Exhibit 10.12

                              DEVELOPMENT AGREEMENT

                            Subcontract No. 32162-SV

                                     BETWEEN

                           THALES COMMUNICATIONS, INC.

                                       AND

                             NEAH POWER SYSTEMS INC.



                                December 19, 2003



<PAGE>


THIS AGREEMENT, effective as of the last date of signature hereto, by and
between Thales Communications, Inc. of 22605 Gateway Center Drive, Maryland
20871, hereinafter called "Thales", "TCI" or "Buyer", and Neah Power Systems,
Inc. of 22118 20th Avenue SE, Suite 142, Bothell, WA 98021, hereinafter called
the "Neah", "Seller" or "Subcontractor", collectively called the "Parties."

                                 WITNESSETH THAT

Whereas, Neah is an expert engaged in the development of small fuel cells for
portable devices based upon silicon technology and desires to enter a business
arrangement with TCI to develop a tactical fuel cell version for use with TCI's
XXXX portable applications;

Whereas, TCI is a Government and defense contractor in the business of
developing, producing and selling XXXX portable radios and desires to enter into
a business arrangement with Neah to have Neah develop a tactical fuel cell power
source for use with TCI's products;

Whereas, in consideration of the mutual promises, covenants, and agreements set
forth herein, the Parties agree that the Neah shall perform all the services and
deliver all of the products required by this Agreement, for the consideration
calculated in accordance with this Agreement. This Agreement, hereinafter
referred to as the "Agreement" or "Subcontract". The rights and obligations of
the Parties shall be governed by this Agreement, the Supplemental Provisions and
any other documents or specifications attached hereto or referenced herein or
within a document so referenced.

Now therefore, the parties agree as follows:

1. DEVELOPMENT PHASE I - PRICES AND DELIVERY SCHEDULE:

For a price of $344,000, Seller agrees to use commercially reasonable efforts to
develop proof-of-concept fuel cell power source prototypes in accordance with
the Statement of Work (SOW) and Specification shown in Attachment 1. The
deliverables for Phase I are as follows:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                           Description                                     Quantity                 Due Date
-------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>
Fuel Cell Prototype in accordance with SOW and Specification                   2              9 Months from date of
                                                                                                    Agreement
-------------------------------------------------------------------------------------------------------------------
Non-Functioning Space Models in Phase 2 Form Factor                            2              9 Months from date of
                                                                                                    Agreement
-------------------------------------------------------------------------------------------------------------------
Draft Phase 2 Fuel Cell Requirements                                           1              9 Months from date of
Document and Not to Exceed Production Price                                                         Agreement
-------------------------------------------------------------------------------------------------------------------
Test and Evaluation Support                                               As required              As Required
-------------------------------------------------------------------------------------------------------------------
Status Reports /Conference Calls                                     Bi-weekly as Required          As Agreed
-------------------------------------------------------------------------------------------------------------------
Meetings/Reviews                                                           3 Minimum                As Agreed
-------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>

For purposes of administration and payment, a separate Purchase Order(s) may be
issued pursuant to this Agreement. In such an event, any purchase order issued
shall make reference to this Agreement and all terms and conditions contained
herein shall apply to the purchase orders. To the extent that such purchase
orders include terms which are in conflict with, or which are not included in,
this Agreement, they shall be subject to acceptance by Neah.

PHASE I PAYMENT SCHEDULE

Payments shall be made to Seller based an the fallowing Milestone Schedule:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
   Milestone                Payment Event/Criteria                  Payment Amount           Estimated Schedule
---------------------------------------------------------------------------------------------------------------------
       <S>       <C>                                                   <C>               <C>
       1         Execution of Agreement                                $153,000                      N/A
---------------------------------------------------------------------------------------------------------------------
       2         Critical Design Review                                $78,000           6 Months from date of this
                                                                                                  Agreement
---------------------------------------------------------------------------------------------------------------------
       3         Delivery of Draft Phase 2 Product                     $113,000          9 Months from date of this
                 Development Specification, two Phase 1                                           Agreement
                 prototypes and two Phase 2 space models,
                 and Not-to-Exceed Production Price.
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Payments are due by Buyer net 30 days after receipt of a valid invoice from
Seller.

