Filed by sedaredgar.com - U.S. Geothermal Inc. - Exhibit 10.37






 

 

 

 

 

U.S. GEOTHERMAL INC. 
________


Consolidated Financial Statements 
March 31, 2008 




Board of Directors 
U.S. Geothermal Inc. 
Boise,
Idaho

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM 

We have audited the accompanying consolidated balance sheets of
U.S. Geothermal Inc. as of March 31, 2008 and 2007, and the related consolidated
statements of operations and comprehensive loss, consolidated statement of
stockholders’ equity and consolidated statement of cash flows for the years
ended March 31, 2008, 2007 and 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. 

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Geothermal Inc. as of March 31, 2008 and 2007 and the results of its operations
and comprehensive loss, consolidated statement of stockholders’ equity and
consolidated statements of cash flows for the years ended March 31, 2008, 2007
and 2006, in conformity with accounting principles generally accepted in the
United States of America. 

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) U.S. Geothermal Inc.’s
internal control over financial reporting as of March 31, 2008, based on
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated June 9, 2008 expressed an adverse opinion. 

 

Williams & Webster, P.S. 
Certified Public Accountants

Spokane, Washington 
June 9, 2008 




U.S. GEOTHERMAL INC.

CONSOLIDATED BALANCE SHEETS 
(Stated in U.S.
Dollars) 

	  	 	March 31, 	 	 	March 31, 	 
	  	 	2008 	 	 	2007
    	 
	  	 	  	 	 	  	 
	ASSETS 	 	  	 	 	  	 
	  	 	  	 	 	  	 
	Current 	 	  	 	 	  	 
	         Cash and cash equivalents
    	$	 4,877,252 	 	$	 6,759,161 	 
	       
       Restricted cash 	 	285,000 	 	 	5,363,400 	 
	         Receivable from
      subsidiary 	 	205,033 	 	 	154,277 	 
	         Other
      current assets 	 	85,466 	 	 	27,706 	 
	                   Total
      current assets 	 	5,452,751 	 	 	12,304,544 	 
	  	 	  	 	 	  	 
	Investment in subsidiary (note 2) 	 	16,745,481 	 	 	6,230,410 	 
	Deposit on property acquisition (note 3)
      	 	11,310,686 	 	 	- 	 
	Property, plant and equipment, net of 	 	  	 	 	  	 
	       
       accumulated depreciation 	 	6,858,015 	 	 	4,138,386 	 
	                   Total
      assets 	$	 40,366,933 	 	$	 22,673,340 	 
	  	 	  	 	 	  	 
	  	 	  	 	 	  	 
	LIABILITIES AND STOCKHOLDERS’ EQUITY
    	 	  	 	 	  	 
	  	 	  	 	 	  	 
	Current Liabilities: 	 	  	 	 	  	 
	         Accounts payable and
      accrued liabilities 	$	 485,783 	 	$	 1,446,952 	 
	         Related
      party accounts payable 	 	9,218 	 	 	9,510 	 
	Total current liabilities 	 	495,001 	 	 	1,456,462 	 
	Long-term Liabilities: 	 	  	 	 	  	 
	         Stock compensation
      payable 	 	1,975,672 	 	 	2,533,858 	 
	           
             Total liabilities 	 	2,470,673 	 	 	3,990,320 	 
	  	 	  	 	 	  	 
	Commitments and Contingencies 	 	- 	 	 	- 	 
	  	 	  	 	 	  	 
	STOCKHOLDERS’ EQUITY 	 	  	 	 	  	 
	  	 	  	 	 	  	 
	Capital stock 	 	  	 	 	  	 
	         Authorized: 	 	  	 	 	  	 
	           
       100,000,000 common shares with a $0.001 par value 	 	  	 	 	  	 
	         Issued and outstanding:
    	 	  	 	 	  	 
	           
         43,810,512 shares at March 31, 2007 and 	 	  	 	 	  	 
	             
       55,339,253 shares at March 31, 2008 	 	55,339 	 	 	43,811 	 
	Additional paid-in capital 	 	48,532,730 	 	 	25,781,832 	 
	Accumulated deficit 	 	(10,691,809	) 	 	(7,142,623	) 
	                   Total
      stockholders’ equity 	 	37,896,260 	 	 	18,683,020 	 
	  	 	  	 	 	  	 
	               
                         
         Total liabilities and stockholders’ equity 	$	 40,366,933 	 	$	 22,673,340 	 


The accompanying notes are an integral part of these
consolidated financial statements.
-2- 




U.S. GEOTHERMAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 
(Stated in
U.S. Dollars) 

	  	 	For the Years Ended March 31, 	 
	  	 	2008 	 	 	2007
    	 	 	2006
    	 
	  	 	  	 	 	  	 	 	  	 
	Operating Revenues: 	 	  	 	 	  	 	 	  	 
	Land, water, and mineral rights lease 	$	 121,742 	 	$	 90,206 	 	$	 - 	 
	Management fees 	 	62,500 	 	 	- 	 	 	- 	 
	  	 	184,242 	 	 	90,206 	 	 	- 	 
	  	 	  	 	 	  	 	 	  	 
	Operating Expenses: 	 	  	 	 	  	 	 	  	 
	Loss from investment in subsidiary 	 	228,234 	 	 	102,336 	 	 	- 	 
	Consulting fees 	 	112,269 	 	 	67,913 	 	 	29,005 	 
	Corporate admin and development 	 	580,035 	 	 	215,914 	 	 	185,186 	 
	Professional and management fees 	 	845,908 	 	 	708,524 	 	 	422,690 	 
	Salaries and wages 	 	617,323 	 	 	506,354 	 	 	484,656 	 
	Stock based compensation 	 	1,903,635 	 	 	1,129,072 	 	 	180,779 	 
	Travel and promotion 	 	440,196 	 	 	408,056 	 	 	360,753 	 
	Lease and equipment repair costs 	 	69,505 	 	 	- 	 	 	- 	 
	        Total operating
      expenses 	 	4,797,105 	 	 	3,138,169 	 	 	1,663,069 	 
	  	 	  	 	 	  	 	 	  	 
	Loss from Operations 	 	(4,612,863	) 	 	(3,047,963	) 	 	(1,663,069	) 
	  	 	  	 	 	  	 	 	  	 
	Other Income: 	 	  	 	 	  	 	 	  	 
	Foreign exchange gain 	 	116,547 	 	 	411,341 	 	 	149,200 	 
	Interest income 	 	947,130 	 	 	693,738 	 	 	23,276 	 
	       Total other income 	 	1,063,677 	 	 	1,105,079 	 	 	172,476 	 
	  	 	  	 	 	  	 	 	  	 
	Net Loss 	$	 (3,549,186	) 	$	 (1,942,884	) 	$	 (1,490,593	) 
	  	 	  	 	 	  	 	 	  	 
	  	 	  	 	 	  	 	 	  	 
	  	 	  	 	 	  	 	 	  	 
	Basic And Diluted
      Net Loss Per Share 	$	 (0.06	) 	$	 (0.04	) 	$	 (0.08	) 
	  	 	  	 	 	  	 	 	  	 
	  	 	  	 	 	  	 	 	  	 
	Weighted Average Number of Shares 	 	  	 	 	  	 	 	  	 
	       Outstanding for Basic
      and Diluted 	 	52,407,704 	 	 	43,640,303 	 	 	17,797,637 	 
	       Calculations
      	 	  	 	 	  	 	 	  	 


The accompanying notes are an integral part of these
consolidated financial statements. 
-3- 




U.S. GEOTHERMAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Stated in U.S. Dollars)


