**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **Form
        10-KSB**
 
 (Mark
        One)
 
 x
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
  For
        the
        fiscal year ended **December
        31, 2006**
   ̈
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
  For
        the
        transition period from ____________ to _______________
 
 Commission
        file number  **005-78871**
  **NEAH
        POWER SYSTEMS, INC.**
 (Name
        of
        small business issuer in its charter)
 
 Nevada
              
              88-0418806(State
                  or other jurisdiction of incorporation or organization
              
              (I.R.S.
                  Employer Identification No.)22122
                  20th Ave SE, Suite 161
              
              Bothell,
                  Washington 98021(Address
                  of principal executive offices)
              
              (City,
                  State and Zip Code)
 
 Issuer’s
        telephone number  ( **425** ) **424-3324**
 
 Securities
        registered under Section 12(b) of the Exchange Act: **None.**
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 
 **Common
        stock, $0.001 par value per share**
 (Title
        of
        class)
 
 Check
        whether 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  ̈
 
 **Persons
        who are to respond to the collection of information contained in this form
        are
        not required to respond unless the form displays a currently valid OMB control
        number.**
 
 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. x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes  ̈   No x
  State
        issuer’s revenues for its most recent fiscal year. **None.**
  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. (See definition of affiliate in Rule
        12b-2 of the Exchange Act.) **$** 30,037,921.
        The aggregate market value was determined by multiplying the approximate
        number
        of shares of common stock (27,812,890) held by non-affiliates by the closing
        price of such stock ($1.08) as of March 14, 2007.
  Note:
        If
        determining whether a person is an affiliate will involve an unreasonable
        effort
        and expense, the issuer may calculate the aggregate market value of the common
        equity held by non-affiliates on the basis of reasonable assumptions, if
        the
        assumptions are stated.
  **(ISSUERS
        INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
        YEARS)**
  Check
        whether the issuer has filed all documents and reports required to be filed
        by
        Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
        under a plan confirmed by a court.  Yes  ̈   No  ̈
  **(APPLICABLE
        ONLY TO CORPORATE REGISTRANTS)**
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date. **103,162,431
        shares of common stock outstanding as of March 14, 2007**
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  If
        the
        following documents are incorporated by reference, briefly describe them
        and
        identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
        the document is incorporated: (1) any annual report to security holders;
        (2) any
        proxy or information statement; and (3) any prospectus filed pursuant to
        Rule
        424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed
        documents should be clearly described for identification purposes (e.g.,
        annual
        report to security holders for fiscal year
        ended December 24, 1990 ).
  Transitional
        Small Business Disclosure Format (Check one):  Yes  ̈   No x
  
  **Explanatory
        Note**
 
 As
        used
        herein, (a) except for share and per share data, 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
        annual statement, including the sections entitled “Business,” “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations” 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” above, 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.
  2
  **PART
        I**
  **Item
        1:**  **Description
        of Business**
  **Overview**
  Through
        our wholly-owned subsidiary, Neah Power Washington, we have developed what
        we
        believe is a potential breakthrough in the development of a direct methanol
        micro fuel cell, that can serve as a replacement for batteries in a variety
        of
        mobile products.
  Fuel
        cells are devices that combine a fuel, such as methanol, with an oxidant,
        such
        as oxygen gas, in a chemical reaction to produce electricity. Much like the
        engine in a car, a fuel cell can generate electricity continuously as long
        as
        fuel and oxygen are supplied to the reactor. Like a car, fuel cells can be
        “refueled” instantly by simply maintaining the fuel supply with small,
        replaceable fuel cartridges. Since fuel cells can be “recharged” instantly,
        end-users of mobile products powered by fuel cells can achieve long runtime
        by
        carrying spare fuel cartridges, not extra batteries and chargers. Also, because
        spare fuel cartridges can be smaller, lighter and less costly than extra
        batteries, convenience of use can be dramatically improved.
  Using
        our
        patented technology based on porous silicon, we are developing this technology
        to produce our proprietary fuel cell for portable electronic devices to replace
        batteries that typically operate in the 10-100 watt range. These electronic
        devices are most commonly served by lithium-ion battery based power
        packs.
  To
        date,
        we have achieved stable, high power operation of our silicon-based chemical
        reactor (also referred to as the “stack”), but have not as yet assembled a
        working prototype with all auxiliary subsystem components. While we expect
        to
        have completed a working prototype by the first half of 2007, we cannot assure
        you that we will in fact be able to do so.
  We
        intend
        to develop prototype devices that can be evaluated by OEM’s for the development
        of final fuel cell products that either we or potential licensees of ours
        will
        use to manufacture final products for sale to our partners, distributors,
        or OEM
        customers. We also intend to design and distribute the fuel cartridge that
        our
        fuel cells require for refueling. We expect to generate revenues from both
        the
        sale and licensing of both fuel cartridges and the completed fuel cells.
        Our
        current business plan contemplates that we will subcontract to third parties
        substantially all of the production and assembly of these fuel cartridges.
        However, we may elect to produce the fuel cells through subcontractors and
        distribute it ourselves, or we may opt to both manufacture and distribute
        the
        fuel cells ourselves. What decision we ultimately make will depend upon our
        capital resources and production costs to be incurred, and cannot be predicted
        at this time.
  In
        order
        to complete development of our fuel cell, we must achieve the following
        goals:
  · Resolve
        certain issues of contamination of the electrolytes which can lead to degraded
        performance of the fuel cell unit and therefore reduce its power
        capability;
  · In order
        to meet specifications suitable for a military fuel cell, increase by
        approximately 400% the volumetric power density over the power density currently
        available in our fuel cells - this power increase is believed to be achievable
        based on experimental data and modeling, but has not yet been demonstrated
        in an
        operating fuel cell;
  · Complete
        development of manufacturing techniques for fuel cell and fuel cartridge
        assembly, allowing the unit to meet relevant specifications (such as those
        of
        the Underwriters’ Laboratories) that are required by many
        customers;
  · Further
        develop manufacturing techniques for key components of the fuel cells and
        locate
        suitable manufacturing partners or subcontractors; and
  · Reduce
        the gold and platinum precious metal content of the fuel cells from present
        levels according to a staged program in order to meet our production cost
        objectives.
  3
 
 **Business
        Development**
  **A.
        Growth Mergers, Inc.**
  Neah
        Power Systems, Inc. was incorporated in the State of Nevada on February 1,
        2001
        under the name Growth Mergers, Inc. Effective March 9, 2006, Growth Mergers,
        Inc. entered into an Agreement and Plan of Merger, as amended on April 10,
        2006.
        Pursuant to such merger agreement, 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. We may seek to list
        our
        shares on a national securities association or exchange, such as the Nasdaq
        Stock Market or the American Stock Exchange. There is no assurance that we
        will
        qualify for quotation on a national securities association or
        exchange.
  Prior
        to
        the merger Growth Mergers, Inc. was a shell company and had engaged in no
        substantive business operations since 2003. In May 2005, a shareholder of
        the
        shell company brought an action in Nevada Superior Court seeking the appointment
        of a custodian for the purpose of reinstating the corporate charter, locating
        the financial records in order to file tax returns and an information statement
        to permit it to resume its status of good standing and to otherwise restore
        the
        business and prospects of Growth Mergers, Inc. for the benefit of its
        shareholders. On June 14, 2005, the custodian was appointed. In August 2005,
        the
        custodian finished its report on the winding up and filed a Report of Custodian
        and Request for Discharge in which it affirmed that it had fulfilled its
        duties
        as custodian under the Nevada Revised Statutes and requested that it be
        discharged as such. In October 2005, this process was complete and the Second
        Judicial District Court of the State of Nevada issued an Order Approving
        Report
        and Discharge of Custodian. As a result, the custodian was appointed the
        sole
        director, President and Secretary, the corporation was restored to good standing
        with a newly appointed agent for service of process and the custodian appointed
        an accounting firm to compile financial statements for 2004 and 2005 to reflect
        no assets, no liabilities and no income or expenses (a subsequently performed
        audit of the financial statements uncovered $49,000 in liabilities to certain
        persons, as discussed below). No record was found involving any liens,
        judgments, warrants, options or other claims against the corporation or its
        stock. This process enabled the then principal stockholders to use the entity
        for other purposes, such as the transaction that ultimately resulted with
        Neah
        Power Washington. Although approved by the Nevada District Court, the effect
        of
        the custodian’s report was not the legal equivalent of a debtor being discharged
        from its obligations in a bankruptcy proceeding.
  Prior
        to
        its acquisition of Neah Power Washington, Growth Mergers, Inc. effected a
        1:100
        reverse split of its 24,077,150 then outstanding shares of common stock,
        and
        entities controlled by David Moore, Peter Cangany, John Otto and David Otto,
        the
        holders of approximately $49,000 of Growth Mergers, Inc.’s then outstanding
        debt, converted such debt into 5,000,000 shares of common stock. Growth Mergers,
        Inc. then effected a 2:1 forward stock split, as a result of which an aggregate
        of 10,481,543 shares of Growth Mergers, Inc. common stock was issued and
        outstanding immediately prior to the acquisition of Neah Power Washington.
        The
        stock splits were effected for the purpose of arriving at a specified capital
        structure for Growth Mergers, Inc. which was the result of negotiations among
        the above-referenced principal stockholders of Growth Mergers, Inc. and
        affiliates of Special Investments Acquisitions Associates, LLC and Summit
        Trading Ltd. Such stock splits were consummated to effect such desired capital
        structure of Growth Mergers, Inc. immediately prior to its acquisition of
        Neah
        Power Washington and were instrumental in inducing the Growth Mergers, Inc.
        principal stockholders to contribute $500,000 to the capital of our company
        as
        working capital for Neah Power Washington. Prior to the merger, Neah Power
        Washington had exhausted all its working capital and furloughed substantially
        all of its employees and was in default in payment of rent under its lease.
        The
        $500,000 was urgently needed to bring the employees back to work prior to
        them
        finding alternative employment, to pay rent and to provide the necessary
        working
        capital for the immediate future while additional financing was being sought.
        Such $500,000 capital contribution was a condition to consummation of our
        acquisition of Neah Power Washington.
  All
        share
        and per share amounts contained in this annual report reflect the reverse
        and
        forward stock splits referred to above.
  4
  **B.
        Terms of the Merger**
  Each
        of
        the 7,990,457 shares of common stock of Neah Power Washington outstanding
        was
        converted into the right to receive 3.2793941 shares of common stock of Growth
        Mergers, Inc. Pursuant to the merger agreement, Growth Mergers, Inc. issued
        26,203,858 shares of its common stock to the former shareholders of Neah
        Power
        Washington. In addition, Growth Mergers, Inc. provided for $500,000 of much
        needed capital for Neah Power Washington.
 
 On
        March
        9, 2006, Growth Mergers, Inc. sold for nominal consideration ($6,500 or $0.001
        per share) to Special Investments Acquisitions Associates, LLC and Summit
        Trading Ltd. a total of 6,500,000 shares of our Series A Preferred Stock
        that
        were convertible into a maximum of 68,130,030 shares of our common stock
        (for a
        common per share purchase price of approximately $0.0001065), less the sum
        of
        (a) 5,502,000 shares of our common stock that were or are issuable to other
        former Neah Power Washington security holders upon conversion of our 8% notes
        or
        exercise of certain warrants, and (b) all shares issued in connection with
        any
        one or more offerings of equity or equity type securities providing our company
        with aggregate initial gross proceeds of $1,500,000, resulting in a net of
        62,628,030 shares. The 5,502,000 shares consist of 2,502,000 shares that
        were
        issuable on conversion of shareholder loans (at a conversion price of $0.20
        per
        share) and 3,000,000 shares contributed as part of our private
        placement.
  As
        indicated above, the holders of our Series A Preferred Stock were instrumental
        in negotiating and arranging for the merger transaction with Neah Power
        Washington. Paul Abramowitz, our Vice Chairman, Chief Executive Officer and
        President, is the principal owner of Special Investments Acquisition LLC,
        and
        also beneficially owned through an affiliate approximately 0.4% of the capital
        stock of Neah Power Washington prior to the merger. On an as-converted basis,
        the purchasers of the Series A Preferred Stock paid nominal consideration
        of
        $6,500, or approximately $0.0001065 per share of underlying common stock.
        This
        nominal purchase price, the number of shares issued and the terms of the
        Series
        A Preferred Stock were based upon negotiations between the board of directors
        of
        Neah Power Washington and representatives of the significant shareholders
        of
        Neah Power Washington (principally, Castile Ventures, Frazier Technology
        Ventures I, L.P. and Alta California Partners III, L.P.), on the one hand,
        and
        the Series A Preferred Stock purchasers, on the other hand. The number of
        shares
        of Series A Preferred Stock and the nominal price thereof was determined
        as
        consideration for the Series A Preferred Stock purchasers’ role in identifying
        Growth Mergers, Inc., negotiating and facilitating the merger and for securing
        the then critically needed short-term funding for Neah Power Washington.
        The
        consideration represented by the Series A Preferred Stock consisted of a
        controlling interest in our company following the merger. Paul Abramowitz
        led
        the negotiations on behalf of SIAA and Summit Trading, the purchasers of
        the
        Series A Preferred Stock. Mr. Abramowitz consulted with and kept Summit Trading
        and its affiliates Richard Fixaris and C.S. Arnold (the settlor of the Weast
        Family Trust, the sole equity owner of Summit Trading) informed of the progress
        of the negotiations throughout the process.
  At
        the
        time of such negotiations, Neah Power Washington urgently needed immediate
        funding from third party sources as its existing investors were subject to
        certain restrictions on investing additional funds, consisting of limits
        on the
        amount of capital Frazier, the largest investor in Neah Power Washington,
        could
        invest in any one transaction. Additionally, Neah Power Washington management
        strongly believed that it needed to become part of a public company through
        the
        merger in order to obtain such immediate funding and attract additional
        financing as needed.
  In
        connection with the merger, in March 2006, Alta California Partners III,
        L.P.,
        Alta Embarcadero Partners III, LLC, Castile Ventures II-A, L.P., Castile
        Ventures II-B, L.P., Frazier Technology Ventures I, L.P. and Friends of Frazier
        Technology Ventures I, L.P., each of which were Neah Power Washington security
        holders, exchanged an aggregate of $142,400 of Neah Power Washington notes
        for
        our convertible notes and lent an additional $358,000 to Neah Power Washington.
        In consideration for such additional loans, we exchanged all Neah Power
        Washington notes for our 8% $500,400 convertible notes due June 30, 2007.
        Such
        8% notes were convertible at $0.20 per share and included five year warrants
        entitling the note holders to purchase an additional 3,753,000 shares of
        our
        common stock at an exercise price of $0.20 per share. By their terms, all
        of the
        $500,400 of convertible notes automatically converted into shares of our
        common
        stock at such time as we received gross proceeds of $1,500,000 or more (in
        addition to the $500,000 provided at closing of the merger by Growth Mergers)
        from any additional debt or equity financing. Dr. Daniel Rosen, the chairman
        of
        the board of directors of our company and a director of Neah Power Washington,
        was at the time of the merger affiliated with Frazier Technology Ventures
        I
        L.P., and Roger Walton, a director of our company and a director of Neah
        Power
        Washington at the time, was at the time of the merger and continues to be
        affiliated with Castile Ventures II-A, L.P. and Castile Ventures II-B, L.P.
        The
        $358,000 of additional loans and the terms of the consolidated 8% convertible
        notes aggregating $500,400 were negotiated by Messrs. Rosen and Walton on
        behalf
        of Frazier and Castile, respectively, and Paul Abramowitz on behalf of our
        company. In view of their representation on the Neah Power Washington board
        of
        directors and their continuing participation on our board of directors after
        the
        merger, principals of each of Frazier, Castile and Alta, other than Dr. Rosen
        and Mr. Walton, approved the final terms of these transactions.
  5
 
