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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2006

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 000-30657

RASER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Utah                                                          |  | 87-0638510                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)

5152 North Edgewood Drive, Suite 375

Provo, Utah 84604

(Address, including zip code, of registrants
principal executive offices)

(801) 765-1200

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large
accelerated filer ̈Accelerated filer   x                     Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes ̈No x.

There were 50,700,078 shares of the registrants common stock, par value $0.01, outstanding on July 21, 2006.



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##### Table of Contents

Raser Technologies, Inc.

SEC Form 10-Q

Table of Contents



|                                                                                              |  |         
|--------------------------------------------------------------------------------------------- |  | --------
|                                                                                              |  | Page No.
|Part I. Financial Information                                                                 |  | 1       
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  | 1       
|                                                                                              | 
|Condensed Consolidated Balance Sheets                                                         |  | 1       
|                                                                                              | 
|Condensed Consolidated Statements of Operations                                               |  | 2       
|                                                                                              | 
|Condensed Consolidated Statements Of Cash Flows                                               |  | 3       
|                                                                                              | 
|Notes to Condensed Consolidated Financial Statements                                          |  | 4       
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11      
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |  | 23      
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 23      
|                                                                                              | 
|Part II. Other Information                                                                    |  | 25      
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 25      
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 38      
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 39      
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 39      
|                                                                                              | 
|SIGNATURES                                                                                    |  | 42      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

RASER TECHNOLOGIES, INC. & SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                         |  | June 30, 2006 |             |   | December 31,2005 |  
|Assets                                                                                                                                                                                   |  |               |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                          |  |               |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                |  | $             | 7,756,791   |   |                  | $ | 17,467,545  |  
|Restricted cash                                                                                                                                                                          |  |               | 400,000     |   |                  |   | 400,000     |  
|Short-term investments                                                                                                                                                                   |  |               |            |   |                  |   | 533,512     |  
|Notes receivable                                                                                                                                                                         |  |               | 5,547,552   |   |                  |   |            |  
|Accounts receivable                                                                                                                                                                      |  |               | 15,750      |   |                  |   | 134,835     |  
|Other current assets                                                                                                                                                                     |  |               | 421,142     |   |                  |   | 154,002     |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                     |  |               | 14,141,235  |   |                  |   | 18,689,894  |  
|Equipment, net                                                                                                                                                                           |  |               | 606,976     |   |                  |   | 580,526     |  
|Patent and trademarks, net                                                                                                                                                               |  |               | 342,748     |   |                  |   | 283,121     |  
|Other assets                                                                                                                                                                             |  |               | 13,410      |   |                  |   | 11,110      |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Total assets                                                                                                                                                                             |  | $             | 15,104,369  |   |                  | $ | 19,564,651  |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                                                                                     |  |               |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                     |  |               |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                         |  | $             | 231,662     |   |                  | $ | 160,576     |  
|Accrued liabilities                                                                                                                                                                      |  |               | 495,328     |   |                  |   | 184,483     |  
|Deferred revenues                                                                                                                                                                        |  |               | 9,870       |   |                  |   | 25,080      |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                |  |               | 736,860     |   |                  |   | 370,139     |  
|Commitments and contingencies, (see note H)                                                                                                                                              |  |               |             |   |                  |   |             |  
|Stockholders equity:                                                                                                                                                                    |  |               |             |   |                  |   |             |  
|Series B and C convertible preferred stock, $.01 par value, 5,000,000 shares authorized; no shares of Series B issued and outstanding, and no
shares of Series C issued and outstanding. |  |               |            |   |                  |   |            |  
|Common stock; $0.01 par value; 250,000,000 shares authorized 50,684,712 and 50,404,005 shares issued and outstanding,
respectively.                                                      |  |               | 506,847     |   |                  |   | 504,040     |  
|Additional paid in capital                                                                                                                                                               |  |               | 38,914,735  |   |                  |   | 35,675,184  |  
|Accumulated deficit                                                                                                                                                                      |  |               | (25,054,073 | ) |                  |   | (16,984,712 | )
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                               |  |               | 14,367,509  |   |                  |   | 19,194,512  |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                               |  | $             | 15,104,369  |   |                  | $ | 19,564,651  |  
|                                                                                                                                                                                         |  |               |             |   |                  |   |             |  

See accompanying notes to condensed consolidated financial statements



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##### Table of Contents

RASER TECHNOLOGIES, INC. & SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                                                                                     |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                                     |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Revenue                                                                                                              |  | $                           | 34,409     |   |                           | $ | 148,961    |      |  | $ | 68,145     |   |  | $ | 148,961     |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Operating expenses:                                                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Cost of sales                                                                                                        |  |                             | 208,547    |   |                           |   | 115,442    |      |  |   | 264,131    |   |  |   | 115,442     |  
|General and administrative                                                                                           |  |                             | 4,283,935  |   |                           |   | 2,115,289  |      |  |   | 6,638,632  |   |  |   | 3,838,937   |  
|Research and development                                                                                             |  |                             | 808,281    |   |                           |   | 415,718    |      |  |   | 1,664,742  |   |  |   | 966,962     |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Total operating expenses                                                                                             |  |                             | 5,300,763  |   |                           |   | 2,646,449  |      |  |   | 8,567,505  |   |  |   | 4,921,341   |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Operating loss                                                                                                       |  |                             | (5,266,354 | ) |                           |   | (2,497,488 | )    |  |   | (8,499,360 | ) |  |   | (4,772,380  | )
|Interest income                                                                                                      |  |                             | 237,708    |   |                           |   | 166,778    |      |  |   | 438,511    |   |  |   | 190,724     |  
|Loss on the sale of securities                                                                                       |  |                             |           |   |                           |   |           |      |  |   | (8,512     | ) |  |   |            |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Loss before income taxes                                                                                             |  |                             | (5,028,646 | ) |                           |   | (2,330,710 | )    |  |   | (8,069,361 | ) |  |   | (4,581,656  | )
|Income tax benefit                                                                                                   |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |            |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Net loss                                                                                                             |  |                             | (5,028,646 | ) |                           |   | (2,330,710 | )    |  |   | (8,069,361 | ) |  |   | (4,581,656  | )
|Preferred stock dividends                                                                                            |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | (7,536      | )
|Deemed dividend related to warrants issued with preferred stock and beneficial conversion feature of preferred stock |  |                             |           |   |                           |   | (5,596,486 | )    |  |   |           |   |  |   | (5,596,486  | )
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Net loss applicable to common shareholders                                                                           |  | $                           | (5,028,646 | ) |                           | $ | (7,927,196 | )    |  | $ | (8,069,361 | ) |  | $ | (10,185,678 | )
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Loss per common share  basic and diluted                                                                            |  | $                           | (0.10      | ) |                           | $ | (0.16      | )    |  | $ | (0.16      | ) |  | $ | (0.21       | )
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  
|Weighted average common shares  basic and diluted                                                                   |  |                             | 50,640,000 |   |                           |   | 49,488,000 |      |  |   | 50,537,000 |   |  |   | 49,359,000  |  
|                                                                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements



