Document:

Unassociated Document

    

      CLEAR
        SKIES SOLAR, INC.

       

      2008
        NON-EMPLOYEE DIRECTORS COMPENSATION PLAN

       

      1. Purpose
        of the Plan. 

       

      This
        2008
        Non-Employee Directors Compensation Plan (the “Plan”) is intended as an
        incentive to enable Clear Skies Solar, Inc., a Delaware corporation (the
        “Company”), to attract and retain the services of experienced and
        highly-qualified individuals as directors of the Company and to encourage
        stock
        ownership by such directors so that their interests are aligned with the
        interests of the Company and its stockholders. It is intended that participants
        in the Plan may acquire or increase their proprietary interests in the Company
        and be encouraged to remain in the directorship of the Company. For purposes
        of
        the Plan, a parent corporation and a subsidiary corporation shall be as defined
        in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended
        (the “Code”).

       

      2. Administration
        of the Plan.

       

      The
        Plan
        shall be administered by the Board of Directors of the Company and/or by
        a duly
        appointed committee of the Board having such powers as shall be specified
        by the
        Board (the “Board”). Any subsequent references herein to the Board shall also
        mean the committee if such committee has been appointed and, unless the powers
        of the committee have been specifically limited, the committee shall have
        all of
        the powers of the Board granted herein, including, without limitation, the
        power
        to terminate or amend the Plan at any time subject to the terms of the Plan
        and
        any applicable limitations imposed by law. The Board shall have authority
        to
        administer the Plan subject to the provisions of the Plan but shall have
        no
        authority, discretion or power to select the non-employee directors of the
        Company who will receive options under the Plan, to set the exercise price
        of
        the options granted under the Plan, to determine the number of shares of
        common
        stock to be granted upon exercise of options or the time at which such options
        are to be granted, to establish the duration of option grants, or to alter
        other
        terms or conditions specified in the Plan. All questions of interpretation
        of
        the Plan or of any options granted under the Plan (an “Option”) shall be
        determined by the Board, and such determinations shall be final and binding
        upon
        all persons having an interest in the Plan and/or any Option. Any officer
        of the
        Company shall have the authority to act on behalf of the Company with respect
        to
        any matter, right, obligation, or election which is the responsibility of
        or
        which is allocated to the Company herein, provided the officer has apparent
        authority with respect to such matter, right, obligation, or
        election.

       

      3. Eligibility.

       

      Options
        and cash fees may be granted only to directors of the Company who, at the
        time
        of such grant, are not employees of the Company or of any parent or subsidiary
        corporation of the Company (“Non-Employee Directors”). Options granted to
        Non-Employee Directors shall be nonqualified stock options; that is, options
        that are not treated as having been granted under Section 422(b) of the Code.
        A
        person granted an Option is hereinafter referred to as an
“Optionee.”

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      4. Cash
        Fees. 

       

      Each
        Non-Employee Director shall be receive a fee of $750, payable in cash, for
        each
        meeting of the Board of Directors or any committee thereof attended in person
        and $500, payable in cash, for each such meeting attended telephonically
        and
        shall be reimbursed for his or her expenses reasonably incurred in connection
        with serving on the Board. Such fees shall be paid retroactively, for meetings
        attended on or after December 20, 2007 and prior to the Effective Date (as
        defined herein).

       

      5. Shares
        Subject to Option.

       

      Subject
        to adjustment as provided in Section 8 hereof, a total of 1,000,000 shares
        of
        the Company’s common stock, par value $0.001 per share (the “Stock”), shall be
        subject to the Plan. The shares of Stock subject to the Plan shall consist
        of
        unissued shares or treasury shares, and such amount of shares of Stock shall
        be
        and is hereby reserved for such purpose. Any of such shares of Stock that
        may
        remain unsold and that are not subject to outstanding Options at the termination
        of the Plan shall cease to be reserved for the purposes of the Plan, but
        until
        termination of the Plan the Company shall at all times reserve a sufficient
        number of shares of Stock to meet the requirements of the Plan. If an Option
        expires or becomes unexercisable without having been exercised in full, or
        is
        forfeited, the unpurchased shares which were subject thereto shall become
        available for future grant or sale under the Plan. Stock used to pay the
        exercise price of an Option shall not become available for future grant or
        sale
        under the Plan. Stock used to satisfy tax withholding obligations shall not
        become available for future grant to sale under the Plan.