	  	 	For the Years Ended March 31, 	 
	  	 	2008 	 	 	2007
    	 	 	2006
    	 
	  	 	  	 	 	  	 	 	  	 
	Operating Activities: 	 	  	 	 	  	 	 	  	 
	Net loss 	$	(3,549,186	) 	$	 (1,942,884	) 	$	 (1,490,593	) 
	Add non-cash items: 	 	  	 	 	  	 	 	  	 
	         Depreciation 	 	56,769 	 	 	16,511 	 	 	1,350 	 
	         Loss of
      operations of subsidiary 	 	228,234 	 	 	133,304 	 	 	- 	 
	         Gain on disposal of equipment
    	 	(2,154	) 	 	- 	 	 	- 	 
	         Shares issued
      for other than cash 	 	- 	 	 	65,384 	 	 	84,000 	 
	         Share based compensation
    	 	1,903,635 	 	 	1,129,072 	 	 	180,779 	 
	Change in non-cash working capital items:
    	 	  	 	 	  	 	 	  	 
	         Receivable subsidiary 	 	(50,756	) 	 	(154,277	) 	 	- 	 
	         Accounts
      payable and accrued liabilities 	 	210,790 	 	 	(160,166	) 	 	115,812 	 
	         Prepaid expenses & other
    	 	(57,760	) 	 	(16,277	) 	 	(1,608	) 
	           
             Total cash used by operating activities 	 	(1,260,428	) 	 	(929,333	) 	 	(1,110,260	) 
	  	 	  	 	 	  	 	 	  	 
	Investing Activities: 	 	  	 	 	  	 	 	  	 
	Purchases of property, plant and equipment 	 	(3,961,024	) 	 	(2,456,782	) 	 	(1,132,764	) 
	Cash released from (restricted by) under contract
    	 	5,078,400 	 	 	(5,363,400	) 	 	- 	 
	Cash in escrow for property acquisition 	 	(11,310,686	) 	 	- 	 	 	- 	 
	Investment in subsidiaries 	 	(10,743,305	) 	 	(9,917,100	) 	 	- 	 
	Proceeds from equipment disposal 	 	14,529 	 	 	- 	 	 	- 	 
	Reimbursement from partner 	 	- 	 	 	4,917,100 	 	 	- 	 
	                 
       Total cash used by investing activities 	 	(20,922,086	) 	 	(12,820,182	) 	 	(1,132,764	) 
	  	 	  	 	 	  	 	 	  	 
	Financing Activities: 	 	  	 	 	  	 	 	  	 
	Issuance of share capital, net of share issue
      cost 	 	20,300,605 	 	 	20,312,177 	 	 	646,710 	 
	                 
       Total cash provided by financing activities 	 	20,300,605 	 	 	20,325,177 	 	 	646,710 	 
	  	 	  	 	 	  	 	 	  	 
	Foreign Exchange Effect on Cash and Equivalents 	 	-
      	 	 	- 	 	 	(164,262	) 
	  	 	  	 	 	  	 	 	  	 
	Increase in Cash and Cash Equivalents 	 	(1,881,909	) 	 	6,562,662 	 	 	(1,760,576	) 
	  	 	  	 	 	  	 	 	  	 
	Cash and Cash Equivalents, Beginning of Period 	 	6,759,161 	 	 	196,499 	 	 	1,957,075 	 
	  	 	  	 	 	  	 	 	  	 
	Cash and Cash Equivalents, End of Period 	$	4,877,252 	 	$	 6,759,161 	 	$	 196,499 	 
	  	 	  	 	 	  	 	 	  	 
	Supplemental Disclosure: 	 	  	 	 	  	 	 	  	 
	   Non-cash investing and financing
      activities: 	 	  	 	 	  	 	 	  	 
	         Transfer of property and
      equipment to subsidiary 	$	- 	 	$	 1,363,714 	 	$	 - 	 
	         Shares issued
      with employment agreements 	 	- 	 	 	65,384 	 	 	84,000 	 
	         Purchase of property and
      equipment on account 	 	1,172,251 	 	 	(1,335,714	) 	 	- 	 


The accompanying notes are an integral part of these
consolidated financial statements. 
-4- 




U.S. GEOTHERMALINC. 

  CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY 
For the Years Ended March 31, 2008 and 2007

(Stated in U.S. Dollars) 

  	     	NUMBER 	 	 	COMMON 	 	 	ADDITIONAL 	 	 	CAPITAL 	 	 	STOCK
      	 	 	     	 	 	     	 
	  	OF 	 	 	SHARES 	 	 	PAID-IN 	 	 	STOCK 	 	 	PURCHASE 	 	 	ACCUM. 	 	 	  	 
	  	SHARES 	 	 	AMOUNT 	 	 	CAPITAL 	 	 	ISSUABLE 	 	 	WARRANTS 	 	 	DEFICIT 	 	 	TOTAL 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Balance at April 1, 2006 	18,263,844 	 	$	 $18,264 	 	$	 4,954,690 	 	$	 20,134,260 	 	$	 - 	 	$	 (5,199,743	) 	$	 19,907,471 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Stock issued as result of
      employment 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     agreements 	49,168 	 	 	49 	 	 	65,331 	 	 	- 	 	 	- 	 	 	4 	 	 	65,384 	 
	Stock options granted 	- 	 	 	- 	 	 	978,772 	 	 	- 	 	 	- 	 	 	- 	 	 	978,772 	 
	Shares issued for stock options and warrants    	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     exercised    	497,500 	 	 	498 	 	 	487,595 	 	 	- 	 	 	(137,806	) 	 	- 	 	 	350,287 	 
	Capital stock issued as result of a private    	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     placement
      closed April 3, 2006, net of 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     issuance costs 	25,000,000 	 	 	25,000 	 	 	20,109,260 	 	 	(20,134,260	) 	 	- 	 	 	- 	 	 	- 	 
	Stock purchase warrants
      expired 	- 	 	 	- 	 	 	1,186,232 	 	 	- 	 	 	(1,186,232	) 	 	- 	 	 	- 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Stock compensation liability    	- 	 	 	- 	 	 	(2,000,048	) 	 	- 	 	 	1,324,038 	 	 	- 	 	 	(676,010	) 
	Net loss for the period 	- 	 	 	- 	 	 	     	 	 	- 	 	 	- 	 	 	(1,942,884	) 	 	(1,942,884	) 
	Balance, March 31, 2007 	43,810,512 	 	 	43,811 	 	 	25,781,832 	 	 	- 	 	 	- 	 	 	(7,142,623	) 	 	18,683,020 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Capital stock issued as
      result of a private 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     placement closed June 5,
      2007, net of 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     issuance
      costs 	9,090,900 	 	 	9,091 	 	 	17,757,681 	 	 	- 	 	 	- 	 	 	- 	 	 	17,766,772 	 
	Shares issued for stock options and warrants    	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	     exercised    	2,437,841 	 	 	2,437 	 	 	4,255,203 	 	 	- 	 	 	- 	 	 	- 	 	 	4,257,640 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Stock compensation liability    	- 	 	 	- 	 	 	738,014 	 	 	- 	 	 	- 	 	 	- 	 	 	738,014 	 
	  	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 
	Net loss for the period 	- 	 	 	- 	 	 	- 	 	 	- 	 	 	- 	 	 	(3,549,186	) 	 	(3,549,186	) 
	Balance at March 31, 2008 	55,339,253 	 	$	 55,339 	 	$	 48,532,730 	 	$	 - 	 	$	 - 	 	$	 (10,691,809	) 	$	 37,896,260 	 


The accompanying notes are an integral part of these
consolidated financial statements. 

-5- 




U.S. GEOTHERMAL INC. 
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
MARCH 31, 2008 
(Stated in U.S.
Dollars) 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS 

When U.S. Cobalt Inc. (“GTH” or the “Company”) completed a
reverse take-over on December 19, 2003, the former stockholders of U.S.
Geothermal Inc. (“GEO – Idaho”) a company incorporated on February 26, 2002 in
the State of Idaho, U.S.A.; acquired control of GTH. In connection with the
transaction, U.S. Cobalt Inc. changed its name to U.S. Geothermal Inc. and
consolidated its common stock on a one new to five old basis. All references to
common shares in these financial statements have been restated to reflect the
roll-back of common stock. 

