LONG TERM INCENTIVE COMPENSATION PLAN

1.

PURPOSES

2.

DEFINITIONS

(a)

“Award” means an incentive award as described in Section 5(a).

(b)

“Board” means the Board of Directors of the Company.

(c)

“Change in Control” means the occurrence of one or more of the change in control events set forth in Treasury Regulation Section 1.409A-3(i)(5).

(d)

“Chief Executive Officer” or “CEO” means the Chief Executive Officer of the Company.

(e)

“Chief Financial Officer” or “CFO” means the Chief Financial Officer of the Company.

(f)

“Code” means the Internal Revenue Code of 1986, as amended.

(g)

“Committee” means the Compensation Committee of the Board unless another committee comprised of members of the Board is designated by the Board to oversee and administer the Plan, provided, that the Committee shall consist of two or more members of the Board as the Board may designate from time to time, each of whom shall satisfy such requirements as:

(i)

the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 or its successor under the Exchange Act;

(ii)

the rules of a stock exchange on which the securities of the Company are traded as may be established pursuant to its rule-making authority of such stock exchange; and

(iii)

the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Code Section 162(m).

(h)

“Company” means Neah Power Systems, Inc., a Nevada corporation.

(i)

“Covered Employee” shall have the meaning given that term by Code Section 162(m) and income tax regulations promulgated thereunder.

(j)

“Disability” means a physical or mental medical condition that prevents the Participant from performing the duties of his or her position with the Company and is likely to last at least twelve months or result in death, as determined by the Committee in its sole discretion.

(k)

“EVA Award” means the award described in Section 11.

(l)

“Exchange Act” means the federal Securities Exchange Act of 1934, as amended.

(m)

“Fair Market Value” means, with respect to the common stock of the Company, the closing sale price of such common stock at four o’clock p.m. (Eastern Time), on the principal United States national stock exchange on which the common stock of the Company is traded, as determined by the Committee, or, if the common stock shall not have been traded on such date, the closing sale price on such stock exchange on the first day prior thereto on which the common stock was so traded, or, if the common stock is not traded on a United States national stock exchange, such other amount as may be determined by the Committee by any fair and reasonable means.  Fair Market Value determined by the Committee in good faith shall be final, binding and conclusive on all parties.

(n)

“Incentive Stock Option” means an option to purchase the stock of the Company as described in Code Section 422.

(o)

“LTIPA” means an agreement establishing the terms and conditions for an Award granted under the Plan, including any applicable performance goals.

(p)

“Nonstatutory Stock Option” means an option to purchase the stock of the Company which is designated not to be an Incentive Stock Option.

(q)

“Participant” means, subject to the provisions of Section 11 with respect to EVA Awards, a full-time employee of the Company, or a non-employee member of the Board, or a member of the scientific advisory committee of the operating company who meets the requirements of Section 4(b).

(r)

“Performance Stock” means the award described in Section 9.

(s)

“Performance Unit” means the award described in Section 10.

(t)

“Plan” means this Neah Power Systems, Inc. Long Term Incentive Compensation Plan.

(u)

“Restricted Stock” means the award described in Section 8.

(v)

“Restricted Stock Unit” means the award described in Section 8, denominated in units, providing a Participant the right to receive payment at a future date after the lapse of restrictions or achievement of performance criteria or other conditions determined by the Committee.

(w)

“Service” means that the Participant’s service with the Company or an affiliated entity, whether as an employee, adviser, consultant or member of the Board, is not interrupted or terminated.  The Participant’s Service shall not be deemed to have been interrupted or terminated merely because of a change in the capacity in which the Participant renders service to the Company or an affiliated entity as an employee, adviser, consultant or member of the Board or a change in the entity for which the Participant renders such service, provided, that there otherwise is no interruption or termination of the Participant’s Service.  For example, a change in status from an employee of the Company to a consultant of an affiliate or a member of the Board will not constitute an interruption of Service.  The Committee, in its sole discretion, may determine whether Service shall be considered interrupted in the case of any leave of absence approved by the Company, including sick leave, military leave or any other personal leave.

(x)

“Stock Appreciation Right” or “SAR” means the award described in Section 7.

(y)

“Stock Option” means the award described in Section 6, which may be either an Incentive Stock Option or a Nonstatutory Stock Option, as determined by the Committee.

