UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-KSB





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


For the
fiscal year ended September 30, 2008





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





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.)22118 20th Ave SE, Suite
142
              
              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:$ 1,395,729





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: $873,368.





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 220,582,608 shares of common stock
outstanding as of February 5, 2009.





Transitional
Small Business Disclosure Format (Check one): Yes  ̈            No
x











TABLE
OF CONTENTS





PageExplanatory
      Note
                1Forward
      Looking Statements
                1PART
      I.Item
      1.
                Description
      of Business
                2Item
      2.
                Description
      of Property
                19Item
      3.
                Legal
      Proceedings
                19Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                19PART
      II.Item
      5.
                Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities
                20Item
      6.
                Management's
      Discussion and Analysis or Plan of Operation
                23Item
      7.
                Financial
      Statements
                29Item
      8.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                51Item
      8A.
                Controls
      and Procedures
                51PART
      III.Item
      9.
                Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act
                53Item
      10.
                Executive
      Compensation
                56Item
      11.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                58Item
      12.
                Certain
      Relationships and Related Transactions; Director
    Independence
                60Item
      13.
                Exhibits
                61Item
      14.
                Principal
      Accountant Fees and Services
                66EXHIBITS


2


Explanatory
Note





As used
herein, (a) the terms “Neah Power,” “Company,” “we,” “our” and like references
mean and include both Neah Power Systems, Inc., a Nevada corporation (formerly,
Growth Mergers, Inc.), and 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





The
problems associated with the use of fossil fuels are well understood. These
range from possible causes for global warming, to the dependence on, and
consumption of, finite (non-renewable) resources like oil, coal, etc.
Additionally, being able to operate off the power grid is becoming increasingly
important for military and industrial applications and for recreational
purposes. Traditionally, the main source of power off the grid was rechargeable
batteries (mainly lithium based batteries) which required the grid to recharge
them. The problems associated with batteries are the weight, decaying lifetime
with use, and the disposal issues.





We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices. Through our recent agreement to acquire SolCool One, LLC, we
intend to expand our portfolio of renewable energy solutions that we intend to
offer the market. SolCool, One LLC is a leading supplier of solar
air-conditioning systems for off-the-grid applications. We believe that the
worldwide distribution network and product placements that they currently have
will facilitate the adoption of fuel cells and integrated power solutions for
off-the-grid applications.





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, air, or other
liquid oxidants in a chemical reaction at a catalyst surface to produce
electricity. 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 10-1000+ watt range.





Recent
Developments and Achievements




The
Company has announced various manufacturing partnerships with companies such as
Aspen Technologies, IceMOS, and Sanmina – SCI. The Company has continued to
demonstrate significant technical progress having reported wire-bond process for
low-loss current collection, a transition to larger, higher energy density,
electrodes, and a higher reliability cell packaging that is expected to have a
long lifetime, All of these changes are geared to enable large scale
commercialization. Previously, the Company demonstrated a working prototype in
September 2007, which generated net positive power, and was a significant
milestone in the history of the Company. On December 19, 2007, the Company
announced that its initial product offerings will focus on military applications
requiring power sources that can operate without air and in harsh environments.
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. Subsequent changes and improvements are focused
around improving the reliability of the system, creating the manufacturing
infrastructure for the product, and other continuous improvement processes
related to the technology and the manufacturing. A number of specific individual
technical advances have also been outlined in recent press releases. These
announcements include the migration to larger wafer platforms to improve
manufacturing efficiencies, electrode structures optimized for greater power
production, cell packaging developments that generate highly reliable, highly
manufacturable components, and unique electrical connection architectures which
move the technology further down the path towards large scale
commercialization.




2





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 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.





In order
to deliver working prototypes of our fuel cell, we must achieve the following
goals:





•
                Increase
      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.





•
              Implement
      an air-based solution (‘aerobic’ solution) that will provide higher energy
      density for aerobic
applications.





Business
Development





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.




3





The
Opportunity





The
increasing focus on the benefits of renewable energy, and its ability to enable
an off-the-grid lifestyle creates a large and growing opportunity. This
opportunity is for energy storage/generation systems, energy efficiency systems,
and other enabling technologies. The continued worldwide proliferation of
portable electronic devices, the requirements of the military and industrial
applications demand  lightweight and powerful 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.  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.





The
Military Need





We
believe that the military has a particularly acute need for better battery
solutions, since fuel cells have the ability to provide longer duration
operation at significantly reduced weight and provide an environmentally
friendly solution compared to rechargeable or non-rechargeable
batteries





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. We believe 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.





The
Fuel Cell Market





Fuel
cells can be categorized by the market applications they potentially serve and
by their power output. We are focused on providing an alternative to
conventional batteries for portable electronic devices that typically operate in
the 5-1000+ watt range. 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.





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”).




4





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.





Business
and Market Development





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.





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.





Our Unique Patented
Technology




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.





We are
developing a micro direct methanol fuel cell 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 silicon electrodes, leverage mainstream
semiconductor processing for cost and manufacturability, and carry the fuel and
oxidant on board gives us a distinct competitive edge.




5





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 silicon 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.





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 and/or oxidant 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;




6




(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 and/or oxidant
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.





Comparison
Between Porous Silicon Fuel Cells and PEM-Based Designs





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





•
                Our
      use of porous silicon electrodes and the liquid electrolyte, eliminate a
      range of possible failure modes that have hampered introduction of PEM
      based systems. These include degradation of the PEM membrane, crossover of
      methanol fuel 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.




7




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;





(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 silicon
  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.




8




(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.





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)




9




(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)





(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:




10





•
              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 20
employees, including two executive officers, 15 persons in research and
development and three clerical and administrative personnel.





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 Consolidated Financial Statements.Our auditors’ report on the Company’s Consolidated financial statements
as at September 30, 2008 and September 30, 2007 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 for further discussion.





We Have Experienced Severe Working
Capital And Liquidity Shortages And Expect To Continue To Do So For The Near
Future.We had working capital deficiencies of $2,567,681 and $359,400 at
September 30, 2008 and 2007, respectively. Our current cash operating expenses
are approximately $180,000 per month, and we have revenues from our Office of
Naval Research (“ONR”) contract of approximately $145,000 per
month.




11





We Will Need To Raise Significant
Additional Capital To Continue Our Business Operations.Our cash position
at September 30, 2008 was $59,661 as compared to our cash position at September
30, 2007, of $710,441. Our current monthly cash operating expenses are
approximately $185,000. 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 $41.8 million through September 30,
2008. We expect to continue to incur net losses at least through our fiscal year
2009 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.





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.




12





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 11.





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.





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. The
manufacturing partners we have identified may not be able to meet our volume and
cost requirements.





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.




13





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.





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 9.





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.





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.




14





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. 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
our 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 38% 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 58.





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.




15





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 220,582,608 shares of
common stock, as well as outstanding options to purchase an aggregate of
7,753,158 shares of common stock at exercise prices ranging between $0.018 and
$2.87 per share and warrants to purchase 15,462,451 shares of common stock at
exercise prices ranging from $0.03 to $2.00 per share. We also have
approximately 64 million shares pledged as security under various loan
agreements (which pledged shares are excluded in the total number of outstanding
shares set forth above.) As of February 5, 2009, we have issued 23,532,600
shares of Series A Preferred At the discretion of our Board of Directors, each
share of Series A Preferred Stock may be converted into 26.67 shares of common
stock. Upon conversion, the Series A Preferred stockholders subscribed to date
currently would own nearly 73% of our outstanding shares.





Accordingly,
on a fully-diluted basis (giving effect to the exercise of all outstanding
options and warrants and the conversion of the Series A Preferred Stock to
common stock), as February 5, 2009, there would be issued and outstanding, an
aggregate of approximately 857,988,717 shares of our common stock.





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, 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. We currently have a Certificate
of Designation with the State of Nevada for 25,000,000 shares of our Series A
Preferred 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.




16





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 page21.





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




17





•  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.





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.


18





Item
2: Description of Property





We currently lease both our corporate
headquarters and laboratory facilities under a lease agreement expiring March
31, 2009. We are negotiating with the landlord for lease extension. As of
September 30, 2008, monthly minimum rental and related payments were
approximately $12,200 per month. Rental expense was approximately $163,000 and
$134,000 for the year ended September 30, 2008 and the nine months ended
September 30, 2007, respectively.





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.





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


19


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
      2006High
                        
                        
                        Low4th
      Quarter — October 1, 2006 through December 31,
    2006
                        
                        $
                        2.050
                        
                        
                        $
                        0.940
 
 Fiscal
      2007High
                        
                        Low1st
      Quarter — January 1, 2007 through March 31, 2007
                        
                        $
                        1.7800
                        
                        
                        $
                        0.87002nd
      Quarter — April 1, 2007 through June 30, 2007
                        
                        
                        1.0150
                        
                        
                        
                        0.43003rd
      Quarter - July 1, 2007 through September 30, 2007
                        
                        
                        0.6100
                        
                        
                        
                        0.2100
 
 Fiscal
      2008High
                          
                          
                          Low1st
      Quarter — October 1, 2007 through December 31,
    2007
                          
                          $
                          0.3400
                          
                          
                          $
                          0.18002nd
      Quarter — January 1, 2008 through March 31, 2008
                          
                          
                          0.2060
                          
                          
                          
                          0.03603rd
      Quarter — April 1, 2008 through June 30, 2008
                          
                          
                          0.0850
                          
                          
                          
                          0.02504th
      Quarter — July 1, 2008 through September 30, 2008
                          
                          
                          0.0300
                          
                          
                          
                          0.0030
  Fiscal
      2009High
                        
                        
                        Low4th
      Quarter — October 1, 2008 through December 31,
    2008
                        
                        $
                        0.0085
                        
                        
                        $
                        0.0030
 
 The last
sale price of our common stock on February 5, 2009, was $0.006.
  Holders
  As of
February 5, 2009, our common stock was held of record by approximately 200
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 7,753,158 shares of our common stock and warrants to purchase
15,462,450 shares of our common stock.
  Other
than approximately 124,000,000 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.
  20
  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.
  Common
Stock Reverse Split
 
 On August
15, 2008, our shareholders approved a 200 to 1 reverse stock split which has not
been effected by our Board of Directors as of the date of this
report.
 
 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
  In August 2008, we amended our Long
Term Incentive Compensation Plan (the “Plan”) first adopted in March 2006. The
amendment increased the total number of shares available for issuance under the
Plan from 10,000,000 shares of Common Stock to 25,000,000 shares of Common
Stock, an amount equal to approximately 5% of the total number of the Company’s
authorized shares of Common Stock as of the date the amendment was approved by
our shareholders. As of September 30, 2008, there were no new stock options
issued under the amended Plan.
 
 We have
7,753,158 options granted under the Plan at a weighted average exercise price of
$0.29 per common share as of September 30, 2008.
 
 The Plan 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 Plan is to continue for a term of ten
years from the date of its adoption. The Plan seeks to promote the long-term
success of our company and our subsidiaries and to provide financial incentives
to employees, members of the Board and advisors and consultants of our company
and our subsidiaries to strive for long-term creation of stockholder value by
providing them stock options and other stock and cash
incentive.
 
 The
Compensation Committee, that administers the Plan, is currently comprised of two
members of our Board of Directors, Messrs. James Smith and Robert McGovern. The
Compensation Committee has the authority to make awards, construe and interpret
the Plan and any awards granted thereunder, to establish and amend rules for
Plan administration, to change the terms and conditions of options and other
awards at or after grant, and to make all other determinations which it deems
necessary or advisable for the administration of the Plan.
  The
maximum number of shares of our stock that may be issued under the Plan, as
amended, for awards other than cash awards is 25,000,000 shares. To date, the
Committee has awarded stock options for 7,753,158 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 Plan, the maximum number of shares which may be made subject
to an award or all awards in any calendar year, and the number of shares covered
by each outstanding award and the price therefor, if any, may be equitably
adjusted by the Committee, in its sole discretion.
  The Board
of Directors or the Committee may amend, suspend, terminate or reinstate the
Plan from time to time or terminate the Plan at any time. However, no such
action shall reduce the amount of any existing award (subject to the reservation
of the authority of the Committee to reduce payments on awards) or change the
terms and conditions thereof without the consent of any affected award
recipient.
  21
  During
the year ended September 30, 2008, the Board of Directors granted 1,105,000
options and 4,056,692 options were cancelled or forfeited leaving 7,753,158
options outstanding at September 30, 2008.
 