2.  OPTION DEVELOPMENT PHASE 2 - PRICES AND DELIVERY SCHEDULE:

The Buyer shall have 3 months following final delivery of all deliverables by
Seller and acceptance thereof by buyer under development Phase 1 to exercise the
Phase 2 option, at which time Buyer shall provide Seller with the finalized
physical farm factor far Phase 2. The buyer shall have an option to purchase an
additional 3 months of decision time at a cost of $40,000. The total price for
Phase 2, if successful, is $1,402,000. Seller agrees to use commercially
reasonable efforts to develop fuel cell power sources in accordance with the
Statement of Work (SOW) and Specification shown in Attachment 1. The
deliverables for Phase 2 are as follows:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
                            Description                                      Quantity                Due Date
---------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                        <C>
Fuel Cell Prototype including fuel cells and fuel cartridges.         5 units qualified per      12 Months after
                                                                      Table 6, Attachment 4B     option exercise
---------------------------------------------------------------------------------------------------------------------
Fuel Cell Documentation                                                       1 lot                  Per SOW
---------------------------------------------------------------------------------------------------------------------
Test and Evaluation Support                                                As Required             As Required
---------------------------------------------------------------------------------------------------------------------
Status Reports/Conference Calls                                       Bi-weekly as Required         As Agreed
---------------------------------------------------------------------------------------------------------------------
Meetings/Reviews                                                            4 Minimum               As Agreed
---------------------------------------------------------------------------------------------------------------------
Phase 3 Production Price and Delivery Proposal                                  1                15 Months after
                                                                                                 option exercise
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

For purposes of administration and payment, a separate Purchase Order(s) may be
issued pursuant to this Agreement. In such an event, any purchase order issued
shall make reference to this Agreement and all terms and conditions contained
herein shall apply to the purchase orders. To the extent that such purchase
orders include terms which are in conflict with, or which are not included in
this Agreement, they shall be subject to acceptance by Neah.

PHASE 2 PAYMENT SCHEDULE

Payments shall be made to Seller based on the following Milestone Schedule:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
          Milestone                  Payment Event/Criteria           Payment Amount          Estimated Schedule
---------------------------------------------------------------------------------------------------------------------
              <S>                <C>                                     <C>               <C>
              1                 Exercise of Option 2 and                 $100,000          2 weeks after exercise of
                                Delivery of Draft Engineering                                       option
                                Procedures (SOW 8.2.1)
---------------------------------------------------------------------------------------------------------------------
              2*                Delivery of Final Phase 2                $100,000          8 weeks after exercise of
                                Product Design Specification                                        option
                                and Status Meeting
---------------------------------------------------------------------------------------------------------------------
              3                 Preliminary Design Review                $100,000            17 weeks after option
                                                                                                   exercise
---------------------------------------------------------------------------------------------------------------------
              4*                Preliminary Working unit                 $100,000            26 weeks after option
                                Demonstration (to be defined at                                    exercise
                                PDR) and Status Meeting
---------------------------------------------------------------------------------------------------------------------
              5                 Critical Design Review, to               $100,000            34 weeks after option
                                include Bill of Materials,                                         exercise
                                Production Costs and Updated
                                Not to Exceed Production
                                Pricing and Price Targets
---------------------------------------------------------------------------------------------------------------------
              6*                Delivery of Qualification Test           $120,000            43 weeks after option
                                Plan and Procedures                                                exercise
---------------------------------------------------------------------------------------------------------------------
              7*                Physical Configuration Audit             $100,000            47 weeks after option
                                                                                                   exercise
---------------------------------------------------------------------------------------------------------------------
              8*                Delivery of five (5) prototypes          $682,000            52 weeks after option
                                (qualified per Table 6, Attachment 4B),
                                delivery of qualification documentation
                                and test data and quality system
                                implementation plan, together with
                                escrow of the engineering and
                                manufacturing data package (upon
                                acceptance of prototypes)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

*Completion of this milestone requires TCI approval of this item prior to
payment. Such approval shall not be unreasonably withheld or delayed.

Additional Phase 2 prototypes may be obtained at Neah's documented fully
burdened cost, not to exceed $10,000 per unit, leadtime = approximately 4 weeks

Seller will submit an invoice for each payment milestone following completion,
and acceptance when required, of the milestone. Payments are due by Buyer net 30
days after receipt of a valid invoice from Seller, provided that for milestones
which are subject to acceptance payment shall be due net 10 days after the date
of acceptance and receipt of valid invoice in accordance with Clause 9 below.

3.   PRODUCTION PHASE 3:

     A.   At the conclusion of Development Phase 2, Buyer shall have the option
          (the "Production Phase Option") to elect to proceed to the production
          phase of this Agreement (the "Production Phase"), which must be
          exercised by written notice to Seller within ninety (90) days
          following the date of receipt by Buyer of reasonable approvals by the
          United States Government for sale of the products developed under this
          Agreement, but in no event later than one hundred eighty (180) days
          following the completion of Development Phase 2. In the event that
          Buyer elects to exercise the production phase of this Agreement, the
          parties agree to negotiate an amendment to this Agreement which adds
          all of the necessary provisions for a production type contract (the
          "Production Phase Amendment"). These terms shall include at a minimum,
          pricing (which shall not be higher than the not to exceed pricing
          established under Milestone 5 of Phase 2 for one year after the first
          production order), quantity break pricing, price escalation formula or
          index, delivery schedules, inspection and acceptance requirements,
          quality assurance program requirements, product warranty, Government
          flow-down clauses and any other appropriate provisions.

     B.   In the event that the parties are unable to agree upon a Production
          Phase Amendment within ninety (90) days following the date of exercise
          of the Production Phase Option by Buyer, the terms of the Production
          Phase Amendment shall be established pursuant to the dispute
          resolution procedures set forth in Clause 29 below, unless Buyer
          rescinds its exercise of the Production Phase Option by written notice
          prior to the commencement of such procedures.