 As
        described elsewhere in this annual statement, in April 2006, we sold an
        aggregate of 4,600,000 shares of our common stock at $0.50 per share to nine
        investors in a private placement. As a result, all $500,400 of our 8% notes
        were
        converted into 2,502,000 shares of our common stock. In addition, all 6,500,000
        shares of Series A Preferred Stock issued in March 2006 to Special Investments
        Acquisitions Associates, LLC (“SIAA”) and Summit Trading Ltd. (“Summit”) were,
        by their stated terms, converted into an aggregate of 62,628,030 shares of
        our
        common stock, of which 3,753,000 shares were returned to us effective as
        of
        April 27, 2006 and are held as treasury shares for issuance upon exercise
        of
        warrants issued to the former holders of our 8% notes. Consequently, the
        status
        of these shares is that they are issued but no longer outstanding. The remaining
        58,875,030 shares originally issued to SIAA and Summit are not affected thereby
        and remain issued and outstanding.
  While
        all
        of the outstanding warrants to purchase common stock of Neah Power Washington
        were “out of the money” as of the date of the merger agreement, the holders of
        our Series A preferred stock agreed to escrow up to 225,000 shares of their
        common stock for issuance to any holder of such Neah Power Washington warrants
        that had not expired or been terminated.
  As
        described elsewhere in this annual report, in December 2006, we entered into
        Bridge Loan Agreements and issued 6% Secured Promissory Notes due May 26,
        2007
        to six accredited institutional investors in exchange for gross proceeds
        of
        $1,550,000. In connection with such financing, we issued the buyers of the
        notes
        an aggregate of 500,000 shares of common stock. We also issued to Palladium
        Capital Advisors, LLC, the distributor, a five year warrant to purchase up
        to
        81,579 additional shares of our common stock at $1.33 per share.
  **The
        Opportunity**
  The
        worldwide proliferation of portable electronic devices, including notebook
        and
        tablet computers, camcorders, digital cameras and military equipment has
        created
        a large and growing demand for energy storage systems that are compact,
        lightweight and powerful and a large market for small, high performance
        batteries.
  **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.
  As
        technology advances are made for a wide variety of portable electronic devices,
        a key gating issue is meeting demands for greater power. Power-hungry features
        include WiFi (802.11 wireless), WiMax (802.16 wireless), high-speed WAN
        networking (e.g. EVDO), DVD players, better sound, better graphics, realistic
        games, etc.
  The
        growth of this power gap can be clearly seen in currently available rechargeable
        batteries. As an example, in recent years, computer notebook makers have
        introduced products with larger, more vivid color displays, faster processors,
        larger hard drives, DVD drives and burners, as well as multimedia and wireless
        networking capabilities. Each of these features requires additional power,
        and
        taken together, can be a significant drain on the PC’s limited battery capacity.
        Even simply watching a two hour movie on a laptop often requires a total
        recharge of the battery. Thus, battery life has become a key component in
        the
        consumer’s purchase decision. We believe that the direct methanol, micro fuel
        cell is one of the most promising technologies that can bridge the power
        gap and
        provide portable products with a significant increase in runtime and greater
        convenience of use.
  6
  We
        believe that the limited energy storage of existing battery technologies
        is
        widely recognized to be among the most important challenges facing the portable
        electronics industry.
  We
        also
        believe that our direct methanol micro fuel cell technology has direct
        commercial applications in portable laptop computers. Laptops now constitute
        over half of all computers sold. We believe that our technology may ultimately
        be capable of replacing the lithium-ion batteries currently used by computer
        manufacturers world-wide.
  Many
        other portable electronic devices would also benefit from our fuel cell
        technology. For example, modern game consoles with realistic graphics and
        sound
        require a great deal of power and could be a market for our fuel cells, as
        could
        a variety of digital cameras and camcorders. Virtually any power hungry portable
        consumer device that currently uses a rechargeable or disposable battery
        is a
        candidate for our fuel cells in the long term.
  **The
        Military Need**
  We
        believe that the military has a particularly acute need for better battery
        solutions. As batteries reach the end of their useful life and power limits
        the
        need for an alternative portable power source is clear.
  **Limited
        Development Potentials Of Conventional Battery
        Technologies**
  Lithium-ion
        is the dominant technology for powering today’s notebook and tabletop PCs, and
        other mobile devices. Introduced in the early 1990s, many experts believe
        the
        technology has become mature. While new electrode materials under development
        have the potential to increase battery energy density by as much as 25% over
        the
        next two to three years, many industry experts believe that the energy demand
        from new features will outpace this growth and that the power gap will continue
        to worsen.
  **The
        Opportunity For Fuel Cells**
  Fuel
        cells are one of the most promising technologies for bridging the “power gap”
described above because they provide much longer runtimes and can be refueled
        indefinitely with small, inexpensive fuel cartridges. Management of our company
        believes that a cost-competitive fuel cell system could ultimately be the
        power
        supply of choice for a broad range of portable consumer devices such as notebook
        computers, media players, cell phones, game consoles and their successors.
        Management of our company also believes that fuel cells will be the power
        source
        of choice for many military, homeland security, emergency service and commercial
        duty uses such as tactical radios, remote sensors, specialized computers
        and
        professional video equipment. The availability of small fuel cells is also
        expected to stimulate the development of completely new categories of
        devices.
  **The
        Fuel Cell Market**
  Fuel
        cells can be categorized by the market applications they potentially serve
        and
        by their power output. We are focused on providing an alternative to
        conventional batteries for portable electronic devices that typically operate
        in
        the 10-100 watt range. Examples of end applications we are targeting include
        notebook computers, media players, game consoles, tactical radios for military
        and homeland security, remote sensors and video equipment.
  Other
        segments of the fuel cell market include low power systems (less than 10
        watts)
        for low power devices and trickle chargers, and higher power systems (greater
        than 100 watt) typically aimed at stationary power generation or vehicle
        power
        plants.
  Our
        target market segment has a number of specific requirements and unique
        challenges. To succeed in this segment, fuel cells must have a high power
        density (i.e., a high wattage for their size and weight). They must also
        have a
        safe, easily portable and efficient fuel source. The fuel cells must be
        transportable and operate reliably in a wide range of environmental
        conditions.
  We
        are
        focused on replacing batteries in the 10-100 watt range. There are applications
        that require less than 10 watts, typically standard cell phones and the like.
        Low power fuel cells can be used as off board “battery chargers” meant to serve
        essentially as a trickle charger to an existing battery solution. These
        applications use simpler fuel cells that are typically characterized by
“passive” fuel management systems, small size and low power output capability.
        Replacing batteries in the 10 to 100 watt range is much more difficult, since
        it
        requires a much higher power output, more efficiency and an active rather
        than
        passive design.
  7
  Within
        the 10-100 watt battery replacement space, the dominant technology direction
        over the last 30 years has been the ongoing development of fuel cells based
        on
        Proton Exchange Membranes (“PEM”). A PEM is usually a polymeric structure
        resembling a thin sheet of plastic that conducts protons, acting as a solid
        state electrolyte for electrochemical reactions. Typical PEM based fuel cells
        use this material as a basic building block of the electrochemical power
        generation unit. PEM -based solutions may use either the oxidation of hydrogen
        gas as the fuel source or the direct oxidation of liquid methanol in a
        configuration known as Direct Methanol Fuel Cell (“DMFC”).
  The
        commercial development of PEM-based solutions has been hampered by a number
        of
        technical issues. Performance of these PEM membranes is highly dependent
        on
        maintaining tight environmental control of the operating conditions which
        has
        been difficult to achieve in product based designs. Longevity of the PEM
        based
        systems has also been a challenge with membrane and catalyst degradation
        issues
        limiting the operating life of the systems. Finally, PEMs are expensive to
        manufacture because they use costly proprietary materials and because the
        industry has not been able to develop the scalable low-cost manufacturing
        processes that are needed for the unique PEM fuel cell
        requirements.
  Rather
        than joining numerous other companies that are trying to create a better
        PEM-based direct methanol fuel cell, we felt an entirely new design approach
        was
        necessary to achieve the energy and power densities and reliability required
        by
        portable electronic devices. Our unique fuel cell design utilizes a patented
        porous silicon electrode structure and circulating liquid streams of fuel,
        oxidant and electrolyte. 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 8 issued patents and 10 additional patent filings, we believe our technology
        is proprietary and can be protected.
  **Strategic
        Goals And Relationships**
  We
        plan
        to employ a two-pronged commercialization strategy, initially focusing on
        military and industrial duty applications, followed by penetration of consumer
        electronics markets as continued development efforts improve fuel cell
        performance and cost. End users of fuel cell-powered products will be able
        to
        achieve long runtime by carrying spare fuel cartridges, not extra batteries
        and
        chargers.
  The
        initial markets (military and industrial) have certain unique needs, both
        for
        fuel cells and cartridges. We plan to partner with existing leaders in those
        fields to assist in the design to meet those unique needs, and ultimately,
        to
        facilitate the sales, marketing and distribution of our products to the end
        customers.
  We
        have
        established several business relationships that we believe will help us develop,
        produce and market our fuel cells and cartridges.
  In
        September 2003, we were awarded a two year, $2.0 million government grant
        from
        National Institute of Standards and Technology’s Advanced Technology Program.
        This grant was completed in September 2005. Deliverables associated with
        the
        grant were confined to reports on technical progress. All terms associated
        with
        the grant are defined in the document “Department of Commerce Financial
        Assistance Standard Terms and Conditions.”
  In
        December 2003, we signed a $1.7 million agreement with Thales Communications,
        Inc., a defense contractor (“Thales”), to provide fuel cells for use with
        portable, tactical military radios and other next generation communications
        devices. This contract provided for an initial payment of $153,000 followed
        by a
        total of $191,000 during the course of a 9-month contract. If Thales exercises
        an option to continue development, $1.402 million will be payable in stages
        over
        the year following exercise of this option. The agreement includes provisions
        for escrow of contract deliverables which would allow Thales to continue
        to
        manufacture our products under certain circumstances. The agreement, as amended,
        is attached as an exhibit to this annual report. We are late in delivering
        prototypes according to the terms of the contract. This is largely due to
        difficulties in reduction of our technology to practice. Early prototypes
        of our
        technology were not successful and this led to a need for changes in the
        fuel
        cell design. We continue to work with Thales toward revising and restating
        our
        contractual milestones. Under the terms of the agreement, Thales can terminate
        the contract at any time.
  8
  In
        May
        2004, Novellus Systems, Inc. invested $2.5 million in Neah Power Washington
        and
        signed a technology collaboration agreement. Effective May 24, 2006, this
        agreement was renewed and extended to March 9, 2008 and we were added as
        a
        party. Under the terms of the renewal agreement, Novellus continues to provide
        us with key engineering and technical expertise in connection with the
        development of our products, including the use of porous silicon in our fuel
        cells. Subject to Novellus’ continued assistance under the collaboration
        agreement and the technology being jointly developed with Novellus achieving
        the
        milestones set forth below, we expect to acquire all significant rights to
        the
        technology developed jointly by Novellus and us and to obtain the right to
        call
        on Novellus for reasonable technical assistance for a period of seven years.
        As
        part of the contract renewal, we have issued to Novellus a warrant to purchase
        4,705,000 shares of our common stock at an exercise price of $.001 per share,
        for an aggregate purchase price assuming total exercise of $4,705, which
        will
        expire on April 1, 2011. The milestones have been established and are set
        forth
        below, as well as their expected dates of completion. Novellus has agreed
        under
        the extension agreement to the termination of all of its previously outstanding
        warrants and options to purchase Neah Power Washington common stock. Novellus
        agreed to cancel warrants of Neah Power Washington it held and we agreed
        to pay
        by November 30, 2006, approximately $150,000 owed to Novellus for services.
        We anticipates that the $150,000 payment to Novellus will be made in
        2007.
  The
        milestones to which we have agreed with Novellus under a letter agreement
        relating to the technology collaboration agreement, as well as their expected
        dates of completion and the related vesting schedule of the warrant, are
        as
        follows:
  1.
        The
        warrant will vest as to ten percent (10%) of the shares of our common stock
        when
        Novellus and we complete a fully self contained prototype fuel cell capable
        of
        producing 10 Watts of power continuously for 5 hours using one detachable
        cartridge. The prototype will be approximately 40% larger than the intended
        size
        of our initial military product.
  We
        expect
        this milestone to be completed by the first half of 2007.
  2.
        The
        warrant will vest as to fifteen percent (15%) of the shares of our common
        stock
        when Novellus and we complete a fully self-contained fuel cell capable of
        producing 45 Watts of peak power and 300 WH capability at 20 Watts average
        operating power. This prototype will be the same size as our initial military
        product, i.e. about 0.9 liter, which is the same size as a standard disposable
        battery widely used in the military.
  We
        expect
        this milestone to be completed by September 30, 2007.
  3.
        The
        warrant will vest as to fifty percent (50%) of the shares of our common stock
        when Novellus and we complete all of the following tasks:
 · Establish
          a pilot production line to assemble completed fuel cells.
  · Finalize
          a manufacturing process for silicon electrodes based on the most common
          silicon
          wafer format, based on commercially available equipment, and identification
          of a
          manufacturing partner that is capable and willing to run the
          process.
  · Reduce
          the cost of processing porous silicon electrodes to $30 or less per silicon
          wafer. One silicon wafer is expected to yield 12 electrodes.
  We
        expect
        this milestone to be completed by December 31, 2007.
  4.
        The
        warrant will vest as to twenty-five percent (25%) of the shares of our common
        stock when Novellus and we complete all of the following tasks:
  9
 · Reduce
          the electrode catalyst loading to 25-30% of its value as of May 2005. Catalyst
          materials form a large part of the production cost of any methanol fuel
          cell;
          reaching this target would allow us to meet our cost of goods targets in
          the
          future.
  · Develop
          a plan to scale our fuel cell production process to commercial volumes,
          and to
          adapt it to commercially available equipment.
  We
          expect
          this milestone to be completed by March 31, 2008.
  These
          four (4) milestones set forth above are each targeted to be completed on
          or
          before the date specified in the specified milestone (“Target Date”),
          however,
  · If the
          milestone is completed on or before 120 days following the Target Date,
          there
          will be no penalty and 100% of the Warrants scheduled to vest under the
          milestone will vest in Novellus;
  · If the
          milestone is completed after 120 days following the Target Date but on
          or before
          210 days following the Target Date, there will be a one-third penalty and
          only
          66.67% of the Warrants scheduled to vest under the milestone will vest
          in
          Novellus;
  · If the
          milestone is completed after 210 days following the Target Date but on
          or before
          300 days following the Target Date, there will be a two-third penalty and
          only
          33.33% of the Warrants scheduled to vest under the milestone will vest
          in
          Novellus;
  · If the
          milestone is completed after 300 days following the Target Date, there
          will be a
          100% penalty and 0% of the Warrants scheduled to vest under the Milestone
          will
          vest in Novellus.
  The
        value
        of the warrant has been calculated using the Black Scholes method pursuant
        to
        FASB Statement of Financial Accounting Standards No. 123(R) at approximately
        $16,000,000 and will be accounted for ratably as each specific milestone
        is
        achieved. Because no milestones have yet been reached, no expense has been
        recorded for the warrant through December 31, 2006.
  Under
        certain circumstances, the Company can exercise a repurchase right to acquire
        warrant stock acquired by Novellus prior to achieving any specific milestone.
        Under such circumstances, Novellus could only recover the exercise price
        it had
        paid for the repurchased stock.
  In
        connection with our entry into the amended technology collaboration agreement
        with Novellus, we issued an option to purchase 1,000,000 shares of our common
        stock to Dr. Drewery in connection. The option will vest upon completion
        of the
        milestones applicable to the warrant issued to Novellus.
  The
        2006
        US Department of Defense Appropriations Bill included a $1.75 million project
        for the development of porous silicon direct methanol fuel cell technology.
        We
        are currently in the final phase of proposal submission to the Office of
        Naval
        Research regarding this program, which is anticipated to start in mid 2007
        . The
        deliverables of the program are anticipated to be reports on technical progress.
        Specific terms of the grant cannot be confirmed before final negotiations
        are
        completed. Our company will be the owner of the rights to any intellectual
        property arising under this program.
 
 On
        April
        7, 2006, we signed a contract with Crystal Research Associates (“Crystal”)
        whereby Crystal agreed to produce an Executive Informational Overview (the
        “EIO”) which would be a detailed report consisting of 40 to 60 pages augmented
        with extensive market perspective written by Crystal. Additionally, Crystal
        agreed to write four (4) quarterly updates approximating 8 to 12 pages each
        to
        be based upon our news announcements, focus and product development. All
        such
        reports are to be submitted to our management for approval prior to being
        printed and issued. Approximately 4,500 copies would be printed for
        distribution. The cost of the initial EIO, with up to two (2) full revisions,
        and the four updates is $35,000 plus warrants to purchase 200,000 shares
        of our
        common stock at $0.85 per share, which warrants would have a term of four
        years
        and were earned and vested in August 2006.. The entire cash payment has been
        made. Related coach travel and reasonable incidental expenses will be
        reimbursed.
  10
  During
        April 2006, we signed a marketing consulting agreement with Apex Strategies,
        Inc. for public sector opportunities such as state, municipal and local
        governments at a fee of $5,000 monthly for one year with automatic renewal
        if
        not previously terminated.
  During
        May 2006, we also signed a one year extension, retroactive to February 15,
        2006
        and ending August 14, 2007, to a similar agreement with McBee Strategic
        Consulting for representation and marketing by Mr. Steve McBee, a lobbyist,
        who
        works to obtain entry to federal government opportunities. The fee under
        this
        agreement is $15,000 monthly through August 15, 2006, subject to our agreement
        to increase this monthly fee to $18,000 per month from August 15, 2006 through
        February 14, 2007. As of February 14, 2007, we have not agreed to raise the
        fee.
  In
        June
        2006, we signed a Consultancy Agreement with Danfoss A/S, a Danish Company
        (“Danfoss”), regarding cooperation between Danfoss and our company within the
        field of fluid control and disposable fluid cartridge technology for portable
        fuel cells that we will produce with the assistance and cooperation of Danfoss.
        Our estimated costs of the services to be provided by Danfoss are approximately
        $280,000 over the course of the 12 to 18 months following June 2006. Danfoss
        also agreed to grant us a license so that we can use any specific Danfoss
        technology or software and that technology that is developed jointly will
        be
        owned by us. We agreed to pay a royalty of 3% of the sales value of certain
        products and technology under the license.
  Having
        recently achieved stable, high power operation of our silicon-based chemical
        reactor (also referred to as a “stack”), we are scheduled to assemble a complete
        working prototype, including all auxiliary subsystem components, for bench-top
        testing during the first half of 2007. In order to do so, we will require
        additional financing. We are seeking to raise approximately $10.0 million
        by
        this offering in order to expand operations and convert the preliminary
        prototype into a self-contained, portable prototype to be used to sample
        various
        U.S. military organizations and other potential OEMs. There can be no assurance
        that we will be successful in raising this capital on a timely basis, if
        at all.
        Our failure to obtain the necessary working capital would have a material
        adverse effect on our development program and business prospects.
  **Our
        Unique Patented Technology**
  We
        are
        developing a miniature direct methanol fuel cell (“DMFC”) system. Fuel cells use
        a chemical reaction to generate electricity that can be used to power devices.
        This external electrical current (carried by negatively charged electrons)
        is
        balanced by an internal flow of positively charged ions through an
‘electrolyte’. Protons and electrons are released from the fuel at an electrode
        (the ‘anode’) and are transported away by an ‘oxidizer’ at a second electrode
        (the ‘cathode’). Our approach is differentiated from that of many competitors by
        our use of our proprietary porous silicon electrodes and the use of liquid
        electrolytes. In our approach, a stream of 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.
  **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, hundreds of thousands of microscopic pores
        5 to
        10 micrometers in diameter are etched completely through the silicon to create
        tubes 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.
  **Basic
        Cell Design**
  Our
        porous silicon electrodes can be assembled into cells and stacks that do
        not use
        a PEM or other type of separator between the anode and cathode. Instead,
        a flow
        of methanol and electrolyte is electrochemically reacted at the anode, while
        a
        flow of oxidant and electrolyte is electrochemically reacted at the cathode.
        Since the cathode is only exposed to the liquid oxidant and electrolyte,
        the
        stack is not directly exposed to the contaminants found in ambient
        air.
  11
  **Overall
        System Design**
  The
        supply of fuels to the fuel cell stack is accomplished by a series of miniature
        pumps, channels through which the fluids are carried and fuel reaction chambers.
        Fuel and oxidizer are contained in a cartridge that may be detached from
        the
        fuel cell and replaced in order to refuel the system. The miniature pumps
        are
        used to drive fuel, electrolyte, and oxidizer around two closed loops, past
        the
        anode and the cathode respectively.
 
 For
        the
        anode the following process takes place:
  1.
        Liquid
        methanol and electrolyte are continuously pumped into the stack and through
        the
        silicon pores in the anode;
  2.
        Unused
        methanol, electrolyte and carbon dioxide are forced out of the
        stack;
  3.
        Carbon
        dioxide is separated from the methanol stream and vented into the
        air;
  4.
        Contaminants are removed from the methanol and electrolyte stream
  5.
        Fresh
        methanol is injected into the fuel stream from the cartridge as needed;
        and
  6.
        The
        fuel stream is then pumped back into the stack.
  This
        recirculation process continues until all available methanol in the replaceable
        fuel cartridge has been consumed.
  For
        the
        cathode the following process takes place:
  1.
        Liquid
        oxidant is continuously pumped into the stack and across the surface of the
        silicon pores;
  2.
        Unused
        oxidant and reduced oxidant compounds are forced out of the stack;
  3.
        Air is
        reacted with reduced oxidant compounds to convert them back into
        oxidant;
  4.
        Excess
        water is collected in the fuel cartridge;
  5.
        Fresh
        oxidant is injected into the oxidant stream from the cartridge as needed;
        and
  6.
        The
        oxidant stream is then pumped back into the stack.
  Again,
        this recirculation process continues until all available methanol in the
        replaceable fuel cartridge has been consumed. Since the oxidant is regenerated
        in the Neah system, the amount of oxidant in the fuel cell and cartridge
        is
        small.
  **Comparison
        Between Fuel Cartridges And PEM-Based Designs**
  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.
  We
        believe that the principal advantages of our approach over PEM-based designs
        include:
 · The
          absence of a proton exchange membrane, and use of a 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.
  12
  · The use
          of silicon technology allows us to make use of existing silicon production
          infrastructure, with reduced need to create specialized production
          facilities.
  · 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 in use may increase the
          cost
          of production of the fuel cell.
  · It is at
          present, and may continue to be, necessary for the fuel cartridge to contain
          certain amounts of chemicals other than fuels, in order to flush out
          contaminants or to replenish the oxidizer present in the fuel cell. This
          reduces
          the energy available per unit volume of the cartridge.
  13
 
 **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 stack operation;
  5.
        Developed balance of plant components (i.e., all parts other than the stack)
        for
        use in complete prototypes;
  6.
        Developed computer models to predict complete fuel cell system performance
        and
        cost; and
  7.
        Filed
        patents to protect our unique technology.
  **Intellectual
        Property**
  We
        filed
        our first U.S. patent application in November 1999. Since then, we have filed
        patent applications covering many of the components and systems involved
        in our
        fuel cell design. In November 2003, we were awarded our first patent, U.S.
        Pat.
        No. 6,641,948, and in February, 2005, were awarded a continuation patent,
        U.S.
        Pat. No. 6,852,443, both entitled “Fuel Cells Having Silicon Substrates and/or
        Sol-Gel Derived Support Structures.” These foundational patents broadly cover
        silicon-based electrodes for use in fuel cells. Subsequently, we have been
        granted seven other patents which are fundamental to our technology and cover
        the use of porous substrates coated with catalyst as fuel cell electrodes
        and
        electrode structures, cell bonding techniques, and cartridges. When appropriate,
        foreign patent equivalents are pursued under the Patent Cooperation Treaty
        (the
“PCT”). We monitor patent filings carefully and are not aware of any other
        patents that create potential conflicts with our fuel cell design or
        technology.
  In
        addition, we believe our fuel cell design and technology are not in conflict
        with the U.S. patents covering PEM-based DMFCs held by several organizations
        in
        the U.S. The following are our basic areas of patent coverage.
  **U.S.
        Patents:**
  1.
        U.S.
        Patent No. 6,641,948 entitled “Fuel Cells Having Silicon Substrates And/Or
        Sol-Gel Derived Support Structures” issued November 4, 2003. (401) Expires:
        April 5, 2020.
  2.
        U.S.
        Patent No. 6,720,105 entitled “Metallic Blocking Layers Integrally Associated
        With Fuel Cell Electrode Structures And Fuel Cell Electrode Stack Assemblies”
issued April 13, 2004. (401C2) Expires: April 5, 2020.
  3.
        U.S.
        Patent No. 6,808,840 entitled “Silicon-Based Fuel Cell Electrode Structures And
        Fuel Cell Electrode Stack Assemblies” issued October 26, 2004. (401C3) Expires:
        April 5, 2020.
  4.
        U.S.
        Patent No. 6,811,916 entitled “Fuel Cell Electrode Pair Assemblies And Related
        Methods” issued November 2, 2004. (402) Expires: December 12, 2021.
  5.
        U.S.
        Patent No. 6,852,443 entitled “Fuel Cells Having Silicon Substrates And/Or
        Sol-Gel Derived Support Structures” issued February 8, 2005. (401D1) Expires:
        April 5, 2020
  14
  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.
  **Foreign
        Patents:**
  1.
        Chinese Patent No. CN1205685C entitled “Fuel Cells Having Silicon Substrates
        And/Or Sol-Gel Derived Support Structures” issued June 1, 2005. (401CN) Expires:
        November 17, 2019.
  In
        addition to the foregoing patents, we also have the following applications
        pending:
  **U.S.
        Utility Patent Applications:**
  1.
        U.S.
        Pat. Appl. No. 10/996,647 entitled “Silicon-Based Fuel Cell Electrode
        Structures” filed Nov. 23, 2004. (401D2)
  2.
        U.S.
        Pat. Appl. No. 10/251,518 entitled “Fuel Cells Having Internal Multistream
        Laminar Flow” filed September 20, 2002. (404C1)
  3.
        U.S.
        Pat. Appl. No. 10/966,721 entitled “Nitric Acid Regeneration Fuel Cell Systems”
filed Oct. 15, 2004. (405)
  4.
        U.S.
        Pat. Appl. No. 10/892,876 entitled “Fuel Cells Having Cross Directional Laminar
        Flowstreams” filed Jul. 16, 2004. (406)
  5.
        U.S.
        Pat. Appl. No. 11/313,550 entitled “Detachable Reactant Supply and Effluent
        Storage Cartridges, Layered Pump Assemblies, and Rotatable Fluid Transfer
        Valve
        Disk Assemblies for Use with Regenerative Fuel Cell Systems” filed Dec. 20,
        2005. (413)
  6.
        U.S.
        Pat. Appl. No. 11/242,237 entitled “Porous Silicon Undercut Etching Deterrent
        Masks and Related Methods” filed October 3, 2005. (414)
  7.
        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)
  15
  5.
        Canadian Pat. Appl. No. 2,444,688 entitled “Porous Silicon And Sol-Gel Derived
        Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
        October 17, 2003. (401CCA)
  6.
        Chinese Pat. Appl. No. 02811803.0 entitled “Porous Silicon And Sol-Gel Derived
        Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
        October 20, 2003. (401CCN)
  7.
        European Pat. Appl. No. 02731430.1 entitled “Porous Silicon And Sol-Gel Derived
        Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
        November 19, 2003. (401CEP)
  8.
        Japanese Pat. Appl. No. 2002-584409 entitled “Porous Silicon And Sol-Gel Derived
        Electrode Structures And Assemblies For Use With Fuel Cell Systems” filed
        October 20, 2003. (401CJP)
  9.
        Canadian Pat. Appl. No. 2,472,232 entitled “Porous Fuel Cell Electrode
        Structures Having Conformal Electrically Conductive Layers Thereon” filed July
        3, 2004. (403CA)
  10.
        Chinese Pat. Appl. No. 03801936.1 entitled “Porous Fuel Cell Electrode
        Structures Having Conformal Electrically Conductive Layers Thereon” filed July
        2, 2004. (403CN)
  11.
        European Pat. Appl. No. 03701220.0 entitled “Porous Fuel Cell Electrode
        Structures Having Conformal Electrically Conductive Layers Thereon” filed July
        3, 2004. (403EP)
  12.
        Japanese Pat. Appl. No. 2003-558944 entitled “Porous Fuel Cell Electrode
        Structures Having Conformal Electrically Conductive Layers Thereon” filed July
        2, 2004. (403JP)
  **Competition**
  The
        development and marketing of fuel cells and fuel cell systems is extremely
        competitive. In many cases, we compete directly with alternative energy and
        entrenched power-generation and power-storage technologies. In addition,
        a
        number of firms throughout the world have established fuel cell development
        programs, albeit most of them PEM-based. Competitors range from development
        stage companies to major domestic and international companies, many of which
        have:
  · substantially
        greater financial,
        technical, marketing and human resource capabilities;
  · established
        relationships with
        original equipment manufacturers;
  · name-brand
        recognition;
        and
  · established
        positions in the markets
        that we have targeted for penetration.
  These
        or
        other companies may succeed in developing and bringing to market products
        or
        technologies that are more cost-effective than those being developed by us
        or
        that would render our products and technology obsolete or non-competitive
        in the
        marketplace.
  **Employees**
  We
        currently have approximately 25 employees, including 3 executive officers,
        20
        persons in research and development and 2 clerical and administrative personnel.
        In addition, Novellus Systems has supplied us with two full time scientists
        whose salary and expenses we are responsible for.
  **Reports
        to Security Holders**
  (1)
        We
        are not currently required to deliver an annual report to security
        holders.
  (2)
        Our
        shares currently trade on the OTC Bulletin Board. 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 addresses and at the SEC’s website, each as provided
        immediately below.
  16
  (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 .
 
