UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




(Mark
One)




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




For
the fiscal year ended: September 30, 2010


OR


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




For
the transition period from  to


Commission
File Number: 000-49962







NEAH
POWER SYSTEMS, INC.


(Exact
name of registrant as specified in its charter)





Nevada
                    88-0418806(State
      or other jurisdiction of
                      incorporation
      or organization
                    (IRS
      Employer Identification No.)22118 20th Ave SE, Suite 142, Bothell
      Washington
                    98021(Address
      of principal executive offices)
                    (Zip
      Code)




(425)
424-3324


(Registrant’s
telephone number, including area code)






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





Title
      of Each Class
                  
                  Name
      of Each Exchange on Which RegisteredNone
                  
                  None





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


Common
Stock, Par $0.001 par value per share


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  ̈         No
x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes  ̈         No
x
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
One).





Large
      Accelerated Filer  ̈
                
                Non-Accelerated
      Filer  ̈
              Accelerated
      Filer  ̈
                
                Smaller
      Reporting Company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x




The
aggregate market value of the Registrant’s common stock held by non-affiliates
was approximately $5.7 million as of March 31, 2010 based upon the closing
price of common stock on March 31, 2010.




As of
January 05, 2011, there were 74,982,031 million shares of the Registrant’s
$0.001 par value common stock outstanding.









NEAH
POWER SYSTEMS, INC.




TABLE
OF CONTENTS




PageExplanatory
      Note
                
                1Forward-Looking
      Statements
                
                1PART
      I.Item
      1.
                Business
                
                2Item
      1A.
                Risk
      Factors
                
                8Item
      1B.
                Unresolved
      Staff Comments
                
                15Item
      2.
                Properties
                
                15Item
      3.
                Legal
      Proceedings
                
                15Item
      4.
                (Removed
      and Reserved)
                
                16PART
      II.Item
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                17Item
      6.
                Selected
      Financial Data
                
                18Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                18Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                24Item
      8.
                Financial
      Statements and Supplementary Data
                
                25Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                
                43Item
      9A.
                Controls
      and Procedures
                
                43Item
      9B.
                Other
      Information
                
                44PART
      III.Item
      10.
                Directors,
      Executive Officers and Corporate Governance
                
                45Item
      11.
                Executive
      Compensation
                
                48Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                50Item
      13.
                Certain
      Relationships and Related Transactions and Director
      Independence
                
                52Item
      14.
                Principal
      Accountant Fees and Services
                
                52PART
      IV.Item
      15
                Exhibits
      and Financial Statement Schedules
                
                54SIGNATURES
                
                55









EXPLANATORY
NOTE




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




FORWARD
LOOKING STATEMENTS




This
Annual Report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Specifically, all statements other than statements of historical facts included
in this annual report regarding our financial position, business strategy and
plans and objectives of management for future operations are forward-looking
statements. These forward-looking statements are based on the beliefs of
management, as well as assumptions made by and information currently available
to management. When used in this annual report, the words “anticipate,”
“believe,” “estimate,” “expect,” “may,” “will,” “continue” and “intend,” and
words or phrases of similar import, as they relate to our financial position,
business strategy and plans, or objectives of management, are intended to
identify forward-looking statements.
  These
statements reflect our current view with respect to future events and are
inherently subject to risks and uncertainties, many of which we cannot predict
with accuracy and some of which we might not even anticipate. Although the we
believe that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions at the time made, we can give no assurance
that such expectations will be achieved. Future events and actual results,
financial and otherwise, may differ materially from those expressed in the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements. We have no duty to update or revise any
forward-looking statements after the date of this Annual Report on Form 10-K and
the documents incorporated herein by reference or to conform them to actual
results, new information, future events or otherwise.
  The
following factors, among others, could cause our or the industry’s future
results to differ materially from historical results or those
anticipated:
  ·
                our
      future capital needs and the ability to obtain
  financing;
  ·
                our
      ability to obtain governmental approvals, including product and patent
      approvals;
  ·
                the
      success or failure of our research and development programs, marketing,
      and sales efforts;
  ·
                the
      acceptance and success of our fuel cell
  products;
  ·
                our
      ability to develop and commercialize products before our competitors;
      and
  ·
                our
      limited operating history, and current debt and working capital
      conditions
  These
factors are the important factors of which we are currently aware that could
cause actual results, performance or achievements to differ materially from
those expressed in any of the forward looking statements. We operate in a
continually changing business environment and new risk factors emerge from time
to time. Other unknown or unpredictable factors could have material adverse
effects on our future results, performance or achievements. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this report may not occur.


1




PART
I




ITEM
1.           BUSINESS.




Overview


We are
engaged in the development and sale of renewable energy solutions. We have
developed what we believe is a breakthrough, disruptive, direct methanol micro
fuel cell which can serve as a replacement for batteries in a variety of
products. Our fuel cells are designed to replace existing rechargeable battery
technology in mobile electronic devices and small-scale transportation vehicles.
Our long-lasting, efficient and safe power solutions for these devices, such as
notebook PCs, military radios, and other power-hungry computer, entertainment
and communications products, use our patented, silicon-based design. This fuel
cell design creates higher power densities and enables lighter-weight, smaller
form-factors, and will potentially create more cost effective, manufacturing and
potentially lower product costs.
  Based on
the research and state of our technology, we believe our fuel cell will
outperform lithium ion batteries and other batteries in terms of run time,
recharge time, portability, and other measures of performance. We anticipate
that our fuel cell solution will be particularly beneficial in applications
requiring the use of more than one battery because the user will only need to
use a single fuel cell with a supply of smaller fuel cartridges, which will
result in reduced overall size and weight. Based on our ten issued patents and 2
additional U.S. patent filings, we believe our technology is proprietary and can
be protected.
  We have
won awards for our technology over the years, the most recent recognition being
the Best of What’s
NewTM2010 award from the
distinguished publication Popular ScienceTM.
  In 2010
we continued to advance the development and maturity of our systems. This
included the completion of the fuel cell prototype and the subsequent completion
of a system not requiring the availability of oxygen from the environment
(“anaerobic” or “closed loop system”). We also demonstrated an air-breathing
(“aerobic”) system. We believe that these technologies provide the foundation
for products to be produced for sale over the next fiscal year.
  We have
announced customer relationships with EKO Vehicles of Bangalore (“EKO”), Hobie
Cat Company (“Hobie Cat”), the Electric Car Company (“ECC”), and a United States
based large defense supplier. Partnering with these companies, we anticipate
that we will develop early production devices for evaluation by original
equipment manufacturers (“OEM”) for the eventual deployment of our fuel cell
products during 2011. We anticipate that we will ultimately sell or license our
products for resale by distributors and OEM customers.
  We also
intend to design and distribute the fuel cartridges that these fuel cells
require for refueling. We anticipate that we will generate future revenues from
the sale and licensing of both fuel cartridges and the completed fuel cells. Our
business plan contemplates that we will subcontract to third parties
substantially all of the production and assembly of the fuel cells and fuel
cartridges.
  The delay
in our ability to acquire capital has led to postponement in the deployment of
our business strategy. We intend to produce and deliver products in conjunction
with the receipt of required financing.


Background




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




2




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




SolCool
One, LLC




We
acquired SolCool One, LLC (" SolCool), a supplier of direct current solar
air-conditioning systems for off-the-grid applications, and took effective
control on January 13, 2010. We issued 476,187 shares of our common stock
to the members of SolCool as consideration for the acquisition of all the
membership units of SolCool. On August 23, 2010, we agreed to unwind the
transaction by cancelling all shares of our common stock issued to SolCool’s
members and returning the stock certificates representing the membership units
of SolCool to SolCool’s members. We are currently in the process of exchanging
the stock certificates. As of September 30, 2010, we had received approximately
50% of the shares of our common stock that we had issued to the members of
SolCool.




Research
and Development




We
conduct our research and development, marketing and sales activities at our
headquarters in Bothell, Washington. Contingent upon the receipt of adequate
financing, we plan to continue investing in research and development, marketing,
and sales. We anticipate that these efforts, and resulting costs, will increase
in 2011 compared to prior years due to increased product development related to
specific customer products and to additional improvements to our
technology.




The Company’s Unique Patented
Technology


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


Porous Silicon Electrodes




Our
electrode architecture uses conductive porous silicon as the catalyst support
structure rather than carbon typically used in fuel cells. We use silicon wafers
that are commonly used in the semiconductor industry. As part of our patented
technology, the wafers are patterned with millions of micron sized pores, which
significantly increase the available active surface area of the silicon. A
conductive film is then applied to the surface of the pore walls followed by a
catalyst coating over the conductive film. The process can be used to produce
either anode or cathode electrodes depending on the type of catalyst used. The
final result is a porous electrode that enables a larger reactive surface area
to generate more power per unit area.




3




While our
focus has been on the closed loop non–air (“anaerobic”) systems in 2009 and 2010
we also demonstrated an aerobic system which could be used where the quality of
the air is high and predictable. This would reduce the complexity of the system,
as well as increase the energy density of the system.




Comparison Between Porous Silicon Fuel
Cells and PEM-Based Designs




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




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




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




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




·
            Our
      technology allows us to create alternative product designs that do not
      require interactions with the environment for operation. This allows the
      use of our fuel cell products for 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
      furthermore patented by Neah Power
Systems.




·
            Water
      created in the fuel cell reaction is retained in the fuel cartridge and
      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, but at concentrations lower than those extant in
      various liquid acid batteries. It is therefore important to ensure that
      users of the technology are safely separated from these
    acids.




·
            The
      need to select materials compatible with the
  chemistry.




As an
ongoing effort to increase the competitiveness of our product, we must focus on
the following areas. These continuous improvement programs (CIP) would further
enhance the performance differentiation of our fuel cell, reduce the cost, and
enhance manufacturability and increase lifetime and reliability.




·
            Increase
      the volumetric power density over the power density currently available
      in our fuel cells - this will enable more compact
      solutions;




·
            Continue
      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;




4




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




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




Commercialization
Strategy




We are
focusing our initial strategy on markets requiring anaerobic or low oxygen
content environments, such as underwater, transportation, aerospace and military
applications. Both EKO, Hobie Cat, and Electric Car Company currently have
electric drive consumer products where power capacity is limited by the need for
extensive battery re-charging. Implementation of a fuel cell into such electric
vehicles could enable continuous operation of these electric drive vehicles by
the use of fuels cells with supplies of fuel cartridges. We have also announced
a relationship with a large US defense supplier where the we are exploring
application for a variety of defense oriented applications. Also, competing
PEM-based fuel cells could have significant operational limitations when
environments contain diesel fumes or high or low humidity. We expect that the
partnerships with these initial customers, and other potential customers, will
enable us to validate our product, supply chain and overall product
strategy.




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




The Fuel Cell Market


Revenues
generated in the fuel cell portable power market is estimatedto have been $177
million in 2009 and is expected to reach $1.3 billion per year by 2016,
according to market research companies like Frost and Sullivan and from our own
research. Of this larger market, the market segment for underwater unmanned
applications is estimated to be growing at a 30% cumulative aggregate growth
rate. The market for batteries for transportation is expected to be in the $10
billion range by 2015. In all these markets, significant portions of the market
can be served either by a fuel cell replacement of, or complement to, the
existing battery technology. Fuel cells can be categorized by the market
applications they potentially serve and by their power output. We are focused on
providing an alternative or a complementary technology to conventional batteries
for portable electronic devices that typically operate in the 5-2000+ Watt
range. Specifically, we are targeting small scale and two and four wheeler
transportation vehicles, military, industrial and consumer markets with
potential applications for computer, electronic media as well as products for
military and homeland security electronic equipment.




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




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




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




5




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




Remote Area Power Supplies (“RAPS”)
Market




We are
pursuing the RAPS market which can provide 1kW to 10+ kW power systems that can
operate off-the-grid. These systems would include a renewable, DC-based
generation system (solar, wind, etc.), a power modulation system (DC-DC
converter, DC-AC inverter) and storage systems. We expect increasing demand
based on the current focus on renewable energy, and the need to reduce
dependence on a depleting fossil fuels resources. Based our internal marketing
estimates and reports published by the marketing research firm of Frost and
Sullivan, this market was estimated to be approximately $500 million in 2009 and
is expected to grow to $2.5 billion by 2016. In addition, RAPS products could
provide backup power for critical infrastructure like cell phone towers,
communication infrastructure and other command and control systems in developed
and developing countries.




Market for Military
Applications




Our
R&D efforts to date have demonstrated the potential use of our fuel cells in
a variety of military applications. The completion of our prototype and the
extended testing have demonstrated that the technology has the potential to
provide higher density power at longer durations in a more reliable fashion. In
addition, we believe our fuel cells will provide a more environmentally friendly
solution compared with rechargeable or non-rechargeable batteries solutions as
it relates to manufacturing processes and waste disposal. Our products
particularly address anaerobic needs such as underwater, underground, close
quarters and high altitude and no atmosphere applications specific to military
needs.
  We
believe that the market for military applications will be a significant portion
of the market, as reflected in market research by Frost and Sullivan, as well as
our internal marketing estimates. This market includes battery replacement and
new fuel cell alternatives for specialized applications such underwater and/or
unmanned vehicles. Our product could also provide an effective backup power
solution.
  During
the year ended September 30, 2009, we received payments of approximately
$1,147,000 from the Office of Naval Research (“ONR”) pursuant to the terms of a
grant providing expense reimbursement for continuing research and development
having to do with certain technology. This contract included various technical
developments, and the demonstration of a closed loop, self contained, anaerobic
system. This system was successfully developed and demonstrated to the ONR in
September 2009.




Market for Industrial Applications,
RAPS, and Transportation




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




In July
2009, we signed a Letter of Intent (“LOI”) with EKO, one of India’s larger
manufacturers of electric two wheel vehicles, to develop fuel cell battery
charging units for integration into their electric scooters, as well as RAPS to
act as charging stations for the scooters and off -grid power sources. With
sufficient funding, we expect to deliver several beta prototype units in 2011
and, upon successful testing, we expect to sell several hundred additional
units.




In July
2009, we signed a technology license agreement with Hobie Cat to explore the use
of our proprietary fuel cells to power various recreational water craft
products. Additionally, we signed a LOI with Hobie Cat to produce on-board fuel
cell battery chargers for their line of electric kayaks. With sufficient
funding, we anticipate delivery of several beta prototype systems in 2011, and
several hundred systems on successful completion of the beta
evaluations.




6




In April
2010, we signed a letter of intent with a large U.S. defense supplier to provide
our innovative fuel cell technology for a variety of defense applications. With
sufficient funding, we anticipate delivery of several beta prototype systems in
2011, and additional business on successful completion of the beta
evaluations.




In
October 2010, we signed a letter of intent with “The Electric Car Company”
(“ECC”) to provide a fuel cell for their electric car products. The fuel cell
would act as a trickle charger for the batteries, and hence become a range
extender and address “range-anxiety” issues that are occur with the increasingly
common electric vehicle deployment. With sufficient funding, we anticipate
delivery of several beta prototype systems in 2011, and additional business on
successful completion of the beta evaluations.




Market for Consumer Mobile
Electronics




Recent
trends continue to demonstrate a clear need for better and longer-lasting power
solutions to close the “power gap,” which is defined as the difference between
the power capacity and the power need, thus enhancing mobility and productivity.
Based on user demand, mobile electronic companies continue to add features for
richer experiences. Notebook PC makers, for example, in recent years have
enhanced their products with larger, more vivid color displays, faster
processors, larger hard drives, DVD and/or CD drives, as well as multimedia and
wireless networking capabilities. Each of these additions requires more power
and, taken together, can be a significant drain on a PC’s limited battery
capacity. Users are also more dependent on these mobile devices and are using
them longer without access to outlet power. Sales of notebook PCs continue to
grow faster than those of the overall PC market, and now represent more than
half of all PCs sold. The size of the consumer market fuel cells as battery
replacements is estimated to be between $6 billion and $8 billion per year, as
reflected in market research by Frost and Sullivan and our internal marketing
estimates. Moreover, with the growth and widespread availability of high-speed
wireless connections (Wi-Fi) in corporate offices and public locations,
“persistent” computing - constant connectivity to the Internet, e-mail and
corporate files - is becoming commonplace, creating additional demand for
longer-lasting power.




While
this is a large, and growing, market, we believe that our fuel cells, when fully
developed, will be capable of bridging the mobile electronics “power gap.” We
expect to offer products that produce more power and last longer than battery or
other power solutions can offer.




Proprietary
Rights and Intellectual Property




We rely
primarily on patents and contractual obligations with employees and third
parties to protect our proprietary rights. We continue to seek appropriate
patent protection for our proprietary technologies by filing patent applications
in the U.S. and in certain foreign countries. As of December 31, 2010, we
owned or controlled ten issued or allowed U.S. patents and two pending U.S.
patent applications, including provisional patent applications.
  Our
patents and patent applications are directed to the components and systems
involved in our fuel cell design and the use of porous substrates coated with
catalyst as fuel cell electrodes and electrode structures, cell bonding
techniques, and cartridges Our financial success will depend in large part on
our ability to:
  ·
                obtain
      patent and other proprietary protection for our intellectual
      property;
  ·
                enforce
      and defend patents and intellectual property once
  obtained;
  ·
                operate
      without infringing on the patents and proprietary rights of third parties;
      and
  ·
                preserve
      our trade secrets;
  In
addition, we believe our fuel cell design and technology are not in conflict
with the U.S. patents covering PEM-based DMFCs held by several
organizations.




7




Employees




As of
September 30, 2010, we had four employees, including two executive officers, one
administrative and one technical employee. We have previously reported that we
had furloughed most of our employees. We intend to rehire personnel and hire
additional staff after raising sufficient funds. We also expect to continue to
using outside business development consultants, whose compensation will be based
on revenue opportunities they create.




Competition




The
development and marketing of fuel cells and fuel cell systems is extremely
competitive. In many cases, we may compete directly with alternative energy,
fuel cell, 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 we develop or that would
render our products and technology obsolete or non-competitive in the
marketplace.