<PAGE>

4.   EXCLUSIVITY PROVISIONS

     Seller hereby grants Buyer limited exclusivity with respect to the fuel
     cell technology being developed under this Agreement as described in
     Attachment 3, License and Exclusivity Provisions.

5.   BUYER EQUITY INTEREST

     Concurrent with TCI exercising its Option to fund Phase 2, Neah shall grant
     TCI a warrant to purchase up to 250,000 shares of Common Stock (as adjusted
     for stock splits, etc.) in the form attached as Attachment 6 (the "Common
     Warrant"), subject to vesting as provided in the Common Warrant. The
     exercise price per share shall be $0.12 (as adjusted for stock splits,
     etc.), which equals the most recent valuation of the Common Stock by the
     Board of Directors prior to the signing of this Agreement. Neah expressly
     acknowledges that Section 4 of the Common Warrant requires Neah to give TCI
     the notice of any stock transactions currently required to be given to
     holders of preferred stock under Article 4B(2)c(iii) of Neah's Articles of
     Incorporation.

6.   MANUFACTURING RIGHTS; LICENSE

     In the event that the materials held in Escrow are released to Buyer in
     accordance with Clause 13 of this Agreement, Seller grants full
     manufacturing rights to Buyer in accordance with Attachment 3, License and
     Exclusivity Provisions. A full manufacturing data package sufficient to
     allow Buyer to have an independent third party produce the final product
     (including, but not limited to, product design documentation, bill of
     materials, manufacturing process design and production instructions, and
     source development documentation) shall be placed into escrow as provided
     for in Clause 13 of this Agreement.

7.   INTELLECTUAL PROPERTY RIGHTS

     A.   All Intellectual Property developed by either party prior to the term
          of this Agreement will be the property of the developing party.

     B.   All Intellectual Property developed by either party during the term of
          this Agreement independently of the other party will be the property
          of the developing party, subject to the following mandatory licenses
          with respect to Intellectual Property related solely to the
          interaction between fuel cells and portable radios ("Fuel Cell/Radio
          IP"):

          1.   Fuel Cell/Radio IP developed independently by Seller during the
               term of this Agreement shall be owned by Seller, subject to a
               perpetual, world-wide, royalty free license to Buyer to make,
               have, made, use, sell and import products based on such
               Intellectual Property.

          2.   Fuel Cell/Radio IP developed independently by Buyer during the
               term of this Agreement shall be owned by Buyer, subject to a
               perpetual, world-wide, royalty bearing license to Seller to make,
               have made, use, sell and import products based on such
               Intellectual Property on terms agreed upon by Buyer and Seller
               or, failing agreement within a reasonable time following request
               by Seller, as determined pursuant to Clause 29 below.


<PAGE>

     C.   All Intellectual Property developed jointly by the parties during the
          term of this Agreement shall be jointly owned, except for Fuel
          Cell/Radio IP. Jointly developed Fuel Cell/Radio IP shall be owned by
          Seller, subject to a perpetual, world-wide, royalty free license to
          Buyer to make, have made, use, sell and import products based on such
          Intellectual Property.

     D.   The licenses granted to Buyer pursuant to this Clause 7 shall be
          limited for use with respect to Buyer's own products, and such rights
          may not be sublicensed by Buyer except in connection with the
          manufacture and sale of Buyer's products.

     E.   Each Party agrees to execute such documents and take such other
          reasonable actions as the other Party may request in connection with
          evidencing or perfecting its rights in Intellectual Property in
          accordance with this Clause 7.

     F.   TCI acknowledges that Neah's technology, and all copyrights, patents
          and other intellectual property rights relating to Neah's technology
          are the exclusive property of Neah or its licensors, and that nothing
          herein shall be construed as granting TCI any right, title, license
          in, or interest to Neah's technology or in the intellectual property
          this relating to Neah's technology other than as specifically set
          forth in this Agreement, inclusive of the licenses granted pursuant to
          Attachment 3.

     G.   Neah acknowledges that TCI's technology, and all copyrights, patents
          and other intellectual property rights relating to TCI's technology
          are the exclusive property of TCI or its licensors, and that nothing
          herein shall be construed as granting Neah any right, title, license
          in, or interest to TCI's technology or in the intellectual property
          rights relating to TCI's technology other than as specifically set
          forth in this Agreement, inclusive of Attachment 3.

8.   CUSTOMER FURNISHED PROPERTY

     In the event that Buyer delivers f to Seller, or Seller acquires for Buyer
     using funding provided in this Agreement, any Customer Furnished Property
     (CFP), including products, material, equipment or tooling, the following
     terms apply:

     A.   CFP received by Seller shall be in a condition suitable for its
          intended use. If it is not so, Seller shall immediately notify Buyer.

     B.   Title to all CFP shall be retained by Buyer while in the possession of
          Seller.

<PAGE>

     C.   Seller shall be liable, responsible and accountable for all CFP
          provided, including loss, damage, or destruction, with the exception
          of reasonable wear and tear.