 **Item
        2:**  **Description
        of Property**
 
 We
        currently lease approximately 12,000 square feet of office and research and
        development space located at 22122 20th Avenue S.E., Bothell, Washington,
        from
        an unaffiliated party, under a lease requiring the payment of monthly rent
        and
        shared expenses of approximately $15,000 and expiring August of
        2007.
  **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 the Form 10
        that we
        filed with the Securities and Exchange Commission. We believe that there
        was an
        agreement for a cap of $60,000 on legal filings in connection with this filing.
        While a claim has been threatened, it has not been filed to date.
  On
        December 5, 2006, our former placement agent filed an action against us and
        our
        CEO in the Los Angeles Superior Court entitled Burt Martin Arnold Securities,
        Inc. v. Neah Power Systems, Inc., et al., Case No. YC 054 295, for breach
        of
        contract, misrepresentation and related claims arising from our March 21,
        2006
        engagement letter in which we agreed to pay a commission up to $160,000 plus
        warrants in connection with our private placement. BMA seeks general damages
        up
        to $2 million. On January 5, 2007, we removed the case to the United States
        District Court for the Central District of California, Case No. CV 07-00183
        ABC
        (SHx). We believe that BMA failed to perform under the agreement and that
        the
        case is substantially without merit, and we intend to vigorously defend the
        action.
  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**
  Not
        applicable.
 
 **PART
        II**
  **Item
        5: Market for Common Equity and Related Stockholder Maters**
  Our
        common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
        “NPWS”. Prior to January 19, 2007, it was quoted on the “pink sheets”
over-the-counter quotation service. Set forth below are the range of high
        and
        low bid quotations for the periods indicated. The market quotations reflect
        inter-dealer prices, without retail mark-up, mark-down or commissions and
        may
        not necessarily represent actual transactions.
 17
 
 **High**
              
              **Low****2006**1st
                  Quarter - March 9, 2006 through March 30, 2006
              
              $
              2.00
              
              $
              0.402nd
                  Quarter - April 1, 2006 through June 30, 2006
              
              $
              3.70
              
              $
              0.553rd
                  Quarter - July 1, 2006 through September 30, 2006
              
              $
              1.65
              
              $
              0.804th
                  Quarter - October 1, 2006 through December 31, 2006
              
              $
              2.05
              
              $
              0.941stQuarter - January 1, 2007 through March 14, 2007
              
              $
              1.84
              
              $
              0.86
 
 The
        last
        sale price of our common stock on March 14, 2007 was $1.08.
  As
        of
        March 14, 2007, 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.
 
 **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**
  **Plan
                  Category**
              
              **Number
                  of Securities To Be Issued Upon Exercise of Outstanding
                  Options**
              
              **Weighted
                  Average Exercise Price of Outstanding Options**
              
              **Number
                  of Securities Remaining Available for Future Issuance under Equity
                  Compensation Plans (Excluding Securities Reflected in Column
                  (a)**(A)
              
              (B)
              
              (C)EquEquity
                  Compensation Plans Approved by Security Holders of Shares of Common
                  Stock
              
              
              6,325,500
              
              $
              0.25
              
              
              3,674,500EquEquity
                  Compensation Plans Not Approved By Security Holders(1)Total
              
              
              6,325,500
              
              $
              0.22
              
              
              3,674,500
  (1)
                On
                    March 14, 2006, our Stockholders approved and adopted the Long
                    Term
                    Incentive Compensation Plan (the “Plan”). On March 14, 2006, the board of
                    directors and the compensation committee authorized the issuance
                    of
                    options to purchase an aggregate of 6,589,500 shares of our common
                    stock
                    at an exercise price of $0.20 per share, which was the fair market
                    value
                    of our common stock on such date (with the exception of the 250,000
                    options issued to Mr. Abramowitz which are exercisable at $0.22
                    per share,
                    and the additional 250,000 options issued to Mr. Abramowitz which
                    are
                    exercisable at $0.85 per share) as set forth in the following
                    section
                    below
  All
        options granted to the employees and consultants under the Plan vest, so
        long as
        the optionee continued to render services to us for a period of three years
        from
        the date of the grant, in accordance with a vesting schedule contained in
        the
        options. The options granted may not be exercised more than seven years after
        the date of grant.
  18
 
 The
        Plan
        is to be administered by the Compensation Committee of the Board of Directors
        and consists of up to 10,000,000 shares of Common Stock which may be granted
        in
        the form of options to our employees, directors, consultants and advisors.
        The
        number of options, option price, vesting and exercise schedules and the duration
        of all options shall all be determined by the Board of Directors at the time
        of
        grant; provided, however, that the option price of any options granted under
        the
        Plan shall be not less than fair market value at the time of grant. Incentive
        stock options expire no later than ten years after the date of
        grant.
 
 **Recent
        Sales of Unregistered Securities**
  During
        the past three years, we sold unregistered securities in the transactions
        described below. There were no underwriters involved in the transactions
        and
        there were no underwriting discounts or commissions paid in connection
        therewith, except as disclosed below. Except as specifically disclosed below,
        the issuance of these securities were considered to be exempt from registration
        under Section 4(2) of the Securities Act, as amended, and the regulations
        promulgated thereunder. The purchasers of the securities in such transactions
        represented their intentions to acquire the securities for investment only
        and
        not with a view to or for sale in connection with any distribution thereof.
        The
        purchaser of the securities in such transactions had adequate access to
        information about us.
  Prior
        to
        Growth Mergers, Inc.’s acquisition of Neah Power Washington, certain entities
        controlled by David Moore, Peter Cangany, John Otto and David Otto holding
        approximately $49,000 of Growth Mergers, Inc. outstanding debt received
        5,000,000 shares of our common stock in exchange for cancellation of these
        obligations.
  In
        connection with the merger transaction in which we acquired Neah Power
        Washington, we issued an aggregate of 26,203,858 shares of our common stock
        to
        approximately 60 Neah Power Washington stockholders. All of the Neah Power
        Washington stockholders represented in writing that they were accredited
        investors and acquired the securities for their own accounts. A legend was
        placed on the securities stating that such securities have not been registered
        under the Securities Act and cannot be sold or otherwise transferred without
        an
        effective registration statement covering such shares or an the availability
        of
        an exemption from the registration requirements of the Securities
        Act.
  In
        March
        2006, we issued 6,500,000 shares of our Series A convertible preferred stock
        to
        Special Investments Acquisitions Associates LLC and Summit Investment Limited.
        The Series A Preferred Stock was converted into an aggregate of 68,130,030
        shares of our common stock, less the sum of (a) 6,255,000 shares of our common
        stock that are issuable to other former Neah Power Washington security holders
        upon conversion of our notes or exercise of certain warrants, and (b) all
        shares
        of our common stock issued or issuable in connection with the next financing
        for
        our company aggregating $1,500,000. In April 2006, all of the Series A preferred
        stock was converted into an aggregate of 62,628,030 shares of our common
        stock,
        of which 3,753,000 shares were returned to us effective as of April 27, 2006
        and
        are held as treasury shares for issuance upon exercise of warrants issued
        to the
        former holders of our 8% notes. Consequently, the status of these shares
        is that
        they are issued but no longer outstanding. The remaining 58,875,030 shares
        originally issued to SIAA and Summit are not affected thereby and remain
        issued
        and outstanding. All recipients of the 62,628,030 shares of our common stock
        issued
        in connection with the conversion of the Series A preferred stock represented
        in
        writing that they were accredited investors and acquired the securities for
        their own accounts. A legend was placed on the securities stating that such
        securities have not been registered under the Securities Act and cannot be
        sold
        or otherwise transferred without an effective registration statement covering
        such shares or an the availability of an exemption from the registration
        requirements of the Securities Act.
  In
        2005
        and 2006, Neah Power Washington had issued $142,400 of notes to certain of
        its
        shareholders and other investors. In connection with the merger transaction,
        such notes and an additional $358,000 of loans provided by affiliates of
        Castile
        Ventures, were exchanged for and evidenced by our 8% convertible notes
        aggregating $500,400 and warrants entitling the holders to purchase an aggregate
        of 3,753,000 shares of our common stock at an exercise price of $0.20 per
        share.
        In April 2006, all $500,400 of our notes were fully converted at $0.20 per
        share, into 2,502,000 shares of our common stock. The holders of such notes
        and
        warrants represented in writing that they were accredited investors and acquired
        the securities for their own accounts. A legend was placed on the securities
        stating that such securities have not been registered under the Securities
        Act
        and cannot be sold or otherwise transferred without an effective registration
        statement covering such shares or an the availability of an exemption from
        the
        registration requirements of the Securities Act.
  19
  On
        March
        14, 2006, we issued options to purchase an aggregate of 6,589,500 shares
        of our
        common stock to the following groups of persons:
  **Board
                  of Directors**Paul
                  Abramowitz
              
              500,000
                  optionsDr.
                  Daniel Rosen
              
              350,000
                  optionsMichael
                  Solomon
              
              350,000
                  optionsRoger
                  Walton
              
              250,000
                  optionsLeroy
                  Ohlsen
              
              425,000
                  options.
  **Technical
                  Advisory Board**Dr.
                  Wilbert van den Hoek
              
              250,000
                  optionsDr.
                  Daniel Rosen
              
              250,000
                  optionsRoger
                  Walton
              
              250,000
                  options
  **Employees
                  and others**Dr.
                  John Drewery
              
              1,000,000
                  optionsStephen
                  Tallman
              
              400,000
                  optionsDr.
                  Arthur Homa
              
              450,000
                  optionsDavid
                  Dorheim
              
              162,500
                  optionsOther
                  employees
              
              1,952,000
                  options
  The
        issuance of these options were considered to be exempt from registration
        under
        Section 4(2) of the Securities Act with the exception of the 1,952,000 options
        issued to the employees, where the exemption relied upon is Rule 701 of the
        Securities Act. Other employees as of February 28, 2007, have a total of
        1,688,000 due to a net decrease of 264,000 options as a result of new hires
        and
        resignations.
  On
        March
        29, 2006, the board of directors and compensation committee agreed that all
        of
        Mr. Dorheim’s 162,500 severance options at $0.20 per share would be immediately
        vested as of such date.
 
 All
        optionees other than the employees represented in writing that they were
        accredited investors and acquired the securities for their own accounts.
        A
        legend was placed on the securities stating that such securities have not
        been
        registered under the Securities Act and cannot be sold or otherwise transferred
        without an effective registration statement covering such shares or an the
        availability of an exemption from the registration requirements of the
        Securities Act.
  In
        April
        2006, we sold to 9 investors in a private placement an aggregate of 4,600,000
        shares of our common stock a price of $0.50 per share. As indicated elsewhere
        in
        this annual statement, one of our directors purchased, for cash, 70,000 of
        these
        shares. In connection with such sales, we received $800,000 in cash and
        $1,500,000 was paid by delivery of a $1,500,000 6% promissory note which
        was
        subsequently amended to a 12% promissory note. All amounts of principle and
        interest were paid in full in various amounts between June 28, 2006 and November
        3, 2006. All investors represented in writing that they were accredited
        investors and acquired the securities for their own accounts. A legend was
        placed on the securities stating that such securities have not been registered
        under the Securities Act and cannot be sold or otherwise transferred without
        an
        effective registration statement covering such shares or an the availability
        of
        an exemption from the registration requirements of the Securities Act. The
        placement agent received five-year warrants to purchase 320,000 common shares
        at
        $0.60 per share. These warrants were valued at $159,000 and have been recorded
        as a non-cash cost of the offering.
  20
  As
        part
        of the extension of the collaboration agreement with Novellus, in May 2006
        we
        issued to Novellus a warrant to purchase 4,705,000 shares of our common stock
        at
        an exercise price of $.001 per share, for an aggregate purchase price assuming
        total exercise of $4,705, which will expire on April 1, 2011.
  As
        described earlier in this annual statement, in December 2006, we entered
        into
        Bridge Loan Agreements and issued 6% Secured Promissory Notes due May 26,
        2007
        to six accredited institutional investors in exchange for gross proceeds
        of
        $1,550,000. In connection with such financing, we issued the buyers of the
        notes
        an aggregate of 500,000 shares of common stock. We also issued to Palladium
        Capital Advisors, LLC a five year warrant to purchase up to 81,579 additional
        shares of our common stock at $1.33 per share.
  The
        milestones have been established and are set forth, as well as their expected
        dates of completion, elsewhere in this annual statement. Novellus has agreed
        under the extension agreement to the termination of all of its previously
        outstanding warrants and options to purchase Neah Power Washington common
        stock.
        Novellus represented in writing that it acquired the securities for its own
        account, is able to bear the economic risk of holding the shares issuable
        upon
        exercise of the warrant and has had the opportunity to obtain any information
        it
        has deemed necessary for it to evaluate an investment in our company. A legend
        was placed on the securities stating that such securities have not been
        registered under the Securities Act and cannot be sold or otherwise transferred
        without an effective registration statement covering such shares or an the
        availability of an exemption from the registration requirements of the
        Securities Act.
 
 In
        April
        2006, the Company granted four-year warrants to Crystal Research Associates
        ("CRA") to purchase 200,000 common shares at $0.85 per share. These warrants
        were valued at $222,000 and were recorded as research and development
        expense.
  In
        November 2006, the Company borrowed $415,000 from existing shareholders.
        The notes bear interest at 10% and are due May 26, 2007. The Company's
        largest shareholder granted one-year warrants to on of the lenders as additional
        consideration. These warrants, to purchase 500,000 shares of the Company's
        common stock owned by the shareholder at $0.55 per share, are valued at
        $357,000, and are recorded as additional interest expense and a contribution
        of
        capital to the Company in the year ended December 31, 2006.
  A
        summary
        of warrants outstanding at December 31, 2006, follows:
 
 Date
              
              Action
              
              Number
                  of Warrants
              
              Fair
                  Value at Issuance
              
              Exer.
                  Price
              
              Expiration
                  DateApril
                  2006
              
              
              Grant
                  to Novellus under
                collaboration
                  agreement
              
              
              4,705,000
              
              $
              16,000,000
              
              $
              0.001
              
              
              Apr.
                  30, 2011April
                  2006
              
              
              Grants
                  to note holders in
                conversion
              
              
              3,753,000
              
              
              0
              
              $
              0.20
              
              
              Apr.
                  27, 2011April
                  2006
              
              
              Grants
                  to placement agent
              
              
              320,000
              
              
              159,000
              
              $
              0.60
              
              
              Apr.
                  29, 2011April
                  2006
              
              
              Grants
                  to CRA
              
              
              200,000
              
              
              222,000
              
              $
              0.85
              
              
              Apr.
                  7, 2011Dec.
                  2006
              
              
              Grant
                  to Palladium
              
              
              81,579
              
              
              101,467
              
              $
              1.33
              
              
              Dec.
                  26, 2011Balance
                  —
                  December 31, 2006
              
              9,059,579
              
              $
              16,482,467
  21
  **Item
        6: Management’s Discussion and Analysis or Plan of
        Operation**
  **General**
  The
        discussion and analysis of our financial condition and results of operations
        are
        based upon our financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States of America.
        The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with the audited financial statements of Neah Power
        Washington for the years ended December 31, 2006 and 2005, 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
        recently achieved stable, high power operation of our silicon-based chemical
        reactor (also referred to as a “stack”), we are scheduled to assemble a complete
        working prototype, including all auxiliary subsystem components, for bench-top
        testing during the second half of 2006.
  Our
        operational plan for fiscal year 2007 and 2008 includes several milestones
        that
        are set forth in our collaboration agreement with Novellus. These milestones
        we
        will accomplish with Novellus are as follows:
  **** 1.
        Complete a fully self contained prototype fuel cell capable of producing
        10
        Watts of power continuously for 5 hours using one detachable cartridge. The
        prototype will be approximately 40% larger than the intended size of our
        initial
        military product.
  We
        expect
        this milestone to be completed by June 30, 2007.
  **** 2.
        Complete a fully self-contained fuel cell capable of producing 45 Watts of
        peak
        power and 300 WH capability at 20 Watts average operating power. This prototype
        will be the same size as our initial military product, i.e. about 0.9 liter,
        which is the same size as a standard disposable battery widely used in the
        military.
  22
  We
        expect
        this milestone to be completed by September 30, 2007.
  3.
        Complete the following tasks:
  · Establish
        a pilot production line to
        assemble completed fuel cells.
  · Finalize
        a manufacturing process for
        silicon electrodes based on the most common silicon wafer format, based on
        commercially available equipment, and identification of a manufacturing partner
        that is capable and willing to run the process.
  · Reduce
        the cost of processing porous
        silicon electrodes to $30 or less per silicon wafer. One silicon wafer is
        expected to yield 12 electrodes.
  We
        expect
        this milestone to be completed by December 31, 2007.
  4.
        Complete the following tasks:
  · Reduce
        the electrode catalyst loading
        to 25-30% of its value as of May 2005. Catalyst materials form a large part
        of
        the production cost of any methanol fuel cell; reaching this target would
        allow
        us to meet our cost of goods targets in the future.
  · Develop
        a plan to scale our fuel cell
        production process to commercial volumes, and to adapt it to commercially
        available equipment.
  We
        expect
        this milestone to be completed by March 31, 2008.
  To
        achieve these milestones and to develop a marketing program for both the
        military and commercial markets as well as OEM’s, we will have to raise
        additional funds of approximately $15 million over the next twelve
        months.
  **Overview**
  We
        have
        limited capital resources. Our auditor’s report for our financial statements as
        at and for the year ended December 31, 2006 contains a “going concern”
qualification indicating that our ability to continue as a going concern
        is
        substantially in doubt. We must, therefore, raise sufficient capital to fund
        our
        overhead burden and our continuing research and development efforts going
        forward.
  **Results
        Of Operations**
  *Year
        Ended December 31, 2006 As Compared To the Year Ended December 31,
        2005*
 
 We
        had no
        revenues for the year ended December 31, 2006 as compared to revenue from
        grants
        of $780,000 in the year ended December 31, 2005. The grant program that
        generated revenue in 2005 terminated in October 2005.
 
 Research
        and development expenses for the year ended December 31, 2006 increased by
        $872,128 or approximately 25%, to $4,347,868 from the $3,475,740 recorded
        in the
        comparable period ended December 31, 2005. The increase was primarily due
        to
        stock option expense of $547,966 relative to research and development employees
        in the 2006 period for which there was no corresponding amount for the year
        ended December 31, 2005 as there were no option grants in fiscal 2005 and
        hence
        no valuations or expense allocation during that year, and an increase of
        $330,343 in project expenses related to cell and stack design due to the
        outsourcing of this particular research and development effort to our partners
        Danfoss A/S, a Danish Company.
 
 General
        and Administrative expenses for the year ended December 31, 2006 were
        $2,572,712, an increase of $1,270,314 or approximately 95% from the $1,302,398
        incurred in the comparable 2005 period. This increase was primarily due to
        stock
        option expense of approximately $288,240 relative to general and administrative
        personnel, warrant expense of $222,000 for the value of the CRA warrants,
        and
        the inclusion of approximately $112,500 of severance pay and related expenses
        payable to our former President and CEO as well as an increase of approximately
        $533,000 in legal, accounting and other professional fees and an increase
        in
        special marketing consultant fees of $217,000. Approximately $165,000 of
        the
        legal fees were incurred in connection with the reverse merger that closed
        on
        March 9, 2006, and the Private Placement that closed on April 27, 2006 and
        there
        were financing costs of approximately $120,000 related to the December 29,
        2006
        Private Placement of $1,550,000 in Notes; for which there were no comparable
        expenses in the prior year. These increases were somewhat offset by a decrease
        in administrative salaries and related costs of approximately $40,000.
  23
 
 **Liquidity
        and Capital Resources**
 
 Existing
        investors loaned us a total of $415,000 in November 2006 on a term loan basis
        bearing interest at 10% per annum and with additional consideration in the
        form
        of warrants contributed by the Company’s largest stockholder. The loans are due
        May 26, 2007. We also raised $1,550,000 of gross proceeds in a Private Placement
        consummated on December 27, 2006. The December 27, 2006 investors also received
        500,000 shares of our common stock as additional consideration and their
        Notes
        are collateralized by all assets of the company and are payable on the first
        to
        occur of a financing of more than $2,000,000 or May 26, 2007. Palladium Capital
        Advisors, LLC, the distributor, received a 5 year warrant to purchase 81,579
        shares of the company’s common stock at $1.33 per share. The warrant was valued
        at $101,467 which was recorded as additional interest.
 
 We
        are
        also in the process of finalizing negotiations with the DoD and the ONR for
        a
        research and development contract pursuant to a Congressional Appropriation
        of
        up to $1.75 million, primarily for expense reimbursement, over approximately
        a
        twelve month time frame that would start in the spring of 2007 subject to
        execution of an agreed contract. An additional Congressional Appropriation
        of up
        to $1.35 million was approved in 2006 and contract negotiations will begin
        shortly to finalize the related contract.
 
 Our
        current operating expenses, net of non-cash charges, are approximately $450,000
        per month and as of December 31, 2006, we had cash balances of $1,141,905.
        This
        amount is not sufficient to support the current level of operations for the
        next
        12 months and it will be necessary to obtain substantial additional financing. We
        are
        seeking further immediate financing of $500,000 on a term loan basis and
        following that intend to raise $10,000,000 through the sale of shares of
        our
        common stock pursuant to a public offering. However, we cannot be certain
        that
        any of such financings will be timely obtained on acceptable terms. If we
        are
        unable to obtain, on a timely basis, the additional financing required to
        meet
        our cash needs, we will have to reduce or curtail operations which would
        materially and adversely affect our development efforts.
 