 The following table schedules the
options issued to directors, officers, employees and others for the year ended
September 30, 2008 and the nine months ended September 30, 2007.
  2008
                                  
                                  
                                  2007BOARD
      OF DIRECTORSGerard
      C. D’Couto
                                  
                                  
                                  
                                  
                                  
                                  2,250,000Michael
      Solomon
                                  
                                  
                                  
                                  
                                  
                                  45,000Leroy
      Ohlsen
                                  
                                  
                                  
                                  
                                  
                                  85,000Buzz
      Aldrin
                                  
                                  
                                  
                                  
                                  
                                  521,000Paul
      Abramowitz
                                  
                                  
                                  
                                  
                                  
                                  45,000Dr.
      Daniel Rosen
                                  
                                  
                                  
                                  
                                  
                                  1,285,000EMPLOYEES
      AND OTHERSStephen
      M Wilson
                                  
                                  
                                  400,000Dr.
      Arthur Homa
                                  
                                  
                                  
                                  
                                  
                                  
                                  60,000Other
      employees
                                  
                                  
                                  705,000
                                  
                                  
                                  
                                  315,850Others
                                  
                                  
                                  
                                  
                                  
                                  
                                  162,500
 
 As of
February 1, 2008 Paul Abramowitz resigned as our President and Chief Executive
Officer. As April 23, 2008, he resigned from our Board of
Directors.
 
 Securities
Authorized For Issuance Under Employee Stock Purchase Plan
 
 In August
2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”).
The amount of shares of Common Stock that may be sold pursuant to the Stock
Purchase Plan shall not exceed, in the aggregate, 30,000,000 shares of Common
Stock, an amount equal to approximately 5% of the total number of the our
authorized shares of Common Stock as of the date the plan was approved by the
shareholders. As of September 30, 2008, no shares have been purchased under the
Stock Purchase Plan.
  22
  Item
6: Management’s Discussion and Analysis
  General
  The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated 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 consolidated financial
statements of Neah Power for the year ended September 30, 2008 and the nine
months ended September 30, 2007, 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.
  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.
  Recent
Developments
  We have
announced various manufacturing partnerships with companies like Aspen
Technologies, IceMOS, and Sanmina – SCI. We have continued to demonstrate
significant technical progress having reported wire-bond process for low-loss
current collection, a transition to larger, higher energy density, electrodes, a
higher reliability cell packaging that is expected to have a high lifetime, All
of these changes are geared to enable large scale commercialization. Previously,
we demonstrated a working prototype in September 2007, which generated net
positive power, and was a significant milestone in the history of the
Company.
  23
  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. 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 believed it was unlikely that
the milestones contained in the agreement with Novellus Systems, Inc. would be
met and on May 19, 2008, we and Novellus agreed to terminate the agreement in
its entirety. As a result, all warrants have been cancelled and all milestones
are not applicable. Subsequent changes and improvements are focused around
improving the reliability of the system, creating the manufacturing
infrastructure for the product, and other continuous improvement processes
related to the technology and the manufacturing. A number of specific individual
technical advances have also been outlined in recent press releases. These
announcements include the migration to larger wafer platforms to improve
manufacturing efficiencies, electrode structures optimized for greater power
production, cell packaging developments that generate highly reliable, highly
manufacturable components, and unique electrical connection architectures which
move the technology further down the path towards large scale
commercialization.
  We
recently announced that on November 26, 2008 we entered into an agreement and
plan of merger (the “Merger Agreement”) with SolCool One, LLC ("SolCool"), a
leader in the solar air conditioning industry. SolCool specializes in supplying
solar air conditioning systems and has a recognized distribution and support
network in various regions throughout the world along with an established
manufacturing relationship. SolCool has a strong distribution network that could
also be used to sell our fuel cell products. Additional synergies could include
adding a fuel cell to the solar air conditioning systems in order to extend the
off-the-grid duration of the product. A solar panel/lithium-ion/fuel cell
integrated system could also be developed for use as power supply for
off-the-grid applications or as a back up power supply. On February 5, 2009, we
received notice of cancellation from the merger agreement due to a failure to
fund the transaction in a timely manner. On February 12, 2009, Solcool rescinded
its notice of cancellation upon our payment to Solcool in the amount of $9,000.
The Company is continuing in its efforts procure funding and to accomplish the
merger.
 
 On August
15, 2008, our shareholders approved a 200 to 1 reverse stock split which has not
been effected by the Board of Directors as of the date of this
report.
 
 Overview
  We have
limited capital resources. Our auditor’s report for our consolidated financial
statements as at and for the year ended September 30, 2008 and the nine months
ended September 30, 2007 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 year ended
September 30, 2008 with the year ended September 30, 2007
  We
had $49,000 in revenues during the year ended September 30, 2007, but during the
year ended September 30, 2008 we recorded contract revenue of $1,396,000 from
ONR expense reimbursement contracts that commenced in July 2007 and in September
2008. We are currently under contract with the DOD and the ONR for an additional
contract of up to $1.2 million, also primarily for expense reimbursement, over
approximately a twelve month time frame for the development of specific
technology.
 
 Research
and development expenses for the year ended September 30, 2008 decreased by
$1,504,000, approximately 33%, to $2,990,000 from the $4,494,000 recorded in the
comparable period last year. The decrease was primarily due to a net decrease in
2008 in general project related expenses in the amount of $ 854,000 offset
partially by an increase to R&D expenditures under the ONR contract in the
amount of $300,000. Wages for research and development decreased by $465,000
from $1,907,000 to $1,442,000 due mainly to streamlining of operations.
Depreciation expense decreased from $379,000 to $125,000, a decrease of
$254,000.
  24
 General
and Administrative expenses for the year ended September 30, 2008 were
$2,710,000, a increase of $142,000 or approximately 6% from the $2,568,000
incurred in the comparable 2007 period. Administrative salaries increased in
2008 by $450,000 from $455,000 to $905,000 primarily due to $314,000 in
severance recorded in 2008 for the former president and CEO, Paul Abramowitz.
Administrative stock compensation decreased in 2008 by $372,000 to $521,000 in
2008 from $893,000 due to the reduced number of options and warrants issued in
2008. Professional services expenses increased in 2008 by $42,000 to $917,000
from $875,000 in 2007.
  Other
Income and Expenses for the year ended September 30, 2008 were $1,850,000, an
increase of $220,000 or approximately 13% from the $1,629,820 incurred in the
comparable 2007 period. A gain on extinguishment of debt in the amount of
$206,000 was recorded in the year ended September 30, 2008 and represented an
increase in that amount over the prior year. Financing costs increased in 2008
by $575,000 to $575,000 from $516,000 in 2007. Interest expense,net, increased
in 2008 by $367,000 to $1,481,000 from $1,113,940 in 2007
 
 Liquidity
and Capital Resources
  Our
consolidated 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. We have limited capital resources
and the Company has sustained substantial losses which raises substantial doubt
about our ability to continue as a going concern. We must, therefore, raise
sufficient capital to fund our overhead burden and our continuing research and
development efforts going forward.
 
 We have
an accumulated deficit as of September 30, 2008 in the amount of approximately
$41,759,700 and negative working capital of approximately $2,568,000. For the
year ended September 30, 2008, we had negative cash flow from operating
activities in the amount of approximately $2,401,000.
 
 We have
relied primarily on sales of securities and proceeds from borrowings for
operating capital. During the year ended September 30, 2008, we raised capital
by selling two promissory notes for a total of $1,000,000 with net proceeds of
$965,000 received upon closing net of fees of $35,000. On April 24, 2008, Summit
Trading Limited, one of our largest shareholders, purchased 10,000,000 shares of
common stock for $0.01 per share for a total of $100,000. Such purchase
agreement provides for certain dilution protection and standard piggyback
registration rights.
 
 During
the year ended September 30, 2008, we also received payments of approximately
$1,409,000 from the Office of Naval Research (“ONR”) pursuant to the terms of
two grants providing expense reimbursement for continuing research and
development having to do with certain technology. As of September, 2008, all of
the work under the first of the ONR contracts was completed. As of September 12,
2008, we entered into a second contract with ONR and received approximately
$33,000 from that contract as of September 30, 2008.
 
 Additionally,
we have received approximately $669,000 in the fourth quarter of our fiscal year
2008 and $132,000 in the first quarter of our fiscal year 2009 of gross proceeds
less financing costs from a private placement funding.
 
 On
February 12, 2009, we entered into a Securities Purchase Agreement with Agile
Opportunity Fund, LLC and Capitoline Advisors Inc. under which we received funds
in the first of two tranches through the issuance of Original Issue Discount
Term Convertible Notes secured by all assets of the Company. We received the
first tranche on February 12, 2009 in the net amount of approximately $162,000.
We expect to receive the second tranche of up to $1,020,000 in the aggregate on
or before February 27, 2009. The notes are convertible at $.10 per share and are
more fully described in the exhibits attached to this Form 10-KSB which are
incorporated herein by reference.
  25
  The current cash balance, proceeds from
our bridge funding, and certain expected expense reimbursement from grant
funding from the ONR are estimated to support our operations through
approximately May 2009. To meet our cash needs from that point forward, we are
currently seeking financing from the sale of debt or equity instruments to
current investors and potential strategic investors. There is no assurance that
we will be successful in raising this capital on a timely basis, if at all. The
failure to obtain the necessary working capital would have a material adverse
effect on the development program and business prospects and, depending upon the
shortfall, we may have to curtail or cease our operations.
 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
our 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
December 2007, the FASB issued SFAS No. 141(R), Business Combinations — a
Replacement of FASB Statement No. 141 (“SFAS No. 141(R)”). The
statement is to be applied prospectively for fiscal years beginning on or after
December 15, 2008. The statement also applies to the treatment of taxes
from prior business combinations. The statement requires more assets acquired
and liabilities assumed in future business combinations to be measured at fair
value as of the acquisition date. In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be re-measured to fair value each subsequent
reporting period. We will adopt SFAS No. 141(R) at the beginning of our
2010 fiscal year, or October 1, 2009. We do not expect this statement will have
a significant impact on our consolidated financial position or results of
operations when adopted.
  On
October 1, 2008, we will adopt Financial Accounting Standards Board (“FASB”)
Statement No. 157, Fair
Value Measurements(“SFAS 157”), which clarifies the definition of fair
value, establishes a framework for measuring fair value, and expands the
required disclosures on fair value measurements. In February 2008, the FASB
issued Staff Position 157-2, Effective Date of FASB Statement
No. 157(“FSP 157-2”),that deferred the effective
date of SFAS 157 for one year for nonfinancial assets and liabilities recorded
at fair value on a non-recurring basis. The effect of adoption of SFAS 157 for
financial assets and liabilities recognized at fair value on a recurring basis
is not expected to have a material impact on our financial position and results
of operations. We are assessing the impact of the adoption of SFAS 157 for
nonfinancial assets and liabilities on our financial position and results of
operations.
  26
 
 On
October 1, 2008, we will adopt FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115(“SFAS 159”). SFAS 159 permits companies to irrevocably
elect to measure certain financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. We will
not elect the fair value option under SFAS 159 for any of our financial assets
or liabilities upon adoption.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”).
The statement changes how non-controlling interests in subsidiaries are measured
to initially be measured at fair value and classified as a separate component of
equity. SFAS No. 160 establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not result in
deconsolidation. No gains or losses will be recognized on partial disposals of a
subsidiary where control is retained. In addition, in partial acquisitions,
where control is obtained, the acquiring company will recognize and measure at
fair value all of the assets and liabilities, including goodwill, as if the
entire target company had been acquired. The statement is to be applied
prospectively for fiscal years beginning on or after December 15, 2008. We will
adopt this statement on October 1, 2009, which is the beginning of our 2010
fiscal year. We do not anticipate any significant impact on our financial
position or results of operations when adopted.
 
 In
March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities(“SFAS 161”), which is effective
January 1, 2009. SFAS 161 requires enhanced disclosures about derivative
instruments and hedging activities to allow for a better understanding of their
effects on an entity’s financial position, financial performance, and cash
flows. Among other things, SFAS 161 requires disclosure of the fair values of
derivative instruments and associated gains and losses in a tabular format.
Since SFAS 161 requires only additional disclosures about our derivatives and
hedging activities, the adoption of SFAS 161 will not affect our financial
position or results of operations, should we acquire derivatives in the
future.
 
 In April
2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life
of Intangible Assets (“FSP No. 142-3”). FSP No. 142-3 amends the factors to be
considered in assumptions used to determine the useful lives of recognized
intangible assets recognized under SFAS No. 142. The new guidance applies to
intangible assets with contractual lives that are acquired individually or with
a group of assets as well as those assets acquired in a business combination.
The new guidance is effective for fiscal years beginning after December 15, 2008
and interim periods. We will adopt the statement October 1, 2009 which is the
beginning of our 2010 fiscal year. We do not expect adoption of FSP No. 142-3 to
have a significant impact on our consolidated financial position or results of
operations.
 
 In
May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement). FSP APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB 14-1 beginning in the first
quarter of fiscal 2010, and this standard must be applied on a retrospective
basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on
our consolidated financial position and results of operations.
 