     D.   CFP shall be returned or disposed of by Seller as directed by Buyer.

9.   INSPECTION AND ACCEPTANCE

     A.   Notwithstanding any prior preliminary inspection and/or acceptance,
          including source inspection(s), final inspection and acceptance of all
          deliverables shall be made at the Buyer's facility in XXXX. Final
          acceptance of any supplies or services shall not be deemed a waiver of
          any warranties contained herein.

     B.   With respect to Milestones 2, 4, 6 and 7 under Phase 2, Buyer shall be
          deemed to have accepted the deliverables unless it provides Seller
          with written notice within thirty (30) days following receipt of the
          deliverable setting forth any perceived issues. The parties shall
          attempt in good faith to agree within twenty (20) days thereafter upon
          a plan for resolving the issues, specifically addressing the impact
          upon program schedule. Payment of amounts owing to Seller by Buyer
          with respect to each such milestone shall be due within ten (10) days
          following the date of acceptance.

     C.   With respect to Milestone 8 under Phase 2, Buyer shall be allowed
          eight (8) weeks following the date of delivery of final deliverables
          to determine, in Buyer's sole discretion, compliance with acceptance
          criteria, and shall be deemed to have accepted the deliverables unless
          it provides Seller with written notice within such period setting
          forth any perceived issues. The parties shall thereafter work in good
          faith to resolve the issues, and Seller shall use commercially
          reasonable efforts to correct any deficiencies, after which the
          testing and problem resolution procedures and schedule shall be
          repeated.

10.  RELEASE OF INFORMATION

     Neither party, nor any of its subcontractors, shall make any public release
     of information (except for reasonable disclosures to the U.S. Government),
     including photographs and films, public announcements, or the nature and
     existence of a business relationship or Agreement between the parties (or
     confirmation of same), without prior approval in writing from the other
     party.

11.  QUALITY ASSURANCE

     At the conclusion of Phase 4, Seller shall deliver to Buyer a Quality
     System Implementation Plan, which will include Seller's plans for achieving
     an acceptable quality assurance program for Production Phase 3. The
     Production Phase Amendment shall include a Quality Assurance Plan, and
     failure of Seller to comply with such plan shall constitute a material
     breach of this Agreement. Subsequent to the Phase 2


<PAGE>

     development, Seller (or Seller's designated and Buyer approved
     manufacturer) agrees to maintain a quality control system in compliance
     with ISO-9001, or equivalent, which is approved by Buyer, and any
     requirements contained within the Statement of Work, Specification(s) and
     other requirements shown in this Agreement. Seller further agrees:

     A.   To provide access to the Seller's facilities and those of its lower
          tier suppliers for periodic witnessing and inspection by the Buyer
          and/or Government representatives during all phases.

     B.   To provide a Quality Plan which addresses design verification,
          configuration management, inspection and testing, process controls,
          requirements verification and other quality elements to Buyer for
          approval during Production Phase 3.

     C.   To provide Qualification Test Plans and Procedures to Buyer for
          approval during Development Phase 2. Hollowing approval of these
          documents and completion of Phase 2 development, Seller shall provide
          a Qualification Test Report which demonstrates full compliance with
          the Statement of Work and Specifications.

     D.   To comply with the following requirements during the Production Phase
          3 of this Agreement:

          1.   The first piece of each product produced shall be inspected for
               all characteristics by Seller. The detailed results of this
               inspection shall be supplied to Buyer with each first article
               piece. Buyer reserves the right to witness the first article
               inspection at Seller's facility or the facility of Seller's
               lower-tier supplier.

          2.   Acceptance Test Procedures (ATP) to be used in the execution of
               this order, for any changes to previously approved ATPs, shall be
               submitted to Buyer for approval prior to the commencement of any
               acceptance testing.

          3.   Buyer reserves the right to inspect all materials that are used
               in the manufacture of product under this Agreement.

          4.   All products shall be delivered by Seller with a Certificate of
               Conformance (C of C) signed by the responsible quality official.
               The C of C shall be a written statement certifying that the
               product(s) have been subjected to the required test(s) to verify
               conformance to the applicable drawing(s) and/or specification
               requirement(s). Test and visual inspection results shall be
               maintained on file by Seller and subject to examination for three
               (3) years following completion of all deliveries under this
               Agreement.

          5.   Any changes to Engineering, Material, or Processes must be
               approved by Buyer.

<PAGE>

          6.   Request for information on any departures from Drawings,
               Specifications, Special Processes, including repairs and design
               changes, or other requirements must be reported on a Vendor
               Information Request (VIR) form. Formal disposition of the VIR
               must be obtained prior to shipment and a copy of the VIR must
               accompany each shipment.

          7.   If applicable, workmanship of bare Printed Wire Boards shall
               conform to the requirements of IPC-A-600, Class II. Workmanship
               of Circuit Card Assemblies shall conform to the requirements of
               IPC-A-610 and ANSI/J-STD001, Class 11.

