UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





x
            ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934


For the
fiscal year ended September 30, 2009





Commission
File Number      000-49962




NEAH POWER SYSTEMS,
INC.


(Exact
name of registrant as specified in its charter)





Nevada
                  
                  88-0418806(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)22118
      20th Ave SE, Suite142,
      Bothell, Washington
                  
                  98021(Address
      of principal executive offices)
                  
                  (Zip
      Code)





Registrant’s
telephone number, including area code: (425)424-3324





Securities
registered pursuant to Section 12(b) of the Exchange Act:   None.





Securities
registered pursuant to Section 12(g) of the Exchange Act:





Common stock, $0.001 par
value per share


(Title of
Each Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes     ̈  No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. 
Yes     ̈  No x





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.          Yes
x          
No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One).


Large
accelerated filer  ̈           Accelerated
filer  ̈       Non-accelerated
filer  ̈Smaller
reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈            No
x





The aggregate market value of
the Registrant’s common stock held by non-affiliates was approximately
$1,279,000 as of March 31, 2009 based upon the closing price of common stock on
March 31, 2009.





As of
January 11, 2010, there were 36,592,730 million shares of the Registrant’s
$0.001 par value common stock outstanding.








NEAH
POWER SYSTEMS, INC.


TABLE
OF CONTENTS





PageExplanatory
      Note
                  1Forward-Looking
      Statements
                  1PART
      I.Item
      1.
                  Business
                  2Item
      1.B
                  Unresolved
      Staff Comments
                  8Item
      2.
                  Properties
                  8Item
      3.
                  Legal
      Proceedings
                  8Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  9PART
      II.Item
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  10Item
      7.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  13Item
      8.
                  Financial
      Statements and Supplementary Data
                  20Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  39Item
      9A(T).
                  Controls
      and Procedures
                  39Item
      9B.
                  Other
      Information
                  40PART
      III.Item
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  41Item
      11.
                  Executive
      Compensation
                  44Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  47Item
      13.
                  Certain
      Relationships and Related Transactions and Director
      Independence
                  49Item
      14.
                  Principal
      Accountant Fees and Services
                  50PART
      IVItem
      15.
                  Exhibits
      and Financial Statement Schedules
                  50SIGNATURES
                  51





Explanatory
Note





As used
herein, (a) the terms “Neah Power,” “Company,” “we,” “our” and like references
mean and include both Neah Power Systems, Inc., a Nevada corporation (formerly,
Growth Mergers, Inc.), and our wholly-owned subsidiary, Neah Power Systems,
Inc., a Washington corporation, on a combined basis, (b) the term, “Neah Power
Washington” refers only to the Washington corporation. Except as otherwise
expressly indicated, all references to shares of capital stock, notes, warrants,
options and other outstanding securities mean securities only of the Nevada
corporation.





Forward
Looking Statements





This
Annual Report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Specifically, all statements other than statements of historical facts included
in this annual report regarding our financial position, business strategy and
plans and objectives of management for future operations are forward-looking
statements. These forward-looking statements are based on the beliefs of
management, as well as assumptions made by and information currently available
to management. When used in this annual report, the words “anticipate,”
“believe,” “estimate,” “expect,” “may,” “will,” “continue” and “intend,” and
words or phrases of similar import, as they relate to our financial position,
business strategy and plans, or objectives of management, are intended to
identify forward-looking statements.





These
statements reflect our current view with respect to future events and are
inherently subject to risks and  uncertainties, many of which we
cannot predict with accuracy and some of which we might not even
anticipate.  Although we believe that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions at the
time made, we can give no assurance that such expectations will be
achieved.  Future events and actual results, financial and otherwise,
may differ materially from those expressed in the forward-looking
statements.  Readers are cautioned not to place undue reliance on
these forward-looking statements.  We have no duty to update or revise
any forward-looking statements after the date of this Annual Report on Form 10-K
and the documents incorporated herein by reference or to conform them to actual
results, new information, future events or otherwise.





The
following factors, among others, could cause our or our industry’s future
results to differ materially from historical results or those
anticipated:





·
            general economic
      conditions;





·
            our future capital needs and our
      ability to obtain financing;





·
            our ability to obtain
      governmental approvals, including product and patent
      approvals;





·
            the success or failure of our
      research and development
programs;





·
            the acceptance and success of our
      fuel cell products;





·
            our ability to develop and
      commercialize or products before our competitors;
    and





·
            our limited operating
      history





These
factors are the important factors of which we are currently aware that could
cause actual results, performance or achievements to differ materially from
those expressed in any of our forward looking statements.  We operate
in a continually changing business environment and new risk factors emerge from
time to time.  Other unknown or unpredictable factors could have
material adverse effects on our future results, performance or achievements. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report may not occur.


1


PART
I





ITEM
1: BUSINESS





Overview





We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors and potentially
lower costs.  Through our recent agreement to acquire SolCool One, LLC
(“SolCool”), we also intend to expand our portfolio of renewable energy
solutions. SolCool is a leading supplier of direct current (“DC”)
air-conditioning systems for off-the-grid applications. We intend to utilize
SolCool’s worldwide distribution network and developed market to facilitate the
adoption of fuel cells and Remote Area Power Supplies (“RAPS”), or integrated
power solutions, for similar applications of our fuel cell
products.





Based on
our research and testing, we believe our team of world-class engineers and
scientists can continue to develop a commercially viable fuel cell that will
outperform lithium ion batteries and other batteries in terms of run time,
recharge time, portability and other measures of battery performance. Our fuel
cell solution is particularly beneficial in applications currently requiring the
use of more than one battery, since the user will only need to carry a single
fuel cell with a supply of additional cartridges resulting in reduced
burden.  We have developed what we believe is a potential breakthrough
in the development of a direct methanol micro fuel cell, which may serve as a
replacement for batteries in a variety of products.   Based on
our seven issued patents and 4 additional U.S. patent filings, we believe our
technology is proprietary and can be protected.





In 2009
we continued to advance the development of our technology. This included the
completion of our fuel cell prototype and the subsequent completion of a system
not requiring the availability of oxygen from the environment (“anaerobic” or
“closed loop system”). We also demonstrated an air-breathing (“aerobic”)
system.  We expect the prototype and the related technology to form
the foundation for future fuel cell products that we plan to further develop and
sell to customers over the next fiscal year.




During
2009, we received payments of approximately $1,147,000 from the Office of Naval
Research (“ONR”) pursuant to the terms of a grant providing expense
reimbursement for continuing research and development (“R&D”) having to do
with certain technology. This system was successfully developed and demonstrated
to the ONR in September 2009.





We have
announced customer relationships with EKO Vehicles of Bangalore (“EKO”) and
Hobie Cat Company (“Hobie Cat”) to develop early production devices that can be
evaluated by original equipment manufacturers (“OEM’s”) for the eventual
deployment of fuel cell products that we or potential licensees will use to
manufacture products for sale to our partners, distributors or OEM customers. We
also intend to design and distribute the fuel cartridge that our fuel cells
require for refueling. We expect to generate future revenues from the sale and
licensing of both fuel cartridges and the completed fuel cells. Our current
business plan contemplates that we will subcontract to third parties
substantially all of the production and assembly.   Prototype
development continues and we expect to make our energy products commercially
available in fiscal 2010.





Background




Neah
Power Systems, Inc. was incorporated in the State of Nevada on February 1, 2001
under the name Growth Mergers, Inc. Effective March 9, 2006, Growth Mergers,
Inc. entered into an Agreement and Plan of Merger, as amended on April 10, 2006,
whereby Growth Acquisitions, Inc., a Washington corporation and wholly-owned
subsidiary of Growth Mergers, Inc., merged with and into Neah Power Washington.
Following the merger, Growth Mergers, Inc. changed its corporate name from
Growth Mergers, Inc. to Neah Power Systems, Inc. By virtue of this merger,
Growth Mergers, Inc. (as Neah Power Systems, Inc.) became the parent corporation
of Neah Power Washington.


2





The
purpose of the merger was to enable Neah Power Washington, as Growth Mergers,
Inc.’s subsidiary, to access the capital markets via a public company. Our
common stock currently trades on the OTC Bulletin Board under the symbol “NPWZ.”
We intend to pursue a qualification on the American Exchange, but there is no
assurance that we will qualify for quotation on a national securities
association or exchange.




SolCool
One, LLC Acquisition





On July
27, 2009, and amended September 19, 2009, we entered into a first amended and
restated agreement and plan of merger (the “Amended Merger Agreement”) with
SolCool, Neah Power Acquisition Corp. (“Merger Sub”), our wholly-owned
subsidiary, and Mark Walsh, manager and founder of SolCool, pursuant to which
the Merger Sub will be merged into SolCool (the “Merger”).





Under the
terms of the Amended Merger Agreement, we will issue $500,000 of common stock,
or 476,000 shares of common stock, at a price of $1.05 per share, such shares of
common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24
months from date of the Amended Merger Agreement, such vesting contingent upon
Mark Walsh remaining as our employee and using his best efforts to achieve
SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and
shipments. In August 2009, we paid $10,000 towards the cash payment obligation.
In October 2009, we issued the initial payment of 238,000 shares. 238,000
additional common shares were issued in October 2009 and will be held in escrow
to ensure best-effort execution of SolCool’s obligations under the Amended
Merger Agreement. The closing of the merger is subject to other customary
closing conditions including the filing of the articles of merger with the
applicable states. For accounting purposes the acquisition was not completed
before September and thus has not been reflected in the consolidated financial
statements.





SolCool’s
existing worldwide distribution infrastructure could provide us with a
distribution channel to distribute our products worldwide. We also anticipate
using some of the energy generation, storage, and regulation expertise from
SolCool to create new product offerings for energy generation and
storage.





RESEARCH
AND DEVELOPMENT





We
conduct our research and development activities at our headquarters in Bothell,
Washington.  We plan to invest in research and development and
anticipate that our R&D costs will increase in 2010 compared to prior years
due to the anticipated increase in product development related to technology
improvements and specific customer products.





Our
Unique Patented Technology





Rather
than joining numerous other companies attempting to create Proton Exchange
Membrane (“PEM”)-based direct methanol fuel cells (“DMFC”s), we felt an
entirely new design approach was necessary to achieve the power capacity and
reliability required by portable electronic devices. Our unique fuel cell design
utilizes a patented porous silicon electrode structure and circulating liquid
streams of fuel, oxidant and electrolyte that produce the chemical reactions
needed to generate power. We believe our use of porous silicon and liquid
oxidant is unique in the fuel cell industry. In final form, our products can be
packaged in plastic casings to create self-contained systems that retain the
excess water produced during operation and prevent contamination to the cathode
as occurs in traditional PEM-based DMFCs. Furthermore, since our design is based
largely on standard silicon wafer processing, we believe that it should have
significant manufacturing advantages over traditional fuel
cells.  Compared to competing DMFC technologies that use carbon-based
electrodes and solid PEM’s, we believe that our approach will deliver higher
power output and lower cost for the equivalent size of fuel cell. We also
believe that our fuel cells will be more reliable and operate in a broader range
of environments. We believe that our ability to use silicon electrodes, leverage
the cost benefits of semiconductor manufacturing, and contain all chemical
reactants within the fuel cell will give us distinct competitive
advantages.


3





Porous
Silicon Electrodes




Our
electrode architecture uses conductive porous silicon as the catalyst support
structure rather than carbon typically used in fuel cells. Using a silicon
wafer commonly used in the semiconductor industry, we etch a pattern of millions
of microscopic pores into the silicon. A conductive film is then applied to the
surface of the pore walls followed by a catalyst coating over the conductive
film. The process can be used to produce either anode or cathode electrodes
depending on the type of catalyst used. The final result is a porous electrode
that enables a larger reactive surface area to generate more power.





While our
focus has been on the closed loop non–air (“anaerobic”) systems, in 2009, we
also demonstrated an aerobic system which could be used where the quality of the
air is high and predictable. This would reduce the complexity of the system, as
well as increase the energy density of the system.





Comparison
Between Porous Silicon Fuel Cells and PEM-Based Designs




We
believe that the principal advantages of our approach over PEM-based designs
include:





•
            Our
      use of porous silicon electrodes and the liquid electrolyte, eliminate a
      range of possible failure modes that have hampered introduction of PEM
      based systems. These include degradation of the PEM membrane, crossover of
      methanol fuel and degradation of the cathode catalyst, damage to the
      cathode catalyst by exposure to airborne contaminants such as sulfur; and
      flooding or alternatively drying out of the cathode catalyst. We believe
      that these advantages will allow our fuel cells to operate in a broader
      range of environmental conditions, in all orientations, with high
      reliability.





•
            The
      use of silicon technology allows us to make use of existing silicon
      production infrastructure, with reduced need to create specialized
      production facilities. We can also use standard silicon technology to
      optimize the dimension of the pores for high power, while reducing the
      thickness to reduce cost and overall dimensions of the fuel
      cell.





•
            The
      larger reaction area, coupled with the use of oxidizer at the cathode,
      leads to greater available power density, which reduces the size and cost
      of the fuel cell system.





•
            Our
      technology allows us to create alternative product designs that do not
      require interactions with the environment for operation. This allows us to
      extend our fuel cell products to applications like sensor networks that
      require operation without breathing air or expelling
  gases.





•
            The
      design of the fuel cell avoids conflicts with numerous patents and is
      itself patented by us.





•
            Water
      created in the fuel cell reaction is retained in the fuel cartridge, not
      vented where it can damage the host
device.




We
believe that the principal disadvantages of our approach consist of the
following factors:





•
            Our
      approach requires both the fuel cell and the cartridge to contain acids at
      corrosive concentrations. It is therefore important to ensure that users
      of the technology are not brought into contact with these acids and that
      additional steps be taken to ensure that the lifetime of the system is
      adequate.





•
            The
      need to select materials compatible with the
  chemistry.




As an
ongoing effort to increase the competitiveness of our product, we must focus on
the following areas:




•
            Increase
      the volumetric power density over the power density currently available in
      our fuel cells - this will enable us to build more compact
      solutions


4





•
            Complete
      development of manufacturing techniques for fuel cell and fuel cartridge
      assembly, allowing the unit to meet relevant specifications (such as those
      of the Underwriters’ Laboratories) that are required by many
      customers;





•
            Further
      develop manufacturing techniques for key components of the fuel cells and
      locate suitable manufacturing partners or subcontractors;
    and





•
            Reduce
      the gold and platinum precious metal content of the fuel cells from
      present levels according to a staged program in order to meet our
      production cost objectives.





•
            Improve
      the aerobic solution that will provide higher energy density for aerobic
      applications, while leveraging other capabilities from our anaerobic
      system




COMMERCIALIZATION
STRATEGY




We are
focusing our initial strategy on the market for fuel cells for use in anaerobic
or low oxygen content environments, such as under water, aerospace and military
applications. Both EKO and Hobie Cat currently have electric drive consumer
products where power capacity is limited by the need for extensive battery
re-charging. Implementation of a fuel cell could enable continuous operation of
these electric drive vehicles by the use of fuels cells with supplies of fuel
cartridges. Also, competing PEM-based fuel cells could have significant
operational limitations when environments contain diesel fumes or high humidity.
We expect that partnerships with EKO, Hobie Cat and other potential customers
will enable us to validate our product, supply chain and overall product
strategy.





Beyond
these initial markets, we intend to pursue the military, industrial and consumer
markets, since we believe our product can also provide significant benefits
within these business segments.





The
Fuel Cell Market





Fuel
cells can be categorized by the market applications they potentially serve and
by their power output. We are focused on providing an alternative to
conventional batteries for portable electronic devices that typically operate in
the 5-1000+ Watt range. Specifically, we are targeting military, industrial and
consumer markets with potential applications for computer, electronic media as
well as products for military and homeland security electronic
equipment.




These
segments of the fuel cell market include low power systems (less than 10 Watts)
for low power devices and trickle chargers, and higher power systems (greater
than 100 Watt) typically aimed at stationary power generation or vehicle power
plants. In particular, our technology may provide some unique advantages over
batteries and other types of fuel cells in harsh environments or where access is
limited or unavailable.




Our
target market segment has a number of specific requirements and unique
challenges. To succeed in this segment, fuel cells must have a high power
density (high wattage for their size and weight), be relatively insensitive to
the quality of the surrounding air and be cost effective. They must also be
safe, easily portable, and efficient. The fuel cells must be transportable and
operate reliably in a wide range of environmental conditions.




Within
the 10-100 watt battery replacement space, the dominant technology direction
over the last 30 years has been the ongoing development of fuel cells based on
PEM. A PEM is usually a polymeric structure resembling a thin sheet of plastic
that conducts protons, acting as a solid state electrolyte for electrochemical
reactions. Typical PEM based fuel cells use this material as a basic building
block of the electrochemical power generation unit. PEM -based solutions may use
either the oxidation of hydrogen gas as the fuel source or the direct oxidation
of liquid methanol in the DMFC configuration.


5




The
commercial development of PEM-based solutions has been hampered by a number of
technical issues. Performance of these PEM membranes is highly dependent on
maintaining tight environmental control of the operating conditions which has
been difficult to achieve in product based designs. Longevity of the PEM based
systems has also been a challenge with membrane and catalyst degradation issues
limiting the operating life of the systems. Finally, PEMs are expensive to
manufacture because they use costly proprietary materials and because the
industry has not been able to develop the scalable low-cost manufacturing
processes that are needed for the unique PEM fuel cell
requirements.





Remote
Area Power Supplies (“RAPS”) Market





After the
completion of the SolCool acquisition, we anticipate building on SolCool’s
expertise to create RAPS which can provide 1kW to 10+ kW power systems that can
operate off-the-grid. These systems would include a renewable, DC-based
generation system (solar, wind, etc.), a power modulation system (DC-DC
converter, DC-AC inverter) and storage systems. We expect increasing demand
based on the current focus on renewable energy, and the need to reduce
dependence on a depleting resource (fossil fuels) and, based our internal
marketing estimates and reports published by the marketing research firm of
Frost and Sullivan, this market is estimated to be in the range of $15 billion
to $20 per year. In addition, RAPS products could provide backup power for
critical infrastructure like cell phone towers, communication infrastructure and
other command and control systems in developed countries.





Market
for Military Applications




Our
R&D efforts to date have demonstrated the potential use of our fuel cells in
a variety of military applications. The technology has the potential to provide
longer power duration at significantly reduced size and weight. In addition, we
believe our fuel cells may provide an environmentally friendly solution compared
to rechargeable or non-rechargeable batteries.  Our products
particularly address anaerobic needs such as underwater, underground, close
quarters and high altitude and no atmosphere applications specific to military
needs.





We
believe that the market for military applications will be greater than $2
billion per year, as reflected in market research by Frost and Sullivan, as well
as our internal marketing estimates.  This market includes fuel cell
replacements for batteries, fuel cell power sources for specialized applications
like underwater and/or unmanned vehicles and backup power supplies.