       

      6. Time
        for Granting Options.

       

      All
        Options shall be granted, if at all, within ten (10) years from the Effective
        Date. 

       

      7. Terms,
        Conditions and Form of Options.

       

      Options
        granted pursuant to the Plan shall be evidenced by written agreements specifying
        the number of shares of Stock covered thereby, which written agreement may
        incorporate all or any of the terms of the Plan by reference and shall comply
        with and be subject to the following terms and conditions:

       

      (a) Automatic
        Grant of Options.
        Subject
        to execution by a Non-Employee Director of an appropriate Option Agreement,
        Options shall be granted automatically and without further action of the
        Board,
        as follows:

       

      (i) Each
        person who is serving as a Non-Employee Director on the Effective Date, or
        is
        newly elected or appointed as an Non-Employee Director after the Effective
        Date,
        shall be granted an Option on the later of the Effective Date and the date
        of
        such initial election or appointment (and not upon any future re-election
        or
        appointment), to purchase ninety thousand 90,000 shares of Stock.

       

      
        
          
          

        

        
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      (ii) Each
        person who remains a Non-Employee Director immediately following the annual
        meeting of stockholders of the Company shall be granted an Option to purchase
        twenty-five thousand (25,000) shares of Stock on the date of such annual
        meeting.

       

      (iii) Notwithstanding
        the foregoing, any person may elect not to receive an Option to be granted
        pursuant to this Section 7(a) by delivering written notice of such election
        to
        the Board no later than the day prior to the date on which such Option would
        otherwise be granted. A person so declining an Option shall receive no payment
        or other consideration in lieu of such declined Option. A person who has
        declined an Option may revoke such election by delivering written notice
        of such
        revocation to the Board no later than the day prior to the date on which
        such
        Option would be granted pursuant to this Section 7(a).

       

      (iv) Notwithstanding
        any other provision of the Plan to the contrary, no Option shall be granted
        to
        any individual on a day when he or she is no longer serving as a Non-Employee
        Director of the Company.

       

      (b) Option
        Exercise Price.
        The
        purchase price of each share of Stock purchasable under an Option shall be
        the
        Fair Market Value (as defined below) of such share of Stock on the date the
        Option is granted. “Fair Market Value” means the average of the high and low
        prices of publicly traded shares of Stock, rounded to the nearest cent, on
        the
        principal national securities exchange on which shares of Stock are listed
        (if
        the shares of Stock are so listed), or on the Nasdaq Stock Market (if the
        shares
        of Stock are regularly quoted on the Nasdaq Stock Market), or, if not so
        listed
        or regularly quoted, the mean between the closing bid and ask prices of publicly
        traded shares of Stock in the over-the-counter market, or, if such bid and
        ask
        prices shall not be available, as reported by any nationally recognized
        quotation service selected by the Company, or as determined by the Board
        in a
        manner consistent with the provisions of the Code. Anything in this Section
        6(b)
        to the contrary notwithstanding, in no event shall the purchase price of
        a share
        of Stock be less than the minimum price permitted under the rules and policies
        of any national securities exchange on which the shares of Stock are listed.
        

       

      (c) Exercise
        Period and Exercisability of Options.
        An
        Option granted pursuant to the Plan shall be exercisable for a term of ten
        (10)
        years. Options granted pursuant to Section 7(a)(i) of the Plan shall become
        exercisable in three equal installments on each of the first three anniversaries
        of the grant date, and Options granted pursuant to Section 7(a)(ii) shall
        become
        exercisable upon the earlier of the first anniversary of the grant date and
        the
        date of the next annual meeting of stockholders of the Company following
        the
        grant date; provided,
        that
        the Optionee remains either a Non-Employee Director or an officer, employee
        or
        consultant of the Company on such date; provided,
        further,
        that no
        Option shall be exercisable until such time as any vesting limitation required
        by Section 16 of the Securities Exchange Act of 1934, as amended, and related
        rules shall be satisfied if such limitation shall be required for continued
        availability of the exemption provided under Rule 16b-3(d)(3).

       

      (d) Termination
        of Options.

