ANNEX I
TO
BRIDGE LOAN AGREEMENT
<PROTOTYPE FOR EACH ISSUANCE>

FORM OF NOTE

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR
AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
 

No.  06-01- 1
US $

 
NEAH POWER SYSTEMS, INC.

6% SECURED PROMISSORY NOTE DUE May 26, 2007

THIS NOTE is one of a duly authorized issue of up to $1,550,000 of NEAH POWER
SYSTEMS, INC., a corporation organized and existing under the laws of the State
of Nevada (the "Company"), designated as its 6% Secured Promissory Note Series
06-01.

FOR VALUE RECEIVED, the Company promises to pay to ____________________, the
registered holder hereof (the "Holder"), the principal sum of ______________
Thousand and 00/100 Dollars (US $__________) on the Maturity Date (as defined
below) and to pay interest on the principal sum outstanding from time to time in
arrears at the rate of 6% per annum (computed on the basis of the actual number
of days elapsed and a year of 365 days), accruing from December 27 , 2006, the
date of initial issuance of this Note (the “Issue Date”), to the date of
payment. Such interest shall be payable on the date which is the earlier of (i)
the Maturity Date, or (ii) the date of any prepayment of principal permitted
hereunder. Accrual of interest shall commence on the Issue Date and shall
continue to accrue on a daily basis until payment in full of the principal sum
has been made or duly provided for (whether before or after the Maturity Date).
 

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Anything herein to the contrary notwithstanding, on the Initial Stated Maturity
Date (as defined below) the Company shall pay the interest on the principal on
this Note in an amount equal to such principal (and such payment shall
constitute the payment of all interest on this Note through the Initial Maturity
Date hereof, but not beyond the Initial Stated Maturity Date.

This Note is being issued pursuant to the terms of the Bridge Loan Agreement,
dated as of December 27, 2006 (the “Loan Agreement”), to which the Company and
the Holder (or the Holder’s predecessor in interest) are parties. Capitalized
terms not otherwise defined herein shall have the meanings ascribed to them in
the Loan Agreement.

This Note is subject to the following additional provisions:

1. (a) The term “Maturity Date” means the earliest of (i) the Stated Maturity
Date (as defined below), (ii) the New Transaction Threshold Date (as defined
below), or (iii) the accelerated date as provided in Section 12 hereof.

(b) The term “Stated Maturity Date” means (i) May 26, 2007 (the “Initial Stated
Maturity Date), unless (ii) the Company gives the Holder, and the Holder
receives at least ten (10) business days prior to the Initial Stated Maturity
Date, a Maturity Date Extension Notice (as defined below), in which event it
means June 26 , 2007 (the “Extended Stated Maturity Date”). The term “Maturity
Date Extension Notice” means a written notice of the Company’s election to
extend the Stated Maturity Date to the Extended Stated Maturity Date; provided,
however, that such Maturity Date Extension Notice shall be effective if, and
only if, all of the following conditions are true:

(X) there is no Event of Default (as defined below; but without regard to the
last clause of Section 12(g) hereof regarding the 30-day time period for
dismissal of the relevant petition or the vacating of the relevant order) both
on the date the Maturity Date Extension Notice is received by the Holder and on
the Initial Stated Maturity Date, and

(Y) simultaneously with the giving of such Maturity Date Extension Notice, the
Company provides to the Holder evidence that all periodic filings with the SEC
have been timely made, and that the Common Stock is listed for trading on the
OTC Bulletin Board,
 
(Z) no later than the business day after the giving of such notice, the Company
pays to the Holder (by wire transfer in accordance with instructions provided by
the Holder), interest through the Extended Stated Maturity Date, and the amount
equal to 2% of the outstanding principal of this Note.

(c) The term “New Transaction Threshold Date” means the date, after the Issue
Date, on which the Company consummates a financing transaction (including, but
not limited to, any other bridge loan transactions; each, a “Bridge Financing”)
in which the Company receives, on a cumulative basis after taking into account
the gross proceeds from all prior financing transactions (including, but not
limited to, any Bridge Financings), if any, after the Issue Date, gross proceeds
of at least Five Hundred Thousand Dollars ($500,000.00), whether or not such
transaction is effected in connection with the current or future issuance of
securities. All such gross proceeds are determined before deduction of any fees
or other expenses or disbursements of any kind in connection with the relevant
New Transaction.
 
