**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **Form
        10-KSB**
 o
                ANNUAL
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF
                    1934
 For
          the
          fiscal year ended _________________________
 
 x
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF
                    1934
 For
          the
          transition period from January 1, 2007 to September 30, 2007
 
 Commission
        file number  **000-49962**
  **NEAH
        POWER SYSTEMS, INC.**
 (Name
        of
        small business issuer in its charter)
 
 **Nevada**
              
              **88-0418806**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**22122
                  20th Ave SE, Suite 161**
              
              **Bothell,
                  Washington 98021**(Address
                  of principal executive offices)
              
              (City,
                  State and Zip Code)
 
 Issuer’s
        telephone number: ( **425** ) **424-3324**
 
 Securities
        registered under Section 12(b) of the Exchange Act: **None.**
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 
 **Common
        stock, $0.001 par value per share**
 (Title
        of
        class)
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act.  ̈
 
 Check
        whether issuer (1) filed all reports to be filed by Section 13 or 15(d) of
        the
        Exchange Act during the past 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  ̈
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this Form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB.  ̈
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes  ̈   No
x
 
 State
        issuer’s revenues for its most recent fiscal year: **$49,057**
 
 State
        the aggregate market value of the voting and non-voting common equity held
        by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days: $6,856,714. [The aggregate market
        value
        was determined by multiplying the approximate number of shares of common
        stock
        34,283,571 held by non-affiliates by the closing price of such stock ($0.20)
        as
        of December 31, 2007.]
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date: 139,862,912
        shares of common stock outstanding as of December 31, 2007.
 
 Transitional
        Small Business Disclosure Format (Check one):  Yes  ̈No
x
 
 **TABLE
        OF CONTENTS**
 
 **Page****Explanatory
                  Note**
              **1****Forward
                  Looking Statements**
              **1****PART
                  I.****Item
                  1.**
              **Description
                  of Business**
              **2****Item
                  2.**
              **Description
                  of Property**
              **22****Item
                  3.**
              **Legal
                  Proceedings**
              **22****Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders**
              **22****PART
                  II.****Item
                  5.**
              **Market
                  for Common Equity and Related Stockholder Matters and Small Business
                  Issuer Purchases of Equity Securities**
              **23****Item
                  6.**
              **Management's
                  Discussion and Analysis or Plan of Operation**
              **25****Item
                  7.**
              **Financial
                  Statements**
              **29****Item
                  8.**
              **Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure**
              **52****Item
                  8A.**
              **Controls
                  and Procedures**
              **52****PART
                  III.****Item
                  9.**
              **Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act**
              **53****Item
                  10.**
              **Executive
                  Compensation**
              **56****Item
                  11.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters**
              **59****Item
                  12.**
              **Certain
                  Relationships and Related Transactions; Director
                  Independence**
              **62****Item
                  13.**
              **Exhibits**
              **63****Item
                  14.**
              **Principal
                  Accountant Fees and Services**
              **66****EXHIBITS**
  
  **Explanatory
        Note**
 
 On
        November 2, 2007, the Board of Directors of Neah Power Systems, Inc. approved
        a
        change of the Company’s fiscal year end from December 31 to September 30,
        effective September 30, 2007. This transition report on Form 10-KSB covers
        the
        transition period from January 1, 2007 to September 30, 2007.
 
 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 its 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
        transition report, including the sections entitled “Description of Business,”
“Management’s Discussion and Analysis or Plan of Operation” and “Risk Factors,”
contains a number of “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 quarterly 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 subject to risks,
        uncertainties and assumptions related to various factors.
 
 You
        should understand that the following important factors, in addition to those
        discussed under “Risk Factors” below, could affect our future results and could
        cause those results to differ materially from those expressed in such
        forward-looking statements:
 
 ·
              general
                  economic conditions;
 
 ·
              limited
                  operating history;
 
 ·
              difficulty
                  in developing, exploiting and protecting proprietary
                  technologies;
 
 ·
              results
                  of additional research and
                  development;
 
 ·
              acceptance
                  and success of our fuel cell
                  products;
 
 ·
              intense
                  competition in our industry;
 
 ·
              our
                  future capital needs and our ability to obtain financing; and
 
 ·
              other
                  risks and uncertainties as may be detailed from time to time in
                  our public
                  announcements and filings with the SEC.
 
 Although
        we believe that our expectations are reasonable, we cannot assure you that
        our
        expectations will prove to be correct. Should any one or more of these risks
        or
        uncertainties materialize, or should any underlying assumptions prove incorrect,
        actual results may vary materially from those described in this annual report
        as
        anticipated, believed, estimated, expected or intended.
  We
        undertake no obligation to publicly update or revise any forward-looking
        statements, whether as a result of new information, future events or any
        other
        reason. All subsequent forward-looking statements attributable to the Company
        or
        any person acting on our behalf are expressly qualified in their entirety
        by the
        cautionary statements contained or referred to herein. In light of these
        risks,
        uncertainties and assumptions, the forward-looking events discussed in this
        report may not occur.
  1
 
 **PART
        I**
 
 **Item
        1: Description of Business**
 
 **Overview**
 
 We
        are
        engaged in the research and development of fuel cells designed to replace
        existing rechargeable battery technology in mobile electronic devices. Most
        electronic devices, including notebook computers and tactical radios for
        military and homeland security, use rechargeable batteries based on lithium
        ion
        technology. Based on our research and testing, we believe we can develop
        a
        commercially viable fuel cell that will outperform lithium ion batteries
        in
        terms of run time, recharge time, portability and other measures of battery
        performance. Our fuel cell solution is particularly beneficial when an
        application requires the user to carry more than one battery, since our fuel
        cell will be refilled by cartridges and the user will only need to carry
        one
        fuel cell and additional cartridges.
  Through
        our wholly-owned subsidiary, Neah Power Washington, we have developed what
        we
        believe is a potential breakthrough in the development of a direct methanol
        micro fuel cell, that can serve as a replacement for batteries in a variety
        of
        mobile products.
  Fuel
        cells are devices that combine a fuel, such as methanol, with an oxidant,
        such
        as oxygen gas, in a chemical reaction to produce electricity. Much like the
        engine in a car converts fuel and oxygen to produce motion, a fuel cell can
        generate electricity directly and continuously as long as fuel and oxygen
        are
        supplied to the reactor. Like a car, fuel cells can be “refueled” instantly by
        simply maintaining the fuel supply with small, replaceable fuel cartridges.
        Since fuel cells can be “recharged” instantly, end-users of mobile products
        powered by fuel cells can achieve long runtime by carrying spare fuel
        cartridges, not extra batteries and chargers. Also, because spare fuel
        cartridges can be smaller, lighter and less costly than extra batteries,
        convenience of use can be dramatically improved.
  Using
        our
        patented technology based on porous silicon, we are developing this technology
        to produce our proprietary fuel cell for portable electronic devices to replace
        batteries that typically operate in the 10-100 watt range. These electronic
        devices are most commonly served by lithium-ion battery based power packs.
  To
        date,
        we have achieved stable, high power operation of our silicon-based chemical
        reactor (also referred to as the “stack”), and have assembled a working
        prototype with all auxiliary subsystem components.
  We
        intend
        to develop prototype devices that can be evaluated by original equipment
        manufacturers ("OEM’s") for the development of final fuel cell products that
        either we or potential licensees of ours will use to manufacture final 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 revenues from both 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 of these fuel cartridges. However, we may elect to
        produce the fuel cells through subcontractors and distribute it ourselves,
        or we
        may opt to both manufacture and distribute the fuel cells ourselves. What
        decision we ultimately make will depend upon our capital resources, production
        costs to be incurred and resulting profit margins for each alternative, and
        cannot be predicted at this time.
  In
        order
        to complete development of our fuel cell, we must achieve the following goals:
  •
              Resolve
                  certain issues of contamination of the electrolytes which can lead
                  to
                  degraded performance of the fuel cell unit and therefore reduce
                  its power
                  capability;
 
 •
              In
                  order to meet specifications suitable for a military fuel cell,
                  increase
                  by approximately 400% the volumetric power density over the power
                  density
                  currently available in our fuel cells - this power increase is
                  believed to
                  be achievable based on experimental data and modeling, but has
                  not yet
                  been demonstrated in an operating fuel cell;
 
 •
              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.
  2
  **Business
        Development**
  **A.
        Growth Mergers, Inc.**
  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.
  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
        "NPWS."
        There is no assurance that we will qualify for quotation on a national
        securities association or exchange.
  Prior
        to
        its acquisition of Neah Power Washington, Growth Mergers, Inc. effected a
        1:100
        reverse split of its 24,077,150 then outstanding shares of common stock,
        and
        entities controlled by David Moore, Peter Cangany, John Otto and David Otto,
        the
        holders of approximately $49,000 of Growth Mergers, Inc.’s then outstanding
        debt, converted such debt into 5,000,000 shares of common stock. Growth Mergers,
        Inc. then effected a 2:1 forward stock split, as a result of which an aggregate
        of 10,481,543 shares of Growth Mergers, Inc. common stock was issued and
        outstanding immediately prior to the acquisition of Neah Power Washington.
        The
        stock splits were effected for the purpose of arriving at a specified capital
        structure for Growth Mergers, Inc. which was the result of negotiations among
        the above-referenced principal stockholders of Growth Mergers, Inc. and
        affiliates of Special Investments Acquisitions Associates, LLC and Summit
        Trading Ltd. Such stock splits were consummated to effect such desired capital
        structure of Growth Mergers, Inc. immediately prior to its acquisition of
        Neah
        Power Washington and were instrumental in inducing the Growth Mergers, Inc.
        principal stockholders to contribute $500,000 to the capital of our Company
        as
        working capital for Neah Power Washington. Prior to the merger, Neah Power
        Washington had exhausted all its working capital and furloughed substantially
        all of its employees and was in default in payment of rent under its lease.
        The
        $500,000 was urgently needed to bring the employees back to work prior to
        them
        finding alternative employment, to pay rent and to provide the necessary
        working
        capital for the immediate future while additional financing was being sought.
        Such $500,000 capital contribution was a condition to consummation of our
        acquisition of Neah Power Washington.
  All
        share
        and per share amounts contained in this annual report reflect the reverse
        and
        forward stock splits referred to above.
  **B.
        Terms of the Merger**
  Each
        of
        the 7,990,457 shares of common stock of Neah Power Washington outstanding
        was
        converted into the right to receive 3.2793941 shares of common stock of Growth
        Mergers, Inc. Pursuant to the merger agreement, Growth Mergers, Inc. issued
        26,203,858 shares of its common stock to the former shareholders of Neah
        Power
        Washington. In addition, Growth Mergers, Inc. provided for $500,000 of much
        needed capital for Neah Power Washington.
  3
  On
        March
        9, 2006, Growth Mergers, Inc. sold for nominal consideration ($6,500 or $0.001
        per share) to Special Investments Acquisitions Associates, LLC and Summit
        Trading Ltd. a total of 6,500,000 shares of our Series A Preferred Stock
        that
        were convertible into a maximum of 68,130,030 shares of our common stock
        (for a
        common per share purchase price of approximately $0.0001065), less the sum
        of
        (a) 6,255,000 shares of our common stock that were or are issuable to other
        former Neah Power Washington security holders upon conversion of our 8% notes
        or
        exercise of certain warrants, and (b) all shares issued in connection with
        any
        one or more offerings of equity or equity type securities providing our Company
        with aggregate initial gross proceeds of $1,500,000. The 6,255,000 shares
        consist of 2,502,000 shares that were issuable on conversion of shareholder
        loans (at a conversion price of $0.20 per share) and 3,753,000 shares underlying
        certain warrants issued to the former Neah Power Washington security holders
        described below.
  Paul
        Abramowitz, our Vice Chairman, Chief Executive Officer and President, is
        the
        principal owner of Special Investments Acquisition LLC, and also beneficially
        owned through an affiliate approximately 0.4% of the capital stock of Neah
        Power
        Washington prior to the merger. On an as-converted basis, the purchasers
        of the
        Series A Preferred Stock paid nominal consideration of $6,500, or approximately
        $0.0001065 per share of underlying common stock. This nominal purchase price,
        the number of shares issued and the terms of the Series A Preferred Stock
        were
        based upon negotiations between the board of directors of Neah Power Washington
        and representatives of the significant shareholders of Neah Power Washington
        (principally, Castile Ventures, Frazier Technology Ventures I, L.P. and Alta
        California Partners III, L.P.), on the one hand, and the Series A Preferred
        Stock purchasers, on the other hand. The number of shares of Series A Preferred
        Stock and the nominal price thereof was determined as consideration for the
        Series A Preferred Stock purchasers’ role in identifying Growth Mergers, Inc.,
        negotiating and facilitating the merger and for securing the then critically
        needed short-term funding for Neah Power Washington. The consideration
        represented by the Series A Preferred Stock consisted of a controlling interest
        in our Company following the merger.
  In
        connection with the merger, in March 2006, Alta California Partners III,
        L.P.,
        Alta Embarcadero Partners III, LLC, Castile Ventures II-A, L.P., Castile
        Ventures II-B, L.P., Frazier Technology Ventures I, L.P. and Friends of Frazier
        Technology Ventures I, L.P., each of which were Neah Power Washington security
        holders, exchanged an aggregate of $142,400 of Neah Power Washington notes
        for
        our convertible notes and lent an additional $358,000 to Neah Power Washington.
        In consideration for such additional loans, we exchanged all Neah Power
        Washington notes for $500,400 in principal amount of our 8% convertible notes
        due June 30, 2007. Such 8% notes were convertible at $0.20 per share and
        included five year warrants entitling the note holders to purchase an additional
        3,753,000 shares of our common stock at an exercise price of $0.20 per share.
        By
        their terms, all of 8% convertible notes automatically converted into shares
        of
        our common stock at such time as we received gross proceeds of $1,500,000
        or
        more (in addition to the $500,000 provided at closing of the merger by Growth
        Mergers) from any additional debt or equity financing. Dr. Daniel Rosen,
        the
        chairman of the board of directors of our Company and a director of Neah
        Power
        Washington, was at the time of the merger affiliated with Frazier Technology
        Ventures I L.P., and Roger Walton, a director of our Company and a director
        of
        Neah Power Washington, was at the time of the merger and continues to be
        affiliated with Castile Ventures II-A, L.P. and Castile Ventures II-B, L.P.
  **The
        Opportunity**
  The
        worldwide proliferation of portable electronic devices, including notebook
        and
        tablet computers, camcorders, digital cameras and military equipment has
        created
        a large and growing demand for energy storage systems that are compact,
        lightweight and powerful and a large market for small, high performance
        batteries that can operate for extended periods of time.
  **The
        Growing “Power Gap”**
  We
        believe that a “power gap” has emerged between the energy demand of portable
        electronic devices and the energy storage available in today’s rechargeable
        batteries. The power gap is widely recognized to be among the most important
        challenges facing the portable electronics industry. We further believe that
        fuel cells are one of the most promising technologies that can bridge the
        power
        gap and provide portable products with a significant increase in runtime,
        instant recharge and greater convenience of use.
  4
  As
        technology advances are made for a wide variety of portable electronic devices,
        a key gating issue is meeting demands for greater power. Power-hungry features
        include WiFi (802.11 wireless), WiMax (802.16 wireless), high-speed WAN
        networking (e.g. EVDO), DVD players, better sound, better graphics, realistic
        games, etc.
  The
        growth of this power gap can be clearly seen in currently available rechargeable
        batteries. As an example, in recent years, computer notebook makers have
        introduced products with larger, more vivid color displays, faster processors,
        larger hard drives, DVD drives and burners, as well as multimedia and wireless
        networking capabilities. Each of these features requires additional power,
        and
        taken together, can be a significant drain on the PC’s limited battery capacity.
        Even simply watching a two hour movie on a laptop often requires a total
        recharge of the battery. Thus, battery life has become a key component in
        the
        consumer’s purchase decision. We believe that the direct methanol, micro fuel
        cell is one of the most promising technologies that can bridge the power
        gap and
        provide portable products with a significant increase in runtime and greater
        convenience of use.
  We
        believe that the limited energy storage of existing battery technologies
        is
        widely recognized to be among the most important challenges facing the portable
        electronics industry.
  We
        also
        believe that our direct methanol micro fuel cell technology will have direct
        commercial applications in portable laptop computers. Laptops now constitute
        over half of all computers sold. We believe that our technology may ultimately
        be capable of replacing the lithium-ion batteries currently used by computer
        manufacturers worldwide. As an entry to this market, our technology may be
        a
        better alternative for laptop purchasers who purchase a second battery for
        their
        laptops at the time of purchase so that they have uninterrupted power when
        they
        are not near a power outlet.
  Many
        other portable electronic devices would also benefit from our fuel cell
        technology. For example, modern game consoles with realistic graphics and
        sound
        require a great deal of power and could be a market for our fuel cells, as
        could
        a variety of digital cameras and camcorders. Virtually any power hungry portable
        consumer device that currently uses a rechargeable or disposable battery
        is a
        candidate for our fuel cells in the long term.
  **The
        Military Need**
  We
        believe that the military has a particularly acute need for better battery
        solutions. As batteries reach the end of their useful life and power limits,
        the
        need for an alternative portable power source is clear.
  **Limited
        Development Potentials Of Conventional Battery
        Technologies**
  Lithium-ion
        is the dominant technology for powering today’s notebook and tabletop PCs, PDAs
        and other mobile devices. Introduced in the early 1990s, many experts believe
        the technology has become mature. While new electrode materials under
        development have the potential to increase battery energy density by as much
        as
        25% over the next two to three years, many industry experts believe that
        the
        energy demand from new features will outpace this growth and that the power
        gap
        will continue to worsen.
  **The
        Opportunity For Fuel Cells**
  Fuel
        cells are one of the most promising technologies for bridging the “power gap”
described above because they provide much longer runtimes and can be refueled
        indefinitely with small, inexpensive fuel cartridges. Management of our Company
        believes that a cost-competitive fuel cell system could ultimately be the
        power
        supply of choice for a broad range of portable consumer devices such as notebook
        computers, media players, cell phones, game consoles and their successors.
        Management of our Company also believes that fuel cells will be the power
        source
        of choice for many military, homeland security, emergency service and commercial
        duty uses such as tactical radios, remote sensors, specialized computers
        and
        professional video equipment. The availability of small fuel cells is also
        expected to stimulate the development of completely new categories of
        devices.
  5
  **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 10-100 watt range. Examples of end applications we are targeting include
        notebook computers, media players, game consoles, tactical radios for military
        and homeland security, remote sensors and video equipment.
  Other
        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 air
        may
        not be available.
  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 (i.e., a high wattage for their size and weight). They must also
        have a
        safe, easily portable and efficient fuel source. The fuel cells must be
        transportable and operate reliably in a wide range of environmental conditions.
  We
        are
        focused on replacing batteries in the 10-100 watt range. There are applications
        that require less than 10 watts, typically standard cell phones and the like.
        Low power fuel cells can be used as off board “battery chargers” meant to serve
        essentially as a trickle charger to an existing battery solution. These
        applications use simpler fuel cells that are typically characterized by
“passive” fuel management systems, small size and low power output capability.
        Replacing batteries in the 10 to 100 watt range is much more difficult, since
        it
        requires a much higher power output, more efficiency and an active rather
        than
        passive design.
  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
        Proton Exchange Membranes (“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 a
        configuration known as Direct Methanol Fuel Cell (“DMFC”).
  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.
  Rather
        than joining numerous other companies that are trying to create a better
        PEM-based direct methanol fuel cell, we felt an entirely new design approach
        was
        necessary to achieve the energy and power densities 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. We believe our use of porous silicon and liquid
        oxidant
        is unique in the fuel cell industry. In final form, the technology can be
        packaged in a plastic case to create a self-contained system that retains
        the
        excess water produced during operation and does not expose the cathode catalyst
        directly to the contaminants found in the air like traditional DMFCs.
        Furthermore, since our design is based largely on standard silicon wafer
        processing, we believe that it should have significant manufacturing advantages
        over traditional PEM-based fuel cells.
  Based
        on
        our 11 issued patents and 6 additional U.S. patent filings, we believe our
        technology is proprietary and can be protected.
  **Strategic
        Goals And Relationships**
  We
        plan
        to employ a two-pronged commercialization strategy, initially focusing on
        military and industrial duty applications, followed by penetration of consumer
        electronics markets as continued development efforts improve fuel cell
        performance and cost. End users of fuel cell-powered products will be able
        to
        achieve long runtime by carrying spare fuel cartridges, not extra batteries
        and
        chargers.
  6
  The
        initial markets (military and industrial) have certain unique needs, both
        for
        fuel cells and cartridges. We plan to partner with existing leaders in those
        fields to assist in the design to meet those unique needs, and ultimately,
        to
        facilitate the sales, marketing and distribution of our products to the end
        customers.
  We
        have
        established several business relationships that we believe will help us develop,
        produce and market our fuel cells and cartridges.
  **Novellus
        Systems, Inc.**
  In
        May
        2004, Novellus Systems, Inc. invested $2.5 million in Neah Power Washington
        and
        signed a technology collaboration agreement. Effective May 24, 2006, this
        agreement was renewed and extended to March 9, 2008 and we were added as
        a
        party. Under the terms of the renewal agreement, Novellus continues to provide
        us with key engineering and technical expertise in connection with the
        development of our products, including the use of porous silicon in our fuel
        cells. Subject to Novellus’ continued assistance under the collaboration
        agreement and the technology being jointly developed with Novellus achieving
        the
        milestones set forth below, we expect to acquire all significant rights to
        the
        technology developed jointly by Novellus and us and to obtain the right to
        call
        on Novellus for reasonable technical assistance for a period of seven years.
        As
        part of the contract renewal, we have issued to Novellus a warrant to purchase
        4,705,000 shares of our common stock at an exercise price of $.001 per share,
        for an aggregate purchase price assuming total exercise of $4,705, which
        will
        expire on April 1, 2011. The milestones have been established and are set
        forth
        below, as well as their expected dates of completion. Novellus has agreed
        under
        the extension agreement to the termination of all of its previously outstanding
        warrants and options to purchase Neah Power Washington common stock.
  The
        milestones to which we have agreed with Novellus under a letter agreement
        relating to the technology collaboration agreement, as well as the target
        dates
        for completion and the related vesting schedule of the warrant, are as follows:
 (1)
                The
                    warrant will vest as to ten percent (10%) of the shares of our
                    common
                    stock when Novellus and we complete a fully self contained prototype
                    fuel
                    cell capable of producing 10 Watts of power continuously for
                    5 hours using
                    one detachable cartridge. The prototype will be approximately
                    40% larger
                    than the intended size of our initial military product.
  Milestone
        Date: September 30, 2007
 (2)
                The
                    warrant will vest as to fifteen percent (15%) of the shares of
                    our common
                    stock when Novellus and we complete a fully self-contained fuel
                    cell
                    capable of producing 45 Watts of peak power and 300 WH capability
                    at 20
                    Watts average operating power. This prototype will be the same
                    size as our
                    initial military product, i.e. about 0.9 liter, which is the
                    same size as
                    a standard disposable battery widely used in the military.
 
 Milestone
          Date: September 30, 2007
  (3)
                The
                    warrant will vest as to fifty percent (50%) of the shares of
                    our common
                    stock when Novellus and we complete all of the following tasks:
  •
                Establish
                    a pilot production line to assemble completed fuel cells.
 
 •
                Finalize
                    a manufacturing process for silicon electrodes based on the most
                    common
                    silicon wafer format, based on commercially available equipment,
                    and
                    identification of a manufacturing partner that is capable and
                    willing to
                    run the process.
 
 •
                Reduce
                    the cost of processing porous silicon electrodes to $30 or less
                    per
                    silicon wafer. One silicon wafer is expected to yield 12 electrodes.
  7
  Milestone
        Date: December 31, 2007
 (4)
                The
                    warrant will vest as to twenty-five percent (25%) of the shares
                    of our
                    common stock when Novellus and we complete all of the following
                    tasks:
 •
                Reduce the
                    electrode catalyst loading to 25-30% of its value as of May 2005. Catalyst
                    materials form a large part of the production cost of any methanol
                    fuel
                    cell; reaching this target would allow us to meet our cost of
                    goods
                    targets in the future.
 