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RASER TECHNOLOGIES, INC. & SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows

(Unaudited)



|                                                                            |  |                           |            |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                            |  | Six Months Ended June 30, |           
|                                                                            |  | 2006                      |            |   | 2005 |  
|Cash flows used in operating activities:                                    |  |                           |            |   |      |   |             |  
|Net loss                                                                    |  | $                         | (8,069,361 | ) |      | $ | (4,581,656  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |            |   |      |   |             |  
|Depreciation and amortization expense                                       |  |                           | 95,282     |   |      |   | 28,690      |  
|Impairment of abandoned patents                                             |  |                           | 24,903     |   |      |   |            |  
|Loss on the sale of securities                                              |  |                           | 8,512      |   |      |   |            |  
|Loss on the sale of equipment                                               |  |                           | 1,177      |   |      |   |            |  
|Common stock, stock options and warrants issued for services                |  |                           | 4,042,924  |   |      |   | 2,003,674   |  
|Impairment of capitalized acquisition costs                                 |  |                           | 806,772    |   |      |   |            |  
|(Increase) / decrease in accounts receivable                                |  |                           | 119,085    |   |      |   | (123,961    | )
|Increase in other current assets                                            |  |                           | (267,140   | ) |      |   | (273,066    | )
|Increase in accounts payable                                                |  |                           | 71,086     |   |      |   | 41,318      |  
|Increase / (decrease) in accrued liabilities                                |  |                           | (684,071   | ) |      |   | 240,968     |  
|Decrease in unearned revenues                                               |  |                           | (15,210    | ) |      |   | (10,000     | )
|                                                                            |  |                           |            |   |      |   |             |  
|Net cash used in operating activities                                       |  |                           | (3,866,041 | ) |      |   | (2,674,033  | )
|                                                                            |  |                           |            |   |      |   |             |  
|Cash flows used in investing activities:                                    |  |                           |            |   |      |   |             |  
|Purchase of available for sale securities                                   |  |                           |           |   |      |   | (20,753,489 | )
|Increase in notes receivable                                                |  |                           | (5,547,552 | ) |      |   |            |  
|Proceeds from the sale of short-term investments                            |  |                           | 525,000    |   |      |   |            |  
|Increase in restricted cash                                                 |  |                           |           |   |      |   | (403,327    | )
|Increase in patents and trademarks                                          |  |                           | (91,787    | ) |      |   | (42,341     | )
|Purchase of equipment                                                       |  |                           | (115,652   | ) |      |   | (262,097    | )
|Increase in other assets                                                    |  |                           | (2,300     | ) |      |   | (2,758      | )
|Costs of attempted acquisition                                              |  |                           | (806,772   | ) |      |   |            |  
|                                                                            |  |                           |            |   |      |   |             |  
|Net cash used in investing activities                                       |  |                           | (6,039,063 | ) |      |   | (21,464,012 | )
|                                                                            |  |                           |            |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                           |            |   |      |   |             |  
|Proceeds from exercise of common stock warrants                             |  |                           | 51,300     |   |      |   | 2,954,500   |  
|Proceeds from exercise of common stock options                              |  |                           | 143,050    |   |      |   | 358,849     |  
|Preferred stock dividend                                                    |  |                           |           |   |      |   | (7,536      | )
|Proceeds from the sale of Series C preferred stock                          |  |                           |           |   |      |   | 18,417,315  |  
|                                                                            |  |                           |            |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                           | 194,350    |   |      |   | 21,723,128  |  
|                                                                            |  |                           |            |   |      |   |             |  
|Net decrease in cash and cash equivalents                                   |  | $                         | (9,710,754 | ) |      | $ | (2,414,917  | )
|Cash and cash equivalents, beginning of period                              |  |                           | 17,467,545 |   |      |   | 2,665,486   |  
|                                                                            |  |                           |            |   |      |   |             |  
|Cash and cash equivalents, end of period                                    |  | $                         | 7,756,791  |   |      | $ | 250,569     |  
|                                                                            |  |                           |            |   |      |   |             |  

See accompanying notes to condensed consolidated financial statements



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RASER TECHNOLOGIES, INC. & SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A. Basis of
Presentation

The interim consolidated financial statements include the accounts of Raser Technologies, Inc. and its subsidiaries.
Unless the context requires otherwise, Raser, the Company, we, our or us refer to Raser Technologies, Inc. and its subsidiaries.

The Company has prepared the accompanying condensed consolidated financial statements without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to
such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of our management, are necessary to present fairly the results of our
operations for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Form 10-KSB for the year ended December 31,
2005. The results of operations for the three months and six months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006 or any other period.

B. Net Loss Per Common Share

Basic net loss per
common share (Basic EPS) is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by
the sum of the weighted average number of common shares outstanding and the weighted average dilutive common share equivalents then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an
anti-dilutive effect. Common share equivalents consist of shares issuable upon the exercise of options and warrants to purchase common stock, the conversion of any convertible debentures and related accrued interest, and shares issuable upon
conversion of any preferred stock. 63,947 and 70,947 shares of common stock issuable upon exercise of warrants that were outstanding on June 30, 2006 and 2005 respectively; 247,000 and 250,000 stock options granted to a contractor that were
outstanding on June 30, 2006 and 2005 respectively; unvested stock grants totaling 688,000 and 916,668 that were outstanding on June 30, 2006 and 2005 respectively; preferred shares convertible into 684,667 shares of common stock on
June 30, 2005 and 1,850,000 and 1,184,606 employee stock options that were outstanding at June 30, 2006 and 2005 respectively were not included in the calculation of diluted net loss per share because their effect was anti-dilutive.