GEO - Idaho entered into an agreement with Vulcan Power Company
(“Vulcan”) of Bend, Oregon, U.S.A., pursuant to which it acquired a 100%
interest in the Raft River Geothermal Property located in Cassia County, Idaho,
U.S.A. 

The Company was created to acquire property, construct power
plants, and manage the operations of those plants that utilize geothermal
resources to produce energy. The Company’s operations have been, primarily,
focused in the Pacific Northwest of the United States.

Basis of Presentation 

The Company consolidates subsidiaries that it controls
(more-than-50% owned) and entities over which control is achieved through means
other than voting rights. These consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The accounts of the
following companies are consolidated in these financial statements: 

	 	i) 	
      U.S. Geothermal Inc. (incorporated in the State of
      Delaware);

	 	ii) 	
      U.S. Geothermal Inc. (incorporated in the State of
      Idaho);

	 	iii) 	
      U.S. Cobalt Inc. (incorporated in the State of
      Colorado);

	 	iv) 	
      U.S. Geothermal Services, LLC (incorporated in the State
      of Delaware).



All intercompany transactions are eliminated upon
consolidation. 

Raft River Energy I LLC, previously a 100% owned subsidiary,
was consolidated through July 2006, after which the entity is recorded under the
equity method. See Consolidation of Variable Interest Entity in Note 2 for
further discussion.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

The following are summarized accounting policies considered to
be significant by the Company’s management: 

Accounting Method

The Company’s financial statements are prepared using the
accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and have been
consistently applied in the preparation of the financial statements. 

-6- 




Change from Development Stage 

Pursuant to Statement of Financial Accounting Standards No. 7,
“Accounting and Reporting by Development Stage Enterprises” (“SFAS 7”), the
Company was considered to be a development stage enterprise from February 26,
2002 to December 31, 2007. Among other provisions, SFAS 7 stipulates the
reporting of inception to date results of operations, cash flows and other
financial information. On January 3, 2008, the Company’s major subsidiary began
generating revenues from planned commercial operations. Although Company
management expects to focus a significant amount of resources to development
type activities over the next 3 to 5 years, the Company has been generating
revenues that originate from planned principal operations. Consequently, these
consolidated financial statements are reported in accordance with generally
accepted accounting principles for an operating company and do not reflect
inception to date information.

Use of Estimates 

The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published, and the reported amounts of revenues and
expenses during the reporting period. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of the Company’s
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions and could have a material effect on
the reported amounts of the Company’s financial position and results of
operations. 

Cash and Cash Equivalents 

The Company considers all unrestricted cash, short-term
deposits, and other investments with original maturities of no more than ninety
days when acquired to be cash and cash equivalents for the purposes of the
statement of cash flows. Discussion regarding restricted cash is included in
Note 4. With the large value of funds invested in short-term deposits, small
variations in short term interest rates may materially affect the value of cash
equivalents. Investments in government obligations accumulate higher interest,
but the principal balance is not insured by the FDIC. All investments held by
the Company are highly liquid and available on demand. 

Concentration of Credit Risk

The Company’s cash and cash equivalents, including restricted
cash, consisted of commercial bank deposits, a money market account, and petty
cash. The money market funds totaled $4,896,040, and are not subject to deposit
insurance. Cash deposits are held in a commercial bank in Boise, Idaho, and in a
commercial bank in Vancouver, British Columbia. The accounts in Idaho are
guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000.
The Canadian dollar accounts in British Columbia are guaranteed by the Canadian
Deposit Insurance Corporation (“CDIC”) up to $100,000 Canadian (approximately
$102,315 in U.S. dollars at March 31, 2008). At March 31, 2008, the Company held
deposits that exceeded the FDIC insured amount by approximately $295,858 and did
not exceed the CDIC insured amount. 

Consolidation of Variable Interest Entities

The Company has a significant interest in Raft River Energy I,
LLC (“RREI”), which has been determined to be a variable interest entity as
defined by FASB Interpretation No. 46(R) (FIN 46(R)). RREI’s purpose is to hold
the financial interests of the first phase of the Raft River project for the
construction of a geothermal power plant.

-7- 




RREI resulted from an August 9, 2006 agreement between the
Company and Raft River Holdings, LLC, a subsidiary of the Goldman Sachs Group,
for construction financing of Phase I of the Raft River project. To accommodate
the construction financing, the Company sold 50% of its ownership in Raft River
Energy to Raft River Holdings. As a result of the agreements, the Company was
required to contribute cash and property sufficient to complete a 10 megawatt
power plant, and Raft River Holdings was required to contribute $34,170,100.

As of March 31, 2008, the Company has contributed $17,102,586
in cash and property to the project, while Raft River Holdings has contributed
$34,170,100. As a result, Raft River Holdings has been designated the primary
beneficiary.

For periods prior to August 2006, the Company was the 100%
owner of RREI and consolidated the loss. For the period August 2006 to March
2008, U.S. Geothermal Inc. recorded RREI under the equity method of accounting
for investments in subsidiaries based on the monthly capital contribution ratio,
which averaged 27.4% for the year ended March 31, 2008.

RREI’s latest financial information is summarized as follows:


	  	 	As of November 	 	 	As of November 	 
	  	 	30,
      2007 	 	 	24,
      2006 	 
	  	 	  	 	 	  	 
	Total current assets 	$	 234,382 	 	$	 3,417,793 	 
	Property and equipment 	 	50,055,675 	 	 	18,618,764 	 
	  	$	 50,290,057 	 	$	 22,036,557 	 
	  	 	  	 	 	  	 
	Total liabilities 	$	 4,252,786 	 	$	 3,360,052 	 
	Total members’ equity 	 	46,037,271 	 	 	18,676,505 	 
	  	$	 50,290,057 	 	$	 22,036,557 	 



	  	 	Fiscal Year 	 	 	August 18, 2005 	 
	  	 	Ended November 	 	 	to November 30, 	 
	  	 	30,
      2007 	 	 	2006
    	 
	  	 	  	 	 	  	 
	Operating revenues 	$	 96,743 	 	$	 - 	 
	Operating loss 	 	(929,615	) 	 	(245,879	) 
	Net loss 	 	(834,234	) 	 	(237,309	) 
	  	 	  	 	 	  	 
	U.S. Geothermal Inc. – portion of net loss
    	 	(228,234	) 	 	(102,336	)



-8- 




Property, Plant and Equipment 

Property, plant and equipment are recorded at historical cost.
Depreciation is calculated on a straight-line basis over the estimated useful
life of the asset. Where appropriate, terms of property rights and revenue
contracts can influence the determination of estimated useful lives.
Depreciation of small equipment is calculated using an annual rate of 30%, which
approximates the assets’ estimated useful lives. 

The Company expenses all costs related to the development of
geothermal reserves prior to the establishment of proven and probable reserves.
Once a resource is considered to be proven, then costs of acquisition and
development are capitalized on an area-of-interest basis. If an area of interest
is subsequently abandoned, those costs are charged to income in the year of
abandonment.

Impairment of Long-Lived Assets 

Statement of Financial Accounting Standards No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) establishes a
single accounting model for long-lived assets to be disposed of by sale
including discontinued operations. SFAS 144 requires that these long-lived
assets be measured at the lower of the carrying amount or fair value less cost
to sell, whether reported in continuing operations or discontinued operations.
The Company has adopted SFAS 144 and evaluates its long-term assets annually for
impairment or when circumstances or events occur that may impact the fair value
of the assets. The fair value of geothermal property is primarily evaluated
based upon the present value of expected revenues directly associated with those
assets. An impairment loss would be recognized if the carrying amount of a
capitalized asset is not recoverable and exceeds its fair value. Management
believes that there have not been any circumstances that have warranted the
recognition of losses due to the impairment of long-lived assets as of March 31,
2008. 