 •
                Develop
                    a plan to scale our fuel cell production process to commercial
                    volumes,
                    and to adapt it to commercially available equipment.
  Milestone
        Date: March 31, 2008
  The
        agreement with Novellus contains the following incentives for Novellus to
        complete the four milestones described above by their respective target
        dates:
 •
                If
                    the milestone is completed on or before 120 days following the
                    target
                    date, there will be no penalty and 100% of the Warrants scheduled
                    to vest
                    under the milestone will vest in Novellus;
  •
                If
                    the milestone is completed after 120 days following the target
                    date but on
                    or before 210 days following the target date, there will be a
                    one-third
                    penalty and only 66.67% of the Warrants scheduled to vest under
                    the
                    milestone will vest in Novellus;
 
 •
                If
                    the milestone is completed after 210 days following the target
                    date but on
                    or before 300 days following the target date, there will be a
                    two-third
                    penalty and only 33.33% of the Warrants scheduled to vest under
                    the
                    milestone will vest in Novellus; or
 
 •
                If
                    the milestone is completed after 300 days following the target
                    date, there
                    will be a 100% penalty and 0% of the Warrants scheduled to vest
                    under the
                    Milestone will vest in Novellus.
  The
        value
        of the warrant has been calculated using the Black Scholes method pursuant
        to
        FASB Statement of Financial Accounting Standards No. 123(R) at approximately
        $16,000,000 and will be accounted for ratably as each specific milestone
        is
        achieved. Because no milestones have yet been reached, no expense has been
        recorded for the warrant through September 30, 2007.
  Based
        on
        the current status of development of a military battery replacement fuel
        cell
        and particularly in light of our focus on developing a closed loop system,
        we
        believe it is unlikely that the above milestones will be met either on their
        initial or extended target dates. As a result. we are currently in negotiations
        with Novellus regarding a replacement for the current technology collaboration
        agreement and warrant agreement. There can be no assurance that such replacement
        agreements will be successfully negotiated.
  Under
        certain circumstances, the Company can exercise a repurchase right to acquire
        warrant stock acquired by Novellus prior to achieving any specific milestone.
        Under such circumstances, Novellus could only recover the exercise price
        it had
        paid for the repurchased stock.
  In
        connection with our entry into the amended technology collaboration agreement
        with Novellus on May 26, 2006, we issued an option to purchase 1,000,000
        shares
        of our common stock to Dr. Drewery. The option will vest upon completion
        of the
        milestones applicable to the warrant issued to Novellus.
  8
  The
        2006
        US Department of Defense Appropriations Bill included approval up to $1.75
        million for the development of porous silicon direct methanol fuel cell
        technology. The Company has finalized negotiations with the Department of
        Defense ("DOD") and the Office of Naval Research ("ONR") under such approval
        for
        a 12 month contract of $1.377 million which commenced in July 2007.
        However, if the grant and award funds or payments from our strategic partner
        are
        not received on a timely basis, the failure to obtain alternative financing
        and
        the necessary working capital would have a material adverse effect on the
        development program and business prospects and, depending upon the shortfall,
        the Company may have to curtail its operations. We will be the owner of the
        rights to any intellectual property arising under this program.
  The
        2006
        US DOD Bill also included a $1.31 million project for further development
        of
        fuel cell technology. A proposal was submitted in early December 2007 and
        this
        contract is expected to be finalized and begin in the second quarter of fiscal
        2008.
  During
        May 2006, we also signed a one year extension, retroactive to February 15,
        2006
        and ending August 14, 2007, to an agreement with McBee Strategic Consulting
        for
        representation and marketing by Mr. Steve McBee, a lobbyist, who works to
        obtain
        entry to federal government opportunities. The fee under this agreement is
        $15,000 monthly through August 15, 2006, subject to our agreement to increase
        this monthly fee to $18,000 per month from August 15, 2006 through February
        14,
        2007. We did not agree to any increase to the monthly fee and the agreement
        expired in accordance with its terms.
  Having
        achieved stable, high power operation of our silicon-based chemical reactor,
        we
        scheduled the assembly a complete working prototype, including all auxiliary
        subsystem components, for bench-top testing. In order to do so, however,
        we
        required additional financing. We raised approximately $6,800,000 in the
        public
        offering which closed on May 11, 2007, in order to expand operations and
        convert
        the preliminary prototype into a self-contained, portable prototype to be
        used
        to sample various U.S. military organizations and other potential OEMs. On
        September 29, 2007, we announced the demonstration of the working
        prototype.
  **Our
        Unique Patented Technology**
  We
        are
        developing a micro direct methanol fuel cell (“DMFC”) system. Fuel cells use a
        chemical reaction to generate electricity that can be used to power devices.
        This external electrical current (carried by negatively charged electrons)
        is
        balanced by an internal flow of positively charged ions through an
‘electrolyte’. Protons and electrons are released from the fuel at an electrode
        (the ‘anode’) and are transported away by an ‘oxidizer’ at a second electrode
        (the ‘cathode’). Our approach is differentiated from that of our competitors by
        our use of proprietary porous silicon electrodes and the use of liquid
        electrolytes. In our approach, methanol mixed with electrolyte is
        electrochemically reacted at the anode, while a flow of oxidizer and electrolyte
        is electrochemically reacted at the cathode. Compared to competing DMFC
        technologies that use carbon-based electrodes and solid PEM’s, we believe that
        our approach will be able to deliver higher power densities, at lower cost,
        and
        with a more reliable operation in a broader range of environmental conditions.
        We believe that our ability to use Si electrodes, leverage mainstream
        semiconductor processing for cost and manufacturability, and carry the fuel
        and
        oxidant on board gives us a distinct competitive edge.
  **Porous
        Silicon Electrodes**
  Our
        electrode architecture uses conductive porous silicon as the catalyst support
        structure rather than carbon. Starting with a silicon wafer much like that
        used
        in the semiconductor industry, millions of microscopic pores of tightly
        controlled micron sized dimensions are patterned and etched in the silicon
        to
        create about 300 micrometers long. A conductive film is then applied to the
        surface of the pore walls followed by a catalyst coating on top of 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 adjusting the pore diameters and substrate thickness to optimize the
        power
        density and cost.
  **Basic
        Cell Design**
  The
        proprietary Si electrodes are assembled into cells and stacks. Varying numbers
        of stacks can be assembled together based on the power required from the
        device.
        Fuel, electrolyte and oxidant are circulated through the stacks, and the
        electrochemical reactions generate power.
  9
  **Overall
        System Design**
  The
        supply of fuels to the fuel cell stack is accomplished by a series of miniature
        pumps, channels through which the fluids are carried and fuel reaction chambers.
        Fuel and oxidizer are contained in a cartridge that may be detached from
        the
        fuel cell and replaced in order to refuel the system. The miniature pumps
        are
        used to drive fuel, electrolyte, and oxidizer around two closed loops, past
        the
        anode and the cathode respectively.
  For
        the
        anode the following process takes place:
 (1)
                Liquid
                    methanol and electrolyte are continuously pumped into the stack
                    and
                    through the silicon pores in the anode;
 
 (2)
                Unused
                    methanol, electrolyte and carbon dioxide are forced out of the
                    stack;
 
 (3)
                Carbon
                    dioxide is separated from the methanol stream and vented into
                    the air;
 
 (4)
                Contaminants
                    are removed from the methanol and electrolyte stream;
 
 (5)
                Fresh
                    methanol is injected into the fuel stream from the cartridge
                    as needed;
                    and
 
 (6)
                The
                    fuel stream is then pumped back into the stack.
  This
        recirculation process continues until all available methanol in the replaceable
        fuel cartridge has been consumed.
  For
        the
        cathode the following process takes place:
  (1)
                Liquid
                    oxidant is continuously pumped into the stack and across the
                    surface of
                    the silicon pores;
  (2)
                Unused
                    oxidant and reduced oxidant compounds are forced out of the stack;
  (3)
                Oxidant
                    regenerator is reacted with reduced oxidant compounds to convert
                    them back
                    into oxidant;
  (4)
                Water
                    generated at the cathode is collected in the fuel cartridge;
  (5)
                Fresh
                    oxidant is injected into the oxidant stream from the cartridge
                    as needed;
                    and
  (6)
                The
                    oxidant stream is then pumped back into the stack.
  Again,
        this recirculation process continues until all available methanol in the
        replaceable fuel cartridge has been consumed. Since the oxidant is regenerated
        in the Neah system, the amount of oxidant in the fuel cell and cartridge
        is
        small.
  The
        fuel
        cartridge in our fuel cells contains flexible storage compartments, which
        contain fuel, a smaller quantity of oxidizer, and waste products produced
        in the
        reaction. The cartridge interfaces to the fuel cell unit by a detachable
        connection engineered to prevent exposure of the user to any liquid chemicals.
  10
  **Comparison
        Between Porous Si Fuel Cells and PEM-Based Designs**
  We
        believe that the principal advantages of our approach over PEM-based designs
        include:
 •
                Our
                    use of porous Si 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 with 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. Neah 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 our Company.
  •
                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.
 **Technical
        Achievements**
  We
        believe that our development effort has produced significant achievements
        to
        date. We further believe that these accomplishments have reduced many of
        the
        technology risks associated with the development of Neah Power Washington
        fuel
        cells.
  The
        following is a qualitative list of these accomplishments.
  (1)
                Porous
                    silicon pilot production capability established at Neah Power
                    Washington -
                    A scalable process has been defined;
  (2)
                Capable
                    of depositing metals in high-aspect ratio silicon pores - Various
                    deposition techniques have been developed;
  (3)
                Demonstrated
                    high power electrode structures for
                    DMFCs;
  11
  (4)
                Demonstrated
                    stable 8 cell and 16-cell stack operation;
  (5)
                Developed
                    balance of plant components for use in prototypes;
  (6)
                Developed
                    computer models to predict complete fuel cell system performance
                    and cost;
                    and
  (7)
                Filed
                    patents to protect our unique technology.
  (8)
                Demonstrated
                    a closed loop functioning prototype of a fuel cell generating
                    net power.
  (9)
                Implemented
                    Deep Reactive Ion Etching to create the Si electrodes.
 **Intellectual
        Property**
  We
        filed
        our first U.S. patent application in November 1999. Since then, we have filed
        patent applications covering many of the components and systems involved
        in our
        fuel cell design. In November 2003, we were awarded our first patent, U.S.
        Pat.
        No. 6,641,948, and in February, 2005, were awarded a continuation patent,
        U.S.
        Pat. No. 6,852,443, both entitled “Fuel Cells Having Silicon Substrates and/or
        Sol-Gel Derived Support Structures.” These foundational patents broadly cover
        silicon-based electrodes for use in fuel cells. Subsequently, we have been
        granted seven other patents which are fundamental to our technology and cover
        the use of porous substrates coated with catalyst as fuel cell electrodes
        and
        electrode structures, cell bonding techniques, and cartridges. When appropriate,
        foreign patent equivalents are pursued under the Patent Cooperation Treaty
        (the
“PCT”). We monitor patent filings carefully and are not aware of any other
        patents that create potential conflicts with our fuel cell design or technology.
  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
        in
        the U.S. The following are our basic areas of patent coverage.
  **U.S.
        Patents:**
 (1)
                U.S.
                    Patent No. 6,641,948 entitled “Fuel Cells Having Silicon Substrates And/Or
                    Sol-Gel Derived Support Structures” issued November 4, 2003. (401)
                    Expires: April 5, 2020.
  (2)
                U.S.
                    Patent No. 6,720,105 entitled “Metallic Blocking Layers Integrally
                    Associated With Fuel Cell Electrode Structures And Fuel Cell
                    Electrode
                    Stack Assemblies” issued April 13, 2004. (401C2) Expires: April 5, 2020.
  (3)
                U.S.
                    Patent No. 6,808,840 entitled “Silicon-Based Fuel Cell Electrode
                    Structures And Fuel Cell Electrode Stack Assemblies” issued October 26,
                    2004. (401C3) Expires: April 5, 2020.
  (4)
                U.S.
                    Patent No. 6,811,916 entitled “Fuel Cell Electrode Pair Assemblies And
                    Related Methods” issued November 2, 2004. (402) Expires: December 12,
                    2021.
  (5)
                U.S.
                    Patent No. 6,852,443 entitled “Fuel Cells Having Silicon Substrates And/Or
                    Sol-Gel Derived Support Structures” issued February 8, 2005. (401D1)
                    Expires: April 5, 2020.
  (6)
                U.S.
                    Patent No. 6,924,058 entitled “Hydrodynamic Transport and Flow Channel
                    Passageways Associated with Fuel Cell Electrode Structures and
                    Fuel Cell
                    Electrode Assemblies” issued Aug. 2, 2005. (401C5) Expires: April 5, 2020.
  (7)
                U.S.
                    Patent No. 7,105,245 entitled “Fuel Cell System Reactant Supply and
                    Effluent Storage Cartridges” issued September 12, 2006. (404C2) Expires:
                    December 20, 2024.
  (8)
                U.S.
                    Patent No. 7,118,822 entitled “Fuel Cell Electrode Pair Assemblies and
                    Related Methods” issued October 10, 2006. (402C1) Expires: October 16,
                    2022.
  (9)
                U.S.
                    Patent No. 7,157,177 entitled “Porous Fuel Cell Electrode Structures
                    Having Conformal Electrically Conductive Layers Thereon” issued January 2,
                    2007. (403) Expires: Sept. 29, 2023.
  (10)
                U.S.
                    Pat. No. 7,198,864 entitled “Silicon-Based Fuel Cell Electrode Structures”
                    issued April 3, 2007. (401D2) Expires: April 5, 2020.
  (11)
                U.S.
                    Pat. No. 7,205,665 entitled “Porous Silicon Undercut Etching Deterrent
                    Masks and Related Methods” issued April 17, 2007. (414) Expires: Nov. 11,
                    2025.
  12
 
 **Foreign
        Patents:**
 (1)
                Chinese
                    Patent No. CN1205685C entitled “Fuel Cells Having Silicon Substrates
                    And/Or Sol-Gel Derived Support Structures” issued June 1, 2005. (401CN)
                    Expires: November 17, 2019.
 