12.  PLACE OF PERFORMANCE

     The Seller shall perform the work under this Agreement at its facilities
     located in Bothell, Washington, and at such other locations as may be
     approved in writing by the Buyer. Such approval shall not be unreasonably
     withheld.

13.  ESCROW

     Upon acceptance of the final Phase 2 deliverables, TCI and NEAH agree to
     establish and administer an Escrow Agreement. Such Escrow Agreement shall
     be placed with a mutually agreed upon escrow agent within the metropolitan
     area, containing all information necessary to build the Neah fuel cell
     battery developed under this Agreement, including all design and
     manufacturing documentation associated with any of the Neah Technology
     ("Escrow Materials") within 30 days after Phase 2 has been completed. The
     information contained in the Escrow Agreement shall as a minimum provide
     that TCI shall gain possession of and the right to use any of the
     information contained therein to manufacture and sell the Phase 2 Neah
     Technology fuel cell in the event (Release Event) that (i) Neah ceases
     doing business and its business is not continued by another corporation or
     entity that acquires the business in connection with a merger or sale as
     described in Clause 25 below and agrees in writing to be bound by the terms
     of this Agreement; (ii) Neah makes a general assignment for the benefit of
     creditors; (iii) Neah suffers or permits the appointment of a receiver for
     it, business or assets which is not removed within a period of sixty (60)
     days (provided that temporary access to the Escrow Materials may be
     obtained if reasonably necessary during such period); (iv) Neah avails
     itself of any proceeding under the Federal Bankruptcy Act and is unable to
     continue to supply and support TCI in a timely manner during the term of
     this Agreement; or (v) Neah is unwilling or unable to manufacture the
     Product for TCI in accordance with the terms of the Production Phase
     Amendment.

     When the Escrow Materials are placed in escrow,  TCIshall have the right to
     conduct one review of those materials in the presence of a Neah employee.
     No copies of any of the Escrow  Materials  shall be made by TCI and none of
     the Escrow Materials,  or any portion thereof, shall be taken or removed by
     TCI during that review or at any other time prior to


<PAGE>

     a Release Event. Neah agrees to keep the Escrow Materials updated and
     current in the event of subsequent changes to the design, test or
     manufacturing documentation.

     The Escrow Agreement shall provide that, in the event that Neah in good
     faith disputes whether a Release Event has occurred, the Escrow Materials
     shall not be released from escrow until the dispute has been resolved by
     binding arbitration as provided in Clause 29 of this Agreement.

     After a Release Event, TCI shall have a license as provided in Attachment 3
     to the Neah Technology for purposes of manufacturing and selling the
     products developed pursuant to this Agreement.

     TCI shall pay all fees and costs associated with the escrow.

14.  TERMINATION

     A.   If either party ceases doing business and its business is not
          continued by another corporation or entity that acquires the business
          in connection with a merger or sale as described in Clause 25 below
          and agrees in writing to be bound by the terms of this Agreement, or
          if any proceeding under the bankruptcy, insolvency or reorganization
          laws is brought by or against a party and it is unable to provide
          reasonable assurances that it will be able to continue to perform its
          obligations under this Agreement, at if a party suffers or permits the
          appointment of a receiver for its business or assets which is not
          removed within a period of sixty (60) days, the other party may
          terminate this Agreement in whole or in part without liability.

     B.   Buyer reserves the right to terminate this Agreement for its
          convenience even though Seller is not in default hereunder. In such
          event a mutually satisfactory and equitable adjustment of the terms
          hereof shall be made. Buyer shall pay for allowable, allocable costs
          and non-cancelable commitments reasonably incurred (if any) prior to
          the date of termination, and fair and allowable closeout costs. Upon
          receipt of notice pf such termination, Seller shall, unless such
          notice otherwise directs, immediately discontinue all work on this
          Agreement and deliver, if and as directed to Buyer all completed and
          partially complete articles, work in process and materials purchases
          or acquired for performance of this Agreement. Seller shall take all
          reasonable steps to minimize termination costs. In no event, however,
          shall Buyer be obligated to pay the Seller any amount in excess of the
          total purchase order price at the time of termination of the work.

     C.   If the Buyer does not exercise the Production Phase Option within the
          period set forth in Clause 3A above, this Agreement shall
          automatically terminate one year thereafter.


<PAGE>

     D.   In the event that either Party breaches any material term of this
          Agreement, the other Party may terminate this Agreement by written
          notice to the other Party, provided that such breach bas not been
          cured within thirty (30) days following the date of such notice (or,
          if cure is not reasonably possible within such period, provided that
          the defaulting party has not taken reasonable steps to effect a cure
          within such period).

     E.   Neither Buyer nor Seller shall be considered in default in performance
          of its obligations hereunder if performance of such obligations is
          prevented or delayed by acts of God or government, labor disputes,
          failure or delay of transportation, or any other similar cause or
          causes beyond their reasonable control.