C. Stock Based Compensation

In March
2004, our Board of Directors (the Board) adopted the Raser Technologies, Inc. Amended and Restated 2004 Long-Term Incentive Plan (the Plan), and in May 2004, our board recommended and the stockholders approved the Plan. The
Plan was adopted to facilitate (1) grants of a wider range of stock incentive awards, including restricted stock, stock appreciation rights, performance shares and performance units, (2) an automatic annual increase to the number of shares
of common stock reserved for issuance under the Plan beginning in 2005 equal to the lesser of 1,750,000 shares of common stock, 3% of the outstanding shares of common stock on the first of each fiscal year, or an amount determined by the Board, and
(3) optional automatic, nondiscretionary annual stock option grants for employees and non-employee directors. As of June 30, 2006, we were authorized to issue up to 4,723,784 shares of common stock pursuant to the Plan.



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Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment (SFAS No. 123R). Under the revised standard, companies may no longer account for share-based compensation transactions, such as stock options, restricted stock, and potential payments under
programs such as the Companys Amended and Restated 2004 Long-Term Incentive Plan using the intrinsic value method as defined in APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Instead, companies are
required to account for such equity transactions using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period.

Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. However, compensation
expense already recognized is not adjusted if market conditions are not met, such as for stock options which expire out-of-the-money, or options which expire unexercised. The new standard was adopted using the modified prospective method
and beginning with the first quarter of 2006, the Company reflects compensation expense in accordance with SFAS No. 123R transition provision. Under the modified prospective method, the effect of the standard is recognized in the period of
adoption and in future periods. Prior periods have not been restated to reflect the impact of adopting the new standard.

The effect of
adopting SFAS No. 123R as of January 1, 2006 for the three months and six months ended June 30, 2006 was to record $990,905 and $1,756,156 of stock-based compensation expense, respectively. For the three months and six months ended
June 30, 2006 and 2005, the Company has allocated stock-based compensation expense, including the amount recorded for the effect of adopting SFAS 123R, the amount recorded for stock grants and the amount recorded for options granted to
contractors to the following statement of operations captions:



|                               |  |                             |           |                           |   |           |  |      |           |  |   |          
|------------------------------ |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                               |  | Three months ended June 30, |           | Six months ended June 30,
|                               |  | 2006                        |           | 2005                      |   | 2006      |  | 2005
|General and administrative     |  | $                           | 2,310,210 |                           | $ | 1,161,564 |  | $    | 3,453,458 |  | $ | 1,851,174
|Research and development       |  |                             | 320,724   |                           |   | 76,250    |  |      | 589,466   |  |   | 152,500  
|                               |  |                             |           |                           |   |           |  |      |           |  |   |          
|Total stock-based compensation |  | $                           | 2,630,934 |                           | $ | 1,237,814 |  | $    | 4,042,924 |  | $ | 2,003,674
|                               |  |                             |           |                           |   |           |  |      |           |  |   |          

Prior to January 1, 2006, no stock-based compensation expense was recognized for stock
options granted to employees at not less than market prices on the dates of grant. The Companys net income and earnings per share for 2005 would have been reduced to the pro forma amounts shown below if compensation expense had been determined
based on the fair value at the grant dates in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure an amendment
of FASB Statement No. 123.



|                                                                                                                                            |  |                    |            |   |            |   |            |              |  |   |             |   |  |               |            |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------- | - | ---------- | ------------ |  | - | ----------- | - |  | ------------- | ---------- | - |  | - | ----------- | -
|                                                                                                                                            |  | 2005 Quarter Ended |            |   | Year Ended |  
|                                                                                                                                            |  | March 31           |            |   | June 30    |   |            | September 30 |  |   | December 31 |   |  | Dec. 31, 2005 |           
|Net loss applicable to common shareholders as reported                                                                                      |  | $                  | (2,258,481 | ) |            | $ | (7,927,196 | )            |  | $ | (2,457,047  | ) |  | $             | (1,966,333 | ) |  | $ | (14,609,057 | )
|Add: Stock based employee compensation expense included in reported net loss, under APB 25, net of tax                                      |  |                    |           |   |            |   |           |              |  |   |            |   |  |               |           |   |  |   |            |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                    | (176,928   | ) |            |   | (534,604   | )            |  |   | (405,883    | ) |  |               | (715,650   | ) |  |   | (1,833,065  | )
|                                                                                                                                            |  |                    |            |   |            |   |            |              |  |   |             |   |  |               |            |   |  |   |             |  
|Pro forma net loss                                                                                                                          |  | $                  | (2,435,409 | ) |            | $ | (8,461,800 | )            |  | $ | (2,862,930  | ) |  | $             | (2,681,983 | ) |  | $ | (16,442,122 | )
|                                                                                                                                            |  |                    |            |   |            |   |            |              |  |   |             |   |  |               |            |   |  |   |             |  
|Net loss per basic and diluted common share:                                                                                                |  |                    |            |   |            |   |            |              |  |   |             |   |  |               |            |   |  |   |             |  
|As reported                                                                                                                                 |  | $                  | (0.05      | ) |            | $ | (0.16      | )            |  | $ | (0.05       | ) |  | $             | (0.04      | ) |  | $ | (0.29       | )
|Pro forma                                                                                                                                   |  | $                  | (0.05      | ) |            | $ | (0.17      | )            |  | $ | (0.06       | ) |  | $             | (0.05      | ) |  | $ | (0.33       | )

Options granted to employees are valued by applying the fair value based method to stock-based
employee compensation in each period utilizing the Black-Scholes option pricing model, a generally accepted valuation model for determining the fair value of options. With respect to stock options granted during the



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three months and six months ended June 30, 2006 and 2005, the assumptions used in the Black-Scholes option-pricing model were as follows:



|                                  |  |                             |   |  |                           |   |  |             |   |  |             |  
|--------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ----------- | - |  | ----------- | -
|                                  |  | Three months ended June 30, |   |  | Six months ended June 30, |  
|                                  |  | 2006                        |   |  | 2005                      |   |  | 2006        |   |  | 2005        |  
|Risk-free interest rate           |  | 4.35  5.19                 | % |  | 2.80 - 4.25               | % |  | 4.35  5.19 | % |  | 2.80  4.25 | %
|Expected dividend yield           |  | 0.0                         | % |  | 0.0                       | % |  | 0.0         | % |  | 0.0         | %
|Volatility                        |  | 109 - 117                   | % |  | 115                       | % |  | 109  117   | % |  | 111  115   | %
|Expected exercise life (in years) |  | 6.0                         |   |  | 6.0                       |   |  | 6.0         |   |  | 0.25 - 6.0  |  

The risk-free interest rate is based on a yield curve of interest rates at the time of the grant
based on the contractual life of the option. Expected dividend yield is based on the Companys dividend history. Expected volatility is based on historical volatility for the Companys common stock. Expected exercise life is based on
management estimates of future attrition and early exercise rates, giving consideration to employee exercise behavior since filing of our S-8 registration statement for our Amended and Restated 2004 Long Term Incentive Plan on March 3, 2005.