 In
        addition to the foregoing patents, we also have the following applications
        pending:
  **U.S.
        Utility Patent Applications:**
 (1)
                U.S.
                    Pat. Appl. No. 10/996,647 entitled “Silicon-Based Fuel Cell Electrode
                    Structures” filed Nov. 23, 2004. (401D2)
  (2)
                U.S.
                    Pat. Appl. No. 10/251,518 entitled “Fuel Cells Having Internal Multistream
                    Laminar Flow” filed September 20, 2002. (404C1)
  (3)
                U.S.
                    Pat. Appl. No. 10/966,721 entitled “Nitric Acid Regeneration Fuel Cell
                    Systems” filed Oct. 15, 2004. (405)
  (4)
                U.S.
                    Pat. Appl. No. 10/892,876 entitled “Fuel Cells Having Cross Directional
                    Laminar Flowstreams” filed Jul. 16, 2004. (406)
  (5)
                U.S.
                    Pat. Appl. No. 11/313,550 entitled “Detachable Reactant Supply and
                    Effluent Storage Cartridges, Layered Pump Assemblies, and Rotatable
                    Fluid
                    Transfer Valve Disk Assemblies for Use with Regenerative Fuel
                    Cell
                    Systems” filed Dec. 20, 2005. (413)
  (6)
                U.S.
                    Pat. Appl. No. 11/530,815 entitled “Closed Liquid Feed Fuel Cell Systems
                    And Reactant Supply And Effluent Storage Cartridges Adapted For
                    Use With
                    The Same” filed September 11, 2006. (404C3)
 **Foreign
        Patent Applications:**
 (1)
                Canadian
                    Pat. Appl. No. 2,392,115 entitled “Fuel Cells Having Silicon Substrates
                    And/Or Sol-Gel Derived Support Structures” filed July 27, 2002. (401CA)
  (2)
                Chinese
                    Pat. Appl. No. 00818422.4 entitled “Fuel Cells Having Silicon Substrates
                    And/Or Sol-Gel Derived Support Structures” filed July 26, 2002. (401CN)
  (3)
                European
                    Pat. Appl. No. 00991398.9 entitled “Fuel Cells Having Silicon Substrates
                    And/Or Sol-Gel Derived Support Structures” filed May 17, 2002. (401EP)
  (4)
                Japanese
                    Pat. Appl. No. 2001-537811 entitled “Fuel Cells Having Silicon Substrates
                    And/Or Sol-Gel Derived Support Structures” filed May 17, 2002. (401JP)
  13
  (5)
                Canadian
                    Pat. Appl. No. 2,444,688 entitled “Porous Silicon And Sol-Gel Derived
                    Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
                    October 17, 2003. (401CCA)
  (6)
                Chinese
                    Pat. Appl. No. 02811803.0 entitled “Porous Silicon And Sol-Gel Derived
                    Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
                    October 20, 2003. (401CCN)
  (7)
                  European
                      Pat. Appl. No. 02731430.1 entitled “Porous Silicon And Sol-Gel Derived
                      Electrode Structures And Assemblies For Use With Fuel Cell
                      Systems” filed
                      November 19, 2003. (401CEP)
  (8)
                Japanese
                    Pat. Appl. No. 2002-584409 entitled “Porous Silicon And Sol-Gel Derived
                    Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
                    October 20, 2003. (401CJP)
  (9)
                Canadian
                    Pat. Appl. No. 2,472,232 entitled “Porous Fuel Cell Electrode Structures
                    Having Conformal Electrically Conductive Layers Thereon” filed July 3,
                    2004. (403CA)
  (10)
                Chinese
                    Pat. Appl. No. 03801936.1 entitled “Porous Fuel Cell Electrode Structures
                    Having Conformal Electrically Conductive Layers Thereon” filed July 2,
                    2004. (403CN)
  (11)
                European
                    Pat. Appl. No. 03701220.0 entitled “Porous Fuel Cell Electrode Structures
                    Having Conformal Electrically Conductive Layers Thereon” filed July 3,
                    2004. (403EP)
  (12)
                Japanese
                    Pat. Appl. No. 2003-558944 entitled “Porous Fuel Cell Electrode Structures
                    Having Conformal Electrically Conductive Layers Thereon” filed July 2,
                    2004. (403JP)
 **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.
  **Employees**
  We
        currently have approximately 30 employees, including 3 executive officers,
        25
        persons in research and development and 2 clerical and administrative personnel.
        We have the right under our Technology Collaboration Agreement with Novellus
        Systems to be supplied with two full time scientists whose salary and expenses
        we are responsible for.
  14
  **Reports
        to Security Holders**
 (1)
                We
                    intend to deliver an annual report to security holders prior
                    to any
                    meeting of shareholders, which report will include audited financial
                    statements.
  (2)
                Our
                    shares currently trade on the OTC Bulletin Board under the symbol
                    "NPWS."
                    We are subject to the informational requirements of the Securities
                    Exchange Act of 1934, as amended, and in accordance therewith
                    must file
                    reports, proxy statements and other information with the SEC.
                    Such
                    reports, proxy statements and other information filed may be
                    inspected
                    without charge and copies may be had at the prescribed fees at
                    the SEC’s
                    address and at the SEC’s website, each as provided immediately below.
  (3)
                The
                    public may read and copy any materials we file with the SEC at
                    the SEC’s
                    Public Reference Room at 100 F Street, NE, Washington, DC 20549.
                    The
                    public may obtain information on the operation of the Public
                    Reference
                    Room by calling the SEC at 1-800-SEC-0330. Additionally, the
                    SEC maintains
                    an Internet site that contains reports, proxy and information
                    statements,
                    and other information regarding issuers that file electronically
                    with the
                    SEC, which can be found at http://www.sec.gov.
 **Risk
        Factors**
  An
        investment in our company is highly speculative in nature and involves an
        extremely high degree of risk. If any of the events, contingencies,
        circumstances or conditions described in this risk factors section actually
        occur, our business, financial condition or results of operations could be
        seriously harmed.
  **Risks
        Related to Our Business**
  **Our
        Auditors Have Issued a “Going Concern” Modification In Their Report On Our
        Financial Statements.** Our
        auditors’ report on the Neah Power Washington financial statements as at
        September 30, 2007 and for the transition period then ended and the fiscal
        year
        ended December 31, 2006, indicates that there is substantial doubt about
        our
        ability to continue as a going concern based upon our balance sheet, cash
        flows
        and liquidity position. See Note 2 to Financial Statements. ****
  **We
        Have Experienced Severe Working Capital And Liquidity Shortages And Expect
        To
        Continue To Do So For The Near Future.** We
        had a
        working capital deficiency of $359,400 at September 30, 2007, and at December
        31, 2006, we had a working capital deficiency of $2,563,170. Our cash operating
        expenses are approximately $500,000 per month, and we have minimal revenues.
        We
        expect this situation to continue for the foreseeable future. We are in the
        process of finalizing negotiations with the Department of Defense (“DoD”) and
        the Office of Naval Research (“ONR”) for a contract relating to an appropriation
        for up to $1.31 million, primarily for expense reimbursement over approximately
        a twelve month time frame for a project that would start in early 2008 subject
        to execution of an agreed contract.
  **We
        Will Need To Raise Significant Additional Capital To Continue Our Business
        Operations.** Our
        cash
        position at September 30, 2007 was $710,441 as compared to our cash position
        at
        December 31, 2006, of $1,141,905. Our current monthly cash operating expenses
        are approximately $500,000. In the event we are unable to obtain, on a timely
        basis, the additional financing required to meet our cash needs, we will
        have to
        reduce or curtail operations which would materially and adversely affect
        our
        development efforts. Even if such financing is obtained, it may not be on
        commercially acceptable terms or may otherwise substantially dilute the equity
        interests of current stockholders in our company. ****
  **We
        Have A History Of Losses Since Our Inception, We Expect Future Losses And
        We May
        Never Achieve Or Sustain Profitability.** We
        have
        incurred net losses each year since our inception and had accumulated losses
        of
        approximately $35.6 million through September 30, 2007. We expect to continue
        to
        incur net losses at least through our fiscal year 2008 and these losses may
        be
        substantial. To implement our business strategy, we will have to incur a
        high
        level of fixed operating expenses and we will continue to incur considerable
        research and development expenses and capital expenditures. Accordingly,
        if we
        are unable to generate substantial revenues and positive cash flows we will
        not
        achieve profitability. Even if we do achieve profitability, we may not be
        able
        to sustain or increase our profitability on a quarterly or annual basis.
  15
  **Our
        Ability To Generate Future Revenues Will Depend On A Number Of Factors, Many
        Of
        Which Are Beyond Our Control.** These
        factors include the rate of market acceptance of our products, regulatory
        developments and general economic trends. Due to these factors, we cannot
        anticipate with any degree of certainty what our revenues, if any, will be
        in
        future periods. You have limited historical financial data and operating
        results
        with which to evaluate our business and our prospects. As a result, you should
        consider our prospects in light of the early stage of our business in a new
        and
        rapidly evolving market. ****
  **We
        Have Had No Commercial Product Sales. We May Not Be Able To Manufacture Or
        Commercialize Our Products In A Cost-Effective Manner.** We
        are
        still a research and development company and have not made any product sales.
        Our activities have been limited to demonstration and prototype models. We
        may
        not be able to produce any of our products in a cost-effective manner, if
        at
        all, and, if produced, we may not be able to successfully market these products.
        See "Description of Business." ****
  **We
        May Not Be Able To Develop The Necessary Technology To Introduce And Market
        Our
        Products In A Timely Fashion, If At All.** Our
        product and technology development efforts are subject to unanticipated and
        significant delays, expenses and technical or other problems, as well as
        the
        possible lack of funding to complete this development. Partially due to our
        lack
        of adequate funding, Neah Power Washington failed to timely meet its initial
        milestones under an existing development agreement with a government contractor.
        Although we are continuing to operate under such agreement, there is no
        assurance that such contract will not be cancelled and our funding ceased.
  Our
        future success will depend upon our products and technologies meeting acceptable
        cost and performance criteria, and upon their timely introduction into the
        marketplace. None of our proposed products and technologies may ever be
        successfully developed, and even if developed, they may not actually perform
        as
        designed.
  Failure
        to develop, or significant delays in the development of, our products and
        technology would have a material adverse effect on our ability to sell our
        products and generate sufficient cash to achieve profitability.
  **Market
        Acceptance Of Our Fuel Cell Products May Take Longer To Occur Than We Anticipate
        Or May Never Occur.** Our
        silicon-based fuel cell products represent a new technology and our success
        will
        depend on this technology achieving market acceptance. Because we design
        our
        products to capitalize on markets that presently utilize or are serviced
        by
        products from traditional and well-established battery manufacturers, we
        may
        face significant resistance from end-users to adopt a new and alternative
        power
        source technology. ****
  Fuel
        cell
        products for portable and mobile applications represent an emerging market
        and
        we do not know whether our targeted distributors, resellers or end-users
        will
        purchase our products. The development of a mass market for our portable
        and
        mobile products may be impacted by many factors, some of which are beyond
        our
        control, including:
  •
              cost
                  competitiveness of portable and mobile products;
  •
              consumer
                  reluctance to try our products;
  •
              consumer
                  perception of our systems’ safety; and
  •
              emergence
                  of newer, more competitive technologies and products.
  If
        a mass
        market develops more slowly than we anticipate or fails to develop, we may
        not
        be able to recover the expenses we incurred to develop these products. See
        Competition on page 14.
  **Certain
        Corrosive Acids Used In Our Fuel Cells May Limit Their Acceptance.** The
        electrolyte and oxidant components of our fuel cells include a sulfuric and
        nitric acid base. Although we intend to manufacture our containers in a manner
        that we believe will virtually eliminate the risk of leakage, there can be
        no
        assurance that manufacturing or design defects will not cause leaking of
        these
        highly corrosive and toxic acids. In addition, the very existence of this
        element of our products may cause OEM and other potential volume purchasers
        to
        be reluctant to replace existing PEM and other technologies with our fuel
        cell
        systems. In addition, we may be required to place warning labels on any consumer
        products we distribute. ****
  16
  **Consumers
        May Not Choose To Adopt The Notion Of Purchasing Cartridges.** Even
        if
        we achieve the acceptance of our fuel cells by OEMs, consumers might buy
        substantially fewer cartridges than we anticipate. Since no portable fuel
        cell
        product has been successful in the market, consumer behavior and acceptance
        is
        unknown.
  **Failure
        of Our Field Tests Could Negatively Impact Demand For Our Products.** We
        have
        not yet begun field testing our products. We may encounter problems and delays
        during field tests for a number of reasons, including the failure of our
        technology or the technology of third parties, as well as our failure to
        maintain and service our prototypes properly. Many of these potential problems
        and delays are beyond our control. Any problem or perceived problem with
        our
        field tests could materially harm our reputation and impair market acceptance
        of, and demand for, our products. ****
  **We
        Do Not Have The Manufacturing Experience To Handle Large Commercial
        Requirements.** We
        may
        not be able to develop manufacturing technologies and processes and expand
        our
        plant facilities to the point where they are capable of satisfying large
        commercial orders, including the demand for both military and commercial
        fuel
        cell systems. Development and expansion of these technologies and processes
        require extensive lead times and the commitment of significant financial,
        engineering and human resources. We may not successfully develop the required
        manufacturing technologies and processes. We may not find suitable partners
        for
        outsourcing our manufacturing.
  **We
        May Not Be Able To Satisfy Our Contractual Obligations To Our Customers If
        We
        are Unable To Obtain Adequate Manufacturing Facilities.** We
        currently have no production facilities that are capable of mass producing
        fuel
        cell systems. Even if we are successful in developing operating fuel cells
        for
        sale, we will not be able to meet our obligations to our military or commercial
        customers unless we promptly identify, acquire or outsource such facilities
        and
        then bring on-line new, large-scale manufacturing facilities. We have not
        yet
        identified suitable facilities and may not be able to do so. If we encounter
        delays in identifying or financing suitable manufacturing plant facilities
        for
        purchase, lease or outsource, in obtaining the necessary equipment or in
        hiring
        and training personnel to commence large-scale manufacturing, we will not
        be
        able to fill customer orders, or profitably manufacture our various fuel
        cell
        systems. If we are unable to finance and establish manufacturing capability,
        we
        will be required to license our technology for third party manufacture which
        will significantly reduce our potential for revenues and profits. ****
  **We
        May Not Be Able To Meet Our Customers’ Demand For Our Products If We Do Not
        Successfully Manage The Expansion Of Our Operations.** Locating
        and establishing new manufacturing facilities will place significant demands
        on
        our managerial, technical, financial and other resources. We will be required
        to
        make significant investments in our engineering and logistics systems, financial
        and management information systems and to retain, motivate and effectively
        manage our employees. There can be no assurance that our management skills
        and
        systems currently in place will enable us to implement our strategy or enable
        us
        to attract and retain skilled management and production personnel. Our failure
        to manage our growth effectively or to implement our strategy would have
        a
        material adverse effect on our ability to produce products and meet our
        contractual obligations. ****
  **Because
        We Will Depend On Third-Party Suppliers, We May Experience Delays In Receiving
        Key Materials And Components Necessary To Produce Our Fuel Cell Systems.** If
        we
        successfully develop our fuel cell, we will depend on third parties for the
        manufacture and assembly of materials and components used to make our products.
        If any of our suppliers are unable or unwilling to provide us with materials
        and
        components on commercially reasonable terms, or at all, delays in identifying
        and contracting for alternative sources of supply would adversely affect
        our
        ability to develop, manufacture and market our products. In addition, some
        of
        these materials and components are purchased from a single or limited number
        of
        supply sources.
  **We
        May Be Subject To Shortages Of Key Materials In The Global Marketplace.** Since
        we
        depend on certain raw materials like silicon wafers to make our fuel cells,
        we
        may become subject to either supply shortages or substantial price increases
        of
        silicon wafers in certain market conditions. We also use gold and platinum
        in
        our processes; these precious metals are commodities and subject to global
        market pressures and shortages. These shortages might hamper our ability
        to ship
        our products on time, might cause us to have to spend considerably more than
        budget to complete our projects, or might make our products prohibitively
        expensive.
  17
  **We
        May Not Be Able To Sell Our Fuel Cell Systems If They Are Not Compatible
        With
        The Products Of Third-Party Manufacturers Or Our Potential Customers.** Our
        success will depend upon our ability to make our products compatible with
        the
        products of third-party manufacturers. In addition, our mobile and portable
        products will be successful only if our potential customers redesign or modify
        their existing products to fully incorporate our products and technologies.
        Our
        failure to make our products and technologies compatible with the products
        of
        third-party manufacturers or the failure of potential customers to redesign
        or
        make necessary modifications to their existing products to accommodate our
        products would cause our products to be significantly less attractive to
        customers. ****
  **The
        Fuels On Which Our Fuel Cell Products Rely May Not Be Readily Available On
        A
        Cost-Effective Basis.** Our
        fuel
        cell products require methanol and oxygen to operate. While ambient air supplies
        the necessary oxygen, we obtain methanol from suppliers. Even if methanol
        is
        available to us, if its price is such that power produced by our systems
        would
        cost more than alternatives, potential users would have less of an economic
        incentive to purchase our units. ****
  **We
        May Be Unable To Compete Successfully In A Highly Competitive Market.** The
        development and marketing of fuel cells and fuel cell systems is extremely
        competitive. In many cases, we compete directly with battery and other micro
        fuel cell producers. In addition, a number of firms throughout the world
        have
        established PEM fuel cell development programs. 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.
  **We
        May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable
        For Infringing The Intellectual Property Rights Of Others.**Our ability
        to compete effectively will depend, in part, on our ability to maintain the
        exclusive ownership of our technology and manufacturing processes through
        a
        combination of patent and trade secret protection, non-disclosure agreements
        and
        other arrangements. Patents may not be issued under pending applications
        and any
        issued patents that we hold may not provide adequate protection for our products
        or processes. Moreover, patent applications filed in foreign countries are
        subject to laws, rules and procedures that differ from those of the United
        States and any resulting patents may be difficult to enforce. See Intellectual
        Property on page 12.
  There
        can
        be no assurance that our competitors will not either independently develop
        proprietary information that is the same or similar to ours or obtain access
        to
        our proprietary information. In addition, there can be no assurance that
        we
        would prevail if challenges to our intellectual property rights are asserted
        by
        third parties against us. We could incur substantial costs defending patent
        infringement suits brought by others and prosecuting patent infringement
        suits
        against third party infringers. Moreover, some foreign countries provide
        significantly less patent protection than the United States. Competitors’
products may infringe upon our patents and the cost of protecting our rights
        may
        be substantial, if not cost prohibitive, thereby undermining our ability
        to
        protect our products effectively.
  18
  We
        rely
        on confidentiality agreements with our employees and third parties to protect
        our unpatented proprietary information, know-how and trade secrets but we
        have
        no effective means to enforce compliance with the terms of these agreements.
  **Government
        Regulation Could Impose Burdensome Requirements And Restrictions That Could
        Impair Demand For Our Fuel Cell Products.** We
        do not
        know the extent to which any existing regulations may impact our ability
        to
        distribute, market, or install our fuel cells or their cartridges. Once our
        fuel
        cell products reach the commercialization stage and we begin distributing
        our
        systems to our target early markets, federal, state or local government agencies
        may seek to impose regulations. Any government regulation of our fuel cell
        products, whether at the federal, state or local level, including any
        regulations relating to the use of these products, may increase our costs
        and
        the price of our fuel cells or cartridges, and may have a negative impact
        on our
        revenue and profitability. Furthermore, we expect that approval will be required
        to carry our fuel cell cartridges onto airplanes. These approvals have not
        yet
        been obtained nor have we determined the actual restriction or the specifics
        of
        what will be required.
  **Any
        Accidents Involving The Flammable Fuels Used With Our Products Could Impair
        Their Market Acceptance.** Our
        fuel
        cells use methanol which is flammable. While our fuel cells do not use these
        fuels in a combustion process, the methanol itself is flammable. Since our
        products have not yet gained widespread market acceptance, any accidents
        involving our systems or other fuel cell-based products could materially
        impede
        demand for our products. In addition, we may be held responsible for damages
        beyond the scope of our insurance coverage, which, at present, ranges from
        $1-2
        million depending on the nature of the claim. ****
  **We
        Could Be Liable For Environmental Damages Resulting From Our Research,
        Development And Manufacturing Operations.** Our
        business exposes us to the risk of harmful substances escaping into the
        environment, resulting in personal injury or loss of life, damage to or
        destruction of property, and natural resource damage. Depending on the nature
        of
        the claim, our current insurance policies may not adequately reimburse us
        for
        costs incurred in settling environmental damage claims, and in some instances,
        we may not be reimbursed at all. Our business is subject to numerous federal,
        state and local laws, regulations and policies that govern environmental
        protection. These laws and regulations have changed frequently in the past
        and
        it is reasonable to expect additional changes in the future. Our operations
        may
        not comply with future laws and regulations and we may be required to make
        significant unanticipated capital and operating expenditures. If we fail
        to
        comply with applicable environmental laws and regulations, governmental
        authorities may seek to impose fines and penalties on us or to revoke or
        deny
        the issuance or renewal of operating permits and private parties may seek
        damages from us. Under those circumstances, we might be required to curtail
        or
        cease operations, conduct site remediation or other corrective action, or
        pay
        substantial damage claims. ****
  **Our
        Success Depends On Attracting And Retaining Key Personnel.** The
        successful development, marketing and manufacturing of our products will
        depend
        upon the skills and efforts of a small group of management and technical
        personnel, including Dr. Chris D'Couto, our Chief Operating Officer, Dr.
        Art
        Homa, our Vice President of Engineering, and Leroy Ohlsen, our Chief Technology
        Officer. The loss of any of our key personnel could adversely impact our
        ability
        to execute our business plan. Furthermore, recruiting and retaining qualified
        executive, technical, marketing, manufacturing and support personnel in our
        emerging industry in the future will be critical to our success and there
        can be
        no assurance that we will be able to do so. We do not maintain “key-man” life
        insurance policies on any of our key personnel. As Neah Power grows, we may
        need
        to recruit other key personnel and out ability to recruit such key personnel
        may
        be limited ****
  **Our
        Principal Stockholders, Executive Officers And Directors Have Substantial
        Control Over Our Affairs And You Will Not Be Able To Influence The Outcome
        Of
        Any Important Transactions Involving Our Company.**Our executive
        officers and directors and stockholders who beneficially own more than 5%
        of our
        common stock will have the power to, in the aggregate, direct the vote of
        approximately 53% of our voting securities. Therefore, these persons may
        have
        the power to influence our business policies and affairs and determine the
        outcome of any matter submitted to a vote of our stockholders, including
        mergers, sales of substantially all of our assets and changes in control.
        See
        Security Ownership of Certain Beneficial Owners and Management on page
        59.
  19
  **We
        May Become Subject To Risks Inherent In International Operations Including
        Currency Exchange Rate Fluctuations And Tariff Regulations.** If
        we
        sell or license our products or technologies outside the United States, we
        will
        be subject to the risks associated with fluctuations in currency exchange
        rates.
        We do not intend to enter into any hedging or other similar agreements or
        arrangements to protect us against any of these currency risks. We also may
        be
        subject to tariff regulations and requirements for export licenses, particularly
        with respect to the export of certain technologies, unexpected changes in
        regulatory requirements, longer accounts receivable requirements and
        collections, difficulties in managing international operations, potentially
        adverse tax consequences, restrictions on repatriation of earnings and the
        burdens of complying with a wide variety of foreign laws. ****
  **We
        May Be Unable To Obtain The Additional Capital Needed To Operate And Grow
        Our
        Business, Thereby Requiring Us To Curtail Or Cease Operations.** Our
        capital requirements in connection with our development activities and
        transition to commercial operations have been and will continue to be
        significant. We will require substantial additional funds to continue the
        research, development and testing of our technologies and products, to obtain
        patent protection relating to our technologies when appropriate, and to
        manufacture and market our products. There is no assurance that any additional
        financing will be available on commercially attractive terms, in a timely
        fashion, in sufficient amounts, or at all. If adequate funds are not available,
        we may have to scale back our operations, including our product development,
        manufacturing and marketing activities, all of which could cause us to lose
        both
        customers and market share and ultimately cease operations.
  **Our
        Quarterly Operating Results Are Likely To Be Volatile In The Future.** Our
        quarterly operating results are likely to vary significantly in the future.
        Fluctuations in our quarterly financial performance may result from, for
        example:
  •
              unevenness
                  in demand and orders for our products;
  •
              significant
                  short-term capital expenses as we develop our manufacturing facilities;
  •
              a
                  shortage of the raw materials used in the production of our fuel
                  cell
                  systems; and
  •
              difficulties
                  with our manufacturing operations.
  Because
        of these anticipated fluctuations, our sales and operating results in any
        fiscal
        quarter are likely to be inconsistent, may not be indicative of our future
        performance and may be difficult for investors to properly evaluate.
  **Risks
        Related to Our Common Stock**
  **We
        Have A Substantial Number Of Shares Outstanding.** We
        currently have outstanding 139,290,186 shares of common stock, as well as
        outstanding options to purchase an aggregate of 10,704,850 shares of common
        stock at exercise prices ranging between $0.20 and $2.87 per share and warrants
        to purchase 18,998,358 shares of common stock at exercise prices ranging
        from
        $0.20 to $2.00 per share. We also have approximately 23 million shares
        pledged as security under various loan agreements (which pledged shares are
        included in the total number of outstanding shares set forth above.
  Accordingly,
        on a fully-diluted basis (giving effect to the exercise of all outstanding
        options and warrants), as at the date of this prospectus, there would be
        issued
        and outstanding, an aggregate of 168,993,394 shares of our common stock,
        excluding an additional 4,705,000 shares underlying a warrant that we have
        issued to Novellus Systems, Inc. under our technology collaboration agreement
        with Novellus. The Novellus warrant is to vest according to a timetable based
        on
        the completion of certain milestones by specified Target Dates. Please see
        “Strategic Goals and Relationships” for a description of these milestones and
        the contractual vesting dates.
  **We
        Could Issue A Significant Amount Of Common Stock Or A Series Of Preferred
        Stock
        That Might Adversely Affect Our Existing Common Stockholders.** Our
        articles of incorporation, as amended, authorize the issuance of 500,000,000
        shares of common stock and 25,000,000 shares of “blank check” preferred stock,
        with designations, rights and preferences that may be determined from time
        to
        time by our board of directors which may be superior to those attached to
        the
        common stock. Accordingly, the board of directors is empowered, without further
        stockholder approval, to issue additional shares of common stock up to the
        authorized amount or to establish a series of preferred stock with dividend,
        liquidation, conversion, voting or other rights either of which could adversely
        affect the voting power or other rights of the holders of the existing common
        stock. Issuance of additional common stock at prices below the fair market
        value
        per share would result in dilution to our existing common stockholders.
        Moreover, shares of preferred stock could be convertible into shares of common
        stock in amounts that would result in similar dilution. In the event of a
        preferred stock issuance, the preferred stock could be used, under certain
        circumstances, as a method of discouraging, delaying or preventing a change
        in
        control of our company.
  20
  **Our
        Stock Price May Be Volatile And, As A Result, You Could Lose All Or Part
        Of Your
        Investment.** There
        is
        a very limited public market for our common stock. We cannot predict the
        extent
        to which, or if, investor interest will lead to the development of an active
        and
        liquid trading market. If
        a
        market for our common stock develops, the price at which our common stock
        will
        trade may be highly volatile and may fluctuate as a result of a number of
        factors, including the following:
  •
              the
                  number of shares available for sale in the
                  market;
  •
              variations
                  in our actual and anticipated operating results;
  •
              our
                  failure to timely achieve technical milestones;
  •
              our
                  failure to commercialize our fuel cell systems;
  •
              changes
                  in technology or competitive fuel cell solutions;
  •
              our
                  failure to meet analysts’ performance expectations; and
  •
              lack
                  of liquidity.
  In
        addition, stock markets, particularly the OTC Bulletin Board where our stock
        is
        currently traded, have experienced extreme price and volume fluctuations,
        and
        the market prices of securities of technology companies have been highly
        volatile. These fluctuations are often unrelated to operating performance
        and
        may adversely affect the market price of our common stock. As a result,
        investors may not be able to resell their shares on a timely basis if at
        all,
        and may lose their entire investment. See Market for Common Equity on
        page 23.
  **Because
        We Do Not Intend To Pay Any Dividends, Stockholders Must Rely On Stock
        Appreciation For Any Return On Their Investment In Our Common Stock.** We
        have
        not paid any dividends on our common stock and we do not intend to declare
        and
        pay any dividends on our common stock. Earnings, if any, are expected to
        be
        retained by us to finance and expand our business. ****
  **Our
        Common Stock Is Subject To Penny Stock Rules Which May Adversely Affect Trading.
        Were our Common Stock Ever DeListed It Would Become Less Liquid.** Our
        common stock is subject to the SEC’s penny stock rules, broker-dealers may
        experience difficulty in completing customer transactions and trading activity
        in our securities may be adversely affected. Because we are not listed on
        an
        exchange and our common stock has a market price per share of less than $5.00,
        transactions in our common stock may be subject to the “penny stock” rules
        promulgated under the Securities Exchange Act of 1934. Under these rules,
        broker-dealers who recommend such securities to persons other than institutional
        accredited investors must: ****
  • make
            a
            special written suitability determination for the purchaser;
  • receive
          the purchaser’s written agreement to a transaction prior to sale;
  • provide
          the purchaser with risk disclosure documents which identify certain risks
          associated with investing in “penny stocks” and which describe the market for
          these “penny stocks” as well as a purchaser’s legal remedies; and
  • 
        obtain a signed and dated acknowledgment from the purchaser demonstrating
        that
        the purchaser has actually received the required risk disclosure document
        before
        a transaction in a “penny stock” can be completed.
  21
  Because
        our common stock is subject to these rules, broker-dealers may find it difficult
        to effectuate customer transactions and trading activity in our securities
        may
        be adversely affected. As a result, the market price of our securities may
        be
        depressed, and you may find it more difficult to sell our securities.
  **Promotional
        Emails Sent After the Filing of our Registration Statement Could Result in
        Costly Litigation or Regulatory Proceedings.** On
        April
        18, 2007, Empire Financial Group, Inc., the underwriter of our offering of
        common stock and warrants which closed May 11, 2007, received correspondence
        from the enforcement department of NASD concerning a February 19, 2007 email
        that promoted the sale of our common stock and identified Jesup & Lamont
        Securities Corp. (an affiliate of Empire that was previously shown as a
        co-managing underwriter of this offering) as being involved in an underwriting.
        Although our inquiries have indicated that no one at our company or the
        underwriter had any involvement or participation in the preparation of
        dissemination of this promotional email, we may become the subject of a
        regulatory investigation, civil litigation or other proceedings, the defense
        of
        which could result in substantial cost and diversion of management’s time and
        attention regardless of the ultimate outcome. If a determination were made
        that
        anyone affiliated with us was involved with the emails, our financial condition
        and results of operations could be adversely affected.
  **Item
        2: Description of Property**
  We
        currently lease approximately 12,000 square feet of office and research and
        development space in two separate locations both located at 22122 20th Avenue
        S.E., Bothell, Washington, from an unaffiliated party, under a lease requiring
        the payment of monthly rent and shared expenses of approximately $15,000.
        Our
        lease expired in August 2007 and we are currently leasing our space on a
        month-to-month basis. We are currently negotiating with our landlord for
        new
        space which will allow us to combine our office and research and development
        space in one location.
  **Item
        3: Legal Proceedings**
  We
        are
        currently disputing an invoice from our former counsel Hodgson Russ LLP for
        $200,000 in legal fees in connection with the preparation of a Form 10
        registration statement that we filed with the Securities and Exchange
        Commission. We believe that there was an agreement for a cap of $60,000 on
        legal
        fees in connection with this filing. While a claim has been threatened, it
        has
        not been filed to date.
  On
        November 26, 2007, we entered into a Settlement Agreement and Mutual Release
        with our former placement agent, Burt Martin Arnold Securities, Inc *.* ,.
        and
        the lawsuit it filed on December 5, 2006, has been dismissed with prejudice.
        We
        agreed to deliver 350,000 fully registered shares of our common stock. If
        a
        registration statement does not become effective within 120 days, we will
        satisfy the settlement obligation with a cash payment of $105,000.
  From
        time
        to time, we may be involved in litigation relating to claims arising out
        of our
        operations in the normal course of business. As of the date of this filing,
        we
        are not currently involved in any such legal proceeding that we believe would
        have a material adverse effect on our business, financial condition or operating
        results.
  **Item
        4: Submission of Matters to a Vote of Security Holders**
  None
  22
  **PART
        II**
 
 **Item
        5: Market for Common Equity and Related Stockholder Matters and Small Business
        Issuer Purchases of Equity Securities**
  **Market
        Information**
  Our
        common stock trades on the Over-the-Counter Bulletin Board under the symbol
        "NPWS." 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.
 **Fiscal
                    2006****High**
                
                **Low**1st
                    Quarter — March 9, 2006 through March 30, 2006
                
                $
                2.00
                
                $
                0.402nd
                    Quarter — April 1, 2006 through June 30, 2006
                
                
                3.70
                
                
                0.553rd
                    Quarter — July 1, 2006 through September 30,
                    2006
                
                
                1.65
                
                
                0.804th
                    Quarter — October 1, 2006 through December 31,
                    2006
                
                
                2.05
                
                
                0.94
 
 **Nine
                    Months Ended 2007****High**
                
                **Low**1st
                    Quarter — January 1, 2007 through March 31, 2007
                
                $
                1.78
                
                $
                0.872nd
                    Quarter — April 1, 2007 through June 30, 2007
                
                
                1.02
                
                
                0.433rd
                    Quarter - July 1, 2007 through September 30, 2007
                
                
                0.55
                
                
                0.25
 
 **Fiscal
                    2008****High**
                
                **Low**1st
                    Quarter — October 1, 2007 through December 31,
                    2007
                
                $
                0.34
                
                $
                0.17
  The
        last
        sale price of our common stock on December 31, 2007, was $0.20.
  **Holders**
  As
        of
        November 30, 2007, our common stock was held of record by approximately 218
        stockholders. 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. There are issued and outstanding options to
        purchase 10,704,850 shares of our common stock and warrants to purchase
        18,998,358 shares of our common stock.
  Other
        than approximately 34,000,000 shares of common stock, all of our issued and
        outstanding shares of common stock are deemed to be restricted stock for
        purposes of Rule 144 under the Securities Act and, accordingly, may not be
        sold
        absent their registration under the Securities Act or pursuant to Rule 144
        following their being held for the applicable holding periods set forth in
        Rule
        144.
  We
        became
        a reporting company under the Securities Exchange Act of 1934, as amended,
        upon
        the effectiveness of a Form 10 registration statement filed September 25,
        2006.
  23
  **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 Neah Power Washington’s
        business.
  **Securities
        Authorized For Issuance Under Equity Compensation Plans**
  **Equity
        Compensation Plan Information**
  **Plan
                  Category**
              
              
              **Number
                  of Securities To Be Issued Upon Exercise of Outstanding Options,
                  Warrants
                  and Rights**
              
              
              **Weighted
                  Average Exercise Price of Outstanding Options, Warrants and
                  Rights**
              
              
              **Number
                  of Securities Remaining Available for Future Issuance under Equity
                  Compensation Plans (Excluding Securities Reflected in Column
                  (a))****(A)**
              
              
              **(B)**
              
              
              **(C)**Equity
                  Compensation Plans Approved by Security Holders of Shares of Common
                  Stock
              
              
              10,000,000
              
              $
              0.25
              
              
              0Equity
                  Compensation Plans Not Approved by Security Holders(1)
              
              
              704,850
              
              
              0.25Total:
              
              
              10,704,850
              
              $
              0.25
              
              
              0
 
 (1)Subject
        to shareholder approval
 
 The
        Long
        Term Incentive Compensation Plan (“LTICP”) was adopted by the Board of Directors
        on March 14, 2006, to be effective on March 14, 2006, and was approved by
        the
        stockholders on that same date. The LTICP is to continue for a term of ten
        years
        from the date of its adoption. The LTICP 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. The
        LTICP provides long-term incentives to employees, members of the Board and
        advisors and consultants of our company and our subsidiaries who are able
        to
        contribute towards the creation of or have created stockholder value by
        providing them stock options and other stock and cash incentives.
 
