SETTLEMENT
      AGREEMENT AND MUTUAL GENERAL RELEASES




This
      Settlement Agreement (the “Agreement”) is entered into as of November 26, 2007,
      by and between Burt Martin Arnold Securities, Inc. (“BMA”) and Neah Power
      Systems, Inc. (“Neah”), with respect to the following facts:




(a)  On
      or
      about March 21, 2006, BMA and Neah entered into a written “Engagement Letter”
(the “Engagement Letter”), pursuant to which BMA agreed to provide certain
      services to Neah in connection with a private offering of Neah common stock
      (the
“Offering”), in consideration for compensation in the form of cash and warrants
      to be paid by Neah to BMA on conditions specified in the Engagement Letter.




(b) No
      compensation has been paid by Neah to BMA.




(c) A
      dispute
      has arisen between BMA and Neah with respect to whether BMA has earned the
      right
      to any compensation in connection with the Offering, and if so in what amount.




(d) As
      a
      result of this dispute, BMA commenced an action in the Los Angeles Superior
      Court (the “Action”), as Case No. YC054295, entitled *Burt
      Martin Arnold Securities, Inc. v. Neah Power Systems, Inc* .
      The
      Action was removed to the United States District Court for the Central District
      of California (the “Court”), where it is now pending as Case No. CV 07-00183 ODW
      (SHx).




(e)  It
      is now
      the desire and intention of BMA and Neah fully, finally and forever to resolve
      all existing disputes between them which are, were or could have been the
      subject matter of the Action.





NOW,
      THEREFORE, in consideration of the foregoing, the Parties hereto agree as
      follows:




1. Consideration .
      Conditioned upon the full execution, delivery and effectiveness of this
      Agreement, and dismissal of the entire Action with prejudice, Neah shall cause
      to be delivered to BMA or its account 350,000 shares of fully registered,
      unrestricted common stock of Neah (the “Shares”) according to the following
      schedule:





(a) Neah
      shall cause a draft Registration Statement (the “Registration Statement”)
      covering the Shares to be filed with the SEC within 30 days of Neah’s receipt of
      its next audited financial statement by its independent public auditors (the
      “Initial Filing”). Neah shall then cause such Registration Statement, as it may
      be amended from time to time, and encompassing the Shares, to become effective
      within 90 days of the Initial Filing, and shall issue the Shares to BMA within
      5
      business days of the Registration Statement becoming effective.




(b) If
      such
      Registration Statement, as amended and including the Shares, shall not have
      become effective within 90 days of the Initial Filing, and the Shares shall
      not
      within five business days thereafter have been issued as fully registered and
      unrestricted shares of Neah, then Neah shall, within 10 business days thereof
      ( *i.e.* ,
      90 days
      plus 15 business days following the day the Initial Filing was made or came
      due,
      whichever was earlier), pay to BMA, the sum of $105,000 in cash.










2. Termination
      of Engagement Letter .
      The
      Engagement Letter, and each and every paragraph thereof, is hereby terminated,
      any provision of the Engagement Letter to the contrary notwithstanding.




3. No
      Trading .
      Effective upon execution hereof, neither BMA nor its employees and officers,
      including without limitation Burt Martin Arnold and Joseph Vigliarolo, shall,
      directly or indirectly, trade in any equity or debt securities of Neah, or
      engage in any other conduct to affect the price or value of securities of Neah;
      provided, however, that nothing contained herein shall limit the right of BMA
      or
      its officers or employees to execute trades for the accounts, and made at the
      request, of existing customers of BMA.




4. Dismissal
      of Action with Prejudice .
      Promptly upon delivery by fax or email of executed copies of this Agreement
      to
      opposing counsel for BMA and Neah, counsel for Neah is authorized and instructed
      to file a stipulation for dismissal of the Action, with prejudice, in the form
      attached hereto as Exhibit 1.




5.  Waiver
      of Fees and Costs in the Action .
      Each of
      BMA and Neah shall bear its own attorneys’ fees and costs incurred in the Action
      through and including the date of this Agreement, and each of BMA and Neah
      expressly waives the right, if any, to recover attorneys’ fees or costs incurred
      to date in the Action from the other.




6. Release
      by BMA .
      BMA
      hereby fully, finally and forever relieves, releases, absolves and discharges
      Neah and its subsidiaries, affiliates, officers, directors, shareholders,
      employees, agents, attorneys (past and present law firms of record in the Action
      and their respective partners, professional corporations, members, associates,
      employees and staff), representatives, predecessors, successors and assigns,
      and
      each of them, in their capacities as such (collectively, the “BMA Releasees”),
      of and from any and all debts, liabilities, demands, obligations, assertions,
      contentions, arbitrations, promises, acts, contracts, costs, expenses,
      attorneys’ fees, claims, damages, actions, and causes of action and lawsuits, in
      law or in equity, of every nature, character, and description, known or unknown,
      suspected or unsuspected, fixed or contingent, including without limitation
      claims based on or relating to the subject matter of the Action or the
      prosecution or defense of all or any part thereof, the Engagement Letter or
      the
      Offering, from the beginning of time through the effective date of this
      Agreement (the “BMA Released Matters”).