     F.   The provisions of this Agreement which by their nature require
          performance following termination of this Agreement shall survive such
          termination, including without limitation Clauses 4, 7, 8, 10, 13, 17,
          18, 19, 20, 23, Attachments 2, 3 and 6.

     G.   Notwithstanding the foregoing: (i) in the event that Buyer terminates
          this Agreement pursuant to Clause 14B or 14C above, or Seller
          terminates this Agreement pursuant to Clause 14A or 14D above, all
          licenses granted to Buyer pursuant to this Agreement shall terminate
          except for rights related to products already sold and licenses with
          respect to jointly developed Fuel Cell/Radio IP granted pursuant to
          Clause 7 above; and (ii) in the event that Buyer terminates this
          Agreement pursuant to Clause 14A or 14D above, all licenses granted to
          Seller pursuant to this Agreement shall terminate.

15.  CHANGES

     A.   Buyer shall have the unilateral right from time to time to propose
          changes within the general scope of the work in any of the following
          areas: 1) drawings, designs, or specifications; 2) method of shipping
          or packing; 3) quantities, period of performance, delivery schedule;
          4) place or time of delivery; 5) amount or type of Customer Furnished
          Property; 6) tasks to be performed; 7) place of inspection and/or
          acceptance; and 8) acceptance criteria. If any such change causes an
          increase or decrease in the cost of, or the time required for, the
          performance of any part of the work being performed under this
          Agreement, an equitable adjustment in contract price or delivery
          schedule, or both, shall be made. Any claim bys the Seller for
          adjustment under this Article must be submitted in writing within
          thirty (30) days from the date of receipt of the change notification
          by Seller. In the event that the parties are unable to mutually agree
          to an equitable adjustment within thirty (30) days following the
          presentment of such claim, either party may submit the dispute for
          resolution pursuant to Clause 29 below. Failure to mutually agree to
          any equitable adjustment shall not excuse the Seller from proceeding
          with the work as changed.



<PAGE>

     B.   Buyer may at any time, by written order to the Seller, require the
          Seller to stop all, or any part of the work called for by this
          Agreement, for a period of up to ninety eighty (90) days after the
          Stop Work Order is delivered to the Seller, and for any further period
          to which the parties may agree. Any such order shall be specifically
          identified as a Stop Work Order issued pursuant to this Clause 15.
          Upon receipt of such a Stop Work Order, the Seller shall forthwith
          comply with its terms and take all reasonable steps to minimize the
          incurrence of costs allocable to the work covered by the order during
          the period of work stoppage. Within a period of ninety (90) days after
          a Stop Work Order is delivered to the Seller, or within any extension
          of that period to which the parties shall have agreed, Buyer shall
          either (1) cancel the Stop Work Order; or (2) terminate or cancel the
          work covered by such Stop Work Order. If any such Stop Work Order
          causes an increase or decrease in the cost of, or the time required
          for, the performance of any part of the work being performed under
          this Agreement, an equitable adjustment in contract price or delivery
          schedule, or both, shall be made in accordance with Clause 15A above.

16.  NOTICE OF DELAY

     Whenever any other actual or potential event is delaying or threatening to
     delay delivery of the supplies ordered pursuant to this Agreement, the
     Seller shall as soon as possible give notice thereof to the Buyer,

17.  SEVERABILITY AND GOVERNING LAW

     If any part, term or provision of this Agreement shall be held void,
     illegal, unenforceable, or in conflict with any law of a federal, state or
     local Government having jurisdiction over this Agreement, the validity of
     the remaining portions or provisions shall not be affected thereby. Any
     litigation resulting from disputes shall be governed by the laws of XXXX.

18.  TAXES

     All sales and use taxes relating to the goods and services to be provided
     by Seller pursuant to this Agreement shall be payable by Buyer, and may be
     added to the amounts invoiced by Seller pursuant to this Agreement. The
     parties shall use reasonable efforts to cooperate to minimize any such
     taxes, including making all shipments F.O.B. destination.

19.  WARRANTY DISCLAIMERS

     A.   Neah warrants that there are no legal actions pending against Neah
          relating to Neah's right to develop, manufacture, sell and or use the
          Neah Technology and that as of the date of this Agreement, to the
          knowledge of Neah, the manufacture, sale and/or use of the Neah
          Technology does not infringe on the intellectual


<PAGE>

          property rights of any third party. Neah warrants that it has the
          right and authority to enter and execute this Agreement.

     B.   THE FOREGOING ARE THE ONLY WARRANTIES OFFERED BY NEAH PURSUANT TO THIS
          AGREEMENT, AND NEAR HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR
          IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
          MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT.

     C.   IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INDIRECT, INCIDENTAL OR
          CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT,
          EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,

20.  NON-DISCLOSURE AGREEMENT

     The parties agree to abide by tile terms of the "Non-Disclosure Agreement"
     included in this Agreement as Attachment 1, provided that in the event of
     any conflict between the terms of the Non-Disclosure Agreement and this
     Agreement, the terms of the Agreement shall control.

