction or otherwise, shares of
      Common Stock (the "Covering Shares") necessary to make delivery of shares which
      would had been delivered if the full amount of the shares to be converted had
      been delivered to the Holder, then the Company shall pay to the Holder, in
      addition to any other amounts due to Holder pursuant to this Convertible
      Debenture, and not in lieu thereof, the Buy-In Adjustment Amount (as defined
      below). The "Buy In Adjustment Amount" is the amount equal to the excess, if
      any, of (x) the Holder's total purchase price (including brokerage commissions,
      if any) for the Covering Shares minus (y) the net proceeds (after brokerage
      commissions, if any) received by the Holder from the sale of the Sold Shares.
      The Company shall pay the Buy-In Adjustment Amount to the Holder in immediately
      available funds within five (5) business days of written demand by the Holder.
      By way of illustration and not in limitation of the foregoing, if the Holder
      purchases shares of Common Stock having a total purchase price (including
      brokerage commissions) of $11,000 to cover a Buy-In with respect to shares
      of
      Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount
      which the Company will be required to pay to the Holder will be
      $1,000.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    ARTICLE
      5 Additional Financing and Registration Statements

     

    Section
      5.1 The Company will not enter into any additional financing agreements whether
      for debt or equity, without prior expressed written consent from the Holder.
      Violation of this Section 5.1 will result in an Event of Default and the Holder
      may elect to take the action or actions outlined in Article 4.

     

    Section
      5.2 The Company agrees that it shall not file any registration statement which
      includes any of its Common Stock, including those on Form S-8, until such time
      as the Note is paid off in full ("Lock-Up Period") or without the prior written
      consent of the Holder. The Company also agrees that no further issuances of
      stock will be made from the current S-8 on file with the SEC, File Number
      333-130554. Failure by the Company to fully comply with this Section 5.2 shall
      result in an Event of Default and the Holder may elect to take the action or
      actions outlined in Article 4 or Section 5.3.

     

    Section
      5.3 If, at any time, while this Note is outstanding, the Company issues or
      agrees to issue to any entity or person ("Third Party") for any reason
      whatsoever, any common stock or securities convertible into or exercisable
      for
      shares of common stock (or modify any such terms in effect prior to the
      execution of this Note) (a "Third Party Financing"), at terms deemed by the
      Holder to be more favorable to the Third Party, then the Company grants to
      the
      Holder the right, at the Holder's election, to modify the terms of this Note,
      including but not limited to the Incentive Shares outlined in Article 15 below,
      to match or conform to the more favorable term or terms of the Third Party
      Financing. The rights of the Holder in this Section 5.3 are in addition to
      all
      other rights the Holder has pursuant to this Note and the Security Agreement
      between the Holder and the Company.

     

    Section
      5.4 During the period of time that this Note is in force, the Company's
      officers, insiders, affiliates or other related parties shall refrain from
      selling any Stock.

     

    ARTICLE
      6 Notice.

     

    Section
      6.1 Any notices, consents, waivers or other communications required or permitted
      to be given under the terms of this Note must be in writing and will be deemed
      to have been delivered (i) upon delivery, when delivered
      personally;

     

    (ii)
      upon
      receipt, when sent by facsimile (provided a confirmation of transmission is
      mechanically or electronically generated and kept on file by the sending party);
      or (iii) one (1) day after deposit with a nationally recognized overnight
      delivery service, so long as it is properly addressed. The addresses and
      facsimile numbers for such communications shall be:

     

    If
      to the Company:

     

    Mark
      Clancy

    Hybrid
      Fuel Systems

    12409
      Telecom Drive

    Tampa,
      FL
      33637

    Telephone:
      813-979-9222

    Facsimile:
      813-979-9224

     

    With
      copy
      to:

     

    Darrin
      M.
      Ocasio, Esq.

    Sichenzia
      Ross Friedman Ference LLP

    1065
      Avenue of the Americas

    New
      York,
      New York 10018

    Phone:
      (212) 930-9700

    Fax:
      (212) 930-9725

     

    If
      to the Holder:

     

    Dutchess
      Capital Management, LLC

    

    
      	
              Douglas
                Leighton

              50
                Commonwealth Ave, Suite 2

              Boston,
                MA 02116

              Phone:
                (617) 301-4700

              Facsimile:
                (617) 249-0947

            

    

    

     

    Section
      6.2 The Parties are required to provide each other with five (5) business days
      prior notice to the other party of any change in address, phone number or
      facsimile number.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    ARTICLE
      7 Time

     

    Where
      this Note authorizes or requires the payment of money or the performance of
      a
      condition or obligation on a Saturday or Sunday or a holiday on which the United
      States Stock Markets ("US Markets") are closed ("Holiday"), such payment shall
      be made or condition or obligation performed on the last business day preceding
      such Saturday, Sunday or Holiday. A "business day" shall mean a day on which
      the
      US Markets are open for a full day or half day of trading.

     

    ARTICLE
      8 No Assignment.

     

    This
      Note
      and the obligations hereunder shall not be assigned, except as otherwise
      provided herein.

     

    ARTICLE
      9 Rules of Construction.

     

    In
      this
      Note, unless the context otherwise requires, words in the singular number
      include the plural, and in the plural include the singular, and words of the
      masculine gender include the feminine and the neuter, and when the tense so
      indicates, words of the neuter gender may refer to any gender. The numbers
      and
      titles of sections contained in the Note are inserted for convenience of
      reference only, and they neither form a part of this Note nor are they to be
      used in the construction or interpretation hereof. Wherever, in this Note,
      a
      determination of the Company is required or allowed, such determination shall
      be
      made by a majority of the Board of Directors of the Company and, if it is made
      in good faith, it shall be conclusive and binding upon the Company.

     

    ARTICLE
      10 Governing Law

     

    The
      validity, terms, performance and enforcement of this Note shall be governed
      and
      construed by the provisions hereof and in accordance with the laws of the
      Commonwealth of Massachusetts applicable to agreements that are negotiated,
      executed, delivered and performed solely in the Commonwealth of
      Massachusetts.

     

    ARTICLE
      11 Disputes Subject to Arbitration

     

    The
      parties to this Note will submit all disputes arising under it to arbitration
      in
      Boston, Massachusetts before a single arbitrator of the American Arbitration
      Association ("AAA"). The arbitrator shall be selected by application of the
      rules of the AAA, or by mutual agreement of the parties, except that such
      arbitrator shall be an attorney admitted to practice law in the Commonwealth
      of
      Massachusetts. No party to this agreement will challenge the jurisdiction or
      venue provisions as provided in this section. Nothing in this section shall
      limit the Holder's right to obtain an injunction for a breach of this Agreement
      from a court of law.

     

    ARTICLE
      12 Conditions to Closing

     

    The
      Company shall have delivered the proper Collateral to the Holder before Closing
      of this Note.