Available
Information




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




ITEM
1A.           RISK
FACTORS.




Investors
should carefully consider the risks described below before deciding whether to
invest in our common stock. The risks described below are not the only ones we
face. Additional risks not presently known to us or that we currently believe
are immaterial may also impair our business operations and financial results. If
any of the following risks actually occur, our business, financial condition or
results of operations could be adversely affected. In such case, the trading
price of our common stock could decline and you could lose all or part of your
investment.




Risks
Related to Our Business




Our
Auditors Have Issued a “Going Concern” Modification In Their Report On Our
Consolidated Financial Statements.




Our
auditors’ report on our consolidated financial statements as of September
30, 2009 and September 30, 2010 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 cannot assure you that we will be able to
obtain sufficient funds from our operating or financing activities to support
our continued operations. If we cannot continue as a going concern, we may need
to substantially revise our business plan or cease operations, which may reduce
or negate the value of your investment.




8




We
Will Need To Raise Significant Additional Capital To Continue Our Business
Operations.




Our
current monthly cash operating expenses are approximately $85,000. In the event
we are unable to obtain, on a timely basis, the additional financing required to
meet our cash needs, we will have to reduce or curtail operations which would
materially and adversely affect our development efforts. Even if such financing
is obtained, it may not be on commercially acceptable terms or may otherwise
substantially dilute the equity interests of current stockholders in our
company.




We
Have A History Of Losses Since Our Inception, We Expect Future Losses And We May
Never Achieve Or Sustain Profitability.




We have
incurred net losses each year since our inception and had accumulated losses of
approximately $53.5 million through September 30, 2010. We expect to continue to
incur net losses at least through our fiscal year 2011 and these losses may be
substantial. To implement our business strategy, 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.




We
Are Delinquent On Our Rent Payments To Our Landlord And Are Subject To A Default
Judgment In Favor Of Our Landlord.




On
December 4, 2009, our landlord for the space we use as our principal offices and
research plant in Bothell, Washington filed a lawsuit against us for unpaid rent
in the amount of $76,069 in the Superior Court of the State of Washington,
County of King. Our landlord was granted a default judgment in December 2009 in
the amount of $81,106.11. In January 2010, in connection with the default
judgment, we received a notice of eviction from our landlord because of the
unpaid rent. Since the eviction notice, we have paid $134,000 against our unpaid
balance and the landlord has extended the date for eviction. We currently owe
approximately $174,000 as of the date of this report.




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 have
demonstrated prototypes which we expect to develop into commercial products.
However, our activities have been limited to these prototype models and we may
not be able to produce our products in a cost-effective
manner.




Market
Acceptance Of Our Fuel Cell Products May Take Longer To Occur Than We Anticipate
Or May Never Occur.




Our
silicon-based fuel cell products represent a new technology and our success will
depend on this technology achieving market acceptance. Because we design our
products to capitalize on markets that presently utilize or are serviced by
products from traditional and well-established battery manufacturers, we may
face significant resistance from end-users to adopt a new and alternative power
source technology.




Fuel cell
products for defense, transportation, 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:




9




·
            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.




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
corrosive and toxic acids whose concentrations are comparable to levels in “wet”
batteries. 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 yet 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 or outsource
adequate manufacturing capacity to the point where we are capable of satisfying
large commercial orders, including the demand for both military and commercial
fuel cell systems. The manufacturing partners we have identified may not be able
to meet our cost as well as our volume requirements.




Because
We Will Depend On Third-Party Suppliers, We May Experience Delays In Receiving
Key Materials And Components Necessary To Produce Our Fuel Cell
Systems.




If we
successfully develop our fuel cell, we will depend on third parties for the
manufacture and assembly of materials and components used to make our products.
If any of our suppliers are unable or unwilling to provide us with materials and
components on commercially reasonable terms, or at all, delays in identifying
and contracting for alternative sources of supply would adversely affect our
ability to develop, manufacture and market our products. In addition, some of
these materials and components are purchased from a single or limited number of
supply sources.




We
May Be Subject To Shortages Of Key Materials In The Global
Marketplace.




Since we
depend on certain raw materials like silicon wafers to make our fuel cells, we
may become subject to either supply shortages or substantial price increases of
silicon wafers in certain market conditions. We also use gold and platinum in
our processes; these precious metals are commodities and subject to global
market pressures and shortages. These shortages might hamper our ability to ship
our products on time, might cause us to have to spend considerably more than
budget to complete our projects, or might make our products prohibitively
expensive.




10




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 for aerobic applications, and a nitric oxidant provides the
oxygen for anaerobic applications, we obtain methanol from suppliers. Even if
methanol is available to us, if our 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 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.




11




Any
Accidents Involving The Flammable Fuels Used With Our Products Could Impair
Their Market Acceptance.




Our fuel
cells use methanol. While our fuel cells do not use these fuels in a combustion
process, the methanol itself is flammable. Because 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. We do not currently have
any property or liability insurance to cover such damages.




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. 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. We are not currently insured against
such risks.




Our
Success Depends On Attracting And Retaining Key Personnel.




The
successful development, marketing and manufacturing of our products will depend
upon the skills and efforts of a small group of management and technical
personnel. The loss of any of our key personnel could adversely impact our
ability to execute our business plan. Furthermore, recruiting and retaining
qualified executive, technical, marketing, manufacturing and support personnel
in our emerging industry in the future will be critical to our success and there
can be no assurance that we will be able to do so. We do not maintain “key-man”
life insurance policies on any of our key personnel. As we grow, we may need to
recruit other key personnel and our ability to recruit such key personnel may be
limited




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.




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
      processes;




12




·
            a
      shortage of the raw materials used in the production of our fuel cell
      systems; and




·
            difficulties
      with outsourced manufacturing
operations.




Because
of these anticipated fluctuations, our sales and operating results in any fiscal
quarter are likely to be inconsistent, may not be indicative of our future
performance and may be difficult for investors to properly
evaluate.




Risks
Related to Our Common Stock




We
Have A Substantial Number Of Shares Outstanding And We Have Issued Convertible
Securities Convertible Into A Number of Shares That Would Exceed Our Authorized
Common Stock.


We
currently have outstanding 74,982,031 shares of common stock. We also have
outstanding (i) options to purchase an aggregate of 11,770,185 shares of common
stock at exercise prices ranging between $0.029 and $6.67 per share (of which
11,160,735 where exercise is contingent upon an increase to our authorized
common stock) (ii) warrants to purchase 974,474 shares of common stock at
exercise prices ranging from $0.001 to $1.00 per share, (iii) convertible
debentures convertible into 54,488 shares of common stock, and (iv)
approximately 3,897,694 million shares pledged as security under various
loan agreements (which pledged shares are excluded in the total number of
outstanding shares set forth above). Our articles of incorporation currently
authorize 80 million shares of common stock. We do not currently have sufficient
authorized common stock to issue shares upon conversion of all of our
convertible securities. We can give no assurance that we will be able to obtain
stockholder approval to increase our authorized common stock or that we will be
able to engage in financing transactions sufficient to support our operations
given the limitation on the number of shares of common stock we are able to
issue




We
Could Issue A Significant Amount Of Common Stock Or A Series Of Preferred Stock
That Might Adversely Affect Our Existing Common Stockholders.




Our
articles of incorporation authorize the issuance of 80,000,000 shares of common
stock and 5,000,000 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. Issuance
of additional common stock or preferred stock could result in substantial
dilution to our existing stockholders. 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.




We
Recently Filed A Certificate Of Correction With The Nevada Secretary of State
Correcting The Implementation Of Our August 2009 Increase In Authorized Common
Stock From 20 Million Shares To 80 Million Shares And 6 For 1 Forward Stock
Split.




We
implemented our August 2009 authorized share increase from 20 million shares to
80 million shares and 6 for 1 forward stock split by, first, filing a
certificate of amendment to the our articles of incorporation on August 3, 2009
to increase our authorized common stock and, then, effecting a forward split of
6 shares of common stock for every one share of common stock outstanding on
August 14, 2009. We determined that the we incorrectly filed a certificate of
amendment pursuant to Nevada Revised Statutes § 78.390 instead of a certificate
of change pursuant to Nevada Revised Statutes § 78.209. The certificate of
change is the correct Nevada form for increasing authorized capital and
effecting a corresponding stock split without stockholder approval. The
certificate of correction that we filed with the Nevada Secretary of State
corrects the implementation of the increase in authorized common stock and the
forward stock split by (i) voiding the certificate of amendment that we filed on
August 3, 2009 and (ii) replacing the certificate of amendment with a
certificate of change. The certificate of change effects (i) as of August 3,
2009 an increase in our authorized common stock from 20 million shares to 80
million shares and (ii) as of August 14, 2009 a forward split of 4 shares of
common stock for every one share of common stock outstanding. In addition, our
board of directors also adopted resolutions to clarify that our board declared a
share dividend of .5 shares of common stock for every one share of common stock
outstanding which was effective immediately following the 4 for 1 forward split
on August 14, 2009. Taken together, the 4 for 1 forward split and .5 for 1 share
dividend resulted in the equivalent of a 6 for 1 forward stock split. We cannot
provide assurance that the method of correcting the error in the implementation
of our increase in authorized common stock and forward stock split will not be
subject to challenge or that such challenge would not be
successful.


13


Our
Stock Price May Be Volatile And, As A Result, You Could Lose All Or Part Of Your
Investment.




There is
a very limited public market for our common stock. We cannot predict the extent
to which, or if, investor interest will lead to the development of an active and
liquid trading market. If a market for our common stock develops, the price at
which our common stock will trade may be highly volatile and may fluctuate as a
result of a number of factors, including the following:




·
            the
      number of shares available for sale in the
  market;




·
            variations
      in our actual and anticipated operating
results;




·
            our
      failure to timely achieve technical
milestones;




·
            our
      failure to commercialize our fuel cell
systems;




·
            changes
      in technology or competitive fuel cell
  solutions;




·
            our
      failure to meet analysts’ performance expectations;
  and




·
            lack
      of liquidity.




In
addition, stock markets, particularly the OTC Bulletin Board where our stock is
currently traded, have experienced extreme price and volume fluctuations, and
the market prices of securities of technology companies have been highly
volatile. These fluctuations are often unrelated to operating performance and
may adversely affect the market price of our common stock. As a result,
investors may not be able to resell their shares on a timely basis if at all,
and may lose their some or all of their 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.




Our
Common Stock Is Subject To Penny Stock Rules.




Our
common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act,
which imposes certain sales practice requirements on broker-dealers who sell our
common stock to persons other than established customers and “accredited
investors” (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000 (or $300,000 together with their spouse)). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to the sale. This rule adversely
affects the ability of broker-dealers to sell our common stock and purchasers of
our common stock to sell their shares of such common stock. Additionally, our
common stock is subject to the SEC regulations for “penny stock.” Penny stock
includes any non-NASDAQ equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. The regulations require that
prior to any non-exempt buy/sell transaction in a penny stock, a disclosure
schedule set forth by the SEC relating to the penny stock market must be
delivered to the purchaser of such penny stock. This disclosure must include the
amount of commissions payable to both the broker-dealer and the registered
representative and current price quotations for the common stock. The
regulations also require that monthly statements be sent to holders of penny
stock which disclose recent price information for the penny stock and
information of the limited market for penny stocks. These requirements adversely
affect the market liquidity of our common stock.


14


ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.




None.




ITEM
      2.
            PROPERTIES.




Our
corporate offices and laboratory facilities are located at 22118 20th Ave SE,
Suite 142, Bothell Washington, where we lease approximately 5,700 square feet of
office space and 5,300 square feet of laboratory space. We currently lease on a
month-to-month basis, and intend to negotiate with the landlord for a lease
extension. The average monthly rental payment including utilities and operating
expenses for the facility is approximately $19,000 per month. We believe that
the leased facility is in good condition and adequate to meet our current and
anticipated requirements.




ITEM
      3.
            LEGAL
      PROCEEDINGS.




From time
to time, we become subject to legal proceedings and claims, both asserted and
unasserted, that arise in the ordinary course of business. Litigation in
general, and securities litigation in particular, can be expensive and
disruptive to normal business operations. Moreover, the results of legal
proceedings are difficult to predict. An unfavorable resolution of one or more
of these lawsuits would materially adversely affect our business, results of
operations, or financial condition. The need to defend any such claims could
require payments of legal fees and our limited financial resources could
severely impact our ability to defend any such claims.




On
September 11, 2009, a consultant of the Company filed a lawsuit in the Superior
Court of California, County of Santa Clara, styled Novellus Systems, Inc. v. Neah Power
Systems, Inc.alleging breach of contract due to unpaid vendor bills. The
consultant obtained a default judgment in December 2009 in the amount of
$62,524. The judgment remains unpaid.




On
December 4, 2009, our landlord filed a lawsuit against us for unpaid rent in the
amount of $76,069 in the case styled Teachers Insurance & Annuity v.
Neah Power Systems, Inc. in the Superior Court of the State of
Washington, County of King (Case No. 09-2112914). Our landlord was granted a
default judgment in December 2009 in the amount of $81,106.11. Pursuant to that
judgment, in January 2010 we received a notice of eviction from our landlord
because of the unpaid rent. Since the notice, we have paid $134,000 against that
balance the landlord has extended the date for eviction. We owe approximately
$174,000 of rent to the landlord as of the date of this report. We hope to avoid
eviction by negotiating a payment plan acceptable to the landlord.




On
January 20, 2010, our former Chief Executive Officer, Paul Abramowitz, initiated
a lawsuit against us in the Superior Court for the State of Washington styled
Abramowitz v. Neah Power
Systems, et al. (Case No. 10-2-3688-1 SEA) in which Mr. Abramowitz has
sued for breach of his employment contract in the amount of $275,000, plus
interest, and willful failure to pay wages for which he seeks double damages or
twice the amount of the wages allegedly withheld. Other persons presently
affiliated with the Company or affiliated with the Company in the past,
including Gerard C. D’Couto, Stephen Wilson, Jon M. Garfield, Ed Cabrera,
Michael Selsman, Paul Sidlo, James Smith and Robert J. McGovern, were also named
as defendants in the Abramowitz lawsuit. In
connection with the Abramowitzlawsuit, our former director, James Smith, has filed a cross-complaint
against the Company, the other defendants in the Abramowitz lawsuit, Michael
Solomon, Leroy Olsen and Buzz Aldrin for breach of contract and unpaid wages
related to Mr. Smith’s past service on our board of directors. We are contesting
both lawsuits.




On March
3, 2010, a complaint was filed by the Chapter 7 Trustee of the law firm Dreier
Stein Kahan Browne Woods George LLP in the Superior Court of California, Los
Angeles Central District (Case No. BC432899) alleging breach of contract for
past legal services and seeking $66,000. Dreier Stein obtained a default
judgment in November 2009 in the amount of approximately $63,000 which includes
the unpaid legal fee amounts plus interest. The judgment remains
unpaid.


15


In August
2010, Protingent Staffing, Inc. filed a lawsuit in the South District Court,
County of Snohomish, State of Washington styled Protingent Staffing, Inc. v. Neah
Power Systems, Inc. (Case No. 10-2-09637)alleging breach of
contract due to unpaid vendor bills and seeking $35,382. Protingent obtained a
default judgment on November 22, 2010 in the amount of $42,604 which includes
the unpaid vendor bill amounts plus interests. The judgment remains
unpaid.




ITEM
      4.
            (REMOVED
      AND RESERVED.)


16


PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.




Market
Information




Our
common stock trades on the Over-the-Counter Bulletin Board under the symbol
“NPWZ.” The OTC Bulletin Board is a regulated quotation service that displays
real-time quotes, last-sale prices and volume information in over-the-counter
equity securities. The OTC Bulletin Board securities are traded by a community
of market makers that enter quotes and trade reports.




Set forth
below are the range of high and low bid quotations for the periods indicated as
reported by the OTC Bulletin Boards. The market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.




High
                  
                  
                  LowFiscal
      Year Ended September 30, 2009:First
      Quarter (October 1, 2008 – December 31, 2008)
                  
                  $
                  0.33
                  
                  
                  $
                  0.08Second
      Quarter (January 1, 2009 – March 31, 2009)
                  
                  
                  0.27
                  
                  
                  
                  0.12Third
      Quarter (April 1, 2009 – June 30, 2009)
                  
                  
                  8.93
                  
                  
                  
                  0.12Fourth
      Quarter (July 1, 2009 –September 30, 2009)
                  
                  
                  5.27
                  
                  
                  
                  0.93Fiscal
      Year Ended September 30, 2010:First
      Quarter (October 1, 2009 – December 31, 2009)
                  
                  $
                  1.30
                  
                  
                  $
                  0.59Second
      Quarter (January 1, 2010 – March 31, 2010)
                  
                  
                  0.79
                  
                  
                  
                  0.18Third
      Quarter (April 1, 2010 – June 30, 2010)
                  
                  
                  0.29
                  
                  
                  
                  0.04Fourth
      Quarter (July 1, 2010 –September 30, 2010)
                  
                  
                  0.12
                  
                  
                  
                  0.05





On
July 27, 2009, we effected a 200:1 reverse stock split of all issued and
outstanding shares of our common stock. On August 14, 2009, we effected a
4:1 forward split and a .5 for 1 share dividend of all issued and outstanding
shares of our common stock resulting in the equivalent of a 6 for 1 forward
stock split. This schedule reflects those changes to the historical
prices.




The last
sale price of our common stock on December 31, 2010, was
$0.016.




Holders




As of
January 5, 2011, there were approximately 350holders of record of our
common stock. This number does not include beneficial owners of common stock
whose shares are held in the names of various dealers, clearing agencies, banks,
brokers and other fiduciaries.