       

      (i) In
        the
        event that an Optionee ceases to be a director of the Company because the
        Optionee has become permanently disabled (within the meaning of Section 22(e)(3)
        of the Code), the Option granted to such Optionee may be exercised by the
        Optionee, to the extent the Option was exercisable on the date such Optionee
        ceases to be a director. Such Option may be exercised at any time until the
        earlier of (a) one (1) year after the date the Optionee ceases to be a director
        and (b) the date on which the Option otherwise expires by its terms, at which
        time the Option shall expire; provided, however, if the Optionee dies before
        the
        Options are forfeited and no longer exercisable, the terms and provisions
        of
        Section 6(d)(ii) shall control.

       

      
        
          
          

        

        
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      (ii) In
        the
        event of the death of an Optionee, the Option granted to such Optionee may
        be
        exercised, to the extent the Option was exercisable on the date of such
        Optionee’s death, by the estate of such Optionee or by any person or persons who
        acquired the right to exercise such Option by bequest or inheritance or
        otherwise by reason of the death of such Optionee. Such Option may be exercised
        at any time until the earlier of (a) one (1) year after the date the Optionee
        ceases to be a director and (b) the date on which the Option otherwise expires
        by its terms, at which time the Option shall expire.

       

      (iii) In
        the
        event that an Optionee ceases to be a director of the Company on account
        of
        fraud, dishonesty or other acts detrimental to the interests of the Company
        or
        any direct or indirect subsidiary of the Company, the Option granted to such
        Optionee shall terminate on the date such Optionee ceases to be a director
        of
        the Company.

       

      (iv) In
        the
        event that an Optionee is removed as a Director by the Company at any time
        other
        than for “Cause” or resigns as a director, the Option granted to such Optionee
        may be exercised by the Optionee, to the extent the Option was exercisable
        on
        the date such Optionee ceases to be a director. Such Option may be exercised
        at
        any time until the earlier of (a) one (1) year after the date the Optionee
        ceases to be a director and (b) the date on which the Option otherwise expires
        by its terms, at which time the Option shall expire; provided, however, if
        the
        Optionee dies before the Option is forfeited and no longer exercisable, then
        the
        terms and provisions of Section 6(d)(ii) shall control. For purposes hereof,
        “Cause” shall exist upon a good-faith determination by the Board, following a
        hearing before the Board at which an Optionee was represented by counsel
        and
        given an opportunity to be heard, that such Optionee has been convicted of
        an
        act of willful and material embezzlement or fraud against the Company or
        of a
        felony under any state or federal statute; provided, however, that it is
        specifically understood that “Cause” shall not include the commission or
        omission of any act taken in the good-faith exercise of such Optionee’s business
        judgment as a Non-Employee Director, as the case may be, of the Company,
        or upon
        the advice of counsel to the Company.

       

      (e) Payment
        of Option Exercise.
        Payment
        of the exercise price for the number of shares of Stock being purchased pursuant
        to any Option shall be made in cash, by check or such other instrument as
        may be
        acceptable to the Board.

       

      (f) Change
        of Control.
        A
“Change of Control” shall be deemed to have occurred in the event any of the
        following occurs with respect to the Company:

       

      (i) a
        tender
        offer (or series of related offers) shall be made and consummated for the
        ownership of 50% or more of the outstanding voting securities of the Company,
        unless as a result of such tender offer more than 50% of the outstanding
        voting
        securities of the surviving or resulting corporation shall be owned in the
        aggregate by the shareholders of the Company (as of the time immediately
        prior
        to the commencement of such offer), any employee benefit plan of the Company
        or
        its subsidiaries, and their affiliates;

       

      
        
          
          

        

        
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      (ii) the
        Company shall be merged or consolidated with another corporation, unless
        as a
        result of such merger or consolidation more than 50% of the outstanding voting
        securities of the surviving or resulting corporation shall be owned in the
        aggregate by the shareholders of the Company (as of the time immediately
        prior
        to such transaction), any employee benefit plan of the Company or its
        subsidiaries, and their affiliates;

       

      (iii) the
        Company shall sell substantially all of its assets to another corporation
        that
        is not wholly owned by the Company, unless as a result of such sale more
        than
        50% of such assets shall be owned in the aggregate by the shareholders of
        the
        Company (as of the time immediately prior to such transaction), any employee
        benefit plan of the Company or its subsidiaries, and their affiliates;
        or

       

      (iv) a
        Person
        (as defined below) shall acquire 50% or more of the outstanding voting
        securities of the Company (whether directly, indirectly, beneficially or
        of
        record), unless as a result of such acquisition more than 50% of the outstanding
        voting securities of the surviving or resulting corporation shall be owned
        in
        the aggregate by the shareholders of the Company (as of the time immediately
        prior to the first acquisition of such securities by such Person), any employee
        benefit plan of the Company or its subsidiaries, and their
        affiliates.