     

    ARTICLE
      13 Structuring and Administration Expense

     

    The
      Company agrees to pay for related expenses associated with the proposed
      transaction of $90,000. This amount shall cover, but is not limited to, the
      following: due diligence expenses, UCC-1 filing fees, document creation
      expenses, closing costs, and transaction administration expenses. All such
      structuring and administration expenses shall be deducted from the first
      closing.

     

    ARTICLE
      14 Indemnification

     

    In
      consideration of the Holder's execution and delivery of this Agreement and
      the
      acquisition and funding by the Holder of this Note and in addition to all of
      the
      Company's other obligations under the documents contemplated hereby, the Company
      shall defend, protect, indemnify and hold harmless the Holder and all of its
      shareholders, officers, directors, employees, counsel, and direct or indirect
      investors and any of the foregoing person's agents or other representatives
      (including, without limitation, those retained in connection with the
      transactions contemplated by this Agreement) (collectively, the "Indemnities")
      from and against any and all actions, causes of action, suits, claims, losses,
      costs, penalties, fees, liabilities and damages, and expenses in connection
      therewith (irrespective of whether any such Indemnitee is a party to the action
      for which indemnification hereunder is sought), and including, without
      limitation, reasonable attorneys' fees and disbursements (the "Indemnified
      Liabilities"), incurred by any Indemnitee as a result of, or arising out of,
      or
      relating to (i) any misrepresentation or breach of any representation or
      warranty made by the Company in the Note, or any other certificate, instrument
      or document contemplated hereby or thereby (ii) any breach of any covenant,
      agreement or obligation of the Company contained in the Note or any other
      certificate, instrument or document contemplated hereby or thereby, except
      insofar as any such misrepresentation, breach or any untrue statement, alleged
      untrue statement, omission or alleged omission is made in reliance upon and
      in
      conformity with written information furnished to the Company by, or on behalf
      of, the Holder or is based on illegal trading of the Common Stock by the Holder.
      To the extent that the foregoing undertaking by the Company may be unenforceable
      for any reason, the Company shall make the maximum contribution to the payment
      and satisfaction of each of the Indemnified Liabilities that is permissible
      under applicable law. The indemnity provisions contained herein shall be in
      addition to any cause of action or similar rights the Holder may have, and
      any
      liabilities the Holder may be subject to.

     

    ARTICLE
      15 Incentive Shares

     

    The
      Company shall issue one million eight hundred and fifty-eight thousand
      (1,858,000) shares of unregistered, restricted Common Stock to the Holder as
      an
      incentive for the investment ("Incentive Shares"). The Incentive Shares shall
      be
      issued and delivered immediately to the Holder
      and shall carry piggyback registration rights. In the event the Shares are
      not
      registered in the next registration statement, the Company shall pay to the
      Holder, as a penalty, one million eight hundred and fifty-eight thousand
      (1,858,000) additional shares of common stock for each time a registration
      statement is filed and the Shares are not included. The Holder at its sole
      discretion may waive such penalty. The Company's failure to issue the Incentive
      Shares constitutes an Event of Default and the Holder may elect to enforce
      the
      remedies outlined in Article 4. The Company's obligation to provide the Holder
      with the Incentive Shares, as set forth herein, shall survive the operation
      of
      the Agreement and any default on this obligation shall provide the Holder with
      all rights, remedies and default provisions set forth in this Note, or otherwise
      available by law.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    ARTICLE
      16 Use of Proceeds

     

    Five
      hundred and forty-one thousand five hundred forty-two dollars ($541,542) shall
      to go to redeem Alpha Capital, Whalehaven Funds and Ellis Fund (the "Previous
      Investors"). The Company hereby authorized the Holder to directly transfer
      funds
      to the Previous Investors directly from Closing. In addition, the Holder shall
      directly transfer funds to Sichenzia Ross Friedman Ference LLP in the amount
      of
      $23,863.77 to cover outstanding legal fees. The remaining proceeds shall be
      used
      for specifically for the purchase of equipment outlined below:

     

    Final
      Payment for Taylor Dynomameter $ 165,000 Purchase 500 Electronic Control Unit
      for resale $ 130,000 Purchase component parts for resale $ 110,000

     

    The
      Holder shall have full right to the equipment through the Security Agreement
      of
      this date, as outlined in Article 21.

     

    The
      remaining $69,594.23 shall be used for miscellaneous working
      capital

     

    ARTICLE
      17 Waiver

     

    The
      Holder's delay or failure at any time or times hereafter to require strict
      performance by Company of any obligations, undertakings, agreements or covenants
      shall not waive, affect, or diminish any right of the Holder under this Note
      to
      demand strict compliance and performance herewith. Any waiver by the Holder
      of
      any Event of Default shall not waive or affect any other Event of Default,
      whether such Event of Default is prior or subsequent thereto and whether of
      the
      same or a different type. None of the undertakings, agreements and covenants
      of
      the Company contained in this Note, and no Event of Default, shall be deemed
      to
      have been waived by the Holder, nor may this Note be amended, changed or
      modified, unless such waiver, amendment, change or modification is evidenced
      by
      a separate instrument in writing specifying such waiver, amendment, change
      or
      modification and signed by the Holder.

     

    ARTICLE
      18 Senior Obligation

     

    The
      Company shall cause this Note to be senior in right of payment to all other
      current or future debt of the Company. The Company warrants that it has taken
      all necessary steps to subordinate its other obligations to the rights of the
      Holder in this Note.

     

    ARTICLE
      19 Transactions With Affiliates

     

    The
      Company shall not, and shall cause each of its Subsidiaries to not enter into,
      amend, modify or supplement, or permit any Subsidiary to enter into, amend,
      modify or supplement, any agreement, transaction, commitment or arrangement
      with
      any of its or any Subsidiary's officers, directors, persons who were officers
      or
      directors at any time during the previous two years, shareholders who
      beneficially own five percent (5%) or more of the Common Stock, or affiliates
      or
      with any individual related by blood, marriage or adoption to any such
      individual or with any entity in which any such entity or individual owns a
      five
      percent (5%) or more beneficial interest (each a "Related Party") during the
      Lock Up Period.

     

    ARTICLE
      20 Equity Line Obligations

     

    At
      the
      request of the Holder, at any time after the Company's current effective
      registration statement for the Equity Line of Credit with Dutchess Private
      Equities, II, LP (File No: 333-129928), has eight million (8,000,000) shares
      or
      less remaining for issuance, the Company shall immediately execute a new
      Investment Agreement for an Equity Line of Credit under the same terms and
      conditions as the previous Equity Line. The Company shall immediately prepare
      and file a registration statement for the registration of shares as set forth
      in
      the new Investment Agreement. The Holder shall also retain the right to
      determine the date of the filing of such registration statement. Failure to
      do
      any action outlined in this Article will result in an Event of
      Default.