Dividends




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


17


Unregistered
Sales of Equity Securities




The
information below lists all of the securities we sold during the fiscal year
that ended September 30, 2010 other than those sales previously reported in a
Current Report on Form 8-K or a Quarterly Report on Form 10-Q which were not
registered under the Securities Act of 1933, as amended, including all sales of
reacquired securities, as well as new issues, securities issued in exchange for
property, services, or other securities, and new securities resulting from the
modification of outstanding securities. No underwriting discounts or commissions
were incurred in connection with any of the following transactions. Each of the
transactions was conducted as a private placement, without the use of any
general solicitation, and was exempt from registration under Section 4(2) of the
Securities Act of 1933.




In July
2010, we issued 240,000 of our common shares to CAMHZN Master LDC at a net share
price of $0.075 per share and valued at $18,000 in payment to relieve a default
notice issued on outstanding loans.




In August
2010, pursuant to an amended financing agreement with AGS Capital Group LLC, we
issued 2,010,000 shares of our common stock at a net share price of $0.064 per
share and net proceeds of $131,461.48.




Description
of Equity Incentive Compensation Plans




We have
two equity compensation plans, including our (i) Long Term Incentive
Compensation Plan and (ii) Employee Stock Purchase Plan.




In March
2006, we adopted our Long Term Incentive Compensation Plan (“the Plan”). In
August 2008, our board of directors amended the Plan to increase the
authorized shares issuable under the Plan to 6,000,000, which amendment our
stockholders approved. In October of 2010, our board of directors amended the
plan to increase the authorized shares issuable under the Plan to 16,000,000.
Our stockholders have not yet approved that amendment.




In 2008,
our shareholders approved the Employee Stock Purchase Plan, under which the
number of shares of common stock that may be sold shall not exceed, in the
aggregate, 900,000 shares. No shares have been purchased under this
plan.




The table
below sets forth certain information as of September 30, 2010 regarding the
shares of common stock available for grant or granted under our equity incentive
plans:




Equity
Incentive Compensation Plan Information




Number of
                  Common shares
                  to be Issued
                  Upon Exercise of
                  Outstanding
                  Options
                
                
                Weighted-Average
                  Exercise Price
                  of Outstanding
                  Options
                
                
                Number of Common
                  Shares Remaining for
                  Future Issuance Under
                  Long-Term Incentive
                  Equity Compensation Plan
                  (Excluding Outstanding
                  Options)Equity
      compensation plans approved by stockholders
                
                
                3,936,760
                
                
                $
                0.12
                
                
                
                2,963,240Equity
      compensation plans not approved by stockholders
                
                
                —
                
                
                
                
                
                
                
                10,000,000Total
                
                
                3,936,760
                
                
                $
                0.12
                
                
                
                12,963,240


ITEM
      6.
              SELECTED
      FINANCIAL DATA
  As a
smaller reporting company, we are not required to provide the information
required by this item.


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.




Overview




The
following management’s discussion and analysis is intended to provide
information necessary to understand our audited consolidated financial
statements and highlight certain other financial information, which in the
opinion of management, will enhance a reader’s understanding of our financial
condition, changes in financial condition, and results of operations. In
particular, the discussion is intended to provide an analysis of significant
trends and material changes in our financial condition and operating results
during the fiscal year ended September 30, 2010 as compared to the fiscal
year ended September 30, 2009. This Item is organized as
follows:




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


18


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




·
            “Comparison
      of Annual Results of Operations” discusses the primary factors that are
      likely to contribute to significant variability of our results of
      operations for the fiscal year ended September 30, 2010 as compared
      to September 30, 2009.




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




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




·
            “Off-Balance
      Sheet Arrangements” indicate that we did not have any off-balance sheet
      arrangements as of September 30,
2010.




Background




We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors, cost effective
manufacturing, and potentially lower product costs. Based on our seven issued
patents and 4 additional U.S. patent filings, we believe our technology is
proprietary and protected. We have won awards for our technology, the most
recent recognition being the Best of What’s NewTM 2010
award from the distinguished publication Popular Science.




We have
announced customer relationships with EKO Vehicles of Bangalore (“EKO”), Hobie
Cat Company (“Hobie Cat”), the Electric Car Company (“ECC”), and a large defense
supplier in the United States Government. Partnering with these companies, we
anticipate that we will develop early production devices for evaluation by
original equipment manufacturers (“OEM”) for the eventual deployment of our fuel
cell products during 2011. We anticipate that we will ultimately sell or license
our products for resale by distributors and OEM customers.




We also
intend to design and distribute the fuel cartridges that these fuel cells
require for refueling. We expect to generate future revenues from the sale and
licensing of both fuel cartridges and the completed fuel cells. Our current
business plan contemplates that we will subcontract to third parties
substantially all of the production and assembly.




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




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




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




The delay
in our ability to acquire capital has led to postponement in the deployment of
our business strategy. We intend to produce and deliver products in conjunction
with the receipt of required financing.




SolCool
One, LLC




We
acquired SolCool One, LLC (" SolCool"), a supplier of direct current solar
air-conditioning systems for off-the-grid applications, and took effective
control on January 13, 2010. We issued 476,187 shares of our common stock
to the members of SolCool as consideration for the acquisition of the membership
units of SolCool. On August 23, 2010, we agreed to unwind the transaction by
cancelling all shares of our common stock issued to SolCool’s members and
returning the stock certificates representing the membership units of SolCool to
SolCool’s members.


19


Liquidity,
Going Concern and Capital Resources




We have
prepared our consolidated financial statements assuming that we will continue as
a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We had approximately $3,000 in
cash on hand as of September 30, 2010. We had an accumulated deficit as of
September 30, 2010 of $53.5 million and negative working capital of $4.3 million
(excess of current liabilities over current assets). Since our inception, we
have reported net losses, including losses of approximately $5.2 million and
$6.5 million during the years ended September 30, 2010 and 2009, respectively,
and we expect losses to continue in the near future as we grow and redeploy our
operations. For the year ended September 30, 2010 and 2009, we had cash used by
operating activities of $1.2 million and $1.0 million,
respectively.




We have
limited capital resources and have sustained substantial losses, which raise
substantial doubt about our ability to continue as a going concern. We must,
therefore, raise sufficient capital to fund our overhead burden and our
continuing research and development efforts going forward. Although we have
received approximately $100,000 subsequent to September 30, 2010, without
additional funding, our current cash resources are expected to be sufficient
only though January 2011. We have significantly reduced the number of staff to
reduce our operating cost, while we focus on raising capital. Our operations are
currently focused on raising capital, sales, and business development. We are
dependent on existing cash resources and external sources of financing to meet
our working capital needs. To satisfy our working capital requirements, we are
currently seeking financing from the sale of debt or equity instruments to
current investors and potential strategic investors. There is no assurance that
we will be successful in raising this capital on a timely basis, if at all. The
failure to obtain the necessary working capital would have a material adverse
effect on the development program and business prospects and, depending upon the
shortfall, we may have to curtail or cease our operations.




We will
continue to be dependent on outside capital to fund our operations for the near
future. We have relied primarily on sales of securities and proceeds from
borrowings for operating capital. During the year ended September 30, 2010, we
received proceeds of $1.1 million from the sale of our common stock. Also during
2010, we raised approximately $183,000 through note payable borrowings.
Subsequent to September 30, 2010, we have raised approximately $103,000 from
advances for purchase of equity or debt investment. Any future financing we
obtain may further dilute or otherwise impair the ownership interest of our
current stockholders. If we fail to generate positive cash flows or obtain
additional capital when required, we could modify, delay or abandon some or all
of our plans. These factors, among others, raise substantial doubt about our
ability to continue as a going concern.




Recent
Financing Activities




In
October 2010, Agile Opportunity Fund, LLC (“Agile”) and Capitoline Advisors Inc.
(“Capitoline”), under the default terms of a securities purchase agreement,
foreclosed on 1,600,000 of the 5,497,694 our common shares they held as
collateral. The market value of the shares totaling $61,000 has been applied
against the balance due in the note with Agile and Capitoline.




In
November 2010, we entered into an agreement for services and issued 2.0 million
shares, valued at $60,000, as compensation.




Subsequent
to our fiscal year ended September 30, 2010 and as of December 31, 2010, we have
issued 18.0 million shares in connection with the extinguishment of debt
totaling $226,000.




Subsequent
to our fiscal year ended September 30, 2010 and as of December 31, 2010, we
received approximately $103,000 from investors in advances for equity or debt
investment.




Comparison
of Annual Results of Operations




The
following table shows our revenue and expenses for fiscal years 2010 and
2009:


20


NEAH
POWER SYSTEMS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the year ended September 30,
                                            
                                            
                                            $
                                            
                                            
                                            %2010
                                            
                                            
                                            2009
                                            
                                            
                                            Change
                                            
                                            
                                            ChangeContract
      Revenues
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            1,106,976
                                            
                                            
                                            $
                                            (1,106,976
                                            )Operating
      expensesResearch
      and development expense
                                            
                                            
                                            604,653
                                            
                                            
                                            
                                            1,452,714
                                            
                                            
                                            
                                            (848,061
                                            )
                                            
                                            
                                            -58
                                            %General
      and administrative expense
                                            
                                            
                                            3,709,567
                                            
                                            
                                            
                                            4,308,627
                                            
                                            
                                            
                                            (599,060
                                            )
                                            
                                            
                                            -14
                                            %Operating
      loss from SolCool subsidiary
                                            
                                            
                                            467,995
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            467,995Total
      operating expenses
                                            
                                            
                                            4,782,215
                                            
                                            
                                            
                                            5,761,341
                                            
                                            
                                            
                                            (979,126
                                            )
                                            
                                            
                                            -17
                                            %Loss
      from operations
                                            
                                            
                                            (4,782,215
                                            )
                                            
                                            
                                            (4,654,365
                                            )
                                            
                                            
                                            (127,850
                                            )Other
      expenseFinancing
      costs
                                            
                                            
                                            (123,139
                                            )
                                            
                                            
                                            (426,582
                                            )
                                            
                                            
                                            303,443
                                            
                                            
                                            
                                            -71
                                            %Interest
      expense
                                            
                                            
                                            (768,269
                                            )
                                            
                                            
                                            (1,433,367
                                            )
                                            
                                            
                                            665,098
                                            
                                            
                                            
                                            -46
                                            %Gain
      on disposition of SolCool
                                            
                                            
                                            433,696
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            433,696Other
                                            
                                            
                                            (3,220
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (3,220
                                            )Net
      Loss
                                            
                                            $
                                            (5,243,147
                                            )
                                            
                                            $
                                            (6,514,314
                                            )
                                            
                                            $
                                            1,271,167




Revenue. We had no revenues
in the year ended September 30, 2010 as compared to $1.1 million due to the
winding up of activity under our September 2008 contract with the Office of
Naval Research that was completed in 2009.




Research and Development.
Research and Development (“R&D”) expenses consist primarily of salaries and
other personnel-related expenses, consulting and other outside services,
laboratory supplies facilities costs and other costs. We expense all R&D
costs as incurred. Total R&D expenses decreased significantly in the fiscal
year ended September 30, 2010 due to the reduction in staff and operations
caused by our financial condition. R&D expense for the year ended
September 30, 2010 decreased as compared to the 2009 period, primarily due
to the following:




·
            R&D
      salaries expense for the year ended September 30, 2010 decreased by
      $560,000 to $277,000 from $837,000 recorded in the prior year due to the
      streamlining of operations and reductions in head
  count.




·
            R&D
      project and laboratory expenses, including direct expenditures relating to
      the ONR contract decreased by $258,000, to $22,000 from $280,000 recorded
      in the prior year comparable period due to the reduction in R&D
      activities.




·
            There
      was $34,000 in stock-based compensation expense incurred in the year ended
      September 30, 2010 compared with $74,000 in stock based compensation
      expense incurred in the prior year.




·
            Facilities
      expenses increased by $17,000 to $251,000 from $234,000 recorded in the
      prior year period, primarily due to an increase in the cost of leased
      office space.




·
            Depreciation
      expense included in R&D expense was $21,000 in 2010 as compared to
      $28,000 in 2009, due to laboratory assets reaching the end of their
      accounting useful lives.




Contingent
on the receipt of adequate capital into the company, we expect our R&D
expenses to increase in 2011 due to the anticipated increase in product
development activities and the development of specific customer
products.


21


General and Administrative.
General and administrative expenses (“G&A”) consist primarily of salaries
and other personnel related expenses to support our R&D activities, non-cash
stock-based compensation for general and administrative personnel and
non-employee members of our board of directors, professional fees, such as
accounting and legal, corporate insurance and facilities costs. The decrease in
total G&A expenses in 2010 was primarily due to the decrease in stock-based
compensation in the current year. Non-director Stock compensation expense
decreased to $176,000 in 2010 from $2,685,000 in 2009. That decrease in stock
compensation expense was due to stock options issued to management and employees
in September 2009. These expenses were partially offset by increased public
relations and marketing and other administrative expenses. These expenses
increased by $2,249,000 to $2,341,000 in the year ended September 30, 2010, from
$92,000 in the same period in 2009, primarily due to non-cash expenses related
to the shares pursuant to advisory services agreements with Summit to indentify,
introduce, engage, and compensate investor relations and/or public relations
firms on our behalf which we entered into in October 2009 and June of 2010.
G&A expenses also increased due to the following:




·
            G&A
      salaries expense for year ended September 30, 2010 increased by $36,000 to
      $449,000 from $413,000 recorded in 2009. These increases were primarily
      due to furloughs of staff in 2009.




·
            We
      recorded $62,000 in the year ended September 30, 2010 for warrants issued
      to Strategic Advisory Board members in the first quarter of 2010 compared
      with nil in the 2009.




·
            Board
      Compensation expenses decreased by $588,000 to $47,000 in the year ended
      September 30, 2010 from $635,000 in 2009. Of these expenses, $47,000 and
      $485,000 were recorded for director stock based compensation in the years
      ended September 30, 2010 and 2009, respectively. The board of director’s
      compensation in 2009 was recorded based on the implementation of the
      compensation plan approved in February 2009 and effective as of
      June 2008 and the issuance of stock options to directors in
      September 2009.




·
            Professional
      services expenses for the year ended September 30, 2010 increased by
      $149,000, to $591,000 from $442,000 recorded in 2009. This increase was
      primarily due to equity based compensation for consultants and increased
      accounting services expenditures.




Contingent
upon receipt of adequate capital into the company, we expect general and
administrative expenses to increase in fiscal 2011 in support of our expected
increased R&D and product development activities.




SolCool. We incurred an
operating loss from our SolCool subsidiary in the amount of $468,000 for the
year ended September 30, 2010 compared with nil in 2009. These costs arose due
to the acquisition of SolCool in January 2010. Included in these 2010 expenses
are the amortization of identifiable intangible assets in the amount of
$462,000.




Financing costs. We incurred
financing costs and fees related to our outstanding loans. Financing costs
decreased for the year ended September 30, 2010 $304,000 to $123,000 from
$427,000 in the prior year’s period. The decreases in financing costs were
primarily due to the higher non-interest expenses and fees associated with the
Agile loans incurred in 2009.





Interest expense. We incurred
interest expense on our outstanding loans. Interest expense decreased for the
year ended September 30, 2010 $665,000 to $768,000 from $1,433,000 in the prior
year. This decrease was primarily due to the $567,000 of forbearance fees
pertaining to the CAMHZN loan charged to interest expense in 2009 and reduced
recorded interest on Agile and Capitoline notes. These reductions were partially
offset by increased interest from increased loan balances on Agile and
Capitoline note balances in the earlier 2010 periods and the accrual of interest
with loan default interest rates in 2010. We expect interest expense to decrease
in 2011 as a result of the lower loan balances and interest resulting from
payment of loan and accounts payable balances from funds received from
anticipated long term funding efforts.





Gain on disposition of SolCool
Subsidiary. We recorded a gain on the disposition of our SolCool
subsidiary.


22


Comparison
of Annual Cash Flows




We used
cash of approximately $1.2 million in our operating activities in 2010, compared
to $1.0 million in 2009. Cash used in operating activities relates primarily to
net losses offset partially by non-cash expenses such as share-based
compensation and other items of net loss not requiring cash. We expect to use
cash for operating activities in the foreseeable future as we continue our
operating activities.




Our
investing activities used cash of approximately $18,000 in 2010 compared to
$16,000 in 2009.




Our
financing activities provided cash of approximately $1.2 million in 2010
compared to $996,000 in 2009. Changes in cash from financing activities are
primarily due to proceeds from sale of common stock and preferred stock, and net
proceeds from notes payable, less principal payments




Critical
Accounting Policies and Estimates




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




Revenue Recognition




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




Contract
revenues consist of amounts recorded from services provided to customers.
Revenues earned under such arrangements are recorded as earned as the services
are provided. Upfront payments received under contractual arrangements are
deferred and recognized as revenue over the service period.




Share Based Payments




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


23


Income Taxes




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




Recent
Accounting Pronouncements




In 2007,
the FASB issued guidance regarding “Business Combinations’ which replaces
previous guidance. The new provisions establish principles and requirements for
how the acquirer recognizes and measures identifiable assets acquired,
liabilities assumed, any noncontrolling interest and goodwill acquired, and also
provide for disclosures to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Additional
amendments address the recognition and initial measurement, subsequent
measurement, and disclosure of assets and liabilities arising from contingencies
acquired as part of a business combination. The newly issued guidance is
effective for fiscal years beginning after December 15, 2008 and is applied
prospectively to business combinations completed on or after that date. The
provisions are effective for our fiscal year ended September 30, 2010 and we
applied the guidance in preparing our September 30, 2010 consolidated financial
statements.




In 2009,
the FASB issued guidance regarding “Measuring Liabilities at Fair Value”, which
amends “Fair Value Measurements and Disclosures”, and provides clarification for
the valuation techniques available when valuing a liability when a quoted price
for an identical liability is not available, and clarifies that no adjustment is
necessary related to the existence of restrictions that prevent the transfer of
the liability. The amendments in this update require the use of valuation
techniques that use the quoted price of an identical liability when traded as an
asset, or quoted prices for similar liabilities or similar liabilities when
traded as assets. The guidance is effective for the first reporting period,
including interim periods, beginning after issuance on August 26, 2009, and
is effective for our fiscal year ended September 30, 2010. Expanded disclosures
related to significant transfers in and out of Level 1 and Level 2, and the
requirement related to the presentation of the Level 3 reconciliation are not
applicable at September 30, 2010, as we had no transfers in valuation levels or
Level 3 financial assets and liabilities.