 In
December 2007, the FASB ratified the consensus reached by the Emerging
Issues Task Force (“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative
Arrangements. EITF 07-1 is effective beginning October 1, 2009 and will
be applied retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. We are assessing the impact of adoption of EITF
07-1 on our financial position and results of operations.
  27
 
 On
October 1, 2008, we will adopt EITF Issue No. 07-3, Accounting for Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities(“EITF 07-3”), which is being applied prospectively for new contracts.
EITF 07-3 addresses nonrefundable advance payments for goods or services that
will be used or rendered for future research and development activities. EITF
07-3 requires these payments be deferred and capitalized and recognized as an
expense as the related goods are delivered or the related services are
performed. The effect of adoption of EITF 07-3 on our financial position and
results of operations is not expected to be material.
  28
 
 Item
7: Financial Statements
  NEAH
POWER SYSTEMS, INC.
  FINANCIAL
REPORT
  SEPTEMBER
30, 2008 AND 2007
  CONTENTS
 
 PAGEREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                      
                      30FINANCIAL
      STATEMENTS:CONSOLIDATED
      BALANCE SHEET
                      
                      31CONSOLIDATED
      STATEMENTS OF OPERATIONS
                      
                      32CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                      
                      33CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                      
                      34NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      
                      35
  29
  
 
 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 sheet of Neah Power Systems, Inc.
and Subsidiary ("the Company") as of September 30, 2008, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year ended September 30, 2008, and the nine months
ended September 30, 2007.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Neah Power Systems, Inc.,
and Subsidiary as of September 30, 2008, and the results of their
operations and their cash flows for the year ended September 30, 2008, and
the nine months ended September 30, 2007, 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 an accumulated deficit
and negative working capital of approximately $41,760,000 and $2,568,000,
respectively, at September 30, 2008.  Additionally, the Company
had negative cash flows from operating activities of approximately $2,401,000
for the year ended September 30, 2008, and has experienced recurring losses
from operations.  This raises substantial doubt about the Company's
ability to continue as a going concern.  Management's plans regarding
this matter are also described in Note 2.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
 
 /S/
PETERSON SULLIVAN LLP
 
 Seattle,
Washington
 February
12, 2009
  30
  NEAH
POWER SYSTEMS, INC.
  CONSOLIDATED
BALANCE SHEET
 September
30, 2008
 ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          59,661Contract
      receivable
                          
                          
                          39,718Prepaid
      expenses and other current assets
                          
                          
                          43,847Total
      current assets
                          
                          
                          143,226Property
      and equipment, net
                          
                          
                          71,870Total
      assets
                          
                          $
                          215,096LIABILITIES
      AND STOCKHOLDERS' DEFICIENCYCurrent
      liabilitiesAccounts
      payable
                          
                          $
                          1,669,068Accrued
      expenses
                          
                          
                          218,138Notes
      payable - related parties
                          
                          
                          45,000Notes
      payable
                          
                          
                          589,201Deferred
      revenue
                          
                          
                          189,500Total
      current liabilities
                          
                          
                          2,710,907Total
      liabilities
                          
                          
                          2,710,907Commitments
      and contingenciesStockholders'
      deficiencyPreferred
      Stock, 25,000,000 shares authorized Series A, convertible, $0.001 par
      value, $0.04 stated value,  20,217,100 shares issued and
      outstanding
                          
                          
                          20,217Common
      stock, $0.001 par value, 500,000,000 shares authorized
      288,210,608  shares issued and 220,582,608
      outstanding
                          
                          
                          220,583Additional
      paid-in capital
                          
                          
                          39,023,090Treasury
      shares, 3,753,000 common shares, at no costAccumulated
      deficit
                          
                          
                          (41,759,701
                          )Total
      stockholders' deficiency
                          
                          
                          (2,495,811
                          )Total
      liabilities and stockholders' deficiency
                          
                          $
                          215,096
 
 See Notes
to Consolidated Financial Statements
  31
  NEAH POWER SYSTEMS,
INC.
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 For the Year Ended September 30,
2008 and Nine Months Ended September 30, 2007
 For the
                        
                        
                        For theYear Ended
                        
                        
                        Nine Months EndedSeptember 30, 2008
                        
                        
                        September 30, 2007Contract
      Revenues
                        
                        $
                        1,395,729
                        
                        
                        $
                        49,057Operating
      expensesResearch
      and development expense
                        
                        
                        2,990,406
                        
                        
                        
                        3,567,807General
      and administrative expense
                        
                        
                        2,709,973
                        
                        
                        
                        2,119,196Total
      operating expenses
                        
                        
                        5,700,379
                        
                        
                        
                        5,687,003Loss
      from operations
                        
                        
                        (4,304,650
                        )
                        
                        
                        (5,637,946
                        )Other
      income (expense), netAmortization
      of deferred financing costs
                        
                        
                        (575,000
                        )
                        
                        
                        —Interest
      expense, net
                        
                        
                        (1,481,073
                        )
                        
                        
                        (339,337
                        )Gain
      on extinguishment of debt
                        
                        
                        206,252
                        
                        
                        
                        —Net
      Loss
                        
                        $
                        (6,154,471
                        )
                        
                        $
                        (5,977,283
                        )Basic
      and diluted loss per common share
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.05
                        )Basic
      and diluted weighted average common shares outstanding
                        
                        
                        147,511,169
                        
                        
                        
                        109,956,708
 
 See Notes
to Consolidated Financial Statements
  32
  NEAH
POWER SYSTEMS, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
Year Ended September 30, 2008 and Nine Months Ended September 30,
2007
  2008
                              
                              
                              2007Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (6,154,471
                              )
                              
                              $
                              (5,977,283
                              )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
                              
                              
                              125,220
                              
                              
                              
                              282,099Amortization
      of deferred financing costs
                              
                              
                              575,000
                              
                              
                              
                              -Share-based
      payments included in operating expenses
                              
                              
                              804,011
                              
                              
                              
                              1,228,229Share
      based payments issued as additional loan consideration, accounted for as
      interest expense
                              
                              
                              -
                              
                              
                              
                              307,357Amortization
      of debt discount and recognition of beneficial conversion feature on
      convertible debt
                              
                              
                              216,299
                              
                              
                              
                              -Gain
      on extinguishment of debt
                              
                              
                              (206,252
                              )
                              
                              
                              -Interest
      paid with warrants
                              
                              
                              5,933
                              
                              
                              
                              -Interest
      paid with common shares
                              
                              
                              1,091,724
                              
                              
                              
                              -Changes
      in operating assets and liabilitiesContract
      receivable
                              
                              
                              13,594
                              
                              
                              
                              (49,057
                              )Prepaid
      expenses and other current assets
                              
                              
                              (4,335
                              )
                              
                              
                              (18,108
                              )Accounts
      payable
                              
                              
                              939,728
                              
                              
                              
                              (439,904
                              )Accrued
      expenses
                              
                              
                              192,101
                              
                              
                              
                              (133,325
                              )Net
      cash used by operating activities
                              
                              
                              (2,401,448
                              )
                              
                              
                              (4,799,992
                              )Cash
      flows from investing activity:Purchase
      of fixed assets
                              
                              
                              -
                              
                              
                              
                              (45,130
                              )Net
      cash used by investing activity
                              
                              
                              -
                              
                              
                              
                              (45,130
                              )Cash
      flows from financing activities:Proceeds
      from sale of common stock
                              
                              
                              100,000Proceeds
      from notes payable
                              
                              
                              1,095,000
                              
                              
                              
                              350,000Proceeds
      from warrant exercises
                              
                              
                              126,181Proceeds
      from Series A Funding
                              
                              
                              707,586Net
      proceeds from public offering
                              
                              
                              -
                              
                              
                              
                              6,353,498Payments
      on equipment loans
                              
                              
                              -
                              
                              
                              
                              (29,840
                              )Private
      placement offering cost adjustment from settlement
                              
                              
                              -
                              
                              
                              
                              55,000Principal
      payments on notes payable
                              
                              
                              (280,000
                              )
                              
                              
                              (2,315,000
                              )Other
                              
                              
                              1,900
                              
                              
                              
                              -Net
      cash provided by financing activities
                              
                              
                              1,750,667
                              
                              
                              
                              4,413,658Net
      change in cash and cash equivalents
                              
                              
                              (650,780
                              )
                              
                              
                              (431,464
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              710,441
                              
                              
                              
                              1,141,905Cash
      and cash equivalents, end of period
                              
                              $
                              59,661
                              
                              
                              $
                              710,441Supplemental
      cash flow informationCash
      paid for interest
                              
                              $
                              -
                              
                              
                              $
                              60,254Cash
      paid for income taxes
                              
                              $
                              -
                              
                              
                              $
                              -Noncash
      investing and financing activitiesPartial
      conversion of EPD Note Payable to common stock
                              
                              $
                              62,576Deferred
      financing costs paid with issuance of common stock
                              
                              $
                              575,000Settlement
      of accounts payable with issuance of stock
                              
                              $
                              105,000Accounts
      payable financed with Note Payable
                              
                              $
                              89,201Conversion
      of note payable to Series A Preferred Stock
                              
                              $
                              50,000Debt
      discount resulting from the issuance of warrants
                              
                              $
                              135,667Issuance
      of common stock to Series A Preferred Stock placement
agent
                              
                              $
                              63,338
 
 See Notes
to Consolidated Financial Statements
 
 33
  NEAH
POWER SYSTEMS, INC.
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT )
 For the Year Ended September 30,
2008 and Nine Months Ended September 30, 2007
  Preferred Stock
                                                                          
                                                                          
                                                                          Common Stock Outstanding
                                                                          
                                                                          
                                                                          Treasury Shares
                                                                          
                                                                          
                                                                          Additional
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          TotalNumber
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Number
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Number
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Paid-in
                                                                          
                                                                          
                                                                          Accumulated
                                                                          
                                                                          
                                                                          Stockholders'of Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          of Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          of Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Capital
                                                                          
                                                                          
                                                                          Deficit
                                                                          
                                                                          
                                                                          (Deficit) EquityBalances
      at December 31, 2006
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          103,162,431
                                                                          
                                                                          
                                                                          $
                                                                          103,162
                                                                          
                                                                          
                                                                          
                                                                          (3,753,000
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          27,395,674
                                                                          
                                                                          
                                                                          $
                                                                          (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 compensation on options and warrants
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          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
                                                                          )Balances
      at September 30, 2007
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          116,179,700
                                                                          
                                                                          
                                                                          
                                                                          116,180
                                                                          
                                                                          
                                                                          
                                                                          (3,753,000
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          35,326,740
                                                                          
                                                                          
                                                                          
                                                                          (35,605,230
                                                                          )
                                                                          
                                                                          
                                                                          (162,310
                                                                          )Sale
      of Series A Preferred Stock for cash
                                                                          
                                                                          
                                                                          18,967,100
                                                                          
                                                                          
                                                                          
                                                                          18,967
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          600,040
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          619,007Conversion
      of debt to Series A Preferred Stock
                                                                          
                                                                          
                                                                          1,250,000
                                                                          
                                                                          
                                                                          
                                                                          1,250
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          48,750
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          50,000Issuance
      of common stock to Series A placement agent
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          8,797,000
                                                                          
                                                                          
                                                                          
                                                                          8,797
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          54,541
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          63,338Sale
      of common stock for cash
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          90,000
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          100,000Issuance
      of common stock pursuant to antidilution provisions of common stock
      purchase agreement
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          56,666,667
                                                                          
                                                                          
                                                                          
                                                                          56,667
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (56,667
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          -Issuance
      of common stock with respect to debt financing fees
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,833,584
                                                                          
                                                                          
                                                                          
                                                                          2,833
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          572,167
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          575,000Issuance
      of common stock for note payable penalty consideration recorded as
      interest expense
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          23,509,221
                                                                          
                                                                          
                                                                          
                                                                          23,509
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,068,215
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,091,724Common
      stock issued upon exercise of warrants
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          630,908
                                                                          
                                                                          
                                                                          
                                                                          631
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          125,550
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          126,181Common
      stock issued upon partial conversion of note payable
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          782,195
                                                                          
                                                                          
                                                                          
                                                                          782
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          61,794
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          62,576Common
      stock issued for legal settlement
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          350,000
                                                                          
                                                                          
                                                                          
                                                                          350
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          104,650
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          105,000Issuance
      of restricted common stock to employees
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          833,333
                                                                          
                                                                          
                                                                          
                                                                          833
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          32,499
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          33,332Share
      based compensation on options and warrants
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          770,679
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          770,679Issuance
      of warrants in lieu of interest on note payable
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          5,933
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          5,933Allocation
      of proceeds from debt to warrants and beneficial conversion
      feature
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          216,299
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          216,299Other
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,900
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,901Net
      loss for the year ended September 30, 2008
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (6,154,471
                                                                          )
                                                                          
                                                                          
                                                                          (6,154,471
                                                                          )Balances
      at September 30, 2008
                                                                          
                                                                          
                                                                          20,217,100
                                                                          
                                                                          
                                                                          $
                                                                          20,217
                                                                          
                                                                          
                                                                          
                                                                          220,582,608
                                                                          
                                                                          
                                                                          $
                                                                          220,583
                                                                          
                                                                          
                                                                          
                                                                          (3,753,000
                                                                          )
                                                                          
                                                                          $
                                                                          0
                                                                          
                                                                          
                                                                          $
                                                                          39,023,090
                                                                          
                                                                          
                                                                          $
                                                                          (41,759,701
                                                                          )
                                                                          
                                                                          $
                                                                          (2,495,811
                                                                          )
    34
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1. The Company
 
 Neah
Power Systems, Inc. (“NPSNV ”, the “Company” or “Neah Power”)
was incorporated in Nevada on February 1, 2001, under the name Growth Mergers,
Inc. (“GMI”). In March 2006 GMI, at the time a public shell company, acquired
all of the outstanding capital stock of an operating Washington corporation,
Neah Power Systems, Inc. (“NPSWA”). 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 develops advanced, portable power fuel cells for mobile
electronics applications contained in the military, commercial, and consumer
market segments. These micro fuel cells may serve as viable replacements of many
types of batteries in use today such as lithium-ion and lithium-polymer power
sources that drive most laptop and notebook computers and many other types of
electronic equipment.
 
