3

PART 1 - FINANCIAL INFORMATION

Item 1.                   Financial Statements

4

5

6

7

NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended December 31, 2012 and 2011 respectively.

(Unaudited)

Note 1.   Organization and Description of Business

Neah Power Systems, Inc. (“the company”, “we”.“us” or “our”) 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.

We are developing two classes of fuel cells, one referred to as the PowerChip™ and the other as the PowerPlay™ product. The PowerChip™ is a silicon based fuel cell that uses traditional computer chip manufacturing to build the fuel cell. The PowerPlay™ product was developed during the last two years using some processing steps of the PowerChip™ technology and using polymeric materials for a lower cost, consumer oriented product. The PowerChip™ is targeted for applications (anaerobic) where the quality of the surrounding air is unpredictable or not available like diesel-fumes contaminated environments or underwater applications. The PowerPlay™ product uses air from the surrounding environment and is targeted for consumer-oriented and less aggressive applications 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 will outperform lithium ion batteries and other similar power sources, with longer run time, shorter recharge time, ease of 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.

We have an intellectual property portfolio consisting of 12 issued patents, 2 patents pending and 1 pending application, that are being developed and various trade secrets for our proprietary technology.  We use a unique, patented and award winning, silicon-based design for our Powerchip™ micro fuel cells that enable higher power densities, lower cost and compact form-factors. The PowerChip™ technology 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’s New Popular Science and other awards. Our website is www.neahpower.com.

Note 2.   Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the fiscal year ended September 30, 2012, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 31, 2012. The information furnished in this Report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended December 31, 2012 may not be indicative of future results.

Fair value of financial instruments

The fair value of our financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, certain accrued liabilities and notes payable approximates the carrying amounts value due to their short maturities. The short-term and long-term fair value of the long-term obligation to our landlord approximates the carrying value based on current interest rates.

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 condensed consolidated financial statements include estimates as to the valuation of equity related instruments.

8

Note 3.Going concern

The accompanying condensed 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 inception, we have reported net losses, including losses of $999,544 and $1,633,217 during the years ended September 30, 2012 and 2011, respectively. We have reported a net loss of $612,317 during the three months ended December 31, 2012, and we expect losses to continue in the near future as we grow our operations. At December 31, 2012, we have a working capital deficit of $740,494 and an accumulated deficit of $56,762,240. Net cash used by operating activities was $292,890 and $332,045 during the three months ended December 31, 2012 and 2011, respectively. We have funded our operations through sales of our common and preferred stock, and short-term borrowings. In this regard, during the three months ended December 31, 2012, we raised $90,500 from our financing activities.

Investment funds received have not been sufficient to continue to support certain operating activities, which led to postponement in the deployment of our business strategy and the scaling back of research and development activities. We continue at reduced staffing levels as we focus on raising additional capital and engaging prospective customers. Without additional funding, our cash is estimated to support our operations into March 2013. These factors, and those of the preceding paragraphs, 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 use a significant amount of our cash resources. Our management seeks to raise additional financing to fund future operations and to provide additional working capital to fund our business. 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 operations altogether, which may include seeking protection under the bankruptcy laws.

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty

Note 4.Net Income and Loss per Share

Basic and diluted net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Common stock equivalents for 2012 are excluded as the effect would be anti-dilutive due to our net loss. The following numbers of shares have been excluded from net loss per share computations for the three months ended December 31, 2012 and 2011:

We calculate our basic earnings per share (“EPS”) using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes any dilutive effect of outstanding convertible preferred stock, stock options, stock warrants, and convertible debt.

9

The reconciliation of the numerators and denominators of the basic and diluted EPS for the three months ended December 31, 2011 was a follows:

Note 5.  Notes Payable

Notes payable and accrued interest consisted of the following at December 31, 2012 and September 30, 2012:

Settlement of Notes Payable

During the three months ended December 31, 2012, one of our note holders assigned their note to a third party to who converted the note into 3,367,003 shares of common stock and we recorded a loss on settlement of liabilities of $14,916 in our condensed consolidated statement of operations. We recorded a reduction to our Notes Payable in the amount of $10,000 for this transaction.