 
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2. (a) This Note may be prepaid in whole or in part at any time prior to the
Maturity Date, without penalty. Any payment shall be applied as provided in
Section 3.

(b) TIME IS OF THE ESSENCE WITH RESPECT TO ANY PAYMENT DUE HEREUNDER. The
Company shall be in default hereunder if any payment is not made in a timely
manner, without any right to cure unless such right to cure is granted by the
Holder in each instance; provided, however, that the grant of such right is in
the sole discretion of the Holder and may be withheld for any reason or for no
reason whatsoever.

3. Any payment made on account of the Note shall be applied in the following
order of priority: (i) first, to any amounts due hereunder other than principal
and accrued interest, (ii) then, to accrued interest through and including the
date of payment, and (iii) then, to principal of this Note.

4. All payments contemplated hereby to be made “in cash” shall be made in
immediately available good funds of United States of America currency by wire
transfer to an account designated in writing by the Holder to the Company (which
account may be changed by notice similarly given). For purposes of this Note,
the phrase “date of payment” means the date good funds are received in the
account designated by the notice which is then currently effective.

5. (a) Subject to the terms of the Loan Agreement, no provision of this Note
shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, and interest on, this Note at the time,
place, and rate, and in the coin or currency, as herein prescribed. This Note is
a direct obligation of the Company.

(b) Payment of this Note is secured pursuant to the terms of (i) a Guaranty, and
(ii) the Security Interest Agreement, dated as of December 27, 2006, executed by
the Subsidiary], as debtor, in favor of the Holder, as secured party, the terms
of which are incorporated herein by reference.

(c) Any payments received by the Holder with respect to this Note or on account
of any rights taken with respect to the Security Interest , the Subsidiary’s
Guarantee (as defined below), the Subsidiary’s Security Interest Agreement, the
Pledgor’s Guarantee (as defined below) or the Pledge Agreement shall be applied
in the following order of priority: (i) first, to any amounts due to the Holder
under any of the Transaction Agreements other than interest and principal on the
Note, (ii) then, to accrued but unpaid interest on the Note, and (iii) then, to
principal on the Note.
 
 
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6. (a) (i) Each Pledgor (as defined below) is personally guarantying to the
Holder the timely and full fulfillment of all of the obligations of the Company
under this Note on the terms provided above and in (and as limited by) such
Pledgor’s Pledgor Guarantee, each of which has been executed by the Pledgor in
favor of, and delivered to, the Holder.

(ii) The term “Pledgor” means the Company, Summit Trading Limited and Paul
Abramowitz, a shareholder of the Company, who is an Affiliate of the Company as
of the Issue Date.

(iii) The obligations of the Company under this Note and of each Pledgor under
the relevant Pledgor Guarantee are secured under the terms of the Pledge
Agreement, to which the Holder, the Agent named therein and the relevant Pledgor
are parties (each such agreement, a “Pledge Agreement”), the terms of which are
incorporated herein by reference, of which such Pledgor is the record and
beneficial owner. If the Holder forecloses on any of the Pledged Shares, the
obligations of the Company will be reduced only to the extent of the proceeds
actually realized from such foreclosure, in the priority specified in Section 5
hereof.

7. Except as provided in Sections 5 and 6 above or in a separate instrument
signed by the party to be charged therewith, no recourse shall be had for the
payment of the principal of, or the interest on, this Note, or for any claim
based hereon, or otherwise in respect hereof, against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
otherwise, all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.

8. The Holder of the Note, by acceptance hereof, agrees that this Note is being
acquired for investment and that such Holder will not offer, sell or otherwise
dispose of this Note except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended, or any applicable state
Blue Sky or foreign laws or similar laws relating to the sale of securities.

9. Any notice given by any party to the other with respect to this Note shall be
given in the manner contemplated by the Loan Agreement in the section entitled
“Notices.”
 