 The
        Compensation Committee that is currently comprised of three members of our
        Board
        of Directors, Messrs. Rosen, Abramowitz and Solomon, administers the LTICP.
        The
        Compensation Committee has the authority to make awards, construe and interpret
        the LTICP and any awards granted thereunder, to establish and amend rules
        for
        LTICP 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 LTICP.
  The
        maximum number of shares of our stock that may be issued under the LTICP
        for
        awards other than cash awards is 10,000,000 shares. To date, the Committee
        has
        awarded stock options for 10,704,850 shares to employees, members of the
        Board
        and advisors and consultants of our company and our subsidiaries, 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 LTICP, 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
        LTICP from time to time or terminate the LTICP 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.
  24
  On
        March
        14, 2006, the board of directors and the compensation committee authorized
        the
        issuance of options to purchase an aggregate of 6,589,500 shares of our common
        stock at an exercise price of $0.20 per share, which was the fair market
        value
        of our common stock on such date (with the exception of the 250,000 options
        issued to Mr. Abramowitz which are exercisable at $0.22 per share). On March
        29,
        2006, the board of directors and compensation committee agreed that all of
        Mr.
        Dorheim’s 162,500 severance options at $0.20 per share would be immediately
        vested as of such date. Through December 31, 2006 employees that resigned
        and
        new employees hired resulted in a net decrease of 264,000 existing stock
        options
        for a total of 6,325,500 options outstanding at December 31, 2006. During
        the
        nine months ended September 30, 2007, the board of directors granted 4,769,350
        options and 390,000 options were cancelled or forfeited leaving 10,704,850
        options outstanding at September 30, 2007.
  BOARD
                    OF DIRECTORS2007
                
                2006Paul
                    Abramowitz
                
                
                45,000
                
                
                250,000Dr.
                    Daniel Rosen
                
                
                1,285,000
                
                
                600,000Michael
                    Solomon
                
                
                45,000
                
                
                350,000Roger
                    Walton
                
                
                --
                
                
                250,000Leroy
                    Ohlsen
                
                
                85,000
                
                
                450,000Buzz
                    Aldrin
                
                
                521,000
                
                
                --TECHNICAL
                    ADVISORY BOARDDr.
                    Wilbert van den Hoek
                
                
                --
                
                
                250,000Dr.
                    Daniel Rosen
                
                
                --
                
                
                250,000Roger
                    Walton
                
                
                --
                
                
                250,000EMPLOYEES
                    AND OTHERSDr.
                    John Drewery*
                
                
                --
                
                
                1,000,000Stephen
                    Tallman
                
                
                --
                
                
                400,000Dr.
                    Arthur Homa
                
                
                60,000
                
                
                450,000David
                    Dorheim
                
                
                --
                
                
                162,500Chris
                    D’Couto
                
                
                2,250,000
                
                
                --Other
                    employees
                
                
                415,850
                
                
                1,894,000Others
                
                
                162,500
                
                
                --
  *
  **Item
        6: Management’s Discussion and Analysis or Plan of
        Operation**
  **General**
  The
        discussion and analysis of our financial condition and results of operations
        are
        based upon our financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States of America.
        The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with the audited financial statements of Neah Power
        Washington for the nine months ended September 30, 2007 and the year ended
        December 31, 2006, together with notes thereto included elsewhere in this
        annual
        report.
  Unless
        otherwise obvious from the context, all references in this discussion are
        to the
        operations of Neah Power Washington, not Growth Mergers.
  25
  **Plan
        of Operation**
  We
        are
        developing a direct methanol micro fuel cell using our patented technology
        which
        is based on porous silicon. The fuel cells we have planned and designed are
        intended to be viable replacements of many types of batteries typically in
        use
        today, such as the lithium-ion and lithium-polymer power sources that drive
        most
        laptop and notebook computers and many other types of electronic
        equipment.
  Recent
        trends continue to show the need for better and longer-lasting power solutions
        to close the “power gap” 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 PC’s limited battery capacity.
  Users
        are
        also more dependent on these mobile devices and using them longer without
        access
        to A/C power, compounding 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. 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, email
        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 an instant recharge
        system
        using replacement fuel cartridges. In addition, we believe that they will
        be
        smaller and lighter than the batteries currently in use.
  Having
        achieved stable, high power operation of our silicon-based chemical reactor
        (also referred to as a “stack”), we assembled a complete non-enclosed working
        prototype, including all auxiliary subsystem components, for bench-top testing
        during September 2007.
  Our
        operational plan for fiscal year 2008 and 2009 includes several milestones
        that
        are set forth in our collaboration agreement with Novellus. See "Novellus
        Systems, Inc. on page 7.
  **Recent
        Developments**
 
 On
        December 19, 2007, we announced that our initial product offerings will focus
        on
        military applications requiring power sources that can operate without air
        and
        in harsh environments. Our working micro fuel cell prototype, which was
        demonstrated on September 28, 2007, runs as a closed loop system without
        requiring air as an oxidant. The focus on a closed loop system is based on
        customer needs for products that address "no air" needs such as underwater,
        underground, close quarters, high altitude and no atmosphere. We will continue
        to pursue the "air breathing" market, including military applications such
        as a
        BA-5590 replacement. As a result of the focus on a closed loop system, we
        believe it is unlikely that the milestones contained in our agreement with
        Novellus will be met. We are currently in the process of renegotiating our
        collaboration agreement with Novellus.
 
 **Overview**
  We
        have
        limited capital resources. Our auditor’s report for our financial statements as
        at and for the nine months ended September 30, 2007 and the year ended December
        31, 2006 contains a “going concern” qualification indicating that our ability to
        continue as a going concern is substantially in doubt. We must, therefore,
        raise
        sufficient capital to fund our overhead burden and our continuing research
        and
        development efforts going forward.
  **Results
        Of Operations**
 
 **For
        purposes of comparison, the following discussion compares the nine months
        ended
        September 30, 2007 with the nine months ended September 30,
        2006**
  26
  We
        had
        revenue of $49,057 for the nine months ended September 30, 2007 as compared
        to
        no revenue in the comparable nine months ended September 30, 2006. The revenue
        in 2007 was from the Federal Department of Defense (DoD), Office of Naval
        Research (ONR) pursuant to a contract for expense reimbursement related to
        certain technology development that began in July 2007 and is expected to
        continue for 12 months.
 
 Research
        and development expenses for the nine months ended September 30, 2007
        increased by $364,714 or approximately 12%, to $3,567,807 from the $3,203,093
        recorded in the nine months ended September 30, 2006. The increase was primarily
        due to a net increase in wages, taxes and other employee related expenses
        of
        approximately $382,336 and an increase in stock based compensation related
        to
        research and development personnel of $87,350. These increases were somewhat
        offset by a net decrease of approximately $97,745 in facilities costs and
        project costs as well as a $46,180 net decrease in depreciation and other
        general expenses. The increase in salaries and related costs is due to the
        hiring of additional personnel to keep operations moving forward and on target.
 
 General
        and Administrative expenses for the nine months ended September 30, 2007
        were
        $2,119,196, a decrease of $63,756 or approximately 3%, from the $2,182,952
        incurred in the comparable 2006 nine month period. This decrease was primarily
        due to a decrease in professional services expenses of approximately $319,688
        most of which was a decrease in legal expense as the prior year’s period had a
        much higher cost due to the number of documents that were prepared and filed
        with the SEC. Approximately $165,000 of the legal fees were incurred in
        connection with the reverse merger that closed on March 9, 2006, and the
        Private
        Placement that closed on April 27, 2006. There was also a decrease in salaries
        and related costs of approximately $17,579 as well as a reduction in facilities
        expense and other costs of $32,668. These decreases were somewhat offset
        by an
        increase in special marketing consultant fees of $107,927, an increase in
        financing costs of approximately $38,880 and an increase in stock based
        compensation of $164,655 related to stock options granted to executive and
        administrative personnel.
 
 **Liquidity
        and Capital Resources**
 
 In
        May
        2007, the Company closed on net proceeds of $6,353,498 from the sale of
        12,845,038 common shares at $0.55 per share which also included 9,633,779
        warrants one third of which are exercisable at $1.10, $1.60 and $2.00
        respectively for 5 years after the offering date. Such warrants are generally
        exercisable only by the original purchaser.
 
 In
        June
        2007 we finalized negotiations with the Office of Naval Research ("ONR")
        for a
        research and development contract pursuant to a Congressional Appropriation
        of
        up to $1.75 million, primarily for expense reimbursement, over approximately
        a
        twelve month time frame that started in July 2007. There is also an additional
        Congressional Appropriation of up to $1.31 million which was approved in
        2006
        and for which we have submitted a proposal. We began related contract
        negotiations in early December and anticipate **** that
        we
        will close and begin work **** during
        the second quarter of fiscal 2008 and that it will continue for a 12 to 18
        month
        period.
 
 In
        November 2007 we sold two Convertible Notes for $500,000 each that are due
        June
        28, 2008 and January 1, 2009 respectively and we received proceeds of $126,000
        from the exercise of warrants at $0.20 per share which were reduced from
        the
        $1.10, $1.60 and $2.00 prices stated above for a six day period to induce
        exercise. A 10% commission is due to Jessup and Lamont Securities Corporation
        on
        all such warrant transactions.
 
 Our
        current operating expenses, net of non-cash charges, are approximately $500,000
        per month and as of September 30, 2007 we had cash balances of $710,441.
        This
        amount plus the grant and contract monies and Note proceeds and warrant proceeds
        mentioned above are not sufficient to support the current level of operations
        for the next 12 months and it will be necessary to obtain substantial additional
        financing. We intend to raise further immediate additional financing in the
        form
        of debt and the possible sale of common shares. However, we cannot be certain
        that any of such financings will be timely obtained on acceptable terms.
        If we
        are unable to obtain, on a timely basis, the additional financing required
        to
        meet our cash needs, we will have to reduce or curtail operations which would
        materially and adversely affect our development efforts.
  In
        light of our current cash situation and new initial
        product focus on a closed loop system that does not require air as an oxidant,
        we are planning to streamline our operations to focus on our ONR
        agreement(s) and the development of a commercial liquid electrolyte
        prototype.  By focusing on these opportunities, we believe we can
        significantly reduce our monthly expenditures.  We believe this will best
        enable us to survive and move forward in the most efficient way possible,
        as we
        seek additional funding and explore strategic opportunities to maximize
        shareholder value.  There can be no assurance that these efforts will be
        successful.
  27
  **Critical
        Accounting Policies**
  Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our financial statements, which have been prepared in accordance
        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. Management evaluates
        our
        estimates on an ongoing basis, including estimates for Income tax assets
        and
        liabilities and the impairment of the value of investments. 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
        its more significant estimates used in the preparation of its financial
        statements.
 
 *Revenue
        Recognition*
  Revenues
        consist of contract revenues. Contract revenues are recognized as the related
        research is conducted.
  *Share
        Based Payments*
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R “Share Based Payment”. This
        statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion
        No. 25, and its related implementation guidance. SFAS 123R addresses all
        forms
        of share based payment (“SBP”) awards including shares issued under employee
        stock purchase plans, stock options, restricted stock and stock appreciation
        rights. Under SFAS 123R, SBP awards will result in a charge to operations
        that
        will be measured at fair value on the awards grant date, based on the estimated
        number of awards expected to vest over the service period. Compensation cost
        for
        awards that vest will not be reversed if the awards expire without being
        exercised. We estimate the fair value of each stock option grant by using
        the
        Black-Scholes option pricing model.
 
 *Recently
        Issued Accounting Pronouncements*
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value,
        establishes a framework for measuring fair value and expands disclosures
        about
        fair value measurements but does not require any new fair value measurements.
        FAS 157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. The
        Company has not yet determined the impact of applying FAS 157.
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, The Fair Value Option for Financial Assets and Financial Liabilities,
        (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November
        15, 2007. The Company does not believe that SFAS 159 will have any material
        effect on its financial statements.
 
 In
        June
        2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
        for Nonrefundable Advance Payments for Goods or Services to be Used in Future
        Research and Development Activities* ,
        (“EITF
        07-3”) which is effective for fiscal years beginning after December 15, 2007.
        EITF 07-3 requires that nonrefundable advance payments for future research
        and
        development activities be deferred and capitalized. Such amounts will be
        recognized as an expense as the goods are delivered or the related services
        are
        performed. The Company does not expect the adoption of EITF 07-3 to have
        a
        material impact on the financial results of the Company.
  In
        December 2007, the FASB issued SFAS No. 141(R), “Business
        Combinations,” (“SFAS No. 141(R)”), which requires the Company to record
        fair value estimates of contingent consideration and certain other potential
        liabilities during the original purchase price allocation, expense acquisition
        costs as incurred and does not permit certain restructuring activities
        previously allowed under Emerging Issues Task Force Issue No. 95-3 to be
        recorded as a component of purchase accounting. The Company will adopt this
        standard at the beginning of the Company’s fiscal year ending September 30,
        2010 for all prospective business acquisitions. The Company has not determined
        the effect that the adoption of SFAS No. 141(R) will have on its
        consolidated financial statements but the impact will be limited to any future
        acquisitions beginning in fiscal 2010.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
        in Consolidated Financial Statements—an amendment of ARB No. 51,” (“SFAS
        No. 160”), which causes noncontrolling interests in subsidiaries to be
        included in the equity section of the balance sheet. The Company will adopt
        this
        standard at the beginning of the Company’s fiscal year ending September 30,
        2010. The Company has not determined the effect that the adoption of SFAS
        No. 160 will have on its consolidated financial statements.
  Beginning
        with our fiscal year ending September 30, 2008, we will become subject to
        the
        requirement to include in our annual report management’s assessment of internal
        controls over financial reporting. This assessment will require us to document
        and test our internal control procedures in accordance with Section 404 of
        the
        Sarbanes-Oxley act of 2002. Our independent registered public accountants
        will
        be required to attest to our assessment of internal controls beginning with
        our
        fiscal year ending September 30, 2009.
  28
  **Item
        7: Financial Statements**
  **NEAH
        POWER SYSTEMS, INC.**
  **FINANCIAL
        REPORT**
  SEPTEMBER
        30, 2007 AND DECEMBER 31, 2006
  **CONTENTS**
 
 **PAGE****REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
              
              30**FINANCIAL
                  STATEMENTS:**CONSOLIDATED
                  BALANCE SHEETS
              
              31CONSOLIDATED
                  STATEMENTS OF OPERATIONS
              
              32CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              
              33CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              
              34NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              
              35
 
 29
  [GRAPHIC
                  OMITTED]PETERSON
                  SULLIVAN PLLCCERTIFIED
                  PUBLIC ACCOUNTANTS
              
              TEL
                  206.382.7777 / FAX 206.382.7700610
                  UNION STREET, SUITE 2300
              
              http://www.pscpa.comSEATTLE,
                  WASHINGTON 98101
  **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., ("the Company") as of September 30, 2007 and December 31, 2006 and
        the
        related consolidated statements of operations, stockholders' equity (deficit),
        and cash flows for the nine months and year, respectively, 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.,
        as
        of September 30, 2007 and December 31, 2006, and the results of its
        operations and its cash flows for the periods 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 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 financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 
 /S/
        PETERSON SULLIVAN PLLC
 
 Seattle,
        Washington
 January
        10, 2008
  30
  **NEAH
        POWER SYSTEMS, INC.**
  CONSOLIDATED
        BALANCE SHEETS
 September
        30, 2007 and December 31, 2006
 2007
                
                2006ASSETSCurrent
                    AssetsCash
                    and cash equivalents
                
                $
                710,441
                
                $
                1,141,905Contract
                    receivable
                
                
                49,057
                
                
                --Prepaid
                    expense
                
                
                39,512
                
                
                21,405Total current assets
                
                
                799,010
                
                
                1,163,310Property
                    and equipment, net
                
                
                197,090
                
                
                434,059Total Assets
                
                $
                996,100
                
                $
                1,597,369LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITYCurrent
                    LiabilitiesAccounts
                    payable
                
                $
                894,045
                
                $
                1,333,949Accrued
                    expenses
                
                
                74,865
                
                
                208,191Equipment
                    loan payable
                
                
                --
                
                
                29,840Notes
                    payable
                
                
                --
                
                
                1,965,000Deferred
                    revenue
                
                
                189,500
                
                
                189,500Total current liabilities
                
                
                1,158,410
                
                
                3,726,480Total
                    liabilities
                
                
                1,158,410
                
                
                3,726,480Commitments
                    and ContingenciesStockholders'
                    DeficiencyCommon
                        Stock,
                    $0.001
                      par value, 500,000,000 shares authorized,
                  119,932,700
                    and 106,915,431 shares issued, 116,179,700 and 103,162,431
                  shares
                    outstanding
                
                
                119,933
                
                
                106,915Additional
                    paid-in capital
                
                
                35,322,987
                
                
                27,391,921Treasury
                    shares, 3,753,000 common shares, at no cost
                
                
                --
                
                
                --Accumulated
                    deficit
                
                
                (35,605,230
                )
                
                (29,627,947
                )Total
                    Stockholders' Deficiency
                
                
                (162,310
                )
                
                (2,129,111
                )Total
                    Liabilities and Stockholders' Deficiency
                
                $
                996,100
                
                $
                1,597,369
 
 See
        Notes
        to Consolidated Financial Statements
  31
 
 **NEAH
        POWER SYSTEMS, INC.**
  CONSOLIDATED
        STATEMENTS OF OPERATIONS
 For
        the
        Nine Months Ended September 30, 2007 and Year Ended December 31,
        2006
  2007
                
                2006RevenuesContract
                    revenue
                
                $
                49,057
                
                $
                --Operating
                    ExpensesResearch
                    and development expense
                
                
                3,567,807
                
                
                4,347,868General
                    and administrative expense
                
                
                2,119,196
                
                
                2,572,712Total operating expenses
                
                
                5,687,003
                
                
                6,920,580Loss from operations
                
                
                (5,637,946
                )
                
                (6,920,580
                )Interest
                    expense, net
                
                
                (339,337
                )
                
                (1,112,548
                )**Net
                    Loss**
                
                **$**
                (5,977,283
                )
                **$**
                (8,033,128
                )Basic
                    and diluted net loss per common share
                
                $
                (0.05
                )
                $
                (0.10
                )Weighted
                    average basic and diluted shares outstanding
                
                
                109,956,708
                
                
                78,659,792
  See
        Notes
        to Consolidated Financial Statements
  32
  **NEAH
        POWER SYSTEMS, INC.**
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 For
        the
        Nine Months Ended September 30, 2007 and Year Ended December 31,
        2006
 2007
                
                2006Cash
                    Flows From Operating ActivitiesNet
                    loss
                
                $
                (5,977,283
                )
                $
                (8,033,128
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activitiesDepreciation
                
                
                282,099
                
                
                400,012Share-based
                    payments included in operating expenses
                
                
                1,228,229
                
                
                1,164,851Share
                    based payments issued as additional loan consideration, accounted
                    for as
                    interest expense
                
                
                307,357
                
                
                665,000Warrants
                    issued by shareholder, accounted for as interest expense
                
                
                --
                
                
                357,000Changes
                    in operating assets and liabilitiesContract
                    receivable
                
                
                (49,057
                )Prepaid
                    expenses
                
                
                (18,108
                )
                
                (11,730
                )Accounts
                    payable
                
                
                (439,904
                )
                
                --Accrued
                    expenses
                
                
                (133,325
                )
                
                1,262,752Net cash used in operating activities
                
                
                (4,799,992
                )
                
                (4,195,243
                )Cash
                    Flows From Investing ActivitiesPurchases
                    of property and equipment
                
                
                (45,130
                )
                
                (2,990
                )Sales
                    of short-term investments
                
                
                --
                
                
                103,200Cash
                    received from GMI in acquisition
                
                
                --
                
                
                506,500Net cash (used in) provided by investing activities
                
                
                (45,130
                )
                
                606,710Cash
                    Flows From Financing ActivitiesProceeds
                    from bridge financing
                
                
                350,000
                
                
                500,400Net
                    proceeds from borrowings on notes payable
                
                
                --
                
                
                1,965,000Payments
                    on equipment loans
                
                
                (29,840
                )
                
                (186,846
                )Net
                    proceeds of common stock sold to investors in Private
                    Placement
                
                
                --
                
                
                2,140,000Private
                    Placement offering cost adjustment from settlement
                
                
                55,000
                
                
                --Net
                    proceeds from public offering
                
                
                6,353,498
                
                
                --Payments
                    on 2007 and 2006 Bridge Financings
                
                
                (2,315,000
                )
                
                --Other
                
                
                --
                
                
                69Net cash provided by financing activities
                
                
                4,413,658
                
                
                4,418,623**Net
                    (decrease) increase in cash and cash equivalents**
                
                
                **(431,464**
                **)**
                
                **830,090**Cash
                    and cash equivalents, beginning of period
                
                
                1,141,905
                
                
                311,815Cash
                    and cash equivalents, end of period
                
                $
                710,441
                
                $
                1,141,905Supplemental
                    disclosure of cash flow informationCash
                    paid for interest
                
                $
                60,254
                
                $
                8,297Cash
                    paid for income taxes
                
                $
                --
                
                $
                --Non-Cash
                    Investing and Financing ActivitiesAcquisition
                    of NPSWA:Convert
                    NPSWA Series A and Series B preferred stock to common
                    stock
                
                $
                --
                
                $
                (18,952,869
                )NPSWA
                    common stock issued to converting preferred shareholders
                
                
                --
                
                
                18,952,869Adjust
                    NPSWA common stock to reflect $0.001 par value
                
                
                --
                
                
                (19,225,636
                )Record
                    additional paid-in capital from adjustment of common stock
                    to$0.001
                    par value
                
                
                --
                
                
                19,225,636Record
                    NPSNV Series A preferred stock
                
                
                --
                
                
                6,500Record
                    par value of NPSNV common stock
                
                
                --
                
                
                10,481Record
                    additional paid-in capital of NPSNV preferred and common
                    stock
                
                
                --
                
                
                489,519Cash
                    received from GMI in acquisition
                
                
                --
                
                
                (506,500
                )Net
                    cash effect of NPSWA acquisition
                
                $
                **--**
                
                $
                --Other
                    non-cash activities:Convert
                    NPSNV Series A preferred stock to common stock
                
                $
                --
                
                $
                (
                    6,500
                )NPSNV
                    common stock issued to converting preferred shareholders
                