During the three months and six months ended June 30, 2006 we granted to our employees 8,000 and 18,000 shares of common stock,
respectively, and options to purchase an aggregate of 311,500 and 339,000 shares of common stock, respectively. During the six months ended June 30, 2006, 250,000 options to purchase common stock were forfeited and 187,500 options to purchase
common stock were issued to a former employee in settlement of an employment arrangement. During the three months and six months ended June 30, 2005 we granted to our employees and directors options to purchase an aggregate of 125,000 and
307,000 shares of common stock, respectively. The activity for stock options and warrants during the six months ending June 30, 2006 is summarized as follows:



|                                |  |                                |   |  |                                 |       |                           |   |           
|------------------------------- |  | ------------------------------ | - |  | ------------------------------- | ----- | ------------------------- | - | ----------
|                                |  | Number of Options and Warrants |   |  | Weighted Average Exercise Price |       | Aggregate Intrinsic Value
|Outstanding at January 1, 2006: |  | 1,921,947                      |   |  | $                               | 9.38  |                           |   |           
|Granted                         |  | 27,500                         |   |  |                                 | 15.81 |                           |   |           
|Exercised                       |  | (28,500                        | ) |  |                                 | 4.32  |                           |   |           
|Expired or forfeited            |  |                               |   |  |                                 | 0.00  |                           |   |           
|                                |  |                                |   |  |                                 |       |                           |   |           
|Outstanding at March 31, 2006:  |  | 1,920,947                      |   |  | $                               | 9.55  |                           | $ | 15,072,390
|                                |  |                                |   |  |                                 |       |                           |   |           
|Granted                         |  | 311,500                        |   |  |                                 | 10.29 |                           |   |           
|Exercised                       |  | (15,500                        | ) |  |                                 | 4.60  |                           |   |           
|Expired or forfeited            |  | (56,000                        | ) |  |                                 | 18.25 |                           |   |           
|                                |  |                                |   |  |                                 |       |                           |   |           
|Outstanding at June 30, 2006:   |  | 2,160,947                      |   |  | $                               | 9.46  |                           | $ | 6,074,032 
|                                |  |                                |   |  |                                 |       |                           |   |           
|Exercisable at March 31, 2006:  |  | 1,159,064                      |   |  | $                               | 5.82  |                           | $ | 13,075,336
|                                |  |                                |   |  |                                 |       |                           |   |           
|Exercisable at June 30, 2006:   |  | 1,221,906                      |   |  | $                               | 6.35  |                           | $ | 5,499,607 
|                                |  |                                |   |  |                                 |       |                           |   |           

The total intrinsic value of options and warrants exercised in the three months and six months
ended June 30, 2006 was approximately $160,000 and $512,000 respectively. The cash received from exercises of options and warrants in the three months and six months ended June 30, 2006 was approximately $71,000 and $194,000, respectively.

The following tables summarize certain stock option and warrant information at June 30, 2006:

Outstanding Options and Warrants Fully Vested and/or Expected to Vest



|                        |  |           |  |                                   |  |                                 |       |                 |   |          
|----------------------- |  | --------- |  | --------------------------------- |  | ------------------------------- | ----- | --------------- | - | ---------
|Range of exercise price |  | Number    |  | Weighted average contractual life |  | Weighted average exercise price |       | Intrinsic value
|$3.00 - $5.10           |  | 1,022,000 |  | 6.28                              |  | $                               | 4.04  |                 | $ | 5,718,630
|$6.00 - $9.10           |  | 368,947   |  | 8.39                              |  |                                 | 8.68  |                 |   | 355,402  
|$12.05 - $17.20         |  | 559,000   |  | 9.36                              |  |                                 | 15.20 |                 |   |         
|$18.25 - $25.95         |  | 211,000   |  | 8.71                              |  |                                 | 21.90 |                 |   |         
|                        |  |           |  |                                   |  |                                 |       |                 |   |          
|Total                   |  | 2,160,947 |  | 7.68                              |  | $                               | 9.46  |                 | $ | 6,074,032
|                        |  |           |  |                                   |  |                                 |       |                 |   |          



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Outstanding Options and Warrants Fully Vested and Exercisable



|                        |  |           |  |                                   |  |                                 |       |                 |   |          
|----------------------- |  | --------- |  | --------------------------------- |  | ------------------------------- | ----- | --------------- | - | ---------
|Range of exercise price |  | Number    |  | Weighted average contractual life |  | Weighted average exercise price |       | Intrinsic value
|$3.00 - $5.10           |  | 955,334   |  | 6.15                              |  | $                               | 4.16  |                 | $ | 5,344,301
|$6.00 - $9.10           |  | 118,614   |  | 5.36                              |  |                                 | 8.33  |                 |   | 155,306  
|$12.05 - $17.20         |  | 56,875    |  | 9.26                              |  |                                 | 15.43 |                 |   |         
|$18.25 - $25.95         |  | 91,083    |  | 8.70                              |  |                                 | 21.07 |                 |   |         
|                        |  |           |  |                                   |  |                                 |       |                 |   |          
|Total                   |  | 1,221,906 |  | 6.41                              |  | $                               | 6.35  |                 | $ | 5,499,607
|                        |  |           |  |                                   |  |                                 |       |                 |   |          

The following table summarizes the non-vested stock options at June 30, 2006:

Non-Vested Option Grants



|                               |  |                   |   |  |                                               |      
|------------------------------ |  | ----------------- | - |  | --------------------------------------------- | -----
|                               |  | Number of Options |   |  | Weighted average per option fair market
value
|Non-vested at January 1, 2006: |  | 786,350           |   |  | $                                             | 13.13
|Granted                        |  | 27,500            |   |  |                                               | 13.50
|Vested                         |  | (51,967           | ) |  |                                               | 13.66
|Forfeited                      |  |                  |   |  |                                               | 0.00 
|                               |  |                   |   |  |                                               |      
|Non-vested at March 31, 2006:  |  | 761,883           |   |  | $                                             | 13.11
|                               |  |                   |   |  |                                               |      
|Granted                        |  | 311,500           |   |  |                                               | 8.87 
|Vested                         |  | (78,342           | ) |  |                                               | 11.79
|Forfeited                      |  | (56,000           | ) |  |                                               | 15.48
|                               |  |                   |   |  |                                               |      
|Non-vested at June 30, 2006:   |  | 939,041           |   |  | $                                             | 11.67
|                               |  |                   |   |  |                                               |      

The following table summarizes the non-vested stock awards at June 30, 2006:

Non-Vested Share Awards



|                                |  |                  |   |  |                                              |      
|------------------------------- |  | ---------------- | - |  | -------------------------------------------- | -----
|                                |  | Number of Shares |   |  | Weighted average per share fair market
value
|Outstanding at January 1, 2006: |  | 1,065,000        |   |  | $                                            | 4.54 
|Granted                         |  | 197,500          |   |  |                                              | 20.75
|Vested                          |  | (276,250         | ) |  |                                              | 4.16 
|Forfeited                       |  | (250,000         | ) |  |                                              | 3.15 
|                                |  |                  |   |  |                                              |      
|Outstanding at March 31, 2006:  |  | 736,250          |   |  | $                                            | 9.50 
|                                |  |                  |   |  |                                              |      
|Granted                         |  | 8,000            |   |  |                                              | 17.19
|Vested                          |  | (56,250          | ) |  |                                              | 21.00
|Forfeited                       |  |                 |   |  |                                              | 0.00 
|                                |  |                  |   |  |                                              |      
|Outstanding at June 30, 2006:   |  | 688,000          |   |  | $                                            | 8.65 
|                                |  |                  |   |  |                                              |      

As of June 30, 2006, there was $10,836,568 (pre-tax) and $4,088,199 (pre-tax) of unrecognized
compensation expense related to non-vested stock option and stock award grants, respectively. This expense is expected to be recognized over a weighted average period of 1.9 years. As of June 30, 2006, the following table summarizes the
unrecognized compensation expense expected to be recognized in future periods.



|                   |  |                                            |           
|------------------ |  | ------------------------------------------ | ----------
|                   |  | Stock-based compensation expense (pre-tax)
|Remainder of 2006: |  | $                                          | 5,250,726 
|2007               |  |                                            | 3,560,484 
|2008               |  |                                            | 2,445,026 
|2009               |  |                                            | 2,039,300 
|2010               |  |                                            | 1,559,223 
|2011               |  |                                            | 70,008    
|                   |  |                                            |           
|Total:             |  | $                                          | 14,924,767
|                   |  |                                            |           

D. Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock.

Series B Preferred Stock

In the third quarter of 2004 the Company sold 4,240.5 shares of Series B 7%, $.01 par value, convertible non-voting preferred stock (Series B
Preferred Stock) in exchange for net proceeds of



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approximately $3.9 million. As of both June 30, 2006 and December 31, 2005 there were no shares of Series B Preferred Stock outstanding. The
offering price was $1,000 per share.

On January 20, 2005, all outstanding shares of Series B Preferred Stock were converted into
common stock pursuant to the terms of the Certificate of Designation.

Dividends

The holders of the Series B Preferred Stock were entitled to cumulative dividends at the rate of 7% of the value of their investment per year, payable
quarterly in either cash or shares of the Companys common stock. The Company elected to pay all dividends in cash during 2005. The Companys dividend obligation ceased upon conversion of all outstanding Series B Preferred Stock shares on
January 20, 2005.

Warrants

Holders of shares of Series B Preferred Stock were granted cash-only exercise warrants equal to 25% of the common stock issued to them upon conversion of their shares of Series B Preferred Stock at an exercise price of $8.55 per share.
During 2005, 271,177 warrants were exercised by holders of Series B Preferred Stock, providing approximately $2.3 million in cash to the Company. As of June 30, 2006, there were warrants to purchase 31,714 and 32,233 shares of the
Companys common stock outstanding and available to the preferred shareholders and investment bankers, respectively, from the Series B Preferred Stock offering.

Convertibility

Each share of Series B Preferred Stock was convertible into such number of shares of
the Companys common stock determined by dividing the $1,000 price per share of the Series B Preferred Stock by $3.50.

During 2005
the remaining 1,133.5 Series B Preferred Stock shares were converted into 323,995 shares of the Companys common stock.

Series C Preferred Stock

In the second quarter of 2005 the Company sold 20,000 shares of Series C, $.01 par value, convertible preferred stock (Series C
Preferred Stock) in exchange for net proceeds of approximately $18.4 million. The offering price was $1,000 per share. All shares of Series C Preferred Stock were converted to common stock during 2005. As of December 31, 2005 there were
no shares outstanding.

Dividends

There were no dividends associated with the Series C Preferred Stock offering. In addition, the Company agreed that it would not pay any dividends out of any assets on any of its capital stock at any time prior to the maturity date for the
Series C Convertible Preferred Stock.

Warrants

In connection with the issuance of 20,000 shares of Series C Preferred Stock, the Company issued warrants exercisable into 166,666 shares of common stock at an exercise price of $24.00 per share. The fair value of the warrants, based on the
Black-Scholes option pricing model, was determined to be $1,381,595. After allocating this amount to the warrants, and after allocating $37,117 to the redemption feature embedded derivative, the beneficial conversion feature of the Series C
Preferred Stock was determined to be $4,249,992; resulting in a combined deemed dividend and beneficial conversion feature of $5,668,704. This amount was reflected as additional net loss to compute net loss applicable to common shareholders.



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The exercise price for the 166,666 outstanding warrants issued in connection with the Series C Preferred
Stock financing was also determined on the Mandatory Conversion Date to be $18.192 per warrant share. These warrants expired unexercised on August 2, 2005.

Convertibility

The shares of Series C Preferred Stock were convertible at the option of the holders into shares of common
stock, and were initially convertible into 833,332 shares of common stock at an initial conversion price of $24.00 per share, which was calculated at a 9% discount to the average closing price of the Companys common stock for the 10-trading
day period ending on March 31, 2005. A total of 3,568 shares of Series C Preferred Stock were converted at a conversion price of $24.00 per share into 148,666 common shares during the optional conversion period in the second quarter of 2005.