(z)

“Ten Percent Shareholder” means a person who owns (or is deemed to own pursuant to Code Section 424(d)) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates (as defined in Code Section 424).

3.

POWERS AND ADMINISTRATION

4.

ELIGIBILITY AND PARTICIPATION

(a)

Eligibility .  Only employees of the Company and its subsidiaries, non-employee members of the Board, and members of the scientific advisory committee of the Company and its subsidiaries or consultants thereto, who are designated by the Plan or selected by the Committee to participate in the Plan shall be eligible to participate in the Plan.  Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by the Company shall be a subsidiary for purposes of the Plan.

(b)

Participation .  The CEO and the CFO shall participate in the Plan and their Awards and rights under the Plan shall be determined by the Committee.  In addition, each year, the CEO shall present to the Committee a list of employees of the Company or its subsidiaries that the CEO recommends be designated as Participants for an upcoming Performance Period (or a concurrent Performance Period with respect to a newly hired employee of the Company or a subsidiary of the Company), proposed Awards to such employees, and proposed terms for the LTIPAs for the proposed Awards to such employees.  In addition, the CEO may  present recommended amendments to any existing LTIPAs, and the proposed Phase Level advancement for existing LTIPAs with respect to EVA Awards.  The Committee shall consider the CEO’s recommendations and shall determine the Awards, if any, to be granted and the terms of the LTIPAs for such Awards, any amendments to existing LTIPAs (subject to the restrictions on the authority granted to the Committee in Section 3), and Phase Level advancements.

5.

AWARDS AVAILABLE

(a)

Types of Awards .  The Awards available under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Stock, Performance Units, EVA Awards, and other stock or cash awards, as described below.

(b)

Shares Available under the Plan .   There is hereby reserved for issuance under the Plan an aggregate of Twenty Five Million shares   of the Company common stock. All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by the Company.  Shares covered by an Award granted under the Plan shall not be counted as used unless and until they are actually issued and delivered to a Participant.  Any shares covered by an SAR shall be counted as used only to the extent shares are actually issued to the Participant upon exercise of the right.  In addition, any shares of common stock exchanged by an optionee as full or partial payment to the Company of the exercise price under any Stock Option exercised under the Plan, any shares retained by the Company pursuant to a Participant’s tax withholding election, and any shares covered by a Award which is settled in cash shall be added to the shares available for Awards under the Plan.  All of the available shares may, but need not, be issued pursuant to the exercise of Incentive Stock Options.  Notwithstanding anything else contained in this Section 5 the total number of shares of the common stock of the Company that may be issued under the Plan for Awards other than cash Awards shall not exceed a total of twenty five million shares (subject to adjustment in accordance with Sections 16 and 17).

(c)

Annual Limit on Total Grants of Restricted Stock, Restricted Stock Units and Performance Stock .  Notwithstanding anything else in this Section 5, the Restricted Stock, Restricted Stock Units and Performance Shares granted under the Plan in any one calendar year shall have annual limits to be determined by the Committee.

(d)

Reversion of Shares .  If there is a lapse, expiration, termination or cancellation of any Stock Option issued under the Plan prior to the issuance of shares thereunder or if shares of common stock are issued under the Plan and thereafter are reacquired by the Company, the shares subject to those options and the reacquired shares shall be added to the shares available for Awards under the Plan.

(e)

Limits on Individual Grants .  Under the Plan, no Participant may receive in any calendar year (i) Stock Options relating to more than six million shares, (ii) Restricted Stock or Restricted Stock Units that are subject to the attainment of Performance Goals below hereof relating to more than one million five hundred thousand shares, (iii) Stock Appreciation Rights relating to more than one million five hundred thousand shares, or (iv) Performance Stock relating to more than one million five hundred thousand shares.  Under the Plan, the maximum cash payment that may be made to an individual Participant in any calendar year under a single Performance Unit Award, a single EVA Award or other cash bonus Award shall not exceed $1,000,000.

(f)

Adjustments .  The shares reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Sections 16 and 17 hereof.

6.

STOCK OPTIONS

(a)

Grant of Stock Options .  Stock Options may be granted to Participants by the Committee, at any time as determined by the Committee.