                
                --
                
                
                62,628Reduce
                    NPSNV paid-in capital upon conversion of Series A preferred stock
                    to
                    common
                
                
                --
                
                
                (56,128
                )Bridge
                    loans converted to common stock
                
                
                --
                
                
                (500,400
                )Common
                    stock issued for convertible bridge loans
                
                
                --
                
                
                500,400Net
                    cash effect of other non-cash activities
                
                $
                --
                
                $
                --
  See
        Notes
        to Consolidated Financial Statements
 
 33
  **NEAH
        POWER SYSTEMS, INC.**
  CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT )
 For
        the
        Nine Months Ended September 30, 2007 and the Year Ended December 31,
        2006
  Series
                        A Preferred Stock
                    
                    Series
                        B Preferred Stock
                    
                    Common
                        Stock
                    
                    Treasury
                        Shares
                    
                    Additional
                      Paid-in
                    
                    AccumulatedShares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Capital
                    
                    Deficit
                    
                    TotalBalance
                        at December 31, 2005
                    
                    
                    583,449
                    
                    $
                    1,208,281
                    
                    
                    6,509,086
                    
                    $
                    17,744,588
                    
                    
                    888,795
                    
                    $
                    298,902
                    
                    
                    0
                    
                    $
                    -
                    
                    $
                    2,913,245
                    
                    $
                    (21,594,819
                    )
                    $
                    570,197Convert
                        NPSWA Series A and Series B preferred stock to common
                        stock
                    
                    
                    (583,449
                    )
                    
                    (1,208,281
                    )
                    
                    (6,509,086
                    )
                    
                    (17,744,588
                    )
                    
                    7,092,535
                    
                    
                    18,952,869
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Other
                        adjustments by NPSWA prior to acquisition
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,127
                    
                    
                    69
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    69Adjust
                        number of NPSWA common shares to be same as GMI common
                        shares
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    18,213,401
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Adjust
                        NPSWA common stock account to reflect $0.001 par value
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (19,225,636
                    )
                    
                    
                    
                    
                    
                    
                    
                    19,225,636
                    
                    
                    
                    
                    
                    -Adjust
                        NPSWA capital accounts to equal capital accounts of GMI
                    
                    
                    6,500,000
                    
                    
                    6,500
                    
                    
                    
                    
                    
                    
                    
                    
                    10,481,534
                    
                    
                    10,481
                    
                    
                    
                    
                    
                    
                    
                    
                    489,519
                    
                    
                    
                    
                    
                    506,500Convert
                        bridge loans to common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,502,000
                    
                    
                    2,502
                    
                    
                    
                    
                    
                    
                    
                    
                    497,898
                    
                    
                    
                    
                    
                    500,400Convert
                        NPSNV Series A preferred stock to common stock
                    
                    
                    (6,500,000
                    )
                    
                    (6,500
                    )
                    
                    
                    
                    
                    
                    
                    
                    62,628,030
                    
                    
                    62,628
                    
                    
                    
                    
                    
                    
                    
                    
                    (56,128
                    )
                    
                    
                    
                    
                    -3,753,000
                        common shares returned to Company at no cost, to be held
                        in
                        treasury
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,753,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Sell
                        4,600,000 common shares at $0.50/share, net of cash offering
                        costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,600,000
                    
                    
                    4,600
                    
                    
                    
                    
                    
                    
                    
                    
                    2,135,400
                    
                    
                    
                    
                    
                    2,140,000Issue
                        warrants valued at $159,000 to purchase 320,000 common shares
                        to placement
                        agent in stock sale, accounted for as cost of offering *
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Issue
                        500,000 common shares valued at $665,000 to lenders, accounted
                        for as
                        interest expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    500,000
                    
                    
                    500
                    
                    
                    
                    
                    
                    
                    
                    
                    664,500
                    
                    
                    
                    
                    
                    665,000Share-based
                        payments for services - common stock options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    841,384
                    
                    
                    
                    
                    
                    841,384Share-based
                        payments for research and development and interest expense
                        -common
                        stock purchase warrants:Crystal
                        Research Associates
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    222,000
                    
                    
                    
                    
                    
                    222,000Palladium
                        Capital Advisors
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101,467
                    
                    
                    
                    
                    
                    101,467Recognize
                        value of warrants issued to lenders by stockholder
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    357,000
                    
                    
                    
                    
                    
                    357,000Other
                        adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Net
                        loss for the year ended December 31, 2006
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (8,033,128
                    )
                    
                    (8,033,128)
                    )Balances
                        at December 31, 2006
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    106,915,431
                    
                    $
                    106,915
                    
                    
                    (3,753,000
                    )
                    $
                    -
                    
                    $
                    27,391,921
                    
                    $
                    (29,627,947
                    )
                    $
                    (2,129,111
                    )Shares
                        and warrants issued as additional consideration
                      for
                        loan accounted for as interest expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    144,231
                    
                    
                    145
                    
                    
                    
                    
                    
                    
                    
                    
                    307,212
                    
                    
                    
                    
                    
                    307,357Sale
                        of common shares in public offering, net of offering costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,845,038
                    
                    
                    12,845
                    
                    
                    
                    
                    
                    
                    
                    
                    6,340,653
                    
                    
                    
                    
                    
                    6,353,498Share
                        based payments Common stock options and warrants issued or
                        granted for
                        services rendered
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,212,829
                    
                    
                    
                    
                    
                    1,212,829Shares
                        issued for services rendered
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    28,000
                    
                    
                    28
                    
                    
                    
                    
                    
                    
                    
                    
                    15,372
                    
                    
                    
                    
                    
                    15,400Private
                        Placement offering cost adjustment from settlement
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    55,000
                    
                    
                    
                    
                    
                    55,000Net
                        loss for the nine months ended September 30, 2007
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,977,283
                    )
                    
                    (5,977,283
                    )Balance
                        at September 30, 2007
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    119,932,700,
                    
                    $
                    119,933
                    
                    
                    (3,753,000
                    )
                    $
                    -
                    
                    $
                    35,322,987
                    
                    $
                    (35,605,230
                    )
                    $
                    (162,310
                    )
 *
          No
          amount listed for this transaction as the amounts recognized as additional
          paid-in capital are offset by the offering costs.
  See
        Notes
        to Consolidated Financial Statements
  34
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1. The Company**
 
 Neah
        Power Systems, Inc. ("NPSNV") was incorporated in Nevada on February 1,
        2001, under the name Growth Mergers, Inc. ("GMI"). As described in Note 16,
        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"). Upon completion of the acquisition, GMI changed
        its
        name to be the same as its new wholly-owned subsidiary. The acquisition was
        accounted for as a reverse merger, which the Securities and Exchange Commission
        ("SEC") considers to be equivalent to a recapitalization. NPSNV is the legal
        parent of NPSWA but these financial statements, other than capital stock
        accounts, are those of NPSWA. In these financial statements, the "Company"
        refers to NPSNV and its wholly-owned consolidated subsidiary,
        NPSWA.
 
 
 The
        Company has developed what it believes is a potential breakthrough in the
        development of a direct methanol micro fuel cell, that can serve as a
        replacement for batteries in a variety of mobile products.
  Fuel
        cells are devices that combine a fuel, such as methanol, with an oxidant,
        such
        as oxygen gas, in a chemical reaction to produce electricity. Much like the
        engine in a car, a fuel cell can generate electricity continuously as long
        as
        fuel and oxygen are supplied to the reactor. Like a car, fuel cells can be
        “refueled” instantly by simply maintaining the fuel supply with small,
        replaceable fuel cartridges. Since fuel cells can be “recharged” instantly,
        end-users of mobile products powered by fuel cells can achieve long runtime
        by
        carrying spare fuel cartridges, not extra batteries and chargers. Also, because
        spare fuel cartridges can be smaller, lighter and less costly than extra
        batteries, convenience of use can be dramatically improved.
  Using
        its
        patented technology based on porous silicon, the Company is developing this
        technology to produce its proprietary fuel cell for portable electronic devices
        to replace batteries that typically operate in the 10-100 watt range. These
        electronic devices are most commonly served by lithium-ion battery based
        power
        packs.
  To
        date,
        the Company has achieved stable, high power operation of its silicon-based
        chemical reactor (also referred to as the “stack”), and has assembled a working
        prototype with all auxiliary subsystem components.
  The
        Company intends to develop prototype devices that can be evaluated by original
        equipment manufacturers ("OEM’s") for the development of final fuel cell
        products that either the Company or potential licensees of the Company will
        use
        to manufacture final products for sale to the Company's partners, distributors,
        or OEM customers. The Company also intends to design and distribute the fuel
        cartridge that the Company's fuel cells require for refueling. The Company
        expects to generate revenues from both the sale and licensing of both fuel
        cartridges and the completed fuel cells. The Company's current business plan
        contemplates that the Company will subcontract to third parties substantially
        all of the production and assembly of these fuel cartridges. However, the
        Company may elect to produce the fuel cells through subcontractors and
        distribute them, or may opt to both manufacture and distribute the fuel cells.
        What decision the Company ultimately makes will depend upon its capital
        resources, production costs to be incurred and the resulting profit margins
        and
        cannot be predicted at this time.
  **Note
        2. Going Concern**
 
 The
        Company's financial statements are prepared consistent with accounting
        principles generally accepted in the United States applicable to a going
        concern, which contemplates the realization of assets and liquidation of
        liabilities in the normal course of business. However, as shown in the financial
        statements, the Company has sustained substantial losses and has relied
        primarily on sales of securities and proceeds from borrowings for operating
        capital, which raise substantial doubt about its ability to continue as a
        going
        concern.
 
 Subsequent
        to September 30, 2007, the Company raised capital in November by selling
        two
        promissory notes for a total of $1,000,000 with proceeds of $815,000 received
        upon closing and $150,000 to be received upon a registration statement being
        declared effective by January 31, 2008 and $35,000 of related expenses were
        paid
        by the Company (see Note 17). The Company also received proceeds of $125,182
        from the exercise of warrants by shareholders that acquired such warrants
        in the
        public offering in May 2007 (See Note 9). The exercise price of such warrants
        was reduced from $1.10, $1.60, and $2.00 to $0.20 (the then market trading
        value) for a period of six days in October 2007 in order to induce such
        exercise. A commission of 10% of the total proceeds of the warrant exercises
        is
        payable to Jessup and Lamont Securities Corporation. These total proceeds
        of
        $1,090,182 and certain ongoing expense reimbursement grant funding from the
        Office of Naval Research ("ONR") will fund the Company’s operations at least
        through February 2008. To meet its cash needs from that point forward, the
        Company intends to seek financing from potential strategic investors, debt
        and
        additional sales of securities. There is no assurance that the Company 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,
        the Company may have to curtail or cease its operations.
 
 The
        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 the Company have to curtail
        operations or be unable to continue in existence.
  35
 
 **Note
        3. Summary of Significant Accounting Policies**
 
 **Change
        in Fiscal Year End**
 
 In
        November 2007, the Company’s Board of Directors approved a change in our fiscal
        year end from December 31 to September 30. The nine month results now being
        reported by the Company relate to the transitional period ended September
        30,
        2007. Comparative information for the nine months ended September 30, 2006
        is
        included in the previously filed unaudited Quarterly Report on Form 10-QSB
        for
        the quarter and nine months ended September 30, 2006.
 
 The
        following table presents certain comparative transition period financial
        information for the nine months ended September 30, 2007 and 2006
        respectively.
  CONSOLIDATED
        STATEMENTS OF OPERATIONS
 For
        the
        Nine Months Ended September 30, 2007 and 2006
 2007
                
                2006Revenues
                
                
                
                (Unaudited)Contract
                    revenue
                
                $
                49,057
                
                $
                --Operating
                    expensesResearch
                    and development expense
                
                
                3,567,807
                
                
                3,203,093General
                    and administrative expense
                
                
                2,119,196
                
                
                2,182,952Total operating expenses
                
                
                5,687,003
                
                
                5,386,045Loss from operations
                
                
                (5,637,946
                )
                
                (5,386,045
                )Interest
                    (expense) income, net
                
                
                (339,337
                )
                
                19,056Net Loss
                
                $
                (5,977,283
                )
                $
                (5,366,989
                )Basic
                    and diluted net loss per common share
                
                $
                (0.05
                )
                $
                (0.08
                )Weighted
                    average basic and diluted shares outstanding
                
                
                109,956,708
                
                
                70,567,398
  **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiary. Intercompany balances and transactions have been
        eliminated.
  **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, the Company maintains cash balances in
        excess
        of federal insurance limits.
  36
  **Financial
        Instruments**
 
 The
        Company's financial instruments consist of cash and cash equivalents, contract
        receivable, accounts payable, accrued expenses, and for 2006, equipment loan
        payable and note payable. The fair value of all financial instruments
        approximates the recorded value based on the short-term nature and market
        interest rates of these financial instruments.
 
 **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**
 
 The
        Company's 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. The Company does not believe that any of its long-lived assets
        were
        impaired at September 30, 2007.
 
 **Revenue
        Recognition**
 
 Revenues
        normally consist of grant and contract revenues. The Company recognizes revenue
        when it has persuasive evidence of an arrangement, the services have been
        provided to the customer, the price for services is fixed and determinable,
        no
        significant unfulfilled Company 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 recognized as revenue over the
        service period.
 
 Unearned
        revenues, recorded as deferred revenue in the balance sheet, were $189,500
        as of
        September 30, 2007.
 
 **Research
        and Development Expense**
 
 Research
        and development costs are expensed as incurred.
 
 **Income
        Taxes**
 
 The
        Company follows 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 acquisition
        described in Note 16 and the resulting greater than 50% change in control,
        the ability of the Company to utilize NOL carryforwards from NPSWA will be
        limited.
 
 **Share-Based
        Payments**
 
 In
        March
        2006, the Company adopted its Long Term Incentive Compensation Plan ("the
        Plan")
        and stock options were granted to certain employees, officers and directors
        of
        the Company, certain former employees, and others at the time of adoption
        of the
        Plan. The Company granted additional stock options under the Plan to certain
        officers, directors and employees and also granted stock purchase warrants
        to
        non-employees and other parties throughout the year ended December 31, 2006
        and the nine months ended September 30, 2007.
 
 37
 
 Grants
        of
        stock options under the Plan are accounted for in accordance with the Financial
        Accounting Standards Board's Statement of Financial Accounting Standards
        No.123
        (revised 2004), *Share-Based
        Payment* ("SFAS
        123(R)"). Grants of stock options under the Plan and grants of stock purchase
        warrants to non-employees and other parties are accounted for in accordance
        with
        the Financial Accounting Standards Board's Emerging Issue Task Force Abstract,
        EITF 96-18, *Accounting
        for Equity Instruments that are Issued to Other Than Employees for Acquiring,
        or
        in Conjunction with Selling, Goods and Services* ("EITF
        96-18").
 
 To
        calculate the value of share-based payments, the Company uses the Black-Scholes
        fair value option-pricing model with the following weighted average assumptions
        for options and warrants granted during the nine months ended September 30,
        2007
        and the year ended December 31, 2006:
  2007
                
                2006Risk
                    free interest rate
                
                
                4.9
                %
                
                4.7
                %Expected
                    dividend yield
                
                
                0.0
                %
                
                0.0
                %Volatility
                
                
                138.6
                %
                
                122.0
                %Expected
                    life in years
                
                
                10.0
                
                
                10.0
  Share-based
        payments recognized as operating expense are as follows for the nine months
        ended September 30, 2007, and year ended December 31, 2006:
 2007
                
                2006Common
                    stock options
                
                $
                1,196,204
                
                $
                841,384Common
                    stock purchase warrants:Crystal
                    Research Associates (Note 11)
                
                
                --
                
                
                222,000Palladium
                    Capital Advisors (Note 7)
                
                
                --
                
                
                101,467Lippert/Heilshorn
                    & Associates
                
                
                16,625
                
                
                --Total
                    warrants
                
                
                16,625
                
                
                323,467Total
                  share based payments
                
                
                1,212,829
                
                
                1,164,851Total
                  share based payments were recorded as follows:Research
                    and development expense
                
                
                370,015
                
                
                547,966General
                    and administrative expense
                
                
                842,814
                
                
                616,885$
                1,212,829
                
                $
                1,164,851
  **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 and unexercised warrants to common
        stock, is not separately computed because inclusion of such conversions is
        antidilutive. In these cases, basic and diluted loss per share is the
        same.
  38
  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 nine months ended September 30, 2007
        and
        the year ended December 31, 2006:
 2007
                
                2006Basic
                    and diluted weighted average common stock shares
                    outstanding
                
                
                109,956,708
                
                
                78,659,792Potentially
                    dilutive securities excluded from loss per share
                    computations:Common
                    stock options
                
                
                10,704,850
                
                
                6,325,500Common
                    stock purchase warrants
                
                
                18,998,358
                
                
                9,059,000
 
 **Recent
        Accounting Pronouncements**
 
 In
        accordance with Release No. 8760 of the Securities Act of 1933, commencing
        with
        the Company's fiscal year ending September 30, 2008, the Company will
        become subject to the requirement to include in its annual report management's
        assessment of internal controls over financial reporting. This assessment
        will
        require the Company to document and test its internal control procedures
        in
        accordance with Section 404 of the Sarbanes-Oxley Act of 2002. The Company's
        independent registered public accountants will be required to attest to the
        Company's assessment of internal controls for its fiscal year ending
        September 30, 2009.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, *Fair
        Value Measurements* ("SFAS
        157"). SFAS 157 is effective for financial statements issued for fiscal years
        beginning after November 15, 2007, and interim periods within those fiscal
        years. The Company has not yet determined the effect of applying SFAS
        157.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, The Fair Value Option for Financial Assets and Financial Liabilities,
        (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November
        15, 2007. The Company does not believe that SFAS 159 will have any material
        effect on its financial statements.
 
 In
        June
        2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
        for Nonrefundable Advance Payments for Goods or Services to be Used in Future
        Research and Development Activities* ,
        (“EITF
        07-3”) which is effective for fiscal years beginning after December 15, 2007.
        EITF 07-3 requires that nonrefundable advance payments for future research
        and
        development activities be deferred and capitalized. Such amounts will be
        recognized as an expense as the goods are delivered or the related services
        are
        performed. The Company does not expect the adoption of EITF 07-3 to have
        a
        material impact on the financial results of the Company.
  In
        December 2007, the FASB issued SFAS No. 141(R), “Business
        Combinations,” (“SFAS No. 141(R)”), which requires the Company to record
        fair value estimates of contingent consideration and certain other potential
        liabilities during the original purchase price allocation, expense acquisition
        costs as incurred and does not permit certain restructuring activities
        previously allowed under Emerging Issues Task Force Issue No. 95-3 to be
        recorded as a component of purchase accounting. The Company will adopt this
        standard at the beginning of the Company’s fiscal year ending September 30,
        2010 for all prospective business acquisitions. The Company has not determined
        the effect that the adoption of SFAS No. 141(R) will have on its
        consolidated financial statements but the impact will be limited to any future
        acquisitions beginning in fiscal 2010.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
        in Consolidated Financial Statements—an amendment of ARB No. 51,” (“SFAS
        No. 160”), which causes noncontrolling interests in subsidiaries to be
        included in the equity section of the balance sheet. The Company will adopt
        this
        standard at the beginning of the Company’s fiscal year ending September 30,
        2010. The Company has not determined the effect that the adoption of SFAS
        No. 160 will have on its consolidated financial statements.
  39
  **Note
        4. Property and Equipment**
 September
                    30,
                
                December 31,2007
                
                2006Laboratory
                    equipment
                
                $
                1,356,414
                
                $
                1,317,165Leasehold
                    improvements
                
                
                579,641
                
                
                579,641Computer
                    equipment and software
                
                
                140,602
                
                
                134,721Office
                    furniture and equipment
                
                
                56,000
                
                
                56,000Subtotal
                
                
                2,132,657
                
                
                2,087,527Accumulated
                    depreciation and amortization
                
                
                (1,935,567
                )
                
                (1,653,468
                )Property
                    and equipment, net
                
                $
                197,090
                
                $
                434,059
  **Note
          5. Accrued Expenses**
 
 September
                    30,
                
                December 31,2007
                
                2006Vacation
                    pay
                
                $
                50,537
                
                $
                39,573Accrued
                    interest
                
                
                4,199
                
                
                --Payroll
                    and payroll taxes
                
                
                20,129
                
                
                168,618Total
                
                $
                74,865
                
                $
                208,191
  **Note
        6. Equipment Loan Payable**
  An
        equipment loan secured by laboratory and testing equipment was payable $6,042
        per month, including interest at 6%. The balance due of $29,840 at
        December 31, 2006, was paid in full during the nine months ended September
        30, 2007.
 
 **Note
        7. Notes Payable**
  In
        November 2006, the Company borrowed $415,000 from existing shareholders
        pursuant to notes payable bearing interest at 10% that were due May 26,
        2007. In addition, the Company's largest shareholder granted one-year warrants
        to one of the lenders as additional consideration. These warrants, to purchase
        500,000 shares of the Company's common stock owned by the shareholder at
        $0.55
        per share, were valued at $357,000, and were recorded as additional interest
        expense and a contribution of capital to the Company in the year ended
        December 31, 2006.
 
 In
        December 2006, the Company borrowed $1,550,000 from six accredited institutional
        investors. The investors also received 500,000 shares of common stock, valued
        at
        $665,000, as additional consideration which was recorded as additional interest
        expense in the year ended December 31, 2006. In addition, Palladium Capital
        Advisors, LLC, the Distributor, received a five-year warrant to purchase
        81,579
        common shares at $1.33 per share. This warrant was valued at $101,467 and
        was
        recorded as additional interest expense in the year ended December 31,
        2006.
 
 All
        of
        the above loans were repaid from proceeds of the public offering in May
        2007.
 
 **Note
        8. Conversions of Debt and Preferred Stock to Common Stock and Return of
        Treasury Shares**
 
 During
        the calendar quarter ended March 31, 2006, certain shareholders loaned the
        Company $500,400, which loans automatically converted into 2,502,000 shares
        of
        common stock in April 2006 when additional financing of not less than
        $1,500,000 was subsequently received by the Company. In addition, these lenders
        received five-year warrants to purchase an aggregate of 3,753,000 shares
        of
        common stock of the Company at an exercise price of $0.20 per share. A
        corresponding number of shares were returned to the Company at no cost by
        the
        two largest shareholders of the Company to cover any exercises of these warrants
        and have been recorded as treasury shares. If the warrants are not exercised,
        these treasury shares will be retained by the Company for general corporate
        purposes, at which time the Company will determine their contributed
        value.
  40
  At
        the
        same time as the conversion described above, stockholders owning the Company's
        6,500,000 shares of its Series A Convertible Preferred Stock converted such
        shares into 62,628,030 shares of common stock. The shares of common stock
        returned to the Company as treasury shares came from these converting
        shareholders.
 
 **Note
        9. Sale of Common Shares in Private Placement and Public Offering**
 
 In
        April
        2006, the Company sold 4,600,000 shares of common stock under a private
        placement to accredited investors for $0.50 per share. The Company realized,
        after cash offering costs of $160,000, a net of $2,140,000. The placement
        agent
        received five-year warrants to purchase 320,000 common shares at $0.60 per
        share. These warrants were valued at $159,000 and were recorded as a non-cash
        cost of the offering. See Note 14 for information on a settlement with the
        placement agent.
  On
        May
        11, 2007, the Company closed a public offering of common stock and warrants
        through Empire Financial Group, Inc. with total gross proceeds raised of
        $7,064,771. After commissions and offering and distribution expenses of
        $711,273, the Company received net proceeds of $6,353,498. The Company sold
        12,845,038 shares of common stock at a price of $0.55 per share, which included
        warrants to purchase up to 75% of the number of shares purchased, at exercise
        prices of $1.10, $1.60 and $2.00, respectively, for each 25%, expiring on
        the
        fifth anniversary of the offering. Such warrants are generally exercisable
        only by the original purchaser. The underwriter’s sales commission was 9.2 % of
        the total amount of proceeds raised, plus $61,314 in underwriter’s expenses,
        legal fees and other offering costs.
  The
        Company used a portion of the proceeds of the offering to repay $1,550,000
        for
        the December 2006 bridge loans, $415,000 for the November 2006 affiliate
        loans, $350,000 for the March 2007 bridge loan, $162,307 in deferred and
        past
        due salary to our President & CEO, $515,000 for general accounts payable and
        accrued expenses and $150,000 was paid to Novellus. In the same offering
        the
        company registered an additional 7,684,579 of shares for the benefit of existing
        shareholders.
 