Stock Options Granted to Employees and Non-employees

On April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”), which requires the measurement of the value of employee services
received in exchange for an award of an equity instrument based on the
grant-date fair value of the award. For employees, directors and officers, the
fair value of the awards are expensed over the vesting period. The current
vesting period for all options is eighteen months. 

Under SFAS 123(R), the Company elected to use the modified
prospective transition method, and accordingly, the Company’s consolidated
financial statements for periods prior to adoption of SFAS 123(R) have not been
restated to reflect, and do not include the impact of adopting SFAS 123(R). 

For non-employee stock based compensation, the Company adopted
EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services” and EITF Issue No. 00-18, “Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees.”
Non-employee stock options have been granted, at the Board of Director’s
discretion, to select vendors as a bonus for exceptional performance. Prior to
issuance of the awards, the Company was not under any obligation to issue the
stock options. Subsequent to the award, the recipient was not obligated to
perform any services. Therefore, the fair value of these options was expensed on
the grant date, which was also the measurement date. 

The Company accounts for stock-based compensation in accordance
with SFAS 123(R). Under the fair value recognition provisions of this statement,
share-based compensation cost is measured at the 

-9- 




grant date based on the value of the award and is recognized as
expense over the vesting period. Determining the fair value of share-based
awards at the grant date requires judgment, including estimating expected
dividends. In addition, judgment is also required in estimating the amount of
share-based awards that are expected to be forfeited. If actual results differ
significantly from these estimates, stock-based compensation expense and our
results of operations could be materially impacted. 

Earnings Per Share

The Company has adopted Statement of Financial Accounting
Standard No. 128 “Earnings per Share” (“SFAS 128”), which provides for
calculation of "basic" and "diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity similar to fully diluted earnings
per share. Although there were common stock equivalents outstanding at March 31,
2008 and 2007, they were not included in the calculation of earnings per share
because their inclusion would have been considered anti-dilutive. 

Financial Instruments

The Company’s financial instruments consist of cash and cash
equivalents, refundable tax credits, and accounts payable and accrued
liabilities. Unless otherwise noted, it is management’s opinion that the Company
is not exposed to significant interest, currency or credit risks arising from
these financial instruments. The fair values of these financial instruments
approximate their carrying values, unless otherwise noted. 

Refundable tax credit is comprised of Goods and Services Tax
(“GST”) which is refundable from the Government of Canada and is included in
other assets. 

Foreign Currency Transactions

The Company’s functional currency is the U.S. dollar. Monetary
items are converted into U.S. dollars at the rate prevailing at the balance
sheet date. Resulting gains and losses are generally included in determining net
income for the period in which exchange rates change. The Company does not have
financial interests that are specified by contract to be settled in foreign
currencies.

Foreign Operations 

The accompanying balance sheet contains certain recorded
Company assets (principally cash) in a foreign country (Canada). Although Canada
is considered economically stable, it is always possible that unanticipated
events in foreign countries could disrupt the Company’s operations. 

Provision for Taxes

Income taxes are provided based upon the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes” (“SFAS 109”). Under this approach, deferred income
taxes are recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each 

-10- 




year-end. A valuation allowance is recorded against deferred
tax assets if management does not believe the Company has met the “more likely
than not” standard imposed by SFAS 109 to allow recognition of such an asset.


At March 31, 2008, the Company had net deferred tax assets
calculated at an expected rate of 34% of approximately $2,429,640 (March 31,
2007 - $1,870,800) principally arising from net operating loss carry forwards
and stock compensation. As management of the Company cannot determine that it is
more likely than not that the Company will realize the benefit of the net
deferred tax asset, a valuation allowance equal to the net deferred tax asset
was recorded at March 31, 2008. The significant components of the deferred tax
asset at March 31, 2008 and 2007 were as follows: 

	  	 	March 31, 	 	 	March 31, 	 
	  	 	2008
    	 	 	2007
    	 
	Estimated net operating loss carry forward
    	$	 7,146,000 	 	$	 5,502,300 	 
	  	 	  	 	 	  	 
	Deferred tax asset 	$	 2,429,600 	 	$	 1,870,800 	 
	Deferred tax asset valuation allowance 	 	(2,429,600	) 	 	(1,870,800	) 
	Net deferred tax asset 	$	 - 	 	$	 - 	 


At March 31, 2008, the Company has net operating loss carry
forwards of approximately $7,146,000 ($5,502,300 in March 31, 2007), which
expire in the years 2023 through 2027. The change in the allowance account from
March 31, 2007 to March 31, 2008 was $558,800. 

Although we believe that our estimates are reasonable, no
assurance can be given that the final tax outcome of these matters will not be
different than that which is reflected in our tax provisions. Ultimately, the
actual tax benefits to be realized will be based upon future taxable earnings
levels, which are very difficult to predict. 

Accounting for Income Tax Uncertainties and Related Matters

We may be assessed penalties and interest related to the
underpayment of income taxes. Such assessments would be treated as a provision
of income tax expense on our financial statements. For the year ended March 31,
2008, no income tax expense has been realized as a result of our operations and
no income tax penalties and interest have been accrued related to uncertain tax
positions. The Company files income tax returns in the U.S. federal jurisdiction
and in the State of Idaho. These filings are subject to a 3 year statue of
limitations. Our evaluation of income tax positions included the fiscal years
ended March 31, 2008, 2007, 2006 and 2005 which could be subject to agency
examinations as of March 31, 2008. No filings are currently under examination.
No adjustments have been made to reduce our estimated income tax benefit at
fiscal year end. Any valuations relating to these income tax provisions will
comply with the principles defined in Financial Accounting Standards No. 157,
Fair Value Measurements. 

Revenue

Revenue Recognition 

Management fee income is recognized when the services have been
provided. Royalties and Lease revenues are recognized as the resource has been
utilized and other contractual obligations have been met. 

-11- 




Revenue Source 
The majority of the
Company’s operating revenues are received from its major subsidiary in the form
of lease/royalty income and management fees. Most of the subsidiary’s operating
revenues originate from electrical power that is sold to a single utility
company that, primarily, operates in the State of Idaho. All of the power
generated originates from the one power plant that utilizes a geothermal
reservoir located in South Eastern Idaho. 

Reclassifications

Certain amounts reported in operating revenues in the fiscal
year ended March 31, 2007, were reclassified from other revenues to conform with
the current period presentation. These reclassifications have resulted in no
changes to the Company’s accumulated deficit and net losses presented. 

Recent Accounting Pronouncements

Stock Based Compensation 
In December
2007, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 110 (“SAB 110”), Share Based Payment. This SAB expresses the views of the
staff regarding the use of a "simplified" method, as discussed in SAB No. 107
(“SAB 107”), in developing an estimate of expected term of "plain vanilla" share
options in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment. The staff stated in SAB 107 that it would
not expect a company to use the simplified method for share option grants after
December 31, 2007. However, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
guidance in SAB 110 is effective beginning January 1, 2008. The Company uses
historical information to estimate the expected term of its stock option grants
and, therefore, it does not expect that adoption of SAB 110 will have a material
impact on the Company’s financial position, results of operations, or cash
flows. 

Business Combinations
In December 2007, the
FASB issued Financial Accounting Standards Statement No. 141 (Revised 2007)
(“SFAS 141(R)”), Business Combinations. Under SFAS 141(R), an acquiring
entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with limited
exceptions. Additionally, SFAS 141(R) will change the accounting treatment for
certain specific items, including: 

	Acquisition costs will be generally expensed as incurred;
  
	Noncontrolling interests (formerly known as "minority interests") will be
  valued at fair value at the acquisition date;
  
	Acquired contingent liabilities will be recorded at fair value at the
  acquisition date and subsequently measured at either the higher of such amount
  or the amount determined under existing guidance for non-acquired
  contingencies;
  
	In-process research and development will be recorded at fair value as an
  indefinite-lived intangible asset at the acquisition date;
  
	Restructuring costs associated with a business combination will be
  generally expensed subsequent to the acquisition date; and
  
	Changes in deferred tax asset valuation allowances and income tax
  uncertainties after the acquisition date generally will affect income tax
  expense. 