In
October 2009, the Financial Accounting Standards Board (“FASB”) issued a new
accounting standard which provides guidance for arrangements with multiple
deliverables. Specifically, the new standard requires an entity to allocate
consideration at the inception of an arrangement to all of its deliverables
based on their relative selling prices. In the absence of vendor-specific
objective evidence or third-party evidence of the selling prices, consideration
must be allocated to the deliverables based on management’s best estimate of the
selling prices. In addition, the new standard eliminates the use of the residual
method of allocation. In October 2009, the FASB also issued a new accounting
standard which changes revenue recognition for tangible products containing
software and hardware elements. Specifically tangible products containing
software and hardware that function together to deliver the tangible products’
essential functionality are scoped out of the existing software revenue
recognition guidance and will be accounted for under the multiple –element
arrangements revenue recognition accounting guidance. We adopted these new
standards in the first quarter of 2010 using the prospective method, and the
adoption did not have a material impact on our consolidated financial
statements.




Off-Balance
Sheet Arrangements




As of
September 30, 2010, we did not have any off-balance sheet
arrangements.




ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




As a
smaller reporting company, we are not required to provide the information
required by this item.


24


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.




PAGEREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                
                26CONSOLIDATED
      FINANCIAL STATEMENTSConsolidated
      Balance Sheets at September 30, 2010 and 2009
                
                27Consolidated
      Statements of Operations for the years ended September 30, 2010 and
      2009
                
                28Consolidated
      Statements of Cash Flows for the years ended September 30, 2010 and
      2009
                
                29Consolidated
      Statements of Stockholders’ Deficit for the years ended September 30,
      2010 and 2009
                
                30Notes
      to Consolidated Financial Statements
                
                31


25







REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors
 Neah
Power Systems, Inc.
 Bothell,
Washington
 
 
 We have
audited the accompanying consolidated balance sheets of Neah Power Systems, Inc.
and Subsidiary ("the Company") as of September 30, 2010 and 2009, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Neah Power Systems, Inc.,
and Subsidiary as of September 30, 2010 and 2009, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
  The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company had an accumulated deficit
of approximately $53.5 million and negative working capital of approximately
$4.3 million at September 30, 2010.  Additionally, net cash used
in operating activities was approximately $1.2 million for the year ended
September 30, 2010, and 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 1.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 /S/
PETERSON SULLIVAN LLP
 
 
 Seattle,
Washington
 January
13, 2011


26




NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
BALANCE SHEETS


September 30,
2010 and 2009


ASSETSSeptember
      30,
                
                
                September
      30,2010
                
                
                2009Current
      assetsCash
      and cash equivalents
                
                $
                2,871
                
                
                $
                20,223Deferred
      financing costs, net
                
                
                --
                
                
                
                28,594Prepaid
      expenses and other current assets
                
                
                24,867
                
                
                
                63,956Total
      current assets
                
                
                27,738
                
                
                
                112,773Property
      and equipment, net
                
                
                22,919
                
                
                
                43,919Total
      assets
                
                $
                50,657
                
                
                $
                156,692LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
                
                $
                1,664,296
                
                
                $
                1,763,581Accrued
      interest
                
                
                551,711
                
                
                
                139,098Accrued
      expenses and other liabilities
                
                
                478,446
                
                
                
                382,341Notes
      payable - related parties
                
                
                300,000
                
                
                
                102,416Notes
      payable
                
                
                1,130,043
                
                
                
                1,776,299Deferred
      revenue
                
                
                189,500
                
                
                
                189,500Total
      current liabilities
                
                
                4,313,996
                
                
                
                4,353,235Total
      liabilities
                
                
                4,313,996
                
                
                
                4,353,235Commitments
      and contingenciesStockholders'
      deficitCommon
      stock and additional paid-in-capital$0.001
      par value, 80,000,000 shares authorized, 59,175,376 and
      34,833,598shares
      issued and 53,229,325 and 34,377,890 outstanding,
    respectively
                
                
                49,253,823
                
                
                
                44,077,472Accumulated
      deficit
                
                
                (53,517,162
                )
                
                
                (48,274,015
                )Total
      stockholders' deficit
                
                
                (4,263,339
                )
                
                
                (4,196,543
                )Total
      liabilities and stockholders' deficit
                
                $
                50,657
                
                
                $
                156,692


27




NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS


For the
Years Ended September 30, 2010 and 2009




For
      the
                
                
                For
      theYear
      ended
                
                
                Year
      endedSeptember
      30, 2010
                
                
                September
      30, 2009Revenues
                
                $
                --
                
                
                $
                1,106,976Operating
      expensesResearch
      and development expense
                
                
                604,653
                
                
                
                1,452,714General
      and administrative expense
                
                
                3,709,567
                
                
                
                4,308,627Operating
      loss from SolCool subsidiary
                
                
                467,995
                
                
                
                --(including
      amortization expense of $461,954)Total
      operating expenses
                
                
                4,782,215
                
                
                
                5,761,341Loss
      from operations
                
                
                (4,782,215
                )
                
                
                (4,654,365
                )Other
      income (expense)Financing
      costs
                
                
                (123,139
                )
                
                
                (426,582
                )Interest
      expense
                
                
                (768,269
                )
                
                
                (1,433,367
                )Gain
      on disposition of SolCool Subsidiary
                
                
                433,696
                
                
                
                --Other
                
                
                (3,220
                )
                
                
                --Net
      Loss
                
                $
                (5,243,147
                )
                
                $
                (6,514,314
                )Basic
      and diluted loss per common share
                
                $
                (0.12
                )
                
                $
                (0.45
                )Basic
      and diluted weighted average common sharesoutstanding
                
                
                42,327,193
                
                
                
                14,569,968
  See Notes
to Consolidated Financial Statements


28




NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the
Years Ended September 30, 2010 and 2009




2010
              
              
              2009Cash
      flows from operating activities:Net
      loss
              
              $
              (5,243,147
              )
              
              $
              (6,514,314
              )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
              
              
              21,000
              
              
              
              27,688Amortization
      of deferred financing costs
              
              
              123,139
              
              
              
              426,582Amortization
      of intangible assets
              
              
              461,954
              
              
              
              -Gain
      on disposition of SolCool subsidiary
              
              
              (433,696
              )
              
              
              -Share-based
      payments included in operating expenses
              
              
              2,407,425
              
              
              
              3,332,707Issuance
      of note payable to related parties as consideration for consulting
      services
              
              
              300,000
              
              
              
              -Non-cash
      forbearance fees on note payable
              
              
              -
              
              
              
              567,000Amortization
      of debt discount
              
              
              36,958
              
              
              
              122,098Interest
      paid with common stock
              
              
              304,026
              
              
              
              563,727Other
              
              
              3,220
              
              
              
              1,861Loss
      on disposal of assets
              
              
              -
              
              
              
              263Changes
      in operating assets and liabilities, net of effects of business
      combinationContract
      receivable
              
              
              -
              
              
              
              39,718Prepaid
      expenses and other current assets
              
              
              23,089
              
              
              
              (4,108
              )Accounts
      payable
              
              
              241,235
              
              
              
              114,513Accrued
      expenses and other liabilities
              
              
              514,330
              
              
              
              303,300Other
              
              
              (461
              )
              
              
              -Net
      cash used by operating activities
              
              
              (1,240,928
              )
              
              
              (1,018,965
              )Cash
      flows from investing activities:Issuance
      of notes receivable
              
              
              -
              
              
              
              (16,000
              )Cash
      payments for acquisition of SolCool (not returned on
      disposition)
              
              
              (18,299
              )
              
              
              -Net
      cash used by investing activities
              
              
              (18,299
              )
              
              
              (16,000
              )Cash
      flows from financing activities:Net
      proceeds from sale of common stock
              
              
              1,064,998
              
              
              
              -Net
      proceeds from notes payable
              
              
              183,424
              
              
              
              832,091Proceeds
      from warrant exercises
              
              
              869
              
              
              
              -Proceeds
      from sale of Series A convertible preferred stock
              
              
              -
              
              
              
              191,020Principal
      payments on notes payable
              
              
              (7,416
              )
              
              
              (27,584
              )Net
      cash provided by financing activities
              
              
              1,241,875
              
              
              
              995,527Net
      change in cash and cash equivalents
              
              
              (17,352
              )
              
              
              (39,438
              )Cash
      and cash equivalents, beginning of period
              
              
              20,223
              
              
              
              59,661Cash
      and cash equivalents, end of period
              
              $
              2,871
              
              
              $
              20,223Supplemental
      cash flow informationCash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -Noncash
      investing and financing activitiesShares
      issued in connection with settlement of liabilities
              
              $
              1,323,813
              
              
              $
              35,000Issuance
      of common stock for Solcool acquisition
              
              $
              245,148
              
              
              $
              -Return
      of common stock on disposition of SolCool
              
              $
              (245,148
              )Accounts
      payable financed with Note Payable
              
              $
              141,047
              
              
              $
              --Deferred
      financing costs paid with issuance of common stock
              
              $
              75,221
              
              
              $
              364,128Original
      issue discount on notes payable
              
              $
              28,213
              
              
              $
              130,843Increase
      in note payable due to forbearance fee
              
              $
              -
              
              
              $
              567,000Shares
      issued in partial payment of forebearance fee on note
    payable
              
              $
              -
              
              
              $
              327,000


See Notes
to Consolidated Financial Statements





29




NEAH
POWER SYSTEMS, INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT


For the
Years Ended September 30, 2010 and 2009


Preferred
      Stock
              
              
              Common
      Stock and APIC
              
              
              
              
              
              TotalNumber
              
              
              
              
              
              Number
      of Shares
              
              
              
              
              
              Accumulated
              
              
              Stockholders'of
      Shares
              
              
              Amount
              
              
              Outstanding
              
              
              Amount
              
              
              Deficit
              
              
              DeficitBalances
      at September 30, 2008
              
              
              20,217,100
              
              
              
              669,007
              
              
              
              6,504,888
              
              
              $
              38,594,883
              
              
              $
              (41,759,701
              )
              
              $
              (2,495,811
              )Sale
      of Series A preferred stock
              
              
              4,775,500
              
              
              
              191,020
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              191,020Conversion
      of Series A preferred stock to common stock
              
              
              (24,992,600
              )
              
              
              (860,027
              )
              
              
              19,994,394
              
              
              
              860,027
              
              
              
              
              
              
              
              -Shares
      issued in partial payment of forebearance fee onnote
      payable
              
              
              
              
              
              
              
              
              
              
              1,635,000
              
              
              
              327,000
              
              
              
              
              
              
              
              327,000Shares
      issued in connection with settlement of liabilities
              
              
              
              
              
              
              
              
              
              
              199,998
              
              
              
              20,000
              
              
              
              
              
              
              
              20,000Common
      stock and warrants issued for services
              
              
              
              
              
              
              
              
              
              
              405,500
              
              
              
              127,252
              
              
              
              
              
              
              
              127,252Compensation
      related to stock options, net of cancellationsand
      forfeitures
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,205,455
              
              
              
              
              
              
              
              3,205,455Shares
      issued for financing costs
              
              
              
              
              
              
              
              
              
              
              1,620,470
              
              
              
              364,128
              
              
              
              
              
              
              
              364,128Shares
      issued in payment of interest on notes payable
              
              
              
              
              
              
              
              
              
              
              1,955,050
              
              
              
              563,727
              
              
              
              
              
              
              
              563,727Issuance
      of common stock pursuant to antidilutionprovisions
      of common stock purchase agreementand
      settlement of note payable
              
              
              
              
              
              
              
              
              
              
              1,950,000
              
              
              
              15,000
              
              
              
              
              
              
              
              15,000Net
      loss for the year ended September 30, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,514,314
              )
              
              
              (6,514,314
              )Balances
      at September 30, 2009
              
              
              -
              
              
              
              -
              
              
              
              34,265,300
              
              
              
              44,077,472
              
              
              
              (48,274,015
              )
              
              
              (4,196,543
              )Shares
      issued in connection with settlement of liabilities
              
              
              
              
              
              
              
              
              
              
              8,401,429
              
              
              
              1,323,813
              
              
              
              
              
              
              
              1,323,813Issuance
      of common stock for cash, net of fees
              
              
              
              
              
              
              
              
              
              
              7,881,636
              
              
              
              1,064,998
              
              
              
              
              
              
              
              1,064,998Exercise
      of warrants
              
              
              
              
              
              
              
              
              
              
              26,058
              
              
              
              869
              
              
              
              
              
              
              
              869Issuance
      of common stock for Solcool acquisition
              
              
              
              
              
              
              
              
              
              
              476,187
              
              
              
              245,148
              
              
              
              
              
              
              
              245,148Return
      of common stock on disposition of SolCool
              
              
              
              
              
              
              
              
              
              
              (476,187
              )
              
              
              (245,148
              )
              
              
              
              
              
              
              (245,148
              )Common
      stock and warrants issued for services
              
              
              
              
              
              
              
              
              
              
              1,808,176
              
              
              
              2,150,275
              
              
              
              
              
              
              
              2,150,275Compensation
      related to stock options, net ofcancellations
      and forfeitures
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              257,150
              
              
              
              
              
              
              
              257,150Shares
      issued for financing costs
              
              
              
              
              
              
              
              
              
              
              191,880
              
              
              
              75,221
              
              
              
              
              
              
              
              75,221Shares
      issued in payment of interest on notes payable
              
              
              
              
              
              
              
              
              
              
              654,846
              
              
              
              304,025
              
              
              
              
              
              
              
              304,025Net
      loss for the year ended September 30, 2010
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,243,147
              )
              
              
              (5,243,147
              )Balances
      at September 30, 2010
              
              
              -
              
              
              $
              -
              
              
              
              53,229,325
              
              
              $
              49,253,823
              
              
              $
              (53,517,162
              )
              
              $
              (4,263,339
              )






30


NEAH
POWER SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010 and 2009
 
 Note
1. Description of Business and Summary of Significant Accounting
Policies
 Organization- Neah
Power Systems, Inc. was incorporated in the State of Nevada in
February 2001, under the name Growth Mergers, Inc. In 2006, pursuant to
terms of an Agreement and Plan of Merger as amended, a wholly-owned subsidiary
of Growth Mergers, Inc., merged with and into Neah Power Washington. Following
the merger, Growth Mergers, Inc. changed its name to Neah Power Systems, Inc.
and became the parent corporation of Neah Power Washington. Neah Power Systems,
Inc., together with its subsidiary, is referred to as the “Company” or
“we”.
  Business- We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors and potentially
lower costs. We have one operating segment. Our laboratory facilities and
corporate office is located in Bothell, Washington.
  Going Concern - The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of our company as a going concern. Since our
inception, we have reported net losses, including losses of approximately $5.2
million and $6.5 million during the years ended September 30, 2010 and 2009,
respectively, and we expect losses to continue in the near future as we grow and
redeploy our operations. At September 30, 2010, we have a working capital
deficit of $4.3 million and an accumulated deficit of $53.5 million. Net cash
used by operating activities approximated $1.2 million and $1.0 million during
the years ended September 30, 2010 and 2009, respectively. We have funded our
operations through sales of common stock and to a lesser extent short-term
borrowings. In this regard, during the fiscal year ended September 30, 2010, we
raised approximately $1.1 million through sales of our common stock and $183,000
through note payable borrowings. Subsequent to our fiscal year ended September
30, 2010 we received approximately $103,000 from investors in advances for
equity or debt investment.
  During
the last half of 2010, funds raised though sales of common stock have not been
sufficient to continue to support certain operating activities, which has led to
postponement in the deployment of our business strategy and curtailment of
research and development activities. We have significantly reduced the number of
staff to reduce our operating costs, while we focus on raising capital. Without
additional funding, our cash is estimated to support our operations only through
the end of January 2011. These factors, and those of the preceding paragraph,
raise substantial doubt about our ability to continue as a going
concern.
 
 We
require additional financing to execute our business strategy and to satisfy our
near-term working capital requirements. Our operating expenses will consume a
material amount of our cash resources. Our management intends to raise
additional financing to fund future operations and to provide additional working
capital to further fund our growth. We are actively seeking to raise additional
capital through the sale of shares of our capital stock. If management deems
necessary, we might also seek additional funds through borrowings. There is no
assurance that such financing will be obtained in sufficient amounts necessary
or on terms favorable or on terms acceptable to us to meet our needs. In the
event that we cannot obtain additional funds, on a timely basis or our
operations do not generate sufficient cash flow, we may be forced to curtail our
development or cease our activities.
 
 The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
 .
 Use of estimates in the
preparation of financial statements - Preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The more significant accounting estimates inherent in the
preparation of our consolidated financial statements include estimates as to
the, valuation of equity related instruments and valuation allowance for
deferred income tax assets.
  31
  Consolidation - The
consolidated financial statements include the accounts of our company and our
wholly-owned subsidiary. All significant intercompany balances and transactions
have been eliminated.
 
 Cash and cash
equivalents - We consider all highly liquid investments purchased with
maturities of three months or less to be cash equivalents. We place our cash
balances with high credit quality financial institutions. At times, such
balances may be in excess of the FDIC insurance limit. At September 30, 2010, no
amounts were in excess of the FDIC limit.
  Contingencies -
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss but which will only be resolved when one or more
future events occur or not occur. We assess such contingent liabilities, and
such assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to pending legal proceedings that are pending against us
or unasserted claims that may result in such proceedings, we evaluate the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein. If the assessment of a contingency indicates that it is probable that a
liability has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in our financial statements. If
the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable would be disclosed.
  Concentrations –All of our revenues in the
year ended September 30, 2009 were from one customer. We had no revenues in
2010.
  Fair value of financial
instruments - We measure our financial assets and liabilities in
accordance with generally accepted accounting principles. For certain of our
financial instruments, including cash and cash equivalents, accounts payable,
notes payable, and accrued liabilities, the carrying amounts approximate fair
value due to their short maturities.
 