Office of Naval Research -
During the year ended September 30, 2009, we received payments of approximately
$1,147,000 from the Office of Naval Research (“ONR”) pursuant to the terms of a
grant providing expense reimbursement for continuing research and development
having to do with certain technology. This contract included various technical
developments, and the demonstration of a closed loop, self contained, anaerobic
system. This system was successfully developed and demonstrated to the ONR in
September 2009.





Other -We were party to a
development agreement with a customer to develop proof-of-concept fuel cell
power source prototypes (Phase I) and, if successful and elected by the
customer, the development of fuel cell power sources (Phase II). We received
$344,000 for certain services in Phase I and recognized revenue of $154,500 for
the completion of the initial Phase I requirement in 2004 and deferred the
balance of $189,500 until the related services were rendered and the final Phase
I milestone was reached. We believe the final Phase I milestone was reached in
2009. However, customer acceptance has not yet occurred and the balance of
$189,500 has not yet been recognized as revenue.





Market for
Industrial Applications,RAPS, and
Transportation





We are
currently developing RAPS that are renewable energy, fuel cell-based power
generation and storage systems that can be used for distributed power
applications where the quality of the electrical grid is non-existent or
sub–par, or where back up power is needed.




In July
2009 we signed a Letter of Intent (“LOI”) with EKO, one of India’s larger
manufacturers of electric two wheel vehicles, to develop fuel cell battery
charging units for integration into their electric scooters, as well
as  RAPS to act as charging stations for the scooters and off -grid
power sources. With sufficient funding, we expect to deliver several beta
prototype units in 2010 and after successful evaluation we expect to ship
several hundred units.


6





In July
2009 we signed a technology license agreement with Hobie Cat to explore the use
of our proprietary fuel cells to power various recreational water craft
products. Additionally, we signed a LOI with Hobie Cat to produce on-board fuel
cell battery chargers for their line of electric kayaks. With sufficient
funding, we anticipate delivery of several beta prototype systems in 2010, and
several hundred systems after successful completion of the beta
evaluations.





Market
for Consumer Mobile Electronics





Recent trends continue to demonstrate a
clear need for better and longer-lasting power solutions to close the “power
gap,” which is defined as the difference between the power capacity and the
power need, thus enhancing mobility and productivity. Based on user demand,
mobile electronic companies continue to add features for richer experiences.
Notebook PC makers, for example, in recent years have enhanced their products
with larger, more vivid color displays, faster processors, larger hard drives,
DVD and/or CD drives, as well as multimedia and wireless networking
capabilities. Each of these additions requires more power and, taken together,
can be a significant drain on the PCs limited battery
capacity.  Users
are also more dependent on these mobile devices and using them longer without
access to A/C power compounds the power gap.  Sales of notebook PCs
continue to grow faster than those of the overall PC market, and now represent
more than half of all PCs sold. The size of the consumer market is estimated to
be between $6 billion and $8 billion per year, as reflected in market research
by Frost and Sullivan and our internal marketing estimates, with no clear
incumbent solution. Moreover, with the growth and widespread availability of
high-speed wireless connections (Wi-Fi) in corporate offices and public
locations, “persistent” computing - constant connectivity to the Internet,
e-mail and corporate files - is becoming commonplace, creating additional
demands for longer-lasting power.




We
believe that our fuel cells, when fully developed, will be capable of bridging
the power gap by having more power, a longer life and instant recharge
capability using replacement fuel cartridges. In addition, we believe that they
will be smaller and lighter-weight than the batteries currently in
use.





PROPRIETARY
RIGHTS AND INTELLECTUAL PROPERTY




We rely
primarily on patents and contractual obligations with employees and third
parties to protect our proprietary rights.  We intend to seek
appropriate patent protection for our proprietary technologies by filing patent
applications in the U.S. and in certain foreign countries.  As of
December 31, 2009, we owned or controlled seven issued or allowed U.S. patents
and four pending U.S. patent applications, including provisional patent
applications.





Our
patents and patent applications are directed to the components and systems
involved in our fuel cell design and  the use of porous substrates
coated with catalyst as fuel cell electrodes and electrode structures, cell
bonding techniques, and cartridges   Our financial success will
depend in large part on our ability to:


·
            obtain
      patent and other proprietary protection for our intellectual
      property;


·
            enforce
      and defend patents and intellectual property once
  obtained;


·
            operate
      without infringing on the patents and proprietary rights of third parties;
      and


·
            preserve
      our trade secrets;




In
addition, we believe our fuel cell design and technology are not in conflict
with the U.S. patents covering PEM-based DMFCs held by several organizations.


7





EMPLOYEES




As of December 31, 2009, we had
thirteen employees, including two executive officers, eight persons in research
and development andtwo
clerical and administrative personnel.




COMPETITION




The
development and marketing of fuel cells and fuel cell systems is extremely
competitive. In many cases, we compete directly with alternative energy and
entrenched power-generation and power-storage technologies. In addition, a
number of firms throughout the world have established fuel cell development
programs, albeit most of them PEM-based. Competitors range from development
stage companies to major domestic and international companies, many of which
have:





•
            substantially
      greater financial, technical, marketing and human resource
      capabilities;





•
            established
      relationships with original equipment
  manufacturers;





•
            name-brand
      recognition; and





•
            established
      positions in the markets that we have targeted for
      penetration.




These or
other companies may succeed in developing and bringing to market products or
technologies that are more cost-effective than those being developed by us or
that would render our products and technology obsolete or non-competitive in the
marketplace.





AVAILABLE
INFORMATION





We are a
reporting company and file annual, quarterly and special reports, and other
information with the SEC. You may read and copy these reports at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. Please call the
SEC at 1-800-SEC-0330 or email the SEC at publicinfo@SEC.gov
for more information on the operation of the public reference room. Our SEC
filings are also available at the SEC’s website at http://www.sec.gov.





ITEM
1B.  Unresolved
Staff Comments.





None.





ITEM
2: Properties.




The
following is a summary of our property and related lease
obligation.  We do not own any real property.  We believe
that these facilities are sufficient to support our research and development,
operational and administrative needs under our current operating
plan.





We
currently lease both our corporate headquarters and laboratory facilities under
a lease agreement which expired March 31, 2009 and was extended through
September 30, 2009. We currently lease on a month-to-month basis, and intend to
negotiate with the landlord for a lease extension.





ITEM
3: Legal
Proceedings.




Our
landlord has filed a claim for unpaid rent in the amount of $76,069 in a case
styled Teachers Insurance & Annuity v. Neah Power Systems, Inc. in the
Superior Court of the State of Washington, County of King, and was granted a
default judgment in December 2009 in the amount of $81,866. Pursuant to that
judgment, in January 2010 we received a notice of eviction from our landlord for
the unpaid rent. We hope to avoid eviction by payment of the past-due rent prior
to the notice response date of January 21, 2010.


8


A
consultant of the Company obtained a default judgment in December 2009 in the
amount of $62,524 in a case styled Novellus Systems, Inc. v. Neah Power Systems,
Inc. in the Superior Court of California, County of Santa Clara.




ITEM
4: Submission of Matters to a
Vote of Security Holders.




None.


9


PART
II





ITEM
5: Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.




Market
Information




Our
common stock trades on the Over-the-Counter Bulletin Board under the symbol
"NPWZ." Set forth below are the range of high and low bid quotations for the
periods indicated as reported by the OTCBB. The market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.




High
                  
                  
                  LowFiscal
      Year Ended September 30 2007:First
      Quarter (October 1, 2006 – December 31, 2006)
                  
                  $
                  68.33
                  
                  
                  $
                  25.00Second
      Quarter (January 1, 2007 – March 31, 2007)
                  
                  
                  61.33
                  
                  
                  
                  28.67Third
      Quarter (April 1, 2007 – June 30, 2007)
                  
                  
                  34.00
                  
                  
                  
                  14.00Fourth
      Quarter (July 1, 2007 – September 30, 2007)
                  
                  
                  22.00
                  
                  
                  
                  6.67Fiscal
      Year Ended September 30, 2008:First
      Quarter (October 1, 2007 – December 31, 2007)
                  
                  $
                  12.33
                  
                  
                  $
                  5.50Second
      Quarter (January 1, 2008 – March 31, 2008)
                  
                  
                  7.00
                  
                  
                  
                  0.83Third
      Quarter (April 1, 2008 – June 30, 2008)
                  
                  
                  3.08
                  
                  
                  
                  0.77Fourth
      Quarter (July 1, 2008 – September 30, 2008)
                  
                  
                  1.00
                  
                  
                  
                  0.08Fiscal
      Year Ended September 30, 2009:First
      Quarter (October 1, 2008 – December 31, 2008)
                  
                  $
                  0.33
                  
                  
                  $
                  0.08Second
      Quarter (January 1, 2009 – March 31, 2009)
                  
                  
                  0.27
                  
                  
                  
                  0.12Third
      Quarter (April 1, 2009 – June 30, 2009)
                  
                  
                  8.93
                  
                  
                  
                  0.12Fourth
      Quarter (July 1, 2009 –September 30, 2009)
                  
                  
                  5.27
                  
                  
                  
                  0.93





On July
27, 2009, we effected a 200:1 reverse stock split of all issued and outstanding
shares of our
common stock. On August 14, 2009, we effected a 6:1 forward split of all issued
and outstanding shares of our common stock. This schedule reflects those changes
to the historical prices.





The last
sale price of our common stock on December 31, 2009, was $0.60.




Holders




As of
December 31, 2009, there were approximately 350 holders of record of our common
stock. This number does not include beneficial owners of common stock whose
shares are held in the names of various dealers, clearing agencies, banks,
brokers and other fiduciaries.





Dividends




We have not paid any cash dividends to date and do
not anticipate or contemplate paying dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for the
development of our business.




Unregistered
Sales of Equity Securities





The
following sets forth certain information for all securities we sold during the
fiscal year ended September 30, 2009 without registration under the Securities
Act of 1933, as amended, other than those sales previously reported in a Current
Report on Form 8-K or a Quarterly Report on Form 10-Q:


10





In
September 2009, we issued 24,000 warrants to purchase shares of our common stock
at $1.05 per share to DNA Global for business development services provided. The
warrants are exercisable until September 2010. In August 2009, we issued 120,000
warrants to purchase shares of our common stock at $2.08 per share to Aaron
Grunfeld for legal services provided. The warrants are exercisable until August
2014. In July 2009, we issued 26,000 warrants to purchase shares of our common
stock at $0.29 per share to Biomed Capital for fees paid to investment bank for
assistance in raising capital. These warrants were exercised in November 2009.
In July 2009, we issued 3,000 warrants to purchase shares of our common stock at
$0.29 per share to Moody Capital for fees paid to investment bank for assistance
in raising capital. The warrants are exercisable until July 2010.





In
February 2009, we entered into a Securities Purchase Agreement with each of
Agile Opportunity Fund, LLC (“Agile”) and Capitoline Advisors, Inc.
(“Capitoline”) under which we were to receive funding through the issuance of
convertible promissory notes (“the Notes) in the aggregate amount of $1,050,000
and an aggregate purchase price of $900,000, with a maturity date of August 12,
2009 and prepaid interest at the rate of 18% per annum. The Notes are
convertible into shares of our common stock at a conversion price of $3.33 per
share, at the discretion of the creditor, subject to adjustment to conversion
price if subsequent sales of our common stock are issued at a price lower than
the conversion price. The Notes are subject to mandatory redemption in the event
we enter into a going private transaction or we are sold. The Notes are secured
by all our assets and, upon conversion, have certain piggyback registration
rights. In February, March and June 2009, we received funds from Agile pursuant
to these agreements in the aggregate face amount of $635,000, and aggregate
purchase price amount of $550,000. In consideration for the Notes, approximately
3,372,000 common shares are issuable under the terms of the
agreement.  As of September 30, 2009, the Notes were unpaid and
past-due. We are negotiating with Agile on forbearance. However, there is no
assurance that Agile will grant forbearance or refrain from taking actions
against us available to them under the agreement.




In July,
August and September 2009, we received funds from Capitoline in the aggregate
face amount of $321,000 and aggregate purchase price amount of $275,000. In
consideration for the Notes, approximately 117,164 common shares are issuable
under the terms of the agreement.  As of the date of this report, the
principal balances of the Notes remain unpaid and past-due. We are negotiating
with Capitoline on forbearance. However, there is no assurance that Capitoline
will grant forbearance or refrain from taking actions against us available to
them under the agreement.





Description
of Equity Incentive Compensation Plans





The table below sets forth certain
information as of September 30, 2009 regarding the shares of common stock
available for grant or granted under our long-term incentive plans that were (i)
approved by our stockholders, and (ii) were not approved by our
stockholders:





Equity
Incentive Compensation Plan Information





Number of
                    Common shares
                    to be Issued
                    Upon Exercise
                    of Outstanding
                    Options
                  
                  
                  Weighted-
                    Average
                    Exercise Price
                    of Outstanding
                    Options
                  
                  
                  Number of Common
                    Shares Remaining for
                    Future Issuance Under
                    Long-Term Incentive
                    Equity Compensation Plan
                    (Excluding Outstanding
                    Options)Equity
      compensation plans approved by stockholders
                  
                  
                  2,862,745
                  
                  
                  $
                  1.31
                  
                  
                  
                  3,137,255Equity
      compensation plans not approved by stockholders
                  
                  
                  —Total
                  
                  
                  2,862,745
                  
                  
                  $
                  1.31
                  
                  
                  
                  3,137,255




11





Long Term Incentive Compensation
Plan - In August of 2008, we amended our Long Term Incentive Compensation
Plan (“the Plan”) first adopted in March 2006. Under the amended Plan, the
maximum number of shares issuable is 6,000,000. The Plan is to continue for a
term of ten years from the date of its adoption. The Plan is administered by our
board of directors. We have outstanding stock options for 2,862,745 shares to
employees, the board of directors, and advisors and consultants, and none of
these options have as of yet been exercised. Options are exercisable for ten
years from date of grant. Options granted in excess of 6,000,000 will require
shareholder approval. For the years ended September 30, 2009 and 2008, there
were 2,841,700 and nil stock options issued, respectively, under the amended
Plan.





Employee Stock Purchase Plan - In
August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase
Plan”). The number of shares of common stock that may be sold pursuant to the
Stock Purchase Plan shall not exceed, in the aggregate, 900,000 shares of our
common stock. As of September 30, 2009, no shares have been purchased under the
Stock Purchase Plan.




12


ITEM
7: Management’s Discussion and
Analysis of Financial Condition and Results of Operation.




Overview





Statements
contained herein that are not historical fact may be forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act, that are subject to a variety of risks and
uncertainties.  There are a number of important factors that could
cause actual results to differ materially from those projected or suggested in
any forward-looking statement made by us.  These factors include, but
are not limited to: (i) general economic conditions; (ii) our future capital
needs and our ability to obtain additional funding; (ii) our ability to obtain
required governmental approvals, including product and patent approvals; (iii)
our ability to successfully complete product research and development and
commercialization; and (iv) our ability to develop and commercialize products
that can compete favorably with those of competitors.  In addition,
significant fluctuations in annual or quarterly results may occur as a result of
the timing of milestone payments, the recognition of revenue from milestone
payments and other sources not related to product sales to third parties, and
the timing of costs and expense related to our research and development
programs.  Additional factors that would cause actual results to
differ materially from those projected or suggested in any forward-looking
statements are contained in our filings with the SEC, including those factors
discussed under the caption “Forward-Looking Statements” in this Report, which
we urge investors to consider.  We undertake no obligation to publicly
release revisions in such forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrences of
unanticipated events or circumstances, except as otherwise required by
securities and other applicable laws.





The
following management’s discussion and analysis is intended to provide
information necessary to understand our audited  consolidated
financial statements and highlight certain other financial information, which in
the opinion of management, will enhance a reader’s understanding of our
financial condition, changes in financial condition, and results of
operations.  In particular, the discussion is intended to provide an
analysis of significant trends and material changes in our financial condition
and operating results during the fiscal year ended September 30, 2009 as
compared to the fiscal year ended September 30, 2008. This Item is organized as
follows:





·
            The
      section entitled “Background” describes our principal operational
      activities and summarizes significant trends and developments in our
      business and in our industry.


·
            “Critical
      Accounting Policies and Estimates” discusses our most critical accounting
      policies and estimates.


·
            “Recently
      Issued Accounting Pronouncements”
      discusses new accounting standards.


·
            “Liquidity,
      Capital Resources and Going Concern” discusses our cash requirements,
      sources and uses of cash and liquidity, including going concern
      qualifications.


·
            “Comparison
      of Annual Results of Operations” discusses the primary factors that are
      likely to contribute to significant variability of our results of
      operations for the fiscal year ended September 30, 2009 as compared to
      September 30, 2008.


·
            “Off-Balance
      Sheet Arrangements” indicate that we did not have any off-balance sheet
      arrangements as of September 30,
2009.




Background




We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation. Our long-lasting, efficient
and safe power solutions for these devices, such as notebook PCs, military
radios, and other power-hungry computer, entertainment and communications
products, use our patented, silicon-based design with higher power densities to
enable lighter-weight, smaller form-factors and potentially lower
costs.  Through our recent agreement to acquire SolCool, we also
intend to expand our portfolio of renewable energy solutions. SolCool is a
leading supplier of direct current (“DC”) air-conditioning systems for
off-the-grid applications. We intend to utilize SolCool’s worldwide distribution
network and developed market to facilitate the adoption of fuel cells and RAPS,
or integrated power solutions, for similar applications of our fuel cell
products.


13





Based on
our research and testing, we believe our team of world-class engineers and
scientists can continue to develop a commercially viable fuel cell that will
outperform lithium ion batteries and other batteries in terms of run time,
recharge time, portability and other measures of battery performance. Our fuel
cell solution is particularly beneficial in applications currently requiring the
use of more than one battery, since the user will only need to carry a single
fuel cell with a supply of additional cartridges resulting in reduced
burden.  We have developed what we believe is a potential breakthrough
in the development of a direct methanol micro fuel cell, which may serve as a
replacement for batteries in a variety of products. Based on our seven
issued patents and four additional U.S. patent filings, we believe our
technology is proprietary and can be protected.





In 2009
we continued to advance the development of our technology. This included the
completion of our fuel cell prototype and the subsequent completion of a system
not requiring the availability of oxygen from the environment (“closed loop
system”). We also demonstrated an air-breathing (“aerobic”)
system.  We expect the prototype and the related technology to form
the foundation for future fuel cell products that we plan to further develop and
sell to customers over the next fiscal year.




During
2009, we received payments of approximately $1,147,000 from ONR pursuant to the
terms of a grant providing expense reimbursement for continuing R&D having
to do with certain technology. This system was successfully developed and
demonstrated to ONR in September 2009.