 Recent
Developments
  The
Company has announced various manufacturing partnerships with companies like
Aspen Technologies, IceMOS, and Sanmina – SCI. The Company has continued to
demonstrate significant technical progress having reported wire-bond process for
low-loss current collection, a transition to larger, higher energy density,
electrodes, a higher reliability cell packaging that is expected to have a high
lifetime. All of these changes are geared to enable large scale
commercialization.
  In
September 2007, the Company reached a significant milestone in the history of
the Company by demonstrating a working prototype which generated net positive
power. On December 19, 2007, the Company announced that its initial product
offerings will focus on military applications requiring power sources that can
operate without air and in harsh environments. 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. The
Company 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, the Company believed it was
unlikely that the milestones contained in the agreement with Novellus Systems,
Inc. would be met and on May 19, 2008, the Company and Novellus agreed to
terminate the agreement in its entirety. As a result, all warrants have been
cancelled and all milestones are not applicable (see Note 9). Subsequent changes
and improvements are focused around improving the reliability of the system,
creating the manufacturing infrastructure for the product, and other continuous
improvement processes related to the technology and the manufacturing. A number
of specific individual technical advances have also been outlined in recent
press releases. These announcements include the migration to larger wafer
platforms to improve manufacturing efficiencies, electrode structures optimized
for greater power production, cell packaging developments that generate highly
reliable, highly manufacturable components, and unique electrical connection
architectures which move the technology further down the path towards large
scale commercialization.
  The
Company recently announced that on November 26, 2008 the Company entered into an
agreement and plan of merger with SolCool One, LLC ("SolCool"), a leader in the
solar air conditioning industry. SolCool specializes in supplying solar air
conditioning systems and has a recognized distribution and support network in
various regions throughout the world along with an established manufacturing
relationship. SolCool has a strong distribution network that could also be used
to sell the Company’s products. Additional synergies could include adding a fuel
cell to the solar air conditioning systems in order to extend the off-the-grid
duration of the product. A solar panel/lithium-ion/fuel cell integrated system
could also be developed for use as power supply for off-the-grid applications or
as a back up power supply. On February 5, 2009, the Company received notice of
cancellation from the merger agreement due to a failure to fund the transaction
in a timely manner. On February 12, 2009, Solcool rescinded its notice of
cancellation upon payment by the Company of $9,000. The Company is continuing in
its efforts procure funding and to accomplish the merger.
  35




Note
2. Going Concern


The
Company’s consolidated 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. The Company has an accumulated
deficit as of September 30, 2008 in the amount of approximately $41,760,000 and
negative working capital of approximately $2,568,000. For the year ended
September 30, 2008, the Company had negative cash flow from operating activities
in the amount of approximately $2,401,000. The Company has limited capital
resources and the Company has sustained substantial losses which raises
substantial doubt about its ability to continue as a going concern. The Company
must, therefore, raise sufficient capital to fund its overhead burden and its
continuing research and development efforts going forward.
 
 The
Company has relied primarily on sales of securities and proceeds from borrowings
for operating capital. During the year ended September 30, 2008, the Company
raised capital by selling two promissory notes for a total of $1,000,000 with
net proceeds of $965,000 received upon closing net of fees of $35,000. On April
24, 2008, Summit Trading Limited (“Summit”), one of the Company’s largest
shareholders, purchased 10,000,000 shares of common stock for $0.01 per share
for a total of $100,000. Such purchase agreement provides for certain dilution
protection and standard piggyback registration rights.
 
 During
the year ended September 30, 2008, the Company also received payments of
approximately $1,409,000 from the Office of Naval Research (“ONR”) pursuant to
the terms of two grants providing expense reimbursement for continuing research
and development having to do with certain technology. As of September 30, 2008,
all of the work under the first of the ONR contracts was completed. As of
September 12, 2008, the Company entered into a second contract with ONR and
received approximately $33,000 from that contract as of September 30,
2008.
 
 Additionally,
as of February 5, 2009, the Company has received approximately $669,000 in the
fourth quarter of its fiscal year 2008 and $132,000 in the first quarter of its
fiscal year 2009 of gross proceeds less financing costs from a private placement
funding for its Series A Preferred Stock (Note 7).
 
 On
February 12, 2009, the Company entered into a Securities Purchase Agreement with
Agile Opportunity Fund, LLC and Capitoline Advisors Inc. under which it received
funds in the first of two tranches through the issuance of Original Issue
Discount Term Convertible Notes secured by all assets of the Company. The
Company received the first tranche on February 12, 2009 in the net amount of
approximately $162,000. The Company expects to receive the second tranche of up
to $1,020,000 in the aggregate on or before February 27, 2009. The notes are
convertible at $.10 per share and are more fully described in the exhibits
attached to this Form 10-KSB which are incorporated herein by
reference.
  The
current cash balance, proceeds from the bridge funding, and certain expected
expense reimbursement from grant funding from the ONR are estimated to support
the Company’s operations through approximately May 2009. To meet cash needs from
that point forward, the Company is currently seeking financing from the sale of
debt or equity instruments to current investors and potential strategic
investors. There is no assurance that we will be successful in raising this
capital on a timely basis, if at all. The failure to obtain the necessary
working capital would have a material adverse effect on the development program
and business prospects and, depending upon the shortfall, we may have to curtail
or cease our operations.
  The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company have to curtail
operations or be unable to continue in existence.
  36


Note
3. Summary of Significant Accounting Policies





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.




Reclassifications




Certain
prior year amounts have been reclassified to conform with the current year
presentation. There has been no impact on previously reported net loss or
shareholders’ deficiency.


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.




Financial
Instruments





The
Company's financial instruments consist of cash and cash equivalents, contract
receivable, accounts payable, notes payable and accrued expenses. 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, 2008.





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 deferred and recognized as revenue
over the service period.


37





Unearned
revenues, recorded as deferred revenue in the consolidated balance sheet, were
$189,500 as of September 30, 2008.





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 reverse
merger that occured in 2006 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 September 30, 2008 and
the nine months ended September 30, 2007.





The
Company has share-based compensation plans under which employees and
non-employee directors may be granted restricted stock, as well as options to
purchase shares of Company common stock at the fair market value at the time of
grant. Stock-based compensation cost is measured by the Company at the grant
date, based on the fair value of the award, over the requisite service period.
For options and warrants issued to employees, the Company recognizes stock
compensation costs utilizing the fair value methodology prescribed in Statement
of Financial Accounting Standards 123 (“SFAS 123(R)”) (revised 2004), Share Based Paymentover the
related period of benefit.  Grants of stock options 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") and SFAS 123(R).





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 year ended September 30, 2008 and
nine months ended September 30, 2007:




2008
                  
                  2007Risk
      free interest rate
                  
                  
                  3.2
                  %
                  4.9
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  0.0
                  %Volatility
                  
                  
                  136.6
                  %
                  138.6
                  %Expected
      life in years
                  
                  
                  7.2
                  
                  10.0




38




Share-based
payments recognized as operating expense are as follows for the year ended
September 30, 2008 and the nine months ended September 30, 2007:





2008
                      
                      
                      2007Common
      stock options
                      
                      $
                      693,766
                      
                      
                      $
                      1,196,204Common
      stock purchase warrants
                      
                      
                      76,913
                      
                      
                      
                      16,625Issuance
      of restricted stock
                      
                      
                      33,332Total
      share based payments
                      
                      $
                      804,011
                      
                      
                      $
                      1,212,829Total
      share based payments were recorded as follows:Research
      and development expense
                      
                      
                      282,873
                      
                      
                      
                      370,015General
      and administrative expense
                      
                      
                      521,138
                      
                      
                      
                      842,814$
                      804,011
                      
                      
                      $
                      1,212,829





During
the year ended September 30, 2008, the Company awarded grants of restricted
common stock to employees, net of cancellations totaling 583,333 shares which
were valued at $23,333, the Fair Market Value based on the closing price of
$0.04 on March 28, 2008. The shares vested at the rate of 33.3% every two months
from the date of grant and the fair value has been fully amortized and
recognized as expense through September 30, 2008. On May 22, 2008, an additional
250,000 shares of restricted stock were granted at a value of $10,000, the fair
market value of such shares based on the closing price of $0.04 per share on the
date of grant.  This restricted stock vested immediately and was
expensed in full on the date of grant.





In August
2008, the Company amended its Long Term Incentive Compensation Plan and added an
Employee Stock Purchase Plan (“the Plans”). As of September 30, 2008, there were
no stock options or common shares issued under the Plans.





Loss per
Share





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




Basic
weighted average common shares outstanding, and the potentially dilutive
securities excluded from loss per share computations because they are
antidilutive, are as follows for the year ended September 30, 2008 and the
nine months ended September 30, 2007:





2008
                                                  
                                                  2007Basic
      and diluted weighted average common stock shares
    outstanding
                                                  
                                                  
                                                  147,511,169
                                                  
                                                  109,956,708Potentially
      dilutive securities excluded from loss per share
    computations:Convertible
      Series A Preferred Stock
                                                  
                                                  
                                                  539,190,057
                                                  
                                                  -Convertible
      debt
                                                  
                                                  
                                                  166,666
                                                  
                                                  -Common
      stock options
                                                  
                                                  
                                                  7,753,158
                                                  
                                                  10,704,850Common
      stock purchase warrants
                                                  
                                                  
                                                  15,462,451
                                                  
                                                  18,998,358




39


Recent Accounting
Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations — a
Replacement of FASB Statement No. 141 (“SFAS No. 141(R)”). The
statement is to be applied prospectively for fiscal years beginning on or after
December 15, 2008. The statement also applies to the treatment of taxes
from prior business combinations. The statement requires more assets acquired
and liabilities assumed in future business combinations to be measured at fair
value as of the acquisition date. In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be re-measured to fair value each subsequent
reporting period. The Company will adopt SFAS No. 141(R) at the beginning
of the Company’s 2010 fiscal year, or October 1, 2009. The Company does not
expect this statement will have a significant impact on the Company’s
consolidated financial position or results of operations when
adopted.




On
October 1, 2008, the Company will adopt Financial Accounting Standards Board
(“FASB”) Statement No. 157, Fair Value Measurements(“SFAS 157”), which clarifies the definition of fair value, establishes a
framework for measuring fair value, and expands the required disclosures on fair
value measurements. In February 2008, the FASB issued Staff Position 157-2,
Effective Date of FASB
Statement No. 157(“FSP 157-2”),that deferred the effective
date of SFAS 157 for one year for nonfinancial assets and liabilities recorded
at fair value on a non-recurring basis. The effect of adoption of SFAS 157 for
financial assets and liabilities recognized at fair value on a recurring basis
is not expected to have a material impact on the Company’s financial position
and results of operations. The Company is assessing the impact of the adoption
of SFAS 157 for nonfinancial assets and liabilities on the Company’s financial
position and results of operations.





On
October 1, 2008, the Company will adopt FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115(“SFAS 159”). SFAS 159 permits companies to irrevocably
elect to measure certain financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The
Company is not planning to elect the fair value option under SFAS 159 for any of
its financial assets or liabilities upon adoption.