Pursuant to the Certificate of Designation of the Preferences, Rights and Limitations of the Series C Preferred Stock (the
Certificate of Designation), all of the outstanding shares of Series C Preferred Stock were automatically converted into shares of common stock on July 3, 2005 (the Mandatory Conversion Date). Pursuant to the Certificate
of Designation, the conversion price at which the outstanding shares of Series C Preferred Stock were converted into common stock on the Mandatory Conversion Date was equal to the average trading price of the Companys common stock during the
ten day trading period beginning on June 20, 2005 and ending on July 1, 2005 (the Reset Provision), which was $18.192 per share of common stock. Accordingly, 16,432 shares of Series C Preferred Stock were converted into 903,253
shares of our common stock on the Mandatory Conversion Date.

In accordance with the Share Contribution Agreement dated April 7, 2005
between the Company and Mr. Kraig T. Higginson, Executive Chairman of the Companys Board of Directors, 218,587 common shares were transferred by Mr. Higginson to the Company to offset the dilutive effects of the conversion of
shares of Series C Preferred Stock into shares of the Companys common stock on the Mandatory Conversion Date. Because the Company did not pay any amount for these shares and the shares were not transferred as payment for any services, the
transfer by Mr. Higginson was recorded as a reduction in the par value of the Companys common stock with an offsetting amount in additional paid-in capital. Therefore, there was no net effect on stockholders equity.

The Company granted registration rights for all of the shares of common stock underlying the Series C Preferred Stock. In accordance with the agreement
with the selling shareholders, the Company was required to timely obtain and maintain effectiveness of the registration statement, or pay the selling shareholders as liquidated damages an amount equal to 0.67 of one percent of the aggregate purchase
price of the Series C Preferred Stock for every 30 day period, or part thereof, in which the Company remained delinquent in meeting its registration obligations, with a maximum of 8% of the selling price of the Series C Preferred Stock. This
registration statement was filed on April 20, 2005 and was declared effective by the Securities and Exchange Commission on May 4, 2005.

Redemption Feature

The maximum number of shares to be issued by Raser under the Series C Preferred Stock offering was
limited to 2,833,332. Any remaining preferred shares, after conversion into a maximum amount of 2,833,332 common shares on the mandatory conversion date, would be redeemed at $1,000 per preferred share.

Embedded Conversion Feature

SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, requires certain instruments that are embedded in a host contract to be separately identified and accounted for as derivative instruments. The Company performed an
analysis of the embedded conversion feature and embedded redemption feature of the Series C Preferred Stock in accordance with SFAS No. 133 and determined that the



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redemption feature required separate accounting as an embedded derivative. The conversion feature was determined to be clearly and closely related to the
Series C Preferred Stock and, therefore, did not require separate accounting as a derivative in accordance with SFAS No. 133.

During
the year-end financial review process, the Company determined that the value of the redemption feature embedded derivative upon issuance of the Series C Preferred Stock on April 11, 2005 was $37,117. This amount was recorded as a derivative
liability and a corresponding discount to the Series C Preferred Stock. The discount to the Series C Preferred Stock was immediately accreted as a deemed dividend, resulting in a decrease to additional paid-in capital, since the Series C Preferred
Stock was immediately convertible and did not have a stated life. Upon the conversion of the Series C Preferred Stock to common stock, the fair value of the redemption feature embedded derivative was determined to be $0. Therefore, the change in the
value of the redemption feature embedded derivative of $37,117 was recorded as a gain in the consolidated statement of operations during the fourth quarter of 2005.

E. Short-Term Investments

On December 31, 2005, we held certain investments in marketable debt
securities as a means of temporarily investing the proceeds from financings until the funds are needed for operating purposes. These investments were being accounted for as available for sale securities under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. As a result, the investments are reflected at their fair value, based on quoted market prices, with unrealized gains
and losses less applicable deferred income taxes, recorded in accumulated other comprehensive income until the investments are sold, at which time the realized gains and losses are included in the results of operations.

All of the short-term investments were sold during the first quarter of 2006 resulting in a loss totaling $8,512. The interest yield on money market
funds averaged approximately 4.9% during the second quarter of 2006. At December 31, 2005 the estimated fair value of short-term securities was equal to the approximated cost. All income generated from short term investments was recorded as
interest income.

Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs,
avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality
issuers.

F. Note Receivable

During
the first six months of 2006, the Company and Amp Resources, LLC (Amp Resources) entered into promissory notes, (the Notes) pursuant to which the Company loaned approximately $5.5 million to Amp Resources. The entire unpaid
principal balance and accrued, but unpaid, interest under the Notes shall be due and payable upon the earlier to occur of March 1, 2007 or the achievement of certain other milestones involving certain geothermal power production projects of Amp
Resources (the Geothermal Projects), including but not limited to the sale or financing of certain of the Geothermal Projects or the sale or assignment of contracts covering certain of the Geothermal Projects. Payments of principal or
interest under the Notes are subordinate to certain obligations of Amp Resources.

The Notes will accrue interest at a rate of 10% per
annum, compounded annually, subject to adjustment. The principal and interest of the Notes may not be prepaid in whole or in part, without premium or penalty, without the prior written consent of the holders of two thirds of the equity interests of
Amp Resources. The principal and interest on the Notes is unsecured and the Notes are non-transferable and non-negotiable.

The Notes
include events of default that include non-payment of principal or interest when due and payable, certain bankruptcy events of Amp Resources and the issuance of certain writ or orders of attachment, levy or garnishment against or upon Amp Resources.



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##### Table of Contents

The Company recognized $113,177 and $124,865 of interest income on the Notes in the three months and six
months ended June 30, 2006, respectively. The Company recorded an interest receivable balance totaling $124,865 and $0 at June 30, 2006 and December 31, 2005, respectively.

G. Deferred Acquisition Costs

Costs incurred that
are directly related to the completion of a proposed acquisition are deferred on the balance sheet and capitalized as part of the purchase price if the transaction is completed. Such costs are expensed if the potential acquisition is no longer
considered viable by management.

Consistent with this policy, approximately $162,000 of acquisition costs that had been deferred in the
first quarter of 2006 in anticipation of the Amp Resources acquisition, were recognized as expense during the second quarter of 2006. In addition, approximately $645,000 of acquisition costs incurred in the current quarter were expensed in the
current quarter.

