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          &lt;font class="GramE"&gt;&lt;b&gt;&lt;font style="font-size:10.0pt;color:black"&gt;Note

          1.&lt;/font&gt;&lt;/b&gt;&lt;/font&gt;&lt;b&gt;&lt;font style="font-size:10.0pt;color:black"&gt;&amp;#160;&amp;#160;

          Organization and Description of Business&lt;/font&gt;&lt;/b&gt;

        &lt;/p&gt;&lt;br/&gt;&lt;p style="margin-top:0in;margin-right:0in;margin-bottom:9.9pt;margin-left:0in; text-align:justify;text-indent:.55in"&gt;

          &lt;font class="GramE"&gt;&lt;font style="font-size: 10.0pt"&gt;Neah

          Power Systems, Inc. (&amp;#8220;the Company&amp;#8221;,

          &amp;#8220;we&amp;#8221;.&lt;/font&gt;&lt;/font&gt; &lt;font style="font-size:10.0pt"&gt;&amp;#8220;&lt;font class="GramE"&gt;us&lt;/font&gt;&amp;#8221; or &amp;#8220;our&amp;#8221;) is

          engaged in the development and sale of renewable energy

          solutions using proprietary fuel cell technology. Our

          fuel cells are designed to replace existing rechargeable

          and non-rechargeable battery technology in a variety of

          applications. We have developed solutions specifically

          targeted for the military, transportation, and portable

          electronics applications, and are continuing to pursue

          additional applications for our technology. Our

          long-lasting, efficient and safe power solutions include

          devices such as notebook PCs, military radios, and other

          power-hungry computer, entertainment and communications

          products.&lt;/font&gt;

        &lt;/p&gt;&lt;br/&gt;&lt;p style="margin-top:0in;margin-right:0in;margin-bottom:9.9pt;margin-left:0in; text-align:justify;text-indent:.55in"&gt;

          &lt;font style="font-size:10.0pt"&gt;We are developing two

          classes of fuel cells, one referred to as the &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;and&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; the other

          as the &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&amp;#160;&lt;/i&gt;

          product. The &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;/i&gt; is

          &lt;font class="GramE"&gt;a silicon&lt;/font&gt; based fuel cell that

          uses traditional computer chip manufacturing to build the

          fuel cell. The &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;product&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; was

          developed during the last two years using some processing

          steps of the &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&amp;#160;&lt;/i&gt;

          technology and using polymeric materials for a lower

          cost, consumer oriented product. The &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;is&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; targeted

          for applications (anaerobic) where the quality of the

          surrounding air is unpredictable or not available such as

          diesel-fumes contaminated environments or underwater

          applications. The &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;product&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; uses

          air from the surrounding environment and is targeted for

          consumer-oriented and less aggressive applications and

          typically for lower power ranges. Our technology and its

          application have been validated both by our own research

          and customer results. We believe our fuel cells would

          outperform lithium ion batteries and other similar power

          sources, with longer run time, shorter 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, resulting in reduced overall size and

          weight.&lt;/font&gt;

        &lt;/p&gt;&lt;br/&gt;&lt;p style="margin-top:0in;margin-right:0in;margin-bottom:9.9pt;margin-left:0in; text-align:justify;text-indent:.55in"&gt;

          &lt;font style="font-size:10.0pt"&gt;We have an intellectual

          property portfolio consisting of 12 issued patents, 3

          patents pending, and various trade secrets for our

          proprietary technology.&amp;#160; We use a unique, patented

          and award winning, silicon-based design for our &lt;font class="SpellE"&gt;&lt;i&gt;Powerchip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;micro&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; fuel

          cells that enable higher power densities, lower cost and

          compact form-factors. The &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;technology&lt;/font&gt;&lt;/font&gt;&lt;/i&gt;

          has been recognized for both its innovativeness and its

          application potential from noted sources including the

          2012 ZINO Green finalist, the 2010 WTIA finalist, 2010

          Best of What&amp;#8217;s New Popular Science and other

          awards. Our website is www.neahpower.com.&lt;/font&gt;