21.  COMPLIANCE WITH LAWS

     Each party shall comply with, all applicable federal, state, and local
     laws, rules and regulations, specifically including the Foreign Corrupt
     Practices Act, the Anus Export Control Act, the International Traffic in
     Arms Regulations (ITAR) and all United States export laws and regulations.
     Each party further agrees not to engage in any deceptive or unauthorized
     practices. Each party agrees to hold the other party harmless from all
     liability resulting from failure to so comply.

22.  TERM OF AGREEMENT

     This Agreement shall commence, as of the last date of signature of this
     Agreement, and shall be in force until the earlier if (i) one year
     following the failure of Buyer to exercise the Production Phase Option
     within the period specified in Clause 3A, (ii) termination as provided in
     Clause 14 above, or (iii) the expiration of the Production Phase Amendment.

23.  PATENT AND INFRINGEMENT INDEMNITY

     Seller agrees to save harmless and protect Buyer and its customers against
     all costs and expenses arising out of a claim that any goods or part
     thereof furnished by Seller under this Agreement infringes any United
     States patent, or misappropriates any third party trade secret, patent or
     copyright, if notified in writing promptly by Buyer after Buyer becomes
     aware of such claim. Seller agrees to defend at its expense any suits or

<PAGE>

     proceedings against Buyer based upon a claim that the product(s), software,
     data or services furnished hereunder by Seller to Buyer infringes a United
     States patent, copyright or other intellectual property right of a third
     party, and agrees to pay costs and damages finally awarded, or any amounts
     paid to said third party as part of a settlement of such action in any such
     suit or proceeding, as well as any attorneys fees or other legal expenses
     incurred in connection therewith, provided that Seller is notified promptly
     in writing of the suit and, at Seller's request and at its expense, is
     given control of said suit and reasonable assistance for defense of the
     same.

     In the event that Buyer is enjoined from using the product as a result of
     such suit, or if the product is likely to become the subject of a claim of
     infringement of a United States patent, copyright or other intellectual
     property right of a third party, Seller at its own election and expense
     shall either (i) procure for Buyer the rights to continue using the
     product, or (ii) modify or replace the product so that it becomes
     non-infringing while giving equivalent performance. In the event that any
     changes made by Seller require requalification testing, Seller shall either
     perform such re-qualification testing at no cost to the Buyer, or shall
     reimburse Buyer for any re-qualification expenses incurred by Buyer.

     This indemnity does not extend to any suit based upon any infringement or
     alleged infringement of any patent, copyright or trade secret to the extent
     arising out of any specifications or materials supplied by Buyer or by the
     modification of the product, software, data or services by or on behalf of
     Buyer, and Buyer shall defend, indemnify and hold harmless Seller with
     respect to any such suit and all related expenses and damages.

     The parties intend to discuss the expansion of the indemnification
     provision to be included in the Production Phase Amendment to provide for
     coverage with respect to patents outside of the United States, it being the
     intention of the parties that the Production Phase Amendment provide for
     such indemnification in the countries where the products are being sold
     where commercially reasonable.

24. AUTHORIZED BUYER REPRESENTATIVE

     During the performance of this Agreement, Seller win not accept from
     Buyer's representatives, other than Buyer's authorized procurement
     personnel, any verbal or written direction, or other course of conduct,
     which changes or can be construed to change the provisions of the contract.
     Seller agrees to notify Buyer's procurement representative promptly of any
     such unauthorized direction or conduct.

         Administrative and official contractual notifications under this
         Agreement shall be referred to the following representatives of the
         parties:


<PAGE>

         Seller:    Gregg Makuch, Director of Product Marketing

         Buyer:     XXXX, Contracts, XXXX

         Technical and programmatic matters under this subcontract shall be
         referred to the following representatives:

         Seller:    Dr. Slobodan Petrovic, Director of Systems Integration

         Buyer:     XXXX, Engineering, XXXX

         Each party may change its representatives named in this Article by
         written notification to the other party.

25.  ASSIGNMENT, DELEGATION AND SUBCONTRACTING

     Seller shall not assign any of its rights or interest in this Agreement
     without the Buyers' prior written consent, provided that no such consent
     shall be required in connection with a merger or other sale of Seller's
     business and assets related to this Agreement if the acquiring party
     expressly assumes all of Seller's obligations under this Agreement. Buyer
     shall not assign any of its rights or interest in this Agreement to any
     third party which Seller reasonably considers to be a competitor in the
     fuel cell business without Seller's prior written consent. Seller shall not
     delegate any of its duties or obligations under this Agreement except as
     expressly provided herein or as agreed in writing by Buyer. No assignment,
     delegation or subcontracting by either party, with or without the other
     party's consents, shall relieve such party of any of its obligations under
     this Agreement

26.  SELLER EXPERTISE

     The Seller acknowledges that it is an expert fully competent in all phases
     of the work involved with the Products, Software, Data and/or Services
     being procured under this Purchase Agreement, including but not limited to
     the designing, testing, manufacturing, and repairing of such Products. The
     Seller agrees that Buyer and Buyer's customers are entitled to, and have
     relied upon the Seller as an expert and the Seller shall not deny any
     responsibility or obligation hereunder on the grounds that Buyer or Buyer's
     customers provided recommendations and/or assistance in any phase of the
     work, including but not limited to the acceptance by Buyer of the design,
     software, data, services or production of the Product.