In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51
(“SFAS No. 160”). The statement changes how non-controlling interests in
subsidiaries are measured to initially be measured at fair value and classified
as a separate component of equity. SFAS No. 160 establishes a single method
of accounting for changes in a parent’s ownership interest in a subsidiary that
do not result in deconsolidation. No gains or losses will be recognized on
partial disposals of a subsidiary where control is retained. In addition, in
partial acquisitions, where control is obtained, the acquiring company will
recognize and measure at fair value all of the assets and liabilities, including
goodwill, as if the entire target company had been acquired. The statement is to
be applied prospectively for fiscal years beginning on or after
December 15, 2008. The Company will adopt this statement on October 1,
2009, which is the beginning of the Company’s 2010 fiscal year. The Company does
not anticipate any significant impact on the Company’s financial position or
results of operations when adopted.





In
March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities(“SFAS 161”), which is effective
January 1, 2009 for the Company. SFAS 161 requires enhanced disclosures
about derivative instruments and hedging activities to allow for a better
understanding of their effects on an entity’s financial position, financial
performance, and cash flows. Among other things, SFAS 161 requires disclosure of
the fair values of derivative instruments and associated gains and losses in a
tabular format. Since SFAS 161 requires only additional disclosures about
derivatives and hedging activities, the adoption of SFAS 161 will not affect the
Company’s financial position or results of operations, should the Company
acquire derivatives in the future.




In April
2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP No. 142-3”). FSP No. 142-3 amends
the factors to be considered in assumptions used to determine the useful lives
of recognized intangible assets recognized under SFAS No. 142. The new
guidance applies to intangible assets with contractual lives that are acquired
individually or with a group of assets as well as those assets acquired in a
business combination. The new guidance is effective for fiscal years beginning
after December 15, 2008 and interim periods. The Company will adopt the
statement October 1, 2009 which is the beginning of the Company’s 2010 fiscal
year. The Company does not expect adoption of FSP No. 142-3 to have a
significant impact on the Company’s consolidated financial position or results
of operations.


40





In
May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement). FSP APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company will adopt FSP APB 14-1 beginning in the
first quarter of fiscal 2010, and this standard must be applied on a
retrospective basis. The Company is evaluating the impact the adoption of FSP
APB 14-1 will have on the Company’s consolidated financial position and results
of operations.





In
December 2007, the FASB ratified the consensus reached by the Emerging
Issues Task Force (“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative
Arrangements. EITF 07-1 is effective for the Company beginning October 1,
2009 and will be applied retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date. EITF 07-1 defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. The Company is assessing the
impact of adoption of EITF 07-1 on its financial position and results of
operations.





On
October 1, 2008, the Company will adopt EITF Issue No. 07-3, Accounting for Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities(“EITF 07-3”), which is being applied prospectively for new contracts.
EITF 07-3 addresses nonrefundable advance payments for goods or services that
will be used or rendered for future research and development activities. EITF
07-3 requires these payments be deferred and capitalized and recognized as an
expense as the related goods are delivered or the related services are
performed. The effect of adoption of EITF 07-3 on the Company’s financial
position and results of operations is not expected to be material.





Note
4. Property and Equipment





September 30,2008Laboratory
      equipment
                      
                      $
                      1,348,620Leasehold
      improvements
                      
                      
                      579,641Computer
      equipment and software
                      
                      
                      140,602Office
      furniture and equipment
                      
                      
                      56,000Subtotal
                      
                      
                      2,124,863Accumulated
      depreciation and amortization
                      
                      
                      (2,052,993
                      )Property
      and equipment, net
                      
                      $
                      71,870




Note
5. Accrued Expenses





September 30,2008Vacation
      pay
                      
                      $
                      57,068Accrued
      interest
                      
                      
                      47,049Payroll
      and payroll taxes
                      
                      
                      114,021Total
                      
                      $
                      218,138




41




Note
6. Notes Payable




EPD
Investment Co., LLC





On
November 9, 2007, the Company sold a 10% convertible secured
promissory note due January 1, 2009 to EPD Investment Co., LLC (“EPD”) for net
proceeds of $500,000. The provisions of the note allowed for the conversion of
the note into shares of common stock at $0.08 per share. EPD received 1.7
million shares of common stock and a 5-year warrant to purchase
500,000 additional shares of common stock at $0.29 per share. There was a
penalty of $10,000 per month for any delays in filing the Company's registration
statement or in being declared effective and a total penalty of $10,000 was
incurred. The terms of the note also dictated additional issuances of shares
should certain other terms of the note were not met by certain dates. The
note was secured by 8,000,000 common shares held as
collateral pursuant to the terms of the purchase, pledge and security agreements
and was further secured by a security interest in substantially all of the
Company’s assets. 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 a public offering.





Effective
February 15, 2008, the Company amended its loan agreements with EPD to eliminate
the requirement that the Company issue additional collateral shares of five
times the note balance, extended the security interest until the note was paid
in full, decreased the rate for conversion of the note to shares of common stock
to $0.08 and required EPD to convert the note prior to its public sale of Equity
Shares as defined in the agreements. In addition, EPD converted $62,576 of the
debt into 782,195 shares of common stock.





As noted
above, the Company issued 1,708,584 shares of common stock to EPD which
represented financing fees determined to be $350,000 based on the market value
of the stock and were recorded during the three months ended December 31, 2007.
These financing fees were capitalized and have been completely amortized as of
September 30, 2008. There was a beneficial conversion feature associated
with the EPD note which was valued at $80,632 and recorded as interest
expense in full on the issuance date of the note as it was immediately
convertible at that date. In addition, the warrants were recorded based on the
relative fair value as compared to the fair value of the debt at issuance. The
relative fair value was recorded as Additional Paid-in Capital, estimated at
$97,873, and as a discount to notes payable and was completely amortized to
interest expense as of September 30, 2008 using the effective interest
method.





During
the year ended September 30, 2008 the Company became obligated for certain
penalties pursuant to defaults, as defined, of the loan agreements with EPD in
the amount of $513,183. These penalties were paid with 10,009,221 shares of
Company common stock to EPD, at various calculated prices per share based on the
market value of the Company’s common stock. The aggregate penalties were
recorded as interest expense during the year ended September 30,
2008.





Effective
as of September 11, 2008, the Company consummated the transactions under an
Agreement and Release, dated August 26, 2008, with NPS Investment Co., LLC
(“NPS”), as assignor of, and successor-in-interest to EPD, pursuant to which the
Company paid NPS the cash amount of $200,000 in consideration for the full
satisfaction and cancellation of the outstanding convertible secured promissory
note and related obligations having an outstanding principal balance of
approximately $357,000 and accrued interest and penalties of approximately
$49,000 held by NPS. Under the agreement, the following agreements and
instruments between the Company and NPS were terminated effective September 11,
2008: A Purchase Agreement, Promissory Note, Security Agreement, and Pledge
Agreement, each originally dated as of November 9, 2007, as amended. In
connection with the agreement, NPS released and terminated its liens on the
Company’s assets and the pledged securities that secured the payment of the
note. The Company recorded a gain on extinguishment of debt in the amount of
$206,252 resulting from this transaction.


42


CAMHZN
Master LDC





On
November 28, 2007, the Company sold a 12% convertible secured promissory note
due June 28, 2008 to CAMHZN Master LDC (“CAMHZN”) fornet proceeds of $465,000
of which $315,000 was received at the closing, net of costs of $35,000 and the
remaining $150,000 was paid to the Company on January 28, 2008, upon the
required registration statement becoming effective. The note is convertible to
shares of common stock at $3.00 per share. CAMHZN received 1.125 million shares
of common stock and a 5-year warrant to purchase 250,000 shares of common stock
at $0.22 per share, as well as a right to acquire additional shares if the
Company does not repay the loan or effect a registration statement for the
shares by specified dates. As of September 30, 2008, the note is secured by
54,500,000 shares of the Company's common stock held in escrow pursuant to the
terms of the purchase, pledge and security agreements. The Company also issued
an additional 2,500,000 shares to be held in escrow related to the transaction
agreements regarding estimated and potential fees and penalties. As of September
30, 2008, 1,375,000 shares of common stock are still held in escrow related to
potential fees and penalties.  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 a public
offering.





The
Company issued 1,125,000 shares of common stock to CAMHZN in connection with the
issuance of the notes which represented financing fees of $225,000 recorded
during the three months ended December 31, 2007. These financing fees were
capitalized and have been completely amortized as of September 30,
2008.  In addition, the warrants were recorded based on the relative
fair value as compared to the fair value of the debt at issuance. The relative
fair value was recorded as Additional Paid-in Capital, estimated at $37,794, and
a discount to notes payable and was completely amortized to interest expense as
of September 30, 2008 using the effective interest method.




Pursuant
to the loan agreement with CAMHZN, the Company received correspondence from
CAMHZN on May 13, 2008 demanding an additional 54,500,000 shares of common stock
to raise their number of collateral shares in order to comply with the 500% debt
coverage requirement included in the loan agreement. Effective May 22, 2008,
CAMHZN agreed to forbear from exercising any remedies available under its loan
documents or applicable law for a period ending on September 29, 2008, in
exchange for the release of 8,000,000 shares of common stock. The shares, valued
at $304,000, were recorded as interest expense in the year ended September 30,
2008.
 
 On
January 12, 2009, the Company entered into an amended loan agreement with CAMHZN
whereby, effective December 31, 2008, CAMHZN has agreed to forbear from
exercising any remedies available under its loan documents or applicable law for
a period ending on March 29, 2009. In exchange for the forbearance, the Company
agreed to pay a fee of $567,000 which will be added to the principal balance of
the loan and will be payable in cash or stock at the Company’s
discretion.
  During
the year ended September 30, 2008 the Company became obligated for certain
penalties pursuant to defaults, as defined, of the loan agreements with CAMHZN
in the amount of $275,000. These penalties were paid with 5,500,000 shares of
Company common stock to CAMHZN at certain calculated prices per share based on
the market value of the Company’s common stock. The aggregate penalties were
recorded as interest expense during the year ended September 30,
2008.
 
 In
connection with the notes, 27,125,000 shares of common stock have been issued
and are outstanding as of September 30, 2008.  In addition, 63,875,000
shares have been issued and are held in escrow and will only be released in the
case of non-payment of the CAMHZN note or as consideration for penalties and
fees due. In addition, there are 3,753,000 shares held in treasury that were
contributed back to the Company by major shareholders in 2006 and, thus, there
are 220,582,608 shares outstanding at September 30, 2008.


Aspen
Technologies





In July
2008, the Company entered into an agreement with Aspen Technologies (“Aspen”), a
vendor of the Company, whereby the accounts payable balances owing Aspen by the
Company would be converted to a note payable up to a maximum of $100,000. Under
the terms of the note payable, the Company would pay Aspen eight equal payments
of $12,500 per month beginning in August 2008 until the outstanding principal
balance was paid. In payment of interest on the note, the Company issued five
year warrants to purchase 300,000 shares of the Company’s stock at $0.03 per
share. Those warrants vested immediately and were valued at $5,933 (Note 9). As
of September 30, 2008, the principal balance was $89,200 and no payments have
been made.


43





Related
Party Notes





In September 2008, the Company entered
into a note agreement with Summit. Under the agreement, the Company borrowed
$15,000 at no interest with a maturity date of October 2, 2008. The principal
balance is included in notes payable, related parties on the Company’s
consolidated balance sheet at September 30, 2008.





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





Note
7. Series A Preferred Stock





On June
27, 2008, the Company’s Board of Directors approved financing through a Series A
Preferred Stock Purchase Agreement pursuant to which it agreed to issue a
minimum of 7,500,000 shares of Series A Preferred Stock at a purchase price of
$0.04 per share, or a minimum of $300,000 in the aggregate to investors in the
Company’s Series A Preferred stock. As of September 30, 2008, there were
approximately $759,000 in gross proceeds received from the offering. Further, a
$50,000 note payable balance was converted into 1,250,000 Series A Preferred
stock during the year ended September 30, 2008. Based on these transactions,
20,217,100 shares were issued under this agreement as of September 30, 2008. The
net proceeds have been used for working capital and general corporate purposes.
The holders of Series A Preferred Stock will be entitled to payment of
dividends, when, as and if declared by the Company’s Board of Directors, in
preference to the holders of common stock. Holders of Series A Preferred Stock
are also entitled to a liquidation preference of $0.04 per share in the event of
the Company’s liquidation, dissolution or winding up. At the discretion of the
Company’s Board of Directors, each share of Series A Preferred Stock may be
converted into 26.67 shares of common stock. Except as required by law, the
Series A Preferred Stock has no voting rights. The issuance of this Series A
Preferred Stock will significantly dilute the interests of the Company’s
existing shareholders if it is converted to common stock. Upon conversion, the
Series A Preferred stockholders subscribed to date currently would own over 74%
of the Company’s outstanding shares.




Jesup
& Lamont Securities Corporation is acting as placement agent in connection
with the private placement of the Series A Preferred Stock and is entitled to a
cash placement success fee equal to 10% of the proceeds resulting from their
placements, or approximately $63,000, of which approximately $34,000 was paid as
of September 30, 2008.  In addition, the placement agent received
8,797,000 shares of common stock of the Company also valued at approximately
$63,000.