     

    ARTICLE
      21 Security

     

    The
      Holder shall have full right to exercise the Security Agreement between the
      Company and the Holder dated this date.

     

    ARTICLE
      22 Miscellaneous

     

    Section
      22.1 This Note may be executed in two or more counterparts, all of which taken
      together shall constitute one instrument. Execution and delivery of this Note
      by
      exchange of facsimile copies bearing the facsimile signature of a party shall
      constitute a valid and binding execution and delivery of this Note by such
      party. Such facsimile copies shall constitute enforceable original
      documents.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Section
      22.2 The Company warrants that the execution, delivery and performance of this
      Note by the Company and the consummation by the Company of the transactions
      contemplated hereby and thereby will not (i) result in a violation of the
      Articles of Incorporation, any Certificate of Designations, Preferences and
      Rights of any outstanding series of preferred stock of the Company or the
      By-laws or (ii) conflict with, or constitute a material default (or an event
      which with notice or lapse of time or both would become a material default)
      under, or give to others any rights of termination, amendment, acceleration
      or
      cancellation of, any material agreement, contract, indenture mortgage,
      indebtedness or instrument to which the Company or any of its Subsidiaries
      is a
      party, or result in a violation of any law, rule, regulation, order, judgment
      or
      decree, including United States federal and state securities laws and
      regulations and the rules and regulations of the principal securities exchange
      or trading market on which the Common Stock is traded or listed (the "Principal
      Market"), applicable to the Company or any of its Subsidiaries or by which
      any
      property or asset of the Company or any of its Subsidiaries is bound or
      affected. Neither the Company nor its Subsidiaries is in violation of any term
      of, or in default under, the Articles of Incorporation, any Certificate of
      Designations, Preferences and Rights of any outstanding series of preferred
      stock of the Company or the By-laws or their organizational charter or by-laws,
      respectively, or any contract, agreement, mortgage, indebtedness, indenture,
      instrument, judgment, decree or order or any statute, rule or regulation
      applicable to the Company or its Subsidiaries, except for possible conflicts,
      defaults, terminations, amendments, accelerations, cancellations and violations
      that would not individually or in the aggregate have a Material Adverse Effect
      as defined below. The business of the Company and its Subsidiaries is not being
      conducted, and shall not be conducted, in violation of any law, statute,
      ordinance, rule, order or regulation of any governmental authority or agency,
      regulatory or self-regulatory agency, or court, except for possible violations
      the sanctions for which either individually or in the aggregate would not have
      a
      Material Adverse Effect. The Company is not required to obtain any consent,
      authorization, permit or order of, or make any filing or registration (except
      the filing of a registration statement) with, any court, governmental authority
      or agency, regulatory or self-regulatory agency or other third party in order
      for it to execute, deliver or perform any of its obligations under, or
      contemplated by, this Note in accordance with the terms hereof or thereof.
      All
      consents, authorizations, permits, orders, filings and registrations which
      the
      Company is required to obtain pursuant to the preceding sentence have been
      obtained or effected on or prior to the date hereof and are in full force and
      effect as of the date hereof. The Company and its Subsidiaries are unaware
      of
      any facts or circumstances which might give rise to any of the foregoing. The
      Company is not, and will not be, in violation of the listing requirements of
      the
      Principal Market as in effect on the date hereof and on each of the Closing
      Dates and is not aware of any facts which would lead to delisting of the Common
      Stock by the Principal Market.

     

    Section
      22.3 The Company and its "Subsidiaries" (which for purposes of this Note means
      any entity in which the Company, directly or indirectly, owns capital stock
      or
      holds an equity or similar interest) are corporations duly organized and validly
      existing in good standing under the laws of the respective jurisdictions of
      their incorporation, and have the requisite corporate power and authorization
      to
      own their properties and to carry on their business as now being conducted.
      Both
      the Company and its Subsidiaries are duly qualified to do business and are
      in
      good standing in every jurisdiction in which their ownership of property or
      the
      nature of the business conducted by them makes such qualification necessary,
      except to the extent that the failure to be so qualified or be in good standing
      would not have a Material Adverse Effect. As used in this Note, "Material
      Adverse Effect" means any material adverse effect on the business, properties,
      assets, operations, results of operations, financial condition or prospects
      of
      the Company and its Subsidiaries, if any, taken as a whole, or on the
      transactions contemplated hereby or by the agreements and instruments to be
      entered into in connection herewith, or on the authority or ability of the
      Company to perform its obligations under the Note.

     

    Section
      22.4 Authorization; Enforcement; Compliance with Other Instruments. (i) The
      Company has the requisite corporate power and authority to enter into and
      perform its obligations under this Note, and to issue this Note and Incentive
      Shares in accordance with the terms hereof and thereof, (ii) the execution
      and
      delivery of this Note by the Company and the consummation by it of the
      transactions contemplated hereby and thereby, including without limitation
      the
      reservation for issuance and the issuance of the Incentive Shares pursuant
      to
      this Note, have been duly and validly authorized by the Company's Board of
      Directors and no further consent or authorization is required by the Company,
      its Board of Directors, or its shareholders, (iii) this Note has been duly
      and
      validly executed and delivered by the Company, and (iv) the Note constitutes
      the
      valid and binding obligations of the Company enforceable against the Company
      in
      accordance with their terms, except as such enforceability may be limited by
      general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation or similar laws relating to, or
      affecting generally, the enforcement of creditors' rights and
      remedies.

     

    Section
      22.5 The execution and delivery of this Note shall not alter the prior written
      agreements between the Company and the Holder, consisting of the Transaction
      Documents, associated with Debenture Number November 2005 101, and the Note
      Number December 2005 101. This Note is the FINAL AGREEMENT between the Company
      and the Holder with respect to the terms and conditions set forth herein, and,
      the terms of this Note may not be contradicted by evidence of prior,
      contemporaneous, or subsequent oral agreements of the Parties. The execution
      and
      delivery of this Note is done in conjunction with the execution of the Security
      Agreement, as defined in Article 21.

     

    Section
      22.6 There are no disagreements of any kind presently existing, or reasonably
      anticipated by the Company to arise, between the Company and the accountants,
      auditors and lawyers formerly or presently used by the Company, including but
      not limited to disputes or conflicts over payment owed to such accountants,
      auditors or lawyers.

     

    Section
      22.7 All representations made by or relating to the Company of a historical
      nature and all undertakings described herein shall relate and refer to the
      Company, its predecessors, and the Subsidiaries.