We have
announced customer relationships with EKO and Hobie Cat to develop early
production devices that can be evaluated by original equipment manufacturers
(“OEM’s”) for the eventual deployment of fuel cell products that we or potential
licensees will use to manufacture products for sale to our partners,
distributors or OEM customers. We also intend to design and distribute the fuel
cartridge that our fuel cells require for refueling. We expect to generate
future revenues from the sale and licensing of both fuel cartridges and the
completed fuel cells. Our current business plan contemplates that we will
subcontract to third parties substantially all of the production and assembly.
Prototype development continues and we expect to make our energy products
commercially available in fiscal 2010.





SolCool
One, LLC Acquisition





On July
27, 2009, and amended September 19, 2009, we entered into the Amended Merger
Agreement with SolCool, Merger Sub, our wholly-owned subsidiary, and Mark Walsh,
manager and founder of SolCool, pursuant to which the Merger Sub will be merged
into SolCool (the “Merger”).





Under the
terms of the Amended Merger Agreement, we will issue $500,000 of common stock,
or 476,190 shares of common stock, at a price of $1.05 per share, such shares of
common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24
months from date of the Amended Merger Agreement, such vesting contingent upon
Mark Walsh remaining our employee and using his best efforts to achieve
SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and
shipments. In August 2009, we paid $10,000 towards the cash payment obligation.
In October 2009, we issued the initial payment of 238,000 shares. 238,000
additional common shares were issued in October 2009 and will be held in escrow
to ensure best-effort execution of SolCool’s obligations under the Amended
Merger Agreement. The closing of the merger is subject to other customary
closing conditions including the filing of the articles of merger with the
applicable states. For accounting purposes the acquisition was not completed
before September and thus has not been reflected in the consolidated financial
statements.





SolCool’s
existing worldwide distribution infrastructure could provide us with a
distribution channel to distribute our products worldwide. We also anticipate
using some of the energy generation, storage, and regulation expertise from
SolCool to create new product offerings for energy generation and
storage.





Critical
Accounting Policies and Estimates




We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires the use of estimates that affect the reported
amounts of assets, liabilities and expenses. Our critical accounting policies
include revenue recognition, accounting for research and development costs,
accounting for contingencies, accounting for income taxes, and accounting for
share-based compensation. Other key estimates and assumptions that affect
reported amounts and disclosures include depreciation and amortization and
expense accruals. We base our estimates on historical experience and on actual
information and assumptions that are believed to be reasonable under the
circumstances at that time. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following critical
accounting policies affect our more significant estimates used in the
preparation of our financial statements.


14





Revenue
Recognition




Revenue
normally consists of grant and contract revenues. We recognize revenue when we
have persuasive evidence of an arrangement, the services have been provided to
the customer, the price for services is fixed and determinable, no significant
unfulfilled obligations exist, and collectability is reasonably
assured.





Grant
revenues are recognized as the related research is conducted. Contract revenues
consist of amounts recorded from services provided to a single customer.
Revenues earned under such arrangements are recorded as earned either as
milestones are achieved or as the services are provided. Upfront payments
received under contractual arrangements are deferred and recognized as revenue
over the service period.





Share
Based Payments





We use
the Black-Scholes option pricing model as our method of valuation for
share-based awards.  Share-based compensation expense is recorded over
the requisite service period typically and based on the value of the portion of
the stock-based award that will vest during the period, adjusted for expected
forfeitures.  Our determination of the fair value of share-based
awards on the date of grant using an option pricing model is affected by our
stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, the
expected life of the award, expected stock price volatility over the term of the
award and historical and projected exercise behaviors.   The
estimation of share-based awards that will ultimately vest requires judgment,
and to the extent actual or updated results differ from our current estimates,
such amounts will be recorded in the period estimates are revised. Although the
fair value of share-based awards is determined in accordance with authoritative
guidance, the Black-Scholes option pricing model requires the input of highly
subjective assumptions and other reasonable assumptions could provide differing
results.  Non-cash compensation expense is recognized on a
straight-line basis over the applicable vesting periods of one to ten years,
based on the fair value of such share-based awards on the grant
date.





Income
Taxes





We follow
the liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and on the expected
future tax benefits to be derived from net operating loss carryforwards measured
using current tax rates. A valuation allowance is established if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Due to the nature of the reverse merger that occurred in 2006 and the
resulting greater than 50% change in control, our ability of to utilize NOL
carryforwards from NPSWA may be limited.





Recently
Issued Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance on revenue arrangements with multiple deliverables that
are outside the scope of the software revenue recognition guidance (which does
not have impact on our accounting).  Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of a selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method.  The new guidance includes new
disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition.  We
believe adoption of this new guidance will not have a material effect on our
consolidated financial statements.


15




In June 2008, the Emerging Issues Task
Force of the FASB issued authoritative guidance on accounting for convertible
instruments and warrants with provisions that protect holders from declines in
the stock price (“down-round” provisions), which is effective for us beginning
October 1, 2009. Instruments with such provisions will no longer be recorded in
equity. The guidance is to be applied to outstanding instruments as of the
beginning of the fiscal year in which the guidance is applied. The cumulative
effect of the change in accounting principle shall be recognized as an
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) for that fiscal year, presented separately. The
cumulative-effect adjustment is the difference between the amounts recognized in
the statement of financial position before initial application of authoritative
guidance and the amounts recognized in the statement of financial position upon
its initial application. The amounts recognized in the statement of financial
position as a result of the initial application are determined based on the
amounts that would have been recognized if the guidance had been applied from
the issuance date of the instrument. In connection with the warrants issued in
connection with the Agile and Capitoline agreements, which have such down-round
protection provisions, we are assessing the impact of adoption of this guidance
on our consolidated financial position and results of
operations.




In
December 2007, the FASB issued authoritative guidance on business combinations
to be applied prospectively for fiscal years beginning on or after
December 15, 2008. The statement also applies to the treatment of taxes
from prior business combinations. The statement requires more assets acquired
and liabilities assumed in future business combinations to be measured at fair
value as of the acquisition date. In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be re-measured to fair value each subsequent
reporting period. We adopted the new authoritative guidance with respect to
business combinations at the beginning of our 2010 fiscal year, or October 1,
2009, and believe the impact will be material as it applies to the accounting
treatment of our merger with SolCool.





In
December 2007, the FASB issued authoritative guidance on accounting for
collaborative arrangements which is effective for us beginning October 1, 2009
and will be applied retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date. The authoritative
guidance defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. The
adoption of this authoritative guidance will not have a material impact on our
financial position and results of operations.





Liquidity,
Going Concern and Capital Resources





We have
prepared our consolidated financial statements assuming that we will continue as
a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We had $20,000 in unrestricted
cash on hand as of September 30, 2009. We had an accumulated deficit as of
September 30, 2009 in the amount of $48,274,000 and negative working capital of
$4,240,000. For the fiscal year ended September 30, 2009, we had negative cash
flow from operating activities of amount of $1,019,000.





We have
limited capital resources and have sustained substantial losses, which raise
substantial doubt about our ability to continue as a going concern. In addition,
we now have multiple instances of actual and threatened litigation for past-due
vendor balances and other obligations. Some of these may result in additional
loss, expense, and management burden. We must, therefore, raise sufficient
capital to remedy these claims, fund our overhead burden, and continue our
R&D and product development efforts going forward. Without this funding, our
current cash balance is estimated to not support our operations through January
2010. Although we have entered into and are negotiating agreements for the sales
of equity securities to meet our requirements, no assurance can be given that we
will be successful in obtaining adequate capital on acceptable conditions or at
all.





In
February 2009, we entered into a Securities Purchase Agreement with Agile and
Capitoline under which we issued Notes secured by all of our assets. The Notes
are convertible at $3.33 per share, subject to down-round adjustment based on
future common stock sales. As of September 30, 2009, we had received net
proceeds of $732,000 from eight tranches in aggregate note amounts totaling
$956,000. Subsequent to September 30, 2009, we have received $125,000 in
additional net proceeds in aggregate note amounts totaling
$164,000.




In July
2009, we entered into a Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with Optimus Capital Partners, LLC (“Optimus”), under which Optimus,
subject to certain conditions, committed to purchase up to $10,000,000 of our
Series B preferred stock. As of the date of this report, we have not issued any
tranche notices for funding under the Purchase Agreement.


16





Discussion
of Cash Flows





We used
cash of approximately $1.0 million in our operating activities in 2009, compared
to $2.4 million in 2008.  Cash used in operating activities relates
primarily to funding net losses offset partially by non-cash expenses such as
stock-based compensation. We expect to use cash for operating activities in the
foreseeable future as we continue our operating activities.





Our
investing activities used cash of approximately $16,000 in 2009 compared to nil
in 2008. The cash used was from notes receivable issued to SolCool and were to
be used for operating expenses as we continued our efforts toward completion of
a merger agreement.





Our
financing activities provided cash of approximately $996,000 in 2009 compared to
$1.8 million in 2008.  Changes in cash from financing activities are
primarily due to proceeds from sale of common stock and preferred stock, and net
proceeds from notes payable, less principal payments.





Recent
Financing Activities





In July
2009, we entered into the Purchase Agreement with Optimus under which Optimus,
subject to certain conditions, committed to purchase up to $10 million of our
Series B Preferred Stock. As of the date of this report, we have not issued any
tranche notices for funding.





Summary





We are
dependent on existing cash resources and external sources of financing to meet
our working capital needs.  The current cash balance, which includes
proceeds from our bridge funding, is estimated to support our budgeted and
anticipated working capital requirements through approximately January 2010. To
satisfy our working capital requirements from that point forward, we are
currently seeking financing from the sale of debt or equity instruments to
current investors and potential strategic investors. There is no assurance that
we will be successful in raising this capital on a timely basis, if at all. The
failure to obtain the necessary working capital would have a material adverse
effect on the development program and business prospects and, depending upon the
shortfall, we may have to curtail or cease our operations.





To attain
profitable operations and generate cash flow, management’s plan is to execute
its strategy of:


(i)
            completing
      production prototypes for EKO vehicles, Hobie Cat, and other customers,
      and qualifying the product for high volume market
    acceptance,


(ii)
            funding
      the market growth of SolCool DC-air conditioning products, and enabling
      shipment to existing and future customers,
and


(iii)
            Developing
      and deploying RAPS systems, and other energy generation and storage
      solutions.





We will
continue to be dependent on outside capital to fund our operations for the near
future. We have relied primarily on sales of securities and proceeds from
borrowings for operating capital. During 2009, we raised capital by selling nine
promissory notes for a total of $1,056,000 with net proceeds of $832,000
received upon closing.  During the year ended September 30, 2009, we
also received payments of $1,147,000 from the ONR pursuant to the terms of a
grant providing expense reimbursement for continuing research and development
having to do with certain technology. As of September 2009, all of the work
under this contract was completed and we had received all related payments due.
In addition, during the year ended September 30, 2009, we received $191,000 from
a private placement of our Series A preferred stock. Any future financing we
obtain may further dilute or otherwise impair the ownership interest of our
current stockholders. If we fail to generate positive cash flows or obtain
additional capital when required, we could modify, delay or abandon some or all
of our plans. These factors, among others, raise substantial doubt about our
ability to continue as a going concern.


17





Comparison
of Annual Results of Operations





For the years ended September 30,
                                          
                                          
                                          $
                                          
                                          
                                          %2009
                                          
                                          
                                          2008
                                          
                                          
                                          Change
                                          
                                          
                                          ChangeContract
      Revenues
                                          
                                          $
                                          1,106,976
                                          
                                          
                                          $
                                          1,395,729
                                          
                                          
                                          
                                          (288,753
                                          )
                                          
                                          
                                          -21
                                          %Operating
      expensesResearch
      and development expense
                                          
                                          
                                          1,452,714
                                          
                                          
                                          
                                          2,990,406
                                          
                                          
                                          
                                          (1,537,692
                                          )
                                          
                                          
                                          -51
                                          %General
      and administrative expense
                                          
                                          
                                          4,308,627
                                          
                                          
                                          
                                          2,709,973
                                          
                                          
                                          
                                          1,598,654
                                          
                                          
                                          
                                          59
                                          %Total
      operating expenses
                                          
                                          
                                          5,761,341
                                          
                                          
                                          
                                          5,700,379
                                          
                                          
                                          
                                          60,962
                                          
                                          
                                          
                                          1
                                          %Loss
      from operations
                                          
                                          
                                          (4,654,365
                                          )
                                          
                                          
                                          (4,304,650
                                          )
                                          
                                          
                                          (349,715
                                          )
                                          
                                          
                                          -8
                                          %Other
      income (expense), netAmortization
      of deferred financing costs
                                          
                                          
                                          (426,582
                                          )
                                          
                                          
                                          (575,000
                                          )
                                          
                                          
                                          148,418
                                          
                                          
                                          
                                          26
                                          %Interest
      expense, net
                                          
                                          
                                          (1,433,367
                                          )
                                          
                                          
                                          (1,481,073
                                          )
                                          
                                          
                                          47,706
                                          
                                          
                                          
                                          3
                                          %Gain
      on extinguishment of debt
                                          
                                          
                                          —
                                          
                                          
                                          
                                          206,252
                                          
                                          
                                          
                                          (206,252
                                          )
                                          
                                          
                                          -100
                                          %Net
      Loss
                                          
                                          $
                                          (6,514,314
                                          )
                                          
                                          $
                                          (6,154,471
                                          )
                                          
                                          
                                          (359,843
                                          )
                                          
                                          
                                          6
                                          %





Revenue.Revenue
decreased in the year ended September 30, 2009 due to the winding up of activity
under the September 2008 ONR contract. As of September 2009, all of the work
under this contract was completed and we have received all related
payments.





Research and Development.Research and Development (“R&D”) expenses consist primarily of
salaries and other personnel-related expenses, consulting and other outside
services, laboratory supplies facilities costs and other costs.  We
expense all R&D costs as incurred.  R&D expense for the year
ended September 30, 2009 decreased as compared to the 2008 period, due to the
following:





·
            Personnel-related
      expenses decreased by approximately 50%, to $837,000 in 2009 compared to
      $1,668,000 in 2008 due to streamlining of operations and reductions in
      head count.





·
            Project
      and laboratory expenses, including direct expenditures relating to the ONR
      contract, decreased by 51% to $280,000 in 2009 compared to $573,000 in
      2008, due to reduced headcount and reduced ONR related
      expenditures.





·
            Stock-based
      compensation included in R&D expense decreased from $260,000 in 2008
      to $74,000 in 2009.





·
            Facilities
      expenses decreased by 36% to $234,000 in 2009 compared to $365,000 in
      2008, primarily due to a decrease in leased office space and reduced IT
      and computer related expenditures allocated on a headcount related
      basis.





·
            Depreciation
      expense included in R&D expense was $28,000 in 2009 as compared to
      $125,000 in 2008, due to laboratory assets reaching the end of their
      accounting useful lives.





We expect
our R&D expenses to increase in 2010 due to the anticipated increase in
product development activities related to technology improvements and specific
customer products





General and
Administrative.  General and administrative expense (“G&A”)
consist primarily of salaries and other personnel-related expenses to support
our R&D activities, non-cash stock-based compensation for general and
administrative personnel and non-employee members of our Board of Directors,
professional fees, such as accounting and legal, corporate insurance and
facilities costs.  The 59% increase in general and administrative
expense in 2009 compared to 2008 resulted primarily from the increase in
stock-based compensation in the current year.  Non-director Stock
compensation expense increased to $2,685,000 in 2009 from $491,000 in 2008. The
increase in stock compensation expense was due to stock options issued to
management and employees in September 2009. These stock options were issued to
encourage retention and compensate for furloughs and salary reductions in 2009
and the board of director’s compensation was recorded based on the
implementation of the compensation plan approved in February 2009 and effective
as of June 2008 and the issuance of stock options to directors in September
2009. We recorded to expense $485,000 and nil for director stock based
compensation for the year’s ended September 30, 2009 and 2008, respectively. We
recorded total board compensation of $635,000 in board of director’s in 2009 as
compared to nil in 2008. The increase in stock-based compensation in the current
year was partially offset by the following:


18





·
            G&A
      salaries decreased by 58% to $413,000 in 2009 from $985,000 in 2008
      primarily due to the decreased headcount of administrative
      staff.





·
            Professional
      services expenses decreased by approximately 54% to $442,000 in 2009 from
      $971,000 in 2008 primarily due to reductions in technical consulting,
      legal and accounting services.


·
            Marketing
      and other administrative expenses decreased by $115,000 to $92,000 in 2009
      from $207,000 in 2008 primarily due to decreases in marketing, public
      relations, and employee travel and moving
  expenses.





We expect
general and administrative expenses to increase in fiscal 2010 in support of our
expected increased R&D and product development activities.





Amortization of deferred financing
costs.  We incurred financing costs and fees related to our
outstanding loans.  The decrease in amortization of deferred financing
costs in 2009 compared to 2008 is due to the differing loan terms, fees and
resulting amortization of our loans with Agile and Capitoline in 2009 and loans
with EPD Investment Co. LLC (“EPD”) and CAMHZN Master LDC (“CAMHZN “) in
2008.





Interest expense, net. We
incurred interest expense on our outstanding loans.  The 3% decrease
in interest expense, net, in 2009 is primarily due to the differing loan terms
and resulting interest on our loans with Agile and Capitoline as compared with
those of the loans with EPD and CAMHZN for the same period in
2008.  We expect interest expense to decrease in 2010 as a result of
the lower loan balances and interest resulting from payment of loan and accounts
payable balances from funds received from anticipated long term funding
efforts.




Gain on extinguishment of Debt.A gain on extinguishment of debt in the amount of $206,000 was recorded
in the year ended September 30, 2008. There was no comparable extinguishment in
the year ended September 30, 2009.





Off-Balance
Sheet Arrangements





As of
September 30, 2009, we did not have any off-balance sheet
arrangements.


19


Item
8: Financial Statements and
Supplementary Data.





PAGEREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                
                
                21FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATAConsolidated
      Balance Sheets at September 30, 2009 and 2008
                
                
                22Consolidated
      Statements of Operations for the years ended September 30, 2009 and
      2008
                
                
                23Consolidated
      Statements of Cash Flows for the years ended September 30, 2009 and
      2008
                
                
                24Consolidated
      Statements of Stockholders’ Equity (Deficit) for the years ended September
      30, 2009 and 2008
                
                
                25Notes
      to Consolidated Financial Statements
                
                
                26


20












REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors


Neah
Power Systems, Inc.


Bothell,
Washington








We have
audited the accompanying consolidated balance sheets of Neah Power Systems, Inc.
and Subsidiary ("the Company") as of September 30, 2009 and 2008, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Neah Power Systems, Inc.,
and Subsidiary as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.




The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 2
to the consolidated financial statements, the Company had an accumulated deficit
of approximately $48,274,000 and negative working capital of approximately
$4,240,000 at September 30, 2009.  Additionally, the Company had
negative cash flows from operating activities of approximately $1,019,000 for
the year ended September 30, 2009, and has experienced recurring losses
from operations.  This raises substantial doubt about the Company's
ability to continue as a going concern.  Management's plans regarding
this matter are also described in Note 2.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.