       

      For
        purposes of this Section 6(f), ownership of voting securities shall take
        into
        account and shall include ownership as determined by applying the provisions
        of
        Rule 13d-3(d)(I)(i) (as in effect on the date hereof) under the Securities
        Exchange Act of 1934, as amended (the “Exchange Act”). In addition, for such
        purposes, “Person” shall have the meaning given in Section 3(a)(9) of the
        Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however,
        a Person shall not include (A) the Company or any of its subsidiaries; (B)
        a
        trustee or other fiduciary holding securities under an employee benefit plan
        of
        the Company or any of its subsidiaries; (C) an underwriter temporarily holding
        securities pursuant to an offering of such securities; or (D) a corporation
        owned, directly or indirectly, by the shareholders of the Company in
        substantially the same proportion as their ownership of stock of the
        Company.

       

      In
        the
        event of a Change of Control, any unexercisable or unvested portion of the
        outstanding Options shall be immediately exercisable and vested in full as
        of
        the date ten (10) days prior to the expected date of the Change of Control.
        The
        exercise or vesting of any Option that was permissible solely by reason of
        this
        Section 6(f) shall be conditioned upon the consummation of the Change of
        Control. In addition, the surviving, continuing, successor, or purchasing
        corporation or parent corporation thereof, as the case may be (the “Acquiring
        Corporation”), may either assume the Company’s rights and obligations under
        outstanding Options or substitute outstanding Options for substantially
        equivalent options for the Acquiring Corporation’s stock. For purposes of this
        Section 6(f), an Option shall be deemed assumed if, following the Change
        of
        Control, the Option confers the right to acquire in accordance with its terms
        and conditions, for each share of Stock subject to the Option immediately
        prior
        to the Change of Control, the consideration (whether stock, cash, other
        securities or property) to which a holder of a share of Stock on the effective
        date of the Change of Control was entitled. Any Options which are neither
        assumed nor substituted for by the Acquiring Corporation in connection with
        the
        Change of Control nor exercised as of the date of the Change of Control shall
        terminate and cease to be outstanding effective as of the date of the Change
        of
        Control.

       

      
        
          
          

        

        
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      8. Termination
        or Amendment of Plan.

       

      (a) The
        Board
        may amend, suspend, or terminate the Plan, except that no amendment shall
        be
        made that would impair the rights of any Optionee under any Option theretofore
        granted without such Optionee’s consent. 

       

      (b) The
        Board
        may amend the terms of any Option theretofore granted, prospectively or
        retroactively, but no such amendment shall impair the rights of any Optionee
        without the Optionee’s consent.

       

      (c) It
        is the
        intention of the Board that the Plan comply strictly with the provisions
        of
        Section 409A of the Code and Treasury Regulations and other Internal Revenue
        Service guidance promulgated thereunder (the “Section 409A Rules”) and the Board
        shall exercise its discretion in granting Options hereunder (and the terms
        of
        such Options) accordingly. The Plan and any grant of an Option hereunder
        may be
        amended from time to time (without, in the case of an Option, the consent
        of the
        Optionee) as may be necessary or appropriate to comply with the Section 409A
        Rules.

       

      9. Effect
        of Change in Stock Subject to Plan.

       

      Appropriate
        adjustments shall be made in the number and class of shares of Stock subject
        to
        the Plan, the number of shares to be granted under the Plan and to any
        outstanding Options and in the Option exercise price of any outstanding Options
        in the event of a stock dividend, stock split, recapitalization, reverse
        stock
        split, combination, reclassification or like change in the capital structure
        of
        the Company.

       

      10. Transferability
        of Options.

       

      (a) Except
        as
        provided in Section 10(b) hereof, an Option may be exercised during the lifetime
        of the Optionee only by the Optionee or the Optionee’s guardian or legal
        representative and may not be assigned or transferred in any manner except
        by
        will or by the laws of descent and distribution; provided,
        however,
        that
        Options may be transferred under a qualified domestic relations order (as
        defined in the Code or Title I of the Employee Retirement Income Security
        Act,
        or the rules promulgated thereunder).