        &lt;/p&gt;&lt;br/&gt;&lt;p style="margin:0in;margin-bottom:.0001pt;text-align:justify;text-indent:.5in"&gt;

          &lt;font style="font-size:10.0pt"&gt;Neah Power continues &lt;font class="GramE"&gt;its aggressive efforts to accelerate the

          commercialization of our proprietary and patented fuel

          cell technologies that we passionately believe has&lt;/font&gt;

          the potential to revolutionize the energy storage

          marketplace. The shipment of our &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&amp;#160;&lt;/i&gt;

          system in the second half of 2012, and &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&amp;#160;&lt;/i&gt;

          system in spring of 2013 were milestone events at the

          Company and we continue to see the fruits of the $50+

          million that have gone into the Company with concrete

          progress of commercialization. We now have an increasing

          array of committed customers and customer prospects. Our

          capital constraints have severely limited our ability to

          execute on our business plan, the funding for which we

          consistently devote major &lt;font class="GramE"&gt;attention,&lt;/font&gt; recent illustrative

          achievements are listed below.&lt;/font&gt;

        &lt;/p&gt;&lt;br/&gt;&lt;ul style="margin-top:0in" type="disc"&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;We

            launched &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;with&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; a paid

            shipment to a Fortune 110 consumer company. This

            company is now expanding its interest and by evaluating

            the &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;technology&lt;/font&gt;&lt;/font&gt;&lt;/i&gt;

            for a range of different applications.&lt;/font&gt; &lt;font style="mso-fareast-font-family: &amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;We

            entered into a mutually exclusive development contract

            with Ion Geophysical Corporation to develop a

            customer-specific product.&amp;#160; The customer has

            committed to purchase a minimum number of units over a

            period of time.&lt;/font&gt; &lt;font style="mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;We

            intend to update on an ongoing basis high levels of

            interest from a range of other defense, aerospace and

            automotive customers for the &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;products&lt;/font&gt;&lt;/font&gt;&lt;/i&gt;,

            as well as the large India Defense entity.&lt;/font&gt; &lt;font style="mso-fareast-font-family: &amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&amp;#160;We

            continue to grow our IP portfolio with new patents

            awarded and applications submitted, which

            differentiates us from the competition and enhances our

            value&lt;/font&gt; &lt;font style="mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&amp;#160;High

            potential impact discussions are ongoing with a telecom

            company for the &lt;font class="SpellE"&gt;&lt;i&gt;PowerPlay&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160; &lt;font style="font-style:normal"&gt;product&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; for

            consumer cell phone recharging.&lt;/font&gt; &lt;font style="mso-fareast-font-family: &amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;We

            have recently been able to successfully remove the

            Depository Trust Clearing Corporation (DTCC) trading

            restrictions (&amp;#8216;Chill&amp;#8217;) that were

            implemented on the stock.&lt;/font&gt; &lt;font style="mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;On

            June 26, 2012, we announced an initial order from a

            Fortune 150, U.S.-based defense supplier, for the &lt;font class="SpellE"&gt;&lt;i&gt;PowerChip&lt;/i&gt;&lt;/font&gt;&lt;i&gt;&amp;#8482;&lt;font class="GramE"&gt;&amp;#160;&lt;b&gt;&lt;sup&gt;&lt;/sup&gt;&lt;/b&gt;&lt;font style="font-style:normal"&gt;fuel&lt;/font&gt;&lt;/font&gt;&lt;/i&gt; cell,

            which has reiterated its interest in the

            Company.&lt;/font&gt; &lt;font style="mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

          &lt;li class="MsoNormal" style="margin-bottom:10.0pt;text-align:justify;mso-list: l0 level1 lfo1;tab-stops:list .5in"&gt;

            &lt;font style="font-size:10.0pt; mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;We

            have two proposals jointly submitted with the

            previously mentioned customer for soldier power and

            unmanned surface vehicle applications, which we believe

            are impacted by sequestration.&lt;/font&gt; &lt;font style="mso-fareast-font-family:&amp;quot;Times New Roman&amp;quot;"&gt;&lt;/font&gt;

          &lt;/li&gt;

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