Issuance of Convertible Promissory Note

In April 2012, we issued a convertible promissory note in the amount of $53,000 to an investor for net proceeds of $50,000. The note bore interest at an annual rate of 8% and had a maturity date of January 13, 2013.  In October and November of 2012, the debenture was converted in full into 9,654,476 shares of common stock under the conversion terms of the note.

In October and December of 2012, we issued convertible promissory notes in the amounts of $53,000 and $37,500 to an investor for net proceeds of $50,000 and $35,000. The notes are interest bearing at an annual rate of 8% and have maturity dates of July 5, 2013 and September 4, 2013, respectively. After six months from the date of issue, the promissory notes may be converted into shares of common stock at a rate of 58% of the average of the three lowest closing bid prices during the ten trading days prior to notice to convert. During the three months ended December 31, 2012, we recorded debt discount for beneficial conversion feature on these notes in the amount of approximately $38,379 and $27,155, and recognized debt discount as interest expense during the three months ended December 31, 2012 in the amount of $12,421 and $3,200 respectively.

During the three months ended December 31, 2012, one of our convertible promissory note holders converted $19,589 of their note into 3,123,466 shares of our common stock on which we recorded $15,641 as loss on settlement of liabilities in our condensed consolidated statement of operations.

10

Note 6.  Preferred Stock and Common Stock

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. As of December 31, 2012, we had three classes of preferred stock designated, of which 2,500,000 shares were designated as Series A preferred stock, 1,000,000 shares as Series B preferred stock, and 1,000,000 shares as Series C preferred stock, leaving 500,000 shares of undesignated preferred stock.

Series A Preferred Stock - As of December 31 and September 30, 2012, we had no shares of Series A preferred stock issued and outstanding

Series B Preferred Stock -  As of December 31 and September 30, 2012, we had 420,700 shares of Series B preferred stock issued and outstanding.  In July 2011, we filed a Certificate of Designation with the Nevada Secretary of State, to set forth the rights, preferences and privileges of the Series B preferred stock (“Series B”).  Holders of Series B have no redemption rights and each share of Series B is entitled to interest at a simple interest rate of 6% per annum. Series B is convertible, at the discretion of our management, into shares of our common stock, except that the holders of the Series B may elect to convert the Series B into common stock upon or after the resignation or termination of our Chief Executive Officer. The number of shares of common stock issuable upon conversion is calculated by (i) multiplying the number of Series B being converted by the per share purchase price received by the Company for such Series B , and then, multiplying such number by 130% and then dividing this calculated value by the average closing bid price, as defined, or by (ii) first, allocating the Series B proportionately according to the amounts by date of individual cash tranches received by the Company then, second, multiplying the number of Series B being converted, identified by tranche, by the per share purchase price received by the Company for such Series B , and then, multiplying such number or numbers by 130% and, finally, dividing the calculated value(s) by the average closing bid price, as defined. The holders of the Series B are entitled to vote with the holders of our common stock with the number of votes equal to the number of common shares available by conversion to the holders of the Series B. We have the right to redeem the Series B in cash at the face amount plus any accrued, but unpaid dividends.

Series C Preferred Stock -  In November 2012, we converted 6,571 shares of Series C preferred stock into 6,571,000 shares of common stock leaving no shares of Series C preferred stock issued and outstanding at December 31, 2012.

Common Stock- We are authorized to issue up to 1.8 billion 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.

During the three months ended December 31, 2012, we issued 7,159,628 shares, valued at $52,981, to an investor as a prepayment on assignments of vendor settlements agreements. This amount in included in prepaid expenses and other current assets in our condensed consolidated balance sheet at December 31, 2012.