 **Critical
        Accounting Policies**
  Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States. The preparation
        of these financial statements requires the use of estimates that affect the
        reported amounts of assets, liabilities and expenses. Management evaluates
        our
        estimates on an ongoing basis, including estimates for Income tax assets
        and
        liabilities and the impairment of the value of investments. We base our
        estimates on historical experience and on actual information and assumptions
        that are believed to be reasonable under the circumstances at that time.
        Actual
        results may differ from these estimates under different assumptions or
        conditions. We believe that the following critical accounting policies affect
        its more significant estimates used in the preparation of its financial
        statements.
  *Revenue
        Recognition*
  Revenues
        consist of grant and contract revenues. Grant revenues are recognized as
        the
        related research is conducted. Contract revenues consist of amounts recorded
        from services provided to a single customer. Revenues earned under such
        arrangements are recorded as earned either as milestones are achieved or
        as the
        services are provided. Upfront payments received under contractual arrangements
        are recognized as revenue over the service period.
  *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.
  24
  *Recently
        Issued Accounting Pronouncements*
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value,
        establishes a framework for measuring fair value and expands disclosures
        about
        fair value measurements but does not require any new fair value measurements.
        FAS 157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. The
        Company has not yet determined the impact of applying FAS 157.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans, (“FAS 158”). FAS 158 requires an employer to recognize the overfunded or
        underfunded status of a defined benefit postretirement plan (other than a
        multiemployer plan) as an asset or liability in its statement of financial
        position and to recognize changes in that funded status in the year in which
        the
        changes occur through comprehensive income. FAS 158 is effective for financial
        statements as of December 31, 2006. The Company does not expect any material
        impact from applying FAS 158.
  In
        September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108 which
        provides interpretive guidance on how the effects of the carryover or reversal
        of prior year misstatements should be considered in quantifying a current
        year
        misstatement. SAB 108 is effective for the first interim period follow the
        first
        fiscal year ending after November 15, 2006, which, for us, is effective for
        fiscal 2007 beginning January 1, 2007. We believe that the adoption of SAB
        108
        will not have a material impact on our results of operations, cash flows
        or
        financial condition.
  In
        June,
        2006 the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes--an
        interpretation of FASB Statement No. 109”. This Interpretation clarifies, among
        other things the accounting for uncertainty in income taxes recognized in
        an
        enterprise’s financial statements in accordance with FASB Statement No. 109,
        Accounting for Income Taxes. This Interpretation prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        This Interpretation also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition and is effective for fiscal years beginning after December 15,
        2006.
        Earlier application is encouraged if the enterprise has not yet issued financial
        statements, including interim financial statements, in the period the
        Interpretation is adopted. Management believes this Statement will have no
        impact on our financial statements once adopted.
  Beginning
        with our fiscal year ending December 31, 2007, we will become subject to
        the
        requirement to include in our annual report management’s assessment of internal
        controls over financial reporting. This assessment will require us to document
        and test our internal control procedures in accordance with Section 404 of
        the
        Sarbanes-Oxley act of 2002. Our independent registered public accountants
        will
        be required to attest to our assessment of internal controls beginning with
        our
        fiscal year ending December 31, 2008. ****
 25
  **Risk
        Factors**
 ****
 *Risks
        Related to Our Business*
  **Our
        Auditors Have Issued A “Going Concern” Qualification In Their Report On Our
        Financial Statements.** Our
        auditors’ report on the Neah Power Washington financial statements as of
        December 31, 2006 and for the two fiscal years then ended 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.
  **We
        Have Experienced Severe Working Capital And Liquidity Shortages and Expect
        to
        Continue to Do So For the Near Future.** We had
        working capital deficiency of $231,044 at December 31, 2005, and at December
        31,
        2006, we had a working capital deficiency of $2,563,170. Our cash operating
        expenses are approximately $450,000 per month, and we have little or no
        revenues. We expect this situation to continue for the foreseeable future.
        We
        are in the process of finalizing negotiations with the Department of Defense
        (“DoD”) and the Office of Naval Research (“ONR”) for a contract relating to an
        appropriation for up to $1.75 million and a second contract for up to $1.35
        million, both primarily for expense reimbursement over approximately a twelve
        month time frame for projects that would start in May 2007 and October 2007
        respectively subject to execution of agreed contracts. We will rely on the
        proceeds of this offering to meet our ongoing obligations over the second
        half
        of 2007.
  **We
        Will Need To Raise Significant Additional Capital To Continue Our Business
        Operations.** Our
        cash
        position at December 31, 2006 was $1,141,905 as compared to $311,815 at December
        31, 2005 and $2,481,103 at December 31, 2004. Our current monthly cash operating
        expenses are approximately $450,000. 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 have had accumulated
        losses of approximately $29,000,000 million through December 31, 2006. We
        expect
        to continue to incur net losses at least through our fiscal year 2007 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.
  **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.
  26
  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 manufactures, we may
        face
        significant resistance from end-users to adopt a new and alternative power
        source technology.
  Fuel
        cell
        products for portable and mobile applications represent an emerging market
        and
        we do not know whether our targeted distributors, resellers or end-users
        will
        purchase our products. The development of a mass market for our portable
        and
        mobile products may be impacted by many factors, some of which are beyond
        our
        control, including:
 · cost
          competitiveness of portable and mobile products;
  · consumer
          reluctance to try our products;
  · consumer
          perception of our systems’ safety; and
 
 · emergence of newer, more competitive technologies and products.
  If
        a mass
        market develops more slowly than we anticipate or fails to develop, we may
        not
        be able to recover the expenses we incurred to develop these
        products.
  **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. Development and expansion of these technologies and processes
        require extensive lead times and the commitment of significant financial,
        engineering and human resources. We may not successfully develop the required
        manufacturing technologies and processes. We may not find suitable partners
        for
        outsourcing our manufacturing.
  27
  **We
        May Not Be Able To Satisfy Our Contractual Obligations To Our Customers If
        We
        are Unable To Obtain Adequate Manufacturing Facilities.** We
        currently have no production facilities that are capable of mass producing
        fuel
        cell systems. Even if we are successful in developing operating fuel cells
        for
        sale, we will not be able to meet our obligations to our military or commercial
        customers unless we promptly identify, acquire or outsource such facilities
        and
        then bring on-line new, large-scale manufacturing facilities. We have not
        yet
        identified suitable facilities and may not be able to do so. If we encounter
        delays in identifying or financing suitable manufacturing plant facilities
        for
        purchase, lease or outsource, in obtaining the necessary equipment or in
        hiring
        and training personnel to commence large-scale manufacturing, we will not
        be
        able to fill customer orders, or profitably manufacture our various fuel
        cell
        systems. If we are unable to finance and establish manufacturing capability,
        we
        will be required to license our technology for third party manufacture which
        will significantly reduce our potential for revenues and profits.
  **We
        May Not Be Able To Meet Our Customers’ Demand For Our Products If We Do Not
        Successfully Manage The Expansion Of Our Operations.** Locating
        and establishing new manufacturing facilities will place significant demands
        on
        our managerial, technical, financial and other resources. We will be required
        to
        make significant investments in our engineering and logistics systems, financial
        and management information systems and to retain, motivate and effectively
        manage our employees. There can be no assurance that our management skills
        and
        systems currently in place will enable us to implement our strategy or enable
        us
        to attract and retain skilled management and production personnel. Our failure
        to manage our growth effectively or to implement our strategy would have
        a
        material adverse effect on our ability to produce products and meet our
        contractual obligations.
  **Because
        We Will Depend On Third-Party Suppliers, We May Experience Delays In Receiving
        Key Materials And Components Necessary To Produce Our Fuel Cell
        Systems.** If we
        successfully develop our fuel cell, we will depend on third parties for the
        manufacture and assembly of materials and components used to make our products.
        If any of our suppliers are unable or unwilling to provide us with materials
        and
        components on commercially reasonable terms, or at all, delays in identifying
        and contracting for alternative sources of supply would adversely affect
        our
        ability to develop, manufacture and market our products. In addition, some
        of
        these materials and components are purchased from a single or limited number
        of
        supply sources.
  **We
        May Be Subject To Shortages Of Key Materials In The Global Marketplace.** Since
        we
        depend on certain raw materials like silicon wafers to make our fuel cells,
        we
        may become subject to either supply shortages or substantial price increases
        of
        silicon wafers in certain market conditions. We also use gold and platinum
        in
        our processes; these precious metals are commodities and subject to global
        market pressures and shortages. These shortages might hamper our ability
        to ship
        our products on time, might cause us to have to spend considerably more than
        budget to complete our projects, or might make our products prohibitively
        expensive.
  **We
        May Not Be Able To Sell Our Fuel Cell Systems If They Are Not Compatible
        With
        The Products Of Third-Party Manufacturers Or Our Potential Customers.** Our
        success will depend upon our ability to make our products compatible with
        the
        products of third-party manufacturers. In addition, our mobile and portable
        products will be successful only if our potential customers redesign or modify
        their existing products to fully incorporate our products and technologies.
        Our
        failure to make our products and technologies compatible with the products
        of
        third-party manufacturers or the failure of potential customers to redesign
        or
        make necessary modifications to their existing products to accommodate our
        products would cause our products to be significantly less attractive to
        customers.
  **The
        Fuels On Which Our Fuel Cell Products Rely May Not Be Readily Available On
        A
        Cost-Effective Basis.** Our
        fuel
        cell products require methanol and oxygen to operate. While ambient air supplies
        the necessary oxygen, we obtain methanol from suppliers. Even if methanol
        is
        available to us, if its price is such that power produced by our systems
        would
        cost more than alternatives, potential users would have less of an economic
        incentive to purchase our units.
  **We
        May Be Unable To Compete Successfully In A Highly Competitive Market.** The
        development and marketing of fuel cells and fuel cell systems is extremely
        competitive. In many cases, we compete directly with battery and other micro
        fuel cell producers. In addition, a number of firms throughout the world
        have
        established PEM fuel cell development programs. Competitors range from
        development stage companies to major domestic and international companies,
        many
        of which have:
  28
 · substantially greater financial, technical, marketing and human resource
          capabilities;
 
 · established relationships with original equipment manufacturers;
 
 · name-brand recognition; and
  · established positions in the markets that we have targeted for penetration.
 
 These
          or
          other companies may succeed in developing and bringing to market products
          or
          technologies that are more cost-effective than those being developed by
          us or
          that would render our products and technology obsolete or non-competitive
          in the
          marketplace.
  **We
        May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable
        For Infringing The Intellectual Property Rights Of Others.** Our
        ability to compete effectively will depend, in part, on our ability to maintain
        the exclusive ownership of our technology and manufacturing processes through
        a
        combination of patent and trade secret protection, non-disclosure agreements
        and
        other arrangements. Patents may not be issued under pending applications
        and any
        issued patents that we hold may not provide adequate protection for our products
        or processes. Moreover, patent applications filed in foreign countries are
        subject to laws, rules and procedures that differ from those of the United
        States and any resulting patents may be difficult to enforce.
 
 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.
  **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.
 29
  **Our
        Success Depends On Attracting And Retaining Key Personnel.** The
        successful development, marketing and manufacturing of our products will
        depend
        upon the skills and efforts of a small group of management and technical
        personnel, including Dr. John Drewery, our Executive Vice President of
        Engineering, Dr. Art Homa, our Vice President of Engineering, and Leroy Ohlsen,
        our Chief Technology Officer. The loss of any of our key personnel could
        adversely impact our ability to execute our business plan. Furthermore,
        recruiting and retaining qualified executive, technical, marketing,
        manufacturing and support personnel in our emerging industry in the future
        will
        be critical to our success and there can be no assurance that we will be
        able to
        do so. We do not maintain “key-man” life insurance policies on any of our key
        personnel.
  **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
        in excess of 65% 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.
 
 **We
        May Become Subject To Risks Inherent In International Operations Including
        Currency Exchange Rate Fluctuations And Tariff Regulations** .
        If we
        sell or license our products or technologies outside the United States, we
        will
        be subject to the risks associated with fluctuations in currency exchange
        rates.
        We do not intend to enter into any hedging or other similar agreements or
        arrangements to protect us against any of these currency risks. We also may
        be
        subject to tariff regulations and requirements for export licenses, particularly
        with respect to the export of certain technologies, unexpected changes in
        regulatory requirements, longer accounts receivable requirements and
        collections, difficulties in managing international operations, potentially
        adverse tax consequences, restrictions on repatriation of earnings and the
        burdens of complying with a wide variety of foreign laws.
  **We
        May Be Unable To Obtain The Additional Capital Needed To Operate And Grow
        Our
        Business, Thereby Requiring Us To Curtail Or Cease Operations.** Our
        capital requirements in connection with our development activities and
        transition to commercial operations have been and will continue to be
        significant. We will require substantial additional funds to continue the
        research, development and testing of our technologies and products, to obtain
        patent protection relating to our technologies when appropriate, and to
        manufacture and market our products. There is no assurance that any additional
        financing will be available on commercially attractive terms, in a timely
        fashion, in sufficient amounts, or at all. If adequate funds are not available,
        we may have to scale back our operations, including our product development,
        manufacturing and marketing activities, all of which could cause us to lose
        both
        customers and market share and ultimately cease operations.
  **Our
        Quarterly Operating Results Are Likely To Be Volatile In The Future.** Our
        quarterly operating results are likely to vary significantly in the future.
        Fluctuations in our quarterly financial performance may result from, for
        example:
 · unevenness in demand and orders for our products;
 
 · significant short-term capital expenses as we develop our manufacturing
          facilities;
 
 · a
          shortage of the raw materials used in the production of our fuel cell systems;
          and
 
 · difficulties with our manufacturing operations.
  30
  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 103,162,431 shares of common stock, as well as
        outstanding options to purchase an aggregate of 6,325,500 shares of common
        stock
        at exercise prices ranging between $0.20 and $2.87 per share and warrants
        to
        purchase 3,753,000 shares of common stock at an exercise price of $0.20 per
        share, warrants to purchase 200,000 shares of common stock at $0.85 per share,
        warrants to purchase 320,000 shares of common stock at $0.60 per share and
        warrants to purchase up to 81,579 shares of our common stock at $1.33 per
        share.
        Our outstanding shares include 58,875,030 shares of our common stock issued
        in
        April 2006 to the former holders of our Series A preferred stock upon the
        automatic conversion of such preferred stock and 2,502,000 shares of common
        stock issued upon conversion in April 2006 of $500,400 of our 8% notes.
  Accordingly,
        on a fully-diluted basis (giving effect to the sale of 4,600,000 shares at
        $0.50
        per share in our private placement completed in April 2006, the conversion
        of
        all Series A preferred stock and 8% notes, and the exercise of all outstanding
        options and warrants), as at the date of this annual report, there would
        be
        issued and outstanding, an aggregate of 113,842,510 shares of our common
        stock,
        excluding an additional 4,705,000 shares underlying a warrant that we have
        issued to Novellus Systems, Inc. under our technology collaboration agreement
        with Novellus. This warrant will vest according to a timetable based on the
        completion of certain milestones, the earliest of which is expected to occur
        in
        the first quarter of 2007, please see “Strategic Goals and Relationships” for a
        description of these milestones and the related expected vesting
        dates.
  **We
        Could Issue A Significant Amount Of Common Stock Or A Series Of Preferred
        Stock
        That Might Adversely Affect Our Existing Common Stockholders.** Our
        articles of incorporation, as amended, authorize the issuance of 500,000,000
        shares of common stock and 25,000,000 shares of “blank check” preferred stock,
        with designations, rights and preferences that may be determined from time
        to
        time by our board of directors which may be superior to those attached to
        the
        common stock. Accordingly, the board of directors is empowered, without further
        stockholder approval, to issue additional shares of common stock up to the
        authorized amount or to establish a series of preferred stock with dividend,
        liquidation, conversion, voting or other rights either of which could adversely
        affect the voting power or other rights of the holders of the existing common
        stock. Issuance of additional common stock at prices below the fair market
        value
        per share would result in dilution to our existing common stockholders.
        Moreover, shares of preferred stock could be convertible into shares of common
        stock in amounts that would result in similar dilution. In the event of a
        preferred stock issuance, the preferred stock could be used, under certain
        circumstances, as a method of discouraging, delaying or preventing a change
        in
        control of our company.
  **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. In addition, since our
        March
        2006 merger, the price of our common stock has risen significantly. We cannot
        predict the extent to which, or if, investor interest will lead to the
        development of an active and liquid trading market. The current market price
        of
        our common stock may decline below its current level and this decline may
        be
        significant.
  The
        value
        of your investment could decline due to the impact of any of the following
        factors upon the market price of our common stock:
 · 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;
  31
 
 · 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 on a timely basis if at all, and
        may
        lose their entire investment.
  **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.
  **If
        Our Common Stock Is Not Accepted For Listing And Trading On An Exchange And
        If
        Our Common Stock Were Ever De-Listed It Would Become Less Liquid.** The
        underwriting agreement requires that we submit an application to have our
        common
        stock traded on the American Stock Exchange (AMEX), The NASDAQ Capital Market,
        or equivalent. We may not be accepted for listing if we do not meet the listing
        standards, such as a minimum price per share of our common stock, $2.00.
        Even if
        we meet the listing standard, AMEX or NASDAQ, as applicable, may in the future,
        delist our common stock from trading on the AMEX or NASDAQ market if we fail
        to
        satisfy their ongoing listing requirements including, without limitation,
        corporate governance, financial condition, and financial reporting rules.
        There
        can be no assurance that our securities will remain eligible for trading
        on the
        AMEX or on NASDAQ. If our common stock is not listed on the AMEX or on NASDAQ,
        or is delisted, our stockholders would not be able to sell the common stock
        on
        the AMEX or on NASDAQ, and their ability to sell any of their common stock
        would
        be severely if not completely limited. Additionally, if we lose our listing
        on
        the AMEX or on NASDAQ, as applicable, our ability to raise capital in the
        future
        may be adversely affected.
  **If
        Our Common Stock Becomes 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.** The
        underwriting agreement requires, as a condition of the firm commitment, that
        our
        shares of common stock have a market price per share in excess of $5.00 per
        share on the date of the offering. We may effect a reverse stock split to
        achieve this price. If at any time we have net tangible assets of $5,000,000
        or
        less or we get de-listed from the AMEX for any reason and our common stock
        has a
        market price per share of less than $5.00, transactions in our common stock
        may
        be subject to the “penny stock” rules promulgated under the Securities Exchange
        Act of 1934. Under these rules, broker-dealers who recommend such securities
        to
        persons other than institutional accredited investors must:
 · make
          a
          special written suitability determination for the purchaser;
 
 · receive
          the purchaser’s written agreement to a transaction prior to sale;
 
 · provide
          the purchaser with risk disclosure documents which identify certain risks
          associated with investing in “penny stocks” and which describe the market for
          these “penny stocks” as well as a purchaser’s legal remedies; and
 
 · obtain a
          signed and dated acknowledgment from the purchaser demonstrating that the
          purchaser has actually received the required risk disclosure document before
          a
          transaction in a “penny stock” can be completed.
  If
        our
        common stock becomes 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.
  32




**Item
      7: Financial Statements**




**NEAH
      POWER SYSTEMS, INC.**




**FINANCIAL
      REPORT**




DECEMBER
      31, 2006 and 2005




**CONTENTS**





**PAGE****REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
            
            34**FINANCIAL
                STATEMENTS**
            
            33CONSOLIDATED
                BALANCE SHEETS
            
            35CONSOLIDATED
                STATEMENTS OF OPERATIONS
            
            36CONSOLIDATED
                STATEMENTS OF CASH FLOWS
            
            37CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
            
            38NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            39





33


[GRAPHIC
                OMITTED]PETERSON
                SULLIVAN PLLCCERTIFIED
                PUBLIC ACCOUNTANTS
            
            TEL
                206.382.7777 O FAX 206.382.7700610
                UNION STREET, SUITE 2300
            
            http://www.pscpa.comSEATTLE,
                WASHINGTON 98101




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Neah
      Power Systems, Inc.


Bothell,
      Washington





We
      have
      audited the accompanying consolidated balance sheets of Neah Power Systems,
      Inc., ("the Company") as of December 31, 2006 and 2005, and the related
      consolidated statements of operations, stockholders' equity (deficit), and
      cash
      flows for the years then ended. These consolidated financial statements are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our
      audits.