     

    Section
      22.8 The only officer, director, employee and consultant stock option or stock
      incentive plan currently in effect or contemplated by the Company has been
      submitted to the Holder or is described or within past filings with the United
      States Securities and Exchange Commission. The Company aggress not to initiate
      or institute any such plan or to issue stock options.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Section
      22.9 The Company acknowledges that its failure to timely meet any of its
      obligations hereunder, including, but without limitation, its obligations to
      make Payments, deliver shares and, as necessary, to register and maintain
      sufficient number of Shares, will cause the Holder to suffer irreparable harm
      and that the actual damage to the Holder will be difficult to ascertain.
      Accordingly, the parties agree that it is appropriate to include in this
      Debenture a provision for liquidated damages. The parties acknowledge and agree
      that the liquidated damages provision set forth in this section represents
      the
      parties' good faith effort to quantify such damages and, as such, agree that
      the
      form and amount of such liquidated damages are reasonable and do not constitute
      a penalty. The payment of liquidated damages shall not relieve the Company
      from
      its obligations to deliver the Common Stock pursuant to the terms of this
      Debenture.

     

    *.*
      *

     

    [BALANCE
      OF PAGE LEFT BLANK INTENTIONALLY]

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Any
      misrepresentations shall be considered a breach of contract and an Event of
      Default under this Agreement and the Holder may seek to take actions as
      described under Article 4 of this Agreement.

     

    IN
      WITNESS WHEREOF, the Company has duly executed this Note as of the date first
      written above.

     

    HYBRID
      FUEL SYSTEMS, INC.

    
      	 	 	 
	 	By:  	/s/ Mark
              Clancy
	 	
              
                

              

              Name:
                Mark Clancy

              Title:
                Chief Executive Officer

            
	 	 

    

     

    DUTCHESS
      PRIVATE EQUITIES FUND, L.P.

    BY
      ITS GENERAL PARTNER DUTCHESS

    CAPITAL
      MANAGEMENT, LLC

    
      	 	 	 
	 	By:  	/s/ Douglas
              H. Leighton
	 	
              
                

              

              Name:
                Douglas H. Leighton

              Title:
                A Managing MemberUnassociated Document

    Exhibit
      10.23

     

    SECURITY
      AGREEMENT

     

    SECURITY
      AGREEMENT (this "Agreement"), dated as of March 23, 2006, by and among Hybrid
      Fuel Systems, Inc., a George corporation ("Company"), and Dutchess Private
      Equities Fund, LP, a Delaware Limited partnership, as the secured parties
      signatory hereto and their respective endorsees, transferees and assigns
      (collectively, the "Secured Party") (sometimes hereinafter the Company and
      the
      Secured Party are collectively referred to as the "parties").

     

    W
      I T N E S S E T H:

     

    WHEREAS,
      pursuant to Note Agreement, dated the date hereof between the Company and the
      Secured Party (the "Note Agreement"), and the prior Note between the Company
      and
      the Secured Party dated December 20, 2005, the Company has agreed to issue
      to
      the Secured Party and the Secured Party has agreed to purchase from Company
      certain of Company's 0% Secured Notes, due one year from the date of issue
      (the
      "Note")

     

    WHEREAS,
      pursuant to Subscription Agreement, dated November 4, 2005 between Company
      and
      the Secured Party (the "Subscription Agreement"), Company has issued to the
      Secured Party and the Secured Party has purchased from Company certain of
      Company's twelve percent (12%) Secured Convertible Debentures, due five years
      from the date of issue (the "Debentures"), which are convertible into shares
      of
      Company's Common Stock, par value $.001 per share (the "Common Stock"). In
      connection therewith, Company shall issue to the Secured Party certain Common
      Stock purchase warrants dated as of the date hereof to purchase the number
      of
      shares of Common Stock (the "Warrants"); and

     

    WHEREAS,
      in order to further induce the Secured Party's purchase of the Note, and for
      further consideration of the Secured Party's purchase of the Debenture, the
      Company has agreed to execute and deliver to the Secured Party this Agreement
      for the benefit of the Secured Party and to grant to it a first priority
      security interest in certain property of Company to secure the prompt payment,
      performance and discharge in full of all of Company's obligations under the
      Note, Debenture and exercise and discharge in full of Company's obligations
      under the Warrants.

     

    NOW,
      THEREFORE, in consideration of the agreements herein contained and for other
      good and valuable consideration, the receipt and sufficiency of which is hereby
      acknowledged, the parties hereto hereby agree as follows:

     

    1.
      Certain Definitions. As used in this Agreement, the following terms shall have
      the meanings set forth in this Section 1. Terms used but not otherwise defined
      in this Agreement that are defined in Article 9 of the UCC (such as "general
      intangibles" and "proceeds") shall have the respective meanings given such
      terms
      in Article 9 of the UCC.

     

    (a)
      "Collateral" means the collateral in which the Secured Party is granted a
      security interest by this Agreement and which shall include the following,
      whether presently owned or existing or hereafter acquired or coming into
      existence, and all additions and accessions thereto and all substitutions and
      replacements thereof, and all proceeds, products and accounts thereof,
      including, without limitation, all proceeds from the sale or transfer of the
      Collateral and of insurance covering the same and of any tort claims in
      connection therewith:

     

    (i)
      All
      Goods of the Company, including, without limitation, all machinery, equipment,
      computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture,
      special and general tools, fixtures, test and quality control devices and other
      equipment of every kind and nature and wherever situated, together with all
      documents of title and documents representing the same, all additions and
      accessions thereto, replacements therefor, all parts therefor, and all
      substitutes for any of the foregoing and all other items used and useful in
      connection with the Company's businesses and all improvements thereto
      (collectively, the "Equipment"); and

     

    (ii)
      All
      Inventory of the Company; and

     

    (iii)
      All
      of the Company's contract rights and general intangibles, including, without
      limitation, all partnership interests, stock or other securities, licenses,
      distribution and other agreements, computer software development rights, leases,
      franchises, customer lists, quality control procedures, grants and rights,
      goodwill, trademarks, service marks, trade styles, trade names, patents, patent
      applications, copyrights, deposit accounts, and income tax refunds
      (collectively, the "General Intangibles"); and

     

    (iv)
      All
      Receivables of the Company including all insurance proceeds, and rights to
      refunds or indemnification whatsoever owing, together with all instruments,
      all
      documents of title representing any of the foregoing, all rights in any
      merchandising, goods, equipment, motor vehicles and trucks which any of the
      same
      may represent, and all right, title, security and guaranties with respect to
      each Receivable, including any right of stoppage in transit; and

     

    (v)
      All
      of the Company's documents, instruments and chattel paper, files, records,
      books
      of account, business papers, computer programs and the products and proceeds
      of
      all of the foregoing Collateral set forth in clauses (i)-(iv)
      above.