 **Note
        10. Stock Option Plan**
 
 In
        March
        2006, the Company adopted its Long Term Incentive Compensation Plan ("the
        Plan"). NPSWA had a stock option plan that was cancelled, along with all
        of its
        outstanding stock options and stock purchase warrants, upon completion of
        the
        acquisition by the Company.
 
 The
        Plan
        is to continue for a term of ten years from the date of its adoption. The
        Plan
        is administered by the Compensation Committee ("the Committee") of the Company's
        Board of Directors. A maximum of 10,000,000 shares of Company common stock
        can
        be issued under the Plan. To date, the Company has awarded stock options
        for
        10,704,850 shares to employees, members of the Committee, the Board, and
        advisors and consultants to the Company, and none of these options has as
        of yet
        been exercised. Options are exercisable for ten years from date of grant.
        All
        current members of the Committee have received grants of stock options under
        the
        Plan. Options granted in excess of 10,000,000 will require shareholder
        approval.
 
 If
        the
        Company changes 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
        therefore, 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 at any time. However, no such action can
        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.
 
 41
 
 The
        following table summarizes stock option activity during the nine months ended
        September 30, 2007 and year ended December 31, 2006:
  OptionsOutstanding
                
                Weighted
                    AverageExercise
                    Price
 Initial
                    grant - March 2006
                
                
                6,589,500
                
                $
                0.24Additional
                    grants through December 31, 2006
                
                
                66,000
                
                
                1.73Forfeitures
                
                
                (330,000
                )
                
                0.20Exercised
                
                
                0Outstanding
                    at December 31, 2006 (3,671,500 exercisable options)
                
                
                6,325,500
                
                $
                0.24Grants
                    during the nine months ended September 30, 2007
                
                
                4,769,350
                
                
                0.40Forfeitures
                    and cancellations
                
                
                (390,000
                )
                
                0.69Exercised
                
                
                0Outstanding
                    at September 30, 2007 (8,229,850 exercisable options )
                
                
                10,704,850
                
                $
                0.29
  The
        weighted average fair value of the options granted during the period ended
        September 30, 2007 and December 31, 2006, was $0.40 and $0.25 respectively
        and the weighted average remaining contractual lives of outstanding options
        was
        8.5 years and 9.3 years respectively.
 
 **Note
        11. Common Stock Purchase Warrants**
  A
        summary
        of warrants outstanding at September 30, 2007 and December 31, 2006,
        follows:
  Number
                      of
                  
                  Fair
                      Value
                  
                  ExerciseDate
                  
                  Action
                  
                  Warrants
                  
                  at
                      Issuance
                  
                  Price
                  
                  Expiration
                      DateApril
                      2006
                  
                  
                  Grant
                      to Novellus under
                    collaboration
                      agreement
                  
                  
                  4,705,000
                  
                  $
                  16,000,000
                  
                  $
                  0.001
                  
                  
                  Apr
                      2011April
                      2006
                  
                  
                  Grants
                      to note holders in
                    conversion
                  
                  
                  3,753,000
                  
                  
                  0
                  
                  
                  0.20
                  
                  
                  Apr
                      2011April
                      2006
                  
                  
                  Grants
                      to placement agent
                  
                  
                  320,000
                  
                  
                  159,000
                  
                  
                  0.60
                  
                  
                  Apr
                      2011April
                      2006
                  
                  
                  Grants
                      to CRA
                  
                  
                  200,000
                  
                  
                  222,000
                  
                  
                  0.85
                  
                  
                  Apr
                      2011Dec.
                      2006
                  
                  
                  Grant
                      to Palladium
                  
                  
                  81,579
                  
                  
                  101,467
                  
                  
                  1.33
                  
                  
                  Dec
                      2011Balance
                      at December 31, 2006
                  
                  
                  9,059,579
                  
                  
                  16,482,467May
                      2007
                  
                  
                  Camofi
                      Master LDC
                  
                  
                  125,000
                  
                  
                  55,823
                  
                  
                  0.55
                  
                  
                  Mar.
                      2012May
                      2007
                  
                  
                  Included
                      with public offering
                  
                  
                  3,211,260
                  
                  
                  1,321,038
                  
                  
                  1.10
                  
                  
                  May
                      2012Included
                      with public offering
                  
                  
                  3,211,260
                  
                  
                  1,280,731
                  
                  
                  1.60
                  
                  
                  May
                      2012Included
                      with public offering
                  
                  
                  3,211,259
                  
                  
                  1,254,552
                  
                  
                  2.00
                  
                  
                  May
                      2012Sept.
                      2007
                  
                  
                  Lippert/Heilshorn
                  
                  
                  180,000
                  
                  
                  73,712
                  
                  
                  0.51
                  
                  
                  Sep.
                      2011Balance
                      at September 30, 2007
                  
                  
                  18,998,358
                  
                  
                  20,468,323
  42
  **Camofi
        Master LDC**
 
 In
        March
        2007, Camofi Master LDC received a five-year warrant to purchase 125,000
        common
        shares at $0.55 per share, 96,154 shares to be registered and 48,077 restricted
        shares as additional consideration for a loan of $350,000 which was convertible
        into common shares at $0.964 per share. The loan was paid in full from proceeds
        of the public offering in May 2007. The values of the additional consideration,
        which were recorded as non cash interest expense in the nine months ended
        September 30, 2007, were as
        follows:
  Warrant
                    Value
                
                $
                83.296Registered
                    Shares
                
                
                62,970Restricted
                    Shares
                
                
                31,485Beneficial
                    Conversion Feature
                
                
                129,606Total
                    Consideration
                
                $
                307,357
 
 **Novellus**
 
 In
        May
        2004, Novellus Systems, Inc. invested $2.5 million in Neah Power Washington
        and
        signed a technology collaboration agreement. Effective May 24, 2006, this
        agreement was renewed and extended to March 9, 2008 and we were added as
        a
        party. Under the terms of the renewal agreement, Novellus continues to provide
        us with key engineering and technical expertise in connection with the
        development of our products, including the use of porous silicon in our fuel
        cells. Subject to Novellus’ continued assistance under the collaboration
        agreement and the technology being jointly developed with Novellus achieving
        the
        milestones set forth below, we expect to acquire all significant rights to
        the
        technology developed jointly by Novellus and us and to obtain the right to
        call
        on Novellus for reasonable technical assistance for a period of seven years.
        As
        part of the contract renewal, we have issued to Novellus a warrant to purchase
        4,705,000 shares of our common stock at an exercise price of $.001 per share,
        for an aggregate purchase price assuming total exercise of $4,705, which
        will
        expire on April 1, 2011. The milestones have been established and are set
        forth
        below, as well as their expected dates of completion. Novellus has agreed
        under
        the extension agreement to the termination of all of its previously outstanding
        warrants and options to purchase Neah Power Washington common stock.
  The
        milestones to which we have agreed with Novellus under a letter agreement
        relating to the technology collaboration agreement, as well as the target
        dates
        for completion and the related vesting schedule of the warrant, are as follows:
  (1)
                The
                    warrant will vest as to ten percent (10%) of the shares of our
                    common
                    stock when Novellus and we complete a fully self contained prototype
                    fuel
                    cell capable of producing 10 Watts of power continuously for
                    5 hours using
                    one detachable cartridge. The prototype will be approximately
                    40% larger
                    than the intended size of our initial military product.
 
 Milestone
          Date: September 30, 2007
  (2)
                The
                    warrant will vest as to fifteen percent (15%) of the shares of
                    our common
                    stock when Novellus and we complete a fully self-contained fuel
                    cell
                    capable of producing 45 Watts of peak power and 300 WH capability
                    at 20
                    Watts average operating power. This prototype will be the same
                    size as our
                    initial military product, i.e. about 0.9 liter, which is the
                    same size as
                    a standard disposable battery widely used in the military.
 
 Milestone
          Date: September 30, 2007
  (3)
                The
                    warrant will vest as to fifty percent (50%) of the shares of
                    our common
                    stock when Novellus and we complete all of the following tasks:
 
 •
                Establish
                    a pilot production line to assemble completed fuel cells.
 
 •
                Finalize
                    a manufacturing process for silicon electrodes based on the most
                    common
                    silicon wafer format, based on commercially available equipment,
                    and
                    identification of a manufacturing partner that is capable and
                    willing to
                    run the process.
 
 •
                Reduce
                    the cost of processing porous silicon electrodes to $30 or less
                    per
                    silicon wafer. One silicon wafer is expected to yield 12 electrodes.
  43
  Milestone
          Date: December 31, 2007
  (4)
                The
                    warrant will vest as to twenty-five percent (25%) of the shares
                    of our
                    common stock when Novellus and we complete all of the following
                    tasks:
  •
                Reduce the
                    electrode catalyst loading to 25-30% of its value as of May 2005.
                    Catalyst
                    materials form a large part of the production cost of any methanol
                    fuel
                    cell; reaching this target would allow us to meet our cost of
                    goods
                    targets in the future.
 
 •
                Develop
                    a plan to scale our fuel cell production process to commercial
                    volumes,
                    and to adapt it to commercially available equipment.
 
 Milestone
          Date: March 31, 2008
  The
          agreement with Novellus contains the following incentives for Novellus
          to
          complete the four milestones described above by their respective target
          dates:
  •
                If
                    the milestone is completed on or before 120 days following the
                    target
                    date, there will be no penalty and 100% of the Warrants scheduled
                    to vest
                    under the milestone will vest in Novellus;
 
 •
                If
                    the milestone is completed after 120 days following the target
                    date but on
                    or before 210 days following the target date, there will be a
                    one-third
                    penalty and only 66.67% of the Warrants scheduled to vest under
                    the
                    milestone will vest in Novellus;
 
 •
                If
                    the milestone is completed after 210 days following the target
                    date but on
                    or before 300 days following the target date, there will be a
                    two-third
                    penalty and only 33.33% of the Warrants scheduled to vest under
                    the
                    milestone will vest in Novellus; or
 
 •
                If
                    the milestone is completed after 300 days following the target
                    date, there
                    will be a 100% penalty and 0% of the Warrants scheduled to vest
                    under the
                    Milestone will vest in Novellus.
  The
        value
        of the warrant has been calculated using the Black Scholes method pursuant
        to
        FASB Statement of Financial Accounting Standards No. 123(R) at approximately
        $16,000,000 and will be accounted for ratably as each specific milestone
        is
        achieved. Because no milestones have yet been reached, no expense has been
        recorded for the warrant through September 30, 2007.
  Based
        on
        the current status of development of a military battery replacement fuel
        cell
        and particularly in light of our focus on developing a closed loop system,
        we
        believe it is unlikely that the above milestones will be met either on their
        initial or extended target dates. As a result, we are currently in negotiations
        with Novellus regarding a replacement for the current technology collaboration
        agreement and warrant agreement. There can be no assurance that such replacement
        agreements will be successfully negotiated.
  Under
        certain circumstances, the Company can exercise a repurchase right to acquire
        warrant stock acquired by Novellus prior to achieving any specific milestone.
        Under such circumstances, Novellus could only recover the exercise price
        it had
        paid for the repurchased stock.
  44
  In
        connection with our entry into the amended technology collaboration agreement
        with Novellus on May 26, 2006, we issued an option to purchase 1,000,000
        shares
        of our common stock to Dr. Drewery. The option will vest upon completion
        of the
        milestones applicable to the warrant issued to Novellus. Because no milestones
        have yet been reached, no expense has been recorded for the option though
        September 30, 2007
  **Convertible
        Notes Converted to Common Stock in April 2006**
 
 As
        described in Note 8, in conjunction with the automatic conversion of
        $500,400 of 8% Convertible Notes on April 27, 2006, the Company issued
        five-year warrants to the note holders to acquire up to 3,753,000 shares
        of
        Company common stock at $0.20 per share. Any shares issued pursuant to exercise
        of these warrants are to be obtained from the treasury shares contributed
        by the
        Company's two principal stockholders for such purpose. No value was attributed
        to these warrants as they have no cost to the Company. If the warrants are
        not
        exercised, these treasury shares will be retained by the Company for general
        corporate purposes, at which time the Company will determine their contributed
        value.
 
 **Private
        Placement in April 2006**
 
 As
        described in Note 9, in April 2006, the Company sold 4,600,000 shares of
        common stock under a private placement. The placement agent received five-year
        warrants to purchase 320,000 common shares at $0.60 per share. These warrants
        were valued at $159,000 and have been recorded as a non-cash cost of the
        offering. See Note 14 for information on a settlement with the placement
        agent.
 
 **Crystal
        Research Associates**
 
 As
        described in Note 13, in April 2006, the Company granted four-year warrants
        to Crystal Research Associates ("CRA") to purchase 200,000 common shares
        at
        $0.85 per share. These warrants were valued at $222,000 and were recorded
        as
        research and development expense.
 
 **Palladium
        Capital Advisors, LLC**
 
 As
        described in Note 7, in December 2006, Palladium Capital Advisors, LLC,
        received a five-year warrant to purchase 81,579 common shares at $1.33 per
        share. This warrant was valued at $101,467 and was recorded as additional
        interest expense in the year ended December 31, 2006.
 
 **Lippert/Heilshorn
        and Associates**
  As
        of June 26, 2007 warrants to acquire 180,000
        shares of common stock were issued to Lippert/Heilshorn, the Company's public
        relations firm, at an exercise price of $0.51 per share.  Such warrants
        vest quarterly over a one year period.
  **Public
        Offering of Securities**
 
 In
        May
        2007, the Company sold 12,845,038 shares of common stock at $0.55 per share
        which shares included three warrants for every four shares acquired and are
        exercisable in three tranches at $1.10, $1.60 and $2.00 respectively. The
        warrants expire on the fifth anniversary of the offering and are generally
        exercisable only by the original purchaser **.** The
        underwriter’s sales commission was 9.2 % of the total amount of proceeds raised,
        plus $61,314 in underwriter’s expenses, legal fees and other offering costs. The
        exercise price of the warrants was reduced to $0.20 per share for a six day
        period in October 2007 to induce exercise and in November 2007 the Company
        received proceeds of $126,182 from the exercise of 630,091warrants
 
 **Note
        12. Income Taxes**
 
 Significant
        components of the Company's deferred tax assets and liabilities and related
        valuation allowances are as follows as of September 30, 2007 and
        December 31, 2006:
  2007
                
                2006Deferred
                    tax assets (liabilities):Accelerated
                    depreciation
                
                $
                (80,000
                )
                $
                148,000Research
                    & development credit
                
                
                793,000
                
                
                678,000Accrued
                    vacation
                
                
                17,000
                
                
                16,000Shared-based
                    compensation expense
                
                
                816,000
                
                
                399,000Net
                    operating loss carryforwards
                
                
                10,861,000
                
                
                9,246,000Total
                    net deferred tax assets
                
                
                12,407,000
                
                
                10,487,000Valuation
                    allowance
                
                
                (12,407,000
                )
                
                (10,487,000
                )Deferred
                    tax assets, net of valuation allowance
                
                $
                -
                
                $
                -
  45
  The
        Company has established a valuation allowance as of September 30, 2007 and
        December 31, 2006, due to the uncertainty of future realization of the net
        deferred tax assets. During the nine months ended September 30, 2007 and
        the
        year ended December 2006, the valuation allowance increased by $1,920,000
        and
        $2,852,000, respectively.
 
 The
        difference between the tax at the statutory federal tax rate and no tax
        provision recorded by the Company for the nine months ended September 30,
        2007,
        and the year ended December 31, 2006, is primarily due to the Company's full
        valuation allowance against its deferred tax assets.
 
 At
        September 30, 2007, the Company had net operating loss carryforwards for
        Federal income tax purposes of approximately $31,900,000 and research and
        development credit carryforwards of approximately $793,000 available to offset
        future income that expire through 2022. Utilization of the carryforwards
        is
        dependent on generating future taxable income and will be limited by Internal
        Revenue Code Section 382 due to the more than 50% change in control in NPSWA's
        ownership in its acquisition by the Company in March 2006.
  **Note
        13. Significant Agreements**
  **Development
        Agreement with a Customer**
 
 The
        Company was 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). The Company 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. The Company
        believes this will occur in 2008, at which time the customer will then have
        the
        right to choose whether or not to continue further with Phase II.
 
 **Employment
        Contract with the President and CEO**
 
 In
        March
        2006, the Company entered into an employment contract with its President
        and
        CEO, Paul Abramowitz. The contract called for an annual salary of $270,000
        plus
        customary executive benefits. Mr. Abramowitz agreed to defer $112,500 of
        the
        annual salary until the Company raised a minimum of $5,000,000. Mr. Abramowitz
        could then either receive the deferred amount or convert it to options that
        vested at 1/12 per month, effective March 2006, and were exercisable at $0.85
        per share. Mr. Abramowitz received his deferred salary in full from proceeds
        of
        the public offering in May 2007 and all such options were
        cancelled.
 
 On
        August
        8, 2007, the Company entered into a new Employment Agreement with Mr. Abramowitz
        under the terms of which Mr. Abramowitz initially receives a base salary
        per
        annum of $275,000, an annual bonus at the reasonable discretion of the Company’s
        Board of Directors, and other usual and customary benefits and perquisites.
        The
        initial term of the Agreement commenced on August 1, 2007 and continues until
        December 31, 2008, unless terminated earlier pursuant to the terms of the
        Employment Agreement. The Agreement will be automatically renewed for an
        additional two-year term, unless either party gives written notice of its
        intention to terminate the Employment Agreement at least six months prior
        to the
        automatic renewal date.
  If
        Mr.
        Abramowitz is terminated without cause or resigns for good reason, his benefits
        would include the following: (i) his salary prorated through the date of
        termination, together with any accrued benefits, (ii) a lump sum cash severance
        payment equal to one year of additional salary, (iii) all unvested stock
        options
        will immediately become vested, and (iv) all fringe benefits shall continue
        for
        a period of two years from the date of termination.
  46
  **Services
        Agreement with the Executive Chairman**
 
 On
        August
        17, 2007, the Company entered into a Services Agreement with Dan Rosen, our
        Executive Chairman whereby Dr. Rosen will be the primary company spokesperson
        and liaison to the investment community. Dr. Rosen is paid a monthly fee
        of
        $18,750 of which $12,500 is currently being deferred. Dr. Rosen also received
        options to acquire 1,000,000 shares of Company common stock at an exercise
        price
        of $ 0.245 per share of which 250,000 vested upon grant and 250,000 will
        vest
        every three months through May 17, 2008.
 
 **Employment
        Contract with the Chief Operating Officer**
 
 On
        September 17, 2007, the Company entered into an Employment Agreement with
        Dr.
        Gerard C. (Chris) D’Couto, who was appointed as our Chief Operating
        Officer . Under
        the
        terms of the Agreement, he will initially receive a base salary of $225,000
        per
        annum, a bonus equal to 50% of his base salary upon the completion of certain
        milestones, the usual and customary executive benefits and perquisites and
        2,250,000 stock options. The options vest 750,000 upon grant and 750,000
        on each
        of March 17, 2008, and June 17, 2008, and all unvested options will immediately
        vest in the event of a change in control. 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.
 
 **Novellus**
 
 In
        connection with the acquisition of NPSWA by the Company, Novellus, a current
        stockholder of the Company and a former stockholder of NPSWA, agreed to cancel
        warrants of NPSWA it held and the Company agreed to pay by November 30,
        2006, approximately $150,000 owed to Novellus for services. In addition,
        on
        May 24, 2006, the Company and Novellus negotiated the final terms of a new
        collaboration agreement and on May 26, 2006, the Company issued 4,705,000
        new
        warrants to Novellus, which are described in detail in Note 11. The Company
        paid the $150,000 to Novellus from proceeds of the public offering in May
        2007.
 
 Based
        on
        the current status of development of a military battery replacement fuel
        cell
        and particularly in light of our focus on developing a closed loop system,
        we
        believe it is unlikely that the above milestones will be met either on their
        initial or extended target dates. As a result. we are currently in negotiations
        with Novellus regarding a replacement for the current technology collaboration
        agreement and warrant agreement. There can be no assurance that such replacement
        agreements will be successfully negotiated.
  **Crystal
        Research Associates**
 
 On
        April 7, 2006, the Company signed a contract with CRA for market research.
        The cost of the research program was $35,000 plus out-of-pocket expenses
        and
        200,000 warrants, which are described in detail in Note 11.
 
 **Danfoss
        A/S**
 
 In
        June
        2006, the Company entered into a research agreement with Danfoss A/S,
        ("Danfoss"), a Danish company. The costs of Danfoss' services were estimated
        to
        be $280,000, of which approximately $70,000 was incurred in the nine months
        ended September 30, 2007 and approximately $98,000 was incurred in the year
        ended December 31, 2006. Danfoss also agreed to grant a license to the
        Company so that any specific Danfoss technology or software can be used by
        the
        Company and the technology that is developed jointly will be owned by the
        Company. The Company will pay a royalty of 3% of the sales value of certain
        products and technology that arise from this agreement. In December 2007,
        this
        contract terminated due to difficulties encountered by Danfoss in completing
        the
        requirements for Phase 3. The Company is now negotiating with a U.S. based
        firm
        that is able to complete what is necessary to finish Phase 3.
  47
  **Note
        14. Commitments and Contingencies**
 
 The
        Company currently leases both its corporate headquarters and laboratory
        facilities on a month-to-month basis and also is negotiating with the landlord
        for a new space in which we intends to combine our operating and administrative
        personnel. As of September 30, 2007, monthly minimum rental and related
        payments were approximately $14,600 per month. Rental expense was approximately
        $133,940 and $186,000 for the nine months ended September 30, 2007 and year
        ended December 31, 2006, respectively.
  The
        Company's former securities counsel claims it is owed $200,000 for legal
        fees.
        The Company believes that there is an agreement in place to cap these fees
        at
        $60,000. No formal legal action has been taken in this matter.
 
 On
        November 26, 2007, the Company entered into a Settlement Agreement and Mutual
        Release with its former placement agent, Burt Martin Arnold Securities,
        Inc *.* ,
        and the
        lawsuit it filed on December 5, 2006, has been dismissed with prejudice.
        The
        Company agreed to deliver 350,000 fully registered shares of its common stock.
        If a registration statement does not become effective within 120 days, the
        Company will satisfy the settlement obligation with a cash payment of
        $105,000.
  **Note
        15. Related Party Transactions**
 
 See
        Note 7 regarding certain stockholders loaning the Company money and the
        contributions of warrants to purchase Company common stock owned by a
        stockholder to the lending stockholders.
 
 See
        Notes 8 regarding the transfer of treasury shares to the Company by certain
        former preferred stockholders.
 
 See
        Note 10 regarding the Plan Committee receiving stock options under the
        Plan.
 
 See
        Notes 11 and 13 regarding an agreement with Novellus, a former stockholder
        of NPSWA.
 
 See
        Note
        13 regarding employment and services contracts with certain officers of the
        Company.
 
 In
        July
        2007, the Company issued 28,000 shares of common stock to David M. Barnes,
        the
        Company's Chief Financial Officer, in payment of monies due for services
        rendered. The shares were valued at $15.400.
 
 **Note
        16. Acquisition of NPSWA**
 
 On
        March 9, 2006, NPSWA entered into an Agreement and Plan of Merger ("the
        Merger Agreement") with GMI, a Nevada public shell corporation, Growth
        Acquisition Corp. ("GAC"), a Washington corporation, Summit Trading Limited
        ("STL"), a British Virgin Islands corporation, and Special Investments
        Acquisition Associates LLC ("SIAA"), a Delaware limited liability company.
        The
        Merger Agreement was further amended on April 12, 2006. By virtue of this
        merger, GMI became the parent corporation of NPSWA and owns 100% of its capital
        stock. Following the merger, GMI changed its corporate name to Neah Power
        Systems, Inc. ("NPSNV").
 