/S/
PETERSON SULLIVAN LLP








Seattle,
Washington


January
13, 2010


21


NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
BALANCE SHEETS


September
30, 2009 and 2008


September 30,
                        
                        
                        September 30,2009
                        
                        
                        2008ASSETSCurrent
      assetsCash
      and cash equivalents
                        
                        $
                        20,223
                        
                        
                        $
                        59,661Contract
      receivable
                        
                        
                        0
                        
                        
                        
                        39,718Deferred
      financing costs, net
                        
                        
                        28,594
                        
                        
                        
                        —Prepaid
      expenses and other current assets
                        
                        
                        63,956
                        
                        
                        
                        43,847Total
      current assets
                        
                        
                        112,773
                        
                        
                        
                        143,226Property
      and equipment, net
                        
                        
                        43,919
                        
                        
                        
                        71,870Total
      assets
                        
                        $
                        156,692
                        
                        
                        $
                        215,096LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilitiesAccounts
      payable
                        
                        $
                        1,763,581
                        
                        
                        $
                        1,669,068Accrued
      expenses
                        
                        
                        521,439
                        
                        
                        
                        218,138Notes
      payable - related parties
                        
                        
                        102,416
                        
                        
                        
                        45,000Notes
      payable, net of debt discount of $8,745 and $0,
    respectively
                        
                        
                        1,776,299
                        
                        
                        
                        589,201Deferred
      revenue
                        
                        
                        189,500
                        
                        
                        
                        189,500Total
      current liabilities
                        
                        
                        4,353,235
                        
                        
                        
                        2,710,907Total
      liabilities
                        
                        
                        4,353,235
                        
                        
                        
                        2,710,907Commitments
      and contingenciesStockholders'
      equity (deficit)Series
      A preferred stock and additional-paid-in capital, convertible $0.001 par
      value, $0.04 stated value, 4,996,500 and 25,000,000 shares authorized,
      respectively, 0 and 20,217,100 shares issued and outstanding,
      respectively
                        
                        
                        0
                        
                        
                        
                        669,007Common
      stock and additional paid-in-capital $0.001 par value, 80,000,000 shares
      authorized, 34,833,598 and 8,646,318 shares issued and 34,377,890 and
      6,617,478 outstanding, respectively
                        
                        
                        44,077,472
                        
                        
                        
                        38,594,883Treasury
      stock, 112,590 common shares, at no costAccumulated
      deficit
                        
                        
                        (48,274,015
                        )
                        
                        
                        (41,759,701
                        )Total
      stockholders' equity (deficit)
                        
                        
                        (4,196,543
                        )
                        
                        
                        (2,495,811
                        )Total
      liabilities and stockholders' equity (deficit)
                        
                        $
                        156,692
                        
                        
                        $
                        215,096





See Notes
to Consolidated Financial Statements


22


NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS


For the
Years Ended September 30, 2009 and 2008


For the
                    
                    
                    For theYear Ended
                    
                    
                    Year EndedSeptember 30, 2009
                    
                    
                    September 30, 2008Contract
      Revenues
                    
                    $
                    1,106,976
                    
                    
                    $
                    1,395,729Operating
      expensesResearch
      and development expense
                    
                    
                    1,452,714
                    
                    
                    
                    2,990,406General
      and administrative expense
                    
                    
                    4,308,627
                    
                    
                    
                    2,709,973Total
      operating expenses
                    
                    
                    5,761,341
                    
                    
                    
                    5,700,379Loss
      from operations
                    
                    
                    (4,654,365
                    )
                    
                    
                    (4,304,650
                    )Other
      income (expense), netAmortization
      of deferred financing costs
                    
                    
                    (426,582
                    )
                    
                    
                    (575,000
                    )Interest
      expense, net
                    
                    
                    (1,433,367
                    )
                    
                    
                    (1,481,073
                    )Gain
      on extinguishment of debt
                    
                    
                    —
                    
                    
                    
                    206,252Net
      Loss
                    
                    $
                    (6,514,314
                    )
                    
                    $
                    (6,154,471
                    )Basic
      and diluted loss per common share
                    
                    $
                    (0.45
                    )
                    
                    $
                    (1.39
                    )Basic
      and diluted weighted average common shares outstanding
                    
                    
                    14,569,968
                    
                    
                    
                    4,425,335






23


NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the
Years Ended September 30, 2009 and 2008


For the Years ended September 30,2009
                            
                            
                            2008Cash
      flows from operating activities:Net
      loss
                            
                            $
                            (6,514,314
                            )
                            
                            $
                            (6,154,471
                            )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
                            
                            
                            27,688
                            
                            
                            
                            125,220Amortization
      of deferred financing costs
                            
                            
                            426,582
                            
                            
                            
                            575,000Share-based
      payments included in operating expenses
                            
                            
                            3,332,707
                            
                            
                            
                            804,011Non-cash
      forbearance fees on note payable
                            
                            
                            567,000
                            
                            
                            
                            -Amortization
      of debt discount and beneficial conversion feature on convertible
      debt
                            
                            
                            122,098
                            
                            
                            
                            216,299Gain
      on extinguishment of debt
                            
                            
                            -
                            
                            
                            
                            (206,252
                            )Interest
      paid with common stock or warrants
                            
                            
                            563,727
                            
                            
                            
                            1,097,657Loss
      on disposal of assets
                            
                            
                            263
                            
                            
                            
                            -Other
                            
                            
                            1,861
                            
                            
                            
                            -Changes
      in operating assets and liabilitiesContract
      receivable
                            
                            
                            39,718
                            
                            
                            
                            13,594Prepaid
      expenses and other current assets
                            
                            
                            (4,108
                            )
                            
                            
                            (4,335
                            )Accounts
      payable
                            
                            
                            114,513
                            
                            
                            
                            939,728Accrued
      expenses
                            
                            
                            303,300
                            
                            
                            
                            192,101Net
      cash used by operating activities
                            
                            
                            (1,018,965
                            )
                            
                            
                            (2,401,448
                            )Cash
      flows from investing activities:Issuance
      of notes receivable
                            
                            
                            (16,000
                            )
                            
                            
                            -Net
      cash used by investing activities
                            
                            
                            (16,000
                            )
                            
                            
                            -Cash
      flows from financing activities:Proceeds
      from sale of common stock
                            
                            
                            -
                            
                            
                            
                            100,000Net
      proceeds from notes payable
                            
                            
                            832,091
                            
                            
                            
                            1,095,000Proceeds
      from warrant exercises
                            
                            
                            -
                            
                            
                            
                            126,181Proceeds
      from sale of Series A convertible preferred stock
                            
                            
                            191,020
                            
                            
                            
                            707,586Principal
      payments on notes payable
                            
                            
                            (27,584
                            )
                            
                            
                            (280,000
                            )Other
                            
                            
                            -
                            
                            
                            
                            1,900Net
      cash provided by financing activities
                            
                            
                            995,527
                            
                            
                            
                            1,750,667Net
      change in cash and cash equivalents
                            
                            
                            (39,438
                            )
                            
                            
                            (650,780
                            )Cash
      and cash equivalents, beginning of period
                            
                            
                            59,661
                            
                            
                            
                            710,441Cash
      and cash equivalents, end of period
                            
                            $
                            20,223
                            
                            
                            $
                            59,661Supplemental
      cash flow informationCash
      paid for interest
                            
                            $
                            -
                            
                            
                            $
                            331Cash
      paid for income taxes
                            
                            $
                            -
                            
                            
                            $
                            -Noncash
      investing and financing activitiesIncrease
      in note payable due to forbearance fee
                            
                            $
                            567,000
                            
                            
                            $
                            -Shares
      issued in partial payment of forebearance fee on note
    payable
                            
                            $
                            327,000
                            
                            
                            $
                            -Deferred
      financing costs paid with issuance of common stock
                            
                            $
                            364,128
                            
                            
                            $
                            575,000Settlement
      of accounts payable with issuance of stock
                            
                            $
                            20,000
                            
                            
                            $
                            105,000Settlement
      of note payable with issuance of stock
                            
                            $
                            15,000
                            
                            
                            $
                            -Original
      issue discount on notes payable
                            
                            $
                            130,843
                            
                            
                            $
                            -Partial
      conversion of EPD Note Payable to common stock
                            
                            $
                            -
                            
                            
                            $
                            62,576Accounts
      payable financed with Note Payable
                            
                            $
                            -
                            
                            
                            $
                            89,201Conversion
      of note payable to Series A Preferred Stock
                            
                            $
                            -
                            
                            
                            $
                            50,000Issuance
      of common stock to Series A placement agent
                            
                            $
                            -
                            
                            
                            $
                            63,338Debt
      discount from issuance of warrants
                            
                            $
                            -
                            
                            
                            $
                            135,667






24





NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT )


For the Years Ended September 30,
2009 and 2008


Preferred Stock
                                                                    
                                                                    
                                                                    Common Stock and APIC
                                                                    
                                                                    
                                                                    Treasury Stock
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    TotalNumber
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Number of shares
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Number
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Accumulated
                                                                    
                                                                    
                                                                    Stockholders'of Shares
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    Outstanding
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    of Shares
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    Deficit
                                                                    
                                                                    
                                                                    Equity (Deficit)Balances
      at September 30, 2007
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    3,485,391
                                                                    
                                                                    
                                                                    $
                                                                    35,442,920
                                                                    
                                                                    
                                                                    
                                                                    (112,590
                                                                    )
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    (35,605,230
                                                                    )
                                                                    
                                                                    $
                                                                    (162,310
                                                                    )Sale
      of Series A Preferred Stock for cash
                                                                    
                                                                    
                                                                    18,967,100
                                                                    
                                                                    
                                                                    
                                                                    619,007
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    619,007Conversion
      of debt to Series A Preferred Stock
                                                                    
                                                                    
                                                                    1,250,000
                                                                    
                                                                    
                                                                    
                                                                    50,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    50,000Issuance
      of common stock to Series A placement agent
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    263,910
                                                                    
                                                                    
                                                                    
                                                                    63,338
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    63,338Sale
      of common stock for cash
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    300,000
                                                                    
                                                                    
                                                                    
                                                                    100,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    100,000Issuance
      of common stock pursuant to antidilution provisions of common stock
      purchase agreement
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,700,000
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    -Issuance
      of common stock with respect to debt financing fees
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    85,008
                                                                    
                                                                    
                                                                    
                                                                    575,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    575,000Issuance
      of common stock for note payable penalty consideration recorded as
      interest expense
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    705,277
                                                                    
                                                                    
                                                                    
                                                                    1,091,724
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,091,724Common
      stock issued upon exercise of warrants
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    18,927
                                                                    
                                                                    
                                                                    
                                                                    126,181
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    126,181Common
      stock issued upon partial conversion of note payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    23,466
                                                                    
                                                                    
                                                                    
                                                                    62,576
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    62,576Common
      stock issued for legal settlement
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    10,500
                                                                    
                                                                    
                                                                    
                                                                    105,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    105,000Issuance
      of restricted common stock to employees
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    25,000
                                                                    
                                                                    
                                                                    
                                                                    33,332
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    33,332Share
      based compensation on options and warrants
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    770,679
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    770,679Issuance
      of warrants in lieu of interest on note payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    5,933
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    5,933Allocation
      of proceeds from debt to warrants and beneficial conversion
      feature
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    216,299
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    216,299Other
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,901
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,901Net
      loss for the year ended September 30, 2008
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (6,154,471
                                                                    )
                                                                    
                                                                    
                                                                    (6,154,471
                                                                    )Balances
      at September 30, 2008
                                                                    
                                                                    
                                                                    20,217,100
                                                                    
                                                                    
                                                                    
                                                                    669,007
                                                                    
                                                                    
                                                                    
                                                                    6,617,478
                                                                    
                                                                    
                                                                    
                                                                    38,594,883
                                                                    
                                                                    
                                                                    
                                                                    (112,590
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (41,759,701
                                                                    )
                                                                    
                                                                    
                                                                    (2,495,811
                                                                    )Sale
      of Series A preferred stock
                                                                    
                                                                    
                                                                    4,775,500
                                                                    
                                                                    
                                                                    
                                                                    191,020
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    191,020Conversion
      of Series A preferred stock to common stock
                                                                    
                                                                    
                                                                    (24,992,600
                                                                    )
                                                                    
                                                                    
                                                                    (860,027
                                                                    )
                                                                    
                                                                    
                                                                    19,994,394
                                                                    
                                                                    
                                                                    
                                                                    860,027
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    -Shares
      issued in partial payment of forebearance fee on note
    payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,635,000
                                                                    
                                                                    
                                                                    
                                                                    327,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    327,000Shares
      issued in connection with settlement of accounts payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    199,998
                                                                    
                                                                    
                                                                    
                                                                    20,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    20,000Common
      stock and warrants issued for services
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    405,500
                                                                    
                                                                    
                                                                    
                                                                    127,252
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    127,252Share-based
      compensation related to stock options
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    3,205,455
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    3,205,455Shares
      issued for financing costs related to notes payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,620,470
                                                                    
                                                                    
                                                                    
                                                                    364,128
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    364,128Shares
      issued in payment of interest on notes payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,955,050
                                                                    
                                                                    
                                                                    
                                                                    563,727
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    563,727Issuance
      of common stock pursuant to antidilution provisions of common stock
      purchase agreement and settlement of note payable
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,950,000
                                                                    
                                                                    
                                                                    
                                                                    15,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    15,000Net
      loss for the year ended September 30, 2009
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (6,514,314
                                                                    )
                                                                    
                                                                    
                                                                    (6,514,314
                                                                    )Balances
      at September 30, 2009
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    0
                                                                    
                                                                    
                                                                    
                                                                    34,377,890
                                                                    
                                                                    
                                                                    $
                                                                    44,077,472
                                                                    
                                                                    
                                                                    
                                                                    (112,590
                                                                    )
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    (48,274,015
                                                                    )
                                                                    
                                                                    $
                                                                    (4,196,543
                                                                    )






25





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1. Business





We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors and potentially
lower costs.  Through our recent agreement to acquire SolCool One, LLC
(“SolCool”), we also intend to expand our portfolio of renewable energy
solutions that we intend to offer the market. SolCool is a leading supplier of
direct current (“DC”) solar air-conditioning systems for off-the-grid
applications. We intend to utilize SolCool’s worldwide distribution network and
developed market to facilitate the adoption of fuel cells and Remote Area Power
Supplies (“RAPS”), or integrated power solutions for similar applications of our
fuel cell products.





On July
27, 2009 and amended September 19, 2009, we entered into a first amended and
restated agreement and plan of merger (the “Amended Merger Agreement”) with
SolCool, Neah Power Acquisition Corp. (“Merger Sub”), our wholly-owned
subsidiary, and Mark Walsh, manager and founder of SolCool, pursuant to which
the Merger Sub will be merged into SolCool (the “Merger”).




Under the
terms of the Amended Merger Agreement, we will issue $500,000 of common stock,
or 476,000 shares of common stock, at a price of $1.05 per share, such shares of
common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24
months from the date of the Amended Merger Agreement, such vesting contingent
upon Mark Walsh remaining our employee and using his best efforts to achieve
SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and
shipments. In August 2009, we paid $10,000 towards the cash payment obligation.
In October 2009, we issued the initial payment of 238,000 shares. 238,000
additional common shares were issued in October 2009 and will be held in escrow
to ensure best-effort execution of SolCool’s obligations under the Amended
Merger Agreement. The closing of the merger is subject to other customary
closing conditions including the filing of the articles of merger with the
applicable states and was not completed for accounting purposes prior to
September 30, 2009 and thus the merger is not reflected in these consolidated
financial statements.


Note
2. Going Concern





We have
prepared our consolidated financial statements assuming that we will continue as
a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business.  We had $20,000 in
unrestricted cash on hand as of September 30, 2009. We had an accumulated
deficit as of September 30, 2009 of $48,274,000 and negative working capital of
$4,240,000. For the fiscal year ended September 30, 2009, we had negative cash
flow from operating activities of $1,019,000.





We have
limited capital resources and have sustained substantial losses, which raise
substantial doubt about our ability to continue as a going concern. In addition,
we now have multiple instances of actual and threatened litigation complaints
for claims of past-due vendor balances and other obligations. Some of these may
result in additional loss, expense, and management burden. We must, therefore,
raise sufficient capital to remedy these claims, fund our overhead burden, and
continue our R&D and product development efforts going forward. Without this
funding, our current cash balance is estimated to not support our operations
through January 2010. Although we have entered into and are negotiating
agreements for the sales of equity securities to meet our requirements, no
assurance can be given that we will be successful in obtaining adequate capital
on acceptable conditions or at all.





We have
relied primarily on sales of securities and proceeds from borrowings for
operating capital. During the fiscal year ended September 30, 2009, we raised
capital by selling nine promissory notes for a total of $1,056,000 with net
proceeds of $832,000 received upon closing.





During
the year ended September 30, 2009, we also received payments of $1,147,000 from
the Office of Naval Research (“ONR”) pursuant to the terms of a grant providing
expense reimbursement for continuing research and development having to do with
certain technology. As of September 2009, all of the work under this contract
was completed and we had received all related payments due.


26


Additionally,
we have received approximately $191,000 in our fiscal year 2009 of proceeds from
a private placement (see Note 7).





In July
2009, we entered into a Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with Optimus Capital Partners, LLC (“Optimus”), under which Optimus,
subject to certain conditions, has committed to purchase up to $10 million of
our Series B Preferred Stock (see Note 7). As of the date of this report, we
have not issued any tranche notices for funding




In
February 2009, we entered into a Securities Purchase Agreement with Agile
Opportunity Fund, LLC (“Agile”) and Capitoline Advisors Inc. (“Capitoline”)
under which we issued Original Issue Discount Term Convertible Notes (the
“Notes”) secured by all of our assets. The Notes are convertible into shares of
our common stock at $3.33 per share. As of September 30, 2009, we had received
proceeds net of Original Issue Discount (“OID”), prepaid interest, and financing
costs paid in cash of $676,000 from eight tranches in aggregate note amounts
totaling $732,000. Subsequent to September 30, 2009, we have received $125,000
in additional net proceeds in aggregate note amounts totaling
$164,000.




The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should we have to curtail operations or
be unable to continue in existence.





Note
3. Summary of Significant Accounting Policies





Principles of
Consolidation





Neah
Power Systems, Inc. was incorporated in Nevada on February 1, 2001, under the
name Growth Mergers, Inc. (“GMI”). In March 2006, GMI, at the time a public
shell company, acquired all of the outstanding capital stock of an operating
Washington corporation, Neah Power Systems, Inc. (“NPSWA”). Neah Power Systems,
Inc. of Nevada (“NPSNV”) is the legal parent of NPSWA, but these financial
statements, other than capital stock accounts, are those of NPSWA.The consolidated financial
statements include the accounts of NPSNV and its wholly-owned subsidiary, NPSWA.
Intercompany balances and transactions have been eliminated.