       

      (b) Notwithstanding
        the foregoing, with the consent of the Board, in its sole discretion, an
        Optionee may transfer all or a portion of the Option to: (i) an Immediate
        Family
        Member (as hereinafter defined), (ii) a trust for the exclusive benefit of
        the
        Optionee and/or one or more Immediate Family Members, (iii) a partnership
        in
        which the Optionee and/or one or more Immediate Family Members are the only
        partners, or (iv) such other person or entity as the Board may permit
        (individually, a “Permitted Transferee”). For purposes of this Section 10(b),
“Immediate Family Members” shall mean the Optionee’s spouse, former spouse,
        children or grandchildren, whether natural or adopted. As a condition to
        such
        transfer, each Permitted Transferee to whom the Option or any interest therein
        is transferred shall agree in writing (in a form satisfactory to the Company)
        to
        be bound by all of the terms and conditions of the Option Agreement evidencing
        such Option and any additional restrictions or conditions as the Company
        may
        require. Following the transfer of an Option, the term “Optionee” shall refer to
        the Permitted Transferee, except that, with respect to any provision for
        the
        Company’s tax withholding obligations, if any, such term shall refer to the
        original Optionee. The Company shall have no obligation to notify a Permitted
        Transferee of any termination of the transferred Option, including an early
        termination pursuant to Section 6(d) hereof. A Permitted Transferee shall
        be
        prohibited from making a subsequent transfer of a transferred Option except
        to
        the original Optionee or to another Permitted Transferee or as provided in
        Section 10(a) hereof.

       

      
        
          
          

        

        
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      11. Re-Pricing
        of Options/Replacement Options.

       

      The
        Company shall not re-price any Options or issue any replacement Options unless
        the Option re-pricing or Option replacement shall have been approved by the
        Board.

       

      12. Government
        Regulations.

       

      (a) The
        Plan,
        and the grant and exercise of Options hereunder, and the obligation of the
        Company to sell and deliver shares under such Options, shall be subject to
        all
        applicable laws, rules and regulations, and to such approvals by any
        governmental agencies, national securities exchanges and interdealer quotation
        systems as may be required.

       

      (b) It
        is the
        Company’s intent that the Plan comply in all respects with Rule 16b-3 of the
        Exchange Act and any regulations promulgated thereunder. If any provision
        of
        this Plan is later found not to be in compliance with such Rule, the provision
        shall be deemed null and void. All grants and exercises of Options under
        this
        Plan shall be executed in accordance with the requirements of Section 16
        of the
        Exchange Act and any regulations promulgated thereunder.

       

      13. General
        Provisions.

       

      (a) Certificates.
        All
        certificates for shares of Stock delivered under the Plan shall be subject
        to
        such stop transfer orders and other restrictions as the Board may deem advisable
        under the rules, regulations and other requirements of the Securities and
        Exchange Commission, or other securities commission having jurisdiction,
        any
        applicable Federal or state securities law, any stock exchange or interdealer
        quotation system upon which the Stock is then listed or traded and the Board
        may
        cause a legend or legends to be placed on any such certificates to make
        appropriate reference to such restrictions.

       

      (b) Director
        Status.
        The
        adoption of the Plan shall not confer upon any Optionee of the Company or
        any
        subsidiary any right to continued service as a director with the Company,
        nor
        shall it interfere in any way with the right of the Company to terminate
        the
        service of any of its directors at any time.

       

      (c) Limitation
        of Liability.
        No
        member of the Board, or any officer or employee of the Company acting on
        behalf
        of the Board, shall be personally liable for any action, determination or
        interpretation taken or made in good faith with respect to the Plan, and
        all
        members of the Board and each and any officer or employee of the Company
        acting
        on their behalf shall, to the extent permitted by law, be fully indemnified
        and
        protected by the Company in respect of any such action, determination or
        interpretation.

       

      
        
          
          

        

        
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      14. Registration
        of Stock.

       

      Notwithstanding
        any other provision in the Plan, no Option may be exercised unless and until
        the
        Stock to be issued upon the exercise thereof has been registered under the
        Securities Act and applicable state securities laws, or are, in the opinion
        of
        counsel to the Company, exempt from such registration in the United States.
        The
        Company shall not be under any obligation to register under applicable federal
        or state securities laws any Stock to be issued upon the exercise of an Option
        granted hereunder in order to permit the exercise of an Option and the issuance
        and sale of the Stock subject to such Option, although the Company may in
        its
        sole discretion register such Stock at such time as the Company shall determine.
        If the Company chooses to comply with such an exemption from registration,
        the
        Stock issued under the Plan may, at the direction of the Board, bear an
        appropriate restrictive legend restricting the transfer or pledge of the
        Stock
        represented thereby, and the Board may also give appropriate stop transfer
        instructions with respect to such Stock to the Company’s transfer agent.