 In
        February 2006, NPSWA converted all of its shares of Series A and Series B
        Preferred Stock to Common Stock and amended its Articles of Incorporation
        to
        eliminate such classes of Preferred Stock and to create a new series of
        preferred stock known as Series A. New Common shares were then issued for
        the
        old Common shares in the ratio of one (1) new share for ten (10) old shares.
        Upon completion of this reverse stock split, 7,990,457 shares of the NPSWA's
        Common Stock were issued and outstanding.
  Prior
        to
        the merger, GMI was an inactive shell corporation and had engaged in no
        substantive business operations since 2003. Prior to its acquisition of NPSWA,
        a
        total of 10,481,534 shares of common stock of GMI were issued and
        outstanding.
  48
  Under
        the
        terms of the merger, the 7,990,457 outstanding Common shares of NPSWA were
        converted into 26,203,858 shares of common stock of NPSNV and all outstanding
        NPSWA stock options and warrants were cancelled. In addition, NPSNV contributed
        $500,000 to the working capital of NPSWA.
 
 Immediately
        prior to the Merger, 6,500,000 shares of NPSNV Series A Convertible Preferred
        Stock were sold to two entities, for an aggregate of $6,500. These shares
        were
        convertible into 58,875,030 shares of NPSNV common stock (exclusive of an
        additional 3,753,000 shares set aside as treasury shares for delivery upon
        the
        exercise of warrants) and were automatically convertible into such common
        stock
        if NPSNV or NPSWA completed an equity or equity type financing for an additional
        $1,500,000.
 
 The
        president and CEO of the Company, Paul Abramowitz, and members of his family
        had
        a beneficial interest in approximately 50% of the shares described above
        upon
        their issuance. In addition, members of the Abramowitz family were indirect
        former stockholders of NPSWA and received, on a pro rata basis, an additional
        93,927 shares of NPSNV common stock in the Merger. The Series A Preferred
        Stock
        automatically converted on April 27, 2006, effective with the closing of
        the
        private placement described in Note 9.
 
 The
        series A and B convertible preferred stock of NPSWA had conversion rights
        from
        the original issue date and on each date when subsequently issued. As part
        of
        the acquisition by GMI, all Preferred Shareholders were required to convert
        into
        common stock in order that the number of shares of NPSWA to be exchanged
        for
        NPSNV shares would be a specific number subsequent to the one-for-ten reverse
        split.
 
 The
        acquisition was recorded as a reverse merger for accounting purposes, which
        the
        SEC considers to be equivalent to a recapitalization. NPSNV is the legal
        parent
        of NPSWA but these financial statements, other than capital stock accounts,
        are
        those of NPSWA. A summary of the entries to record the acquisition follows
        (in
        thousands of dollars):
  49
  GMI
                    - (Neah Power - Nevada)
                
                Neah
                    - (Neah Power - Washington)@
                
                
                
                
                
                @
                
                
                
                
                
                
                
                Consol.Merger
                
                Merger
                
                Post-
                
                Merger
                
                Merger
                
                Post-
                
                Consol.
                
                -
                    Post-Date
                
                Adj.
                
                merger
                
                Date
                
                Adj.
                
                merger
                
                Adj
                
                mergerASSETS:Assets
                
                $
                506.5
                
                
                
                
                $
                506.5
                
                $
                1,189.4
                
                
                
                
                $
                1,189.4
                
                
                ($500.0
                )(4)
                $
                1,195.9Investment
                    in NPS-Nev
                
                
                
                
                
                
                
                
                0.0
                
                
                
                
                
                506.5
                (3)
                
                506.5
                
                
                (506.5
                )(5)
                
                0.0TOTAL
                    ASSETS
                
                $
                506.5
                
                $
                0.0
                
                $
                506.5
                
                $
                1,189.4
                
                $
                506.5
                
                $
                1,695.9
                
                
                ($1,006.5
                )
                $
                1,195.9LIABILITIES
                    AND SHAREHOLDERS' EQUITY:LIABILITIES
                
                $
                0.0
                
                
                
                
                $
                0.0
                
                $
                1,972.4
                
                
                
                
                $
                1,972.4
                
                
                ($500.0
                )(4)
                $
                1,472.4SHAREHOLDERS'
                    EQUITY:GMI:Preferred
                    Stock
                
                
                6.5
                
                
                
                
                
                6.5
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6.5Common
                    Stock
                
                
                10.5
                
                
                26.2
                (1)
                
                36.7
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                36.7APIC
                
                
                75.8
                
                
                (26.2
                )(1)
                
                49.6
                
                
                
                
                
                
                
                
                
                
                
                (49.6
                )(5)
                
                0.0Retained
                    Earnings (Accum. Deficit)
                
                
                413.8
                
                
                
                
                
                413.8
                
                
                
                
                
                
                
                
                
                
                
                (413.8
                )(5)
                
                0.0Neah:
                    Preferred Stock -Series A
                
                
                
                
                
                
                
                
                
                
                
                0.0
                
                
                6.5
                (3)
                
                6.5
                
                
                (6.5
                )(5)
                
                0.0Common
                    Stock
                
                
                
                
                
                
                
                
                
                
                
                19,251.8
                
                
                (19,225.6
                )(2)
                
                36.7
                
                
                (36.7
                )(5)
                
                0.010.5
                (3)
                
                
                
                
                
                
                
                0.0APIC
                
                
                
                
                
                
                
                
                
                
                
                3,124.3
                
                
                19,225.6
                (2)
                
                22,839.4
                
                
                
                
                
                22,839.4489.5
                (3)
                
                
                
                
                
                
                
                0.0Retained
                    Earnings (Accum. Deficit)
                
                
                
                
                
                
                
                
                
                
                
                (23,159.2
                )
                
                
                
                
                (23,159.2
                )
                
                
                
                
                (23,159.2
                )TOTAL
                    SHAREHOLDERS' EQUITY:
                
                
                506.5
                
                
                0.0
                
                
                506.5
                
                
                (783.1
                )
                
                506.5
                
                
                (276.6
                )
                
                (506.5
                )
                
                (276.6
                )TOTAL
                    LIABILITIES AND SHAREHOLDERS' EQUITY:
                
                $
                506.5
                
                $
                0.0
                
                $
                506.5
                
                $
                1,189.4
                
                $
                506.5
                
                $
                1,695.9
                
                
                ($1,006.5
                )
                $
                1,195.9
  50
  **Footnotes:**
 
 1.
        Record
        acquisition of Neah Power - Washington by Growth Mergers (Neah Power - Nevada).
        The offsetting debit to the credit to Growth Mergers Common Stock is to
        Additional Paid-In Capital rather than to an Investment account because the
        subsidiary (Neah Power - Washington) will be treated as if it were the
        acquirer.
 
 2.
        Recapitalize Neah Power - Washington Common Stock so that the number of shares
        issued and par value is the same as Growth Mergers (Neah Power - Nevada)
        (36,685,392 shares at $0.001 per share).
 
 3.
        Record
        the book value of the net assets of Growth Mergers (Neah Power - Nevada)
        on the
        books of Neah Power - Washington as if Neah Power - Washington were the
        acquirer.
 
 4.
        Eliminate intercompany advance.
 
 5.
        Eliminate Neah Power - Washington's investment in Neah Power -
        Nevada.
 
 **Note
        17. Subsequent Events**
 
 On
        November 9, 2007, the Company sold a 10% convertible secured
        promissory note due January 1, 2009 to EPD Investment Co., LLC (“EPD”) for gross
        proceeds of $500,000. The note is convertible to shares of common stock at
        $0.29 per share. EPD will receive 1.25 million common shares and a 5-year
        warrant to purchase 500,000 shares at $0.29 per share, as well as
        additional shares if we do not repay the loan or effect a registration
        statement for the shares by specified dates.  The
        note is secured by common shares valued at five times
        the outstanding note balance, and is further secured by a security
        interest in substantially all of our assets until 45 days after a
        registration statement for all shares is declared effective.
  On
        November 13, 2007, as consideration and security for the EPD financing, the
        Company issued 12.5 million shares of common stock to be held in escrow pursuant
        to the terms of the purchase agreement and related transaction agreements.
        The
        Company also issued the five-year warrants to purchase up to 500,000 additional
        shares of our common stock at $0.29 per share. These securities were issued
        without registration pursuant to the exemption afforded by Section 4(2) of
        the Securities Act of 1933, as a transaction by us not involving any public
        offering.
 
 On
        November 28, 2007, the Company sold a 12% convertible secured promissory
        note
        due June 28, 2008 to CAMHZN Master LDC (“CAMHZN”) for **** gross
        proceeds of $500,000. $315,000 was received at the closing, net of costs
        of
        $35,000 and the remaining $150,000 will be paid to the Company upon our
        registration statement becoming effective. The Company will file a registration
        statement with the Securities and Exchange Commission immediately following
        the
        filing of this Form 10-KSB. There is a penalty of $10,000 per month for any
        delays in the Company's registration statement being declared effective.
        The
        note is convertible to shares of common stock at $3.00 per share. CAMHZN
        will
        receive 1.1 million common shares and a 5-year warrant to purchase 250,000
        shares at $0.22 per share, as well as additional shares if the Company does
        not
        repay the loan or effect a registration statement for the shares by specified
        dates. The note is secured by 8,000,000 shares of the Company's common stock.
  As
        consideration and security for this financing, the Company issued 10.5 million
        shares of common stock to be held in escrow pursuant to the terms of the
        letter
        agreement and related transaction agreements. The Company also issued five-year
        warrants to purchase up to 250,000 additional shares of our common stock
        at
        $0.22 per share. These securities were issued without registration pursuant
        to
        the exemption afforded by Section 4(2) of the Securities Act of 1933, as
        a
        transaction by the Company not involving any public offering.
 
 The
        Company also
        received gross proceeds of approximately $126,000 in November 2007 from
        exercises of warrants issued in connection with our underwritten public
        offering, at an agreed amended exercise price of $0.20 per share for a six
        day
        period in October 2007 pursuant to an amendment to the warrant
        exercise agreements. The Company has agreed to pay Jessup & Lamont Capital
        Markets, Inc. and its affiliate Jessup & Lamont Securities Corporation a
        placement fee of 10% of the gross proceeds from such exercises.
 
 See
        Note
        14 for information about the settlement with the placement agent for the
        Company's April 2006 private placement.
  51
 
 **Item
        8: 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
        8A: Controls and Procedures**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our Securities Exchange Act reports
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms, and that such information is accumulated and
        communicated to our management, including our chief executive and financial
        officer, to allow timely decisions regarding required disclosure. In designing
        and evaluating the disclosure controls and procedures, management recognized
        that any controls and procedures, no matter how well designed and operated,
        can
        provide only reasonable assurance of achieving the desired control objectives,
        as ours are designed to do, and management necessarily was required to apply
        its
        judgment in evaluating the cost-benefit relationship of possible controls
        and
        procedures.
  As
        of
        September 30, 2007, an evaluation was performed under the supervision and
        with
        the participation of our management, including our chief executive and financial
        officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures. Based upon that evaluation, our chief executive
        and
        financial officer concluded that our disclosure controls and procedures are
        effective to ensure that required material information is included in this
        report. There has been no change in our internal control over financial
        reporting during the current quarter that has materially affected, or is
        reasonably likely to materially affect, our internal control over financial
        reporting.
  52
  **PART
        III**
 
 **Item
        9: Directors, Executive Officers, Promoters, Control Persons and Corporate
        Governance; Compliance with Section 16(a) of the Exchange
        Act.**
  **Identification
        Of Directors And Executive Officers.** Our
        current officers and directors are listed below. Each of our directors will
        serve for one year or until their respective successors are elected and
        qualified. Our officers serve at the pleasure of the board of directors.
  **Name**
              
              **Age**
              
              **Position**Paul
                  Abramowitz
              
              51
              
              Vice
                  Chairman, Chief Executive Officer and PresidentDr.
                  Daniel Rosen
              
              55
              
              Chairman
                  of the Board of DirectorsDr.
                  Arthur Homa
              
              52
              
              Vice
                  President of EngineeringLeroy
                  Ohlsen
              
              32
              
              Chief
                  Technology Officer and DirectorDavid
                  M. Barnes
              
              65
              
              Chief
                  Financial OfficerDr.
                  Gerard C. D’Couto
              
              40
              
              Chief
                  Operating OfficerMichael
                  Solomon
              
              54
              
              DirectorDr.
                  Buzz Aldrin
              
              77
              
              Director
 
 ***Paul
        Abramowitz.*** A
        professional manager and entrepreneur, Mr. Abramowitz has experience covering
        a
        broad spectrum of industries. He became Vice Chairman, Chief Executive Officer
        and a director of our Company in March 2006 following the merger with Neah
        Power
        Washington. For one year prior to his affiliation with our Company, Mr.
        Abramowitz was CEO of the Experience Music Project, a charitable project
        located
        in Seattle, co-founded by investor and philanthropist Paul G. Allen of Microsoft
        and Vulcan Inc., dedicated to exploring creativity and innovation in American
        popular music. From 1986 to March 2006, Mr. Abramowitz acted as an independent
        “turnaround” consultant to distressed and bankrupt companies. Mr. Abramowitz
        holds a Masters in Business Administration from the University of Southern
        California and a Bachelors Degree in Business Administration at Ohio State
        University.
  ***Daniel
        Rosen, Ph.D.*** Dr.
        Rosen has served as the chairman of the board of directors of Neah Power
        Washington since 2000 and Executive Chairman since August 17, 2007. Dr. Rosen
        is
        CEO of Dan Rosen & Associates, a business he founded in 2006. For six years
        prior thereto, he was the founding general partner of Frazier Technology
        Ventures, a technology venture capital firm. Prior to 2000, Dr. Rosen served
        in
        several executive posts while at Microsoft, including General Manager of
        New
        Technology at Microsoft Research and General Manager, MSN Network. Earlier
        in
        his career, Dr. Rosen was the VP and general manager of AT&T’s first
        consumer Internet offering and AT&T’s first Managing Director for Northern
& Eastern Europe. He holds a Ph.D. in biophysics from the University of
        California San Diego and a B.A. in biology from Brandeis University.
  ***Arthur
        Homa, Ph.D.*** Dr.
        Homa has been Vice President of Engineering for our Company since July 2003.
        From 2001 to 2003, Dr. Homa worked as an independent consultant with respect
        to
        technology transfers. He has over 20 years of technical management experience
        in
        the electrochemical and battery industries. He has held senior posts at Bolder
        Technologies, an early-stage battery development company, as well as Rayovac
        Corporation and General Electric Company. He has extensive experience in
        managing research and development operations and in advancing technology
        from
        the laboratory stage to a high-volume, highly automated commercial production
        capability. Dr. Homa received his Ph.D. in Electrochemistry from Case Western
        Reserve University in 1981, and earned his B.A. in Chemistry from Franklin
&
Marshall College in Lancaster, PA in 1976.
  ***Leroy
        Ohlsen.*** Mr.
        Ohlsen co-founded Neah Power Systems in 1999 to follow his passion for fuel
        cell
        technology developed during undergraduate studies. Mr. Ohlsen acted as the
        chief
        executive officer from 1999 until 2000 and was thereafter appointed chief
        technology officer and vice president of engineering; he relinquished the
        latter
        position in July 2003. Mr. Ohlsen remains our chief technology officer and
        has
        since our inception served on our board of directors. Previously, he worked
        as a
        Project Manager for MultiChem Analytical Services, an environmental testing
        laboratory. Mr. Ohlsen worked part-time throughout college at MDS Panlabs
        as
        part of the chemistry team. Leroy received a B.S. degree in Chemistry from
        the
        University of Washington in 1998.
  53
  ***David
        M. Barnes.*** Mr.
        Barnes has over 40 years of experience as a chief financial officer and senior
        executive for a number of publicly traded companies, and has coordinated
        audits
        and supervised the preparation and filing of public disclosure documents.
        Mr.
        Barnes served as Chief Financial Officer of Cyber Defense Systems, Inc. (CYDF)
        from August 2005 through November 2007 and from April 1996 through July 2006
        he
        served as Chief Financial Officer of American United Global, Inc. (Now SLTN).
        He
        also is an advisor, director and member of the audit committees and compensation
        committees of a number of other public companies, including China Direct,
        Inc.
        (CDS), MDWerks, Inc. (MDWK), Thinkpath Inc. (THPHF), Searchhelp, Inc. (SHLP),
        Medical Solutions Management, Inc. (SMSI),and Fleet Lease Disposal Corp.,
        a
        private company.
  Mr.
        Barnes currently devotes approximately 45% of his professional time to the
        affairs of our Company in his capacity as our chief financial officer and
        the
        remaining 55% is devoted to his other positions mentioned herein. We believe
        that this is an adequate amount of time to serve our current needs for our
        chief
        financial officer, as we have a part-time controller and other accounting
        staff
        and do not believe that we currently require a full-time chief financial
        officer. We do, however, anticipate that we will commence efforts to hire
        a
        full-time chief financial officer by the second quarter of fiscal year 2008.
  ***Dr.
        Gerard C. (Chris) D’Couto*** .
        Dr.
        D'Couto has been appointed as our Chief Operating Officer, a new position
        at our
        company, effective September 17, 2007. Prior to joining our company, 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 that are
        critical to the ongoing success of our company. 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.
  ***Michael
        F. Solomon.*** Mr.
        Solomon has served on our board of directors since March 2006. Since August
        of
        2003, he has been a partner in the law firm of Pillsbury Winthrop Shaw Pittman
        LLP specializing in tax and corporate transactions. From July, 2001 through
        August 2003, Mr. Solomon was a partner at PricewaterhouseCoopers, LLP. Mr.
        Solomon is also a long-time private investor in numerous businesses on whose
        boards he has served. His law practice has been heavily concentrated in the
        technology and research and development sectors, and he has been specifically
        involved in cases addressing fuel cell technology. He is an Adjunct Professor
        of
        Law at the Georgetown University Law Center and an honors graduate of both
        Yale
        University (1974) and Harvard Law School (1977).
  ***Buzz
        Aldrin, Ph.D.*** Dr.
        Aldrin, a former U.S. astronaut best known for his moon walk during the Apollo
        XI mission in 1969, received his Doctorate in Astronautics from MIT. Since
        retiring from NASA, the Air Force, and his position as Commander of the Test
        Pilot School at Edwards Air Force Base, Dr. Aldrin has remained at the forefront
        of efforts to ensure a continued leading role for America in manned space
        exploration. In 1993 Dr. Aldrin received a U.S. patent for a permanent space
        station he designed. In 1996 he founded Starcraft Boosters, Inc., a rocket
        design company, and in 1998 he created the ShareSpace Foundation, a nonprofit
        devoted to opening the doors to space tourism for all people. Dr. Aldrin
        earned
        a Doctorate in Astronautics from the Massachusetts Institute of Technology
        in
        Manned Space Rendezvous. The techniques he devised were used on all NASA
        missions, including the first space docking with the Russian Cosmonauts.
        Dr.
        Aldrin has been presented the Presidential Medal of Freedom, the United States
        highest honor.
  Directors
        are elected to serve for a term of one year or until their successors are
        duly
        elected and qualified. Directors are not compensated for serving as such,
        though
        they may receive options to purchase shares of our common stock and
        reimbursement for properly documented and authorized expenses. Officers serve
        at
        the discretion of the board of directors.
  54
  **FAMILY
        RELATIONSHIPS**
  There
        are
        no family relationships among any of our directors or executive
        officers.
  **LEGAL
        PROCEEDINGS**
  There
        have been no events under any bankruptcy act, no criminal proceedings and
        no
        judgments, injunctions, orders or decrees material to the evaluation of the
        ability and integrity of any director, executive officer, promoter or control
        person of our Company during the past five years.
  **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
        all required forms have been filed on a timely basis except as
        follows:
  For
        the
        nine months ended September 30, 2007, Daniel Rosen filed one late report
        regarding an award of stock options. The transaction was reported to the
        SEC on
        August 24, 2007. The report was filed late due to a delay in communication
        between us and Dr. Rosen.
  For
        the
        nine months ended September 30, 2007, David Barnes filed one late report
        regarding the issuance of common stock as partial compensation for services.
        The
        transaction was reported to the SEC on July 18, 2007. The report was filed
        late
        due to a delay in communication between us and Mr. Barnes.
  For
        the
        nine months ended September 30, 2007, Buzz Aldrin filed one late report
        regarding the award of stock options. The transaction was reported to the
        SEC on
        March 13, 2007. The report was filed late due to a delay in communication
        between us and Dr. Aldrin.
  For
        the
        nine months ended September 30, 2007, Gerard C. D'Couto filed one late report
        regarding the award of stock options. The transaction was reported to the
        SEC on
        September 5, 2007. The report was filed late due to a delay in communication
        between us and Dr. D'Couto.
  **CODE
        OF ETHICS**
  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 to the Company.
  **AUDIT
        COMMITTEE OF THE BOARD OF DIRECTORS**
  We
        have
        an audit committee of the Board of Directors, consisting entirely of independent
        directors. The Audit Committee consists of: Michael F. Solomon and Buzz Aldrin.
        The Audit Committee functions in part as an independent and objective party
        with
        oversight of the Company’s financial reporting process and internal controls.
        Mr. Solomon and Dr. Aldrin are the financial experts on our audit committee
        as
        defined by Item 407(d)(5)(ii) of Regulation S-B.
  **COMPENSATION
        COMMITTEE OF THE BOARD OF DIRECTORS**
  We
        have a
        compensation committee of the Board of Directors. The Compensation Committee
        consists of: Michael F. Solomon and Buzz Aldrin. 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 the Company’s executive officers and to administer the Company’s Long
        Term Incentive Compensation Plan.
  55
  **NOMINATING
        COMMITTEE OF THE BOARD OF DIRECTORS**
  We
        have a
        nominating committee of the Board of Directors. The Nominating Committee
        consists of: Daniel Rosen and Michael F. Solomon. 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.
  In
        addition, we have a Technical Advisory Board comprised of Dr. John Drewery,
        Dr.
        Daniel Rosen, Wilbert van den Hoek and Roger Walton. The Technical Advisory
        Board advises us and our board of directors on matters relating to our
        technology.
  **INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM**
  The
        firm
        of Peterson Sullivan PLLC has been appointed to serve as our independent
        registered public accounting firm for the 2008 fiscal year unless the Audit
        Committee deems it advisable to make a substitution.
  **Item
        10: Executive Compensation**
  The
        following table sets forth the total compensation received by the named
        executive officer during the transition period (nine months) ended September
        30,
        2007 and the fiscal year ended December 31, 2006:
  **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
                      ($)**Paul
                      Abramowitz
                  
                  
                  2007
                  
                  $
                  206,250
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  75,535
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  $
                  281,785President
                      & CEO
                  
                  
                  2006
                  
                  
                  223,767
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  45,722
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  269,489David
                      Dorheim
                  
                  
                  2007
                  
                  $
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $Former
                      President & CEO
                  
                  
                  2006
                  
                  $
                  125,000
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  31,126
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  156,126Arthur
                      Homa
                  
                  
                  2007
                  
                  $
                  155,060
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  26,465
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  155,060VP
                      Engineering
                  
                  
                  2006
                  
                  $
                  187,249
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  86,197
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  $
                  273,446Leroy
                      Ohlson
                  
                  
                  2007
                  
                  $
                  82,843
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  17,150
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  87,488Chief
                      Technology Officer
                  
                  
                  2006
                  
                  $
                  101,352
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  81,408
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  182,760Daniel
                      Rosen
                  
                  
                  2007
                  
                  $
                  28,125
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  296,227
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  324,352Executive
                      Chairman
                  
                  
                  2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  114,928
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  114,928Gerard
                      C. ("Chris") D'Couto
                  
                  
                  2007
                  
                  $
                  8,654
                  
                  
                  —
                  
                  
                  
                  
                  $
                  549,739
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  558,393Chief
                      Operating Officer
                  