7.  Release
      by Neah .
      Neah
      hereby fully, finally and forever relieves, releases, absolves and discharges
      BMA and its subsidiaries, affiliates, officers, directors, shareholders,
      employees, agents, attorneys (past and present law firms of record in the Action
      and their respective partners, professional corporations, members, associates,
      employees and staff), representatives, predecessors, , successors and assigns,
      and each of them, in their capacities as such (collectively, the “Neah
      Releasees”), of and from any and all debts, liabilities, demands, obligations,
      assertions, contentions, arbitrations, promises, acts, contracts, costs,
      expenses, attorneys’ fees, claims, damages, actions, and causes of action and
      lawsuits, in law or in equity, of every nature, character, and description,
      known or unknown, suspected or unsuspected, fixed or contingent, including
      without limitation claims based on or relating to the subject matter of the
      Action or the prosecution or defense of all or any part thereof, the Engagement
      Letter or the Offering, from the beginning of time through the effective date
      of
      this Agreement (the “Neah Released Matters”).




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8.  Section
      1542 Waiver .
      The
      foregoing mutual general releases are intended to be binding notwithstanding
      the
      discovery of additional or different facts. In accordance with such intention,
      the parties waive the benefits of California Civil Code section 1542 to the
      fullest extent permitted by law. Section 1542 provides:




A
      general
      release does not extend to claims which the creditor does not know or suspect
      to
      exist in his or her favor at the time of executing the release, which if known
      by him or her must have materially affected his or her settlement with the
      debtor.




9. Third
      Party Beneficiaries .
      Except
      as set forth herein, this Agreement is expressly for the benefit of all Neah
      Releasees (with respect to the BMA Released Matters) and the BMA Releasees
      (with
      respect to the Neah Released Matters), whether or not signatories to this
      Agreement (collectively, the “Third Party Beneficiaries”).




10. No
      Admission of Liability .
      Nothing
      contained herein, nor the entry of the Judgment and Stipulated Permanent
      Injunction contemplated herein, shall be deemed to be an admission of liability,
      fault or wrongdoing by any Party. Each Party contends that it has no liability
      to any other Party, and the Parties acknowledge that they are entering into
      this
      Agreement to settle the disputes that exist between them and to avoid the
      uncertainty and expense of litigation.




11.  Dispute
      Resolution .
      If any
      dispute arises under this Agreement, it shall be resolved by a final and binding
      hearing, without oral testimony, using the procedure set forth in California
      Code of Civil Procedure section 664.6, subject to the following:




(a)  The
      hearing shall be on noticed motion, expedited to be heard on a schedule to
      conform to the time limitations on such a motion in the Los Angeles Superior
      Court, and shall be conducted before JAMS Santa Monica, using one retired
      California State Court judge (the “Arbitrator”). Justice Charles Vogel (ret.) is
      pre-selected and approved, if available. Otherwise, the parties shall use JAMS’
standard procedures for selection of the Arbitrator. The parties shall continue
      to prepare, serve and submit to JAMS and opposing counsel their papers,
      including any points and authorities, documentary evidence, affidavits and
      declarations, while they are selecting the Arbitrator.




(b)  After
      considering the papers and argument, the Arbitrator shall make a written award,
      which, if appropriate based on the relief sought, may include damages, interest
      and equitable remedies, but in the case of a breach of paragraph 2(b), shall
      include damages and interest, and shall, in any case, award reasonable
      attorneys’ fees and allowable costs to the prevailing party.




(c)  Any
      award
      shall be enforceable pursuant to California Code of Civil Procedure section
      1285 *et
      seq.* ;
      provided, however, that any judgment entered pursuant to the arbitration award
      shall provide that it is not *res
      judicata* ,
      and
      does not act as a bar, except as to claims or defenses actually raised at the
      hearing or in the papers submitted in connection therewith. The parties agree
      that any action to enforce an award shall be brought only in the Los Angeles
      Superior Court, Southwest District, and shall not be removed to federal court.




(d)  Pending
      any award of reasonable attorneys’ fees and costs by the Arbitrator, the parties
      shall advance JAMS’ fees and costs equally.




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(e)  Nothing
      contained herein shall prevent a subsequent hearing, award or judgment pursuant
      to this section 11, based on a separate breach of the same or a different
      provision of the Agreement.





12.  Construction .
      This
      Agreement shall not be construed for or against any party, and without regard
      to
      the drafting or preparation hereof. The headings used herein are for convenience
      of reference only. The feminine, masculine and neuter, and the singular and
      plural, shall be deemed to include the other where such inclusion will cause
      a
      provision to be construed more broadly.