       

      15. Effective
        Date of Plan.

       

      The
        Plan
        shall be effective on May 1, 2008 (the “Effective Date”).

       

      16. Governing
        Law.

       

      The
        validity, construction, and effect of the Plan and any rules and regulations
        relating to the Plan shall be determined in accordance with the internal
        laws of
        the State of Delaware, without giving effect to principles of conflicts of
        laws,
        and applicable federal law.

      

       

      
        
          
          

        

        
          8NEAH
      POWER SYSTEMS, INC.

     

    May
      20,
      2008

    

    CAMHZN
      Master LDC

    350
      Madison Avenue

    New
      York, New York 10017

    

    Ladies
      and Gentlemen: 

     

    We
      refer
      to (i) the Purchase Agreement (the “Purchase Agreement”) dated November 27, 2007
      between Neah Power Systems, Inc., a Nevada corporation (the “Borrower”), and
      CAMHZN Master LDC (the “Lender”), (ii) the 12% Secured Promissory Note (the
“Note”) in the principal amount of $500,000 dated November 27, 2007 issued by
      the Borrower to the Lender, (iii) the Security Interest and Pledge Agreement
      dated November 27, 2007 (the “Pledge Agreement”) by and between the Borrower and
      the Lender, (iv) the Warrant dated November 27, 2007 issued by the Borrower
      to
      the Lender (the “Warrant”), and (v) the letter agreement by and between the
      Borrower and the Lender, November 27, 2007 (the “Letter Agreement”). The
      Purchase Agreement, the Note, the Pledge Agreement, the Warrant and the Letter
      Agreement are referred to herein as the “Loan Documents.” Unless otherwise
      defined herein, capitalized terms have the meanings assigned to them in the
      Loan
      Documents. 

    

    The
      Borrower confirms and agrees as follows: 

    

    1.  Outstanding
      Debt.
      The
      Borrower is indebted to the Lender in the principal sum of $500,000, plus all
      accrued interest thereon and costs and expenses (including legal expenses)
      incurred in connection therewith (the “Obligations”). The Obligations arose
      under, and are evidenced by, the Loan Documents and the documents, agreements
      and instruments pertaining thereto. The Obligations are secured, among other
      things, by a first priority security interest in the Pledged Securities, and
      all
      products and proceeds of the foregoing in any form. 

    

    2.  Default.
      The
      Borrower acknowledges that (i) certain events of default have occurred and
      are
      continuing under the Loan Documents and (ii) all obligations on the Lender’s
      part to make advances or otherwise provide financial accommodations to the
      Borrower have terminated. The Borrower waives any requirement of notice with
      respect to existing events of default, or any other notice to which the Borrower
      may be entitled under the Loan Documents. 

     

    3.  Issuances.
      Simultaneously with the execution and delivery of this letter, the Borrower
      is
      (i) in accordance with the terms of the Loan Documents, issuing to the Lender
      54,500,000 shares
      of the Borrower’s common stock, par value $.0001 per share as additional
      Collateral and (ii) in consideration of the forbearance described in paragraph
      4
      below, issuing to the Lender
      7,857,142 shares of such common stock (5,000,000 of which shall be free-trading
      and 2,857,142 of which shall be restricted); provided,
      however,
      that the free-trading shares shall be credited against 8,000,000 free-trading
      shares that are being released from Collateral. The shares issued under this
      paragraph 3 are referred to as the “Shares”. The Borrower represents and
      warrants to the Lender that the Shares are duly authorized, fully paid and
      nonassessable, free and clear of any liens or encumbrances of any
      kind.
      Lender
      agrees that it will comply with the prospectus delivery requirements of the
      Securities Act as applicable to it.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      CAMHZN
        Master LDC

      May
        20,
        2008

      Page
        2

       

    