As of February 5, 2009, the Company has
issued 23,532,600 shares of Series A Preferred and received proceeds, including
the note payable conversion, net of financing costs of approximately
$802,000.





Note
8. Stock Incentive Plans





Stock
Option Plan





In August
of 2008, the Company amended its Long Term Incentive Compensation Plan ("the
Plan") first adopted in March 2006. The amendment to the Plan increased the
total number of shares available for issuance under the Incentive Plan from ten
million (10,000,000) shares of Common Stock to twenty-five million (25,000,000)
shares of Common Stock, an amount equal to approximately 5% of the total number
of the Company’s authorized shares of Common Stock as of the Record Date. 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. The Company has outstanding stock options for
7,753,158 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. Options
granted in excess of 10,000,000 will require shareholder approval. As of
September 30, 2008, there were no new stock options issued under the amended
Plan.


44





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.





The
following table summarizes stock option activity during the nine months ended
September 30, 2007 and year ended September 30, 2008:




Options
                  Outstanding
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at December 30, 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
                
                
                $
                0.29Grants
      during the year ended September 30, 2008
                
                
                1,105,000
                
                
                
                0.04Forfeitures
      and cancellations
                
                
                (4,056,692
                )
                
                
                0.69Exercised
                
                
                0Outstanding
      at September 30, 2008 (6,582,992 exercisable options)
                
                
                7,753,158
                
                
                $
                0.29




The
weighted average fair value of the options granted during the periods ended
September 30, 2008 and 2007 was $0.04 and $0.40 respectively and the weighted
average remaining contractual lives of outstanding options was 8.5
years.





The
aggregate intrinsic value of the options outstanding represents the total pretax
intrinsic value for all “in-the-money” options (i.e., the difference between the
Company’s closing stock price on the last trading day of September 30,
2008 and the exercise price, multiplied by the number of shares) that would
have been received by the option holders had all option holders exercised their
options on September 30, 2008. As the exercise price of all outstanding and
exercisableoptions at September 30, 2008 is in excess of the Company’s
closing stock price at that date, there is no intrinsic value.





For all
outstanding granted options as of September 30, 2008, the weighted average
remaining contractual term is 8.2 years. For exercisable and vested options as
of September 30, 2008, the weighted average contractual term is 8.0
years.





As of
September 30, 2008, the Company had approximately $304,000 of total unrecognized
compensation cost related to non-vested stock-based awards granted under all
equity compensation plans. Total unrecognized compensation cost will be adjusted
for any future changes in estimated forfeitures. The Company expects to
recognize this cost from 2009 through 2012.


45




Stock
Purchase Plan





In August 2008, the Company adopted an
Employee Stock Purchase Plan (the “Stock Purchase Plan”). The amount of shares
of Common Stock that may be sold pursuant to the Stock Purchase Plan shall not
exceed, in the aggregate, thirty million (30,000,000) shares of Common Stock, an
amount equal to approximately 5% of the total number of the Company’s authorized
shares of Common Stock the date the plan was approved by the shareholders. As of
September 30, 2008, no shares have been purchased under the Stock Purchase
Plan





Note
9. Common Stock Purchase Warrants




Novellus
Systems, Inc.




The
Company had in place a collaboration agreement dated May 24, 2006, with
Novellus, a stockholder of the Company. On May 26, 2006, pursuant to an
extension of the collaboration agreement, the Company issued a warrant to
Novellus to acquire up to 4,705,000 shares of Company common stock at an
exercise price of $0.001 per share. Vesting of the warrant shares was to occur
upon certain milestones being achieved by Novellus and the Company and each
milestone had a specific number of warrant shares assigned thereto and no
milestones were ever completed. On May 19, 2008, the Company and Novellus agreed
to terminate the above agreement in its entirety. As a result, all warrants have
been cancelled and all milestones are not applicable.




Offering
of Warrants





The
offering of shares of common stock that was consummated on May 11, 2007 included
five-year warrants to acquire a total of 9,633,779 shares of common stock. One
third of the total number of warrants is exercisable at $1.10, $1.60 and $2.00
respectively. Such warrants are generally exercisable only by the original
purchaser. The exercise price of the warrants was reduced to $0.20 per share for
six days in October 2007 in order to induce exercise and a total of 630,908
warrants were exercised with proceeds received of $126,181.





Noteholder
Warrants




During
the year ended June 30, 2008, the Company issued five year warrants to purchase
500,000 shares of common stock at $0.29 and 250,000 shares at $0.22 to EPD and
CAMHZN, respectively, the two noteholders, as described in Note 6.





In
payment of interest on a note payable with Aspen, the Company issued five year
warrants to purchase 300,000 shares of the Company’s stock at $0.03 per share
(Note 6).





Strategic
Advisory Board (“SAB”) Warrants





In
February 2008 three-year warrants to acquire 750,000 shares of common stock were
granted to the three new SAB members in the amount of 250,000 each. Of the
warrants granted, 500,000 are exercisable at $0.10 per share and 250,000 are
exercisable at $0.06 per share. Each person paid $100 for their warrant and all
warrants vest in full one year from the date of grant. Share-based compensation
of $33,155 was calculated using the Black-Scholes model,of which $19,826 was
recorded to expense for the year ended September 30, 2008, and the balance will
be amortized through the one year anniversary of the grants.


46


A summary
of warrants granted and outstanding at September 30, 2007 and 2008
follows:




Number of
                                          
                                          
                                          Exercise
                                          
                                          ExpirationDate
                                          
                                          Action
                                          
                                          Warrants
                                          
                                          
                                          Price
                                          
                                          DateBalance at December 31, 2006
                                          
                                          9,059,579May
      2007
                                          
                                          Camofi
      Master LDC
                                          
                                          
                                          125,000
                                          
                                          
                                          
                                          0.55
                                          
                                          Mar.
      2012May
      2007
                                          
                                          Included
      with public offering
                                          
                                          
                                          3,211,260
                                          
                                          
                                          
                                          1.10
                                          
                                          May
      2012Included
      with public offering
                                          
                                          
                                          3,211,260
                                          
                                          
                                          
                                          1.60
                                          
                                          May
      2012Included
      with public offering
                                          
                                          
                                          3,211,259
                                          
                                          
                                          
                                          2.00
                                          
                                          May
      2012Sept.
      2007
                                          
                                          Lippert/Heilshorn
                                          
                                          
                                          180,000
                                          
                                          
                                          
                                          0.51
                                          
                                          Sep.
      2011Balance at September 30, 2007
                                          
                                          
                                          18,998,358Nov.
      2007
                                          
                                          EPD/CAMHZN
                                          
                                          
                                          750,000
                                          
                                          
                                          
                                          0.27
                                          
                                          Nov.
      2012Feb.
      2008
                                          
                                          Strategic
      Advisory Board
                                          
                                          
                                          750,000
                                          
                                          
                                          
                                          0.09
                                          
                                          Feb.
      2011July
      2008
                                          
                                          Aspen
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          0.03
                                          
                                          July
      2011Exercised
                                          
                                          
                                          
                                          
                                          (630,908
                                          )Cancelled
                                          
                                          
                                          
                                          
                                          (4,705,000
                                          )Balance
      at September 30, 2008
                                          
                                          
                                          15,462.450




Warrants
outstanding at September 30, 2008 expire at various dates from February 2011 to
May 2012.





Note
10. Common Stock




On August
15, 2008, our shareholders approved a 200 to 1 reverse stock split which has not
been effected by the Board of Directors as of the date of this report, thus all
share and per share amounts in these consolidated financial statements have not
been restated for this reverse stock split.
 
 On April
24, 2008, Summit, one of the Company’s largest shareholders, purchased
10,000,000 shares of common stock for $0.01 per share for a total of $100,000.
The purchase agreement provides for certain dilution protection and standard
piggyback registration rights. Pursuant to this agreement, the sale of Series A
Preferred Stock triggered an antidilution provision. Accordingly, the Company
issued an additional 56,666,667 of common stock to Summit in satisfaction of
this antidilution provision. No value was assigned to the 56,666,667 shares as
they were considered part of the original share issuance for
$100,000.


Note
11. Income Taxes





Significant
components of the Company's deferred tax assets and liabilities and related
valuation allowances are as follows as of September 30, 2008 and
2007:





2008
                  
                  
                  2007Deferred
      tax assets (liabilities):Accelerated
      depreciation
                  
                  $
                  128,000
                  
                  
                  $
                  (80,000
                  )Research
      & development credit
                  
                  
                  916,000
                  
                  
                  
                  793,000Accrued
      vacation
                  
                  
                  19,000
                  
                  
                  
                  17,000Accrued
      severance and wages
                  
                  
                  119,000
                  
                  
                  
                  -Shared-based
      compensation expense
                  
                  
                  1,072,000
                  
                  
                  
                  816,000Net
      operating loss carryforwards
                  
                  
                  12,548,000
                  
                  
                  
                  10,861,000Total
      net deferred tax assets
                  
                  
                  14,802,000
                  
                  
                  
                  12,407,000Valuation
      allowance
                  
                  
                  (14,802,000
                  )
                  
                  
                  (12,407,000
                  )Deferred
      tax assets, net of valuation allowance
                  
                  $
                  -
                  
                  
                  $
                  -




47


The
Company has established a valuation allowance as of September 30, 2008 and 2007,
due to the uncertainty of future realization of the net deferred tax assets.
During the year ended September 30, 2008 and nine months ended September 30,
2007, the valuation allowance increased by $2,395,000 and $1,920,000,
respectively.





The
difference between the tax at the statutory federal tax rate and no tax
provision recorded by the Company for the year ended September 30, 2008 and nine
months ended September 30, 2007, is primarily due to the Company's full
valuation allowance against its deferred tax assets.





At
September 30, 2008, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $36,900,000 and research and
development credit carryforwards of approximately $916,000 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
12. 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 2009, at which time the customer will then have the
right to choose whether or not to continue further with Phase
II.





Note
13. Commitments and Contingencies





The
Company currently leases both its corporate headquarters and laboratory
facilities under a lease agreement expiring March 31, 2009. The Company is
negotiating with the landlord for lease extension. As of September 30,
2008, monthly minimum rental and related payments were approximately $12,200 per
month. Rental expense was approximately $163,300 and $133,940 for the year ended
September 30, 2008 and the nine months ended September 30, 2007,
respectively.





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





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 which has been recorded as expense and is included in accounts payable
on the Company’s consolidated balance sheet at September 30, 2008. No formal
legal action has been taken in this matter.


48


Note
14. Related Party Transactions





See
Note 6 regarding related party note agreements with the
Company.





During
the year ended September 30, 2008, the Company issued 250,000 shares of common
stock to David M. Barnes, formerly the Company's Chief Financial Officer, in
payment for services rendered. The shares were valued at
$10,000.





Note
15. Subsequent Events





Solcool One, LLC
Acquisition





On
November 26, 2008, the Company entered into an agreement and plan of merger (the
“Merger Agreement”) with SolCool, Neah Power Acquisition Corp., a wholly-owned
subsidiary of Neah Power (“Merger Sub”), and Mark Walsh, Manager and founder of
SolCool, pursuant to which the Merger Sub will be merged into SolCool (the
“Merger”).





Under the
terms of the Merger Agreement, Neah Power will issue $500,000 of Series B
Preferred Stock, or 100,000 shares of Series B preferred stock, which shares are
convertible two years after the date of the Merger Agreement into shares of Neah
Power common stock at a conversion price equal to the average of the closing bid
and asked prices of Buyer’s shares of common stock for four days prior to the
date of the Merger Agreement. The shares of Series B preferred stock will be
held in escrow to ensure payment of SolCool’s indemnification obligations under
the Merger Agreement. All of the stockholders of SolCool are accredited
investors as such term is defined in Rule 501 of the Securities Act of 1933, as
amended (the “Securities Act”), and the 100,000 shares of Neah Power Series B
preferred stock will be issued pursuant to the exemption from registration under
Rule 506 of Regulation D of the Securities Act.





The
Merger Agreement also provides that Neah Power will invest up to $500,000 in
SolCool to meet shipping commitments and cover operating costs, including
payments of salaries and other overhead items, of SolCool. In addition, prior to
completing the Merger five of SolCool’s principals and consultants must enter
into employment agreements with SolCool and SolCool must satisfy other customary
closing conditions relating to the delivery of closing certificates as to
representations and warranties and the delivery of any required consents or
government approvals.




On
February 5, 2009, we received notice of cancellation from SolCool pertaining to
the merger agreement due to a failure to fund the transaction in a timely
manner. On February 12, 2009, Solcool rescinded its notice of cancellation upon
payment by the Company of $9,000. The Company is continuing in its efforts
procure funding and to accomplish the merger.