10. This Note shall be governed by and construed in accordance with the laws of
the State of New York. Each of the parties consents to the exclusive
jurisdiction of the federal courts whose districts encompass any part of the
County of New York or the state courts of the State of New York sitting in the
County of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non coveniens, to the bringing of any
such proceeding in such jurisdictions. To the extent determined by such court,
the Company shall reimburse the Holder for any reasonable legal fees and
disbursements incurred by the Holder in enforcement of or protection of any of
its rights under any of this Note.
 
 
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11. JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury
in any action, proceeding or counterclaim brought by either of the Parties
hereto against the other in respect of any matter arising out of or in
connection with this Note.

12. The following shall constitute an "Event of Default":

 
a.
The Company shall default in the payment of any amount due on this Note, time
being of the essence; or

 
b.
Any of the representations or warranties made by the Company herein, in the Loan
Agreement or in any of the other Transaction Agreements shall be false or
misleading in any material respect at the time made; or

 
c.
The Company shall default in any covenant herein, in the Loan Agreement or in
any of the other Transaction Agreements; or

 
d.
There shall be either (i) a material breach by the Grantor Subsidiary of the
terms of the Grantor Subsidiary’s Guarantee or of the Grantor Subsidiary’s
Certificate or (ii) an Event of Default under the Security Interest Agreement to
which the Grantor Subsidiary is a party; or

 
e.
Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted, applied for or consented to by the Company; or

 
f.
Any governmental agency or any court of competent jurisdiction at the instance
of any governmental agency shall assume custody or control of the whole or any
substantial portion of the properties or assets of the Company; or

 

 
g.
Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted against the Company without its consent or a
trustee, liquidator or receiver shall be appointed for the Company or for a
substantial part of its property or business without its consent, and the
petition in such proceeding is not dismissed, or such appointment is not
vacated, within thirty (30) days after such filing or such appointment;

If an Event of Default shall have occurred, then, or at any time thereafter, and
in each and every such case, unless such Event of Default shall have been waived
in writing by the Holder (which waiver shall not be deemed to be a waiver of any
subsequent default) at the option of the Holder and in the Holder's sole
discretion, the Holder may consider this Note immediately due and payable (and
the Maturity Date shall be accelerated accordingly), without presentment,
demand, protest or notice of any kinds, all of which are hereby expressly
waived, anything herein or in any note or other instruments contained to the
contrary notwithstanding, and interest shall accrue on the total amount due (the
“Default Amount”) on the date of the Event of Default (the “Default Date”) at
the rate of 18% per annum or the maximum rate allowed by law, whichever is
lower, from the Default Date until the date payment is made, and the Holder may
immediately enforce any and all of the Holder's rights and remedies provided
herein or any other rights or remedies afforded by law.
 
 
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13. In the event for any reason, any payment by or act of the Company or the
Holder shall result in payment of interest which would exceed the limit
authorized by or be in violation of the law of the jurisdiction applicable to
this Note, then ipso facto the obligation of the Company to pay interest or
perform such act or requirement shall be reduced to the limit authorized under
such law, so that in no event shall the Company be obligated to pay any such
interest, perform any such act or be bound by any requirement which would result
in the payment of interest in excess of the limit so authorized. In the event
any payment by or act of the Company shall result in the extraction of a rate of
interest in excess of a sum which is lawfully collectible as interest, then such
amount (to the extent of such excess not returned to the Company) shall, without
further agreement or notice between or by the Company or the Holder, be deemed
applied to the payment of principal, if any, hereunder immediately upon receipt
of such excess funds by the Holder, with the same force and effect as though the
Company had specifically designated such sums to be so applied to principal and
the Holder had agreed to accept such sums as an interest-free prepayment of this
Note. If any part of such excess remains after the principal has been paid in
full, whether by the provisions of the preceding sentences of this Section or
otherwise, such excess shall be deemed to be an interest-free loan from the
Company to the Holder, which loan shall be payable immediately upon demand by
the Company. The provisions of this Section shall control every other provision
of this Note.

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer thereunto duly authorized this 27th day of December, 2006.
 
 
NEAH POWER SYSTEMS, INC.

By:_______________________________________

__________________________________________
(Print Name)
_________________________________________ 
(Title)

 
 

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