 Property and
Equipment - Property and equipment is stated at cost. Additions and
improvements that significantly add to the productive capacity or extend the
life of an asset are capitalized. Maintenance and repairs are expensed as
incurred. Depreciation is computed using the straight-line method over three to
five years. Leasehold improvements are amortized over the lesser of the
estimated remaining useful life of the asset or the remaining lease
term.
  Impairment of Long-Lived
Assets - Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. We have not
recognized any impairment.
 
 Income taxes - We
account for income taxes using an asset and liability method which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to amounts expected
to be realized. We continue to provide a full valuation allowance to reduce our
net deferred tax asset to zero, inasmuch as we have not determined that
realization of deferred tax assets is more likely than not. The provision for
income taxes represents the tax payable for the period and change during the
period in net deferred tax assets and liabilities.
  32
  Revenue recognition -
We recognize revenue when we have persuasive evidence of an arrangement, the
services have been provided to the customer, the price for services is fixed and
determinable, no significant unfulfilled obligations exist and collectability is
reasonably assured. Contract revenues consist of amounts recorded from services
provided to a single customer. Revenues earned under contracts are recognized as
services are provided. Upfront payments received under contractual arrangements
are deferred and recognized as revenue over the service period.
  Research and Development
Expense - Research and development costs are expensed as
incurred.
  Share based
compensation -We use the
Black-Scholes-Merton option pricing model as our method of valuation for
stock-based awards. Stock-based compensation expense is based on the value of
the portion of the stock-based award that will vest during the period, adjusted
for expected forfeitures. The estimation of stock-based awards that will
ultimately vest requires judgment, and to the extent actual or updated results
differ from our current estimates, such amounts will be recorded in the period
the estimates are revised. The Black-Scholes-Merton option pricing model
requires the input of highly subjective assumptions, and other reasonable
assumptions could provide differing results. Our determination of the fair value
of stock-based awards on the date of grant using an option pricing model is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to, the expected life of the award and expected stock price volatility over the
term of the award. Stock-based compensation expense is recognized on a
straight-line basis over the applicable vesting period (deemed the requisite
service period) based on the fair value of such stock-based awards on the grant
date.
 
 Net loss per share -
Basic and diluted net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
Common stock equivalents are excluded as the effect would be anti-dilutive due
to our net losses. The following numbers of shares have been excluded from net
loss per share computations for the years ended September 30, 2010 and
2009:
 
 2010
                                        
                                        
                                        2009Convertible
      debt
                                        
                                        
                                        54,488
                                        
                                        
                                        292,039Common
      stock options
                                        
                                        
                                        3,936,760
                                        
                                        
                                        2,862,745Common
      stock purchase warrants
                                        
                                        
                                        974,474
                                        
                                        
                                        636,832
 
 Recent Accounting
Pronouncements –
 
 In 2007,
the FASB issued guidance regarding “Business Combinations’ which replaces
previous guidance. The new provisions establish principles and requirements for
how the acquirer recognizes and measures identifiable assets acquired,
liabilities assumed, any noncontrolling interest and goodwill acquired, and also
provide for disclosures to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Additional
amendments address the recognition and initial measurement, subsequent
measurement, and disclosure of assets and liabilities arising from contingencies
acquired as part of a business combination. The newly issued guidance is
effective for fiscal years beginning after December 15, 2008 and is applied
prospectively to business combinations completed on or after that date. The
provisions are effective for our fiscal year ended September 30, 2010 and we
applied the guidance in preparing our September 30, 2010 consolidated financial
statements.
  In 2009,
the FASB issued guidance regarding “Measuring Liabilities at Fair Value”, which
amends “Fair Value Measurements and Disclosures”, and provides clarification for
the valuation techniques available when valuing a liability when a quoted price
for an identical liability is not available, and clarifies that no adjustment is
necessary related to the existence of restrictions that prevent the transfer of
the liability. The amendments in this update require the use of valuation
techniques that use the quoted price of an identical liability when traded as an
asset, or quoted prices for similar liabilities or similar liabilities when
traded as assets. The guidance is effective for the first reporting period,
including interim periods, beginning after issuance on August 26, 2009, and
is effective for our fiscal year ended September 30, 2010. Expanded disclosures
related to significant transfers in and out of Level 1 and Level 2, and the
requirement related to the presentation of the Level 3 reconciliation are not
applicable us at September 30, 2010, as we had no transfers in valuation levels
or Level 3 financial assets and liabilities.
 33
  In
October 2009, the Financial Accounting Standards Board (“FASB”) issued a new
accounting standard which provides guidance for arrangements with multiple
deliverables. Specifically, the new standard requires an entity to allocate
consideration at the inception of an arrangement to all of its deliverables
based on their relative selling prices. In the absence of vendor-specific
objective evidence or third-party evidence of the selling prices, consideration
must be allocated to the deliverables based on management’s best estimate of the
selling prices. In addition, the new standard eliminates the use of the residual
method of allocation. In October 2009, the FASB also issued a new accounting
standard which changes revenue recognition for tangible products containing
software and hardware elements. Specifically tangible products containing
software and hardware that function together to deliver the tangible products’
essential functionality are scoped out of the existing software revenue
recognition guidance and will be accounted for under the multiple –element
arrangements revenue recognition accounting guidance. We adopted these new
standards in the first quarter of 2010 using the prospective method, and the
adoption did not have a material impact on our consolidated financial
statements.
  Note
2. SolCool One, LLC Acquisiton and Disposition
 
 SolCool
One, LLC
  We
acquired SolCool One, LLC (" SolCool"), a supplier of direct current solar
air-conditioning systems for off-the-grid applications,and took effective control
on January 13, 2010. We issued 476,187 shares of our common stock to the
members of SolCool as consideration for the acquisition of all the membership
units of SolCool. Shares issued were recorded at fair value of
approximately $245,000, based on the closing price of our common stock on the
acquisition date. The total purchase consideration transferred was $275,000,
which included $30,000 of funds previously advanced to SolCool, which was
allocated as follows (in thousands):
 
 Assets:
                          
                          
                          
                          Liabilities
      and net assets acquired:Cash
      and cash equivalents
                          
                          $
                          1
                          
                          Accounts
      payable and accrued liabilities
                          
                          $
                          439Identifiable
      intangible assets
                          
                          
                          713
                          
                          Net
      assets acquired
                          
                          
                          275$
                          714
                          
                          
                          
                          $
                          714
  The
acquisition of SolCool is accounted for using the acquisition method under
accounting guidance issued by the FASB, with January 13, 2010 being the
acquisition date when we obtained control. This accounting guidance requires,
among other things, that assets acquired and liabilities assumed be recognized
at their fair values as of the acquisition date. Portions of the purchase price
have been allocated to intangible assets, which were identified by management as
SolCool’s distribution network and customer relationships. The fair values of
identifiable intangible assets were determined using the income approach.
Estimated lives of intangible assets were determined to be one year and were
based on factors including, among others, the expected use of the assets,
effects of demand, competition and the level of funding required to obtain the
expected future cash flows from the assets.
  On August
23, 2010, we agreed to unwind the transaction by cancelling all shares of our
common stock issued to SolCool’s members and returning the stock certificates
representing the membership units of SolCool to SolCool’s members. In connection
with accounting for the unwind transaction we unrecognized assets and
liabilities of $251,000 and $440,000, respectively, and recorded the reacquired
shares at the same amount recorded at the acquisition date, or $245,000, which
resulted in recording a gain on disposition of $434,000. The net effect on
operations of the acquisition and subsequent disposition of SolCool is
approximately $34,000 for the year ended September 30, 2010, which represents
the amount of cash paid for the acquisition as well as advances made to SolCool
during the period we owned them that we will not recover. We are currently in
the process of exchanging the stock certificates. As of September 30, 2010,
we had received approximately 50% of the shares of our common stock that we had
issued to the members of SolCool.
 34
  SolCool’s
operating results from the acquisition date through the unwind date, comprised
of amortization expense of $462,000 and $6,000 of other expense, is included in
our consolidated statement of operations for the fiscal year ended September 30,
2010.
 
 Note
3. Property and Equipment
  Property
and equipment consisted of the following at September 30 (in
thousands):
  2010
                      
                      
                      2009Laboratory
      equipment
                      
                      $
                      1,344
                      
                      
                      $
                      1,344Computer
      hardware and software
                      
                      
                      165
                      
                      
                      
                      165Leasehold
      improvements
                      
                      
                      580
                      
                      
                      
                      580Total
      property and equipment
                      
                      
                      2,089
                      
                      
                      
                      2,089Accumulated
      depreciation and amortization
                      
                      
                      (2,066
                      )
                      
                      
                      (2,045
                      )Property
      and equipment, net
                      
                      $
                      23
                      
                      
                      $
                      44
  Note
4. Accrued Expenses
  Accrued
expenses consisted of the following at September 30 (in thousands):
  2010
                        
                        
                        2009Accrued
      compensation and related expenses
                        
                        $
                        365
                        
                        
                        $
                        312Other
      accrued liabilities
                        
                        
                        113
                        
                        
                        
                        70Total
                        
                        $
                        478
                        
                        
                        $
                        382
  Note
5. Notes Payable
  2007 Notes payable-
In November 2007, we received net proceeds of $465,000 and issued to CAMHZN
Master LDC (“CAMHZN”) (the “Lender”) a $500,000 12% convertible secured
promissory note, which was amended in May 2008 to mature in September 2008. We
entered into an amended loan agreement, whereby the Lender agreed to forbear
from exercising any remedies available under the loan documents or applicable
law through March 2009, and in exchange, we agreed to pay a fee of $567,000
which was added to the principal balance of the loan and payable in cash or
stock at our discretion. In February 2009, we released to the Lender 1,635,000
shares held by the Lender as collateral shares valued at $327,000 based on the
closing price of our common stock on the release date, which was recorded as a
partial payment of the fee. In March 2010, we received a letter from the Lender
stating that we were in default on the outstanding note. We are contesting the
default notice and are disputing the validity of, among other things, the fee
which was added to the note balance, and treatment of release of shares as a
reduction of the fee. We have not reflected any change to previous accounting
treatment for the transactions given the uncertainty regarding the ultimate
resolution of these matters. To the extent new facts become known or ultimate
settlement of this note occurs, the impact of the change will be reflected in
the consolidated financial statements at that time. On July 22, 2010, we entered
into an agreement with the Lender pursuant to which we agreed to issue 240,000
shares of our common stock to the Lender. In exchange, the Lender agreed to (i)
limit the number of shares of our common stock that it would sell; (ii) return
any excess shares after sales proceeds received equal the unpaid principal and
accrued and unpaid interest due under the note; and (iii) rescind for a minimum
of thirty days from the date of the agreement the notice of default delivered to
us in March 2010. These shares, valued at $18,000, were recorded as interest
expense during the year ended September 30, 2010.
 
 As of
September 30, 2010 and 2009, we have recorded $740,000 as the note balance
outstanding and $361,000 and $117,000, respectively, in accrued interest. The
stated interest rate upon the event of default is the lower of 110% or the
statutory maximum. We have recorded interest expense effective from the maturity
dates of the notes at a rate of 25% which is the maximum rate that can be
applied to these loans under New York State law.
  35
  2008 Notes Payable-
In 2008, we entered into an agreement with one of our vendors, whereby the
accounts payable balance owed was converted to an unsecured note payable, due in
eight equal payments of $12,500 beginning in August 2008. At September 30, 2010
and 2009 the balance outstanding was $89,000, does not accrue interest, and is
past due.
 
 2009 Notes Payable-
In February 2009, we entered into a Securities Purchase Agreement ( with
amendments, the “Agreement”) with each of Agile Opportunity Fund, LLC and
Capitoline Advisors Inc. (the “Investors”) pursuant to which we subsequently
received funding through the issuance of promissory notes (the “Notes”) in the
aggregate amount of approximately $1.1 million and an aggregate purchase price
of $920,000, with a maturity date of August 12, 2009 and prepaid interest at the
rate of 18% per annum. The Notes are convertible into shares of our common stock
at a conversion price of $3.33 per share, at the discretion of the note holder,
and were subject to down-round adjustment to conversion price based on future
common stock issuances. In February 2010, the Notes were amended, effective
September 30, 2009, to eliminate future down-round adjustments. The Notes are
collateralized by a pledge of all our assets and, upon conversion, have certain
piggyback registration rights. In October 2009, we entered into an amendment to
the Agreement whereby we issued 10,000,000 shares of our common stock to be held
as additional collateral for the Notes.
  During
the years ended September 30, 2010 and 2009, we issued notes under the agreement
to investors in the aggregate face amounts of $169,000 and $825,000,
respectively, with Original Issue Discount (“OID”) amounts of $28,000 and
$131,000, respectively, for total face amount of the Notes of $197,000 and
$956,000, respectively. The value of the OID was recorded as debt discount and
has been amortized in its entirety as interest expense as of September 30,
2010.
 
 In
consideration for the Notes issued during the years ended September 30, 2010 and
2009, 391,000 common shares, valued at $267,000 and 1,620,000 common shares
valued at $364,000, respectively, were issued under the terms of the Securities
Purchase Agreement and amendments. This has been recorded as financing costs and
has been amortized over the term of the Notes. Under the terms of the agreement
for the years ended September 30, 2010 and 2009, 115,000 additional shares
valued at $94,000 and 1,869,000 additional shares valued at $455,000 are also
issuable and have been recorded as interest expense.
 
 In April
2010, we received a letter from the Investors stating that we were in default
under the Agreement and demanding payment of approximately $1.4 million for
principal and interest due under the Notes.In conjunction with the
notice of default, the Investors foreclosed on 4,502,306 shares of the
10,000,000 shares of our common stock held as collateral to be applied against
the principal of the Notes. The remaining 5,497,694 collateral shares have been
recorded as issued, but not outstanding. The shares released to the Investors
were recorded at $991,000 based on the closing price of our common stock on the
release date and have been applied against the balance of the Notes. In October
2010, the Investors foreclosed on an additional 1,600,000 shares valued at
$61,000.
  As of
September 30, 2010 and 2009, we recorded $165,000 and $955,000, respectively, in
principal due Agile and Capitoline as notes payable on the consolidated balance
sheets. We recorded $185,000 and $21,000 in accrued interest as of September 30,
2010 and 2009, respectively. The stated interest rate upon the event of default
is the lower of 36% or the statutory maximum. We have recorded interest expense
effective from the maturity dates of the notes at a rate of 25% which is the
maximum rate that can be applied to these loans under New York State
law.
 
 Other 2009 Notes
Payable – In September and October 2009, we received funds from a private
investor related to one of our investors, in the aggregate face amounts of
$100,000 and $25,000, respectively, and accruing interest at a 6% annual rate.
In June 2010, we paid the notes and accrued interest in full by the issuance of
our common stock.
 
 February 2010 Notes
Payable – In February 2010, we entered into an agreement with one of our
professional service providers, whereby our accounts payable balance of $141,000
owed was converted to a 6% note payable due June 1, 2010. As of September 30,
2010, the principal balance was $136,000, accrued interest was $5,000, and
amounts are past due.
 
 June 2010 Notes Payable- In June 2010, we entered into an advisory services agreement with
Summit Trading Limited (“Summit”), whereby they will identify, introduce,
engage, and compensate investor relations and/or public relations firms on our
behalf. Under the terms of this agreement as consideration for those services,
we issued a non-interest bearing note payable in the amount of $300,000 payable
upon demand, which we recorded as general and administrative expense during the
year ended September 30, 2010 as all services were provided by the investor
during the year.
  36
  Note
6. Stockholders’ Equity
  Preferred Stock - Our
board of directors has the authority to designate and issue up to 5,000,000
shares of $0.001 par value preferred stock in one or more series, and to fix and
determine the relative economic rights and preferences of preferred shares any
or all of which may be greater than the rights of our common stock, as well as
the authority to issue such shares without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders preferred rights to our assets upon
liquidation, the right to receive dividends before dividends are declared to
holders of our common stock, and the right to the redemption of such preferred
shares, together with a premium, prior to the redemption of the common stock. In
addition, shares of preferred stock could be issued with terms calculated to
delay or prevent a change in control or make removal of management more
difficult. Preferred stock is designated 4,996,500 shares to Series A and 3,500
shares to Series B at September 30, 2010.
 