Series A Preferred
Stock




As
discussed in Note 7, on June 27, 2008, the Company entered into a Series A
Preferred Stock Purchase Agreement pursuant to which the Company agreed to issue
a minimum of 7,500,000 shares of Series A Preferred Stock at a purchase price of
$0.04 per share, or a minimum of $300,000 in the aggregate. As of February 5,
2009, the Company has issued 23,532,600 Series A Preferred shares and received
proceeds net of financing costs of approximately $669,000 in the fourth quarter
of its fiscal year 2008 and $133,000 in the first quarter of its fiscal year
2009.





CAMHZN Master LDC Amendment
to Note Payable





On January 12, 2009, the Company
entered into an amended loan agreement with CAMHZN whereby, effective December
31, 2008, CAMHZN has agreed to forbear from exercising any remedies available
under its loan documents or applicable law for a period ending on March 29,
2009. In exchange for the forbearance, the Company agreed to pay a fee of
$567,000 which will be added to the principal balance of the loan and will be
payable in cash or stock at the Company’s discretion.


49





Securities Purchase
Agreement




On
February 12, 2009, the Company entered into a Securities Purchase Agreement with
Agile Opportunity Fund, LLC (“Agile”) and Capitoline Advisors Inc.
(“Capitoline”, and together with “Agile”, the “Investors”) under which the
Company received funds through the issuance of Original Issue Discount Term
Convertible Notes in two tranches, (i) the first tranche in the aggregate face
amount of $262,500 for an aggregate purchase price of $225,000 with a maturity
date of August 12, 2009 and prepaid interest at the rate of 18% per annum in the
amount of $23,625 (the “Initial Closing”) and (ii) at each Investor’s
discretion, on or before February 27, 2009, Original Issue Discount Term
Promissory Notes in the maximum aggregate face amounts of $787,500 for a maximum
aggregate purchase price of $675,000 each totaling $1,020,000 in the aggregate,
such Notes to mature on August 12, 2009 together with interest on the face
amount of the Notes at a rate equal to 18% to be paid in advance at the time of
purchase of the Notes (the “Subsequent Closing”). The Notes are convertible at a
conversion price of $0.10 per share, subject to standard adjustments. The Notes
are subject to mandatory redemption in the event the Company enters into a going
private transaction or the Company is sold. The Notes are secured by all assets
of the Company and upon conversion have certain piggyback registration rights.
The Notes are more fully described in the exhibits attached to this Form 10-KSB
which are incorporated herein by reference.
   50


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(T): Controls and Procedures




The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of September 30, 2008. The
term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions to be made regarding required
disclosure. It should be noted that any system of controls and procedures,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met and that
management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation,
our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our “disclosure controls and procedures” (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded that,
subject to the inherent limitations noted in this Part II, Item 8A, as of
September 30, 2008, our disclosure controls and procedures were not effective
due to the existence of material weaknesses in our internal control over
financial reporting, as discussed below.





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934). A company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the interim or annual
consolidated financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





The
management of Neah Power Systems, Inc. assessed the effectiveness of the
Company’s internal control over financial reporting as of September 30, 2008,
and this assessment identified the following material weaknesses in the
Company’s internal control over financial reporting.




·
              Inadequate
      or ineffective policies for documenting
  transactions;


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


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




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2008. In making the
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Because of the material weakness described in the
preceding paragraph, management believes that, as of September 30, 2008, the
Company’s internal control over financial reporting was not effective based on
those criteria.


51




The
Company has established several internal controls that management believes has
materially affected internal controls over financial reporting and intends to
design and implement further policies and procedures to remediate the material
weaknesses in the Company’s internal control over financial
reporting.





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




Changes
in internal control over financial reporting





During
the quarter ended September 30, 2008, our management and financial staff has
implemented several additive internal controls including the addition of a
full-time Chief Financial Officer, increased oversight and required approval by
management and senior financial personnel of financial transactions, the hiring
of additional accounting personnel, and the implementation of several basic
internal control processes. As of September 30, 2008 and for the period covered
by this Report, the implementation of these controls has materially affected,
and is reasonably likely to materially affect, in a positive manner, our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act).





Item
8B





None





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
                  
                  PositionJames H. Smith
                  
                  Chairman of the Board of DirectorsDr. Gerard C. D’Couto
                  
                  President and Chief Executive OfficerRobert J. McGovern
                  
                  DirectorJon M. Garfield
                  
                  DirectorMichael Solomon
                  
                  DirectorStephen M. Wilson
                  
                  Chief Financial Officer





James H.
Smith. Mr. Smith, 64, has served on our board of directors since May
2008.  He has over 40 years with publicly traded and privately-held
companies. Currently, he serves on the board of directors for Unisone Inc., a
patented software company, where he served as President and CEO from January
2002 to April 2004. He worked with private equity company Advent International
in 2004, served as President and CEO of Nexion from 2000 to 2001, Co-Founder and
COO of application solutions provider Decision Dynamix from 1996 to 2000, and
President of the world largest pharmaceutical wholesaler McKesson Corporation
from 1994 to 1996. From 1986 to 1994, Mr. Smith served as Executive Vice
President of Hamilton/Hallmark division of Avnet, Inc. (NYSE: AVT), the world’s
largest industrial electronic component distributor. From 2004 to the present,
Mr. Smith also advises small privately-held technology companies on management
issues, (DEVEK, a Porsche road racing company, TRIC tool an innovator of sewer
pipe replacement, and LifeSense a medical device company. In addition he has
also serves on the advisory board of PipeSpy and the boards of directors of
LifeSense and CakeBoxx a shipping container company. He received a B.A. in
economics from Michigan State University.





Dr. Gerard C.
(Chris) D’Couto. Dr. D’Couto, 42, has served as a member of our board of
directors since January 28, 2008 and as our Chief Executive Officer and
President since February 2008.  Until such time, he served as our
Chief Operating Officer and Executive Vice President since September 2007. Prior
to joining 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. 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.




Robert J.
McGovern. Mr. McGovern, 56, has served on our board of directors since
May 2008.  He has served as a top senior manager for several public
and private companies around the world.   He currently is a
Principal/General Manager of a sales focused consultancy and Sales
Force Automation product base company, The Cura Group, since April
2006.  From 1998 to 2005, Mr. McGovern served as President/COO of
Horton Automatics a global manufacturer of entrance and security systems. 
From 1996 to 1998, he led sales for manufacturer Besam USA, an Assa Abloy
(OMX: ASSA) group company. From 1988 to 1996, Mr. McGovern served in positions
of increasing responsibility at The Stanley Works (NYSE: SWK), including serving
as Chairman and President of one of its sales and manufacturing units in Europe
and Corporate Director of The Manufacturing and Technology Center.
 From 1979 to 1988, he served as Controller and then VP-Business
Development for National Hand Tool. Mr. McGovern received a BS from State
University of New York at Brockport, and an MBA in Finance from The Keller
Institute.


53


Jon M.
Garfield. Mr. Garfield, 45, has served on our board of directors since
May 2008.  He has served as Chief Executive Officer of technology
company Clearant, Inc. (OTCBB: CLRA) since January 2007 and as Chief Financial
Officer at Clearant since September 2006.  Mr. Garfield has served as
a member of its board of directors since May 2007.  From September
2001 through 2006, Mr. Garfield served as an independent financial consultant,
including advising as to SEC reporting obligations and Sarbanes-Oxley
compliance. From 1998 until 2001, he served as Chief Financial Officer of a
telecom service provider and a software developer. From 1996 to 1998, he served
as Vice President of Acquisitions for formerly NYSE-listed ground transportation
consolidator Coach USA, Inc. From 1991 to 1996, Mr. Garfield served as Corporate
Assistant Controller of Maxxim Medical, Inc., a formerly New York Stock Exchange
listed manufacturer and distributor. During 1986 to 1991, Mr. Garfield practiced
public accounting with Arthur Andersen and PricewaterhouseCoopers. Mr. Garfield
received a Bachelor of Business Administration in Accounting from University of
Texas, Austin.





Michael F.
Solomon.  Mr. Solomon, 56, has served on our board of
directors since March 2006. Since May of 2006, he has been a partner in the
law firm of Fenwick & West specializing in tax and corporate transactions.
Mr. Solomon was a partner at Ivins, Phillips & Barker from 1977 to 2001, at
PricewaterhouseCoopers, LLP from 2001 to 2003 and at Pillsbury Winthrop from
2003 to 2005.    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  has been an Adjunct Professor of Law at the Georgetown
University Law Center  and Boalt Hall.  Mr. Solomon is an
honors graduate of both Yale University (1974) and Harvard Law School
(1977).





Stephen M.
Wilson, CPA, CMA.  Mr. Wilson, 52, has served as our Chief
Financial Officer since July 2008 and Corporate Secretary and Controller since
June 2008.  From May 2007 until February 2008, he served as Chief
Financial Officer of Impart Media Group, Inc., a publicly-held digital signage
technology company.  From July 2006 until his promotion to Chief
Financial Officer of Impart, he served as its Vice President of
Finance/Corporate Controller. Impart Media Group, Inc. consented to bankruptcy
relief on May 21, 2008 following a petition for involuntary bankruptcy filed on
February 14, 2008 in the United States Bankruptcy Court for the Southern
District of New York. From 2004 to 2006, he served as Division Controller for
Rabanco Companies, a division of Allied Waste. From 2000 to 2004, Mr. Wilson was
owner and President of Strategic Finance & Accounting Services, Inc. He is a
licensed Certified Public Accountant and is also a Certified Management
Accountant and holds dual Bachelor of Arts degrees in Accounting and Business
Administration from Western Washington University.





FAMILY
RELATIONSHIPS




There are
no family relationships among any of our directors or executive
officers.




LEGAL
PROCEEDINGS




None.




SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who beneficially own more than 10% of our common stock
to file with the SEC initial reports of ownership and reports of changes in
ownership of our common stock. These insiders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file, including Forms 3,
4 and 5. Based solely upon our review of copies of such forms that we have
received, and other information available to us, to the best of our knowledge
all required forms have been filed on a timely basis.




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.


54


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: Jon M. Garfield, Michael F. Solomon
and Robert J. McGovern. The Audit Committee functions in part as an independent
and objective party with oversight of the Company’s financial reporting process
and internal controls. All members 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: James H. Smith and Robert J. McGovern. 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 and Employee Stock Purchase Plan.




NOMINATING
COMMITTEE OF THE BOARD OF DIRECTORS




We have a
nominating committee of the Board of Directors. The Nominating Committee
consists of: James H. Smith 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.




INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




The firm
of Peterson Sullivan LLP has been appointed to serve as our independent
registered public accounting firm for the 2009 fiscal year unless the Audit
Committee deems it advisable to make a substitution.




55





Item
10: Executive Compensation




The
following table sets forth the total compensation received by the named
executive officer during the fiscal year ended September 30, 2008 and the
transition period (nine months) ended September 30, 2007:




Summary
Compensation Table





Name and Principal Position
                              
                              Year
                              
                              Salary
                                ($)
                              
                              Bonus
                                ($)
                              
                              Stock
                                Awards
                                ($)
                              
                              Option
                                Awards
                                ($)
                              
                              Non-Equity
                                Incentive Plan
                                Compensation
                                ($)
                              
                              Non-qualified
                                Deferred
                                Compensation
                                Earnings
                                ($)
                              
                              All Other
                                Compensation
                                ($)
                              
                              Total ($)Gerard
      C. ("Chris") D'Couto
                              
                              2008
                              
                              $
                              210,073
                              
                              —
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              —
                              
                              13,934
                              
                              $
                              224,007President
      & CEO
                              
                              2007
                              
                              
                              8,654
                              
                              —
                              
                              —
                              
                              $
                              549,739
                              
                              —
                              
                              
                              —
                              
                              —
                              
                              
                              558,393Paul
      Abramowitz
                              
                              2008
                              
                              $
                              377,462
                              
                              —
                              
                              —
                              
                              $
                              
                              
                              —
                              
                              
                              —
                              
                              
                              
                              $
                              377,462President
      & CEO
                              
                              2007
                              
                              
                              206,250
                              
                              —
                              
                              —
                              
                              
                              75,535
                              
                              —
                              
                              
                              —
                              
                              
                              
                              
                              281,785Arthur
      Homa
                              
                              2008
                              
                              $
                              172,656
                              
                              —
                              
                              —
                              
                              $
                              
                              
                              —
                              
                              
                              —
                              
                              —
                              
                              $
                              172,656VP
      Engineering
                              
                              2007
                              
                              $
                              155,060
                              
                              —
                              
                              —
                              
                              
                              26,465
                              
                              —
                              
                              
                              —
                              
                              
                              
                              $
                              181,525





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




Dr. Gerard C. (Chris) D'Couto:Under the terms of the Offer Letter entered into between Dr. Gerard C.
(Chris) D’Couto and us when he joined us as Chief Operating Officer, he receives
a per annum base salary of $225,000, 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.