H. Commitments

The
Company has a contractual obligation to pay $750,000 in investment banking fees to JP Morgan Securities, Inc. upon closing of the acquisition transaction with Amp Resources.

During the second quarter of 2006, the Company entered into a lease obligation to double the square footage available in its Technology Development
Center. The Company has commitments under these leases that extend through August 31, 2011. Future minimum lease payments under non-cancelable operating leases as of December 31, 2005 were as follows:



|                         |  |                      |          
|------------------------ |  | -------------------- | ---------
|Year Ending December 31, |  | Minimum leasepayment
|2006                     |  | $                    | 117,460  
|2007                     |  |                      | 238,510  
|2008                     |  |                      | 244,154  
|2009                     |  |                      | 204,227  
|2010                     |  |                      | 176,235  
|2011                     |  |                      | 119,177  
|                         |  |                      |          
|Total minimum payments   |  | $                    | 1,099,763
|                         |  |                      |          

Total rent expense for the six months ended June 30, 2006 and 2005, was approximately
$104,000 and $55,000, respectively.

I. Supplemental Cash Information

We had no cash paid for interest expense and made no income tax payments in the six months ended June 30, 2006 and 2005 respectively.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Cautionary Statement Regarding Forward-Looking Statements

This section of our quarterly report
should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included elsewhere in this report. In addition to historical information, this quarterly report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our, and in some cases our customers or partners, future plans, objectives,
expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, without limitation, statements concerning the following:



| |  |  | our proposed transaction with Amp Resources, and the significant possibility that such transaction may not ultimately be completed;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the validity of Amp Resources purported termination of the acquisition agreement;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the outcome of ongoing discussion with Amp Resources regarding the proposed transaction and alternative transactions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------





| |  |  | our ability to place the Amp Resources projects in service in time to qualify for production tax credits, assuming the Amp Resources acquisition is ultimately completed;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to repay indebtedness that we assume as part of the Amp Resources transaction within 12 months following the closing, assuming the Amp Resources acquisition is
ultimately completed;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to collect contractual amounts owed to us by Amp Resources under our note receivable;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our ability to develop products and technologies acceptable to industry, establish and maintain relationships with licensees and other users of our technology and products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain capital to fund our operations, working capital needs and plans for growth, the working capital needs of Amp Resources should our transaction with Amp
Resources close, and any revised growth strategy we develop if our transaction with Amp Resources does not close;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to effectively develop a revised growth strategy should our transaction with Amp Resources fail to close;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our research and development expenses;
| | - |  | --------------------------------------



| |  |  | our initial customer sales contracts and other funding sources;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to manage our expected growth and to ensure the effectiveness of our internal controls;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our beliefs and those of third parties, including industry analysts, regarding the size, growth rates and potential of the commercial markets for our technologies and of related
markets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop, test and market commercial applications of our technologies;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to develop prototypes incorporating our technologies for our customers and potential customers;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | our beliefs regarding potential efficiency and other improvements offered by the commercial applications of our technologies; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to secure and defend patents.
| | - |  | -----------------------------------------

These
statements involve known and unknown risks, uncertainties and other factors that may cause events, industry trends or our actual results, level of activity, performance or achievements to be materially



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different from any future events, results, levels of activity, performance or achievements expressed or implied by these statements. These factors include
those set forth in the following discussion and under the caption Risk Factors in Part II, Item 1A of this quarterly report.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, levels of activity, performance or achievements. We will not update any of the forward-looking
statements after the date of this quarterly filing to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as
of the date of this quarterly report. You should carefully review the risk factors described in other documents that we file from time to time with the U.S. Securities and Exchange Commission, (SEC).

Our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and Form 10-Q, current reports on Form 8-K and amendments to all such reports are
available, free of charge, on our Internet website under Company-Investor Relations-SEC Filings, as soon as reasonably practicable after we file electronically such material with, or furnish it to, the SEC. Our Internet website address
is http://www.rasertech.com. Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.

Overview

We are a technology licensing company offering innovations in electromagnetic technology for both electricity-to-motion and motion-to-electricity
applications. We have developed several innovations in electric motors and controllers that allow for increased torque, power and efficiency, while controlling heat. We call our technology developments SymetronTMand label motors and controllers enhanced by the technology as SymetronTMenhanced motors and controllers. We have also applied our technologies to alternators and generators, where the efficiency of these motion-to-electricity
systems can be improved. We also intend to pursue acquisitions and development of companies and technologies that are complementary to our existing technologies.

We believe our technology can have an impact in several transportation, industrial and power generation markets. Targeted transportation markets including rapidly emerging hybrid-electric vehicles, all-electric
industrial traction, public transportation vehicles on wheels and rails, and recreational vehicle markets. Our first entries into transportation markets would likely be with alternator or integrated starter-alternator technologies. Early targets for
industrial market applications include heating, ventilation and air conditioning, (HVAC), fluid pumps and fan motors where our motor drive technology could have an impact.

Within the transportation market, we are pursuing opportunities in Alternators, Integrated Starter-Alternators, Industrial Traction Vehicles, Medium and
Heavy-Duty Trucks and Automotive Hybrid Electric Vehicle Propulsion Drive Systems.

The Alternator Market is a large commodity market for
mobile electric power. The consumer trend toward more comforts in transportation continues to manifest itself in sound systems, navigation systems, and other powered features that increase demand on the vehicles power infrastructure.
Approximately 6-8% of a vehicles fuel is used to power its electrical system. Greater efficiency from an alternator would provide more power while producing less drag on the engine. We are developing our designs to offer value in standard
alternators which comprise a large part of the market, and integrated starter-alternators (ISAs) for the growing mild-hybrid market. Cost and size are the main technical differentiators in the alternator market. We believe that our
SymetronTMtechnologies offer the possibility of smaller, less expensive alternators operating at higher efficiency
across the relevant RPM range as compared to current offerings.

The trend in the industrial vehicles market, which includes forklifts, is
moving toward all electric vehicles in order to reduce emissions indoors, and improve vehicle economy. In the electric forklift market,



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over the last few years, the inverter-driven AC induction motor has clearly been established as the technology of choice due to its durability and
operational economy. We believe that our high torque, high efficiency AC induction technology is ideally suited for this market. We believe that our motor and motor drive technologies can offer significant benefits in this traction drive
application.