     

    (b)
      "Company" shall mean, collectively, Company and all of the subsidiaries of
      Company, a list of which is contained in Schedule A, attached
      hereto.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (c)
      "Obligations" means all of the Company's obligations under this Agreement and
      the Notes, in each case, whether now or hereafter existing, voluntary or
      involuntary, direct or indirect, absolute or contingent, liquidated or
      unliquidated, whether or not jointly owed with others, and whether or not from
      time to time decreased or extinguished and later decreased, created or incurred,
      and all or any portion of such obligations or liabilities that are paid, to
      the
      extent all or any part of such payment is avoided or recovered directly or
      indirectly from the Secured Party as a preference, fraudulent transfer or
      otherwise as such obligations may be amended, supplemented, converted, extended
      or modified from time to time.

     

    (d)
      "UCC"
      means the Uniform Commercial Code, as currently in effect in the Commonwealth
      of
      Massachusetts.

     

    2.
      Grant
      of Security Interest. As an inducement for the Secured Party to purchase the
      Notes and to secure the complete and timely payment, performance and discharge
      in full, as the case may be, of all of the Obligations, the Company hereby,
      unconditionally and irrevocably, pledges, grants and hypothecates to the Secured
      Party, a continuing security interest in, a continuing first lien upon, an
      unqualified right to possession and disposition of and a right of set-off
      against, in each case to the fullest extent permitted by law, all of the
      Company's right, title and interest of whatsoever kind and nature in and to
      the
      Collateral (the "Security Interest").

     

    3.
      Representations, Warranties, Covenants and Agreements of the Company. The
      Company represents and warrants to, and covenants and agrees with, the Secured
      Party as follows:

     

    (a)
      The
      Company has the requisite corporate power and authority to enter into this
      Agreement and otherwise to carry out its obligations thereunder. The execution,
      delivery and performance by the Company of this Agreement and the filings
      contemplated therein have been duly authorized by all necessary action on the
      part of the Company and no further action is required by the Company. This
      Agreement constitutes a legal, valid and binding obligation of the Company
      enforceable in accordance with its terms, except as enforceability may be
      limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
      affecting the enforcement of creditor's rights generally.

     

    (b)
      The
      Company represents and warrants that it has no place of business or offices
      where its respective books of account and records are kept (other than
      temporarily at the offices of its attorneys or accountants) or places where
      Collateral is stored or located, except as set forth on Schedule A attached
      hereto;

     

    (c)
      The
      Company is the sole owner of the Collateral (except for non-exclusive licenses
      granted by the Company in the ordinary course of business), free and clear
      of
      any liens, security interests, encumbrances, rights or claims, and is fully
      authorized to grant the Security Interest in and to pledge the Collateral.
      There
      is not on file in any governmental or regulatory authority, agency or recording
      office an effective financing statement, security agreement, license or transfer
      or any notice of any of the foregoing (other than those that have been filed
      in
      favor of the Secured Party pursuant to this Agreement) covering or affecting
      any
      of the Collateral. So long as this Agreement shall be in effect, the Company
      shall not execute and shall not knowingly permit to be on file in any such
      office or agency any such financing statement or other document or instrument
      (except to the extent filed or recorded in favor of the Secured Party pursuant
      to the terms of this Agreement).

     

    (d)
      No
      part of the Collateral has been judged invalid or unenforceable. No written
      claim has been received that any Collateral or the Company's use of any
      Collateral violates the rights of any third party. There has been no adverse
      decision to the Company's claim of ownership rights in or exclusive rights
      to
      use the Collateral in any jurisdiction or to the Company's right to keep and
      maintain such Collateral in full force and effect, and there is no proceeding
      involving said rights pending or, to the best knowledge of the Company,
      threatened before any court, judicial body, administrative or regulatory agency,
      arbitrator or other governmental authority.

     

    (e)
      The
      Company shall at all times maintain its books of account and records relating
      to
      the Collateral at its principal place of business and its Collateral at the
      locations set forth on Schedule A attached hereto and may not relocate such
      books of account and records or tangible Collateral unless it delivers to the
      Secured Party at least 30 days prior to such relocation (i) written notice
      of
      such relocation and the new location thereof (which must be within the United
      States) and (ii) evidence that appropriate financing statements and other
      necessary documents have been filed and recorded and other steps have been
      taken
      to perfect the Security Interest to create in favor of the Secured Party valid,
      perfected and continuing first priority liens in the Collateral.

     

    (f)
      This
      Agreement creates in favor of the Secured Party a valid security interest in
      the
      Collateral securing the payment and performance of the Obligations and, upon
      making the filings described in the immediately following sentence, a perfected
      first priority security interest in such Collateral. Except for the filing
      of
      financing statements on Form-1 under the UCC with the jurisdictions indicated
      on
      Schedule B, attached hereto, no authorization or approval of or filing with
      or
      notice to any governmental authority or regulatory body is required either
      (i)
      for the grant by the Company of, or the effectiveness of, the Security Interest
      granted hereby or for the execution, delivery and performance of this Agreement
      by the Company or (ii) for the perfection of or exercise by the Secured Party
      of
      its rights and remedies hereunder.

     

    (g)
      On
      the date of execution of this Agreement, the Company will deliver to the Secured
      Party one or more executed UCC financing statements on Form-1 with respect
      to
      the Security Interest for filing with the jurisdictions indicated on Schedule
      B,
      attached hereto and in such other jurisdictions as may be requested by the
      Secured Party.

     

    (h)
      The
      execution, delivery and performance of this Agreement does not conflict with
      or
      cause a breach or default, or an event that with or without the passage of
      time
      or notice, shall constitute a breach or default, under any agreement to which
      the Company is a party or by which the Company is bound. No consent (including,
      without limitation, from stock holders or creditors of the Company) is required
      for the Company to enter into and perform its obligations
      hereunder.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (i)
      The
      Company shall at all times maintain the liens and Security Interest provided
      for
      hereunder as valid and perfected first priority liens and security interests
      in
      the Collateral in favor of the Secured Party until this Agreement and the
      Security Interest hereunder shall terminate pursuant to Section 11. The Company
      hereby agrees to defend the same against any and all persons. The Company shall
      safeguard and protect all Collateral for the account of the Secured Party.
      At
      the request of the Secured Party, the Company will sign and deliver to the
      Secured Party at any time or from time to time one or more financing statements
      pursuant to the UCC (or any other applicable statute) in form reasonably
      satisfactory to the Secured Party and will pay the cost of filing the same
      in
      all public offices wherever filing is, or is deemed by the Secured Party to
      be,
      necessary or desirable to effect the rights and obligations provided for herein.
      Without limiting the generality of the foregoing, the Company shall pay all
      fees, taxes and other amounts necessary to maintain the Collateral and the
      Security Interest hereunder, and the Company shall obtain and furnish to the
      Secured Party from time to time, upon demand, such releases and/or
      subordinations of claims and liens which may be required to maintain the
      priority of the Security Interest hereunder.