 In 2008,
our board of directors approved the issuance of a minimum of 7,500,000 shares of
Series A preferred stock ("Series A") at a purchase price of $0.04 per share.
During the year ended September 30, 2009, we issued 4,775,500 shares of
Series A and received $191,000 in cash proceeds, net of financing costs.
Additionally, during the year ended September 30, 2009, all outstanding
shares of our Series A were converted into shares of our common
stock.
  Common Stock - We are
authorized to issue up to 80,000,000 shares of $0.001 par value common stock.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the holders of our common stock.
Subject to the rights of the holders of any class of our capital stock having
any preference or priority over our common stock, the holders of shares of our
common stock are entitled to receive dividends that are declared by our board of
directors out of legally available funds. In the event of our liquidation,
dissolution or winding up, the holders of our common stock are entitled to share
ratably in our net assets remaining after payment of liabilities, subject to
prior rights of preferred stock, if any, then outstanding. Our common stock has
no preemptive rights, conversion rights, redemption rights, or sinking fund
provisions, and there are no dividends in arrears or in default. All shares of
our common stock have equal distribution, liquidation and voting rights and have
no preferences or exchange rights.
  In
January 2010, we entered into a Stock Purchase Agreement (the “Stock Purchase
Agreement”) with each of three investment firms (collectively, the “Investors”)
under which each of the Investors committed to purchase up to $5 million of our
common stock. Under the terms of each Stock Purchase Agreement, from time to
time until one year from the date of the Stock Purchase Agreement and at our
sole discretion, we may present each of the Investors with a notice to purchase
such common stock (the “Notice”). The Investors are obligated to purchase such
common stock by the tenth trading day after the Notice date (the “Tranche
Closing”), subject to certain defined conditions, including among others, a
minimum closing price as a percentage of the closing price on the Notice date.
As financing fees, we will issue to Investors, at each Tranche Closing, shares
of our common stock equal to 20% of the number of common shares purchased at the
Tranche Closing. In addition, we will pay fees to the Investors in the amount of
2% of the proceeds of each Tranche Closing. Notwithstanding any of the other
provisions of this Agreement, and to provide some initial capital, each of the
Investors purchased 250,000 shares of our common stock for $250,000. During the
year ended September 30, 2010, we received net proceeds of $705,000 and issued
2,368,406 shares of common stock to one of the Investors. We did not receive
funds from the other two investors under the terms of the Stock Purchase
Agreement and we do not intend to issue any further tranche requests or issue
any additional stock under the Stock Purchase Agreement.
  In June
2010, we entered into two Stock Purchase and Subscription Agreements (the
“Agreements”) with another investor under which we issued 2,986,667 shares of
our common stock for net proceeds of $112,000.
  37
  During
the year ended September 30, 2010, we entered into a financing agreement, as
amended, with another investor under which the investor agreed to purchase up to
$5 million of our common stock under certain limitations and conditions,
including that a registration statement be effective for such shares after
1,015,000 shares of our common stock are purchased by the investor. Pursuant to
the agreement we issued an additional 1,545,000 unregistered shares of which
1,500,000 are to be used as credit towards shares for advance notices. During
the year ended September 30, 2010, we sold 2,510,000 shares of our common stock
to the investor, based on the closing prices of our stock on the dates of
issuance, for cash proceeds, net of financing fees, of $201,000. In connection
with the agreement, we also issued 100,000 shares, valued at $37,000 based on
the closing prices of our stock on the dates of issuance, in payment of
financing fees.
 
 As
disclosed in Note 5, during the year ended September 30, 2010, we issued 507,000
shares of our common stock to holders of certain of our notes payable, and these
lenders also foreclosed on 4,502,306 shares of the 10,000,000 shares of our
common stock held by the lenders as collateral. In October an additional
1,600,000 shares were foreclosed upon. Additionally as disclosed in Note 5, we
issued 240,000 shares of our common stock to the holder of certain of our notes
payable, which were recognized as interest expense of $18,000, based on closing
market prices.
  In May
2010, we issued 500,000 shares of our common stock, valued at $40,000 to one of
our members of our board of directors, in payment of an account balance owing
for past public relations services.
 
 In June
2010, we issued 3,333,000 shares of our common stock having value of $247,000
based on closing market prices to a private investor related to one of our
investors in exchange for payment in full of notes payable due in April 2010,
which together with accrued interest totaled $131,000. The excess of fair value
over the recorded value of the obligations of $116,000 has been recognized as a
loss on extinguishment of debt during the year ended September 30,
2010.
 
 During
the year ended September 30, 2010, we issued 1,808,000 shares of our common
stock having a value of approximately $2.0 million based on closing market
prices on dates of issuances, primarily in consideration for services provided
which was recorded as general and administrative expense. During the year ended
September 30, 2009, we issued approximately 396,000 shares of our common
stock for services valued at approximately $69,000 based on the market value of
the stock, and issued approximately 200,000 shares of our common stock, valued
at $20,000, in connection with the settlement of outstanding accounts payable
balances.
  During
the year ended September 30, 2010, we received $43,000 from an investor in
advance for security purchases, which has been recorded as a liability included
in accrued expenses as of September 30, 2010 in the consolidated balance
sheet.
 
 Pursuant
to the terms of our convertible note payable agreement with CAMZHN (see Note 5),
in February 2009 we issued 1,635,000 shares of our common stock valued at
$327,000 based on the market value of the stock as a partial forbearance fee
related to our note payable. In addition, pursuant to the terms of our
convertible note payable agreements with Agile and Capitoline (see Note 5),
during the year ended September 30, 2009, we issued 1,620,470 shares of our
common stock valued at approximately $364,100, based on the market value of the
stock, for financing fees and 1,869,334 shares of our common stock valued at
$455,200, based on the market value of the stock, for interest.
  In
August 2009, we issued 1,950,000 additional shares of common stock to
Summit pursuant to the terms of the anti-dilution clause of the agreement.
Effective August 2009, the anti-dilution clause of the purchase agreement
was terminated.
  Long Term Incentive
Compensation Plan– Our Long Term Incentive Compensation Plan ("the
Plan") was adopted in 2006 and amended in 2008. Under the amended Plan, the
maximum number of shares issuable is 6,000,000. The Plan is to continue for a
term of ten years from the date of its adoption. The Plan is administered by our
board of directors. We have granted stock options under the plan to employees,
members of our board of directors, and advisors and consultants. No options have
been exercised. Options are exercisable for ten years from date of grant. The
following table summarizes stock option activity during the years ended
September 30, 2009 and 2010:
  38
 
 
 Options
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at September 30, 2008 (197,580 exercisable options)
                  
                  
                  232,595
                  
                  
                  $
                  9.67Grants
                  
                  
                  2,841,700
                  
                  
                  
                  1.29Forfeitures
                  
                  
                  (136,634
                  )
                  
                  
                  6.36Cancellations
                  
                  
                  (74,916
                  )
                  
                  
                  8.99Outstanding
      at September 30, 2009 (2,592,475 exercisable options)
                  
                  
                  2,862,745
                  
                  
                  $
                  1.31Grants
                  
                  
                  3,853,110
                  
                  
                  
                  0.08Forfeitures
                  
                  
                  (93,550
                  )
                  
                  
                  1.35Cancellations
                  
                  
                  (2,685,545
                  )
                  
                  
                  1.28Outstanding
      at September 30, 2010 (3,113,115 exercisable options)
                  
                  
                  3,936,760
                  
                  
                  $
                  0.12
  Of the
3,113,115 options available for exercise, 3,103,665 are conditional upon the
increase in the number of our authorized shares of common stock.
  The
weighted average fair value of the options granted during the years ended
September 30, 2010 and 2009 was $0.08 and $1.29 respectively, and the
weighted average remaining contractual lives of outstanding options at
September 30, 2010 was 9.7 years. For exercisable options as of
September 30, 2010, the weighted average contractual term is also 9.7
years. As of September 30, 2010, we had approximately $96,000 of total
unrecognized compensation cost related to non-vested stock-based awards granted
under all equity compensation plans. Total unrecognized compensation cost will
be adjusted for any future changes in estimated forfeitures. We expect to
recognize this cost in 2011.
  As of
September 30, 2010 and 2009, the aggregate intrinsic value of options
outstanding, representing the excess of the closing market price of our common
stock over the exercise price, is nil.
  We
determine the value of share-based compensation using the Black-Scholes fair
value option-pricing model with the following weighted average assumptions for
options and warrants granted during the years ended
September 30:
  2010
                        
                        
                        2009Risk
      free interest rate
                        
                        
                        2.3
                        %
                        
                        2.9
                        %Expected
      dividend yield
                        
                        
                        0.0
                        %
                        
                        0.0
                        %Volatility
                        
                        
                        226.78
                        %
                        
                        238.1
                        %Expected
      life in years
                        
                        
                        5.0
                        
                        
                        9.6
  Share-based
payments recognized as operating expense are as follows for the years ended
September 30, 2010 and 2009:
  2010
                            
                            
                            2009Common
      stock options
                            
                            $
                            257,150
                            
                            
                            $
                            3,205,455Common
      stock purchase warrants
                            
                            
                            157,305
                            
                            
                            
                            59,383Issuance
      of common stock
                            
                            
                            1,992,970
                            
                            
                            
                            67,869Total
      share based payments
                            
                            $
                            2,407,425
                            
                            
                            $
                            3,332,707Total
      share based payments were recorded as follows:Research
      and development expense
                            
                            
                            34,258
                            
                            
                            
                            86,346General
      and administrative expense
                            
                            
                            2,373,167
                            
                            
                            
                            3,246,361$
                            2,407,425
                            
                            
                            $
                            3,332,707
  39
  We
awarded grants of restricted common stock to employees, net of cancellations,
totaling nil and 9,000 shares and valued at approximately nil and $25,200 for
the years ended September 30, 2010 and September 30, 2009,
respectively. All shares were fully vested and recognized as expense within
their respective years.
  In
June 2010, we cancelled approximately 2,684,000 stock options previously
issued to employees having a weighted average exercise price of $1.28 and, in
June 2010, we issued these employees an aggregate of approximately
2,976,000 new options having an exercise price of $0.08 per share, which was
equal to the fair value of our common stock on the date of grant. As a result of
these transactions, which are being accounted for as a modification, the
incremental value of the new options in excess of the value of the old options,
was $32,000 which is being recognized over the vesting period of the new
options.
  In
September 2009, we cancelled approximately 75,000 stock options previously
issued to employees having a weighted average exercise price of $8.99 and, in
September 2009 we issued these employees an aggregate of 2,376,250 new options
having an exercise price of $1.28 per share, which was equal to the fair value
of our common stock on the date of grant. As a result of these transactions
which are being accounted for as a modification, incremental value of the new
options in excess of the value of the old options was $2,697,000 which is being
recognized over the vesting period of the new options.
 Warrants – At
September 30, 2010, there were warrants outstanding for the purchase of
approximately 975,000 shares of our common stock at a weighted average exercise
price of $16.03 per share. During the year ended September 30, 2010, we
issued warrants to purchase a total of approximately 402,000 shares of common
stock at a weighted average exercise price of $0.57 per share for services.
Share-based compensation was calculated using the Black-Scholes
model.
  Warrants
outstanding at September 30, 2010 expire at various dates from
February 2011 to November 2014. A summary of warrant activity during
the years ended September 30, 2009 and 2010 follows:
  Warrants
                              OutstandingOutstanding
      at September 30, 2008
                            
                            
                            463,874Grants
                            
                            
                            172,958Outstanding
      at September 30, 2009
                            
                            
                            636,832Grants
                            
                            
                            402,000Exercised
                            
                            
                            (26,058
                            )Expired
                            
                            
                            (38,300
                            )Outstanding
      at September 30, 2010
                            
                            
                            974,474
  Employee Stock Purchase
Plan - In 2008, we adopted an Employee Stock Purchase Plan, under which
the number of shares of common stock that may be sold shall not exceed, in the
aggregate, 900,000 shares. No shares have been purchased under this
plan
  Note
7. Commitments and Contingencies
  We were
party to a development agreement with a customer to develop proof-of-concept
fuel cell power source prototypes (Phase I) and, if successful and elected
by the customer, the development of fuel cell power sources (Phase II). We
received $344,000 for Phase I services and recognized revenue of $154,500 in
2004 upon completion of the initial Phase I requirement and deferred the
balance of $189,500 until services were provided and Phase I is complete.
We believe Phase I was completed in 2009. However, customer acceptance has
not yet occurred and the balance of $189,500 has not yet been recognized as
revenue.
  40
  Our
corporate headquarters and laboratory facilities are leased under a lease
agreement which expired in 2009. We currently lease on a month-to-month basis
and intend to negotiate with the landlord for a lease extension. As of
September 30, 2010, monthly minimum rental and related payments were
approximately $19,000 per month. Rental expense was approximately $227,000 and
$192,000 for the years ended September 30, 2010 and 2009,
respectively.
  We
included an expense of $314,000 in our consolidated financial statements for the
year ended September 30, 2008 pertaining to severance obligations and related
costs related to our former Chairman, President and Chief Executive Officer,
Paul Abramowitz, who resigned as President and CEO in January 2008 and as a
director in April 2008. This amount is included in accounts payable at September
30, 2010 and 2009, however, we contest that any payment is due under our
agreements with Mr. Abramowitz and, if successful, will have minimal or no
liability for such amounts. Mr. Abramowitz has initiated a lawsuit against us in
the Superior Court for the State of Washington styled Abramowitz v. Neah Power
Systems, et al.(Case No.
10-2-3688-1 SEA) in which Mr. Abramowitz sued for breach of contract in the
amount of $275,000, plus interest, and willful failure to pay wages for which he
seeks double damages or twice the amount of the wages allegedly
withheld.
 
 As
disclosed in Note 5, we have received notices of default on various note payable
obligations and are engaged in discussions with our creditors regarding these
obligations.
  In 2009,
we entered into an agreement with an investment firm whereby the firm committed
to purchase up to $10 million of our preferred stock, from time to time through
July 2010 and at our sole discretion. We did not receive funds from notices
issued and the agreement has expired. In May 2010, we received a notice from the
firm stating the firm was entitled to fees of $500,000 pertaining to the
agreement. We dispute this claim and will defend our rights vigorously. No
amounts have been recorded for this contingency in these consolidated financial
statements.
  We are
subject to various legal proceedings and claims that arise in the ordinary
course of business. Our management currently believes that resolution of such
legal matters will not have a material adverse impact on our consolidated
financial position, results of operations or cash flows.
 
 Note
8. Income Taxes
  We have
recorded no provision or benefit for income taxes. The difference between tax at
the statutory rate and no tax is primarily due to the full valuation allowance.
The increase in the valuation allowance was approximately $1.8 million during
the year ended September 30, 2010, and $2.3 million during the year ended
September 30, 2009. A valuation allowance has been recorded in the full amount
of total deferred tax assets as it has not been determined that it is more
likely than not that these deferred tax assets will be realized. As of September
30, 2010, we have net operating loss carryforwards of approximately $45.3
million, which begin to expire in 2023 and will continue to expire through 2030
if not otherwise utilized. Our ability to use such net operating losses and tax
credit carryforwards is subject to annual limitations due to change of control
provisions under Sections 382 and 383 of the Internal Revenue Code, and such
limitation would be significant. Realization is dependent on generating
sufficient taxable income prior to expiration. Further, as a result of ownership
changes, we may be subject to annual limitations on the amount of net operating
loss utilizable in any tax year.
 
 Deferred
income taxes represent the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. Significant components of our deferred tax
assets and liabilities and related valuation allowances are as
follows:
 41
  September 30,2010
                          
                          
                          2009Deferred
      tax assetsNet
      operating loss carryforwards
                          
                          $
                          15,398,000
                          
                          
                          
                          13,770,000Share-based
      compensation
                          
                          
                          2,139,000
                          
                          
                          
                          2,174,000R
      & D tax credit carryforwards
                          
                          
                          973,000
                          
                          
                          
                          973,000Other
                          
                          
                          326,000
                          
                          
                          
                          156,000Total
      deferred tax assets
                          
                          
                          18,836,000
                          
                          
                          
                          17,073,000Valuation
      allowance
                          
                          
                          (18,836,000
                          )
                          
                          
                          (17,073,000
                          )Deferred
      tax assets, net of valuation allowance
                          
                          $
                          -
                          
                          
                          $
                          -
 
 We have
identified our federal tax return as our “major” tax jurisdiction, as defined.
Tax years since inception are subject to audit. We believe our income tax filing
positions and deductions will be sustained on audit and we do not anticipate any
adjustments that would result in a material change to our financial position. No
reserves for uncertain income tax positions have been recorded. Our policy for
recording interest and penalties associated with uncertain income tax positions
is to record such items as a component of interest expense.
 