SFAS 141(R) also includes a substantial number of new
disclosure requirements. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 and
earlier 

-12- 




adoption is prohibited. Accordingly, the Company will be
required to record and disclose business combinations following existing U.S.
GAAP until April 1, 2009. The Company does not expect that adoption of SFAS
141(R) will have a material effect on its financial position, results of
operation, or cash flows. 

Noncontrolling Interests in Consolidated Financial
Statements 
In December 2007, the FASB issued Financial
Accounting Standards Statement No. 160 (SFAS 160), Noncontrolling Interests
in Consolidated Financial Statements - An Amendment of ARB No. 51.

SFAS 160 establishes new accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent's equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. SFAS 160 clarifies that changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 and earlier adoption is prohibited. Accordingly, the
Company will be required to record and disclose minority interest following
existing GAAP until April 1, 2009. The Company does not expect that adoption of
SFAS 160 will have a material effect on its financial position, results of
operation, or cash flows. 

Fair Value Measurement 
During
September 2006 the FASB issued Financial Accounting Standards No. 157, Fair
Value Measurements (“SFAS 157”). FASB 157 defines fair value, establishes a
framework for measuring fair value under U.S. GAAP, expands disclosures about
fair value measurements and addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under U.S. GAAP. SFAS 157 does not require any new fair value
measurements. This standard is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years (fiscal year 2009 for the Company). However, on December 14, 2007
the FASB issued a proposed FASB staff position ("FSP") that would amend SFAS 157
to delay its effective date for all non-financial assets and non-financial
liabilities, except for those that are recognized or disclosed at fair value in
the financial statements on a recurring basis, that is, at least annually. For
items within the scope of the proposed FSP the effective date of SFAS 157 would
be delayed to fiscal years beginning after November 15, 2008 (fiscal 2010 for
the Company) and interim periods within those fiscal years. During February 2008
the FASB confirmed and made effective the FSP. Based on the type of assets and
liabilities currently held by the Company, management does not believe that the
adoption will have a material impact on the financial position or results of
operation. 

During February 2007 the FASB issued Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”).
SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions of SFAS 159 apply only
to entities that elect the fair value option. However, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities (“SFAS 115”) applies to all entities with available-for-sale and
trading securities. SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007 (fiscal year beginning April 1,
2008 for the Company). The Company does not expect the adoption of standard to
have a material impact on its financial position or results of operations. 

-13- 




NOTE 3 – ESCROW DEPOSIT ON ACQUISITION 

As of March 31, 2008, the Company transferred $11,310,686 to an
escrow account related to the acquisition of the geothermal assets located near
Empire, Nevada. As noted in Note 11, this transaction was completed on May 1,
2008, and the funds were transferred from the escrow account to the seller.

NOTE 4 – RESTRICTED CASH 

The Company maintains cash balances that are restricted due to
contractual obligations. Restricted cash balances and explanations of the nature
of the restrictions are summarized as follows: 

	 	  	 	March 31, 	 	 	March 31, 	 
	 	Entity/Description 	 	2008
    	 	 	2007
    	 
	 	  	 	  	 	 	  	 
	 	Ormat Nevada – construction letter of
      credit 	$	 - 	 	$	 5,103,400 	 
	 	Idaho Department of Water Resources – well 	 	  	 	 	  	 
	 	         bonding
    	 	260,000 	 	 	260,000 	 
	 	Oregon Department of Geology and Mineral 	 	  	 	 	  	 
	 	       
       Industries – well bonding 	 	25,000 	 	 	- 	 
	 	  	$	 285,000 	 	$	 5,363,400 	 


The Ormat letter of credit was released during the year ended
March 31, 2008 after the final construction payment was made in January 2008.
Well bonding requirements renew on an annual basis. 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT 

During the year ended March 31, 2008, the Company made
significant acquisitions of geothermal, mineral and surface water rights.
Geothermal and mineral rights were acquired in Gerlach, Nevada that amounted to
approximately $319,785. Additional costs of $122,522 were incurred to continue
to study and develop the Company’s interests in the project located near Neal
Hot Springs, Oregon. In June 2007, the right to lease the geothermal and mineral
rights of 1,685 acres in Raft River, Idaho was purchased for $1,015,102.

Net construction costs of $862,124 were incurred during the
fiscal year ended March 31, 2008. The majority of these costs were for buildings
and facilities ($351,765) and pipelines ($499,783) related to the development of
the Raft River well field. No significant assets under construction were put
into operation during the fiscal year. 

-14- 




Property, plant and equipment categories are summarized as
follows: 

	 	  	 	Balance at 	 	 	Balance at 	 
	 	  	 	March 31, 2008 	 	 	March 31, 2007 	 
	 	  	 	  	 	 	  	 
	 	Land 	$	 384,000 	 	$	 384,000 	 
	 	Water rights 	 	1,146,003 	 	 	1,146,003 	 
	 	Geothermal and mineral rights 	 	1,903,226 	 	 	286,112 	 
	 	Furniture and equipment 	 	402,660 	 	 	108,125 	 
	 	  	 	3,835,889 	 	 	1,924,240 	 
	 	             
       Less: accumulated depreciation 	 	(73,980	) 	 	(19,836	) 
	 	  	 	3,761,909 	 	 	1,904,404 	 
	 	Construction in progress 	 	3,096,106 	 	 	2,233,982 	 
	 	  	 	  	 	 	  	 
	 	  	$	 6,858,015 	 	$	 4,138,386 	 


Depreciation expense charged to operations for the years ended
March 31, 2008, 2007 and 2006 amounted to $56,769, $16,511 and $1,350;
respectively. The construction in progress consists of development activities at
Raft River Unit 2 and Neal Hot Springs. 

NOTE 6 - CAPITAL STOCK 

The Company is authorized to issue 100,000,000 shares of common
stock. All shares have equal voting rights, are non-assessable and have one vote
per share. Voting rights are not cumulative and, therefore, the holders of more
than 50% of the common stock could, if they choose to do so, elect all of the
directors of the Company. 

During the quarter ended March 31, 2008, the Company issued
56,667 common shares to officers, employees and consultants upon exercise of
stock options at strike prices ranging from $0.72 CDN to $0.90 CDN (average
$0.92 U.S.). 

During the quarter ended December 31, 2007, the Company issued
1,854,141 common shares upon the exercise of 222,550 stock options and 1,631,591
broker compensation options in both U.S. and Canadian dollars. Shares of 15,000
were issued at an exercise price of U.S $2.41. Shares of 1,680,050 shares were
issued at exercise prices that ranged between CDN $0.60 to $1.00 ($0.61 to $1.02
U.S.). Shares issued from stock purchase warrants, amounted to 159,091 shares at
an exercise price of U.S. $2.08. 

During the quarter ended September 30, 2007, the Company issued
235,833 common shares to officers, employees and consultants upon exercise of
stock options at strike prices ranging from $0.60 CDN to $1.40 CDN (average
$1.03 U.S.). 

During the quarter ended June 30, 2007, the Company issued
291,200 common shares to officers, employees and consultants upon exercise of
stock options at strike prices ranging from $0.60 CDN to $1.40 CDN (average
$0.76 U.S.). 

On June 5, 2007, the Company completed a private placement of
9,090,900 common shares at a price of $2.20 CDN ($2.08 U.S. as of June 5, 2007).
Proceeds, net of financing fees, totaled $17,766,772.