     

    (j)
      The
      Company will not transfer, pledge, hypothecate, encumber, license (except for
      non-exclusive licenses granted by the Company in the ordinary course of
      business), sell or otherwise dispose of any of the Collateral without the prior
      written consent of the Secured Party.

     

    (k)
      The
      Company shall keep and preserve its Equipment, Inventory and other tangible
      Collateral in good condition, repair and order and shall not operate or locate
      any such Collateral (or cause to be operated or located) in any area excluded
      from insurance coverage.

     

    (l)
      The
      Company shall, within ten (10) days of obtaining knowledge thereof, advise
      the
      Secured Party promptly, in sufficient detail, of any substantial change in
      the
      Collateral, and of the occurrence of any event which would have a material
      adverse effect on the value of the Collateral or on the Secured Party's security
      interest therein.

     

    (m)
      The
      Company shall promptly execute and deliver to the Secured Party such further
      deeds, mortgages, assignments, security agreements, financing statements or
      other instruments, documents, certificates and assurances and take such further
      action as the Secured Party may from time to time request and may in its sole
      discretion deem necessary to perfect, protect or enforce its security interest
      in the Collateral including, without limitation, the execution and delivery
      of a
      separate security agreement with respect to the Company's intellectual property
      ("Intellectual Property Security Agreement") in which the Secured Party has
      been
      granted a security interest hereunder, substantially in a form acceptable to
      the
      Secured Party, which Intellectual Property Security Agreement, other than as
      stated therein, shall be subject to all of the terms and conditions
      hereof.

     

    (n)
      The
      Company shall permit the Secured Party and its representatives and agents to
      inspect the Collateral at any time, and to make copies of records pertaining
      to
      the Collateral as may be requested by the Secured Party from time to
      time.

     

    (o)
      The
      Company will take all steps reasonably necessary to diligently pursue and seek
      to preserve, enforce and collect any rights, claims, causes of action and
      accounts receivable in respect of the Collateral.

     

    (p)
      The
      Company shall promptly notify the Secured Party in sufficient detail upon
      becoming aware of any attachment, garnishment, execution or other legal process
      levied against any Collateral and of any other information received by the
      Company that may materially affect the value of the Collateral, the Security
      Interest or the rights and remedies of the Secured Party hereunder.

     

    (q)
      All
      information heretofore, herein or hereafter supplied to the Secured Party by
      or
      on behalf of the Company with respect to the Collateral is accurate and complete
      in all material respects as of the date furnished.

     

    (r)
      Schedule A attached hereto contains a list of all of the subsidiaries of
      Company.

     

    4.
      Defaults. The following events shall be "Events of Default":

     

    (a)
      The
      occurrence of an Event of Default (as defined in the Transaction Documents)
      under the Transaction Documents, or breach of the terms of the Transaction
      Documents.

     

    (b)
      Any
      representation or warranty of the Company in this Agreement or in the
      Intellectual Property Security Agreement shall prove to have been incorrect
      in
      any material respect when made;

     

    (c)
      The
      failure by the Company to observe or perform any of its obligations hereunder
      or
      in the Intellectual Property Security Agreement for ten (10) days after receipt
      by the Company of notice of such failure from the Secured Party.

     

    5.
      Duty
      To Hold In Trust. Upon the occurrence of any Event of Default and at any time
      thereafter, the Company shall, upon receipt by it of any revenue, income or
      other sums subject to the Security Interest, whether payable pursuant to the
      Notes or otherwise, or of any check, draft, note, trade acceptance or other
      instrument evidencing an obligation to pay any such sum, hold the same in trust
      for the Secured Party and shall forthwith endorse and transfer any such sums
      or
      instruments, or both, to the Secured Party for application to the satisfaction
      of the Obligations.

     

    6.
      Rights
      and Remedies Upon Default. Upon occurrence of any Event of Default and at any
      time thereafter, the Secured Party shall have the right to exercise all of
      the
      remedies conferred hereunder and under the Notes, and the Secured Party shall
      have all the rights and remedies of a secured party under the UCC and/or any
      other applicable law (including the Uniform Commercial Code of any jurisdiction
      in which any Collateral is then located). Without limitation, the Secured Party
      shall have the following rights and powers:

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (a)
      The
      Secured Party shall have the right to take possession of the Collateral and,
      for
      that purpose, enter, with the aid and assistance of any person, any premises
      where the Collateral, or any part thereof, is or may be placed and remove the
      same, and the Company shall assemble the Collateral and make it available to
      the
      Secured Party at places which the Secured Party shall reasonably select, whether
      at the Company's premises or elsewhere, and make available to the Secured Party,
      without rent, all of the Company's respective premises and facilities for the
      purpose of the Secured Party taking possession of, removing or putting the
      Collateral in saleable or disposable form.

     

    (b)
      The
      Secured Party shall have the right to operate the business of the Company using
      the Collateral and shall have the right to assign, sell, lease or otherwise
      dispose of and deliver all or any part of the Collateral, at public or private
      sale or otherwise, either with or without special conditions or stipulations,
      for cash or on credit or for future delivery, in such parcel or parcels and
      at
      such time or times and at such place or places, and upon such terms and
      conditions as the Secured Party may deem commercially reasonable, all without
      (except as shall be required by applicable statute and cannot be waived)
      advertisement or demand upon or notice to the Company or right of redemption
      of
      the Company, which are hereby expressly waived. Upon each such sale, lease,
      assignment or other transfer of Collateral, the Secured Party may, unless
      prohibited by applicable law which cannot be waived, purchase all or any part
      of
      the Collateral being sold, free from and discharged of all trusts, claims,
      right
      of redemption and equities of the Company, which are hereby waived and
      released.

     

    7.
      Applications of Proceeds. The proceeds of any such sale, lease or other
      disposition of the Collateral hereunder shall be applied first, to the expenses
      of retaking, holding, storing, processing and preparing for sale, selling,
      and
      the like (including, without limitation, any taxes, fees and other costs
      incurred in connection therewith) of the Collateral, to the reasonable
      attorneys' fees and expenses incurred by the Secured Party in enforcing its
      rights hereunder and in connection with collecting, storing and disposing of
      the
      Collateral, and then to satisfaction of the Obligations, and to the payment
      of
      any other amounts required by applicable law, after which the Secured Party
      shall pay to the Company any surplus proceeds. If, upon the sale, license or
      other disposition of the Collateral, the proceeds thereof are insufficient
      to
      pay all amounts to which the Secured Party is legally entitled, the Company
      will
      be liable for the deficiency, together with interest thereon, at the rate of
      18%
      per annum (the "Default Rate"), and the reasonable fees of any attorneys
      employed by the Secured Party to collect such deficiency. To the extent
      permitted by applicable law, the Company waives all claims, damages and demands
      against the Secured Party arising out of the repossession, removal, retention
      or
      sale of the Collateral, unless due to the gross negligence or willful misconduct
      of the Secured Party.