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, 2008:


56


Outstanding
Equity Awards at Fiscal Year-End





Option Awards
                            
                            Stock AwardsName      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
                              (#)Dr.
      Gerard C. (Chris)
                              D'Couto
                            
                            
                            2,250,000
                            
                            
                            
                            
                            
                            $
                            0.25
                            
                            Sep. 2017Arthur
      Homa
                              VP
      Engineering
                            
                            
                            450,000
                            
                            
                            
                            
                            
                            $
                            0.20
                            
                            Mar 2016
                            
                            
                            —
                            
                            —
                            
                            
                            —
                            
                            —Arthur
      Homa
                            
                            
                            20,000
                            
                            40,000
                            
                            
                            
                            $
                            0.45
                            
                            May 2017Leroy
      Ohlson
                              CTO
                            
                            
                            425,000
                            
                            
                            
                            
                            
                            $
                            0.20
                            
                            Mar 2016
                            
                            
                            —
                            
                            —
                            
                            
                            —
                            
                            —Leroy
      Ohlson
                            
                            
                            45,000
                            
                            
                            
                            
                            
                            $
                            0.45
                            
                            May 2017Leroy
      Ohlson
                            
                            
                            23,333
                            
                            16,117
                            
                            
                            
                            $
                            0.45
                            
                            May 2017





Compensation
of Directors




Our
directors are compensated with stock options from time to time under our Long
Term Incentive Compensation Plan. There were no stock options awarded as
compensation to directors in the year ended September 30, 2008.




Stock
Option Plan and Stock Options




In August
2008, we amended our Long Term Incentive Compensation Plan (the “Plan”) first
adopted in March 2006. The amendment increased the total number of shares
available for issuance under the Incentive Plan from 10,000,000 shares of Common
Stock to twenty-five million 25,000,000 shares of Common Stock, an amount equal
to approximately 5% of the total number of the Company’s authorized shares of
Common Stock as of the date the amendment was approved by our shareholders. As
of September 30, 2008, there were no new stock options issued under the amended
Plan.





The Plan 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 Plan is to continue for a term of ten
years from the date of its adoption. The Plan seeks to promote the long-term
success of our company and our subsidiaries and to provide financial incentives
to employees, members of the Board and advisors and consultants of our company
and our subsidiaries to strive for long-term creation of stockholder value by
providing them stock options and other stock and cash
incentive.





The
Compensation Committee that is currently comprised of two members of our Board
of Directors, Messrs. James Smith and Robert McGovern administers the Plan. The
Compensation Committee has the authority to make awards, construe and interpret
the Plan and any awards granted thereunder, to establish and amend rules for
Plan administration, to change the terms and conditions of options and other
awards at or after grant, and to make all other determinations which it deems
necessary or advisable for the administration of the Plan.




The
maximum number of shares of our stock that may be issued under the Plan, as
amended, for awards other than cash awards is 25,000,000 shares. To date, the
Committee has awarded stock options for 7,753,158 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 Plan, the maximum number of shares which may be made subject
to an award or all awards in any calendar year, and the number of shares covered
by each outstanding award and the price therefor, if any, may be equitably
adjusted by the Committee, in its sole discretion.


57




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





Employee
Stock Purchase Plan





In August
2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”).
The amount of shares of Common Stock that may be sold pursuant to the Stock
Purchase Plan shall not exceed, in the aggregate, thirty million (30,000,000)
shares of Common Stock, an amount equal to approximately 5% of the total number
of the our authorized shares of Common Stock the date the plan was approved by
the shareholders. As of September 30, 2008, no shares have been purchased under
the Stock Purchase Plan





Item
11: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


Set forth below is certain
information as of February 5, 2009 with respect to each person or group who is
known to us, in reliance on Schedules 13D and 13G reporting beneficial ownership
and filed with the Securities and Exchange Commission (the “SEC”), to
beneficially own more than 5% of our outstanding shares of Common Stock. Except
as otherwise noted below, all shares of Common Stock are owned beneficially by
the individual or group listed with sole voting and/or investment
power.





Name and Address of Beneficial Owner(1)
                                                
                                                Amount
                                                  Beneficial
                                                  Ownership
                                                
                                                Class of
                                                  Beneficial
                                                  Ownership
                                                
                                                Percent
                                                  of
                                                  ClassSummit Trading Limited
                                                  Charlotte House, P.O. Box N-65
                                                  Charlotte Street
                                                  Nassau, Bahamas(2)
                                                
                                                68,616,667
                                                
                                                Common
                                                  Stock
                                                
                                                
                                                31.1
                                                %Summit
      Trading Limited
                                                  Charlotte
      House, P.O. Box N-65
                                                  Charlotte
      Street
                                                  Nassau,
      Bahamas(2)
                                                
                                                1,250,000
                                                
                                                Series
      A
                                                  Preferred
                                                  Stock
                                                
                                                
                                                6.2
                                                %Paul
      Abramowitz
                                                  16659
      Ashley Oaks
                                                  Encino,
      CA  91436
                                                
                                                14,270,745
                                                
                                                Common
                                                  Stock
                                                
                                                
                                                6.5
                                                %





(1)
              Unless
      otherwise indicated, we believe that all persons named in the table have
      sole voting and investment power with respect to all shares of our common
      stock beneficially owned by them. A person is deemed to be the beneficial
      owner of securities which may be acquired by such person within 60 days
      from the date on which beneficial ownership is to be determined, upon the
      exercise of options, warrants or convertible securities. Each beneficial
      owner’s percentage ownership is determined by assuming that options,
      warrants and convertible securities that are held by such person (but not
      those held by any other person) and which are exercisable, convertible or
      exchangeable within such 60 day period, have been so exercised, converted
      or exchanged.
 
 (2)
              Summit
      Trading Limited (“Summit”) is a Bahamian holding company and is owned by
      the Weast Family Trust. The Weast Family Trust is a private trust
      established for the benefit of C.S. Arnold, Daisy Rodriguez, Stephanie
      Kaye and Tracia Fields. C.S. Arnold is the settlor of the Weast Family
      Trust. The natural person exercising voting control of the shares of our
      common stock held by Summit is Richard
Fixaris.




58


SECURITY
OWNERSHIP OF MANAGEMENT




Set forth
below is certain information as of February 5, 2009 for (i) the members of and
nominees for the Board of Directors, (ii) our executive officers, and (iii) our
directors and executive officers as a group. No shares identified below are
subject to a pledge.





Name and Address of Beneficial Owner(1)
                      
                      Amount and
                        Nature of
                        Beneficial
                        Ownership
                      
                      Percent of
                        ClassDr.
      Gerard C. D’Couto, President, Chief Executive Officer, Director(2)
                      
                      
                      2,250,000
                      
                      1.0
                      %Michael
      Solomon, Director(3)
                      
                      
                      1,278,125
                      
                      *Leroy
      Ohlsen, Former Director(4)
                      
                      
                      1,557,467
                      
                      *Robert
      J. McGovern, Director
                      
                      
                      0
                      
                      *Stephen
      M. Wilson, Chief Financial Officer(5)
                      
                      
                      400,000
                      
                      *James
      H. Smith, Director
                      
                      
                      0
                      
                      *Jon
      M. Garfield, Director
                      
                      
                      0
                      
                      *All
      Directors and Officers as a Group (8 individuals)
                      
                      
                      5,485,592
                      
                      4.1
                      %




*
              Less
      than one percent.





(1)
              Unless
      otherwise indicated, we believe that all persons named in the table have
      sole voting and investment power with respect to all shares of our common
      stock beneficially owned by them. A person is deemed to be the beneficial
      owner of securities which may be acquired by such person within 60 days
      from the date on which beneficial ownership is to be determined, upon the
      exercise of options, warrants or convertible securities. Each beneficial
      owner’s percentage ownership is determined by assuming that options,
      warrants and convertible securities that are held by such person (but not
      those held by any other person) and which are exercisable, convertible or
      exchangeable within such 60 day period, have been so exercised, converted
      or exchanged. Unless otherwise indicated, the address of all of the above
      named persons is c/o Neah Power Systems, Inc., 22118 20th Avenue SE, Suite
      142, Bothell, Washington 98201.
 
 (2)
              Consists
      of 2,250,000 shares of common stock underlying options which vest over one
      year beginning on September 17,
2007.
 
 (3)
              Includes
      883,125 shares owned directly by Mr. Solomon and 395,000 shares of our
      common stock underlying options issued as director’s compensation
      exercisable at $0.20 per share.
 
 (4)
              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.
 
 (5)
              Consists
      of 400,000 shares of our common stock underlying
  options.




59


Item
12: Certain Relationships and Related Transactions; Director
Independence




Transactions
with Related Persons




On August
29, 2008, the Company entered into a note agreement with President and Chief
Executive Officer, Dr. Gerard C. D’Couto. Under the agreement, as amended, the
Company borrowed $30,000 with interest at 10% compounded monthly and a maturity
date of March 29, 2009. The principal balance is recorded in the notes payable
section of the Company’s consolidated balance sheet.




In
September 2008, the Company entered into a note agreement with Summit. Under the
agreement, the Company borrowed $15,000 at no interest with a maturity date of
October 2, 2008. The principal balance is included in notes payable, related
parties on the Company’s consolidated balance sheet at September 30,
2008.





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. Smith,
McGovern, Garfield and Solomon qualify as independent
directors.


60


Item
13: Exhibits





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




10.11
            
            Option
      Agreement issued to Dr. John Drewery (2)10.12
            
            Stock
      Option Plan (2)




10.13
              
              Form
      of Stock Option Agreement (2)10.14
              
              Development
      Agreement by and between Neah Power Washington and Thales Communications,
      Inc. dated December 19, 2003 (3)




61





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)






62




10.33
              
              Repayment
      Issuance Letter dated November 28, 2007, to CAMHZN Master LDC (10)10.34
              
              Securities
      Purchase Agreement dated February 12, 2009 among Neah Power Systems, Inc.,
      Agile Opportunity Fund, LLC and Capitoline Advisors
Inc.10.35
              
              Form
      of Initial Original Issue Discount Term Promissory Note issued by Neah
      Power10.36
              
              Security
      Agreement dated February 12, 2009 among Neah Power Systems, Inc., Agile
      Opportunity Fund, LLC and Capitoline Investors Inc.10.37
              
              Form
      of Patent Security Agreement dated February 12, 2009 among Neah Power
      Systems, Inc., Agile Opportunity Fund, LLC and Capitoline Advisors
      Inc.14.1
              
              Code
      of Ethics(5)21.1
              
              Subsidiaries
      of the Registrant (2)31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 per Section
      906 of the Sarbanes-Oxley Act of 200232.2
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 per Section
      906 of the Sarbanes-Oxley Act of
2002


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




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




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




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




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




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




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




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




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




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


63




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 LLP for the audit of our annual
financial statements during the periods year ended September 31, 2008 and the 9
months ended September 31, 2007, and all fees billed for other services by
Peterson Sullivan LLP during those periods:





2008
                  
                  
                  2007Audit
      Fees (1)
                  
                  $
                  74,246
                  
                  
                  $
                  57,104Audit
      Related Fees (1)
                  
                  $
                  60,076
                  
                  
                  
                  98,781Tax
      Fees (2)
                  
                  $
                  
                  
                  
                  $
                  710All
      other Fees (3)
                  
                  $
                  22,049
                  
                  
                  
                  —Total
      Accounting Fees and Services
                  
                  $
                  156,370
                  
                  
                  $
                  156,595





(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 LLP for the periods ended September 30, 2008 and September 30,
2007 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.


64


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: February 13, 2009
            NEAH POWER SYSTEMS, INC.By:
            /s/ GERARD C. D’OUTOGerard C. D’Couto
              President and Chief Executive Officer





In
accordance with the Securities and Exchange Act of 1934, this Form 10-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/ GERARD C. D’COUTO
                              
                              President and Chief Executive Officer
                              
                              February 13, 2009Gerard C. D’Douto
                              
                              (Principal Executive Officer)/s/ STEPHEN M. WILSON
                              
                              Chief Financial Officer
                              
                              February 13, 2009Stephen M. Wilson
                              
                              (Principal Financial and Accounting Officer)/s/ JAMES H. SMITH
                              
                              Executive Chairman
                              
                              February 13, 2009James H. Smith/s/ JON M. GARFIELD
                              
                              Director
                              
                              February 13, 2009Jon M. Garfield/s/ MICHAEL SOLOMON
                              
                              Director
                              
                              February 13, 2009Michael Solomon/s/ ROBERT J. MCGOVERN
                              
                              Director
                              
                              February 13, 2009Robert J. McGovern




65