-15- 




During the quarter ended March 31, 2007, the Company issued
62,500 common shares upon the exercise of 12,500 stock options, plus 50,000
broker compensation options at an exercise price of $1.00 CDN ($0.83 U.S.). 

During the quarter ended December 31, 2006, the Company issued
72,741 shares to employees in satisfaction of employment agreements at an
average price of $0.90, and 23,573 shares previously held in escrow were
cancelled. 

During the quarter ended December 31, 2006, the Company issued
395,000 common shares upon the exercise of 280,000 stock purchase warrants at an
exercise price of $0.85 CDN ($0.73 -$0.75 U.S.), the exercise of 15,000 stock
purchase warrants at an exercise price of $1.25 CDN ($0.86 U.S.), and the
exercise of 100,000 options at an exercise price of $0.60 CDN ($0.54 U.S.). 

During the quarter ended June 30, 2006, the Company issued
40,000 common shares upon the exercise of 40,000 options at an exercise price of
$0.60 CDN ($0.53 U.S.). 

On April 3, 2006, the Company completed a private placement of
25,000,000 common shares at a price of $1.00 CDN ($0.86 U.S. as of April 3,
2006). Proceeds, net of financing fees, totaled $20,134,260. Of the net
proceeds, $172,370 had been received in the Company’s bank accounts prior to
March 31, 2006. Since the subscription forms reflected a March 30, 2006 date,
and the remainder of the cash of $19,961,890 was on deposit with Dundee
Securities Corporation, the private placement was recorded as “Private placement
proceeds receivable” and as “Capital Stock Issuable” in the financial statements
at March 31, 2006.

During the quarter ended March 31, 2006, the Company issued
691,304 common shares upon the exercise of 378,370 options at an exercise price
of $0.60 CDN ($0.51 U.S.), the exercise of 192,934 stock purchase warrants at an
exercise price of $0.75 U.S., and 120,000 common shares as a signing bonus as
part of an employment agreement at a deemed price of $0.72 CDN ($0.61 U.S.).

During the quarter ended December 31, 2005, the Company issued
183,333 common shares upon the exercise of 100,000 options at an exercise price
of $0.60 CDN ($0.51 U.S.) and 83,333 purchase warrants at an exercise price of
$0.45 U.S. 

During the quarter ended September 30, 2005, the Company issued
40,000 common shares upon the exercise of 40,000 options at an exercise price of
$0.60 CDN ($0.51 U.S.).

During the quarter ended June 30, 2005, the Company issued
17,778 common shares upon the exercise of 17,778 options at an exercise price of
$0.90 CDN ($0.73 U.S.). 

NOTE 7 - STOCK BASED COMPENSATION 

The Company’s stock option plan provides for the grant of
incentive stock options for up to 5,342,845 common shares to employees,
consultants, officers and directors of the Company. All terms and conditions of
the options are the same for external parties as well as internal employees and
directors. Options are granted for a term of up to five years from the date of
grant. Stock options granted generally vest over a period of eighteen months,
with 25% vesting on the date of grant and 25% vesting every six months
thereafter. Since the plan has been administered by the Company’s Vancouver
office and Pacific Corporate Trust Company, the Company has issued stock options
with an exercise price stated in Canadian dollars per share. The Company
recognizes compensation expense using the straight-line method of amortization.
Historically, the Company has issued new shares to satisfy exercises of stock
options and the Company expects to issue new shares to satisfy any future
exercises of stock options. 

-16- 




U.S. Geothermal and their Board of Directors have previously
provided additional incentive to our United States (“U.S.A.”) employees and
consultants by offering stock options at a discount off market price as allowed
by the TSX Venture exchange. The U.S.A. legislature and the Internal Revenue
Service (“IRS”) have issued regulations to dissuade companies from granting
these discounted stock options. Through the American Jobs Creation Act of 2004
and the Internal Revenue Code Section 409A, discounted stock options have now
been classified as deferred compensation in which the “discount” is taxable at
the date of vesting, instead of upon the date of exercise. They have also
dictated that a 20% penalty on all discounts is to be paid at date of vesting.
These new rules have been retroactively applied to all options vesting after
January 1, 2005. 

Since U.S. Geothermal stock options vest 25% on date of grant
and 25% every six months thereafter, option holders would be subject to amending
tax returns for prior years and paying tax and penalty on the value of the
discount. These amendments and payments would be required whether or not the
option holder exercises the options. The IRS allowed option holders until
December 31, 2007 to rectify the situation by allowing them to reprice the
existing options to the market price on the date of option grant. As of March
31, 2007, all of our U.S.A. option holders repriced their options to the market
price on the date of grant. An adjustment to the fair market value of the
repriced options was included in the stock compensation accrual for March 2007.


During the quarter ended September 30, 2007, the Company
granted 775,000 stock options to consultants and employees exercisable at a
price of $2.41 U.S. until January 22, 2012. 

During the quarter ended March 31, 2007, the Company granted
235,000 stock options to consultants and employees exercisable at a price of
$1.40 CDN ($1.24 U.S.) until January 22, 2012. 

During the quarter ended September 30, 2006, the Company
granted 170,000 stock options to consultants and employees exercisable at a
price of $1.00 CDN ($0.89 U.S.) until July 31, 2011. 

During the quarter ended June 30, 2006, the Company granted
1,763,000 stock options to consultants, employees, directors and officers
exercisable at prices ranging from $0.85 to $1.00 CDN ($0.77 to $0.90 U.S.)
until April 12, 2011. 

-17- 




The following table reflects the summary of stock options
outstanding at March 31, 2008 and changes during the years ended March 31, 2008,
2007 and 2006: 

	  	 	  	 	 	Weighted 	 	 	Weighted 	 	 	  	 
	  	 	  	 	 	Average 	 	 	Average 	 	 	Aggregate 	 
	  	 	Number of 	 	 	Exercise 	 	 	Fair 	 	 	Intrinsic 	 
	  	 	shares under 	 	 	Price Per 	 	 	Value 	 	 	Value 	 
	  	 	options 	 	 	Share 	 	 	(US)
    	 	 	(US)
    	 
	  	 	  	 	 	 	 	 	  	 	 	  	 
	Balance outstanding, March
      31, 2005 	 	1,756,265 	 	$	 0.68 CDN 	 	$	 0.34 	 	$	 590,033 	 
	     Forfeited 	 	(204,489	) 	 	0.86 CDN 	 	 	0.62 	 	 	(64,037	) 
	     Exercised
    	 	(536,148	) 	 	0.63 CDN 	 	 	0.30 	 	 	(153,641	) 
	     Granted 	 	50,000 	 	 	1.05
      CDN 	 	 	0.99
    	 	 	26,791 	 
	Balance outstanding, March
      31, 2006 	 	1,065,628 	 	 	0.69 CDN 	 	 	0.37 	 	 	399,146 	 
	     Forfeited 	 	(145,000	) 	 	0.86 CDN 	 	 	0.62 	 	 	(90,487	) 
	     Exercised
    	 	(152,500	) 	 	0.63 CDN 	 	 	0.30 	 	 	(46,427	) 
	     Granted 	 	2,168,000 	 	 	1.05
      CDN 	 	 	0.99
    	 	 	2,140,719 	 
	Balance outstanding, March
      31, 2007 	 	2,936,128 	 	 	0.96 CDN 	 	 	0.82 	 	 	2,402,951 	 
	  	 	  	 	 	 	 	 	  	 	 	  	 
	     Forfeited
    	 	(5,000	) 	 	1.00 CDN 	 	 	0.80 	 	 	(4,000	) 
	     Exercised 	 	(806,250	) 	 	0.83 CDN 	 	 	0.63 	 	 	(511,494	) 
	     Granted
    	 	775,000 	 	 	2.41 US 	 	 	1.95 	 	 	1,513,964 	 
	Balance outstanding, March 31, 2008 	 	2,899,878 	 	$	 1.35CDN 	 	$	 1.17 	 	$	 3,401,421 	 


The fair value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model using the assumptions noted
in the following table. Expected volatilities are based on historical volatility
of the Company’s stock. The Company uses historical data to estimate option
exercises and employee termination within the Black-Scholes model. The expected
term of options granted represents the period of time that options granted are
expected to be outstanding, based upon past experience and future estimates and
includes data from the Plan. The risk-free rate for periods within the expected
term of the option is based upon the U.S. Treasury yield curve in effect at the
time of grant. The Company currently does not foresee the payment of dividends
in the near term. 