                  
                  2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
 
 On
        March
        27, 2006, Mr. Dorheim resigned as President and COO of Neah Power Washington.
        As
        severance, Mr. Dorheim received options to purchase 162,500 shares of our
        common
        stock at $0.20 per share and six months salary payable monthly.
  **Employment
        Agreements**
  **Paul
        Abramowitz:** On
        August 8, 2007, we entered into an Employment Agreement with our Chief Executive
        Officer, Paul Abramowitz (the “Employment Agreement”). The Employment Agreement
        details the duties, responsibilities, compensation and term of Mr. Abramowitz’s
        employment at the Company. Under the terms of the Employment Agreement, Mr.
        Abramowitz will initially receive a per annum base salary of $275,000, an
        annual
        bonus at the reasonable discretion of the Company’s Board of Directors, and
        other benefits and perquisites. The initial term of the Agreement commenced
        on
        August 1, 2007 and continues until December 31, 2008, unless terminated earlier
        pursuant to the terms of the Employment Agreement. The Agreement will be
        automatically renewed for an additional two-year term, unless either party
        gives
        written notice of its intention to terminate the Employment Agreement at
        least
        six months prior to the automatic renewal date.
  56
  The
        Employment Agreement also details Mr. Abramowitz’s salary and benefits to be
        received if his employment is terminated or he resigns for good reason. In
        such
        an event, Mr. Abramowitz’s benefits would include the following: (i) his salary
        prorated through the date of termination, together with any accrued benefits,
        (ii) a lump sum cash severance payment equal to one year of additional salary,
        (iii) all unvested stock options will immediately become vested, and (iv)
        all
        fringe benefits shall continue for a period of two years from the date of
        termination.
  **Dr.
        Gerard C. (Chris) D'Couto:** Under
        the
        terms of the Offer Letter entered into between Dr. Gerard C. (Chris) D’Couto and
        us, he will initially receive a per annum base salary of $225,000, a bonus
        equal
        to 50% of his base salary upon the completion of certain milestones, 2,250,000
        stock options (which options will immediately vest in the event of a change
        in
        control) and other benefits and perquisites. 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.
  **Dr.
        Daniel Rosen:** On
        August
        17, 2007, Dr. Daniel Rosen was appointed Executive Chairman and we entered
        into
        a Services Agreement with him to act as our primary company spokesperson
        and
        liaison to the investment community. Dr. Rosen will receive $8,833 per month
        plus $12,500 per month in deferred compensation. We also agreed to grant
        Dr.
        Rosen incentive compensation plan options to purchase up to 1,000,000 shares
        of
        common stock at the closing price on August 17, 2007, with 250,000 options
        vested immediately, and 250,000 options vesting on each three month anniversary
        thereafter during the term of the agreement. The agreement will continue
        on an
        at-will basis until terminated by either party on no less than 30 days written
        notice. On September 4, 2007, Dr. Rosen was granted options to acquire an
        additional 225,000 shares for his role in numerous presentations throughout
        the
        country to promote our May 2007 public offering.  All of the 225,000
        options vested upon grant.
  We
        do not
        have employment agreements with any of our other executive officers or key
        employees. However, we require each of our employees to execute confidentiality
        and non-disclosure agreements with respect to all technical aspects of our
        business, and to agree to assign to our Company all inventions, research
        and
        technical data developed by them during the course of their employment.
  **Outstanding
        Equity Awards At Fiscal Year-End**
  The
        following table sets forth information concerning unexercised options; stock
        that has not vested; and equity incentive plan awards for certain named
        executive officers outstanding as of September 30, 2007:
  **Outstanding
        Equity Awards at Fiscal Year-End**
  **Option
                    Awards**
                
                **Stock
                    Awards****Name****NEW**
                
                **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 Have Not 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**
                  **(#)**Paul
                    Abramowitz
                  President
                    & CEO
                
                
                250,000
                
                
                
                
                
                
                
                $
                0.22
                
                
                Mar.
                    14,2016
                
                
                —
                
                
                —
                
                
                —
                
                
                —Paul
                    Abramowitz
                
                
                45,000
                
                
                
                
                
                
                
                $
                0.45
                
                
                May
                    2017David
                    Dorheim
                  Former
                    President & CEO
                
                
                162,500
                
                
                
                
                
                
                
                $
                0.20
                
                
                Mar
                    2016
                
                
                —
                
                
                —
                
                
                —
                
                
                —Dan
                    Rosen
                
                
                60,000
                
                
                
                
                
                
                
                $
                0.45
                
                
                May
                    2007Dan
                    Rosen
                
                
                590,000
                
                
                
                
                
                
                
                $
                0.25
                
                
                Aug.
                    2017Dan
                    Rosen
                
                
                
                
                
                500,000
                
                
                
                
                $
                0.25
                
                
                Aug.
                    2017Dan
                    Rosen
                
                
                225,000
                
                
                
                
                
                
                
                $
                0.23
                
                
                Sep.
                    2017Dr.
                    Gerard C. (Chris) D'Couto
                
                
                2,250,000
                
                
                
                
                
                
                
                $
                0.25
                
                
                Sep.
                    2017Arthur
                    Homa
                  VP
                    Engineering
                
                
                450,000
                
                
                
                
                
                
                
                $
                0.20
                
                
                Mar2016
                
                
                —
                
                
                —
                
                
                —
                
                
                —Arthur
                  Homa
                
                
                —
                
                
                60,000
                
                
                
                
                $
                0.45
                
                
                May
                    2017Leroy
                    Ohlson
                  CTO
                
                
                425,000
                
                
                
                
                
                
                
                $
                0.20
                
                
                Mar2016
                
                
                —
                
                
                —
                
                
                —
                
                
                —Leroy
                    Ohlson
                
                
                45,000
                
                
                
                
                
                
                
                $
                0.45
                
                
                May
                    2017Leroy
                    Ohlson
                
                
                —
                
                
                40,000
                
                
                
                
                $
                0.45
                
                
                May
                    2017
 
 57
 
 **Compensation
        of Directors**
  Our
        directors are compensated with stock options from time to time under our
        Long
        Term Incentive Compensation Plan.
  The
        following table reflects the compensation of directors for the nine months
        ended
        September 30, 2007:
  **Director
        Compensation**
  **Name**
                  
                  **Fees
                      Earned or Paid in Cash ($)**
                  
                  **Stock
                      Awards ($)**
                  
                  **Option
                      Awards ($)**
                  
                  **Non-Equity
                      Incentive****Plan
                      Compensation ($)**
                  
                  **Non-Qualified
                      Deferred Compensation Earnings ($)**
                  
                  **All****Other
                      Compensation ($)**
                  
                  **Total
                      ($)**Paul
                      Abramowitz (1)
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  0
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  0Daniel
                      Rosen (1)
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $Michael
                      Solomon
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  4,645
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  4,645Buzz
                      Aldrin
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  498,153
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  498,153Leroy
                      Ohlsen (1)
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
 
 (1)
        included in Summary Compensation Table above
  **Stock
        Option Plan and Stock Options**
  The
        Long
        Term Incentive Compensation Plan (“LTICP”) was adopted by the Board of Directors
        on March 14, 2006, to be effective on March 14, 2006, and was approved by
        the stockholders on that same date. The LTICP is to continue for a term of
        ten
        years from the date of its adoption. The LTICP 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.
        The
        LTICP provides long-term incentives to employees, members of the Board and
        advisors and consultants of our Company and our subsidiaries who are able
        to
        contribute towards the creation of or have created stockholder value by
        providing them stock options and other stock and cash incentives.
  The
        Compensation Committee that is currently comprised of three members of our
        Board
        of Directors, Messrs. Rosen, Abramowitz and Solomon, administers the LTICP.
        The
        Compensation Committee has the authority to make awards, construe and interpret
        the LTICP and any awards granted thereunder, to establish and amend rules
        for
        LTICP 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 LTICP.
  58
  The
        maximum number of shares of our stock that may be issued under the LTICP
        for
        awards other than cash awards is 10,000,000 shares. To date, the Committee
        has
        awarded stock options for 10,704,850 shares to employees, members of the
        Board
        and advisors and consultants of our Company and our subsidiaries, 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 LTICP, 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
        LTICP from time to time or terminate the LTICP 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.
  **AGGREGATED
        OPTION/SAR* EXERCISES IN LAST FISCAL YEAR**
 **AND
        FY END OPTION/SAR VALUES**
 Name
                
                Shares
                  Acquired
                    on
                  Exercise
                
                Value
                  Realized
                
                Number
                    of Exercisable
                  Securities
                    Underlying
                  Unexercised
                    Options at
                  FY-End
                
                Value
                    of Unexercised
                  In-the-money
                    Options
                  At
                    FY-End ExercisablePaul
                    Abramowitz
                
                
                -0-
                
                
                -0-
                
                
                283,750
                
                $
                20,000Dan
                    Rosen
                
                
                -0-
                
                
                -0-
                
                
                1,100,000
                
                
                68,000Michael
                    Solomon
                
                
                -0-
                
                
                -0-
                
                
                383,750
                
                
                28,000Leroy
                    Ohlsen
                
                
                -0-
                
                
                -0-
                
                
                458,750
                
                
                34,000Art
                    Homa
                
                
                -0-
                
                
                -0-
                
                
                450,000
                
                
                36,000
 
 * We
        have
        not granted any Stock Appreciation Rights ("SAR")
 
 **Item
        11: Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters**
  **Equity
        Compensation Plan Information**
  **Plan
                    Category**
                
                **Number
                    of Securities To Be Issued Upon Exercise of Outstanding Options,
                    Warrants
                    and Rights**
                
                **Weighted
                    Average Exercise Price of Outstanding Options, Warrants and
                    Rights**
                
                **Number
                    of Securities Remaining Available for Future Issuance under Equity
                    Compensation Plans (Excluding Securities Reflected in Column
                    (a))****(A)**
                
                **(B)**
                
                **(C)**Equity
                    Compensation Plans Approved by Security Holders of Shares of
                    Common
                    Stock
                
                
                10,000,000
                
                $
                0.25
                
                
                0Equity
                    Compensation Plans Not Approved by Security Holders(1)
                
                
                704,850
                
                
                0.25Total:
                
                
                10,704,850
                
                $
                0.25
                
                
                0
 
 (1)
              Subject
                  to shareholder approval
 
 59
  Security
        Ownership of Certain Beneficial Owners
  The
        following table sets forth, as of November 30, 2007, the number of shares
        of
        Common Stock owned of record and beneficially by executive officers and
        directors, and persons who hold 5% or more of the outstanding our common
        stock.
        Also included are the shares held by all executive officers and directors
        as a
        group. As of the date hereof, there were 139,290,186 shares of our common
        stock
        outstanding.
 **Name
                    and Address of Beneficial Owner****(1)**
                
                **Amount
                    and Nature of Beneficial Ownership**
                
                **Percent
                    of**
                  **Class**Summit
                    Trading Limited
                  Charlotte
                    House, P.O. Box N-65
                  Charlotte
                    Street
                  Nassau,
                    Bahamas(2)
                
                
                22,929,515
                
                
                16.5
                %Paul
                    Abramowitz(3)
                
                
                19,108,948
                
                
                13.7
                %Castile
                    Ventures II-A, L.P.
                  Castile
                    Ventures II-B, L.P.
                  890
                    Winter Street, Suite 140
                  Waltham,
                    MA 02451(4)
                
                
                7,564,275
                
                
                5.3
                %Novellus
                    Systems, Inc.
                  4000
                    North First Street
                  San
                    Jose, California 95134(5)
                
                
                2,949,094
                
                
                2.1
                %Michael
                    Solomon(6)
                
                
                6,576,878
                
                
                4.7
                %Dr.
                    Daniel Rosen(7)
                
                
                1,427,910
                
                
                1.0
                %Frazier
                    Technology Ventures I, L.P.
                  Friends
                    of Frazier Technology Ventures I, L.P.
                  Two
                    Union Square, 601 Union Street, Suite 3200
                  Seattle,
                    Washington 98101(8)
                
                
                7,491,025
                
                
                5.4
                %Alta
                    California Partners III, L.P.
                  Alta
                    Embarcadero Partners III, LLC
                  One
                    Embarcadero Center, Suite 4050
                  San
                    Francisco, California 94111(9)
                
                
                7,014,566
                
                
                5.0
                %Dr.
                    Gerard C. D'Couto(10)
                
                
                750,000Leroy
                    Ohlsen(11)
                
                
                1,557,467
                
                
                1.1
                %Buzz
                    Aldrin(12)
                
                
                521,000
                
                
                *Roger
                    Walton(13)
                
                
                8,064,275
                
                
                5.8
                %Arthur
                    Homa(14)
                
                
                450,000
                
                
                *John
                    Drewery(15)
                
                
                0
                
                
                *David
                    M. Barnes
                
                
                28,000
                
                
                *All
                    Directors and Officers as a Group (8 individuals)
                
                
                30,420,203
                
                
                20.5
                %
  * 
                  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., 22122 20th Avenue
                  S.E.,
                  Suite 161, Bothell, Washington 98201.
  60
  (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. Summit beneficially owned 3,250,000 shares of our Series
                  A
                  preferred stock that automatically converted into an aggregate
                  of
                  29,437,515 shares of our common stock upon completion of our April
                  2006
                  private placement. Summit transferred an aggregate of 4,508,000
                  shares of
                  such common stock to certain third parties not affiliated with
                  it or our
                  Company, other than Daisy Rodriguez (a beneficiary of the Weast
                  Family
                  Trust), who received 1,000,000 shares of common stock. The natural
                  person
                  exercising voting control of the shares of common stock held by
                  Summit is
                  Richard Fixaris.(3)
              These
                  shares consist of 18,820,010 shares previously held by SIAA, of
                  which Paul
                  Abramowitz is the manager and a principal member. The figure also
                  includes
                  (i) 295,000 shares underlying directors’ options that Mr. Abramowitz
                  received for serving on our board of directors, (ii) 93,938 shares
                  representing Mr. Abramowitz’s 33.0% ownership of Fairway Ventures which
                  holds 313,000 shares.(4)
              Consists
                  of (i) 2,359,276 shares of common stock received by Castile Ventures
                  II-A
                  LP (“CVIIA”) and Castile Ventures II-B LP (“CVIIB”) in connection with the
                  merger and (ii) 1,882,000 shares of common stock issued upon automatic
                  conversion of our notes held by CVIIA and CVIIB. The figure also
                  includes
                  3,323,000 shares issuable upon exercise of warrants held by CVIIA
                  and
                  CVIIB, 500,000 of which are shares owned by Summit. Castile Partners
                  II
                  LLC (“CPII”) is the general partner of CVIIA and CVIIB. Nina Saberi,
                  Marcia Hooper, Roger Walton and David Duval are the members of
                  CPII and
                  exercise shared voting and dispositive power with respect to the
                  shares
                  held by CVIIA and CVIIB. Each of Nina Saberi, Marcia Hooper, Roger
                  Walton
                  and David Duval disclaims beneficial ownership of the shares held
                  by CVIIA
                  and CVIIB except to the extent of his or her respective proportionate
                  pecuniary interest in such shares. No limited partners of CVIIA
                  or CVIIB
                  can be said to control either CVIIA or CVIIB by virtue of their
                  limited
                  partnership interest therein.(5)
              Includes
                  2,949,094 common shares owned directly. Does not include any portion
                  of
                  the 4,705,000 shares of our common stock underlying a warrant issued
                  to
                  Novellus in connection with our entry into the amended technology
                  collaboration agreement therewith. The warrant vests in four parts
                  upon
                  completion of certain milestones. It is not anticipated that any
                  portion
                  of the warrant will vest within 60 days from the date on which
                  beneficial
                  ownership was determined. Please see “Strategic Goals and
                  Relationships.”(6)
              Includes
                  883,125 shares owned directly by Mr. Solomon, 395,000 shares of
                  our common
                  stock underlying options issued as director’s compensation exercisable at
                  $0.20 per share and 5,298,753 shares held as trustee with voting
                  power
                  over the Paul Abramowitz Irrevocable Trust # I for Children. Mr.
                  Solomon
                  disclaims beneficial ownership of these shares.(7)
              Includes
                  1,268,750 shares of our common stock underlying stock options.
                  Excludes
                  any portion of the 7,491,025 shares of our common stock beneficially
                  owned
                  by Frazier Technology Ventures I, L.P. and Friends of Frazier Technology
                  Ventures I, L.P., of each of which Dr. Rosen beneficially owns
                  approximately 2.5% but with which he is not otherwise affiliated.(8)
              Consists
                  of (i) 6,658,525 shares of common stock received by Frazier Technology
                  Ventures I, L.P. (“FTV I”) and Friends of Frazier Technology Ventures I,
                  L.P. (“FFTV I”) in connection with the merger and (ii) 333,000 shares of
                  common stock issued upon automatic conversion of our notes held
                  by FTV I
                  and FFTV I. The figure also includes 499,500 shares issuable upon
                  exercise
                  of warrants held by FTV I and FFTV I. FTV I and FFTV I are both
                  limited
                  partnerships formed to make investments in early stage technology
                  companies. The general partner of each of FTV I and FFTV I is Frazier
                  Technology Ventures Management I, LP, whose general partner is
                  Frazier
                  Technology Management, LLC (“FTM”). All decisions related to the
                  acquisition, disposition or voting of securities held by FTV I
                  and FFTV I,
                  including our shares of common stock, are made by majority vote
                  of the
                  managers of FTM. The managers of FTM are Leonard Jordan, Gary Gigot,
                  Paul
                  Bialek and Frazier Management, LLC, none of whom beneficially owns
                  more
                  than 5% of the equity of FTV I or FFTV I.
  61
  (9)
              Consists
                  of (i) 6,297,066 shares of common stock received by Alta California
                  Partners III, L.P. (“ACPIII”) and Alta Embarcadero Partners III, LLC
                  (“AEIII”) in connection with the merger and (ii) 287,000 shares of common
                  stock issued upon automatic conversion of our notes held by ACPIII
                  and
                  AEIII. The figure also includes 430,500 shares issuable upon exercise
                  of
                  warrants held by ACPIII and AEIII. Alta Partners II, Inc. (“APII”)
                  provides investment advisory services to several venture capital
                  funds
                  including ACPIII and AEIII. Its principals are Garrett Gruener,
                  Guy Nohra
                  and Daniel Janney (the “Principals”). The general partner of ACPIII is
                  Alta California Management Partners II, LLC (the “GP”). The managing
                  directors of the GP, who exercise sole voting and investment power
                  with
                  respect to the shares owned by ACPIII, are the Principals. The
                  Principals
                  are also the managers of AEIII, in which capacity they exercise
                  sole
                  voting and investment power with respect to the shares owned by
                  AEIII. The
                  Principals disclaim beneficial ownership of all such shares held
                  by ACPIII
                  and AEIII, except to the extent of their proportionate pecuniary
                  interests
                  therein. No equity owners of ACPIII or AEPIII can be said to control
                  either ACPIII or AEPIII by virtue of their ownership interest therein.(10)
              Consists
                  of 750,000 shares of common stock underlying options.(11)
              Consists
                  of 1,042,467 shares of common stock received in connection with
                  our
                  acquisition of Neah Power Washington, and includes 515,000 shares
                  of
                  common stock underlying options.(12)
              Consists
                of 521,000 shares of our common stock underlying options.(13)
              Consists
                  of the 7,564,275 shares beneficially owned by Castile Ventures
                  II-A LP and
                  Castile Ventures II-B LP, affiliates of Castile, and includes 500,000
                  shares of common stock underlying options. Roger Walton, a director
                  of our
                  Company, is an affiliate of Castile Ventures.(14)
              Consists
                  of 450,000 shares of our common stock underlying options.(15)
              Excludes
                  1,000,000 shares of our common stock underlying an option issued
                  to Dr.
                  Drewery in connection with our entry into the amended technology
                  collaboration agreement with Novellus. The warrant will vest upon
                  completion of certain milestones, none of which will occur within
                  sixty
                  (60) days hereof; please see “Strategic Goals and
                  Relationships.”
 
 **Item
        12: Certain Relationships and Related Transactions; Director
        Independence**
  **Transactions
        with Related Persons**
  In
        May
        2004, Novellus Systems, Inc. invested $2.5 million in Neah Power Washington
        and
        signed a technology collaboration agreement. Effective May 24, 2006, this
        agreement was renewed and extended to March 9, 2008 and we were added as
        a
        party. Under the terms of the renewal agreement, Novellus continues to provide
        us with key engineering and technical expertise in connection with the
        development of our products, including the use of porous silicon in our fuel
        cells. Subject to Novellus’ continued assistance under the collaboration
        agreement and the technology being jointly developed with Novellus achieving
        the
        milestones set forth below, we expect to acquire all significant rights to
        the
        technology developed jointly by Novellus and us and to obtain the right to
        call
        on Novellus for reasonable technical assistance for a period of seven years.
        As
        part of the contract renewal, we have issued to Novellus a warrant to purchase
        4,705,000 shares of our common stock at an exercise price of $.001 per share,
        for an aggregate purchase price assuming total exercise of $4,705, which
        will
        expire on April 1, 2011. The milestones have been established and are set
        forth
        herein, as well as their expected dates of completion. Pursuant to the terms
        of
        the extension, all previously outstanding warrants and options to purchase
        common stock of Neah were cancelled and the $150,000 debt of our subsidiary
        Neah
        Power Washington was reaffirmed to be paid on November 30, 2006 with the
        understanding that we would guarantee such payment. This obligation was paid
        from the proceeds of the public offering which closed May 11, 2007. **** In
        connection with our entry into the amended technology collaboration agreement
        with Novellus, we issued an option to purchase 1,000,000 shares of our common
        stock to Dr. Drewery in connection. The option will vest upon completion
        of the
        milestones applicable to the warrant issued to Novellus.
  Based
        on
        the current status of development of a military battery replacement fuel
        cell
        and particularly in light of our focus on developing a closed loop system,
        we
        believe it is unlikely that the above milestones will be met either on their
        initial or extended target dates. As a result. we are currently in negotiations
        with Novellus regarding a replacement for the current technology collaboration
        agreement and warrant agreement. There can be no assurance that such replacement
        agreements will be successfully negotiated.
  62
  **Director
        Independence**
  Because
        they are not employees and have no other business relationships with our
        Company
        except as directors, the Board of Directors has determined that Messrs. Aldrin
        and Solomon qualify as independent directors.
 
 **Item
        13: Exhibits**
 
 **No.**
              
              **Description**3.1
              
              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 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)
  63
  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)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)
  64
  10.33
              
              Repayment
                  Issuance Letter dated November 28, 2007, to CAMHZN Master LDC(10)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.
  65
  **Item
        14: Principal Accountant Fees and Services**
 
 The
        following table represents the aggregate fees billed for professional audit
        services rendered to us by Peterson Sullivan PLLC for the audit of our annual
        financial statements during the periods year (9 months) ended September 31,
        2007
        and the year ended December 31, 2006, and all fees billed for other services
        by
        Peterson Sullivan PLLC during those periods:
  2007
                
                2006Audit
                    Fees (1)
                
                $
                57,104
                
                $
                42,446Audit
                    Related Fees (1)
                
                $
                98,781
                
                
                86,690Tax
                    Fees (2)
                
                $
                710
                
                $
                1,200All
                    other Fees (3)
                
                $
                —
                
                
                —Total
                    Accounting Fees and Services
                
                $
                156,595
                
                $
                130,336
 
 (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 10QSB 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.
 
 **PRE-APPROVAL
        POLICY FOR AUDIT SERVICES**
 
 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 PLLC for the periods ended September 30, 2007 and December
        31,
        2006 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.
 66
  **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-KSB to be signed on its behalf
        by
        its duly authorized representatives.
 Dated:
                  January 14, 2008
              **NEAH
                  POWER SYSTEMS, INC.**By:
              /s/
                  PAUL ABRAMOWITZPaul
                  Abramowitz
                President
                  and Chief Executive Officer
 
 In
        accordance with the Securities and Exchange Act of 1934, this Form 10-KSB
        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/ 
                    PAUL ABRAMOWITZ
                
                President
                    and Chief Executive Officer
                
                January
                    14, 2008Paul
                    Abramowitz
                
                (Principal
                    Executive Officer)/s/
                    DAVID M. BARNES
                
                Chief
                    Financial Officer
                
                January
                    14, 2008David
                    M. Barnes
                
                (Principal
                    Financial and Accounting Officer)/s/
                    DANIEL ROSEN
                
                Executive
                    Chairman
                
                January
                    14, 2008Daniel
                    Rosen/s/
                    LEROY OHLSEN
                
                Chief
                    Technology Officer and Director
                
                January
                    14, 2008Leroy
                    Ohlsen/s/
                    MICHAEL SOLOMON
                
                Director
                
                January
                    14, 2008Michael
                    Solomon/s/
                    BUZZ ALDRIN
                
                Director
                
                January
                    14, 2008Buzz
                    Aldrin
 
 67