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





In
      our
      opinion the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Neah Power Systems, Inc.,
      as
      of December 31, 2006 and 2005, and the results of its operations and its
      cash flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company has experienced recurring losses
      from operations. This raises substantial doubt about the Company's ability
      to
      continue as a going concern. Management's plans regarding this matter are also
      described in Note 2. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





/S/
      PETERSON SULLIVAN PLLC





Seattle,
      Washington


February 22,
      2007





34




**NEAH
      POWER SYSTEMS, INC.**




CONSOLIDATED
      BALANCE SHEETS


December 31,
      2006 and 2005


2006
            
            2005ASSETSCurrent
                AssetsCash
                and cash equivalents
            
            $
            1,141,905
            
            $
            311,815Short-term
                investments
            
            
            
            
            
            103,200Prepaid
                expense
            
            
            21,405
            
            
            9,675Total
                current assets
            
            
            1,163,310
            
            
            424,690Property
                and equipment, net
            
            
            434,059
            
            
            831,081Total
                Assets
            
            $
            1,597,369
            
            $
            1,255,771LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                LiabilitiesAccounts
                payable
            
            $
            1,333,949
            
            $
            176,831Accrued
                expenses
            
            
            208,191
            
            
            102,557Equipment
                loan payable, current portion
            
            
            29,840
            
            
            186,846Notes
                payable
            
            
            1,965,000Deferred
                revenue
            
            
            189,500
            
            
            189,500Total
                current liabilities
            
            
            3,726,480
            
            
            655,734Equipment
                loans, less current portion
            
            
            
            
            
            29,840Total
                liabilities
            
            
            3,726,480
            
            
            685,574Commitments
                and ContingenciesStockholders'
                Equity (Deficit)Preferred
                stock - authorized 8,795,384 shares, no par valueSeries
                A convertible preferred stock - designated none and799,750
                shares, none and 583,449 shares issued andoutstanding,
                liquidation value of none and $1,363,871
            
            
            
            
            
            1,208,281Series
                B convertible preferred stock - designated none and7,995,634
                shares, none and 6,509,086 issued andoutstanding,
                liquidation value of none and $18,095,259
            
            
            
            
            
            17,744,588Common
                Stock,$0.001
                par value, 500,000,000 shares authorized,106,915,431
                shares issued, 103,162,431 shares outstanding
            
            
            106,915No
                par value, 12,300,000 shares authorized,888,795
                shares issued and outstanding
            
            
            
            
            
            298,902Additional
                paid-in capital
            
            
            27,391,921
            
            
            2,913,245Treasury
                shares, 3,753,000 and no common shares, at no costAccumulated
                deficit
            
            
            (29,627,947
            )
            
            (21,594,819
            )Total
                stockholders' equity (deficit)
            
            
            (2,129,111
            )
            
            570,197Total
                Liabilities and Stockholders' Equity (Deficit)
            
            $
            1,597,369
            
            $
            1,255,771


See
        Notes
        to Consolidated Financial Statements




35


**NEAH
      POWER SYSTEMS, INC.**




CONSOLIDATED
      STATEMENTS OF OPERATIONS


For
      the
      Years Ended December 31, 2006 and 2005




2006
            
            2005RevenuesGrant
                revenue
            
            $
            -
            
            $
            780,000Operating
                ExpensesResearch
                and development expense
            
            
            4,347,868
            
            
            3,475,740General
                and administrative expense
            
            
            2,572,712
            
            
            1,302,398Total
                operating expenses
            
            
            6,920,580
            
            
            4,778,138Loss
                from operations
            
            
            (6,920,580
            )
            
            (3,998,138
            )Interest
                income (expense), net
            
            
            (1,112,548
            )
            
            13,391**Net
                Loss**
            
            **$**
            **(8,033,128**
            **)**
            **$**
            **(3,984,747**
            **)**Basic
                and diluted net loss per common share
            
            $
            (0.10
            )
            $
            (4.48
            )Weighted
                average basic and diluted shares outstanding
            
            
            78,659,792
            
            
            888,629




See
      Notes to Consolidated Financial
      Statements


36


**NEAH
      POWER SYSTEMS, INC.**




CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the
      Years Ended December 31, 2006 and 2005




2006
            
            2005Cash
                Flows From Operating ActivitiesNet
                loss
            
            $
            (8,033,128
            )
            $
            (3,984,747
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
            
            
            400,012
            
            
            382,151Share-based
                payments included in operating expenses
            
            
            1,164,851
            
            
            8,135Shares
                issued as additional loan consideration, accounted for as interest
                expense
            
            
            665,000Changes
                in operating assets and liabilitiesWarrants
                issued by shareholder, accounted for as interest expense
            
            
            357,000Prepaid
                expenses
            
            
            (11,730
            )
            
            13,393Accounts
                payable and accrued expenses
            
            
            1,262,752
            
            
            (33,322
            )Net
                cash used in operating activities
            
            
            (4,195,243
            )
            
            (3,614,390
            )Cash
                Flows From Investing ActivitiesPurchases
                of property and equipment
            
            
            (2,990
            )
            
            (80,424
            )Sales
                of short-term investments
            
            
            103,200
            
            
            1,608,575Deposits
            
            
            
            
            
            13,566Cash
                received from GMI in acquisition
            
            
            506,500Net
                cash provided by investing activities
            
            
            606,710
            
            
            1,541,717Cash
                Flows From Financing ActivitiesProceeds
                from bridge financing
            
            
            500,400Net
                proceeds from borrowings on notes payable
            
            
            1,965,000Payments
                on equipment loans
            
            
            (186,846
            )
            
            (116,191
            )Net
                proceeds of common stock sold to investors
            
            
            2,140,000Proceeds
                from exercise of stock options and warrants
            
            
            
            
            
            19,576Other
            
            
            69Net
                cash provided by financing activities
            
            
            4,418,623
            
            
            (96,615
            )**Net
                increase in cash and cash equivalents**
            
            
            **830,090**
            
            
            **(2,169,288**
            **)**Cash
                and cash equivalents, beginning of period
            
            
            311,815
            
            
            2,481,103Cash
                and cash equivalents, end of period
            
            $
            1,141,905
            
            $
            311,815Supplemental
                disclosure of cash flow informationCash
                paid for interest
            
            $
            8,297
            
            $
            46,043Cash
                paid for income taxes
            
            $
            -
            
            $
            -Non-Cash
                Investing and Financing ActivitiesAcquisition
                of NPSWA:Convert
                NPSWA Series A and Series B preferred stock to common
                stock
            
            $
            (18,952,869
            )NPSWA
                common stock issued to converting preferred shareholders
            
            
            18,952,869Adjust
                NPSWA common stock to reflect $0.001 par value
            
            
            (19,225,636
            )Record
                additional paid-in capital from adjustment of common stock
                to
            
            
            19,225,636$0.001
                par valueRecord
                NPSNV Series A preferred stock
            
            
            6,500Record
                par value of NPSNV common stock
            
            
            10,481Record
                additional paid-in capital of NPSNV preferred and common
                stock
            
            
            489,519Cash
                received from GMI in acquisition
            
            
            (506,500
            )Net
                cash effect of NPSWA acquisition
            
            $
            -Other
                non-cash activities:Convert
                NPSNV Series A preferred stock to common stock
            
            $
            (6,500
            )NPSNV
                common stock issued to converting preferred shareholders
            
            
            62,628Reduce
                NPSNV paid-in capital upon conversion of Series A preferred stock
                to
            
            
            (56,128
            )common
                stockBridge
                loans converted to common stock
            
            
            (500,400
            )Common
                stock issued for convertible bridge loans
            
            
            500,400Net
                cash effect of other non-cash activities
            
            $
            -




See
      Notes to Consolidated Financial
      Statements


37


**NEAH
      POWER SYSTEMS, INC.**




CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT )


For
      the
      Years Ended December 31, 2006 and 2005


Series
                  A Preferred Stock
              
              Series
                  B Preferred Stock
              
              Common
                  Stock
              
              Treasury
                  Stock
              
              Additional
                Paid-in
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalance
                  at January 1, 2005
              
              
              575,473
              
              $
              1,189,105
              
              
              6,509,086
              
              $
              17,744,588
              
              
              888,462
              
              $
              298,502
              
              
              
              
              $
              -
              
              $
              2,905,110
              
              $
              (17,610,072
              )
              $
              4,527,233Exercise
                  of stock options and warrants
              
              
              7,976
              
              
              19,176
              
              
              
              
              
              
              
              
              333
              
              
              400
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,576Share-based
                  payments for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,135
              
              
              
              
              
              8,135Net
                  loss for the year ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,984,747
              )
              
              (3,984,747
              )Balance
                  at December 31, 2005
              
              
              583,449
              
              
              1,208,281
              
              
              6,509,086
              
              
              17,744,588
              
              
              888,795
              
              
              298,902
              
              
              0
              
              
              -
              
              
              2,913,245
              
              
              (21,594,819
              )
              
              570,197Convert
                  NPSWA Series A and Series B preferred stock to common
                  stock
              
              
              (583,449
              )
              
              (1,208,281
              )
              
              (6,509,086
              )
              
              (17,744,588
              )
              
              7,092,535
              
              
              18,952,869
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Other
                  adjustments by NPSWA prior to acquisition
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,127
              
              
              69
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              69Adjust
                  number of NPSWA common shares to be same as GMI common
                  shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,213,401
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Adjust
                  NPSWA common stock account to reflect $0.001 par value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (19,225,636
              )
              
              
              
              
              
              
              
              19,225,636
              
              
              
              
              
              -Adjust
                  NPSWA capital accounts to equal capital accounts of GMI
              
              
              6,500,000
              
              
              6,500
              
              
              
              
              
              
              
              
              10,481,534
              
              
              10,481
              
              
              
              
              
              
              
              
              489,519
              
              
              
              
              
              506,500Convert
                  bridge loans to common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,502,000
              
              
              2,502
              
              
              
              
              
              
              
              
              497,898
              
              
              
              
              
              500,400Convert
                  NPSNV Series A preferred stock to common stock
              
              
              (6,500,000
              )
              
              (6,500
              )
              
              
              
              
              
              
              
              62,628,030
              
              
              62,628
              
              
              
              
              
              
              
              
              (56,128
              )
              
              
              
              
              -3,753,000
                  common shares returned to Company at no cost, to be held in
                  treasury
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,753,000
              )
              
              
              
              
              
              
              
              
              
              
              -Sell
                  4,600,000 common shares at $0.50/share, net of cash offering
                  costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,600,000
              
              
              4,600
              
              
              
              
              
              
              
              
              2,135,400
              
              
              
              
              
              2,140,000Issue
                  warrants valued at $159,000 to purchase 320,000 common shares to
                  placement
                  agent in stock sale, accounted for as cost of offering *
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Issue
                  500,000 common shares valued at $665,000 to lenders, accounted
                  for as
                  interest expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              500
              
              
              
              
              
              
              
              
              664,500
              
              
              
              
              
              665,000Share-based
                  payments for services - common stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              841,384
              
              
              
              
              
              841,384Share-based
                  payments for research and development and interest expense
                  -common
                  stock purchase warrants:Crystal
                  Research Associates
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              222,000
              
              
              
              
              
              222,000Palladium
                  Capital Advisors
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              101,467
              
              
              
              
              
              101,467Recognize
                  value of warrants issued to lenders by stockholder
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              357,000
              
              
              
              
              
              357,000Other
                  adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Net
                  loss for the year ended December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,033,128
              )
              
              (8,033,128
              )Balances
                  at December 31, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              106,915,431
              
              $
              106,915
              
              
              (3,753,000
              )
              $
              -
              
              $
              27,391,921
              
              $
              (29,627,947
              )
              $
              (2,129,111
              )





*
            There
                is no amount listed for this transaction as the amounts recognized
                as
                additional paid-in capital are offset by the offering
                costs.




See
      Notes to Consolidated Financial
      Statements


38




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Note
      1. The Company**





Neah
      Power Systems, Inc. ("NPSNV") was incorporated in Nevada on February 1,
      2001, under the name Growth Mergers, Inc. ("GMI"). As described in Note 16,
      in March 2006 GMI, at the time a public shell company, acquired all of the
      outstanding capital stock of an operating Washington corporation, Neah Power
      Systems, Inc. ("NPSWA"). Upon completion of the acquisition, GMI changed its
      name to be the same as its new wholly-owned subsidiary. The acquisition was
      accounted for as a reverse merger, which the Securities and Exchange Commission
      ("SEC") considers to be equivalent to a recapitalization. NPSNV is the legal
      parent of NPSWA but these financial statements, other than capital stock
      accounts, are those of NPSWA. In these financial statements, the "Company"
      refers to NPSNV and its wholly-owned consolidated subsidiary,
      NPSWA.





The
      Company has developed, and is planning to bring to market, a direct methanol
      micro fuel cell that may serve as a replacement for batteries in a variety
      of
      mobile electronic products.





**Note
      2. Going Concern**





The
      Company's financial statements are prepared consistent with accounting
      principles generally accepted in the United States applicable to a going
      concern, which contemplates the realization of assets and liquidation of
      liabilities in the normal course of business. However, as shown in the financial
      statements, the Company has sustained substantial losses and has relied
      primarily on sales of securities and proceeds from borrowings for operating
      capital, which raise substantial doubt about its ability to continue as a going
      concern.





To
      meet
      its cash needs, in the first calendar quarter of 2007, the Company intends
      to
      raise $500,000 in short-term financing and $10 million in an offering of its
      securities. There is no assurance that the Company will be successful in raising
      this capital on a timely basis, if at all. The failure to obtain the necessary
      working capital would have a material adverse effect on the development program
      and business prospects and, depending upon the shortfall, the Company may have
      to curtail its operations.





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





**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.




**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**




39




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, accounts
      payable, accrued expenses, and equipment loan payable, and note payable. The
      fair value of all financial instruments approximates the recorded value based
      on
      the short-term nature and market interest rates of these financial
      instruments.





**Depreciation
      and Amortization**





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





**Impairment
      of Long-Lived Assets**





The
      Company's long-lived assets, including property and equipment, are reviewed
      for
      carrying value impairment at least annually or more frequently when events
      or
      changes in circumstances indicate that the carrying amount may not be
      recoverable. The Company does not believe that any of its long-lived assets
      were
      impaired at December 31, 2006.





**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 collectibility 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. The Company did not
      have any contract revenues in these financial statements. Upfront payments
      received under contractual arrangements are recognized as revenue over the
      service period.





Unearned
      revenues, recorded as deferred revenue in the balance sheet, were $189,500
      as of
      December 31, 2006.





**Research
      and Development Expense**





Research
      and development costs are expensed as incurred.





**Income
      Taxes**





The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, deferred tax assets and liabilities are determined based on differences
      between the financial reporting and tax basis of assets and liabilities and
      on
      the expected future tax benefits to be derived from net operating loss
      carryforwards measured using current tax rates. A valuation allowance is
      established if it is more likely than not that some portion or all of the
      deferred tax assets will not be realized. Due to the nature of the acquisition
      described in Note 16 and the resulting greater than 50% change in control,
      the ability of the Company to utilize NOL carryforwards from NPSWA will be
      limited.





**Share-Based
      Payments**





In
      March
      2006, the Company adopted its Long Term Incentive Compensation Plan ("the Plan")
      and stock options were granted to certain employees, officers and directors
      of
      the Company, certain former employees, and others at the time of adoption of
      the
      Plan. The Company granted additional stock options under the Plan to employees
      and stock purchase warrants to non-employees and other parties throughout the
      period ended December 31, 2006.





40




Grants
      of
      stock options to employees and directors under the Plan are accounted for in
      accordance with the Financial Accounting Standards Board's Statement of
      Financial Accounting Standards No.123 (revised 2004), *Share-Based
      Payment* ("SFAS
      123(R)"). Grants of stock options under the Plan and grants of stock purchase
      warrants to non-employees and other parties are accounted for in accordance
      with
      the Financial Accounting Standards Board's Emerging Issue Task Force Abstract,
      EITF 96-18, *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods and Services* ("EITF
      96-18").





To
      calculate the value of share-based payments, the Company uses the Black-Scholes
      minimum value option-pricing model with the following weighted average
      assumptions for options and warrants granted during the period ended December 31,
      2006:





Risk
                free interest rate
            
            
            4.7
            %Expected
                dividend yield
            
            
            0.0
            %Volatility
            
            
            122.0
            %Expected
                life
            
            
            10.0
                years





Share-based
      payments recognized as expense are as follows for the years ended
      December 31:





2006
            
            2005Common
                stock options
            
            $
            841,384
            
            $
            8,135Common
                stock purchase warrants:Crystal
                Research Associates (Note 11)
            
            
            222,000Palladium
                Capital Advisors (Note 7)
            
            
            101,467Total
                warrants
            
            
            323,467
            
            
            -Total
                share-based payments
            
            $
            1,164,851
            
            $
            8,135





**Loss
      per Share**





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





41


Basic
      weighted average common shares outstanding, and the potentially dilutive
      securities excluded from loss per share computations because they are
      antidilutive, are as follows for the years ended December 31:





2006
            
            2005Basic
                and diluted weighted average common stock shares
                outstanding
            
            
            78,659,792
            
            
            888,629Potentially
                dilutive securities excluded from loss per share
                computations:Common
                stock options
            
            
            6,325,500Common
                stock purchase warrants
            
            
            9,059,000





**Recent
      Accounting Pronouncements**





In
      accordance with Release No. 8760 of the Securities Act of 1933, commencing
      with
      the Company's fiscal year ending December 31, 2007, the Company will become
      subject to the requirement to include in its annual report management's
      assessment of internal controls over financial reporting. This assessment will
      require the Company to document and test its internal control procedures in
      accordance with Section 404 of the Sarbanes-Oxley Act of 2002. The Company's
      independent registered public accountants will be required to attest to the
      Company's assessment of internal controls for its fiscal year ending
      December 31, 2008.





In
      February 2006, the Financial Standard Accounting Board ("FASB") issued Statement
      of Financial Accounting Standards No. 155, *Accounting
      for Certain Hybrid Financial Instruments* ("SFAS
      155"). SFAS 155 is effective for all financial statements issued for fiscal
      years beginning on or after September 15, 2006, with earlier adoption
      permitted. The Company believes this statement will have no effect on its
      financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *"Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
      109"* ("FIN
      48"). FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company believes that this interpretation will have no material effect
      on its financial statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurements* ("SFAS
      157"). SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company has not yet determined the effect of applying SFAS
      157.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      158, *Employers'
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ,
      ("SFAS
      158"). Portions of SFAS 158 are effective for financial statements as of
      December 31, 2006. The Company believes this statement will have no effect
      on its financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin 108 ("SAB 108") which
      provides interpretive guidance on how the effects of the carryover or reversal
      of prior year misstatements should be considered in quantifying a current year
      misstatement. SAB 108 is effective for the first interim period following the
      first fiscal year ending after November 15, 2006. The Company believes this
      bulletin will have no effect on its financial statements.





42





**Note
      4. Property and Equipment**





December 31,2006
            
            2005Laboratory
                equipment
            
            $
            1,317,165
            
            $
            1,279,666Leasehold
                improvements
            
            
            579,641
            
            
            579,641Computer
                equipment and software
            
            
            134,721
            
            
            169,230Office
                furniture and equipment
            
            
            56,000
            
            
            56,000Subtotal
            
            
            2,087,527
            
            
            2,084,537Accumulated
                depreciation and amortization
            
            
            (1,653,468
            )
            
            (1,253,456
            )Property
                and equipment, net
            
            $
            434,059
            
            $
            831,081




**Note
      5. Accrued Expenses**





December 31,2006
            
            2005Vacation
                pay
            
            $
            39,573
            
            $
            48,657Payroll
                and payroll taxes
            
            
            168,618
            
            
            53,900Total
            
            $
            208,191
            
            $
            102,557




**Note
      6. Equipment Loan Payable**




An
      equipment loan secured by laboratory and testing equipment is payable $6,042
      per
      month, including interest at 6%. The balance due of $29,840 at December 31,
      2006, is payable within one year.





**Note
      7. Notes Payable**




In
      November 2006, the Company borrowed $415,000 from existing shareholders.
      The notes bear interest at 10% and are due May 26, 2007. The Company's
      largest shareholder granted one-year warrants to on of the lenders as additional
      consideration. These warrants, to purchase 500,000 shares of the Company's
      common stock owned by the shareholder at $0.55 per share, are valued at
      $357,000, and are recorded as additional interest expense and a contribution
      of
      capital to the Company in the year ended December 31, 2006.





In
      December 2006, the Company borrowed $1,550,000 from six accredited institutional
      investors. The loan is collateralized by all assets of the company, bears
      interest at 6%, and is payable on the earlier of the Company receiving new
      financing of more than $2,000,000 or May 7, 2007. The investors also
      received 500,000 shares of common stock, valued at $665,000, which is recorded
      as additional interest expense in the year ended December 31, 2006. In
      addition, Palladium Capital Advisors, LLC, received a five-year warrant to
      purchase 81,579 common shares at $1.33 per share. This warrant is valued at
      $101,467 and is recorded as additional interest expense in the year ended
      December 31, 2006.





43


**Note
      8. Conversions of Debt and Preferred Stock to Common Stock and Return of
      Treasury Shares**





During
      the calendar quarter ended March 31, 2006, certain shareholders loaned the
      Company $500,400, which loans automatically converted into 2,502,000 shares
      of
      common stock in April 2006 when additional financing of not less than
      $1,500,000 was subsequently received by the Company. In addition, these lenders
      received five-year warrants to purchase an aggregate of 3,753,000 shares of
      common stock of the Company at an exercise price of $0.20 per share. A
      corresponding number of shares were returned to the Company at no cost by the
      two largest shareholders of the Company to cover any exercises of these warrants
      and have been recorded as treasury shares. If the warrants are not exercised,
      these treasury shares will be retained by the Company for general corporate
      purposes, at which time the Company will determine their contributed
      value.





At
      the
      same time as the conversion described above, stockholders owning the Company's
      6,500,000 shares of its Series A Convertible Preferred Stock converted such
      shares into 62,628,030 shares of common stock. The shares of common stock
      returned to the Company as treasury shares came from these converting
      shareholders.





**Note
      9. Sale of Common Shares in Private Placement**





In
      April
      2006, the Company sold 4,600,000 shares of common stock under a private
      placement to accredited investors for $0.50 per share. The Company realized,
      after cash offering costs of $160,000, a net of $2,140,000. The placement agent
      received five-year warrants to purchase 320,000 common shares at $0.60 per
      share. These warrants have been valued at $159,000 and have been recorded as
      a
      non-cash cost of the offering.





**Note
      10. Stock Option Plan**





In
      March
      2006, the Company adopted its Long Term Incentive Compensation Plan ("the
      Plan"). NPSWA had a stock option plan that was cancelled, along with all of
      its
      outstanding stock options and stock purchase warrants, upon completion of the
      acquisition by the Company.





The
      Plan
      is to continue for a term of ten years from the date of its adoption. The Plan
      is administered by the Compensation Committee ("the Committee") of the Company's
      Board of Directors. A maximum of 10,000,000 shares of Company common stock
      can
      be issued under the Plan. To date, the Company has awarded stock options for
      6,325,500 shares to employees, members of the Committee, the Board, and advisors
      and consultants to the Company, and none of these options has as of yet been
      exercised. Options are exercisable for ten years from date of grant. All current
      members of the Committee have received grants of stock options under the
      Plan.





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.





44


The
      following table summarizes stock option activity during the period ended
      December 31, 2006:





Options
                Outstanding
            
            Weighted
                Average Exercise PriceInitial
                grant - March 2006
            
            
            6,589,500
            
            $
            0.24Additional
                grants through December 31, 2006
            
            
            66,000
            
            
            1.73Forfeitures
            
            
            (330,000
            )Exercised
            
            
            0Outstanding
                at December 31, 2006 (exercisable 3,615,500 options)
            
            
            6,325,500
            
            $
            0.25





The
      weighted average fair value of the options granted during the period ended
      December 31, 2006, was $0.19. At December 31, 2006, the weighted
      average remaining contractual lives of outstanding options was 9.3
      years.





**Note
      11. Common Stock Purchase Warrants**




A
      summary
      of warrants outstanding at December 31, 2006, follows:





Date
            
            Action
            
            Number
                of Warrants
            
            Fair
                Value at Issuance
            
            Exer.
                Price
            
            Expiration
                DateApril
                2006
            
            
            Grant
                to Novellus under
              collaboration
                agreement
            
            
            4,705,000
            
            $
            16,000,000
            
            $
            0.001
            
            
            Apr.
                30, 2011April
                2006
            
            
            Grants
                to note holders in
              conversion
            
            
            3,753,000
            
            
            0
            
            $
            0.20
            
            
            Apr
                27, 2011April
                2006
            
            
            Grant
                to placement agent
            
            
            320,000
            
            
            159,000
            
            $
            0.60
            
            
            Apr.
                29, 2011April
                2006
            
            
            Grant
                to CRA
            
            
            200,000
            
            
            222,000
            
            $
            0.85
            
            
            Apr.
                7, 2011Dec.
                2006
            
            
            Grant
                to Palladium
            
            
            81,579
            
            
            101,467
            
            $
            1.33
            
            
            Dec.
                26, 2011Balance
                - December 31, 2006
            
            9,059,579
            
            $
            16,482,467





**Novellus**





As
      described in Note 13, the Company has in place a collaboration agreement
      dated May 24, 2006, with Novellus Systems Inc., ("Novellus"), a current
      stockholder of the Company and a former stockholder of NPSWA. 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
      will occur upon certain milestones being achieved by Novellus and the Company
      and each milestone has a specific number of warrant shares assigned thereto.
      The
      milestones are as follows and the warrant is exercisable in whole or in part
      through April 30, 2011.