(b)

Terms of Stock Options .  The Committee shall determine the terms and conditions of each Stock Option, the number of shares subject to the Stock Option, and whether the Stock Option is an Incentive Stock Option or a Nonstatutory Stock Option.  The option price for each Stock Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of the Company’s common stock on the date the Stock Option is granted.  Notwithstanding the foregoing, a Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Code Section 424(a).

(c)

Term of Stock Options . Each Stock Option shall expire at such time as the Committee shall determine at the time of grant.

(d)

Exercisability of Stock Options .  Each Stock Option shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no Stock Option shall be exercisable later than the tenth anniversary of its grant.  The option price, upon exercise of any Stock Option, shall be payable to the Company in full by (i) cash payment or its equivalent, (ii) tendering previously acquired shares (held for at least six months to the extent necessary to avoid any variable accounting on such option) or purchased on the open market and having a Fair Market Value at the time of exercise equal to the option price, or certification of ownership of such previously-acquired shares, (iii) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to the Company, and (iv) such other methods of payment as the Committee, at its discretion, deems appropriate, provided, that payment of the common stock’s “par value,” as defined in the Nevada General Corporation Law, shall not be made by deferred payment.

(e)

Vesting .  Subject to the provisions of Sections 5(f), 16 and 24, the total number of shares of Common Stock subject to a Stock Option shall be subject to the following vesting provisions of this Subsection 6(e):

(i)

The total number of shares of Common Stock subject to a Stock Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal.

(ii)

The Stock Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Committee may deem appropriate.

(iii)

The vesting provisions of individual Stock Options may vary.

(iv)

The provisions of this Subsection 6(e) are subject to any Stock Option provisions governing the minimum number of shares of Common Stock as to which a Stock Option may be exercised.

(f)

Incentive Stock Option Requirements .  Stock Options granted under the Plan as Incentive Stock Options shall have such terms as required by Code Sections 422 for an Incentive Stock Option, including, but not limited to, the following terms in this Section 6(f).

(i)

Incentive Stock Options shall be granted only to employees of the Company or its subsidiary.

(ii)

The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted or one hundred ten percent (110%) in the case of a grant of an Incentive Stock Option to a Ten Percent Shareholder.  Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Code Section 424(a).

(iii)

The maximum term of an Incentive Stock Option shall be ten years from the date of grant provided that the maximum term of an Incentive Stock Option granted to a Ten Percent Shareholder shall be five years from the date of grant of the Incentive Stock Option.

(iv)

To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and its affiliated corporations) exceeds one hundred thousand dollars ($100,000), the Stock Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.

(v)

If any Participant shall make any disposition of shares issued pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) calendar days thereof.

(g)

Reduction in Price or Reissuance .   In no event shall the Committee, without first receiving shareholder approval, (a) cancel any outstanding Stock Option for the purpose of reissuing the Stock Option to the Participant at a lower exercise price or (b) reduce the exercise price of a previously issued Stock Option.

7.

STOCK APPRECIATION RIGHTS

(a)

Stock Appreciation Rights may be granted to Participants at any time as determined by the Committee.  An SAR may be granted in tandem with a Stock Option granted under the Plan or on a free-standing basis.  The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options, at any time when the Company is subject to fair value accounting.

(b)

The grant price of a tandem or substitute SAR shall be equal to the option price of the related option.  The grant price of a free-standing SAR shall be equal to the Fair Market Value of the Company’s common stock on the date of its grant.  An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines to apply to the SAR; provided, however , that the term of the SAR shall not exceed the option term in the case of a tandem or substitute SAR or ten years in the case of a free-standing SAR, and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces.

(c)

Upon exercise of an SAR, the Participant shall be entitled to receive payment from the Company in an amount determined by multiplying the excess of the Fair Market Value of a share of common stock of the Company on the date of exercise over the grant price of the SAR by the number of shares with respect to which the SAR is exercised.  The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.

(d)

In no event shall the Committee, without first receiving shareholder approval, (1) cancel any outstanding SAR for the purpose of reissuing the SAR to the Participant at a lower exercise price or (2) reduce the exercise price of a previously issued SAR.

8.

RESTRICTED STOCK AND RESTRICTED STOCK UNITS

(a)

a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified period;

(b)

a requirement that the holder forfeit (or in the case of shares or units sold to the Participant resell to the Company at cost) such shares or units in the event of termination of employment or other