     

    8.
      Costs
      and Expenses. The Company agrees to pay all out-of-pocket fees, costs and
      expenses incurred in connection with any filing required hereunder, including
      without limitation, any financing statements, continuation statements, partial
      releases and/or termination statements related thereto or any expenses of any
      searches reasonably required by the Secured Party. The Company shall also pay
      all other claims and charges which in the reasonable opinion of the Secured
      Party might prejudice, imperil or otherwise affect the Collateral or the
      Security Interest therein. The Company will also, upon demand, pay to the
      Secured Party the amount of any and all reasonable expenses, including the
      reasonable fees and expenses of its counsel and of any experts and agents,
      which
      the Secured Party may incur in connection with (i) the enforcement of this
      Agreement, (ii) the custody or preservation of, or the sale of, collection
      from,
      or other realization upon, any of the Collateral, or (iii) the exercise or
      enforcement of any of the rights of the Secured Party under the Notes. Until
      so
      paid, any fees payable hereunder shall be added to the principal amount of
      the
      Notes and shall bear interest at the Default Rate.

     

    9.
      Responsibility for Collateral. The Company assumes all liabilities and
      responsibility in connection with all Collateral, and the obligations of the
      Company hereunder or under the Transaction Documents shall in no way be affected
      or diminished by reason of the loss, destruction, damage or theft of any of
      the
      Collateral or its unavailability for any reason.

     

    10.
      Security Interest Absolute. All rights of the Secured Party and all Obligations
      of the Company hereunder, shall be absolute and unconditional, irrespective
      of:
      (a) any lack of validity or enforceability of this Agreement, the Notes, the
      Warrants or any agreement entered into in connection with the foregoing, or
      any
      portion hereof or thereof; (b) any change in the time, manner or place of
      payment or performance of, or in any other term of, all or any of the
      Obligations, or any other amendment or waiver of or any consent to any departure
      from the Notes, the Warrants or any other agreement entered into in connection
      with the foregoing; (c) any exchange, release or nonperfection of any of the
      Collateral, or any release or amendment or waiver of or consent to departure
      from any other collateral for, or any guaranty, or any other security, for
      all
      or any of the Obligations; (d) any action by the Secured Party to obtain,
      adjust, settle and cancel in its sole discretion any insurance claims or matters
      made or arising in connection with the Collateral; or (e) any other circumstance
      which might otherwise constitute any legal or equitable defense available to
      the
      Company, or a discharge of all or any part of the Security Interest granted
      hereby. Until the Obligations shall have been paid and performed in full, the
      rights of the Secured Party shall continue even if the Obligations are barred
      for any reason, including, without limitation, the running of the statute of
      limitations or bankruptcy. The Company expressly waives presentment, protest,
      notice of protest, demand, notice of nonpayment and demand for performance.
      In
      the event that at any time any transfer of any Collateral or any payment
      received by the Secured Party hereunder shall be deemed by final order of a
      court of competent jurisdiction to have been a voidable preference or fraudulent
      conveyance under the bankruptcy or insolvency laws of the United States, or
      shall be deemed to be otherwise due to any party other than the Secured Party,
      then, in any such event, the Company's obligations hereunder shall survive
      cancellation of this Agreement, and shall not be discharged or satisfied by
      any
      prior payment thereof and/or cancellation of this Agreement, but shall remain
      a
      valid and binding obligation enforceable in accordance with the terms and
      provisions hereof. The Company waives all right to require the Secured Party
      to
      proceed against any other person or to apply any Collateral which the Secured
      Party may hold at any time, or to marshal assets, or to pursue any other remedy.
      The Company waives any defense arising by reason of the application of the
      statute of limitations to any obligation secured hereby.

     

    11.
      Term
      of Agreement. This Agreement and the Security Interest shall terminate on the
      date on which all payments under the Notes have been made in full and all other
      Obligations of the Company have been paid or discharged. Upon such termination,
      the Secured Party, at the request and
      at
      the expense of the Company, will join in executing any termination statement
      with respect to any financing statement executed and filed pursuant to this
      Agreement.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    12.
      Power
      of Attorney; Further Assurances.

     

    (a)
      The
      Company authorizes the Secured Party, and does hereby make, constitute and
      appoint it, and its respective officers, agents, successors or assigns with
      full
      power of substitution, as the Company's true and lawful attorney-in-fact, with
      power, in its own name or in the name of the Company, to, after the occurrence
      and during the continuance of an Event of Default (i) endorse any notes, checks,
      drafts, money orders, or other instruments of payment (including payments
      payable under or in respect of any policy of insurance) in respect of the
      Collateral that may come into possession of the Secured Party; (ii) to sign
      and
      endorse any UCC financing statement or any invoice, freight or express bill,
      bill of lading, storage or warehouse receipts, drafts against debtors,
      assignments, verifications and notices in connection with accounts, and other
      documents relating to the Collateral; (iii) to pay or discharge taxes, liens,
      security interests or other encumbrances at any time levied or placed on or
      threatened against the Collateral; (iv) to demand, collect, receipt for,
      compromise, settle and sue for monies due in respect of the Collateral; and
      (v)
      generally, to do, at the option of the Secured Party, and at the Company's
      expense, at any time, or from time to time, all acts and things which the
      Secured Party deems necessary to protect, preserve and realize upon the
      Collateral and the Security Interest granted therein in order to effect the
      intent of this Agreement, the Notes and the Warrants, all as fully and
      effectually as the Company might or could do; and the Company hereby ratifies
      all that said attorney shall lawfully do or cause to be done by virtue hereof.
      This power of attorney is coupled with an interest and shall be irrevocable
      for
      the term of this Agreement and thereafter as long as any of the Obligations
      shall be outstanding.

     

    (b)
      On a
      continuing basis, the Company will make, execute, acknowledge, deliver, file
      and
      record, as the case may be, in the proper filing and recording places in any
      jurisdiction, including, without limitation, the jurisdictions indicated on
      Schedule B, attached hereto, all such instruments, and take all such action
      as
      may reasonably be deemed necessary or advisable, or as reasonably requested
      by
      the Secured Party, to perfect the Security Interest granted hereunder and
      otherwise to carry out the intent and purposes of this Agreement, or for
      assuring and confirming to the Secured Party the grant or perfection of a
      security interest in all the Collateral.