1.  Ten
      (10)
      percent of the Warrants granted to Novellus will vest when Novellus and the
      Company complete a fully self-contained prototype fuel cell capable of producing
      10 Watts of power continuously for five hours using one detachable cartridge.
      The prototype will be approximately 40% larger than the intended size of our
      initial military product. This milestone is targeted for the six months ending
      June 30, 2007.




2.  Fifteen
      (15) percent of the Warrants will vest when Novellus and the Company complete
      a
      fully self-contained fuel cell capable of producing 45 Watts of peak power
      and
      300WH capability at 20 Watts average operating power. This prototype will be
      the
      same size as the Company's initial military product, i.e. about 0.9 liter,
      which
      is the same size as a standard disposable battery widely used in the military.
      This milestone is targeted for the nine months ending September 30,
      2007.




45




3.  Fifty
      (50) percent of the Warrants will vest when Novellus and the Company complete
      all of the following tasks:





·
            Establish
                a pilot production line to assemble completed fuel
                cells.





·
            Finalize
                a manufacturing process for silicon electrodes based on the most
                common
                silicon wafer format, based on commercially available equipment,
                and
                identification of a manufacturing partner that is capable and willing
                to
                run the process.




·
            Reduce
                the cost of processing porous silicon electrodes to $30 or less per
                silicon wafer. One silicon wafer is expected to yield 12 electrodes.





This
      milestone is targeted for the year ending December 31, 2007.





4.
            Twenty-five
                (25) percent of the Warrants will vest when Novellus and the Company
                complete all of the following
                tasks:





·
            Reduce
                the electrode catalyst loading to 25-30% of its value as of May 2005.
                Catalyst materials form a large part of the production cost of any
                methanol fuel cell; this target allows the Company to meet its cost
                of
                goods targets in the future.





·
            Develop
                a plan to scale the Company's fuel cell production process to commercial
                volumes, and to adapt it to commercially available
                equipment.





This
      milestone is targeted for the first quarter of 2008.





These
      four (4) Milestones set forth above are each targeted to be completed on or
      before the date specified in the specified Milestone ("Target Date");
      however,





·
            If
                the Milestone is completed on or before 120 days following the Target
                Date, there will be no penalty and 100% of the Warrants scheduled
                to vest
                under the Milestone will vest in
                Novellus;





·
            If
                the Milestone is completed after 120 days following the Target Date
                but on
                or before 210 days following the Target Date, there will be a one-third
                penalty and only 66.67% of the Warrants scheduled to vest under the
                Milestone will vest in Novellus;





·
            If
                the Milestone is completed after 210 days following the Target Date
                but on
                or before 300 days following the Target Date, there will be a two-third
                penalty and only 33.33% of the Warrants scheduled to vest under the
                Milestone will vest in Novellus;





·
            If
                the Milestone is completed after 300 days following the Target Date,
                there
                will be a 100% penalty and 0% of the Warrants scheduled to vest under
                the
                Milestone will vest in Novellus;





The
      warrant has been valued at approximately $16,000,000 and will be accounted
      for
      ratably as each specific milestone is achieved. Because no milestones were
      reached during the period ended December 31, 2006, there has not been any
      expense recorded through that date.





Under
      certain circumstances, the Company can exercise a repurchase right to acquire
      warrant stock acquired by Novellus prior to achieving any specific milestone.
      Under such circumstances, Novellus could only recover the exercise price it
      had
      paid for the repurchased stock.





46


**Convertible
      Notes Converted to Common Stock in April 2006**





As
      described in Note 8, in conjunction with the automatic conversion of
      $500,400 of 8% Convertible Notes on April 27, 2006, the Company issued
      five-year warrants to the note holders to acquire up to 3,753,000 shares of
      Company common stock at $0.20 per share. Any shares issued pursuant to exercise
      of these warrants are to be obtained from the treasury shares contributed by
      the
      Company's two principal stockholders for such purpose. No value was attributed
      to these warrants as they have no cost to the Company. If the warrants are
      not
      exercised, these treasury shares will be retained by the Company for general
      corporate purposes, at which time the Company will determine their contributed
      value.





**Private
      Placement in April 2006**





As
      described in Note 9, in April 2006, the Company sold 4,600,000 shares of
      common stock under a private placement. The placement agent received five-year
      warrants to purchase 320,000 common shares at $0.60 per share. These warrants
      were valued at $159,000 and have been recorded as a non-cash cost of the
      offering.





**Crystal
      Research Associates**





As
      described in Note 13, in April 2006, the Company granted four-year warrants
      to Crystal Research Associates ("CRA") to purchase 200,000 common shares at
      $0.85 per share. These warrants were valued at $222,000 and were recorded as
      research and development expense.





**Palladium
      Capital Advisors, LLC**





As
      described in Note 7, in December 2006, Palladium Capital Advisors, LLC,
      received a five-year warrant to purchase 81,579 common shares at $1.33 per
      share. This warrant is valued at $101,467 and is recorded as additional interest
      expense in the year ended December 31, 2006.





**Note
      12. Income Taxes**





Significant
      components of the Company's deferred tax assets and liabilities and related
      valuation allowances are as follows as of December 31:





2006
            
            2005Deferred
                tax assets (liabilities):Accelerated
                depreciation
            
            $
            148,000
            
            $
            (22,000
            )Research
                & development credit
            
            
            678,000
            
            
            691,000Accrued
                vacation
            
            
            16,000
            
            
            16,500Shared-based
                compensation expense
            
            
            399,000
            
            
            93,000Net
                operating loss carryforwards
            
            
            9,246,000
            
            
            6,857,000Total
                net deferred tax assets
            
            
            10,487,000
            
            
            7,635,500Valuation
                allowance
            
            
            (10,487,000
            )
            
            (7,635,500
            )Deferred
                tax assets, net of valuation allowance
            
            $
            -
            
            $
            -





The
      Company has established a valuation allowance as of December 31, 2006, due
      to the uncertainty of future realization of the net deferred tax assets. During
      the years ended December 31, 2006 and 2005, the valuation allowance
      increased by $2,852,000 and $1,511,500, respectively.





At
      December 31, 2006, the Company had net operating loss carryforwards for
      Federal income tax purposes of approximately $27,200,000 and research and
      development credit carryforwards of approximately $678,000 available to offset
      future income that expire in 2021. Utilization of the carryforwards are
      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.





47




**Note
      13. Significant Agreements**





**National
      Institute of Standards and Technology**





For
      the
      year ended December 31, 2005, the Company received fees of $780,000 from
      the National Institute of Standards and Technology ("NIST") under a research
      grant that ended that year.





**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 $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 2007, at which time the customer will then have the right to
      choose whether or not to continue further with Phase II.





**Employment
      Contract with President and CEO**





In
      March
      2006, the Company entered into an employment contract with its President and
      CEO, Paul Abramowitz. The contract calls for an annual salary of $270,000 plus
      customary executive benefits. Mr. Abramowitz has agreed to defer $112,500 of
      the
      annual salary until the Company raises a minimum of $5,000,000. Mr. Abramowitz
      can then either receive the deferred amount or convert it to options that vest
      at 1/12 per month, effective March 2006, and are exercisable at $0.85 per share.
      If Mr. Abramowitz elects to convert to the options, the Company will pay the
      exercise price of $0.85 per share for all such options then exercised and Mr.
      Abramowitz will be responsible for any taxes due. The contract is terminable
      by
      either party at any time.





**Novellus**





In
      connection with the acquisition of NPSWA by the Company, Novellus, a current
      stockholder of the Company and a former stockholder of NPSWA, agreed to cancel
      warrants of NPSWA it held and the Company agreed to pay by November 30,
      2006, approximately $150,000 owed to Novellus for services. In addition, on
      May 24, 2006, the Company and Novellus negotiated the final terms of a new
      collaboration agreement and on May 26, 2006, the Company issued 4,705,000 new
      warrants to Novellus, which are described in detail in Note 11. The Company
      anticipates that the $150,000 payment to Novellus will be made in 2007 upon
      completion of the stock offering described in Note 17.





**Crystal
      Research Associates**





On
      April 7, 2006, the Company signed a contract with CRA for market research.
      The cost of the research program was $35,000 plus out-of-pocket expenses and
      200,000 warrants, which are described in detail in Note 11.





**Apex
      Strategies, Inc.**





In
      April
      2006, the Company signed a marketing consulting agreement with Apex Strategies,
      Inc. for public sector opportunities such as State, municipal and local
      governments at a fee of $5,000 monthly for one year with automatic renewal
      if
      not previously terminated.





**McBee
      Strategic Consulting**





In
      August
      2006, the Company signed a one-year extension, retroactive to February 15,
      2006, and ending August 14, 2007, to a marketing consulting agreement with
      McBee Strategic Consulting at a fee of $15,000 monthly through August 15,
      2006. The fee was, with the Company's consent, to increase to $18,000 monthly
      through February 14, 2007, but at the present time, the Company has not
      agreed to the increase.





48




**Danfoss
      A/S**





In
      June
      2006, the Company entered into a research agreement with a Danish company,
      Danfoss A/S, ("Danfoss"). The costs of Danfoss' services are estimated to
      be $280,000, of which approximately $98,000 was incurred in the year ended
      December 31, 2006, Danfoss also agreed to grant a license to the Company so
      that any specific Danfoss technology or software can be used by the Company
      and
      the technology that is developed jointly will be owned by the Company. The
      Company will pay a royalty of 3% of the sales value of certain products and
      technology that arise from this agreement.





**Note
      14. Commitments and Contingencies**





The
      Company leases its corporate headquarters and laboratory facilities under a
      non-cancelable operating lease which expires in August 2007 and also leases
      laboratory facilities on a month-to-month basis. As of December 31, 2006,
      future minimum rental and related payments required under operating leases
      are
      approximately $84,000. Rental expense was approximately $186,000 and $188,000
      for the years ended December 31, 2006 and 2005, respectively.





The
      Company's former securities counsel claims it is owed $200,000 for legal fees.
      The Company believes that there is an agreement in place to cap these fees
      at
      $60,000. No formal legal action has been taken in this matter.





In
      December 2006, the Company's former placement agent filed an action against
      the
      Company and its president and CEO for breach of contract, misrepresentation
      and
      related claims arising from an engagement letter in which the Company agreed
      to
      pay a commission up to $160,000 plus warrants in connection with a private
      placement. The agent seeks general damages up to $2 million. The Company
      believes that the agent failed to perform under the agreement and that the
      case
      is substantially without merit and the Company intends to vigorously defend
      the
      action.




**Note
      15. Related Party Transactions**





See
      Note 7 regarding certain stockholders loaning the Company money and the
      contributions of warrants to purchase Company common stock owned by a
      stockholder to the lending stockholders.





See
      Notes 8 and 11 regarding the transfer of treasury shares to the Company by
      certain former preferred stockholders.





See
      Note 10 regarding the Plan Committee receiving stock options under the
      Plan.





See
      Notes 11 and 13 regarding an agreement with Novellus, a former stockholder
      of NPSWA.





See
      Note
      13 regarding the employment contract with the Company's president and
      CEO.





**Note
      16. Acquisition of NPSWA**





On
      March 9, 2006, NPSWA entered into an Agreement and Plan of Merger ("the
      Merger Agreement") with GMI, a Nevada public shell corporation, Growth
      Acquisition Corp. ("GAC"), a Washington corporation, Summit Trading Limited
      ("STL"), a British Virgin Islands corporation, and Special Investments
      Acquisition Associates LLC ("SIAA"), a Delaware limited liability company.
      The
      Merger Agreement was further amended on April 12, 2006. By virtue of this
      merger, GMI became the parent corporation of NPSWA and owns 100% of its capital
      stock. Following the merger, GMI changed its corporate name to Neah Power
      Systems, Inc. ("NPSNV").





In
      February 2006, NPSWA converted all of its shares of Series A and Series B
      Preferred Stock to Common Stock and amended its Articles of Incorporation to
      eliminate such classes of Preferred Stock and to create a new series of
      preferred stock known as Series A. New Common shares were then issued for the
      old Common shares in the ratio of one (1) new share for ten (10) old shares.
      Upon completion of this reverse stock split, 7,990,457 shares of the NPSWA's
      Common Stock were issued and outstanding.





49




Prior
      to
      the merger, GMI was an inactive shell corporation and had engaged in no
      substantive business operations since 2003. Prior to its acquisition of NPSWA,
      a
      total of 10,481,534 shares of common stock of GMI were issued and
      outstanding.





Under
      the
      terms of the merger, the 7,990,457 outstanding Common shares of NPSWA were
      converted into 26,203,858 shares of common stock of NPSNV and all outstanding
      NPSWA stock options and warrants were cancelled. In addition, NPSNV contributed
      $500,000 to the working capital of NPSWA.





Immediately
      prior to the Merger, 6,500,000 shares of NPSNV Series A Convertible Preferred
      Stock were sold to two entities, for an aggregate of $6,500. These shares were
      convertible into 58,875,030 shares of NPSNV common stock (exclusive of an
      additional 3,753,000 shares set aside as treasury shares for delivery upon
      the
      exercise of warrants) and were automatically convertible into such common stock
      if NPSNV or NPSWA completed an equity or equity type financing for an additional
      $1,500,000.





The
      president and CEO of the Company, Paul Abramowitz, and members of his family
      had
      a beneficial interest in approximately 50% of the shares described above upon
      their issuance. In addition, members of the Abramowitz family were indirect
      former stockholders of NPSWA and received, on a pro rata basis, an additional
      93,927 shares of NPSNV common stock in the Merger. The Series A Preferred Stock
      automatically converted on April 27, 2006, effective with the closing of the
      private placement described in Note 9.





The
      series A and B convertible preferred stock of NPSWA had conversion rights from
      the original issue date and on each date when subsequently issued. As part
      of
      the acquisition by GMI, all Preferred Shareholders were required to convert
      into
      common stock in order that the number of shares of NPSWA to be exchanged for
      NPSNV shares would be a specific number subsequent to the one-for-ten reverse
      split.





The
      acquisition was recorded as a reverse merger for accounting purposes, which
      the
      SEC considers to be equivalent to a recapitalization. NPSNV is the legal parent
      of NPSWA but these financial statements, other than capital stock accounts,
      are
      those of NPSWA. A summary of the entries to record the acquisition follows
      (in
      thousands of dollars):




50


GMI
                  - (Neah Power - Nevada)
              
              Neah
                  - (Neah Power - Washington)@
              
              
              
              
              
              @
              
              
              
              
              
              
              
              Consol.Merger
              
              Merger
              
              Post-
              
              Merger
              
              Merger
              
              Post-
              
              Consol.
              
              -
                  Post-Date
              
              Adj.
              
              merger
              
              Date
              
              Adj.
              
              merger
              
              Adj
              
              mergerASSETS:Assets
              
              $
              506.5
              
              
              
              
              $
              506.5
              
              $
              1,189.4
              
              
              
              
              $
              1,189.4
              
              
              ($500.0
              )(4)
              $
              1,195.9Investment
                  in NPS-Nev
              
              
              
              
              
              
              
              
              0.0
              
              
              
              
              
              506.5
              (3)
              
              506.5
              
              
              (506.5
              )(5)
              
              0.0TOTAL
                  ASSETS
              
              $
              506.5
              
              $
              0.0
              
              $
              506.5
              
              $
              1,189.4
              
              $
              506.5
              
              $
              1,695.9
              
              
              ($1,006.5
              )
              $
              1,195.9LIABILITIES
                  AND SHAREHOLDERS' EQUITY:LIABILITIES
              
              $
              0.0
              
              
              
              
              $
              0.0
              
              $
              1,972.4
              
              
              
              
              $
              1,972.4
              
              
              ($500.0
              )(4)
              $
              1,472.4SHAREHOLDERS'
                  EQUITY:GMI:Preferred
                  Stock
              
              
              6.5
              
              
              
              
              
              6.5
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6.5Common
                  Stock
              
              
              10.5
              
              
              26.2
              (1)
              
              36.7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              36.7APIC
              
              
              75.8
              
              
              (26.2
              )(1)
              
              49.6
              
              
              
              
              
              
              
              
              
              
              
              (49.6
              )(5)
              
              0.0Retained
                  Earnings (Accum. Deficit)
              
              
              413.8
              
              
              
              
              
              413.8
              
              
              
              
              
              
              
              
              
              
              
              (413.8
              )(5)
              
              0.0Neah:
                  Preferred Stock -Series A
              
              
              
              
              
              
              
              
              
              
              
              0.0
              
              
              6.5
              (3)
              
              6.5
              
              
              (6.5
              )(5)
              
              0.0Common
                  Stock
              
              
              
              
              
              
              
              
              
              
              
              19,251.8
              
              
              (19,225.6
              )(2)
              
              36.7
              
              
              (36.7
              )(5)
              
              0.010.5
              (3)
              
              
              
              
              
              
              
              0.0APIC
              
              
              
              
              
              
              
              
              
              
              
              3,124.3
              
              
              19,225.6
              (2)
              
              22,839.4
              
              
              
              
              
              22,839.4489.5
              (3)
              
              
              
              
              
              
              
              0.0Retained
                  Earnings (Accum. Deficit)
              
              
              
              
              
              
              
              
              
              
              
              (23,159.2
              )
              
              
              
              
              (23,159.2
              )
              
              
              
              
              (23,159.2
              )TOTAL
                  SHAREHOLDERS' EQUITY:
              
              
              506.5
              
              
              0.0
              
              
              506.5
              
              
              (783.1
              )
              
              506.5
              
              
              (276.6
              )
              
              (506.5
              )
              
              (276.6
              )TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY:
              
              $
              506.5
              
              $
              0.0
              
              $
              506.5
              
              $
              1,189.4
              
              $
              506.5
              
              $
              1,695.9
              
              
              ($1,006.5
              )
              $
              1,195.9




51




**Footnotes:**





1.
      Record
      acquisition of Neah Power - Washington by Growth Mergers (Neah Power - Nevada).
      The offsetting debit to the credit to Growth Mergers Common Stock is to
      Additional Paid-In Capital rather than to an Investment account because the
      subsidiary (Neah Power - Washington) will be treated as if it were the
      acquirer.





2.
      Recapitalize Neah Power - Washington Common Stock so that the number of shares
      issued and par value is the same as Growth Mergers (Neah Power - Nevada)
      (36,685,392 shares at $0.001 per share).





3.
      Record
      the book value of the net assets of Growth Mergers (Neah Power - Nevada) on
      the
      books of Neah Power - Washington as if Neah Power - Washington were the
      acquirer.





4.
      Eliminate intercompany advance.





5.
      Eliminate Neah Power - Washington's investment in Neah Power -
      Nevada.





**Note
      17. Subsequent Events**





In
      January 2007 the Company filed a registration statement under the Securities
      Act
      of 1933 on Form SB-2 for the sale of $10 million in the Company's common
      stock.





52




**PART
      III**





**Item
      9: Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
      Act.**





**Identification
      Of Directors And Executive Officers** .
      Our
      current officers and directors are listed below. Each of our directors will
      serve for one year or until their respective successors are elected and
      qualified. Our officers serve at the pleasure of the board of
      directors.




**Name**
            
            **Age**
            
            **Position**Paul
                Abramowitz
            
            51
            
            Vice
                Chairman, Chief Executive Officer and PresidentDr.
                Daniel Rosen
            
            55
            
            Chairman
                of the Board of DirectorsDr.
                Arthur Homa
            
            52
            
            Vice
                President of EngineeringLeroy
                Ohlsen
            
            32
            
            Chief
                Technology Officer and DirectorDavid
                M. Barnes
            
            64
            
            Chief
                Financial OfficerDr.
                John Drewery
            
            45
            
            Executive
                Vice President of EngineeringMichael
                Solomon
            
            54
            
            DirectorDr.
                Buzz Aldrin
            
            77
            
            Director




**Paul
      Abramowitz.** A
      professional manager and entrepreneur, Mr. Abramowitz has experience covering
      a
      broad spectrum of industries. He became Vice Chairman, Chief Executive Officer
      and a director of our company in March 2006 following the merger with Neah
      Power
      Washington. For one year prior to his affiliation with our company, Mr.
      Abramowitz was CEO of the Experience Music Project, a charitable project located
      in Seattle, co-founded by investor and philanthropist Paul G. Allen of Microsoft
      and Vulcan Inc., dedicated to exploring creativity and innovation in American
      popular music. From 1986 to March 2006, Mr. Abramowitz acted as an independent
      “turnaround” consultant to distressed and bankrupt companies. Mr. Abramowitz
      holds a Masters in Business Administration from the University of Southern
      California and a Bachelors Degree in Business Administration at Ohio State
      University.




**Daniel
      Rosen, PhD.** Dr.
      Rosen has served as the chairman of the board of directors of Neah Power
      Washington since 2000. Dr. Rosen is CEO of Dan Rosen & Associates, a
      business he founded in 2006. For six years prior thereto, he was the founding
      general partner of Frazier Technology Ventures, a technology venture capital
      firm. Prior to 2000, Dr. Rosen served in several executive posts while at
      Microsoft, including General Manager of New Technology at Microsoft Research
      and
      General Manager, MSN Network. Earlier in his career, Mr. Rosen was the VP and
      general manager of AT&T’s first consumer Internet offering and AT&T’s
      first Managing Director for Northern & Eastern Europe. He holds a Ph.D. in
      biophysics from the University of California San Diego and a B.A. in biology
      from Brandeis University. Dr. Rosen serves as a member of our Audit and
      Compensation Committees.




**Arthur
      Homa, PhD.** Dr. Homa
      has been Vice President of Engineering for our company since July 2003. From
      2001 to 2003, Dr. Homa worked as an independent consultant with respect to
      technology transfers. He has over 20 years of technical management experience
      in
      the electrochemical and battery industries. He has held senior posts at Bolder
      Technologies, an early-stage battery development company, as well as Rayovac
      Corporation and General Electric Company. He has extensive experience in
      managing research and development operations and in advancing technology from
      the laboratory stage to a high-volume, highly automated commercial production
      capability. Dr. Homa received his Ph.D. in Electrochemistry from Case Western
      Reserve University in 1981, and earned his B.A. in Chemistry from Franklin
&
Marshall College in Lancaster, PA in 1976.




**Leroy
      Ohlsen.** Mr.
      Ohlsen co-founded Neah Power Systems in 1999 to follow his passion for fuel
      cell
      technology developed during undergraduate studies. Mr. Ohlsen acted as the
      chief
      executive officer from 1999 until 2000 and was thereafter appointed chief
      technology officer and vice president of engineering; he relinquished the latter
      position in July 2003. Mr. Ohlsen remains our chief technology officer and
      has
      since our inception served on our board of directors. Previously, he worked
      as a
      Project Manager for MultiChem Analytical Services, an environmental testing
      laboratory. Mr. Ohlsen worked part-time throughout college at MDS Panlabs as
      part of the chemistry team. Leroy received a B.S. degree in Chemistry from
      the
      University of Washington in 1998.