 Note
9. Subsequent Events
 Subsequent
to our fiscal year ended September 30, 2010, we have received approximately
$103,000 from investors in advances for equity or debt investment.
  Subsequent
to our fiscal year ended September 30, 2010, we have issued 18.0 million shares
in connection with the extinguishment of debt to vendors and note holders
totaling $226,000.
 In
October 2010, certain notes payable holders, under the default terms of a
securities purchase agreement, foreclosed on 1,600,000 of the 5,497,694 shares
our common stock they held as collateral. The market value of the shares
totaling $61,000 has been applied against the balance due the note
holders.
  In
November 2010, we entered into an agreement for services and issued 2.0 million
shares, valued at $60,000, as compensation.
  In
December 2010, we filed a certificate of correction with the Nevada Secretary of
State to correct an error we made with respect to the implementation of our
August 2009 increase in authorized common stock from 20 million shares to 80
million shares and 6 for 1 forward stock split. Our articles of incorporation,
as amended, and the certificate of correction that we filed with the Nevada
Secretary of State on December 16, 2010 are attached as Exhibits 3.1 and 3.2 to
the amended Form 8-K filed with Security and Exchange Commission on December 21,
2010.
  Subsequent
to September 30, 2010, we awarded to employees, directors, and officers
incentive stock options to purchase 7,440,000 shares of our common stock with an
exercise price based on the market price on the date of approval by our board of
directors. The exercise of these shares is conditional upon the increase in the
number of our authorized shares of common stock.
  42
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
  There are
not and have not been any disagreements between us and our accountants on any
matter of accounting principles, practices or financial statement
disclosure.
  ITEM 9A.
              CONTROLS
      AND PROCEDURES.
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this Annual Report on Form 10-K, we carried out an
evaluation, under the supervision and with the participation of senior
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Based upon that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were not effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act due
to the material weaknesses in our internal control over financial reporting. A
discussion of the material weaknesses in our internal control over financial
reporting is described below.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a
process designed by, or under the supervision of, our CEO and CFO, or persons
performing similar functions, and effected by our board of directors, management
or other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
management, with the participation of our CEO and CFO, has established and
maintained policies and procedures designed to maintain the adequacy of our
internal control over financial reporting, and include those policies and
procedures that:
  ·
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;
  ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and
  ·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on the interim or annual consolidated financial
      statements.
  Management
has used the framework set forth in the report entitled Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) to evaluate the effectiveness of our internal
control over financial reporting. Management was unable to implement its
remediation plans during 2010 due to cost considerations. As a result of the
material weaknesses described below, management has concluded that our internal
control over financial reporting was not effective as of September 30,
2010.
  Management
has determined that, as of the September 30, 2010 measurement date, there
were deficiencies in both the design and the effectiveness of our internal
control over financial reporting. Management has assessed these deficiencies and
determined that there were various material weaknesses in our internal control
over financial reporting. As a result of our assessment that material weaknesses
in our internal control over financial reporting existed as of
September 30, 2010, management has concluded that our internal control over
financial reporting was not effective as of September 30, 2010. The
existence of a material weakness or weaknesses is an indication that there is a
more than remote likelihood that a material misstatement of our financial
statements will not be prevented or detected in a future
period.
  43
  Management
has assigned a high priority to the short-and long-term improvement of our
internal control over financial reporting. We have listed below the nature of
the material weaknesses we have identified:
  ·
              inadequate
      or ineffective policies for documenting
  transactions;
  ·
              inadequate
      or ineffective design of policies and execution of processes related to
      accounting for transactions; and
  ·
              inadequate
      segregation of duties due to the limited size of the accounting department
      and the lack of experienced accountants caused by the Company’s limited
      financial resources.
  We intend
to design and implement policies and procedures to remediate the material
weaknesses in our internal control over financial reporting in fiscal
2011.
  Management
does not believe that any of the Company’s annual or interim financial
statements issued to date contain a material misstatement as a result of the
aforementioned weaknesses in our internal control over financial
reporting.
  Changes
in Internal Control over Financial Reporting
  There
have been no changes in our internal controls over financial reporting or in
other factors during the fourth fiscal quarter ended September 30, 2010 that
materially affected, or is likely to materially affect, our internal control
over financial reporting.
  Limitations
on Internal Controls
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all errors or misstatements and all fraud. Therefore, even
those systems determined to be effective can provide only reasonable, not
absolute, assurance that the objectives of the policies and procedures are met.
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
  ITEM 9B.
              OTHER
      INFORMATION
  None.
  44
  PART
III
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  The table
below lists certain information regarding our current directors and executive
officers. Directors are elected each year by our stockholders at the annual
meeting. Each director holds his office until his successor is elected and
qualified or his earlier resignation or removal. Executive officers are elected
annually by our board of directors (the “Board”). Each executive officer holds
his office until he resigns or is removed by our Board or his successor is
elected then qualified. There are no family relationships among members of our
management or our Board.
  Name
                
                Age
                
                PositionDr. Gerard
      C. D’Couto
                
                44
                
                President
      and Chief Executive Officer, DirectorJeffrey
      B Sakaguchi
                
                49
                
                Chairman
      of the Board of DirectorsDavid
      Schmidt
                
                47
                
                DirectorJon
      M. Garfield
                
                47
                
                DirectorMichael
      Selsman
                
                74
                
                DirectorStephen
      M. Wilson
                
                55
                
                Chief
      Financial Officer
 
 Set forth
below is biographical information concerning our directors and executive
officers.
  Dr. Gerard
C. (Chris) D’Couto has served as a member of our Board since
January 28, 2008 and as our Chief Executive Officer and President since
February 2008. Until such time, Dr. D’Couto served as our Chief Operating
Officer and Executive Vice President since September 2007. Prior to joining
us, Dr. D’Couto served as senior director of marketing at Form Factor Inc.
from January 2006 until September 2007, where he headed the launch of NAND
flash and DRAM sort probe cards. Prior to that, Dr. D’Couto had a nine-year
tenure at Novellus Systems, Inc., with positions of increasing responsibility
ranging from product management to technology development and sales. Prior to
that, Dr. D’Couto worked at Varian Associates and as a consultant to Intel
Corporation. Dr. D’Couto received a bachelor’s degree in chemical
engineering from the Coimbatore Institute of Technology in India and also
received a master’s and a doctoral degree in chemical engineering from Clarkson
University in New York. Dr. D’Couto also earned an MBA from the Haas
School of Business at the University of California, Berkeley. Mr. D’Couto was
chosen to serve on our Board because of his management and operational skills
from his business school education and past management positions as well as his
technical knowledge related to our fuel cell technology.
  Jeffrey
B Sakaguchi has served on our board since November 2010. Mr. Sakaguchi
has served since 2009 as the Chairman of the Board of Directors of the American
Red Cross, Greater Los Angeles Chapter where he has been responsible for the
financial and organizational turnaround of chapter performance. From 2004 until
2007, Mr. Sakaguchi served as the President and Chief Operating Officer of
Evolution Robotics Retail, Inc. In that role, Mr. Sakaguchi co-led a spin off of
Evolution Robotics Retail, Inc. from its former parent company and developed and
executed a commercialization strategy for a breakthrough visual scanning product
targeted for the retail industry. From 1995 until 2003, Mr. Sakaguchi served as
the Managing Partner for the North American Energy Strategy Practice at
Accenture LLP in Los Angeles. From 1989 until 1995, Mr. Sakaguchi served as the
Senior Engagement Manager at McKinsey & Company, Inc. in Los Angeles. Mr.
Sakaguchi earned his bachelors of science in chemical engineering from the
Massachusetts Institute of Technology and his masters in business administration
from the Wharton School of the University of Pennsylvania. Mr. Sakaguchi was
chosen to serve on our Board because of his extensive business leadership
experience with technology and emerging companies and his knowledge of the
emerging fuel cell industry.
  David
Schmidt has served on our board since November 2010. Mr. Schmidt has
served since 2008 as an independent consultant advising chemical, material and
alternate energy spaces regarding strategic marketing and execution services.
From 2004 until 2008, Mr. Schmidt served as the Manager of Commercial Excellence
and the Strategic Marketing Business Development Manager at Honeywell
International Specialty Materials, Inc. From 2000 until 2003, Mr. Schmidt served
as a Senior Director and Chief Operations Officer of Plasmion Corporation, Inc.
Mr. Schmidt has also served in management positions at Film Specialties, Inc.
from 1993 until 2000, Hydromer, Inc. from 1989 until 1992 and ROI Group, Inc.
from 1986 until 1988. Mr. Schmidt earned his bachelor of science in business and
economics from Lehigh University. Mr. Schmidt was chosen to serve on our Board
because of his extensive executive and business development experience in
technology industries.
  45


Jon M.
Garfield has served on our Board since May 2008. Mr. Garfield served
as Chief Executive Officer of technology company Clearant, Inc. (OTCBB: CLRA)
from January 2007 until October 2010 and as Chief Financial Officer at
Clearant, Inc. from September 2006 until January 2007. Mr. Garfield
has served as a member of Clearant, Inc.’s board of directors since
May 2007. From September 2001 through 2006, Mr. Garfield served
as an independent financial consultant, including advising as to SEC reporting
obligations and Sarbanes-Oxley compliance. From 1998 until 2001, he served as
Chief Financial Officer of a telecom service provider and a software developer.
From 1996 to 1998, he served as Vice President of Acquisitions for the formerly
NYSE-listed ground transportation consolidator Coach USA, Inc. From 1991 to
1996, Mr. Garfield served as Corporate Assistant Controller of Maxxim
Medical, Inc., a formerly New York Stock Exchange listed manufacturer and
distributor. During 1986 to 1991, Mr. Garfield practiced public accounting
with Arthur Andersen and PricewaterhouseCoopers. Mr. Garfield received a
Bachelor of Business Administration in Accounting from University of Texas,
Austin. Mr. Garfield was chosen to serve on our Board because of his past
experience in chief executive officer and chief financial officer roles at
public companies and because of his financial literacy.




Michael
Selsman has served on our Board since September 2009.
Mr. Selsman writes and edits financial analyses, annual reports,
stockbroker-investor overviews, corporate presentations, speeches, books and
media communications for public and private companies. He has an extensive
background in marketing, public relations, fund raising, media relations,
strategic planning, corporate identity/image, public policy advocacy, employee
communications and advertising. Since 1992, Mr. Selsman has been a
principal of Public Communications Co. of Beverly Hills, California. Mr. Selsman
was chosen to serve on our Board because of public relations knowledge and
experience advising public companies on strategic matters.




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




Section 16(a) Beneficial
Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of our securities,
to file with the SEC reports of ownership of our securities and changes in
reported ownership. Officers, directors and greater than ten percent
stockholders are required by SEC rules to furnish us with copies of all Section
16(a) reports they file.




Based
solely on a review of the reports furnished to us, or written representations
from reporting persons that all reportable transaction were reported, we believe
that during the fiscal year ended September 30, 2010, our officers, directors
and greater than ten percent stockholders timely filed all reports they were
required to file under Section 16(a).




Code
of Ethics




We have
adopted a Code of Ethics and Business Conduct (the “Code of Ethics”) for our
principal executive, financial and accounting officers. The Code of Ethics
addresses inter alia such issues as conflicts of interest, corporate
opportunities, confidentiality, fair dealing, protection and proper use of our
assets, compliance with applicable laws (including insider trading laws) and
reporting of illegal or unethical behavior. We are committed to ensuring
transparent and good corporate governance in our dealings with all stakeholders.
Our Code of Ethics is included as an exhibit to this Annual Report. Any person
may obtain a copy of our Code of Ethics


46


Audit
Committee of the Board of Directors




We have
an Audit Committee of the Board consisting of three independent directors, Jon
M. Garfield (Chair), David Schmidt and Michael Selsman. Our Board has determined
that Mr. Garfield and Mr. Schmidt  qualify as Audit Committee
financial experts. In addition to being independent under Nasdaq Marketplace
Rule 5605(a)(2), all members of the Audit Committee meet the additional
independence and qualification standards for audit committee members set forth
in Nasdaq Marketplace Rule 5605(c)(2)(A). The Audit Committee functions in part
as an independent and objective party with oversight of our financial reporting
process and internal controls.


Compensation
Committee of the Board of Directors




The
Compensation Committee consists of three independent directors Jeffrey B
Sakaguchi (Chair), Jon M Garfield and Michael Selsman. The functions of the
Compensation Committee are to review and approve the goals of the Chief
Executive Officer, to review and approve salaries, bonuses and other benefits
payable to our executive officers and to administer our Long Term Incentive
Compensation Plan and Employee Stock Purchase Plan.




Nominating
Committee of the Board of Directors




The
Nominating Committee consists of David Schmidt (Chair), Jon M Garfield, and
Gerard C D’Couto. 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.




Financing
Committee of the Board of Directors




The
Financing Committee consists of Gerard C D’Couto (Chair), David Schmidt, and
Jeffrey Sakaguchi. The Financing Committee is responsible for evaluating various
financing options and recommending to the full Board various financing
avenues.




Governance
Committee of the Board of Directors




The
Governance Committee consists of three independent directors David Schmidt
(Chair), Jon M Garfield and Jeffrey Sakaguchi. The Governance Committee is
responsible for supervision and oversight of our general
operations.


47


ITEM
      11.
            EXECUTIVE
      COMPENSATION




The
following table sets forth all compensation awarded to, earned by, or paid to
our named executive officers during the fiscal year ended September 30, 2010.
Individuals we refer to as our “named executive officers” include our chief
executive officer (and any individual serving in that capacity during the last
fiscal year) and our two most highly compensated executive officers other than
our chief executive officer whose compensation exceeded $100,000 during the
fiscal year ended September 30, 2010.




Summary
Compensation Table




Name and
                    Principal
                    Position
                
                Year
                
                Salary ($) (2)
                
                Bonus ($)
                
                Stock
                    Awards
                    ($)
                
                Option
                    Awards ($)
                    (2)
                
                Non-Equity
                    Incentive Plan
                    Compensation
                    ($)
                
                Non-qualified
                    Deferred
                    Compensation
                    Earnings
                    ($)
                
                All Other
                    compensation
                    ($) (3)
                
                
                Total$Gerard
      C. (“Chris”) D’Couto
                
                2010
                
                $
                155,000
                
                
                
                
                
                $
                47,000
                
                
                
                
                
                $
                15,000
                
                
                $
                217,000President & CEO
                
                2009
                
                
                106,000
                
                
                
                
                
                
                2,649,000
                
                
                
                
                
                
                11,000
                
                
                
                2,766,000Stephen
      M. Wilson
                
                2010
                
                $
                102,000
                
                
                
                
                
                $
                21,000
                
                
                
                
                
                $
                15,000
                
                
                $
                138,000Chief
      Financial Officer
                
                2009
                
                
                106,000
                
                
                
                
                
                
                331,000
                
                
                
                
                
                
                11,000
                
                
                
                448,000





(1)
            Salaries
      for officers include deferred salaries in the amount of $56,000 and
      $18,000 for Gerard C. D’Couto and Stephen M. Wilson,
      respectively.




(2)
            This
      column represents the aggregate grant-date fair value of the awards
      computed in accordance with FASB ASC Topic 718. These amounts reflect our
      accounting value for these awards and do not necessarily correspond to the
      actual value that may be realized by the named executive officer. The
      assumptions used in the calculation of these amounts are described in note
      6 to our consolidated financial statements included with this annual
      report.




(3)
            Consists
      of health related benefits provided to
  employees.




Outstanding
Equity Awards At Fiscal Year-End




The
following table sets forth information regarding the outstanding equity awards
held by our Named Executive Officers as of September 30, 2010:




Outstanding
Equity Awards at Fiscal Year-End




Option Awards
                
                Stock AwardsName
                
                Number
                    of
                    Securities
                    Underlying
                    Unexercised
                    Options
                    (#)
                    Exercisable
                
                
                Number
                    of
                    Securities
                    Underlying
                    Unexercised
                    Options
                    (#)
                    Unexercisable
                
                Equity
                    Incentive
                    Plan
                    Awards:
                    Number of
                    Securities
                    Underlying
                    Unexercised
                    Unearned
                    Options
                    (#)
                
                Option
                    Exercise
                    Price
                    ($)
                
                Option
                    Expiration
                    Date
                
                Number
                    of Shares
                    or Units
                    of Stock
                    That
                    Have Not
                    Vested
                    (#)
                
                Market
                    Value of
                    Shares
                    or Units
                    of Stock
                    That
                    Have
                    Not
                    Vested
                    ($)
                
                Equity
                    Incentive
                    Plan
                    Awards:
                    Number
                    of
                    Unearned
                    Shares,
                    Units or
                    Other
                    Rights
                    That Have
                    Not
                    Vested
                    (#)
                
                Equity
                    Incentive
                    Plan
                    Awards:
                    Market or
                    Payout
                    Value of
                    Unearned
                    Shares,
                    Units or
                    Other
                    Rights
                    That Have
                    Not
                    Vested
                    (#)Dr. Gerard
      C. (Chris) D’Couto
                
                
                2,200,000
                (1)
                
                
                388,000
                
                
                
                $
                0.08
                
                June
      2020Stephen
      M. Wilson
                
                
                323,000
                (2)
                
                
                194,000
                
                
                
                $
                0.08
                
                June
      2020Chief
      Financial Officer
                
                
                6,000
                (3)
                
                
                6,000
                
                
                
                $
                1.67
                
                Apr.
      2018


48





(1)
            These
      options vests in equal monthly installments over a twelve month period
      following the grant date.




(2)
            These
      options vests in equal monthly installments over a twelve month period
      following the grant date.




(3)
            These
      options vests in equal yearly installments over a 4 year period following
      the grant date.




Stock
Option Plan and Stock Options




In March
14, 2006, we adopted our Long Term Incentive Compensation Plan (the “Plan”). We
have since amended the Plan in August 2008 to increase the number of shares
available for issuance under the plan to 6,000,000 shares and in October 2010 to
increase the number of shares available for issuance under the plan to
16,000,000 shares. As of September 30, 2010, there were approximately
3,937,000 stock options issued under the amended Plan. The Plan is to continue
for a term of ten years from the date of its adoption.




The Plan
seeks to promote our long-term success and our subsidiaries and to provide
financial incentives to employees, members of the Board and advisors and
consultants of our company and our subsidiaries to strive for long-term creation
of stockholder value by providing stock options and other stock and cash
incentive.




Our
Compensation Committee has the authority to make awards, construe and interpret
the Plan and any awards granted thereunder, to establish and amend rules for
Plan administration, to change the terms and conditions of options and other
awards at or after grant, and to make all other determinations which it deems
necessary or advisable for the administration of the Plan.




If we
change the number of issued shares of common stock by stock dividend, stock
split, spin-off, split-off, spin-out, recapitalization, merger, consolidation,
reorganization, combination, or exchange of shares, the total number of shares
reserved for issuance under the Plan, the maximum number of shares which may be
made subject to an award or all awards in any calendar year, and the number of
shares covered by each outstanding award and the price therefor, if any, may be
equitably adjusted by the Committee, in its sole discretion.




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




Employee
Stock Purchase Plan




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




Employment,
Severance and Change in Control Agreements




Under the
terms of the Offer Letter entered into between Dr. Gerard C. (Chris) D’Couto and
the Company when Dr. D’Couto joined us as Chief Operating Officer, Dr. D’Couto
receives a per annum base salary of $225,000 and a bonus equal to 50% of his
base salary upon the completion of certain milestones. Due to our financial
circumstances, Dr. C’Couto has taken reductions in salary and did not earn the
base salary of $225,000 in the years ended September 30, 2010 or 2009. In the
event Dr. D’Couto’s employment is terminated (i) for any reason other than for
cause or a winding down of our operations or (ii) due to a change in control
where he is not offered a comparable position at a similar compensation, Dr.
D’Couto will be entitled to a severance payment equal to six months of his then
current base salary.


49


Under the
terms of the offer letter dated April 18, 2008, we entered into an “at-will”
employment letter agreement with Mr. Wilson that provides for an annual base
salary of $130,000 and an annual performance-based bonus of up to $26,000, or
20% of base salary. Due to our financial circumstances, Mr. Wilson has taken
reductions in salary and did not earn the base salary of $130,000 in the years
ended September 30, 2010 or 2009.




Compensation
of Directors




We do not
have any formal policy for the compensation of our non-employee director. Our
Board has made grants of stock options to our outside directors at various times
as compensation for our director’s service on the Board. In the future, we
anticipate adopting a policy of paying directors a fee for their attendance at
board and committee meetings if the financial condition of our company
improves.