Reclassifications





Certain
prior year amounts have been reclassified to conform with the current year
presentation. There has been no impact on previously reported net loss or
stockholders’ equity (deficit).





Use of
Estimates




In
preparing financial statements conforming with accounting principles generally
accepted in the United States, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.




Cash and Cash
Equivalents




Cash and
cash equivalents consist of cash and short-term investments that are readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. On occasion, we maintain cash balances in excess of federal
insurance limits.  We have not experienced any losses related to these
balances, and believe our credit risk is minimal.


27


Fair Value of Financial
Instruments





We
consider the fair value of cash and cash equivalents, contract receivable,
accounts payable, notes payable and accrued expenses to not be materially
different from their carrying value due to their short-term
maturities.  Effective October 1, 2008, we adopted the authoritative
guidance for financial assets and liabilities which defines fair value, provides
guidance for measuring fair value and requires certain disclosures. At September
30, 2009, we had no financial assets or liabilities subject to fair value
measurement.





Depreciation and
Amortization





Depreciation
and amortization are calculated on a straight-line basis over the estimated
useful lives of the related assets, ranging from three to five years for
property and equipment. Leasehold improvements are amortized over the shorter of
their useful lives or term of the lease.





Impairment of Long-Lived
Assets





Our
long-lived assets, including property and equipment, are reviewed for carrying
value impairment at least annually or more frequently when events or changes in
circumstances indicate that the carrying amount may not be
recoverable.





Revenue
Recognition





Revenue
normally consists of grant and contract revenues. We recognize revenue when we
have persuasive evidence of an arrangement, the services have been provided to
the customer, the price for services is fixed and determinable, no significant
unfulfilled obligations exist and collectability is reasonably
assured.





Grant
revenues are recognized as the related research is conducted. Contract revenues
consist of amounts recorded from services provided to a single customer.
Revenues earned under such arrangements have been recorded as the services have
been provided. Upfront payments received under contractual arrangements are
deferred and recognized as revenue over the service period.





Unearned
revenues, recorded as deferred revenue in the consolidated balance sheets, were
$189,500 as of September 30, 2009 and 2008 (See Note 8).





Research and Development
Expense





Research
and development costs are expensed as incurred.





Income
Taxes





We follow
the liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and on the expected
future tax benefits to be derived from net operating loss carryforwards measured
using current tax rates. A valuation allowance is established if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.





Share-Based
Compensation





We use
the Black-Scholes option pricing model as our method of valuation for
share-based awards. Share-based compensation expense is recorded over the
requisite service period typically and based on the value of the portion of the
share-based award that will be earned and vested during the period, adjusted for
expected forfeitures. The estimation of share-based awards that will ultimately
vest requires judgment, and to the extent actual or updated results differ from
our current estimates, such amounts will be recorded in the period the estimates
are revised. Although the fair value of stock-based awards is determined in
accordance with authoritative accounting literature, the Black-Scholes option
pricing model requires the input of highly subjective assumptions, and other
reasonable assumptions could provide differing results. Our determination of the
fair value of stock-based awards on the date of grant using an option pricing
model is affected by our stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to, the expected life of the award and expected stock price volatility
over the term of the award.


28





Loss per
Share





Basic
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common stock shares outstanding
during the period. Diluted loss per share, which would include the effect of the
conversion of unexercised stock options, unexercised warrants to common stock,
preferred stock, and convertible debt is not separately computed because
inclusion of such conversions is antidilutive due to our net losses.
Accordingly, basic and diluted loss per share is the same.





Basic
weighted average common shares outstanding, and the potentially dilutive
securities excluded from loss per share computations because they are
antidilutive, are as follows for the years ended September 30, 2009 and
2008:





2009
                              
                              
                              2008Basic and diluted weighted
      average common stock shares outstanding
                              
                              
                              14,569,968
                              
                              
                              
                              4,425,335Potentially dilutive securities
      excluded from loss per share computations:Convertible
      Series A preferred stock
                              
                              
                              0
                              
                              
                              
                              16,175,702Convertible
      debt
                              
                              
                              292,039
                              
                              
                              
                              5,000Common stock
      options
                              
                              
                              2,862,745
                              
                              
                              
                              232,595Common stock purchase
      warrants
                              
                              
                              636,832
                              
                              
                              
                              463,873





Recent Accounting
Pronouncements





In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance on revenue arrangements with multiple deliverables that
are outside the scope of the software revenue recognition guidance (which does
not have impact on our accounting).  Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of a selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method.  The new guidance includes new
disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition.  We
believe adoption of this new guidance will not have a material effect on our
consolidated financial statements.




In June
2008, the Emerging Issues Task Force of the FASB issued authoritative guidance
on accounting for convertible instruments and warrants with provisions that
protect holders from declines in the stock price (“down-round” provisions),
which is effective for us beginning October 1, 2009. Instruments with such
provisions will no longer be recorded in equity. The guidance is to be applied
to outstanding instruments as of the beginning of the fiscal year in which the
guidance is applied. The cumulative effect of the change in accounting principle
shall be recognized as an adjustment to the opening balance of retained earnings
(or other appropriate components of equity) for that fiscal year, presented
separately. The cumulative-effect adjustment is the difference between the
amounts recognized in the statement of financial position before initial
application of authoritative guidance and the amounts recognized in the
statement of financial position upon its initial application. The amounts
recognized in the statement of financial position as a result of the initial
application are determined based on the amounts that would have been recognized
if the guidance had been applied from the issuance date of the instrument. In
connection with the convertible notes issued to Agile and Capitoline, which have
such down-round provisions, we are assessing the impact of adoption of this
guidance on our consolidated financial position and results of
operations.




In
December 2007, the FASB issued authoritative guidance on business combinations
to be applied prospectively for fiscal years beginning on or after
December 15, 2008. The statement also applies to the treatment of taxes
from prior business combinations. The statement requires more assets acquired
and liabilities assumed in future business combinations to be measured at fair
value as of the acquisition date. In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be re-measured to fair value each subsequent
reporting period. We adopted the new authoritative guidance with respect to
business combinations at the beginning of our 2010 fiscal year, or October 1,
2009, and believe the impact will be material as it applies to the accounting
treatment of our merger with SolCool.


29





In
December 2007, the FASB issued authoritative guidance on accounting for
collaborative arrangements which is effective for us beginning October 1, 2009
and will be applied retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date. The authoritative
guidance defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. The
adoption of this authoritative guidance will not have a material impact on our
consolidated financial position and results of operations.





Note
4. Property and Equipment





September 30,
                      
                      
                      September 30,2009
                      
                      
                      2008Laboratory
      equipment
                      
                      $
                      1,343,969
                      
                      
                      $
                      1,348,620Leasehold
      improvements
                      
                      
                      579,641
                      
                      
                      
                      579,641Computer
      equipment and software
                      
                      
                      109,632
                      
                      
                      
                      140,602Office
      furniture and equipment
                      
                      
                      56,000
                      
                      
                      
                      56,000Subtotal
                      
                      
                      2,089,242
                      
                      
                      
                      2,124,863Accumulated
      depreciation and amortization
                      
                      
                      (2,045,323
                      )
                      
                      
                      (2,052,993
                      )Property
      and equipment, net
                      
                      $
                      43,919
                      
                      
                      $
                      71,870





Note
5. Accrued Expenses





September 30,
                          
                          
                          September 30,2009
                          
                          
                          2008Vacation
      pay
                          
                          $
                          44,341
                          
                          
                          $
                          57,068Accrued
      interest
                          
                          
                          139,098
                          
                          
                          
                          47,049Accrued
      board compensation
                          
                          
                          149,788
                          
                          
                          
                          —Payroll
      and related taxes
                          
                          
                          117,860
                          
                          
                          
                          114,021Accrued
      taxes
                          
                          
                          70,352
                          
                          
                          
                          —Total
                          
                          $
                          521,439
                          
                          
                          $
                          218,138




Note
6. Notes Payable




Agile Opportunity Fund, LLC andCapitoline Advisors,
Inc.- In
February 2009, we entered into a Securities Purchase Agreement with each of
Agile and Capitoline under which we were to receive funding through the issuance
of Notes in the aggregate amount of $1,050,000 and an aggregate purchase price
of $900,000, with a maturity date of August 12, 2009 and prepaid interest at the
rate of 18% per annum. The interest rate increases to 36% upon the event of
default. The Notes are convertible into shares of our common stock at a
conversion price of $3.33 per share, at the discretion of the creditor, subject
to down-round adjustment to conversion price based on future common stock sales.
The Notes are subject to mandatory redemption in the event we enter into a
going-private transaction or we are sold. All shares issued under terms of the
Securities Purchase Agreement have been calculated using market value of stock
on the date of issuance. The Notes are secured by all our assets and, upon
conversion, have certain piggyback registration rights. In October 2009 we
entered into a 4th
Amendment to Securities Purchase Agreement with Agile and Capitoline whereby we
issued 10,000,000 shares of our common stock to be held as additional collateral
for the Notes issued to these lenders.


30




In
February, March and June 2009, we received funds from Agile pursuant to these
agreements in the aggregate face amount of $635,000 and an OID of $85,000 for an
aggregate purchase price amount of $550,000. The OID was recorded as debt
discount and has been amortized in its entirety as interest expense as of
September 30, 2009. In consideration for the Notes from Agile, approximately
1,568,000 common shares, valued at $242,000, are issuable under the terms of the
agreement. This was recorded as deferred financing costs and was amortized
through the maturity dates of the Notes. Under the terms of the agreement,
approximately 1,804,000 additional shares valued at $302,000 are also issuable
and have been recorded as interest expense. As of the date of this report, the
principal balances of the Notes remain unpaid and are past-due. We are
negotiating with Agile on forbearance. However, there is no assurance that Agile
will grant forbearance or refrain from taking actions against us available to
them under the agreement.





In July,
August and September 2009, we received funds from Capitoline in the aggregate
face amount of $321,000 and an OID of $46,000 for an aggregate purchase price
amount of $275,000. The OID was recorded as debt discount with $37,000 amortized
as interest expense as of September 30, 2009. The Notes issued to Capitoline in
July 2009 have a maturity date of August 12, 2009, the note issued in August
2009 has a maturity date of October 23, 2009, and the note issued in September
has a maturity date of November 28, 2009. In consideration for the Notes to
Capitoline, 52,064 common shares, valued at $122,000 are issuable under the
terms of the agreement. This has been recorded as deferred financing costs and
is being amortized over the term of the Notes. Under the terms of the agreement,
65,100 additional shares valued at $153,000 are also issuable and have been
recorded as interest expense.  As of September 30, 2009, the principal
balances of the Notes remain unpaid with principal balances of $204,000 past the
maturity dates. As of the date of this report, all Notes remain unpaid and are
past-due. We are negotiating with Capitoline on forbearance. However, there is
no assurance that Capitoline will grant forbearance or refrain from taking
actions against us available to them under the agreement.





CAMHZN Master LDC - In
November 2007, we sold a $500,000 12% convertible secured promissory note,
amended in May 2008, to mature on September 29, 2008, to CAMHZN Master LDC
(“CAMHZN”) fornet
proceeds of $465,000. The loan agreement provides for conversion of the
principal balance into shares of our common stock at a conversion price of
$100.00 per share, at the discretion of the creditor. The loan agreement also
provides the interest rate will increase to 110% in the event of default. In
January 2009, we entered into an amended loan agreement with CAMHZN, whereby,
effective December 31, 2008, CAMHZN agreed to forbear from exercising any
remedies available under its loan documents or applicable law through March
2009. In exchange for the forbearance, we agreed to pay a fee of $567,000 which
was added to the principal balance of the loan and payable in cash or stock at
our discretion. In February 2009, we released to CAMHZN, in partial payment of
the fee, 1,635,000 shares valued at $327,000, based on the market value of our
shares on the date issued. These shares were formerly held by CAMHZN as
collateral shares under the amended note agreement. As of the date of this
report, the principal balance of the note totaling $740,000 remains unpaid and
is past-due. Also, as of the February 2009 release of the 1,635,000 collateral
shares, there have been no additional shares issued as collateral. We are
negotiating with CAMHZN on further forbearance. However, there is no assurance
that CAMHZN will grant further forbearance or refrain from taking actions
against us available under the agreement.





Aspen Technologies - In July
2008, we entered into an agreement with Aspen Technologies (“Aspen”), our
vendor, whereby the accounts payable balances owed to Aspen would be converted
to a note payable up to a maximum of $100,000. Under the terms of the note
payable, we would pay Aspen eight equal payments of $12,500 per month beginning
in August 2008 until the outstanding principal balance was paid. In payment of
interest on the note, we issued five year warrants to purchase 9,000 shares of
our common stock at $1.00 per share (See Note 7). As of September 30, 2009 and
2008, the principal balance was $89,000. As of the date of this report, no
payments have been made. We have no assurance that Aspen will refrain from
taking actions against us under the terms of the note.





EPD Investment Co., LLC – On
November 9, 2007, we sold a 10% convertible secured promissory note
due January 1, 2009 to EPD Investment Co., LLC (“EPD”) for net proceeds of
$500,000. Effective February 2008, we amended our November 2007 loan agreements
with EPD to eliminate the requirement that we issue additional collateral shares
of five times the note balance, extended the security interest until the note
was paid in full, decreased the rate for conversion of the note to shares of
common stock to $2.67 and required EPD to convert the note prior to its public
sale of Equity Shares as defined in the agreements. In addition, EPD converted
$63,000 of the debt into approximately 23,000 shares of our common
stock.


31





In 2007,
we issued approximately 51,000 shares of common stock to EPD which represented
financing fees determined to be $350,000 based on the market value of the stock.
These financing fees were capitalized, recorded during the three months ended
December 31, 2007, and were fully amortized as of September 30, 2008. There was
a beneficial conversion feature associated with the EPD note
which was valued at $81,000 and expensed as interest expense on the
issuance date of the note as it was immediately convertible at that date. In
addition, a 5-year warrant to purchase 15,000 additional shares of our
common stock at $9.67 per share were recorded based on the relative fair value
as compared to the fair value of the debt at issuance. The relative fair value
was estimated at $98,000, recorded as additional paid-in capital,  and
as a discount to notes payable and was completely amortized to interest expense
as of September 30, 2008 using the effective interest method.





During
the year ended September 30, 2008, we became obligated for certain penalties
pursuant to defaults, as defined under the loan agreements with EPD, in the
amount of $513,000. These penalties were paid with approximately 300,000 shares
of our common stock to EPD, at various calculated prices per share based on the
market value of our common stock. The aggregate penalty was recorded as interest
expense during the year ended September 30, 2008.





Effective
as of September 2008, we consummated the transactions under an Agreement and
Release, dated August 2008, with NPS Investment Co., LLC (“NPS”), as assignor
of, and successor-in-interest to EPD, pursuant to which we paid NPS the cash
amount of $200,000 in consideration for the full satisfaction and cancellation
of the outstanding convertible secured promissory note and related obligations
having an outstanding principal balance of $357,000 and accrued interest and
penalties of $49,000 held by NPS. In connection with the agreement, NPS released
and terminated its liens on our assets and the pledged securities that secured
the payment of the note. We recorded a gain on extinguishment of debt of
$206,000 resulting from this transaction.





Related
Party Notes





In September 2008, we entered into a
note agreement with Summit Trading Limited (“Summit”). Under the agreement,
we borrowed $15,000 at no interest with a maturity date of October 2, 2008. The
balance was paid in full in August 2009. The principal balance is included in
notes payable, related parties on our consolidated balance sheet at September
30, 2008.





In September 2009, we received funds
from Daisy Rodriguez, a private investor married to the primary beneficiary of
Summit, in the aggregate face amount of $100,000 at 6% interest and an April 30,
2010 maturity date. The principal balance is included in notes payable, related
parties on our consolidated balance sheet at September 30, 2009.





In August
2008, we entered into a note agreement with our President and Chief Executive
Officer, Dr. Gerard C. D’Couto. Under the agreement, as amended, we borrowed
$30,000 with interest at 10% compounded monthly and a maturity date of March 29,
2009. As of September 30, 2009 and 2008 the remaining note balance was $2,416
and $30,000, respectively. The principal balance is included in notes payable,
related parties on our consolidated balance sheets.





Note
7. Stockholders’ Equity





Preferred Stock – Our board
of directors has the authority, without action by the stockholders, to designate
and issue up to 5,000,000 shares of preferred stock as of
September 30, 2009in one or more series and to designate the rights,
preferences and privileges of each series, any or all of which may be greater
than the rights of our common stock.





In June
2008, our board of directors approved the issuance of a minimum of 7,500,000
shares of Series A preferred stock (“Series A”) at a purchase price of $0.04 per
share, or a minimum of $300,000 in the aggregate, to investors under a Series A
Securities Purchase Agreement.  The holders of Series A were entitled
to payment of dividends, when, as and if declared by our Board of Directors, in
preference to the holders of common stock. Holders of Series A are also entitled
to a liquidation preference of $0.04 per share in the event of our liquidation,
dissolution or winding up. At the discretion of our board of directors, each
share of Series A may be converted into .80 shares of common stock. Except as
required by law, the Series A has no voting rights.  As of September
30, 2008, approximately $759,000 in gross proceeds had been received from the
offering. Further, a $50,000 note payable balance was converted into 1,250,000
shares of Series A during the year ended September 30, 2008. Based on these
transactions, 20,217,100 shares were issued under this agreement as of September
30, 2008 for net cash proceeds of approximately $708,000. During the year ended
September 30, 2009, we issued an additional 4,775,500 shares of Series A
Preferred and received approximately $191,000 in cash proceeds, net of financing
costs.


32




Jesup
& Lamont Securities Corporation is acting as placement agent in connection
with the private placement of the Series A and in 2008 received 264,000 shares
of our common stock valued at approximately $63,000 in payment of
services.





As of
September 30, 2009, all 24,992,600 outstanding shares of our Series A were
converted into 19,994,394 shares of our common stock.





Series B Preferred Stock – As
discussed in Note 2, in July 2009, we entered into the Purchase Agreement with
Optimus under which Optimus has committed to purchase up to $10,000,000 of our
Series B preferred stock. Under the terms of the Purchase Agreement, from time
to time until July 29, 2010 and at our sole discretion, we may present Optimus
with a notice to purchase such Series B Preferred Stock (the “Notice”). Optimus
is obligated to purchase such Series B Preferred Stock on the tenth trading day
after the Notice date, subject to satisfaction of certain closing conditions.
Optimus will not be obligated to purchase the Series B Preferred Stock (i) in
the event the closing price of our common stock during the nine trading days
following delivery of a Notice falls below 75% of the closing price on the
trading day prior to the date such Notice is delivered to Optimus, or (ii) to
the extent such purchase would result in Optimus and its affiliates beneficially
owning more than 9.99% of our common stock.