The fair value of the stock options granted was estimated using
the Black-Scholes option-pricing model and is amortized over the vesting period
of the underlying options. The assumptions used to calculate the fair value are
as follows: 

	  	Year
      Ended March 31, 
	  	2008
    	2007
    
	  	  	  
	Dividend yield 	0 	0 
	Expected volatility 	77-140% 	82-149% 
	Risk free interest rate 	1.74-5.10% 	3.94-4.2% 
	Expected life (years) 	3.18 	3.36 


Changes in the subjective input assumptions can materially
affect the fair value estimate and, therefore, the existing models do not
necessarily provide a reliable measure of the fair value of the Company’s stock
options. 

-18- 




The following table summarizes information about the stock
options outstanding at March 31, 2008: 


  	OPTIONS
        OUTSTANDING 	 	  
	 	  	REMAINING 	 	NUMBER OF 
	EXERCISE 	NUMBER OF 	CONTRACTUAL 	 	OPTIONS 
	PRICE 	OPTIONS 	LIFE (YEARS) 	 	EXERCISABLE 
	 	  	  	 	  
	$         0.60 CDN
      	210,628 	0.83 	 	210,628 
	           0.72
        CDN 	67,500 	1.58 	 	67,500 
	           0.85
        CDN 	20,000 	3.00 	 	20,000 
	           0.90
        CDN 	182,500 	1.58 	 	182,500 
	           1.00
        CDN 	1,423,000 	3.00 	 	1,423,000 
	           1.15
        CDN 	78,750 	3.33 	 	78,750 
	           1.40
        CDN 	157,500 	3.83 	 	118,125 
	           2.41
        US 	760,000 	4.33 	 	380,000 
	 	  	  	 	  
	$         1.35 CDN 	2,899,878 	3.12 	 	2,480,503 




The following table summarizes information about the stock
options outstanding at March 31, 2007: 


  	OPTIONS
        OUTSTANDING 	 	  
	  	  	REMAINING 	 	NUMBER OF 
	 EXERCISE 	NUMBER OF 	CONTRACTUAL 	 	OPTIONS 
	PRICE (CDN)
      	   SHARES 	LIFE (YEARS) 	 	EXERCISABLE 
	  	  	  	 	  
	$         0.60 	355,628 	1.91 	 	355,628 
	           0.72 	197,500 	2.67 	 	197,500 
	           0.85
      	20,000 	4.00 	 	15,000 
	           0.90 	347,500 	2.67 	 	347,500 
	           1.00
      	1,615,500 	4.00 	 	807,750 
	           1.15 	165,000 	4.50 	 	82,500 
	           1.40
      	235,000 	4.83 	 	58,750 
	$         0.96 	2,936,128 	3.59 	 	1,864,628 




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A summary of the status of the Company’s nonvested stock
options for the fiscal years ended March 31, 2008, 2007 and 2006 are presented
as follows: 

	  	 	  	 	 	Weighted 	 	 	Weighted 	 
	  	 	  	 	 	Average Grant 	 	 	Average 	 
	  	 	Number of 	 	 	Date Fair Value 	 	 	Grant Date 	 
	  	 	Options 	 	 	Per
      Share 	 	 	Fair
      Value 	 
	  	 	  	 	 	 	 	 	  	 
	Nonvested, March 31, 2005 	 	719,066 	 	$	 0.68 CDN 	 	$	 0.34 	 
	     Granted 	 	50,000 	 	 	0.72 CDN 	 	 	0.54 	 
	     Vested
	 	(386,566	) 	 	0.61 CDN 	 	 	0.29 	 
	     Forfeited 	 	(240,000	) 	 	0.63
      CDN 	 	 	0.31
    	 
	Nonvested, March 31, 2006 	 	142,500 	 	 	0.69 CDN 	 	 	0.37 	 
	     Granted 	 	2,168,000 	 	 	1.05 CDN 	 	 	0.99 	 
	     Vested
	 	(1,094,000	) 	 	0.63 CDN 	 	 	0.30 	 
	     Forfeited 	 	(145,000	) 	 	0.86
      CDN 	 	 	0.62
    	 
	Nonvested, March 31, 2007 	 	1,071,500 	 	 	0.96 CDN 	 	 	0.82 	 
	  	 	  	 	 	 	 	 	  	 
	     Granted
    	 	775,000 	 	 	2.41 US 	 	 	1.54 	 
	     Vested 	 	(1,422,125	) 	 	2.15 US 	 	 	1.37 	 
	     Forfeited
    	 	(5,000	) 	 	1.00 CDN 	 	 	0.80 	 
	Nonvested, March 31, 2008 	 	419,375 	 	$	 1.12 CDN 	 	$	 1.43 	 


As of March 31, 2008, there was $363,923 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 1.5 years. The total fair value of shares vested
during the year ended March 31, 2008 and 2007 was $1,723,807 and $1,129,072;
respectively. 

Stock Purchase Warrants

At June 30, 2007, 454,545 share purchase warrants at an
exercise price of $2.08 US were issued to compensate brokers resulting from the
private placement of 9,090,900 common shares issued June 5, 2007. During the
quarter ended December 31, 2007, stock purchase warrants representing 159,091
common shares at an exercise price of $2.08 U.S. were exercised. 

NOTE 8 - RELATED PARTY TRANSACTIONS 

At March 31, 2008 and 2007, the amounts of $9,218 and $9,510,
respectively, are payable to directors and officers of the Company. These
amounts are unsecured and due on demand. 

The Company’s subsidiary Raft River Energy I, LLC owed the
Company $205,033 and $154,277 at March 31, 2008 and 2007; respectively, for
operating and maintenance expenses. The receivable balance is comprised of
unsecured demand obligations due within twelve months. During the fiscal year
ended March 31, 2008, the Company received $62,500 in management fees and
$121,742 in lease and royalties from RREI. 

-20- 




The Company incurred the following transactions with directors,
officers and a company with a common director: 

	 	  	 	Year Ended 	 	 	Year Ended 	 
	 	  	 	March 31, 	 	 	March 31, 	 
	 	  	 	2008
    	 	 	2007
    	 
	 	  	 	  	 	 	  	 
	 	Administrative services 	$	 22,321 	 	$	 20,563 	 
	 	Director fees 	 	41,250 	 	 	23,250 	 
	 	Consulting fees 	 	16,000 	 	 	24,000 	 
	 	 	 	 	 	 	 	 
	 	  	$	 79,571 	 	$	 67,813 	 


NOTE 9 - DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP 

The Company’s consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”). The material difference in respect to these financial statements
between U.S. GAAP and Canadian GAAP is reflected in the recording of Property,
Plant and Equipment. Under Canadian GAAP, development and exploration costs
associated with the Raft River project (property lease payments, geological
consulting fees, well monitoring and permitting, etc.) are recorded as a capital
asset. Under U.S. GAAP, these amounts are expensed. As a result of the above,
under Canadian GAAP the following line items in the consolidated balance sheets
and income statements would have been presented as follows: 