27.  TIME OF THE ESSENCE

     It is understood by Seller that time is of the essence in performance of
     all work purchased by Buyer under this Agreement and any related purchase
     order(s). Seller acknowledges that a key consideration for Buyer selecting
     Seller is schedule criticality.


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28.  COMPLETE AGREEMENT AND RELATIONSHIP OF THE PARTIES

     All paragraphs, attachments and other documents incorporated by reference
     in this Agreement, or referenced within those documents, constitute the
     complete and entire expression of the parties to the exclusion of any other
     documents or representations. The terms and conditions hereof may not be
     varied except by a written modification signed by both parties.

     Nothing contained in this Agreement shall be deemed or construed as
     creating a joint venture or partnership between Neah and Neither party
     shall have the power to control the activities and operations of the other
     and their status will be that of independent contractor with respect to
     each other. Neither party shall have any power or authority to bind or
     commit the other.

     Except as specifically provided for elsewhere herein, each Party shall be
     solely responsible for all its costs, salaries and other expenses incurred
     in connection with the performance of its obligations hereunder, and the
     other Party shall have no liability, obligation or responsibility
     therefore.

29.  DISPUTES

     All disputes arising under this Agreement shall be resolved by mediation
     and binding arbitration in accordance with the following terms. Either
     party may commence an action by notifying the other Party and the American
     Arbitration Association ("AM"). Unless the parties agree upon a mediator
     within thirty (30) days following such notification, AAA will promptly
     designate a mediator who is independent, impartial and has relevant
     industry experience, and AAA's decision about the identity of the mediator
     will be final and binding. The Parties agree to conduct at least eight (8)
     consecutive hours of mediated negotiations within 30 days after the notice
     is sent. Each Party shall bear its own expenses for the mediation and they
     shall each share equally in the expenses and fees of the mediator. If the
     dispute is not resolved by negotiation or mediation within thirty (30) days
     after the first notice to AAA is sent, then, upon notice by either Party to
     the other and to AAA, the controversy or dispute will be submitted to an
     independent, impartial, sole arbitrator, who is recognized as an expert in
     the fuel cell industry, for binding arbitration in accordance with AAA's
     Commercial Arbitration Rules. The arbitrator may be selected by mutual
     agreement of the Parties, or either Party may elect to have the AAA select
     an arbitrator. The arbitration shall be held at a mutually agreeable
     location in the city of Denver, Colorado, USA, and the United States
     Arbitration Act will govern the arbitration, 9 U.S.C. Sections 1-16 (or by
     the same principles enunciated by such Act in the event it may not be
     technically applicable). The Parties agree that they will faithfully
     observe this Agreement and will abide by and perform any judgment rendered
     by the arbitrator. The judgment of the arbitrator will be final and binding
     on the Parties. The Agreements contained herein have been given for
     valuable consideration, are coupled with an interest and are not intended
     to be executory contracts. The arbitrator shall apportion to each Party all
     costs, including without limitation, attorney's fees, incurred in
     conducting the arbitration, in accordance with what he or she deems just
     and


<PAGE>

     equitable under the circumstances. Notwithstanding the foregoing, neither
     party shall be precluded from seeking injunctive relief from a court of
     competent jurisdiction pending the resolution of any dispute in accordance
     with this Clause 29.

30.  ADDITIONAL SUPPLEMENTAL FLOW-DOWN PROVISIONS DURING PRODUCTION

     In the event that Buyer elects to proceed to Production Phase 3, the
     Production Phase Amendment will incorporate applicable U.S. Government
     flow-down contract terms, FAR and DFAR provisions which are made a part of
     the Buyer's prime contract(s). Seller agrees to abide by the terms of those
     provisions and to indemnify Buyer in the event of non-compliance.

31.  HEADINGS

     The capitalized terms used in this! Agreement shall have the meaning set
     forth on Attachment 5.

32.  ATTACHMENTS

     The following attachments are an integral part of this Agreement:

     Attachment 1 - Statement of Work

     Attachment 2 - Non-Disclosure Agreement

     Attachment 3 - License and Exclusivity Provisions

     Attachment 4A - Phase 1 Specification

     Attachment 4B - Phase 2 Specification

     Attachment 5 - Defined Terms

     Attachment 6 - Common Warrant

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as shown
below: Neah Power Systems, Inc.

Neah Power Systems, Inc.                    Thales Communications, Inc.

By:                                         By:
------------------------------------        -----------------------------------
(Signature)                                (Signature)

------------------------------------        -----------------------------------
(Typed or Printed Name)                     (Typed or Printed Name)

------------------------------------        -----------------------------------
(Title)                                     (Title)

------------------------------------        -----------------------------------
(Date)                                      (Date)