On
the date of delivery of each Notice under the Purchase Agreement, we will also
issue to Optimus five-year warrants to purchase our common stock at an exercise
price equal to the closing price of our common stock on the trading day prior to
the delivery date of the Notice. The number of shares issuable upon exercise of
the warrant will be equal in value to 135% of the purchase price of the Series B
preferred stock to be issued in respect of the related Notice. Each warrant will
be exercisable on the earlier of (i) the date on which a registration statement
registering for resale the shares of common stock issuable upon exercise of such
warrant becomes effective and (ii) the date that is six months after the
issuance date of such warrant.




The
Series B preferred stock is redeemable after the fourth anniversary of the date
of its issuance and is subject to repurchase: (i) at any time at our election,
or (ii) following the consummation of certain fundamental transactions, at the
option of a majority of the holders of the Series B preferred
stock.




Holders
of Series B preferred stock will be entitled to receive dividends which will
accrue in shares of Series B preferred stock on an annual basis at a rate equal
to 10% per annum from the issuance date. Accrued dividends will be payable upon
redemption of the Series B preferred stock. The Series B preferred stock ranks,
with respect to dividend rights and rights upon liquidation, senior to our
common stock.




The
Series B preferred stock and warrants and the common stock issuable upon
exercise of the warrants will not be or have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.





The terms
of the Purchase Agreement and form of Warrant, described above, are only a
summary of these documents and are qualified in their entirety by reference to
these documents, which are incorporated by reference to our Form 8-K filed on
July 30, 2009. As of the date of this report, we have not issued any tranche
notices for funding under the Purchase Agreement.





Common Stock –Holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of our common
stock.  Subject to the rights of the holders of any class of our
capital stock having any preference or priority over our common stock, the
holders of shares of our common stock are entitled to receive dividends that are
declared by our board of directors out of legally available funds.  In
the event of our liquidation, dissolution or winding up, the holders of our
common stock are entitled to share ratably in our net assets remaining after
payment of liabilities, subject to prior rights of preferred stock, if any, then
outstanding.  Our common stock has no preemptive rights, conversion
rights, redemption rights, or sinking fund provisions, and there are no
dividends in arrears or in default.  All shares of our common stock
have equal distribution, liquidation and voting rights and have no preferences
or exchange rights.


33





Common Stock Splits – In July
2009, we effectuated the 200:1 reverse common stock split approved by
shareholders in August 2008. In August 2009, FINRA approved our request for a
6:1 forward stock split of our common shares as approved by our board of
directors. The record date for this split was August 14, 2009. All common share
and per share amounts included in these consolidated financial statements have
been adjusted retroactively to reflect the effects of these splits.





Upon the
implementation of the 200:1 reverse common stock split, the authorized shares of
common stock were reduced to 20 million shares from 500 million. In July 2009,
our board of directors approved the increase in authorized common stock from
20,000,000 shares to 80,000,000 shares.




Common Stock Issuances –
During the year ended September 30, 2009, we issued approximately 396,000 shares
of our common stock for services valued at approximately $69,000 based on the
market value of the stock. During the year, we also issued approximately 200,000
shares of our common stock, valued at $20,000, in connection with the settlement
of outstanding accounts payable balances.


Pursuant
to the terms of our convertible note payable agreement with CAMZHN (see Note 6),
in February 2009 we issued 1,635,000 shares of our common stock valued at
$327,000 based on the market value of the stock as a partial forbearance fee
related to our note payable.  In addition, pursuant to the terms of
our convertible note payable agreements with Agile and Capitoline (see Note 6),
during the year ended September 30, 2009, we issued 1,620,470 shares of our
common stock valued at approximately $364,100, based on the market value of the
stock, for financing fees and 1,869,334 shares of our common stock valued at
$455,200, based on the market value of the stock, for interest.





In April
2008, Summit, one of our largest shareholders, purchased 300,000 shares of
common stock for $0.33 per share for a total of $100,000. The purchase agreement
provided standard piggyback registration rights and certain down-round
protection, in that additional shares would be issued to Summit in the event of
subsequent financings at an effective price per share less than $0.33, subject
to certain exceptions.




In
September 2008 and August 2009, we issued 1,700,000 and 1,950,000 additional
shares of common stock to Summit pursuant to the terms of the anti-dilution
clause of the agreement and, for the August 2009 stock issuance, in full payment
of a $15,000 note due Summit. Effective August 2009, the anti-dilution clause of
the purchase agreement was terminated.
  During
the year ended September 30, 2008, CAMHZN received approximately 165,000 shares
of common stock, valued at $275,000, in payment of interest and penalties as
provided for in the loan documents discussed in Note 6. All common shares
issued were recorded to interest expense during the year ended September 30,
2008.  We also issued 33,750 shares of common stock in November 2007
to CAMHZN for financing fees of $225,000 based on the market value of the stock.
Additionally, pursuant to the loan agreement with CAMHZN, the Company received
correspondence from CAMHZN on May 13, 2008 demanding an additional 1,635,000
shares of common stock to raise their number of collateral shares in order to
comply with the 500% debt coverage requirement included in the loan agreement.
Effective May 22, 2008, CAMHZN agreed to forbear from exercising any remedies
available under its loan documents or applicable law for a period ending on
September 29, 2008, in exchange for the release of 240,000 shares of common
stock which were valued at $304,000 and were recorded as interest expense in the
year ended September 30, 2008.




As
discussed in Note 6, in November 2007 we issued approximately 51,000 shares of
common stock to EPD for financing fees of $350,000 based on the market value of
the stock. In addition, during 2008, we issued approximately 300,000 shares of
our common stock to EPD, at various calculated prices per share based on the
market value of our common stock, in payment of certain penalties pursuant to
defaults, as defined under the loan agreements with EPD. The aggregate penalty
of $513,000 was recorded as interest expense during the year ended September 30,
2008.  In February 2008, EPD converted $63,000 of our outstanding note
payable into 23,466 shares of our common stock.


34





Long Term Incentive
CompensationPlan
– In August of 2008, we amended our Long Term Incentive Compensation Plan
(“the Plan”) first adopted in March 2006. Under the amended Plan, the maximum
number of shares issuable is 6,000,000. The Plan is to continue for a term of
ten years from the date of its adoption. The Plan is administered by our board
of directors. We have outstanding stock options for 2,862,745 shares to
employees, the board of directors, and advisors and consultants, and none of
these options have as of yet been exercised. Options are exercisable for ten
years from date of grant. Options granted in excess of 6,000,000 will require
shareholder approval.  For the years ended September 30, 2009 and
2008, there were 2,841,700 and nil stock options issued, respectively, under the
amended Plan.





Share-Based Compensation - To
calculate the value of share-based compensation, we use the Black-Scholes fair
value option-pricing model with the following weighted average assumptions for
options and warrants granted during the year ended September 30, 2009 and
2008:




2009
                                  
                                  
                                  2008Risk
      free interest rate
                                  
                                  
                                  2.9
                                  %
                                  
                                  
                                  3.2
                                  %Expected
      dividend yield
                                  
                                  
                                  0.0
                                  %
                                  
                                  
                                  0.0
                                  %Volatility
                                  
                                  
                                  238.1
                                  %
                                  
                                  
                                  136.6
                                  %Expected
      life in years
                                  
                                  
                                  9.6
                                  
                                  
                                  
                                  7.2




Share-based
payments recognized as operating expense are as follows for the year ended
September 30, 2009 and 2008:





2009
                              
                              
                              2008Common
      stock options
                              
                              $
                              3,205,455
                              
                              
                              $
                              693,766Common
      stock purchase warrants
                              
                              
                              59,383
                              
                              
                              
                              76,913Issuance
      of common stock
                              
                              
                              67,869
                              
                              
                              
                              33,332Total
      share based payments
                              
                              $
                              3,332,707
                              
                              
                              $
                              804,011Total
      share based payments were recorded as follows:Research
      and development expense
                              
                              
                              86,346
                              
                              
                              
                              282,873General
      and administrative expense
                              
                              
                              3,246,361
                              
                              
                              
                              521,138$
                              3,332,707
                              
                              
                              $
                              804,011





We
awarded grants of restricted common stock to employees, net of cancellations,
totaling 9,000 and 25,000 shares and valued at approximately $25,200 and $33,300
for the years ended September 30, 2009 and September 30, 2008, respectively. All
shares were fully vested and recognized as expense within their respective
years.





In
September 2009, we cancelled approximately 75,000 stock options previously
issued to employees having a weighted average exercise price of $8.99 and, in
September 2009 we issued these employees an aggregate of 2,376,250 new options
having an exercise price of $1.28 per share, which was equal to the fair value
of our common stock on the date of grant. As a result of these transactions
which is being accounted for as a modification, we recognized an incremental
credit of $96,000 to stock-based compensation in 2009, of which $9,000 was
recorded to R&D expense and $87,000 was recorded to G&A
expense.





Warrants – At September 30,
2009, there were warrants outstanding for the purchase of approximately 637,000
shares of our common stock at a weighted average exercise price of $25.14 per
share.  During the year ended September 30, 2009, we issued warrants
to purchase a total of approximately 173,000 shares of common stock at a
weighted average exercise price of $1.64 per share for
services.  Share-based compensation was calculated using the
Black-Scholes model.


35





In July
2008, in payment of interest on a note payable with Aspen, we issued five year
warrants to purchase 9,000 shares of our common stock at $1.00 per share (see
Note 6). Those warrants vested immediately in 2008 and were valued at
$5,933.





In
February 2008, three-year warrants to acquire 22,500 shares of common stock were
granted to the three new Strategic Advisory Board members in the amount of 7,500
each. Of the warrants granted, 15,000 are exercisable at $3.33 per share and
7,500 are exercisable at $2.00 per share. Each person paid $100 for their
warrant and all warrants vest in full one year from the date of grant.
Share-based compensation of $33,155 was calculated using the Black-Scholes
model, of which $19,826 was recorded to expense for the year ended September 30,
2008, and the remaining balance was amortized during the year ended September
30, 2009.





The
offering of shares of common stock that was consummated in May 2007 included
five-year warrants to acquire a total of 289,013 shares of common stock. One
third of the total number of warrants is exercisable at $36.67, $53.33 and
$66.67 respectively. Such warrants are generally exercisable only by the
original purchaser. The exercise price of the warrants was reduced to $6.67 per
share for six days in October 2007 in order to induce exercise and we issued
18,927 common shares for proceeds of $126,000.




A summary
of warrants granted and outstanding at September 30, 2008 and 2009
follows:





Warrants
                          OutstandingOutstanding
      at September 30, 2007
                        
                        
                        569,951Grants
                        
                        
                        54,000Cancellations
                        
                        
                        (141,150
                        )Exercised
                        
                        
                        (18,927
                        )Outstanding
      at September 30, 2008
                        
                        
                        463,874Grants
                        
                        
                        172,958Outstanding
      at September 30, 2009
                        
                        
                        636,832





Warrants
outstanding at September 30, 2009 expire at various dates from July 2010 to
August 2014.





The
following table summarizes stock option activity during the years ended
September 30, 2009 and 2008:




Options
                  Outstanding
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at September 30, 2007 (246,896 exercisable options )
                
                
                321,146
                
                
                $
                9.67Grants
      during the year ended September 30, 2008
                
                
                33,150
                
                
                
                1.33Forfeitures
      and expirations
                
                
                (121,701
                )
                
                
                23.00Outstanding
      at September 30, 2008 (197,580 exercisable options)
                
                
                232,595
                
                
                $
                9.67Grants
      during the year ended September 30, 2009
                
                
                2,841,700
                
                
                
                1.29Forfeitures
                
                
                (136,634
                )
                
                
                6.36Cancellations
                
                
                (74,916
                )
                
                
                8.99Outstanding
      at September 30, 2009 (2,592,475 exercisable options)
                
                
                2,862,745
                
                
                $
                1.31




The
weighted average fair value of the options granted during the years ended
September 30, 2009 and 2008 was $1.29 and $1.33 respectively and the weighted
average remaining contractual lives of outstanding options at September 30, 2009
was 10 years. For exercisable and vested options as of September 30, 2009, the
weighted average contractual term is also 10 years.


36





The
aggregate intrinsic value of the options outstanding represents the total pretax
intrinsic value for all “in-the-money” options (i.e., the difference between our
closing stock price on the last trading day of September 30, 2009 and the
exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options on
September 30, 2009. At September 30, 2009, there were 3,150 options with
exercise prices below the closing price with an intrinsic value of
$2,000.





As of
September 30, 2009, we had approximately $331,000 of total unrecognized
compensation cost related to non-vested stock-based awards granted under all
equity compensation plans. Total unrecognized compensation cost will be adjusted
for any future changes in estimated forfeitures. We expect to recognize this
cost from 2010 through 2012.





Employee Stock Purchase Plan - In
August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase
Plan”). The number of shares of common stock that may be sold pursuant to the
Stock Purchase Plan shall not exceed, in the aggregate, 900,000 shares of Common
Stock. As of September 30, 2009, no shares have been purchased under the Stock
Purchase Plan





Note
8. Development Agreement with a Customer





We were
party to a development agreement with a customer to develop proof-of-concept
fuel cell power source prototypes (Phase I) and, if successful and elected by
the customer, the development of fuel cell power sources (Phase II). We received
$344,000 for certain services in Phase I and recognized revenue of $154,500 for
the completion of the initial Phase I requirement in 2004 and deferred the
balance of $189,500 until the related services are rendered and the final Phase
I milestone is reached. We believe the final Phase I milestone was reached in
2009. However, customer acceptance has not yet occurred and the balance of
$189,500 has not yet been recognized as revenue.





Note
9.  Commitments and Contingencies





Our
corporate headquarters and laboratory facilities are leased under a lease
agreement which expired March 31, 2009 and was extended to September 30, 2009.
We currently lease on a month-to-month basis and intend to negotiate with the
landlord for a lease extension. As of September 30, 2009, monthly minimum rental
and related payments were approximately $17,000 per month. Rental expense was
approximately $192,000 and $163,000 for the years ended September 30, 2009 and
2008, respectively.





We
included an expense of $314,000 in our consolidated financial statements for the
year ended September 30, 2008 pertaining to severance obligations and related
costs related to our former Chairman, President and Chief Executive Officer,
Paul Abramowitz who resigned as President and CEO in January 2008 and as a
director in April 2008. This amount is included in accounts payable at September
30, 2009 and 2008, however, we contest that any payment is due under our
agreements with Mr. Abramowitz and, if successful, will have minimal or no
liability for such amounts.





Note
10. Related Party Transactions





See
Note 6 regarding related party note agreements.





During
the year ended September 30, 2008, we issued 7,500 shares of common stock to
David M. Barnes, formerly our Chief Financial Officer, in payment for services
rendered. The shares were valued at $10,000.





Note
11. Income Taxes





Significant
components of our deferred tax assets and liabilities and related valuation
allowances are as follows as of September 30, 2009 and 2008:




37




2009
                          
                          
                          2008Deferred
      tax assets (liabilities):Accelerated
      depreciation
                          
                          $
                          5,000
                          
                          
                          $
                          128,000Research
      & development credit
                          
                          
                          973,000
                          
                          
                          
                          916,000Accrued
      vacation
                          
                          
                          12,000
                          
                          
                          
                          19,000Accrued
      severance and wages
                          
                          
                          139,000
                          
                          
                          
                          119,000Shared-based
      compensation expense
                          
                          
                          2,174,000
                          
                          
                          
                          1,072,000Net
      operating loss carryforwards
                          
                          
                          13,770,000
                          
                          
                          
                          12,548,000Total
      net deferred tax assets
                          
                          
                          17,073,000
                          
                          
                          
                          14,802,000Valuation
      allowance
                          
                          
                          (17,073,000
                          )
                          
                          
                          (14,802,000
                          )Deferred
      tax assets, net of valuation allowance
                          
                          $
                          -
                          
                          
                          $
                          -




We have
established a valuation allowance as of September 30, 2009 and 2008, due to the
uncertainty of future realization of the net deferred tax assets. During the
years ended September 30, 2009 and 2008, the valuation allowance increased by
$2,271,000 and $2,395,000, respectively.


The
difference between the tax at the statutory federal tax rate and no tax
provision for the years ended September 30, 2009 and 2008 is primarily due to
our full valuation allowance against our deferred tax assets.





At
September 30, 2009, we had net operating loss carryforwards for Federal
income tax purposes of approximately $40,500,000 and research and development
credit carryforwards of approximately $973,000 available to offset future income
that expire through 2028. Utilization of the carryforwards is dependent on
generating future taxable income and may be limited by Internal Revenue Code
Section 382 due to the more than 50% change in control in NPSWA's ownership in
its acquisition in March 2006.




Note
12. Subsequent Events through January 13, 2010 (the date these financial
statements were issued).





Agile Opportunity Fund, LLC andCapitoline Advisors,
Inc.- In
October and November 2009, we issued additional notes to Capitoline in the
aggregate face amount of $164,000, and aggregate purchase price amount of
$141,000. Under the terms of the Securities Purchase Agreement, 166,000
additional shares valued at $156,000 are also issuable and will be recorded as
interest expense.





In
November 2009, we also entered into a 4th
Amendment to Securities Purchase Agreement with Agile and Capitoline whereby we
issued 10,000,000 shares of our common stock to be held as additional collateral
for the Notes issued to these lenders.





SolCool Shares. In October
2009, under the terms of the Amended Merger Agreement with SolCool, we issued
238,000 shares of our common stock to the owners of SolCool. 238,000 additional
common shares were issued in October 2009 and will be held in escrow to ensure
best-effort execution of SolCool’s obligations under the Amended Merger
Agreement. The closing of the merger is subject to other customary closing
conditions including the filing of the articles of merger with the applicable
states.





Summit Agreement.In October
2009, we entered into an advisory services agreement with Summit whereby Summit
will indentify, introduce, engage, and compensate investor relations and/or
public relations firms (“Firms”) on our behalf. We issued Summit 1,650,000
shares under the terms of this agreement, 95% of the value of which is to
represent compensation to be applied against services provide by
Firms.





Daisy Rodriguez. In October
2009, we received $25,000 in additional funds from Daisy Rodriguez, a private
investor married to the primary beneficiary of Summit. The balance will be added
to the aggregate face amount of the $100,000 note payable currently outstanding
(See Note 6) and will have the same 6% interest and April 30, 2010 maturity
date.


38


ITEM
9: Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.




There are
not and have not been any disagreements between us and our accountants on any
matter of accounting principles, practices or financial statement
disclosure.




ITEM
9A(T): Controls and
Procedures.




(a)
            Disclosure Controls and
      Procedures.  As of the end of the period covered by this
      Annual Report on Form 10-K, we carried out an evaluation, under the
      supervision and with the participation of senior management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of the  design and operation of our disclosure controls and
      procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”).  Based upon that evaluation, our CEO and CFO concluded
      that our disclosure controls and procedures were not effective in
      recording, processing, summarizing and reporting, on a timely basis,
      information required to be disclosed by us in the reports that we file or
      submit under the Exchange Act due to the material weaknesses in our
      internal control over financial reporting.  A discussion of the
      material weaknesses in our controls and procedures is described
      below.