The
following table sets forth information regarding the compensation of directors
during the fiscal year ended September 30, 2010:




Director
Compensation




Name
              
              Fees
                  Earned or
                  Paid in
                  Cash ($)
              
              Stock Awards
                  ($)
              
              Option
                  Awards ($)
                  (1)
              
              Non-Equity
                  Incentive Plan
                  Compensation
                  ($)
              
              Change in
                  Pension
                  Value and
                  Nonqualified
                  Deferred
                  Earnings ($)
              
              All Other
                  Compensation
                  ($)
              
              Total ($)Jon
      M. Garfield (2)
              
              
              
              
              
              $
              13,000
              
              
              
              
              
              
              
              $
              13,000Eduardo
      Cabrera (3)
              
              
              
              
              
              $
              2,000
              
              
              
              
              
              
              
              $
              2,000Michael
      Selsman (4)
              
              
              
              
              
              $
              2,000
              
              
              
              
              
              
              
              $
              2,000





(1)
            This
      column represents the aggregate grant-date fair value of the awards
      computed in accordance with FASB ASC Topic 718. These amounts reflect our
      accounting value for these awards and do not necessarily correspond to the
      actual value that may be realized by the named executive officer. The
      assumptions used in the calculation of these amounts are described in note
      6 to our consolidated financial statements included with this annual
      report.




(2)
            Options
      awards consist of approximately 216,000 options exercisable at $0.08 per
      share of which approximately 183,000 are fully vested. The options expire
      in June 2020.




(3)
            Options
      awards consist of approximately 129,000 options exercisable at $0.08 per
      share of which approximately 110,000 are fully vested. The options expire
      in June 2020.




(4)
            Options
      awards consist of approximately 86,000 options exercisable at $0.08 per
      share of which approximately 73,000 are fully vested. The options expire
      in June 2020.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
following table presents information concerning the beneficial ownership of the
shares of our common stock as of January 5, 2011 by: (i) each of our named
executive officers and current directors, (ii) all of our current executive
officers and directors as a group and (iii) each person we know to be the
beneficial owner of 5% of more of our outstanding shares of common stock. Unless
otherwise specified, the address of each beneficial owner listed in the table is
c/o Neah Power Systems, Inc., 22118 20th Avenue SE, Suite 142, Bothell,
Washington 98021.




Percentage
of class beneficially owned is based on 74,982,031 shares of common stock
outstanding on January 5, 2011. In accordance with SEC rules, when we computed
the number of shares of common stock beneficially owned by a person and the
percentage ownership of that person, we deemed as outstanding shares of common
stock subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of January 5, 2011. We did not deem
these shares outstanding, however, for the purpose of computing the percentage
ownership of any other person.


50


Except as
indicated by the footnotes below, we believe, based on the information furnished
to us, that the persons and entities named in the table below have sole voting
and investment power with respect to all shares of common stock that they
beneficially own, subject to applicable community property laws.




Name of Beneficial Owner
              
              Number of Shares
                  Beneficially
                  Owned(1)
              
              
              Percentage
                  of Class
                  Beneficially
                  OwnedOfficers
      and DirectorsDr. Gerard
      C. D’Couto, President, Chief Executive Officer, Director (2)
              
              
              3,728,127
              
              
              
              5.0
              %Jon
      Garfield, Director(3)
              
              
              574,843
              
              
              
              *Jeffrey
      Sakaguchi, Director(4)
              
              
              300,000
              
              
              
              *David
      Schmidt, Director(5)
              
              
              200,000
              
              
              
              *Michael
      Selsman, Director(6)
              
              
              796,939
              
              
              
              1.1
              %Stephen
      M. Wilson, Chief Financial Officer(7)
              
              
              911,818
              
              
              
              1.2
              %All
      Directors and Officers as a Group (6 individuals)
              
              
              6,511,727
              
              
              
              8.8
              %5%
      StockholdersSummit
      Trading Limited(8)
              
              
              5,085,756
              
              
              
              6.8
              %Green
      World Trust(9)
              
              
              4,823,060
              
              
              
              6.4
              %





* Less
than one percent.




(1)
            Exercise
      of all options listed in this table is conditional upon the our increasing
      our authorized common stock to provide for an adequate authorized common
      stock for the exercise of all of the convertible securities issued by the
      Company.




(2)
            Consists
      of 400,002 common shares and 3,328,125 shares of common stock underlying
      options of which 3,198,750 are fully
vested.




(3)
            Consists
      of 574,843 shares of common stock underlying options of which 564,062 are
      fully vested.




(4)
            Consists
      of 300,000 shares of common stock underlying options which are fully
      vested.




(5)
            Consists
      of 200,000 shares of common stock underlying options which are fully
      vested.




(6)
            Consists
      of 500,000 common shares and 296,939 shares of common stock underlying
      options of which 292,626 are fully
vested.




(7)
            Consists
      of 80,004 common shares and 831,814 shares of common stock underlying
      options of which 764,126 are fully
vested.




(8)
            Summit
      Trading Limited (“Summit”) is a Bahamian holding company and is owned by
      the Weast Family Trust. The Weast Family Trust is a private trust
      established for the benefit of C.S. Arnold, Daisy Rodriguez, Stephanie
      Kaye and Tracia Fields. C.S. Arnold is the settlor of the Weast Family
      Trust. The natural person exercising voting control of the shares of our
      common stock held by Summit is Richard Fixaris. The address of Summit is
      Charlotte House, P.O. Box N-65, Charlotte Street, Nassau,
      Bahamas.




(9)
            The
      natural person exercising voting control over the shares of our common
      stock is Darren Baldo, Trustee of Green World Trust. The address of Green
      World Trust is 4093 Quakerbridge Road, Princeton Jct, NJ
      08550.




51


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




Transactions
with Related Persons




We did
not enter into any transactions with related parties since the beginning of our
most recently completed fiscal year in which the amount involved exceeded the
lesser of $120,000 or one percent of the average of our total assets at year end
for the last two completed fiscal years except as follows:
  In
September and October 2009, we received funds from Daisy Rodriguez, a private
investor married to the primary beneficiary of Summit Trading Limited, one of
our investors beneficially owning more than 5% of our common stock, in the
aggregate face amounts of $100,000 and $25,000, respectively, and accruing
interest at a 6% annual rate. In June 2010, we paid the notes and accrued
interest in full by issuing common stock to Ms. Rodriguez.
  In June
2010, we entered into an advisory services agreement with Summit Trading Limited
(“Summit”), whereby they will identify, introduce, engage, and compensate
investor relations and/or public relations firms on our behalf. Under the terms
of this agreement as consideration for those services, we issued a non-interest
bearing note payable in the amount of $300,000 payable. All services were
provided during the year ended September 30, 2010.




Director
Independence




The Board
has adopted Nasdaq’s standards for determining the independence of its members.
The Board has determined that Jeff B. Sakaguchi, Jon M. Garfield, David Schmidt
and Michael Selsman qualify as independent directors in accordance with Nasdaq
Marketplace Rule 5605(a)(2).




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




We have
selected Peterson Sullivan LLP as our independent registered public accounting
firm for 2010. Peterson Sullivan LLP has been our principal accountant since
2006 and was our principal accountant for the fiscal years ended September 30,
2009 and September 30, 2010.




For
purposes of the tables below:




Audit
      Fees
              
              include
      fees and expenses for professional services rendered for the audits of our
      annual financial statements for the applicable year and for the review of
      the financial statements included in our quarterly reports on
      Form 10-Q for the applicable year.Audit-Related
      Fees
              
              Consist
      of fees billed for assurance and related services that are related to the
      performance of the audit or review of our financial statements and
      registration filings with the SEC and are not reported as audit
      fees.Tax
      Fees
              
              Consist
      of preparation of our federal and state tax returns, review of quarterly
      estimated payments, and consultation concerning tax compliance
      issues.All
      Other Fees
              
              Includes
      any fees for services not covered above. Fees noted for both annual
      periods primarily represent fees associated with communications and
      attendance at meetings with management, the board of directors, and the
      audit committee of the board of
directors.





The
following table sets forth the aggregate fees billed for services for the year
ended September 30, 2010 by Peterson Sullivan LLP:




Audit
      Fees
                  
                  $
                  38,755Audit
      Related Fees
                  
                  $
                  29,642Tax
      Fees
                  
                  $
                  0All
      Other Fees
                  
                  $
                  1,653Total
                  
                  $
                  70,050





The
following table sets forth the aggregate fees billed for services for the year
ended September 30, 2009 by Peterson Sullivan LLP:


52




Audit
      Fees
                    
                    $
                    62,458Audit
      Related Fees
                    
                    $
                    11,521Tax
      Fees
                    
                    $
                    280All
      Other Fees
                    
                    $
                    0Total
                    
                    $
                    74,259




Audit
Committee Pre-Approval Policies and Procedures




The
policy of the Audit Committee is to pre-approve all audit and permissible
non-audit services provided by our independent auditors. All of the services
rendered to us by Peterson Sullivan LLP for the periods ended September 30, 2010
and September 30, 2009 were pre-approved by the Audit Committee at the time of
the engagement of Peterson Sullivan LLP.


53


PART
IV




ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.




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




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




(a)(3)
Exhibits.




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


54


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Neah Power Systems, Inc., the registrant, has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.




Dated:
      January 13, 2011
              NEAH
      POWER SYSTEMS, INC.By:
              /s/ GERARD C. D’OUTOGerard
      C. D’CoutoPresident
      and Chief Executive Officer





POWER
OF ATTORNEY




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints Gerard C. D’Couto and Stephen M. Wilson, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite or necessary fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that each said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of Neah Power
Systems, Inc., in the capacities and on the dates indicated.




Signature
            
            Title(s)
            
            Date/s/ GERARD C. D’COUTO
            
            President
      and Chief Executive Officer
            
            January 13,
      2011Gerard
      C. D’Couto
            
            (Principal
      Executive Officer)/s/ STEPHEN M. WILSON
            
            Chief
      Financial Officer
            
            January 13,
      2011Stephen
      M. Wilson
            
            (Principal
      Financial and Accounting Officer)/s/ JEFFREY B. SAKAGUCHI
            
            Director
            
            January 13,
      2011Jeffrey
      B. Sakaguchi/s/ JON M. GARFIELD
            
            Director
            
            January 13,
      2011Jon
      M. Garfield/s/ DAVID SCHMIDT
            
            Director
            
            January 13,
      2011David
      Schmidt/s/ MICHAEL SELSMAN
            
            Director
            
            January 13,
      2011Michael
      Selsman


55


Exhibit Index




No.
              
              Description
              
              Incorporation
      By Reference3.1
              
              Articles of
      Incorporation, as amended
              
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K/A, filed
      on December 21, 2010 and incorporated herein by
  reference.3.2
              
              Certificate
      of Correction
              
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K/A, filed
      on December 21, 2010 and incorporated herein by
  reference.3.3
              
              Amended
      and Restated By-laws
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form
      10-SB, filed on May 1, 2006 and incorporated herein by
      reference.10.1
              
              Agreement
      and Plan of Merger among Neah Power Systems, Inc., Growth Mergers, Inc.
      and Growth Acquisitions Inc.
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.2
              
              Amendment
      to Agreement and Plan of Merger among Neah Power Systems, Inc., Growth
      Mergers, Inc. and Growth Acquisitions Inc.
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.3
              
              Form
      of warrant to purchase 3,753,000 shares of common stock
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form
      10-SB, filed on May 1, 2006 and incorporated herein by
      reference.10.4*
              
              Stock
      Option Plan
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.5*
              
              Form
      of Stock Option Agreement
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.6*
              
              Employee
      Stock Purchase Plan
              
              Filed
      as an Exhibit to the Registrant’s Proxy Statement on Schedule 14A, filed
      on July 29, 2008 and incorporated herein by reference.10.7
              
              Development
      Agreement by and between Neah Power Washington and Thales Communications,
      Inc. dated December 19, 2003
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.8
              
              Amendment
      No. 1 to Development Agreement by and between Neah Power Washington
      and Thales Communications, Inc. dated July 28, 2004
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.10.9*
              
              Employment
      Agreement of Paul Abramowitz dated August 8, 2007
              
              Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on August 14, 2007, and incorporated herein by reference
      thereto.10.10
              
              Lease
      Agreement, dated as of March 5, 2001, by and between Teachers
      Insurance & Annuity Association of America and Neah Power
      Washington
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB/A,
      filed on September 12, 2006 and incorporated herein by
      reference.10.11
              
              First
      Amendment to Lease Agreement, dated as of June 6, 2003, by and
      between Teachers Insurance & Annuity Association of America and Neah
      Power Washington
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB/A,
      filed on September 12, 2006 and incorporated herein by
      reference.


56





10.12
                
                Second
      Amendment to Lease Agreement, dated as of July 7, 2006, by and
      between Teachers Insurance & Annuity Association of America and Neah
      Power Washington
                
                Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB/A,
      filed on September 12, 2006 and incorporated herein by
      reference.10.13
                
                Consultancy
      Agreement by and between Danfoss A/S and Neah Power Systems, Inc., dated
      as of June 14, 2006
                
                Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB/A,
      filed on September 12, 2006 and incorporated herein by
      reference.10.14*
                
                Employment
      Agreement Neah Power Systems, Inc. and Dr. Gerard C (Chris)
      D'Couto
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on September 5, 2007 and incorporated herein by
      reference.10.15
                
                12%
      Secured Promissory Note to CAMHZN Master LDC due June 28,
      2008
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on November 30, 2007 and incorporated herein by
      reference.10.16
                
                Common
      Stock Purchase Warrant of CAMHZN Master LDC
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on November 30, 2007 and incorporated herein by
      reference.10.17
                
                Purchase
      Agreement dated as of November 28, 2007, between Neah Power Systems,
      Inc. and CAMHZN Master LDC
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on November 30, 2007 and incorporated herein by
      reference.10.18
                
                Security
      Interest and Pledge Agreement dated as of November 28, 2007, between
      Neah Power Systems, Inc. and CAMHZN Master LDC
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on November 30, 2007 and incorporated herein by
      reference.10.19
                
                Repayment
      Issuance Letter dated November 28, 2007, to CAMHZN Master
      LDC
                
                Filed
      as an Exhibit to the Registrant's Current Report on Form 8-K, filed
      on November 30, 2007 and incorporated herein by
      reference.10.20
                
                Securities
      Purchase Agreement dated February 12, 2009 among Neah Power Systems,
      Inc., Agile Opportunity Fund, LLC and Capitoline Advisors
    Inc.
                
                Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB, filed on
      February 13, 2009 and incorporated herein by reference.10.21
                
                Form
      of Initial Original Issue Discount Term Promissory Note issued by Neah
      Power Systems, Inc.
                
                Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB, filed on
      February 13, 2009 and incorporated herein by reference.10.22
                
                Security
      Agreement dated February 12, 2009 among Neah Power Systems, Inc.,
      Agile Opportunity Fund, LLC and Capitoline Advisors Inc.
                
                Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB, filed on
      February 13, 2009 and incorporated herein by reference.10.23
                
                Form
      of Patent Security Agreement dated February 12, 2009 among Neah Power
      Systems, Inc., Agile Opportunity Fund, LLC and Capitoline Advisors
      Inc.
                
                Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB, filed on
      February 13, 2009 and incorporated herein by reference.10.24
                
                Advisory
      Services Agreement dated October 1, 2009 among Neah Power Systems, Inc.
      and Summit Trading Limited
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      October 22, 2009 and incorporated herein by reference.10.25
                
                Stock
      Purchase Agreement dated January 18, 2010 among Neah Power Systems, Inc.
      and First Equity Trust, Inc.
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      January 22, 2010 and incorporated herein by reference.10.26
                
                Stock
      Purchase Agreement dated January 18, 2010 among Neah Power Systems, Inc.
      and Amber Capital Corporation
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      January 22, 2010 and incorporated herein by reference.10.27
                
                Stock
      Purchase Agreement dated January 18, 2010 among Neah Power Systems, Inc.
      and Knightsbridge Law Co. Ltd.
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      January 22, 2010 and incorporated herein by reference.10.28
                
                Reserve
      Equity Financing Agreement dated January 18, 2010 among Neah Power
      Systems, Inc. and AGS Capital Group, LLC
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      January 22, 2010 and incorporated herein by reference.10.29
                
                Agreement
      dated August 3, 2010 between Neah Power Systems, Inc. and CAMHZN Master
      LLC
                
                Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      August 9, 2010 and incorporated herein by
  reference.
 57




10.30
              
              Amendment
      No. 1 to Reserve Equity Financing Agreement, dated January 18, 2010,
      between Neah Power Systems, Inc. and AGS Capital Group,
LLC
              
              Filed
      as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on
      August 23, 2010 and incorporated herein by reference.10.31
              
              Exchange
      Agreement dated June 17, 2010 between Neah Power Systems, Inc. and Daisy
      Rodriguez
              
              Filed
      as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on
      August 23, 2010 and incorporated herein by reference.10.32*
              
              Form
      Director and Officer Indemnification Agreement
              
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed on
      December 3, 2010 and incorporated herein by reference.14.1
              
              Code
      of Ethics
              
              Filed
      as an Exhibit to Amendment No. 5 to the Registrant's
      Registration Statement on Form SB-2 filed on May 3, 2007 and
      incorporated herein by reference.21.1
              
              Subsidiaries
      of the Registrant
              
              Filed
      as an Exhibit to the Registrant’s Registration Statement on Form 10-SB,
      filed on July 27, 2006 and incorporated herein by
    reference.24.1
              
              Power
      of Attorney
              
              Included
      on the signature page.31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer
              
              Filed
      herewith.31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer
              
              Filed
      herewith.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 per Section 906 of the Sarbanes-Oxley Act of
      2002
              
              Filed
      herewith.


*           Management
contract or compensatory plan or arrangement.


58