13.  Advice
      of Counsel .
      This
      Agreement in all respects has been voluntarily and knowingly executed by the
      Parties on the advice and with the approval of their respective legal counsel.




14.  Severability .
      If any
      paragraph, term, or provision of this Agreement shall be held or determined
      to
      be unenforceable by a court or tribunal of competent jurisdiction, the same
      shall be deemed severable from the balance of this Agreement and the balance
      of
      this Agreement shall continue in full force and effect. The Parties agree that
      if such paragraph, term, or provision is deemed invalid as written, but would
      be
      valid to some lesser extent, it shall be deemed valid and enforceable to the
      fullest extent permitted by law.




15.  Integration
      and Merger .
      This
      Agreement constitutes a single, integrated written contract expressing the
      entire agreement of the Parties concerning its subject matter. No covenants,
      agreements, representations, or warranties of any kind whatsoever have been
      made
      by any Party to this Agreement, except as specifically set forth herein. All
      prior agreements, discussions, and negotiations have been and are merged and
      integrated into, and are entirely superseded by this Agreement.




16.  Governing
      Law .
      This
      Agreement shall be governed, interpreted and construed by the laws of the State
      of California without regard to conflicts of law principles.




17.  Execution .
      This
      Agreement may be executed in counterparts and signatures transmitted by
      facsimile or by scanning and emailing shall be deemed to be originals. All
      such
      counterparts and signatures, when taken together, shall constitute one and
      the
      same agreement.




18.  Due
      Authorization .
      Each
      signatory to this Agreement signing in a representative capacity warrants and
      represents that he or she has been duly authorized by and on behalf of his
      or
      her principal or principals to execute this Agreement.




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19.  Notice .
      Any
      notice required or permitted to be given pursuant to this Agreement shall be
      in
      writing and shall be made to the address, facsimile number or e-mail address
      set
      forth below, or such other addresses or numbers as a party may designate from
      time to time in the manner provided hereby. Any such notice shall be deemed
      complete as follows: (a) by personal delivery to the proper individuals, on
      the
      date of delivery if on a business day before 5:30 p.m., otherwise on the
      succeeding business day; (b) by any recognized form of overnight mail
      guaranteeing delivery on the succeeding business day, on the succeeding business
      day; (c) by registered or certified mail, on the third succeeding business
      day;
      or (d) by facsimile transmission and .pdf e-mail, on the date of transmission
      if
      on a business day prior to 5:30 p.m., otherwise on the succeeding business
      day.
      Notices shall be given and addressed as follows:




(a)
              If
                  to Neah:Neah
                  Power Systems, Inc.22122
                  20th Ave SE, Suite 161Bothell,
                  Washington 98021Attn:
                  Mr. Paul AbramowitzFacsimile:
              425-483-8454e-mail:
              pabramowitz@neahpower.comwith
                  a copy to:David
                  S. Gubman, Esq.Dreier
                  Stein & Kahan LLP1620
                  26th StreetNorth
                  Tower, Sixth FloorSanta
                  Monica, CA 90404Facsimile:
              424-202-6220e-mail:
              dgubman@dskllp.comand:John
                  C. Kirkland, Esq.Dreier
                  Stein & Kahan LLP1620
                  26th StreetNorth
                  Tower, Sixth FloorSanta
                  Monica, CA 90404Facsimile:
              424-202-6250e-mail:
              jkirkland@dskllp.com(b)
              If
                  to BMA:Burt
                  Martin ArnoldBurt
                  Martin Arnold Securities, Inc.608
                  Silver Spur Road, Suite 100Rolling
                  Hills Estates, California 90274Facsimile:
              310-544-6626e-mail:
              burtarnold@bmasecurities.comwith
                  a copy to:Nancy
                  B. Sperber, Esq.Law
                  Offices of Nancy B. Sperber6709
                  La Tijera BoulevardBox
                  No. 633Los
                  Angeles, California 90045Facsimile:
              310
                  670-3804e-mail:
              nbsperber@lawyer.com




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IN
      WITNESS WHEREOF, the parties, intending to be bound hereby, and their respective
      counsel, have executed this Agreement as of the date set forth above.




AGREED AND ACCEPTED:BURT MARTIN ARNOLDSECURITIES, INC.
            
            NEAH POWER
              SYSTEMS, INC.By
            /s/
                Burt Martin Arnold
            
            By
            /s/
                Paul AbramowitzBurt
                Martin Arnold
            
            
            Paul
                AbramowitzPresident and Chief Executive
              Officer
            
            President and Chief Executive
              OfficerAPPROVED AS TO FORM:LAW OFFICES OF NANCY B.
              SPERBER
            
            DREIER STEIN & KAHAN LLPBy
            /s/
                Nancy B. Sperber
            
            By
            /s/
                David S. GubmanNancy
                B. Sperber
            
            
            David
                S. Gubman




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