(b)
            Internal Control over
      Financial Reporting.  There have been no changes in our
      internal controls over financial reporting or in other factors during the
      fourth fiscal quarter ended September 30, 2009 that materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting subsequent to the date we carried out our most recent
      evaluation.





(c)
            Management Report on Internal
      Control.  Management is responsible for establishing and
      maintaining adequate internal control over financial
      reporting.  Internal control over financial reporting, as such
      term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,
      is a process designed by, or under the supervision of, our CEO and CFO, or
      persons performing similar functions, and effected by our board of
      directors, management or other personnel, to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with generally
      accepted accounting principles.  Our management, with the
      participation of our CEO and CFO, has established and maintained policies
      and procedures designed to maintain the adequacy of our internal control
      over financial reporting, and include those policies and procedures that
      :





·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;


·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and


·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on the interim or annual consolidated financial
      statements.





Management
has used the framework set forth in the report entitled Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) to evaluate the effectiveness of our internal
control over financial reporting. Management was unable to implement its
remediation plans during 2009 due to cost considerations. As a result of the
material weaknesses described below, management has concluded that our internal
control over financial reporting was not effective as of September 30,
2009.





Management
has determined that, as of the September 30, 2009 measurement date, there were
deficiencies in both the design and the effectiveness of our internal control
over financial reporting. Management has assessed these deficiencies and
determined that there were various material weaknesses in our internal control
over financial reporting. As a result of our assessment that material weaknesses
in our internal control over financial reporting existed as of September 30,
2009, management has concluded that our internal control over financial
reporting was not effective as of September 30, 2009. The existence of a
material weakness or weaknesses is an indication that there is a more than
remote likelihood that a material misstatement of our financial statements will
not be prevented or detected in a future period.


39





Management
has assigned a high priority to the short-and long-term improvement of our
internal control over financial reporting.  We have listed below the
nature of the material weaknesses we have identified, the steps we are taking to
remediate these material weaknesses and when we expect to have the material
weaknesses remediated.




·
            Inadequate
      or ineffective policies for documenting
  transactions;


·
            Inadequate
      or ineffective design of policies and execution of processes related to
      accounting for transactions; and


·
            Inadequate
      or ineffective internal control environment related to segregation of
      duties.




We intend
to design and implement policies and procedures to remediate the material
weaknesses in our internal control over financial reporting in fiscal
2010.





This
annual report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all errors or misstatements and all fraud. Therefore, even
those systems determined to be effective can provide only reasonable, not
absolute, assurance that the objectives of the policies and procedures are
met.  Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





ITEM
9B.  Other
Information.





None




40




PART
III





Item
10: Directors, Executive
Officers and Corporate Governance.




The
following table sets forth the names and ages as of January 12, 2010 of our
directors and executive officers:




Name
                
                Age
                
                PositionDr.
      Gerard C. D’Couto
                
                
                43
                
                President
      and Chief Executive Officer, DirectorJon
      M. Garfield
                
                
                46
                
                DirectorEduardo
      Cabrera
                
                
                50
                
                DirectorMichael
      Selsman
                
                
                73
                
                DirectorPaul
      Sidlo
                
                
                53
                
                DirectorStephen
      M. Wilson
                
                
                54
                
                Chief
      Financial OfficerJames
      H. Smith
                
                
                
                
                Former
      DirectorRobert
      J. McGovern
                
                
                
                
                Former
      DirectorMichael
      Solomon
                
                
                
                
                Former
      DirectorLeroy
      Ohlsen
                
                
                
                
                Former
      Director





Set forth
below is biographical information concerning our directors and executive
officers.





Dr. Gerard C.
(Chris) D’Coutohas
served as a member of our board of directors since January 28, 2008 and as our
Chief Executive Officer and President since February 2008.  Until such
time, he served as our Chief Operating Officer and Executive Vice President
since September 2007. Prior to joining us, Dr. D’Couto served as senior director
of marketing at FormFactor Inc. from January 2006, where he headed the launch of
NAND flash and DRAM sort probe cards. Prior to that, Dr. D’Couto had a nine-year
tenure at Novellus Systems, Inc., with positions of increasing responsibility
ranging from product management to technology development and sales. Prior to
that, Dr. D’Couto worked at Varian Associates and as a consultant to Intel
Corporation. Dr. D’Couto received a bachelor’s degree in chemical engineering
from the Coimbatore Institute of Technology in India and also received a
master’s and a doctoral degree in chemical engineering from Clarkson University
in New York. Dr. D’Couto also earned an MBA from the Haas School of Business at
the University of California, Berkeley.




Jon M.
Garfieldhas
served on our board of directors since May 2008.  He has served as
Chief Executive Officer of technology company Clearant, Inc. (OTCBB: CLRA) since
January 2007 and as Chief Financial Officer at Clearant since September
2006.  Mr. Garfield has served as a member of its board of directors
since May 2007.  From September 2001 through 2006, Mr. Garfield served
as an independent financial consultant, including advising as to SEC reporting
obligations and Sarbanes-Oxley compliance. From 1998 until 2001, he served as
Chief Financial Officer of a telecom service provider and a software developer.
From 1996 to 1998, he served as Vice President of Acquisitions for formerly
NYSE-listed ground transportation consolidator Coach USA, Inc. From 1991 to
1996, Mr. Garfield served as Corporate Assistant Controller of Maxxim Medical,
Inc., a formerly New York Stock Exchange listed manufacturer and distributor.
During 1986 to 1991, Mr. Garfield practiced public accounting with Arthur
Andersen and PricewaterhouseCoopers. Mr. Garfield received a Bachelor of
Business Administration in Accounting from University of Texas,
Austin.





Ed
Cabrera has served on our board of directors since June 2009. Mr.
Cabrera has worked on Wall Street for over 20 years, including his current
position as Head of Investment Banking at Jesup & Lamont Securities
Corporation where he has been employed since July 2005, at J. Giordano
Securities Group from March 2004 until July 2005 and with Merrill Lynch as
Managing Director and Head of Latin America from May 1993 until December
2002.  Since 2003, Mr. Cabrera has focused on providing advisory
services and capital market access for emerging growth companies. Mr. Cabrera
was selected for the 2000 Millenium edition of Who’s Who In Finance and in 1999
was named to the All-America team by Institutional Investor. Mr. Cabrera
received his Bachelor of Science from the University of Florida in Engineering
and Material Sciences where he graduated with honors and received his MBA in
1987 from Harvard Business School.


41


Michael
Selsman has served on our board of directors since September 2009. Mr.
Selsman writes and edits financial analyses, annual reports,
stockbroker-investor overviews, corporate presentations, speeches, books and
media communications for public and private companies. He has an extensive
background in marketing, public relations, fund raising, media relations,
strategic planning, corporate identity/image, public policy advocacy, employee
communications and advertising. For the last 20 years, Mr. Selsman has been a
principal of Public Communications Co., of Beverly Hills, CA and for the last
five years has been President and CEO of Archer Entertainment Media
Communications, Inc. (AEMC:PK).





Paul Sidlo
has served on our board of directors since July 2009. Since 1987 Mr. Sidlo has
been CEO and a director at Rez-N-8 Productions, Inc. (“REZN8”), a company that
he founded that designs and creates high-end graphics, multi-media branding and
graphical image systems that are employed to build and promote a brand. REZN8
served as principal outside design consultant for Microsoft, responsible for
graphical user interface (GUI) development and production and development for
XBOX, XBOX2, XBOX LIVE, MSN9&10, HOME MEDIA CENTER, WindowsXP and
Microsoft’s Home of the Future. Mr. Sidlo is also Chief Creative Officer and a
director of EMN8, a company that he co-founded in 2002 that is involved in the
development and use of real-time rich media to better manage customer
relationships in a variety of industries.





Stephen M.
Wilson, CPA, CMAhas
served as our Chief Financial Officer since July 2008 and Corporate Secretary
and Controller since June 2008.  From May 2007 until February 2008, he
served as Chief Financial Officer of Impart Media Group, Inc., a publicly-held
digital signage technology company.  From July 2006 until his
promotion to Chief Financial Officer of Impart, he served as its Vice President
of Finance/Corporate Controller. Impart Media Group, Inc. consented to
bankruptcy relief on May 21, 2008 following a petition for involuntary
bankruptcy filed on February 14, 2008 in the United States Bankruptcy Court for
the Southern District of New York. From 2004 to 2006, he served as Division
Controller for Rabanco Companies, a division of Allied Waste. From 2000 to 2004,
Mr. Wilson was owner and President of Strategic Finance & Accounting
Services, Inc. He is a licensed Certified Public Accountant and is also a
Certified Management Accountant and holds dual Bachelor of Arts degrees in
Accounting and Business Administration from Western Washington
University.




Composition
of Board of Directors





Our
bylaws authorize no less than one (1) and no more than seven (7)
directors.  We currently have five directors on our board of directors
(the “Board”).





Term
of Office





Our
directors are appointed for one-year term to hold office until the next annual
general meeting of our shareholders or until removed from office in accordance
with our bylaws.  Our officers are appointed by the Board and hold
office until removed by the Board.





Family
Relationships




None.




Director
or Officer Involvement in Certain Legal Proceedings




None.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who beneficially own more than 10% of our common stock
to file with the SEC initial reports of ownership and reports of changes in
ownership of our common stock. These insiders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file, including Forms 3,
4 and 5. Based solely upon our review of copies of such forms that we have
received, and other information available to us, to the best of our knowledge
each of the following persons was late in filing one Form 4: Gerard C. D’Couto,
Stephen M. Wilson, Eduardo Cabrera, Jon Garfield, Paul Sidlo, and Michael
Selsman.




42




Code
of Ethics Disclosure




We have a
Code of Ethics that applies to our directors and officers or others performing
similar functions. Any person can receive a free copy of our Code of Ethics upon
written request.





Audit
Committee of the Board of Directors





We have
an audit committee of the Board consisting of one independent director, Jon M.
Garfield. The Audit Committee functions in part as an independent and objective
party with oversight of our financial reporting process and internal
controls.




Compensation
Committee of the Board of Directors




Compensation
Committee functions are currently administrated by the full Board. The
Compensation Committee formerly consisted of James H. Smith and Robert J.
McGovern until their departure from the Board in 2009. The functions of the
Compensation Committee are to review and approve the goals of the Chief
Executive Officer, to review and approve salaries, bonuses and other benefits
payable to our executive officers and to administer our Long Term Incentive
Compensation Plan and Employee Stock Purchase Plan.




Nominating
Committee of the Board of Directors




Nominating
Committee functions are currently administrated by the full Board. The
Nominating Committee formerly consisted of James H. Smith and Michael F. Solomon
until their departure from the Board in 2009. The Nomination Committee is
responsible for proposing a slate of directors for election by the stockholders
at each annual stockholders meeting and for proposing candidates to fill any
vacancies.


43


ITEM
11: EXECUTIVE COMPENSATION




The
following Summary Compensation Table sets forth certain information concerning
the compensation of (i) our Chief Executive Officer, (ii) our Chief Financial
Officer, and (iii) our other most highly compensated executive officers (“Named
Executive Officers”) during the fiscal years ended September 30, 2009 and
2008:




Summary
Compensation Table





Name and
                                                                                                                                  Principal
                                                                                                                                  Position
                                                                                                                                
                                                                                                                                Year
                                                                                                                                
                                                                                                                                Salary ($)
                                                                                                                                
                                                                                                                                Bonus ($)
                                                                                                                                
                                                                                                                                Stock
                                                                                                                                  Awards ($)
                                                                                                                                
                                                                                                                                Option
                                                                                                                                  Awards ($)
                                                                                                                                
                                                                                                                                Non-Equity
                                                                                                                                  Incentive Plan
                                                                                                                                  Compensation
                                                                                                                                  ($)
                                                                                                                                
                                                                                                                                Non-qualified
                                                                                                                                  Deferred
                                                                                                                                  Compensation
                                                                                                                                  Earnings
                                                                                                                                  ($)
                                                                                                                                
                                                                                                                                All Other
                                                                                                                                  Compensation
                                                                                                                                  ($)
                                                                                                                                
                                                                                                                                
                                                                                                                                Total ($)Gerard
      C. ("Chris") D'Couto
                                                                                                                                
                                                                                                                                2009
                                                                                                                                
                                                                                                                                $
                                                                                                                                106,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                2,649,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                11,000
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                2,766,000President
      & CEO
                                                                                                                                
                                                                                                                                2008
                                                                                                                                
                                                                                                                                
                                                                                                                                210,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                —
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                14,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                224,000Stephen
      M. Wilson
                                                                                                                                
                                                                                                                                2009
                                                                                                                                
                                                                                                                                $
                                                                                                                                106,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                331,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                11,000
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                448,000Chief
      Financial Officer
                                                                                                                                
                                                                                                                                2008
                                                                                                                                
                                                                                                                                
                                                                                                                                53,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                20,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                79,000Tsali
      Cross(1)
                                                                                                                                
                                                                                                                                2009
                                                                                                                                
                                                                                                                                $
                                                                                                                                83,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                19,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                5,000
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                107,000VP
      Engineering
                                                                                                                                
                                                                                                                                2008
                                                                                                                                
                                                                                                                                
                                                                                                                                98,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                79,000Paul
      AbramowitzFormer
      President & CEO
                                                                                                                                
                                                                                                                                2008
                                                                                                                                
                                                                                                                                $
                                                                                                                                377,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                377,000





(1)
            Dr.
      Cross does not serve as an officer.





We have
recorded expense in our consolidated financial statements for the year ended
September 30, 2008 and included in this table $314,000 pertaining to severance
obligations and related costs pertaining to Mr. Abramowitz’s resignation as
President and CEO in January 2008 and as a director in April 2008. We contest
that any payment is due under its agreements with Mr. Abramowitz and, if
successful, will have minimal or no liability for such amounts.




Dr. Gerard C. (Chris) D'Couto:Under the terms of the Offer Letter entered into between Dr. Gerard C.
(Chris) D’Couto and us when he joined us as Chief Operating Officer, he receives
a per annum base salary of $225,000 and, a bonus equal to 50% of his base salary
upon the completion of certain milestones. Due to our financial circumstances,
Dr. C’Couto has taken a reduction in salary and did not earn the base salary of
$225,000 in the year ended September 30, 2009. In the event Dr. D’Couto’s
employment is terminated (i) for any reason other than for cause or a winding
down of our operations or (ii) due to a change in control where he is not
offered a comparable position at a similar compensation, Dr. D'Couto will be
entitled to a severance payment equal to six months of his then current base
salary.




Outstanding
Equity Awards At Fiscal Year-End




The
following table sets forth information regarding the outstanding equity awards
held by our Named Executive Officers as of September 30, 2009:


44





Outstanding
Equity Awards at Fiscal Year-End




Option Awards
                                            
                                            Stock AwardsName
                                            
                                            Number
                                              of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              (#)
                                              Exercisable
                                            
                                            
                                            Number
                                              of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              (#)
                                              Unexercisable
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Number of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Unearned
                                              Options
                                              (#)
                                            
                                            Option
                                              Exercise
                                              Price
                                              ($)
                                            
                                            Option
                                              Expiration
                                              Date
                                            
                                            Number
                                              of Shares
                                              or Units
                                              of Stock
                                              That
                                              HaveNot
                                              Vested
                                              (#)
                                            
                                            Market
                                              Value of
                                              Shares
                                              or Units
                                              of Stock
                                              That
                                              Have
                                              Not
                                              Vested
                                              ($)
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Number
                                              of
                                              Unearned
                                              Shares,
                                              Units or
                                              Other
                                              Rights
                                              That Have
                                              Not
                                              Vested
                                              (#)
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Market or
                                              Payout
                                              Value of
                                              Unearned
                                              Shares,
                                              Units or
                                              Other
                                              Rights
                                              That Have
                                              Not
                                              Vested
                                              (#)Dr.
      Gerard C. (Chris)
                                              D'Couto
                                            
                                            
                                            2,070,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1.28
                                            
                                            Sep.
      2019Stephen
      M. Wilson
                                              Chief
      Financial Officer
                                            
                                            
                                            64,688
                                            
                                            
                                            
                                            194,062
                                            
                                            
                                            
                                            $
                                            1.28
                                            
                                            Sep.
      20193,000
                                            
                                            
                                            
                                            9,000
                                            
                                            
                                            
                                            $
                                            1.67
                                            
                                            Apr.
      2018





Compensation
of Directors




The
following table sets forth information regarding the compensation of directors
during the fiscal year ended September 30, 2009:





DIRECTOR COMPENSATIONChange inFees
                      Earned
                      or Paid
                      in Cash
                    
                    
                    Stock
                      Awards
                    
                    
                    Option
                      Awards
                    
                    Non-Equity
                      Incentive Plan
                      Compensation
                    
                    Pension Value
                      and
                      Nonqualified
                      Deferred
                      Earnings
                    
                    All Other
                      Compensation
                    
                    
                    TotalName
                    
                    ($)
                    
                    
                    ($)
                    
                    
                    ($)
                    
                    ($)
                    
                    ($)
                    
                    ($)
                    
                    
                    ($)Jon
      M. Garfield(1)
                    
                    
                    10,000
                    
                    
                    
                    29,000
                    
                    
                    
                    221,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    260,000Eduardo
      Cabrera(2)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    132,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    132,000Michael
      Selsman(3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    88,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    88,000Paul
      Sidlo(4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    110,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    110,000James
      H. Smith(5)
                    
                    
                    17,000
                    
                    
                    
                    38,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    16,000
                    
                    
                    
                    71,000Robert
      J. McGovern(6)
                    
                    
                    11,000
                    
                    
                    
                    26,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,500
                    
                    
                    
                    39,500Michael
      Solomon(7)
                    
                    
                    5,000
                    
                    
                    
                    15,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    20,000





(1) Fees
earned in cash and stock awards not issued and are recorded as accrued
compensation. Options awards consist of 172,500 fully vested options exercisable
at $1.28 per share and expiring in September 2019.


(2)
Options awards consist of 103,500 fully vested options exercisable at $1.28 per
share and expiring in September 2019.


45


(3)
Options awards consist of 69,000 options exercisable at $1.28 per share of which
17,250 are fully vested. The options expire in September 2019.


(4)
Options awards consist of 86,250 fully vested options exercisable at $1.28 per
share and expiring in September 2019.


(5) Fees
earned in cash and stock awards not issued and are recorded as accrued
compensation. Other compensation consisted of consulting services and was earned
and paid.


(6) Fees
earned in cash and stock awards not issued and are recorded as accrued
compensation. Other compensation consisted of consulting services and was earned
and paid.


(7) Fees
earned in cash and stock awards not issued and are recorded as accrued
compensation.