53


**David
      M. Barnes.** Mr.
      Barnes has over 40 years of experience as a chief financial officer and senior
      executive for a number of publicly traded companies, and has coordinated audits
      and supervised the preparation and filing of public disclosure documents. Since
      August 2005, Mr. Barnes has served as Chief Financial Officer of Cyber Defense
      Systems, Inc. (CYDF) and from April 1996 through July 2006 he served as Chief
      Financial Officer of American United Global, Inc. (AUGB). He has also is an
      advisor, director and member of the audit committees of a number of other public
      companies, including MDWerks, Inc. (MDWK), Thinkpath Inc. (THPHF), and
      Searchhelp, Inc. (SHLP). From April 1983 until October 1988, Mr. Barnes served
      as Executive Vice President and Director of Lifetime Corporation, an American
      Stock Exchange listed home health care provider, and from April 1975 to May
      1983
      he was Executive Vice President and Chief Financial Officer of Beefsteak
      Charlie’s, Inc., an American Stock Exchange listed food service and
      entertainment company.




Mr.
      Barnes currently devotes approximately 45% of his professional time to the
      affairs of our company in his capacity as our chief financial officer and the
      remaining 55% is devoted to his other positions mentioned herein. We believe
      that this is an adequate amount of time to serve our current needs for our
      chief
      financial officer, as we have a part-time controller and other accounting staff
      and do not believe that we currently require a full-time chief financial
      officer. We do, however, anticipate that we will commence efforts to hire a
      full-time chief financial officer by the second quarter of fiscal year
      2007.




**John
      Drewery, PhD.** Dr.
      Drewery is an employee of Novellus whose services are furnished to us in the
      capacity of an independent contractor under the terms of our collaboration
      agreement with Novellus. Dr. John Drewery works for us under the Collaboration
      Agreement with Novellus Systems Inc., a leading manufacturer of semiconductor
      capital equipment and an investor in our company. He is a director of technology
      at Novellus. Dr. Drewery specializes in leading rapid development of
      groundbreaking technologies and has 25 years of experience in the fields of
      solid-state physics, metals deposition technology, and semiconductor processing.
      Before joining our company, Dr. Drewery headed up advanced metals processing
      development at Novellus. Before joining Novellus, he invented and developed
      ground-breaking metal deposition technologies at Tokyo Electron, Ltd. and at
      Varian Associates. From 1989 to 1995, Dr. Drewery was a staff scientist at
      Lawrence Berkeley National Laboratory. Dr. Drewery received his Ph.D. in solid
      state physics from the University of Cambridge (Cavendish Physics Laboratory)
      in
      1986.





**Michael
      F. Solomon.** Mr.
      Solomon has served on our board of directors since March 2006. Since August
      of
      2003, he has been a partner in the law firm of Pillsbury Winthrop Shaw Pittman
      LLP specializing in tax and corporate transactions. From July, 2001 through
      August 2003, Mr. Solomon was a partner at PricewaterhouseCoopers, LLP. Mr.
      Solomon is also a long-time private investor in numerous businesses on whose
      boards he has served. His law practice has been heavily concentrated in the
      technology and research and development sectors, and he has been specifically
      involved in cases addressing fuel cell technology. He is an Adjunct Professor
      of
      Law at the Georgetown University Law Center and an honors graduate of both Yale University (1974)
      and
      Harvard Law School (1977).Mr.
      Solomon is a member of our Audit, Nominating and Compensation
      Committees.




**Buzz**  **Aldrin,
      PhD** .
      Dr.
      Aldrin, a former U.S. astronaut best known for his moon walk during the Apollo
      XI mission in 1969, received his Doctorate in Astronautics from MIT. Since
      retiring from NASA, the Air Force, and his position as Commander of the Test
      Pilot School at Edwards Air Force Base, Dr. Aldrin has remained at the forefront
      of efforts to ensure a continued leading role for America in manned space
      exploration. In 1993 Dr. Aldrin received a U.S. patent for a permanent space
      station he designed. In 1996 he founded Starcraft Boosters, Inc., a rocket
      design company, and in 1998 he created the ShareSpace Foundation, a nonprofit
      devoted to opening the doors to space tourism for all people. Dr. Aldrin earned
      a Doctorate in Astronautics from the Massachusetts Institute of Technology
      in
      Manned Space Rendezvous. The techniques he devised were used on all NASA
      missions, including the first space docking with the Russian Cosmonauts. Dr.
      Aldrin has been presented the Presidential Medal of Freedom, the United States
      highest honor. Dr. Aldrin is a member of our Audit and Nominating
      Committees.





54


Directors
      are elected to serve for a term of one year or until their successors are duly
      elected and qualified. Directors are not compensated for serving as such, though
      they may receive options to purchase shares of our common stock and
      reimbursement for properly documented and authorized expenses. Officers serve
      at
      the discretion of the board of directors.





**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: Daniel
      Rosen **,** Michael
      F. Solomon and Buzz
      Aldrin. The Audit Committee functions in part as an independent and objective
      party with oversight of the Company’s financial reporting process and internal
      controls. Mr. Solomon and Mr. Rosen are the financial experts on our audit
      committee.





**Compensation
      Committee of the Board of Directors**





We
      have a
      compensation committee of the Board of Directors. The Compensation Committee
      consists of: Michael
      F. Solomon and Buzz
      Aldrin. The functions of the Compensation Committee are to review and approve
      the goals of the Chief Executive Officer, to review and approve salaries,
      bonuses and other benefits payable to the Company’s executive officers and to
      administer the Company’s Long Term Incentive Compensation Plan.





**Nominating
      Committee of the Board of Directors**





We
      have a
      nominating committee of the Board of Directors. The Nominating Committee
      consists of: Daniel Rosen and Michael
      F. Solomon .
      The
      Nomination Committee is responsible for proposing a slate of directors for
      election by the stockholders at each annual stockholders meeting and for
      proposing candidates to fill any vacancies.





**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. Based solely upon our review of copies of such
      forms 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 principal executive officer, principal
      financial officer, principal accounting officer or controller, or others
      performing similar functions. Any person can receive a free copy of our Code
      of
      Ethics upon written request to the Company.





**Item
      10: Executive Compensation**





The
      following table sets forth summary information concerning compensation paid
      by
      or accrued for services rendered to the Company in all capacities during the
      past three fiscal years to (i) the Company’s Chief Executive Officer and (ii)
      the two other most highly compensated executive officers who were serving as
      executive officers at December 31, 2006 and whose total annual salary and bonus
      exceeded $100,000 (the “Named Executive Officers”).





LONG
                TERM COMPENSATIONANNUALCOMPENSATION
            
            AWARDS
            
            PAYOUTSName
                and Principal Position
            
            
            Year
            
            
            Salary(1)
            
            
            Other
              Bonus
            
            
            Annual
              Compensation
            
            
            Underlying
                Options
            
            
            All
                Other CompensationPaul
                Abramowitz
            
            
            2006
            
            $
            223,767
            
            
            
            
            
            
            
            
            500,000President
                & CEO
            
            
            2005
            
            $
            02004
            
            $
            0David
                Dorheim
            
            
            2006
            
            $
            125,000
            
            
            
            
            
            
            
            
            162,500Former
                President and CEO
            
            
            2005
            
            $
            250,0002004
            
            $
            315,000Arthur
                Homa
            
            
            2006
            
            $
            187,137
            
            
            
            
            
            
            
            
            450,000Vice
                President of Engineering
            
            
            2005
            
            $
            187,2492004
            
            $
            177,827Leroy
                Ohlson
            
            
            2006
            
            $
            101,352
            
            
            
            
            
            
            
            
            425,000Chief
                Technology Officer
            
            
            2005
            
            $
            101,3522004
            
            $
            96,014





55


On
      March
      27, 2006, Mr. Dorheim resigned as President and COO of Neah Power Washington.
      As
      severance, Mr. Dorheim received options to purchase 162,500 shares of our common
      stock at $0.20 per share and six months salary payable monthly.





**Employment
      Agreements**




In
      April
      2006, the board of directors approved an employment agreement for Paul
      Abramowitz to serve as President and Chief Executive officer of our company
      and
      our Neah Power Washington subsidiary on an “at will” basis. Mr. Abramowitz was
      awarded an annual salary of $275,000, but agreed to defer $112,500 of such
      amount until our company has received not less than $5,000,000 of financing
      from
      either the sale of securities, or in connection with a significant joint venture
      or strategic alliance. In lieu of payment of his deferred salary, Mr. Abramowitz
      was granted five year options to purchase 250,000 shares of our common stock
      at
      $0.85 per share (the fair market value of our shares at the time of grant);
      which options vest at the rate of 20,833 shares each month, commencing as of
      March 27, 2006.




In
      the
      event the options are exercised, we will pay the exercise price; Mr. Abramowitz,
      however, will remain responsible for the payment of taxes incurred in connection
      with the exercise. Even if vested, such options may not be exercised until
      Mr.
      Abramowitz shall become entitled to receive payment of his deferred salary.
      In
      the event Mr. Abramowitz becomes entitled to payment of such deferred salary
      and
      accepts such payment, all of the 250,000 stock options shall automatically
      terminate. Under the terms of his agreement, our company reserves the right
      to
      terminate Mr. Abramowitz’ employment agreement and any unvested
      options.




We
      do not
      have employment agreements with any of our other executive officers or key
      employees. However, we require each of our employees to execute confidentiality
      and non-disclosure agreements with respect to all technical aspects of our
      business, and to agree to assign to our company all inventions, research and
      technical data developed by them during the course of their
      employment.




**Compensation
      Of Directors**




Our
      directors are compensated with stock options from time to time under our Long
      Term Incentive Compensation Plan.




**Stock
      Option Plan And Stock Options**




56


The
      Long
      Term Incentive Compensation Plan (“LTICP”) was adopted by the Board of Directors
      on March 14, 2006, to be effective on March 14, 2006, and was approved by the
      stockholders on that same date. The LTICP is to continue for a term of ten
      years
      from the date of its adoption. The LTICP seeks to promote the long-term success
      of our company and our subsidiaries and to provide financial incentives to
      employees, members of the Board and advisors and consultants of our company
      and
      our subsidiaries to strive for long-term creation of stockholder value. The
      LTICP provides long-term incentives to employees, members of the Board and
      advisors and consultants of our company and our subsidiaries who are able to
      contribute towards the creation of or have created stockholder value by
      providing them stock options and other stock and cash incentives.





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




The
      maximum number of shares of our stock that may be issued under the LTICP for
      awards other than cash awards is 10,000,000 shares. To date, the Committee
      has
      awarded stock options for 6,325,500 shares to employees, members of the Board
      and advisors and consultants of our company and our subsidiaries, and none
      of
      these options has as of yet been exercised. If we change the number of issued
      shares of common stock by stock dividend, stock split, spin-off, split-off,
      spin-out, recapitalization, merger, consolidation, reorganization, combination,
      or exchange of shares, the total number of shares reserved for issuance under
      the LTICP, the maximum number of shares which may be made subject to an award
      or
      all awards in any calendar year, and the number of shares covered by each
      outstanding award and the price therefor, if any, may be equitably adjusted
      by
      the Committee, in its sole discretion.




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




On
      March
      14, 2006, the board of directors and the compensation committee authorized
      the
      issuance of options to purchase an aggregate of 6,589,500 shares of our common
      stock at an exercise price of $0.20 per share, which was the fair market value
      of our common stock on such date (with the exception of the 250,000 options
      issued to Mr. Abramowitz which are exercisable at $0.22 per share, and the
      additional 250,000 options issued to Mr. Abramowitz which are exercisable at
      $0.85 per share). On March 29, 2006, the board of directors and compensation
      committee agreed that all of Mr. Dorheim’s 162,500 severance options at $0.20
      per share would be immediately vested as of such date. Through December 31,
      2006
      employees that resigned and new employees hired resulted in a net decrease
      of
      264,000 existing stock options for a total of 6,325,500 options outstanding
      at
      December 31, 2006 as follows:




BOARD
                OF DIRECTORSPaul
                Abramowitz
            500,000
                optionsDr.
                Daniel Rosen
            350,000
                optionsMichael
                Solomon
            350,000
                optionsRoger
                Walton
            250,000
                optionsLeroy
                Ohlsen
            425,000
                optionsTECHNICAL
                ADVISORY BOARDDr.
                Wilbert van den Hoek
            250,000
                optionsDr.
                Daniel Rosen
            250,000
                optionsRoger
                Walton
            250,000
                optionsEMPLOYEES
                AND OTHERSDr.
                John Drewery*
            1,000,000
                optionsStephen
                Tallman
            400,000
                optionsDr.
                Arthur Homa
            450,000
                optionsDavid
                Dorheim
            162,500
                optionsother
                employees
            1,688,000
                options





57




*
              Dr.Drewery
                  received his options for services performed by him in accordance
                  with our
                  agreement with Novellus
                  Systems.





AGGREGATED
      OPTION/SAR* EXERCISES IN LAST FISCAL YEAR


AND
      FY
      END OPTION/SAR VALUES




Name
            
            
            Shares
                  Acquired
                    on
                  Exercise
            
            
            Value
                Realized
            
            
            Number
                  of Exercisable
                Securities
                  Underlying
                Unexercised
                  Options at
                  FY-End
            
            
            Value
                      of Unexercised
                    In-the-money
                      Options
                    At
                      FY-End ExercisablePaul
                Abramowitz
            
            
            -0-
            
            
            -0-
            
            
            187,500
            
            $
            174,438Paul
                Abramowitz
            
            
            -0-
            
            
            -0-
            
            
            187,500
            
            
            56,250Dan
                Rosen
            
            
            -0-
            
            
            -0-
            
            
            450,000
            
            
            427,500Michael
                Solomon
            
            
            -0-
            
            
            -0-
            
            
            262,500
            
            
            249,375Leroy
                Ohlsen
            
            
            -0-
            
            
            -0-
            
            
            318,750
            
            
            302,812Art
                Homa
            
            
            -0-
            
            
            -0-
            
            
            337,500
            
            
            320,625





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





The
      following table sets forth, as of March 14, 2007, the number of shares of Common
      Stock owned of record and beneficially by executive officers and directors,
      and
      persons who hold 5% or more of the outstanding our common stock. Also included
      are the shares held by all executive officers and directors as a group. As
      of
      March 14, 2007, there were 103,162,431 shares of our common stock
      outstanding.




58





NAME
                AND ADDRESS
            
            
            NUMBER
                OF SHARES
            
            
            PERCENT
                OF SHARESSummit
                Trading LimitedCharlotte
                House, P.O. Box N-65, CharlotteStreetNassau,
                Bahamas (1)
            
            
            23,929,515
            
            
            23.2
            %Paul
                Abramowitz (2)
            
            
            19,413,948
            
            
            18.7
            %Castile
                Ventures II-A, L.P.Castile
                Ventures II-B, L.P.890
                Winter Street, Suite 140Waltham,
                MA 02451(3)
            
            
            7,564,275
            
            
            7.1
            %Novellus
                Systems, Inc.4000
                North First StreetSan
                Jose, California 95134 (4)
            
            
            3,419,594
            
            
            3.3
            %Michael
                Solomon (5)
            
            
            6,531,878
            
            
            6.3
            %Dr.
                Daniel Rosen (6)
            
            
            668,321
            
            
            *Frazier
                Technology Ventures I, L.P.Friends
                of Frazier Technology Ventures I, L.P.Two
                Union Square, 601 Union Street, Suite 3200Seattle,
                Washington 98101 (7)
            
            
            7,491,025
            
            
            7.2
            %Alta
                California Partners III, L.P.Alta
                Embarcadero Partners III, LLCOne
                Embarcadero Center, Suite 4050San
                Francisco, California 94111 (8)
            
            
            7,014,566
            
            
            6.8
            %Leroy
                Ohlsen (9)
            
            
            1,467,465
            
            
            1.4
            %Buzz
                Aldrin (10)
            
            
            125,000
            
            
            *Arthur
                Homa (11)
            
            
            450,000
            
            
            *John
                Drewery (12)
            
            
            0
            
            
            —David
                M. Barnes
            
            
            0
            
            
            —All
                Directors and Officers as a Group (8individuals)
            
            
            28,656,612
            
            
            27.7
            %




* Less
        than
        one percent.




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.




59


Unless
      otherwise indicated, the address of all of the above named persons is c/o Neah
      Power Systems, Inc., 22122 20th Avenue S.E., Suite 161, Bothell, Washington
      98201.




(1)
      Summit Trading Limited (“Summit”) is a Bahamian holding company and is owned by
      the Weast Family Trust.
      The Weast Family Trust is a private trust established for the benefit of C.S.
      Arnold, Daisy Rodriguez, Stephanie Kaye and Tracia Fields. C.S. Arnold is the
      settlor of the Weast Family Trust. Summit beneficially owned 3,250,000 shares
      of
      our Series A preferred stock that automatically converted into an aggregate
      of
      29,437,515 shares of our common stock upon completion of our April 2006 private
      placement. Summit transferred an aggregate of 4,508,000 shares of such common
      stock to certain third parties not affiliated with it or our company, other
      than
      Daisy Rodriguez (a beneficiary of the Weast Family Trust), who received
      1,000,000 shares of common stock. The natural person exercising voting control
      of the shares of common stock held by Summit is Richard
      Fixaris.




(2)
      These
      shares consist of 18,820,010 shares previously held by SIAA, of which Paul
      Abramowitz is the manager and a principal member. The figure also includes
      (i)
      250,000 shares underlying directors’ options that Mr. Abramowitz received for
      serving on our board of directors,(ii) 250,000 shares of common stock underlying
      an option which he may elect to exercise, provided certain financing terms
      are
      met (in lieu of receipt of a presently unpaid portion of his salary) as
      compensation for his services as our president and chief executive officer
      and
      (iii) 93,938 shares representing Mr. Abramowitz's 33.0% ownership of Fairway
      Ventures which holds 313,000 shares.




(3)
      Consists of (i) 2,359,276 shares of common stock received by Castile Ventures
      II-A LP (“CVIIA”) and Castile Ventures II-B LP (“CVIIB”) in connection with the
      merger and (ii) 1,882,000 shares of common stock issued upon automatic
      conversion of our notes held by CVIIA and CVIIB. The figure also includes
      3,323,000 shares issuable upon exercise of warrants held by CVIIA and CVIIB,
      500,000 of which are shares owned by Summit.




Castile
      Partners II LLC (“CPII”) is the general partner of CVIIA and CVIIB. Nina Saberi,
      Marcia Hooper, Roger Walton and David Duval are the members of CPII and exercise
      shared voting and dispositive power with respect to the shares held by CVIIA
      and
      CVIIB. Each of Nina Saberi, Marcia Hooper, Roger Walton and David Duval
      disclaims beneficial ownership of the shares held by CVIIA and CVIIB except
      to
      the extent of his or her respective proportionate pecuniary interest in such
      shares. No limited partners of CVIIA or CVIIB can be said to control either
      CVIIA or CVIIB by virtue of their limited partnership interest
      therein.




(4)
      Includes 2,949,094 common shares owned directly and 470,500 shares of the
      4,705,000 shares of our common stock underlying a warrant issued to Novellus
      in
      connection with our entry into the amended technology collaboration agreement
      therewith. The warrant vests in four parts upon completion of certain
      milestones. We anticipate that the first milestone will be met in the quarter
      ending March 31, 2007. Please see “Strategic Goals and
      Relationships.”




(5)
      Includes 883,125 shares owned directly by Mr. Solomon, 350,000 shares of our
      common stock underlying options issued as director’s compensation exercisable at
      $0.20 per share and 5,298,753 shares held as trustee with voting power over
      the
      Paul Abramowitz Irrevocable Trust # I for Children. Mr. Solomon disclaims
      beneficial ownership of these shares.




(6)
      Includes 600,000 shares of our common stock underlying stock options. Excludes
      any portion of the 7,491,025 shares of our common stock beneficially owned
      by
      Frazier Technology Ventures I, L.P. and Friends of Frazier Technology Ventures
      I, L.P., of each of which Mr. Rosen beneficially owns approximately 2.5% but
      with which he is not otherwise affiliated.




(7)
      Consists of (i) 6,658,525 shares of common stock received by Frazier Technology
      Ventures I, L.P. (“FTV I”) and Friends of Frazier Technology Ventures I, L.P.
      (“FFTV I”) in connection with the merger and (ii) 333,000 shares of common stock
      issued upon automatic conversion of our notes held by FTV I and FFTV I. The
      figure also includes 499,500 shares issuable upon exercise of warrants held
      by
      FTV I and FFTV I.




FTV
      I and
      FFTV I are both limited partnerships formed to make investments in early stage
      technology companies. The general partner of each of FTV I and FFTV I is Frazier
      Technology Ventures Management I, LP, whose general partner is Frazier
      Technology Management, LLC (“FTM”). All decisions related to the acquisition,
      disposition or voting of securities held by FTV I and FFTV I, including our
      shares of common stock, are made by majority vote of the managers of FTM. The
      managers of FTM are Leonard Jordan, Gary Gigot, Paul Bialek and Frazier
      Management, LLC, none of whom beneficially owns more than 5% of the equity
      of
      FTV I or FFTV I.




60


(8)
      Consists of (i) 6,297,066 shares of common stock received by Alta California
      Partners III, L.P. (“ACPIII”) and Alta Embarcadero Partners III, LLC (“AEIII”)
      in connection with the merger and (ii) 287,000 shares of common stock issued
      upon automatic conversion of our notes held by ACPIII and AEIII. The figure
      also
      includes 430,500 shares issuable upon exercise of warrants held by ACPIII and
      AEIII.




Alta
      Partners II, Inc. (“APII”) provides investment advisory services to several
      venture capital funds including ACPIII and AEIII. Its principals are Garrett
      Gruener, Guy Nohra and Daniel Janney (the “Principals”). The general partner of
      ACPIII is Alta California Management Partners II, LLC (the “GP”). The managing
      directors of the GP, who exercise sole voting and investment power with respect
      to the shares owned by ACPIII, are the Principals. The Principals are also
      the
      managers of AEIII, in which capacity they exercise sole voting and investment
      power with respect to the shares owned by AEIII. The Principals disclaim
      beneficial ownership of all such shares held by ACPIII and AEIII, except to
      the
      extent of their proportionate pecuniary interests therein. No equity owners
      of
      ACPIII or AEPIII can be said to control either ACPIII or AEPIII by virtue of
      their ownership interest therein.