	Consolidated Balance
      
Sheets 	U.S. GAAP
      
December 31, 
2008 	Canadian 
GAAP
      
December 31, 
2008 	U.S. GAAP 
March
      31, 
2007 	Canadian 
GAAP
      
March 31, 
2007 
	Plant, Property and Equipment 	$ 6,858,015 	$ 7,298,626 	$ 4,138,386 	$ 4,578,997 
	Total Assets 	40,366,933 	40,807,544 	22,673,340 	23,113,951 
	Stockholders’
      Equity 	38,075,200 	38,515,831 	21,216,878 	21,657,489 
	Total Liabilities and Stockholders’ Equity 	$ 40,366,933 	$ 40,807,544 	$ 22,673,340 	$ 23,113,951 





	Consolidated Statements 
of
      Operations and 
Comprehensive Loss 	U.S. GAAP 
Year
      Ended 
December 31, 
2008 	Canadian 
GAAP
      Year 
Ended 
December 31, 
2008 	U.S. GAAP 
Year
      ended 
March 31, 
2007 	Canadian 
GAAP
      Year 
ended March 
31, 2007 
	Exploration
      Expenditures 	$                  -
    	$                  -
    	$                  -
    	$                  -
    
	Loss from
      Operations 	(4,433,035) 	(4,433,035) 	(2,987,869) 	(2,987,869) 
	Net Loss 	$
      (3,369,358) 	$
      (3,369,358) 	$
      (1,792,584) 	$
      (1,792,584) 



-21- 




NOTE 10 - COMMITMENTS AND CONTINGENCIES 

Operating Lease Agreements 
The Company
has entered into several lease agreements with terms expiring up to December 1,
2034 for geothermal properties adjoining the Raft River Geothermal Property and
for Neal Hot Springs. The Company incurred total lease expenses for years ended
March 31, 2008, 2007 and 2006 of $49,975, $28,698 and $10,498; respectively.


BLM Lease Agreement 
On August 1, 2007,
the Company signed a geothermal resources lease agreement with the United States
Department of the Interior Bureau of Land Management (“BLM”). The contract
requires an annual payment of $3,502 including processing fees. The primary term
of the agreement is 10 years. After the primary term, the Company has the right
to extend the contract. BLM has the right to terminate the contract upon written
notice if the Company does not comply with the terms of the agreement.

Office Lease 
The Company entered into
a 3 year lease contract effective January 1, 2008 through January 31, 2011, for
general office space for an executive office located in Boise, Idaho. The lease
payments are due in monthly installments that start at $5,637 per month and
increase annually to $5,981 per month. 

The following is the total contracted lease obligations for the
next five fiscal years: 


	Year 	 	 	 	 	  	 
	Ending 	 	 	 	 	  	 
	March 31, 	 	 	 	 	Amount 	 
	  	 	 	 	 	  	 
	2009 	 	 	 	$	 111,686 	 
	2010 	 	 	 	 	118,726 	 
	2011 	 	 	 	 	109,607 	 
	2012 	 	 	 	 	53,800 	 
	2013 	 	 	 	 	44,802 	 
	Thereafter 	 	 	 	 	134,608 	 



Power Purchase Agreements 
The Company
has signed a power purchase agreement with Idaho Power Company for sale of power
generated from its subsidiary Raft River Energy I, LLC. The Company has also
signed a transmission agreement with Bonneville Power Administration for
transmission of the electricity from this plant to Idaho Power, and from the
phase two plants to other purchasers. These agreements will govern the
operational revenues for the initial phases of the Company’s operating
activities. 

The Company signed a power purchase agreement on March 12, 2008
with Eugene Water and Electric Board for the planned phase two power plant at
Raft River, Idaho. The agreement allows for variable output up to a maximum of
16 megawatts with a term of 25 years. The agreement is subject to successful
drilling and resource development. 

As a part of the purchase of the assets from Empire Geothermal
Power, LLC and Michael B. Stewart acquisition (“Empire Acquisition”) (see Note
11), a Power Purchase agreement with Sierra Pacific Power Company was assigned
to the Company. The contract has a stated expected output of 3,250 kilowatts
maximum per hour and extends through 2017. All power produced will be purchased
and there are no penalties for not meeting or exceeding expected output levels.


-22- 




Construction Contract
On December 5, 2005, the
Company signed a contract (the “Ormat EPC Agreement”) with Ormat Nevada, Inc.
(Ormat) for Ormat to construct a 13 megawatt geothermal power plant at Raft
River, Idaho. As part of the Agreement, Ormat has guaranteed certain performance
specifications and plant components. At fiscal year end, Company management does
not believe that all specifications have been met, and has withheld payment of
approximately $1 million dollars. This amount has not been reflected as a
liability in the Company’s financial statements. 

Joint Venture Agreement Construction Costs

Raft River Energy I is a joint venture between the Company and Raft
River I Holdings, LLC a subsidiary of Goldman Sachs Group, Inc. An Operating
Agreement governs the rights and responsibilities of both parties. At fiscal
year end, the Company had contributed approximately $17 million in cash and
property, and Raft River I Holdings has contributed approximately $34 million in
cash. Raft River I Holdings, LLC is not required to contribute additional
capital based upon the current agreement. The Company is obligated to provide
contributions sufficient to complete a 10 mega watt power plant. At fiscal year
end, the project is believed to be substantially funded. Profits and losses are
allocated to the members based upon contributed capital levels. As profits are
realized, the levels of capital will be returned to Raft River I Holdings, LLC.


NOTE 11 – SUBSEQUENT EVENTS 

Major Acquisition 
Prior to fiscal year
end, the Empire Acquisition transaction was initiated to acquire a 3.6 megawatt
operating geothermal power plant and approximately 28,358 acres (44.3 square
miles) of geothermal energy leases and certain ground water rights all located
north of Reno, Nevada. The power plant is comprised of four binary cycle units,
a wet cooling tower and nine geothermal wells developed in a proven geothermal
reservoir. The total sales price was $16.6 million dollars. A portion of the
funds that amounted to approximately $11.3 million dollars was transferred from
escrow prior to April 1, 2008. On May 1, 2008, the remaining $5.32 million was
transferred to the seller, and the transaction was considered to be
complete.

Private Placement Common Stock Offering

Subsequent to fiscal year end, the Company entered into an agreement
with a Canadian investment dealer, in which an underwriter has agreed to
purchase 4,260,000 units of the Company’s equity interests. Each unit comprises
one common share of the Company’s stock and one half of one common share
purchase warrant. The initial offering, completed on April 28, 2008, generated
gross proceeds $10,011,000 CDN (approximately $10,154,458 US) at a price of
$2.35 CDN per share. Each warrant will entitle the holder the right to acquire
one additional common share of the Company for a period of 24 months following
the closing of the offering for $3.00 US per share. In addition, the
Underwriters exercised their option to purchase an additional 2,122,500 Units at
the issue price of the offering, resulting in the issuance of a total of
6,382,500 Units for aggregate gross proceeds of approximately 15 million
CDN.

Exploration Joint Venture 
In May 2008,
the Company entered into an agreement with Gerlach Green Energy LLC of Nevada
(“GGE”). The purpose of the joint venture is the exploration of the Gerlach
geothermal system, which is located in northwestern Nevada, near the town of
Gerlach. The agreement establishes a limited liability company named Gerlach
Geothermal LLC. The agreement provides for a 60 percent U.S. Geothermal
ownership interest in the joint venture by a subsidiary of the Company and a 40
percent ownership interest by GGE, with the Company expending $2,000,000 toward
the project, of which $300,000 is a property contribution in the form of a BLM
geothermal lease. GGE has contributed one BLM geothermal lease and one private
geothermal lease. These leases have all had previous work 

-23- 




including geophysical studies and drilling. The combined
property totals 3,615 acres (5.6 square miles) with 3,415 acres of BLM leases
and 200 acres in a private property lease. The joint venture agreement gives GGE
an option to maintain its 40% ownership interest as additional capital
contributions are required. If GGE dilutes to below a 10 percent interest, their
ownership position in the joint venture would be converted to a 10 percent net
profits interest. The Company will serve as the manager for the joint venture’s
development activities.

 

 

 

-24-