    4.  Forbearance.
      The
      Lender agrees to forbear from exercising any remedies available under the Loan
      Documents or applicable law for a period ending on September 29, 2008 (the
      “Forbearance Period”), and to waive any registration rights it may have in
      connection with the Block II securities (as defined in the Letter Agreement
      dated November 28, 2007) issued by the Lender to Borrower. As consideration
      for
      such forbearance, Borrower hereby consents that the 8,000,000 free-trading
      shares presently being held by the Lender as Collateral shall be immediately
      released to the Lender and shall be replaced by 8,000,000 restricted shares
      of
      the Borrower’s common stock. Borrower shall cause to be delivered to the Lender
      (i) the sum of $15,000 as a management fee and for legal expenses, and (ii)
      all
      necessary documentation, including but not limited to, medallion guaranteed
      stock powers, opinions of counsel (in connection with the removal of any legends
      on securities issued to the Lender or its designees) and/or letters of
      instruction directed to the Borrower’s Transfer Agent, in order to accurately
      reflect the Lender’s ownership of any securities issued by the Borrower to the
      Lender in connection with the Loan Documents, including, but not limited to,
      the
      correct date of any stock issuance. As additional consideration for such
      forbearance, the Borrower releases the Lender from any claim, damage, suit
      or
      liability arising on or before the date hereof relating to the Loan Documents
      or
      otherwise. 

    

    5.  Additional
      Documents.
      The
      Borrower agrees that it will, at the Lender's request, execute such documents
      and provide such information as the Lender may deem necessary or desirable
      to
      confirm the Lender’s interest in the Collateral and the Pledged Securities or to
      effect the disposition, collection, or other realization upon the Collateral
      and
      the Pledged Securities in the event the Lender elects to exercise remedies
      following the Forbearance Period. 

    

    6.  Effectiveness
      of Loan Documents.
      The
      Borrower confirms that the Loan Documents remain in full force and effect in
      accordance with their respective terms and that the Lender has not waived its
      rights or remedies, whether under the Loan Documents or otherwise, except only
      to the extent of the forbearance described herein. 

    

    7.  Representations
      and Warranties.
      The
      Borrower represents and warrants as follows: (i) the Borrower is a corporation
      duly organized, validly existing and in good standing under the laws of the
      State of Delaware; (ii) the execution, delivery and performance by the Borrower
      of this letter is within the powers of the Borrower, have been duly authorized
      by all necessary action, and do not contravene (A) the Borrower’s certificate of
      incorporation or by-laws or (B) (x) any law or (y) any agreement or document
      binding on or affecting the Borrower, (iii) no authorization or approval or
      other action by, and no notice to or filing with, any governmental authority,
      regulatory body or third person is required for the due execution, delivery
      and
      performance by the Borrower of this letter; (iv) this letter constitutes the
      legal, valid and binding obligation of the Borrower enforceable against it
      in
      accordance with its terms except as enforcement hereof may be limited by
      bankruptcy, insolvency or other similar laws affecting the enforcement of
      creditors’ rights generally and subject to the applicability of general
      principles of equity; and (v) there is no pending or, to the knowledge of the
      Borrower, threatened action or proceeding affecting the Borrower before any
      governmental agency or arbitrator which challenges or relates to this letter
      or
      which may otherwise have a material adverse effect on the Borrower.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      CAMHZN
        Master LDC

      May
        20,
        2008

      Page
        3

       

    

    8.  Miscellaneous.
      This
      letter shall be governed by and construed in accordance with the laws of the
      State of New York without regard to its conflict of laws rules. This letter
      may
      be amended or modified only by a written instrument signed by the Lender and
      the
      Borrower. The Lender’s failure at any time to require the performance of any
      provision of this letter shall in no manner affect the Lender’s right at a later
      time to enforce the same provision. Headings are inserted for convenience of
      reference only and shall not effect the interpretation of this letter. This
      letter shall be binding upon the Borrower, and its legal representatives,
      successors and permitted assigns. In no event may the Borrower assign any rights
      or obligations under this letter without the Lender’s prior written consent and
      any purported assignment without such consent shall be null and
      void.

    

    
      	 	
              Very
                truly yours, 

            	 
	 	 	 
	 	
              Neah
                Power Systems, Inc.

            	 
	 	
              a
                Nevada corporation 

            	 
	 	 	 	 
	 	 	 	 
	 	
              By:
                

            	
                            
                          

            	 
	 	 	
              Name:
                Chris D’Couto

            	 
	 	 	
              Title:
                President and CEO

            	 

    

    

    AGREED:

    

    CAMHZN
      Master LDC

     

    
      	
              By:
                

            	
                                    
                

            
	
               

            	
              Name:
                

            
	
               

            	
              Title:

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