     

    (c)
      The
      Company hereby irrevocably appoints the Secured Party as the Company's
      attorney-in-fact, with full authority in the place and stead of the Company
      and
      in the name of the Company, from time to time in the Secured Party's discretion,
      to take any action and to execute any instrument which the Secured Party may
      deem necessary or advisable to accomplish the purposes of this Agreement,
      including the filing, in its sole discretion, of one or more financing or
      continuation statements and amendments thereto, relative to any of the
      Collateral without the signature of the Company where permitted by
      law.

     

    13.
      Notices. All notices, requests, demands and other communications hereunder
      shall
      be in writing, with copies to all the other parties hereto, and shall be deemed
      to have been duly given when (i) if delivered by hand, upon receipt, (ii) if
      sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent
      by
      nationally recognized overnight delivery service (receipt requested), the next
      business day or (iv) if mailed by first-class registered or certified mail,
      return receipt requested, postage prepaid, four days after posting in the U.S.
      mails, in each case if delivered to the following addresses:

     

    If
      the to the Company:

     

    Mark
      Clancy

    Hybrid
      Fuel Systems

    12409
      Telecom Drive

    Tampa,
      FL
      33637

    Telephone:
      813-979-9222

    Facsimile:
      813-979-9224

     

    With
      copy
      to:

     

    Darrin
      M.
      Ocasio, Esq.

    Sichenzia
      Ross Friedman Ference LLP 1065 Avenue of the Americas

    New
      York,
      New York 10018

    Phone:
      (212) 930-9700

    Fax:
      (212) 930-9725

     

    If
      to the Holder:

     

    Dutchess
      Capital Management, LLC

    Douglas
      Leighton

    50
      Commonwealth Ave, Suite 2

    Boston,
      MA 02116

    Phone:
      (617) 301-4700

    Facsimile:
      (617) 249-0947

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    14.
      Other
      Security. To the extent that the Obligations are now or hereafter secured by
      property other than the Collateral or by the guarantee, endorsement or property
      of any other person, firm, corporation or other entity, then the Secured Party
      shall have the right, in its sole discretion, to pursue, relinquish,
      subordinate, modify or take any other action with respect thereto, without
      in
      any way modifying or affecting any of the Secured Party's rights and remedies
      hereunder.

     

    15.
      Miscellaneous.

     

    (a)
      No
      course of dealing between the Company and the Secured Party, nor any failure
      to
      exercise, nor any delay in exercising, on the part of the Secured Party, any
      right, power or privilege hereunder or under the Notes shall operate as a waiver
      thereof; nor shall any single or partial exercise of any right, power or
      privilege hereunder or thereunder preclude any other or further exercise thereof
      or the exercise of any other right, power or privilege.

     

    (b)
      All
      of the rights and remedies of the Secured Party with respect to the Collateral,
      whether established hereby or by the Notes or by any other agreements,
      instruments or documents or by law shall be cumulative and may be exercised
      singly or concurrently.

     

    (c)
      This
      Agreement constitutes the entire agreement of the parties with respect to the
      subject matter hereof and is intended to supersede all prior negotiations,
      understandings and agreements with respect to the subject matter hereof. Except
      as specifically set forth in this Agreement, no provision of this Agreement
      may
      be modified or amended except by a written agreement specifically referring
      to
      this Agreement and signed by the parties hereto.

     

    (d)
      In
      the event that any provision of this Agreement is held to be invalid, prohibited
      or unenforceable in any jurisdiction for any reason, unless such provision
      is
      narrowed by judicial construction, this Agreement shall, as to such
      jurisdiction, be construed as if such invalid, prohibited or unenforceable
      provision had been more narrowly drawn so as not to be invalid, prohibited
      or
      unenforceable. If, notwithstanding the foregoing, any provision of this
      Agreement is held to be invalid, prohibited or unenforceable in any
      jurisdiction, such provision, as to such jurisdiction, shall be ineffective
      to
      the extent of such invalidity, prohibition or unenforceability without
      invalidating the remaining portion of such provision or the other provisions
      of
      this Agreement and without affecting the validity or enforceability of such
      provision or the other provisions of this Agreement in any other
      jurisdiction.

     

    (e)
      No
      waiver of any breach or default or any right under this Agreement shall be
      considered valid unless in writing and signed by the party giving such waiver,
      and no such waiver shall be deemed a waiver of any subsequent breach or default
      or right, whether of the same or similar nature or otherwise.

     

    (f)
      This
      Agreement shall be binding upon and inure to the benefit of each party hereto
      and its successors and assigns.

     

    (g)
      Each
      party shall take such further action and execute and deliver such further
      documents as may be necessary or appropriate in order to carry out the
      provisions and purposes of this Agreement.

     

    (h)
      The
      validity, terms, performance and enforcement of this Agreement shall be governed
      and construed by the provisions hereof and in accordance with the laws of the
      Commonwealth of Massachusetts applicable to agreements that are negotiated,
      executed, delivered and performed solely in the Commonwealth of
      Massachusetts.

     

    (i)
      All
      disputes arising under this agreement shall be governed by and interpreted
      in
      accordance with the laws of the Commonwealth of Massachusetts, without regard
      to
      principles of conflict of laws. The parties to this agreement will submit all
      disputes arising under this agreement to arbitration in Boston, Massachusetts
      before a single arbitrator of the American Arbitration Association ("AAA").
      The
      arbitrator shall be selected by application of the rules of the AAA, or by
      mutual agreement of the parties, except that such arbitrator shall be an
      attorney admitted to practice law in the Commonwealth of Massachusetts. No
      party
      to this agreement will challenge the jurisdiction or venue provisions as
      provided in this section. Nothing in this section shall limit the Holder's
      right
      to obtain an injunction for a breach of this Agreement from a court of
      law.

     

    (j)
      This
      Agreement may be executed in any number of counterparts, each of which when
      so
      executed shall be deemed to be an original and, all of which taken together
      shall constitute one and the same Agreement. In the event that any signature
      is
      delivered by facsimile transmission, such signature shall create a valid binding
      obligation of the party executing (or on whose behalf such signature is
      executed) the same with the same force and effect as if such facsimile signature
      were the original thereof.

     

    (k)
      This
      Agreement shall supersede the prior executed Security Agreement dated November
      4, 2005, and upon execution of this Agreement, the prior Security Agreement
      shall be void.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    HYBRID
      FUEL SYSTEMS,
      INC.

    
      	 	 	 
	 	By:  	/s/ Mark
              Clancy
	 	
              
                

              

              Name:
                Mark Clancy

              Title:
                Chief Executive Officer

            
	 	 

    

     

     

    DUTCHESS
      PRIVATE EQUITIES FUND, L.P.

    BY
      ITS GENERAL PARTNER DUTCHESS

    CAPITAL
      MANAGEMENT, LLC

    
      	 	 	 
	 	
            
	
            	By:  	/s/ Douglas
              H. Leighton
	 	
              
                

              

              Name:
                Douglas H. Leighton

              Title:
                A Managing Member

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