Common Stock issued for services – We entered into an agreement with a service provider where we in December 2012 issued 3,178,000 shares of our common stock valued at $37,500. In addition, we issued  warrants to purchase 1,580,000 shares of common stock at a price of $0.0095 exercisable after 180 days, to a consultant, valued at $14,483. We recorded $51,983 to Prepaid Expense of which we recorded $17,328 as general and administrative expense during the three months ended December 31, 2012 in our condensed consolidated statements of operations.

11

Long Term Incentive Compensation Plan – Our Long Term Incentive Compensation Plan (the Plan") was adopted in 2006 and amended in 2009. The Plan is administered by our board of directors. Our Board of Directors has amended the Stock Incentive Plan to increase the aggregate number of shares available for issuance under the plan to 25,000,000 shares conditional upon approval by our shareholders. 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. As of December 31, 2012, there are 21,282,543 options outstanding under this plan, all of which are exercisable.

Stock-based compensation expense related to these options was approximately zero and $22,000 during the three months ended December 31, 2012 and December 31, 2011, respectively, substantially all of which was recognized as general administrative expense. As of December 31, 2012, there is no unrecognized compensation cost related to these options.

Director, Officer, and Employee Sales Incentive Plan– As of December 31,2012, and September 30, 2012, we have 225,200,000 sales incentive options issued. These options expire in 2022, are performance based, and vest upon the attainment of certain sales targets.

Management has determined that as of December 31, 2012 the vesting of these options is not probable, accordingly no compensation expense has been recognized to these options.

The following table summarizes stock option activity during the quarter ended December 31, 2012.

As of December 31, 2011, 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.

Stock-based compensation expense related to options was zero and approximately $22,000 during the three months ended December 31, 2012 and December 31, 2011, respectively, substantially all of which was recognized as general administrative expense.

Warrants– At December 31, 2012, there were warrants outstanding for the purchase of 348,476,534 shares of our common stock at a weighted average exercise price of $0.015 per share. During the three months ended December 31, 2012, we issued warrants to purchase a total of 1,580,000 shares of common stock at a weighted average exercise price of $0.0095 per share for services. Share-based compensation was calculated using the Black-Scholes-Merton model. Warrants outstanding at December 31, 2012 expire at various dates from August 2014 to December 2018. A summary of warrant activity during the three months ended December 31, 2012 follows:

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 900,000 shares. No shares have been purchased under this plan.

12

Note 7.Commitments and Contingencies

Lease- Our corporate offices and laboratory facilities are leased under a lease agreement amended in November 2011.  Under the terms of the lease amendment, the term of the lease continues through October 31, 2013 at a monthly rent of $9,500, plus expenses.

2011 Contested Loan Write-Offs- As described in the notes to our consolidated financial statements for the year ended September 30, 2012 in our annual report on Form 10-K, during fiscal 2011 we wrote off certain contested notes payable to CAMHZN Master LDC, Agile Opportunity Fund (“Agile”), and Capitoline Advisors, Inc. (“Capitoline”) in an aggregate amount of approximately $1.6 million. In addition, during fiscal 2011, we rescinded 2,422,979 shares of our common stock previously issuable to Agile and Capitoline.  We wrote off the balance of these notes and shares after concluding that the total amount of our equity payments made on each of these notes represented payments in excess of the loan principal plus the maximum interest allowed under the applicable laws of the state of New York, the state by which the notes were governed.  These lenders dispute our conclusions and continue to allege that we are in default of our obligations. Although we believe that we have paid our obligations on the notes to the maximum amount permitted or required under applicable law, it is reasonably possible that one or more of these lenders may bring legal action against us and there are no assurances whether we would prevail in any such action.

Disputes With Various Vendors and Lenders- Certain of our vendors and lenders have brought suits and/or obtained judgments in their favor regarding past due balances owed them by us. We have recorded these past due balances in liabilities in our condensed consolidated balance sheets at December 31 and September 30, 2012.

Note 8.Related Party Transactions

ITEM 2.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.