(9)
      Consists of 1,042,465 shares of common stock received in connection with our
      acquisition of Neah Power Washington, and includes 425,000 shares of common
      stock underlying options.




(10)
      Consists of the 125,000 shares of common stock underlying options.




(11)
      Consists of 450,000 shares of our common stock underlying options.




(12)
      Excludes 1,000,000 shares of our common stock underlying an option issued to
      Dr.
      Drewery in connection with our entry into the amended technology collaboration
      agreement with Novellus. The warrant will vest upon completion of certain
      milestones, none of which will occur within sixty (60) days hereof; please
      see
“Strategic Goals and Relationships.”




**Item
      12: Certain Relationships and Related Transactions**





Effective
      March 9, 2006, Growth Mergers, Inc. entered into an Agreement and Plan of
      Merger, as amended on April 10, 2006. Pursuant to such merger agreement, Growth
      Acquisitions, Inc., a Washington corporation, a 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.




Prior
      to
      its acquisition of Neah Power Washington, Growth Mergers, Inc. effected a 1:100
      reverse split of its 24,077,150 then outstanding shares of common stock, and
      entities controlled by David Moore, Peter Cangany, John Otto and David Otto,
      the
      holders of approximately $49,000 of Growth Mergers, Inc.’s then outstanding
      debt, converted such debt into 5,000,000 shares of common stock. Growth Mergers,
      Inc. then effected a 2:1 forward stock split, as a result of which an aggregate
      of 10,481,543 shares of Growth Mergers, Inc. common stock was issued and
      outstanding immediately prior to the acquisition of Neah Power Washington.
      The
      stock splits were effected for the purpose of arriving at a specified capital
      structure for Growth Mergers, Inc. which was the result of negotiations among
      the above-referenced principal stockholders of Growth Mergers, Inc. and
      affiliates of Special Investments Acquisitions Associates, LLC and Summit
      Trading Ltd. Such stock splits were consummated to effect such desired capital
      structure of Growth Mergers, Inc. immediately prior to its acquisition of Neah
      Power Washington and were instrumental in inducing the Growth Mergers, Inc.
      principal stockholders to contribute $500,000 to the capital of our company
      as
      working capital for Neah Power Washington. Such $500,000 capital contribution
      was a condition to consummation of our acquisition of Neah Power Washington
      and
      was used to fund short-term expenses of Neah Power Washington.




61


Each
      of
      the 7,990,457 shares of common stock of Neah Power Washington outstanding was
      converted into the right to receive 3.2793941 shares of common stock of Growth
      Mergers, Inc. Pursuant to the merger agreement, Growth Mergers, Inc. issued
      26,203,858 shares of its common stock to the former shareholders of Neah Power
      Washington. In addition, Growth Mergers, Inc. provided for $500,000 of working
      capital for Neah Power Washington. The merger agreement provides for the
      membership of our board of directors, permitting Special Investments
      Acquisitions Associates, LLC and Summit Trading Ltd., two of our significant
      stockholders, to appoint two directors as of the effective time of the merger
      and further requiring the addition of two independent directors, both of whom
      are acceptable to these two stockholders, on or prior to the date our common
      stock first trades on the OTC Bulletin Board. In addition, the agreement
      subjects these shareholder as well as the holders of a majority of shares issued
      to former Neah Power Washington stockholders to a lock-up of their
      shares for up to 12 months from the effective time of the
      merger.




Immediately
      prior to the merger, Growth Mergers, Inc. sold for nominal consideration ($6,500
      or $0.001 per share) to two of our significant stockholders, Special Investments
      Acquisitions Associates, LLC (of which Paul Abramowitz, our President and Chief
      Executive Officer is a principal) and Summit Trading Ltd., a total of 6,500,000
      shares of our Series A Preferred Stock that were convertible into a maximum
      of
      68,130,030 shares of our common stock, less the sum of (a) 6,255,000 shares
      of
      our common stock that were or are issuable to other former Neah Power Washington
      security holders upon conversion of our 8% notes or exercise of certain
      warrants, and (b) all shares issued in connection with any one or more offerings
      of equity or equity type securities providing us with aggregate initial gross
      proceeds of $1,500,000. The 6,255,000 shares consisted of 2,502,000 shares
      that
      were issuable on conversion of stockholder loans (at a conversion price of
      $0.20
      per share) and 3,753,000 shares underlying certain warrants issued to former
      Neah Power Washington security holders. These 3,753,000 shares were returned
      to
      us effective as of April 27, 2006 and are held as treasury shares for issuance
      upon exercise of warrants issued to the former holders of our 8% notes. If
      the
      warrants are not exercised, these treasury shares will be retained by the
      Company for general corporate purposes, at which time the Company will determine
      their contributed value. Consequently, the status of these shares is that they
      are issued but no longer outstanding. The remaining 58,875,030 shares originally
      issued to SIAA and Summit are not affected thereby and remain issued and
      outstanding.




As
      indicated above, the holders of our Series A Preferred Stock were instrumental
      in negotiating and arranging for the merger transaction with Neah Power
      Washington. Paul Abramowitz, our Vice Chairman, Chief Executive Officer and
      President, is the principal owner of Special Investments Acquisition LLC, and
      also beneficially owned, through Fairway Venture Capital Group III,
      approximately 0.4% of the capital stock of Neah Power Washington prior to the
      merger. On an as-converted basis, the purchasers of the Series A Preferred
      Stock
      paid nominal consideration of approximately $.001 per share of underlying common
      stock. This nominal purchase price and the number of shares issued were based
      upon negotiations between the management and significant shareholders of Neah
      Power Washington, on one hand, and the Series A Preferred Stock purchasers,
      on
      the other, as consideration for the Series A Preferred Stock purchasers’ role in
      identifying, negotiating and facilitating the merger and for securing short-term
      funding for Neah Power Washington to cover its working capital needs at the
      time
      of the merger. This consideration consisted of a controlling interest in Growth
      Mergers, Inc. following the merger. At the time of such negotiations, Neah
      Power
      Washington urgently needed this short-term funding as its existing investors
      had
      certain contractual impediments to investing additional funds, and its
      management strongly believed that it needed to complete the merger in order
      to
      provide the required liquidity to attract new investors.




As
      described elsewhere in this annual statement, in April 2006, we sold an
      aggregate of 4,600,000 shares of our common stock at $0.50 per share to nine
      investors in a private placement. As a result, all $500,400 of our 8% notes
      were
      converted into 2,502,000 shares of our common stock. In addition, all 6,500,000
      shares of Series A Preferred Stock issued in March 2006 to Special Investments
      Acquisitions Associates, LLC (“SIAA”) and Summit Trading Ltd. (“Summit”) were,
      by their stated terms, converted into an aggregate of 62,628,030 shares of our
      common stock, of which 3,753,000 shares were returned to us effective as of
      April 27, 2006 and are held as treasury shares for issuance upon exercise of
      warrants issued to the former holders of our 8% notes. Consequently, the status
      of these shares is that they are issued but no longer outstanding. The remaining
      58,875,030 shares originally issued to SIAA and Summit are not affected thereby
      and remain issued and outstanding. SIAA and Summit are both significant
      stockholders of our company, and Paul Abramowitz, our President and Chief
      Executive Officer, is a principal of SIAA. Certain members of Mr. Abramowitz’
family are also members of SIAA.




62


While
      all
      of the outstanding warrants to purchase common stock of Neah Power Washington
      were cancelled in the Neah Power Washington merger, the holders of our Series
      A
      preferred stock agreed to set aside up to 225,000 shares of their shares of
      common stock in order to satisfy possible claims made by certain Neah Power
      Washington creditors and other third parties.




Between
      February 2006 and March 2006, Castile Ventures II-A LP and Castile Ventures
      II-B
      LP lent to Neah Power Washington an aggregate of $376,400. In connection with
      the merger transaction consummated on March 9, 2006 (discussed above), all
      such
      loans were exchanged for our 8% convertible notes due June 30, 2007. The holders
      of the notes were entitled to convert them into shares of our common stock
      at
      $0.20 per share at any time. In addition, upon
      consummation of any equity or equity type financing by our company of $1,500,000
      or more, the notes were automatically converted into shares of our common stock
      at $0.20 per share. In addition, Castile Ventures II-A LP and Castile Ventures
      II-B LP received warrants to purchase an aggregate of 2,823,000 shares of our
      common stock at an exercise price of $0.20 per share. Upon completion of our
      private placement of 4,600,000 shares of common stock at $0.50 per share in
      April 2006, all of the 8% convertible notes were converted into 2,502,000 shares
      of our common stock. The four partners of Castile Partners II LLC, the general
      partner of Castile Ventures II-A LP and Castile Ventures II-B LP, exercise
      equal
      shared voting and dispositive power with respect to the shares held by CVIIA
      and
      CVIIB irrespective of their individual equity interest.




Between
      February 2006 and March 2006, Frazier Technology Ventures I, L.P. and Friends
      of
      Frazier Technology Ventures I, L.P. (“Frazier”) lent to Neah Power Washington an
      aggregate of $66,600. In connection with the merger transaction consummated
      on
      March 9, 2006 (discussed above), all such loans were exchanged for our 8%
      convertible notes due June 30, 2007. The holders of the notes were entitled
      to
      convert them into shares of our common stock at $0.20 per share at any time.
      In
      addition, upon consummation of any equity or equity type financing by our
      company of $1,500,000 or more, the notes were automatically converted into
      shares of our common stock at $0.20 per share. In addition, Frazier received
      warrants to purchase an aggregate of 499,500 shares of our common stock at
      an
      exercise price of $0.20 per share. Upon completion of our private placement
      of
      4,600,000 shares of common stock at $0.50 per share in April 2006, all of the
      8%
      convertible notes were converted into 2,502,000 shares of our common stock.
      Dr.
      Daniel Rosen, the chairman of our board of directors, holds a beneficial
      interest in approximately 2.5% of Frazier but is not otherwise affiliated with
      it.





To
      the
      extent that any of our outstanding warrants to purchase 3,753,000 shares of
      common stock are exercised (which include the warrants to purchase an aggregate
      of 499,500 shares of our common stock issued to Frazier and described above),
      the proceeds of such exercise shall be remitted directly to us. However, to
      the
      extent that a warrant holder elects a “cashless” exercise of his or its
      warrants, a lesser number of shares will be delivered to the warrant holder.
      In
      a cashless exercise, the warrant holder receives, for no cash payment, a number
      of exercised shares (at the current market price) based on the difference
      between the dollar value of such shares at our current market price at the
      time
      of exercise and the dollar value of such shares at the $0.20 exercise price.
      In
      such event, our company will not receive any proceeds from the exercise of
      the
      warrants; however, we would issue fewer shares than 3,753,000.




Paul
      Abramowitz, our Chief Executive Officer, President and a Director of our company
      owns approximately one third of the equity of Fairway Venture Capital Group
      III,
      a company that owned approximately 1.2% of the capital stock of Neah Power
      Washington and which received a total of 313,092 shares of our common stock
      in
      connection with the merger. Mr. Abramowitz exercises no control over Fairway
      Venture Capital Group III.




Summit
      Trading Ltd. is a significant stockholder of our company. Prior to the merger,
      neither Summit Trading Limited nor any of its affiliates or associates had
      any
      involvement or relationship with our Company or Neah Power
      Washington.




63


In
      connection with our April 2006 private placement of 4,600,000 shares at $0.50
      per share, an entity controlled by Michael Solomon, one of our directors, that
      was formed for the benefit of his parents, purchased 70,000 of these
      shares.




In
      May
      2004, Novellus Systems, Inc. invested $2.5 million in Neah Power Washington
      and
      signed a technology collaboration agreement. Effective May 24, 2006, this
      agreement was renewed and extended to March 9, 2008 and we were added as a
      party. Under the terms of the renewal agreement, Novellus continues to provide
      us with key engineering and technical expertise in connection with the
      development of our products, including the use of porous silicon in our fuel
      cells. Subject to Novellus’ continued assistance under the collaboration
      agreement and the technology being jointly developed with Novellus achieving
      the
      milestones set forth below, we expect to acquire all significant rights to
      the
      technology developed jointly by Novellus and us and to obtain the right to
      call
      on Novellus for reasonable technical assistance for a period of seven years.
      As
      part of the contract renewal, we have issued to Novellus a warrant to purchase
      4,705,000 shares of our common stock at an exercise price of $.001 per share,
      for an aggregate purchase price assuming total exercise of $4,705, which will
      expire on April 1, 2011. The milestones have
      been established and are set forth below, as well as their expected dates of
      completion. Pursuant to the terms of the extension, all previously outstanding
      warrants and options to purchase common stock of Neah were cancelled and the
      $150,000 debt of our subsidiary Neah Power Washington was reaffirmed to be
      paid
      on November 30, 2006 with the understanding that we would guarantee such
      payment.




The
      milestones to which we have agreed with Novellus under a letter agreement
      relating to the technology collaboration agreement, as well as their expected
      dates of completion and the related vesting schedule of the warrant, are as
      follows:




1.
      The
      warrant will vest as to ten percent (10%) of the shares of our common stock
      when
      Novellus and we complete a fully self contained prototype fuel cell capable
      of
      producing 10 Watts of power continuously for 5 hours using one detachable
      cartridge. The prototype will be approximately 40% larger than the intended
      size
      of our initial military product. We expect this milestone to be completed by
      the
      first half of 2007.




2.
      The
      warrant will vest as to fifteen percent (15%) of the shares of our common when
      Novellus and we complete a fully self-contained fuel cell capable of producing
      45 Watts of peak power and 300 WH capability at 20 Watts average operating
      power. This prototype will be the same size as our initial military product,
      i.e. about 0.9 liter, which is the same size as a standard disposable battery
      widely used in the military. We expect this milestone to be completed by
      September 30, 2007.




3.
      The
      warrant will vest as to fifty percent (50%) of the shares of our common stock
      when Novellus and we complete all of the following tasks:


·
              Establish
                  a pilot production line to assemble completed fuel
                  cells.
  ·
              Finalize
                  a manufacturing process for silicon electrodes based on the most
                  common
                  silicon wafer format, based on commercially available equipment,
                  and
                  identification of a manufacturing partner that is capable and willing
                  to
                  run the process.
  ·
              Reduce
                  the cost of processing porous silicon electrodes to $30 or less
                  per
                  silicon wafer. One silicon wafer is expected to yield 12
                  electrodes.


We
      expect
      this milestone to be completed by December 31, 2007.




4.
      The
      warrant will vest as to twenty-five percent (25%) of the shares of our common
      stock when Novellus and we complete all of the following tasks:




·
            Reduce
                the electrode catalyst loading to 25-30% of its value as of May 2005.
                Catalyst materials form a large part of the production cost of any
                methanol fuel cell; reaching this target would allow us to meet our
                cost
                of goods targets in the future.




·
            Develop
                a plan to scale our fuel cell production process to commercial volumes,
                and to adapt it to commercially available
                equipment.




64




We
      expect
      this milestone to be completed by March 31, 2008.




These
      four (4) milestones set forth above are each targeted to be completed on or
      before the date specified in the specified milestone (“Target Date”);
      however,




·
            If
                the milestone is completed on or before 120 days following the Target
                Date, there will be no penalty and 100% of the Warrants scheduled
                to vest
                under the milestone will vest in
                Novellus;




·
            If
                the milestone is completed after 120 days following the Target Date
                but on
                or before 210 days following the Target Date, there will be a one-third
                penalty and only 66.67% of the Warrants scheduled to vest under the
                milestone will vest in Novellus;





·
            If
                the milestone is completed after 210 days following the Target Date
                but on
                or before 300 days following the Target Date, there will be a two-third
                penalty and only 33.33% of the Warrants scheduled to vest under the
                milestone will vest in Novellus;





·
            If
                the milestone is completed after 300 days following the Target Date,
                there
                will be a 100% penalty and 0% of the Warrants scheduled to vest under
                the
                Milestone will vest in Novellus.




The
      value
      of the warrant has been calculated using the Black Scholes method pursuant
      to
      FASB Statement of Financial Accounting Standards No. 123(R) at approximately
      $16,000,000 and will be accounted for ratably as each specific milestone is
      achieved. Because no milestones have yet been reached, no expense has been
      recorded for the warrant through December 31, 2006.




Under
      certain circumstances, the Company can exercise a repurchase right to acquire
      warrant stock acquired by Novellus prior to achieving any specific milestone.
      Under such circumstances, Novellus could only recover the exercise price it
      had
      paid for the repurchased stock.




In
      connection with our entry into the amended technology collaboration agreement
      with Novellus, we issued an option to purchase 1,000,000 shares of our common
      stock to Dr. Drewery in connection. The option will vest upon completion of
      the
      milestones applicable to the warrant issued to Novellus.





**Item
      13: Exhibits**




**No.**
            
            **Description**3.1
            
            Articles
                of Incorporation, as amended (1)3.2
            
            Amended
                and Restated By-laws (1)3.3
            
            Certificate
                of Designation of Series A Preferred Stock (1)3.4
            
            Certificate
                of Merger (1)4.1
            
            Form
                of Stock Certificate for Common Stock (1)4.2
            
            Form
                of Stock Certificate for Preferred Stock (1)10.1
            
            Engagement
                Letter, dated as of March 20, 2006 by and between Neah and BMA Securities,
                Inc. (2)10.2.1
            
            Agreement
                and Plan of Merger among Neah Power Systems, Inc., Growth Mergers,
                Inc.
                and Growth Acquisitions Inc. (2)10.2.2
            
            Amendment
                to Agreement and Plan of Merger among Neah Power Systems, Inc., Growth
                Mergers, Inc. and Growth Acquisitions Inc.
                (2)




65


10.3
            
            Form
                of Subscription Agreement (1)10.4
            
            Form
                of 8% $500,400 Convertible Notes due June 30, 2007 (1)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)10.7.A
            
            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)10.7.B
            
            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. (6)10.8
            
            Warrant
                issued to Novellus Systems, Inc. (2)10.9
            
            Option
                Agreement issued to Dr. John Drewery (2)10.10
            
            Stock
                Option Plan (2)10.11
            
            Form
                of Stock Option Agreement (2)10.12
            
            Development
                Agreement by and between Neah Power Washington and Thales Communications,
                Inc. dated December 19, 2003 (3)10.13
            
            Amendment
                No. 1 to Development Agreement by and between Neah Power Washington
                and
                Thales Communications, Inc. dated July 28, 2004 (2)10.14
            
            Employment
                Agreement of Paul Abramowitz dated April 17, 2006 (2)10.15.1
            
            Lease
                Agreement, dated as of March 5, 2001, by and between Teachers Insurance
                and Annuity Association of America and Neah Power Washington
                (3)10.15.2
            
            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)10.15.3
            
            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)10.16.1
            
            Independent
                Contractor Services Agreement, by and between Neah Power Systems,
                Inc. and
                McBee Strategic Consulting, LLC, dated February 15, 2005
                (3)10.16.2
            
            First
                Amendment to Independent Contractor Services Agreement, by and between
                Neah Power Systems, Inc. and McBee Strategic Consulting, LLC, dated
                as of
                February 15, 2006 (3)10.17
            
            Consulting
                Agreement by and between Neah Power Systems, Inc. and APEX Strategies,
                Inc., dated as of April 25, 2006 (3)10.18
            
            Letter
                of Agreement between Crystal Research Associates, LLC and Neah Power
                Systems, Inc., dated as of April 7, 2006 (3)10.19
            
            Consultancy
                Agreement by and between Danfoss A/S and Neah Power Systems, Inc.,
                dated
                as of June 14, 2006 (3)10.20
            
            Loan
                and Security Agreement by and between Silicon Valley Bank and Neah
                Power
                Systems, Inc., dated as of May 24, 2005 (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
            
            Amended
                and Restated Note issued to the Registrant by Kevin Luetje and the
                related
                Pledge Agreement, each dated as of October 23, 2006.
                (6)21
            
            Subsidiaries
                of the Registrant (2)23.1
            
            Consent
                of Peterson Sullivan PLLC (7)31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer (7)31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer (7)32.1
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                Pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002 (7)32.2
            
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                Pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002
                (7)




66




(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 the Registrant’s Registration Statement on Form 10-SB, filed on
      October 11, 2006 and incorporated herein by reference thereto.




(6)
      Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB 12G/A,
      filed on October 27, 2006 and incorporated herein by reference
      thereto.





(7)
      Filed
      herewith.




**Item
      14: Principal Accountant Fees and Services**





The
      following table represents the aggregate fees billed for professional audit
      services rendered to us by Peterson Sullivan PLLC for the audit of our annual
      financial statements during the 2 years ended December 31, 2006 and 2005, and
      all fees billed for other services by Peterson Sullivan PLLC during those
      periods:





Year
                Ended December 31,
            
            
            2006
            
            
            2005Audit
                Fees (1)
            
            $
            42,446
            
            $
            32,767Audit
                Related Fees (1)
            
            $
            18,014
            
            
            NoneTax
                Fees (2)
            
            $
            1,200
            
            $
            2,587All
                other Fees (3)
            
            $
            68,676
            
            
            NoneTotal
                Accounting Fees and Services
            
            $
            130,336
            
            $
            35,354





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





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





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





PRE-APPROVAL
      POLICY FOR AUDIT SERVICES





Our
      Audit
      Committee has responsibility for the approval of all audit and non-audit
      services before we engage an accountant. All of the services rendered to us
      by
      Peterson Sullivan PLLC for the fiscal years ended December 31, 2006 and 2005
      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.




67


**SIGNATURES**





Pursuant
      to the requirements 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:
              March 19, 2007
            NEAH POWER SYSTEMS, INC.By:
            /s/
              PAUL
              ABRAMOWITZPaul
                Abramowitz
                President
                  and Chief Executive Officer





Pursuant
      to the requirements of the Securities and Exchange Act of 1934, this report
      has
      been signed below by the following persons on behalf of the Registrant and
      in
      the capacities and on the dates indicated:





Signature
            
            Title(s)
            
            Date/s/ 
PAUL
              ABRAMOWITZ
            
            President
              and Chief Executive Officer
            
            March
                19, 2007Paul
                Abramowitz
            
            (Principal
              Executive Officer)


/s/
                DAVID M. BARNES
            
            Chief
                Financial Officer (Principal Financial
            
            March
                19, 2007David
                  M. Barnes
            
            and
                Accounting Officer)/s/
              DANIEL ROSEN
            
            Chairman
              of the Board of Directors
            
            March
              19, 2007Daniel
                Rosen/s/
                LEROY OHLSEN
            
            Chief
                Technology Officer and Director
            
            March
                19, 2007Leroy
              Ohlsen/s/
                MICHAEL SOLOMON
            
            Director
            
            March
                19, 2007Michael
                Solomon/s/
                BUZZ ALDRIN
            
            Director
            
            March
                19, 2007Buzz
              Aldrin





68