Stock
Option Plan and Stock Options




In August
2008, we amended our Long Term Incentive Compensation Plan (the “Plan”) first
adopted in March 2006. Under the amended Plan, the maximum number of shares
issuable is 6,000,000. As of September 30, 2009, there were 2,862,745 stock
options issued under the amended Plan.





The Plan was adopted by the Board on
March 14, 2006, to be effective on March 14, 2006, and was approved by the
stockholders on that same date. The Plan is to continue for a term of ten years
from the date of its adoption. The Plan seeks to promote the long-term success
of our company and our subsidiaries and to provide financial incentives to
employees, members of the Board and advisors and consultants of our company and
our subsidiaries to strive for long-term creation of stockholder value by
providing stock options and other stock and cash incentive.





The
functions of the Compensation Committee are currently administered by the full
Board. Until their departure from the Board in 2009, the Compensation Committee
was comprised of two members of our Board of Directors, James Smith and Robert
McGovern who administered the Plan. The Compensation Committee has the authority
to make awards, construe and interpret the Plan and any awards granted
thereunder, to establish and amend rules for Plan administration, to change the
terms and conditions of options and other awards at or after grant, and to make
all other determinations which it deems necessary or advisable for the
administration of the Plan.




To date,
the Committee has awarded stock options for 2,862,745 shares to employees,
members of the Board and advisors and consultants, and none of these options has
as of yet been exercised. If we change the number of issued shares of common
stock by stock dividend, stock split, spin-off, split-off, spin-out,
recapitalization, merger, consolidation, reorganization, combination, or
exchange of shares, the total number of shares reserved for issuance under the
Plan, the maximum number of shares which may be made subject to an award or all
awards in any calendar year, and the number of shares covered by each
outstanding award and the price therefor, if any, may be equitably adjusted by
the Committee, in its sole discretion.




The Board
of Directors or the Committee may amend, suspend, terminate or reinstate the
Plan from time to time or terminate the Plan at any time. However, no such
action shall reduce the amount of any existing award (subject to the reservation
of the authority of the Committee to reduce payments on awards) or change the
terms and conditions thereof without the consent of any affected award
recipient.





Employee
Stock Purchase Plan





In August
2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”).
The amount of shares of common stock that may be sold pursuant to the Stock
Purchase Plan shall not exceed, in the aggregate, 900,000. As of September 30,
2009, no shares have been purchased under the Stock Purchase
Plan


46


Item
12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMEENT AND RELATED
STOCKHOLDER MATTERS


Set forth below is certain
information as of December 31, 2009 with respect to each person or group
who is known to us, in reliance on Schedules Forms 4 and transfer agent records
in reporting beneficial ownership and filed with the SEC, to beneficially own
more than 5% of our common stock. Except as otherwise noted below, all shares of
common stock are owned beneficially by the individual or group listed with sole
voting and/or investment power.





Name and Address of Beneficial Owner(1)
                        
                        Amount
                          Beneficial
                          Ownership
                        
                        Class of
                          Beneficial
                          Ownership
                        
                        Percent
                          of
                          ClassSummit
      Trading Limited
                          Charlotte
      House, P.O. Box N-65
                          Charlotte
      Street
                          Nassau,
      Bahamas(2)
                        
                        
                        1,938,506
                        
                        Common
                          Stock
                        
                        
                        5.1
                        %Green
      World Trust
                          4093
      Quakerbridge Road
                          Princeton
      Jct, NJ  08550(3)
                        
                        
                        4,823,060
                        
                        Common
                          Stock
                        
                        
                        12.3
                        %





(1)
            Unless
      otherwise indicated, we believe that all persons named in the table have
      sole voting and investment power with respect to all shares of our common
      stock beneficially owned by them. A person is deemed to be the beneficial
      owner of securities which may be acquired by such person within 60 days
      from the date on which beneficial ownership is to be determined, upon the
      exercise of options, warrants or convertible securities. Each beneficial
      owner’s percentage ownership is determined by assuming that options,
      warrants and convertible securities that are held by such person (but not
      those held by any other person) and which are exercisable, convertible or
      exchangeable within such 60 day period, have been so exercised, converted
      or exchanged.





(2)
            Summit
      Trading Limited (“Summit”) is a Bahamian holding company and is owned by
      the Weast Family Trust. The Weast Family Trust is a private trust
      established for the benefit of C.S. Arnold, Daisy Rodriguez, Stephanie
      Kaye and Tracia Fields. C.S. Arnold is the settlor of the Weast Family
      Trust. The natural person exercising voting control of the shares of our
      common stock held by Summit is Richard
Fixaris.


(3)
            The
      natural person exercising voting control over the shares of our common
      stock is Darren Baldo, Trustee of Green World
  Trust.




SECURITY
OWNERSHIP OF MANAGEMENT




Set forth
below is certain information as of December 31, 2009 for (i) the members of and
nominees for the Board of Directors, (ii) our executive officers, and (iii) our
directors and executive officers as a group. No shares identified below are
subject to a pledge.





Name and Address of Beneficial Owner(1)
                  
                  Amount and
                    Nature of
                    Beneficial
                    Ownership
                  
                  
                  Percent of
                    ClassDr.
      Gerard C. D’Couto, President, Chief Executive Officer, Director(2)
                  
                  
                  2,470,002
                  
                  
                  
                  6.6
                  %Jon
      Garfield, Director(3)
                  
                  
                  172,500
                  
                  
                  
                  *Eduardo
      Cabrera, Director(4)
                  
                  
                  103,000
                  
                  
                  
                  *Paul
      Sidlo, Director(5)
                  
                  
                  86,250
                  
                  
                  
                  *Michael
      Selsman, Director(6)
                  
                  
                  69,000
                  
                  
                  
                  *Stephen
      M. Wilson, Chief Financial Officer(7)
                  
                  
                  350,754
                  
                  
                  
                  *All
      Directors and Officers as a Group (6 individuals)
                  
                  
                  3,251,506
                  
                  
                  
                  8.7
                  %


47





* 
Less than one percent.





(1)
            Unless
      otherwise indicated, we believe that all persons named in the table have
      sole voting and investment power with respect to all shares of our common
      stock beneficially owned by them. A person is deemed to be the beneficial
      owner of securities which may be acquired by such person within 60 days
      from the date on which beneficial ownership is to be determined, upon the
      exercise of options, warrants or convertible securities. Each beneficial
      owner’s percentage ownership is determined by assuming that options,
      warrants and convertible securities that are held by such person (but not
      those held by any other person) and which are exercisable, convertible or
      exchangeable within such 60 day period, have been so exercised, converted
      or exchanged. Unless otherwise indicated, the address of all of the above
      named persons is c/o Neah Power Systems, Inc., 22118 20th Avenue SE, Suite
      142, Bothell, Washington 98201.





(2)
            Consists
      of 400,002 common shares and 2,070,000 shares of common stock underlying
      options which are fully vested.





(3)
            Consists
      of 172,500 shares of common stock underlying options which are fully
      vested.





(4)
            Consists
      of 103,500 shares of common stock underlying options which are fully
      vested.





(5)
            Consists
      of 86,250 shares of common stock underlying options which are fully
      vested.





(6)
            Consists
      of 69,000 shares of common stock underlying options of which
      17,250 are fully vested.





(7)
            Consists
      of 80,004 common shares and 270,750 shares of common stock underlying
      options of which 67,688 are fully
vested.


48


ITEM 13:CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




Transactions
with Related Persons




In
September 2008, we entered into a note agreement with Summit Trading
Limited (“Summit”). Under the agreement, we borrowed $15,000 at no interest
with a maturity date of October 2, 2008. The balance was paid in full in August
2009. The principal balance is included in notes payable, related parties on our
consolidated balance sheet at September 30, 2008.





In September 2009, we received funds
from Daisy Rodriguez,a private investor married
to the primary beneficiary of Summit, in the aggregate face amount of $100,000
at 6% interest and an April 30, 2010 maturity date. The principal balance is
included in notes payable, related parties on our consolidated balance sheet at
September 30, 2009.





In August
2008, we entered into a note agreement with our President and Chief Executive
Officer, Dr. Gerard C. D’Couto. Under the agreement, as amended, we borrowed
$30,000 with interest at 10% compounded monthly and a maturity date of March 29,
2009. As of September 30, 2009 the remaining note balance was $2,400. The
principal balance is included in notes payable, related parties on our
consolidated balance sheet.





Director
Independence




Because
they are not employees and have no other business relationships with us except
as directors, the Board of Directors has determined that Messrs. Garfield,
Cabrera, Sidlo, and Selsman qualify as independent directors.


49


ITEM
14.  PRINCIPAL ACCOUNTING FEES AND SERVICES





The firm
of Peterson Sullivan LLP has been appointed to serve as our independent
registered public accounting firm for the 2009 fiscal year unless the Audit
Committee deems it advisable to make a substitution.  Our Audit
Committee has responsibility for the approval of all audit and non-audit
services before we engage an accountant. All of the services rendered to us by
Peterson Sullivan LLP for the periods ended September 30, 2009 and September 30,
2008 were pre-approved by the Audit Committee before the engagement of the
auditors for such services. Our pre-approval policy will expressly provide for
the annual pre-approval of all audits, audit-related and all non-audit services
proposed to be rendered by the independent auditor for the fiscal year, as
specifically described in the auditor's engagement letter, such annual
pre-approval to be performed by the Audit Committee.





The
following table represents the aggregate fees billed for professional audit
services rendered to us by Peterson Sullivan LLP for the audit of our annual
financial statements during the year ended September 30, 2009 and 2008, and all
fees billed for other services by Peterson Sullivan LLP during those
periods:




2009
                    
                    
                    2008Audit
      Fees (1)
                    
                    $
                    62,458
                    
                    
                    $
                    74,246Audit
      Related Fees (1)
                    
                    
                    11,521
                    
                    
                    
                    60,076Tax
      Fees (2)
                    
                    
                    280
                    
                    
                    
                    —All
      other Fees (3)
                    
                    
                    —
                    
                    
                    
                    22,049Total
      Accounting Fees and Services
                    
                    $
                    74,259
                    
                    
                    $
                    156,370





(1) Audit
Fees. These are fees for professional services for the audit of our annual
financial statements, and for the review of the financial statements included in
our filings on Form 10Q and for services that are normally provided in
connection with statutory and regulatory filings or engagements, including late
filings for previous years.





(2) Tax
Fees. These are fees for professional services with respect to tax compliance,
tax advice, and tax planning.





(3) All
Other Fees. These are fees for permissible work that does not fall within any of
the other fee categories, i.e., Audit Fees or Tax Fees.





Item
15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.





(a)(1)(2)  Financial
Statements.





The financial statements listed in the
Index to Financial Statements are filed as part of this Annual Report on Form
10-K.





(a)(3)  Exhibits.





The
exhibits required by this Item are set forth on the Exhibit Index attached
hereto.


50


SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Form 10-K to be signed on its behalf by its
duly authorized representatives.





Dated:
      January 13, 2010
              NEAH
      POWER SYSTEMS, INC.By:
              /s/ GERARD C. D’OUTOGerard
      C. D’Couto
                President
      and Chief Executive Officer





In
accordance with the Securities and Exchange Act of 1934, this Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:





Signature
                                  
                                  Title(s)
                                  
                                  Date/s/ GERARD C. D’COUTO
                                  
                                  President
      and Chief Executive Officer
                                  
                                  January
      13, 2010Gerard
      C. D’Couto
                                  
                                  (Principal
      Executive Officer)/s/ STEPHEN M. WILSON
                                  
                                  Chief
      Financial Officer
                                  
                                  January
      13, 2010Stephen
      M. Wilson
                                  
                                  (Principal
      Financial and Accounting Officer)/s/ EDUARDO CABRERA
                                  
                                  Director
                                  
                                  January
      13, 2010Eduardo
      Cabrera/s/ JON M. GARFIELD
                                  
                                  Director
                                  
                                  January
      13, 2010Jon
      M. Garfield/s/ PAUL SIDLO
                                  
                                  Director
                                  
                                  January
      13, 2010Paul
      Sidlo/s/ MICHAEL SELSMAN
                                  
                                  Director
                                  
                                  January
      13, 2010Michael
      Selsman




51


Exhibit
Index





No.
                
                Description3.1
                
                Articles
      of Incorporation, as amended (1)3.2
                
                Amended
      and Restated By-laws (1)3.3
                
                Certificate
      of Designation of Series A Preferred Stock (1)3.4
                
                Certificate
      of Merger (1)4.1
                
                Form
      of Stock Certificate for Common Stock (1)4.2
                
                Form
      of Stock Certificate for Preferred Stock (1)10.1
                
                Engagement
      Letter, dated as of March 20, 2006 by and between Neah Power Systems, Inc.
      and BMA Securities, Inc. (2)10.2
                
                Agreement
      and Plan of Merger among Neah Power Systems, Inc., Growth Mergers, Inc.
      and Growth Acquisitions Inc. (2)10.3
                
                Amendment
      to Agreement and Plan of Merger among Neah Power Systems, Inc., Growth
      Mergers, Inc. and Growth Acquisitions Inc. (2)10.5
                
                Form
      of warrant to purchase 3,753,000 shares of common stock (1)10.6
                
                Collaboration
      Agreement effective April 1, 2004 between Novellus Systems, Inc. and Neah
      Power Washington (5)10.7
                
                Letter
      Agreement extending the Collaboration Agreement, dated May 24, 2006 by and
      among Novellus Systems, Inc. , Neah Power Washington and Neah Power
      Systems, Inc. (2)10.8
                
                Amendment
      to Letter Agreement extending the Collaboration Agreement, dated August
      22, 2006 by and among Novellus Systems, Inc., Neah Power Washington and
      Neah Power Systems, Inc. (3)10.9
                
                Amendment
      to Letter Agreement extending the Collaboration Agreement, dated August
      22, 2006 by and among Novellus Systems, Inc., Neah Power Washington and
      Neah Power Systems, Inc. (7)10.10
                
                Warrant
      issued to Novellus Systems, Inc. (2)10.11
                
                Option
      Agreement issued to Dr. John Drewery (2)10.12
                
                Stock
      Option Plan (2)10.13
                
                Form
      of Stock Option Agreement (2)10.14
                
                Development
      Agreement by and between Neah Power Washington and Thales Communications,
      Inc. dated December 19, 2003 (3)




52





10.15
              
              Amendment
      No. 1 to Development Agreement by and between Neah Power Washington and
      Thales Communications, Inc. dated July 28, 2004 (2)10.16
              
              Employment
      Agreement of Paul Abramowitz dated August 1, 2007 (6)10.17
              
              Lease
      Agreement, dated as of March 5, 2001, by and between Teachers Insurance
      and Annuity Association of America and Neah Power Washington (3)10.18
              
              First
      Amendment to Lease Agreement, dated as of June 6, 2003, by and between
      Teachers Insurance and Annuity Association of America and Neah Power
      Washington (3)10.19
              
              Second
      Amendment to Lease Agreement, dated as of July 7, 2006, by and between
      Teachers Insurance and Annuity Association of America and Neah Power
      Washington (3)10.20
              
              Consultancy
      Agreement by and between Danfoss A/S and Neah Power Systems, Inc., dated
      as of June 14, 2006 (3)10.21
              
              Amendment
      to Letter Agreement extending the Collaboration Agreement, dated August
      22, 2006 by and among Novellus Systems, Inc., Neah Power Washington and
      Neah Power Systems, Inc. (4)10.22
              
              Settlement
      Agreement and Mutual General Releases between Burt Martin Arnold
      Securities, Inc. and Neah Power Systems, Inc. dated as of November 26,
      200710.23
              
              Services
      Agreement between Neah Power Systems, Inc. and Daniel Rosen (7)10.24
              
              Employment
      Agreement Neah Power Systems, Inc. and Dr. Gerard C (Chris) D'Couto (8)10.25
              
              10%
      Convertible Secured Promissory Note to EPD Investment Co., LLC due January
      1, 2009 (9)10.26
              
              Common
      Stock Purchase Warrant of EPD Investment Co., LLC (9)10.27
              
              Purchase
      Agreement between Neah Power Systems, Inc. and EPD Investment Co., LLC
      (9)10.28
              
              Security
      Interest Agreement dated as of November 12, 2007, between Neah Power
      Systems, Inc. and EPD Investment Co., LLC (9)10.29
              
              12%
      Secured Promissory Note to CAMHZN Master LDC due June 28, 2008 (9)10.30
              
              Common
      Stock Purchase Warrant of CAMHZN Master LDC (10)10.31
              
              Purchase
      Agreement dated as of November 28, 2007, between Neah Power Systems, Inc.
      and CAMHZN Master LDC (10)10.32
              
              Security
      Interest and Pledge Agreement dated as of November 28, 2007, between Neah
      Power Systems, Inc. and CAMHZN Master LDC (10)10.33
              
              Repayment
      Issuance Letter dated November 28, 2007, to CAMHZN Master LDC (10)10.34
              
              Securities
      Purchase Agreement dated February 12, 2009 among Neah Power Systems, Inc.,
      Agile Opportunity Fund, LLC and Capitoline Advisors
  Inc.




53





10.35
              
              Form
      of Initial Original Issue Discount Term Promissory Note issued by Neah
      Power10.36
              
              Security
      Agreement dated February 12, 2009 among Neah Power Systems, Inc., Agile
      Opportunity Fund, LLC and Capitoline Investors Inc.10.37
              
              Form
      of Patent Security Agreement dated February 12, 2009 among Neah Power
      Systems, Inc., Agile Opportunity Fund, LLC and Capitoline Advisors
      Inc.14.1
              
              Code
      of Ethics(5)21.1
              
              Subsidiaries
      of the Registrant (2)31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 per Section
      906 of the Sarbanes-Oxley Act of 200232.2
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 per Section
      906 of the Sarbanes-Oxley Act of
2002




(1) Filed
as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on
May 1, 2006 and incorporated herein by reference thereto.




(2) Filed
as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on
July 27, 2006 and incorporated herein by reference thereto.




(3) Filed
as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on
September 12, 2006 and incorporated herein by reference thereto.




(4) Filed
as an Exhibit to the Registrant’s Current Report on Form 8-K, filed on September
28, 2006 and incorporated herein by reference thereto.




(5) Filed
as an Exhibit to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2 filed on May 3, 2007.




(6) Filed
as an Exhibit to the Registrant's Current Report on Form 8-K, filed on August 8,
2007, and incorporated herein by reference thereto.




(7) Filed
as an Exhibit to the Registrant's Current Report on Form 8-K, filed on August
17, 2007, and incorporated herein by reference thereto.




(8) Filed
as an Exhibit to the Registrant's Current Report on Form 8-K, filed on September
5, 2007, and incorporated herein by reference thereto.




(9) Filed
as an Exhibit to the Registrant's Current Report on Form 8-K, filed on November
9, 2007, and incorporated herein by reference thereto.




(10)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on
November 28, 2007, and incorporated herein by reference
thereto.


54