In Medium and Heavy-Duty Trucks (ranging from small delivery trucks to 18-wheel big rigs), new government regulations,
particularly in the United States and Europe, are driving companies to invest heavily in research and development with the goal of developing more environmentally friendly electrically-driven equipment. Sales growth, particularly in the United
States in recent years, has been driven by new engines created to meet emissions regulations. For fleet owners, fuel represents a large and growing percentage of overall expenses, which has risen dramatically during the current year. In addition to
alternators and ISAs mentioned above, we are developing our P2 drive motor for potential integration into full Electric Vehicle propulsion systems including full and strong hybrid automotive vehicles.

Hybrid Electric Vehicles are becoming increasingly popular in the United States. With gas prices expected to remain high, many consumers are opting for
more fuel efficient cars such as hybrid vehicles. U.S. Government studies have shown that most consumers average less than 50 miles per day for their personal driving. We believe that our SymetronTMAC induction motor technologies can help to provide a solution in this market that includes a low cost, high mileage offering through a dual mode Plug-In
Hybrid Electric Vehicle, (PHEV). We are a founding member of the Plug-In Hybrid Development Consortium, which seeks to shorten the development cycle for new hybrid automobile offerings, thereby accelerating the commercialization of dual
mode PHEV technology.

In the industrial sector, Heating, Ventilating and Air Conditioning, (HVAC) is one of the largest
end-users of AC electric motors and variable frequency drives. Commercial HVAC motors fit our target profile of applications that require variable-speed electric motors and could benefit from an increase in efficiency. Competition in the HVAC
industry centers on price and efficiency. We believe that our work on the SymetronTMmotor drive technology under
the United States Department of Energy grant being administered through our partner Advanced Energy may afford us the opportunity to offer efficiency increases to existing motors in this industry.

In the Power Generation market segment, we agreed to acquire Amp Resources LLC in an acquisition agreement dated January 19, 2006. On June 16,
2006, Amp Resources delivered a termination notice of the acquisition agreement. We believe the contractual conditions for termination have not been met and are exploring our options and evaluating our rights with respect to the acquisition
agreement. The parties continue to discuss alternatives regarding the transaction contemplated by the acquisition agreement. The proposed acquisition and its purported termination involve risks and uncertainties that are more fully set forth under
the caption Risks Related to the Proposed Acquisition of Amp Resources and its Purported Termination under Risk Factors in Item 1A of Part II of this report.

The underlying trend in the markets discussed above is toward higher efficiency in motors, drive systems, alternators and generators; reduction in
emissions from fossil fuels; higher performance levels in terms of motor torque output; and economical operation of systems from initial acquisition through the life cycle of the product. We have identified other market opportunities, and we
evaluate the opportunity associated with such markets on an ongoing basis.

Risk Factors

An investment in our common stock involves a high degree of risk. Investors are encouraged to carefully consider the information under Risk
Factors set forth in Part II, Item 1A below before making an investment decision regarding our common stock.

Moreover,
investors should carefully consider that the public trading market for our common stock is limited and our common stock has historically experienced significant volatility and is likely to experience



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significant price and volume fluctuations in the future. The limited trading volume of our common stock has caused in the past, and is likely to cause in the
future, our stock price to fluctuate dramatically over short periods of time. For example, the closing price of our common stock has fluctuated from a low of $7.00 per share to a high of $22.51 per share during the six month period ending on
June 30, 2006. Price levels of our common stock, as with other technology companies in the past, may not bear any relation to our past or present operating results or our underlying intrinsic value. As a result, an investor cannot be assured
that our stock price will continue to trade at current levels, that the current levels reflect our intrinsic value or that our stock price will not decline in the future.

Sources of revenue

We expect to derive the large majority of our revenue from sales of
technology licenses and collection of royalty payments, although we have not yet commercially licensed our technologies. We are offering our technologies through our direct sales force as well as through selected sales agents familiar with rotating
electromagnetic technology and specific industries. We also derive revenue from research and development contracts with government agencies and other entities, in which we undertake engineering activities designed to demonstrate our technologies in
specific applications.

We anticipate that the majority of our revenue will be generated in the United States until our technologies have
been adopted and applied to specific applications. Subsequently, we intend to license our technologies to companies in Europe and Asia.

Licenses of our technology to potential customers will typically result from the entry of the potential customer into our Test Demonstration Program. Our Test Demonstration Program involves four phases described as follows: (1) Paper
Test  an initial indication of engineered value to the customer which is provided through our computer modeling capabilities. (2) Install Test  a customer specific demonstration of the SymetronTMadvanced motor technology into a motor of the customers choosing. (3) System Test  an application specific installation of our
technology into the customers product. (4) License  an agreement whereby the customer will acquire specified rights to manufacture or use the SymetronTMadvanced motor technology. Of the customers that have joined the program, most are in early stages of Phase 1 or Phase 2 development. As a result, we do not
have an established revenue stream and our revenues to date have not been significant. It is our intent to accelerate the progress of customers through the Test Demonstration Program during 2006. We believe that we will be delivering prototypes to
customers for installation tests during the remaining quarters of 2006.

Revenue recognition

Revenue is recognized when earned in accordance with applicable accounting standards and guidance, including Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, as amended. Revenue recognition is more fully discussed below in Critical Accounting Policies.

Losses
since inception and limited operating history

We have incurred significant costs to develop our technology and products, to recruit
and train personnel for our engineering, sales, marketing, professional services and administration departments, and to build and promote our brand, and we have not yet commercially licensed our technologies. As a result, we have incurred
significant losses since our inception and had an accumulated deficit of approximately $25.0 million on cumulative revenues of approximately $430,000 as of June 30, 2006.

Our limited operating history makes the prediction of future operating results difficult. We believe that period-to-period comparisons of operating
results should not be relied upon to predict future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in rapidly evolving
markets.



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Critical accounting policies

We consider the policies discussed below to be critical to an understanding of our financial statements. The application of these policies places significant demands on the judgment of our management and, when
reporting financial results, causes us to rely on estimates about the effects of matters that are inherently uncertain. We describe specific risks related to these critical accounting policies below. Regarding all of these policies, we caution that
future results rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Our critical accounting policies include the following:



| |  |  | Revenue recognition,
| | - |  | --------------------



| |  |  | Allowance for Uncollectible Accounts,
| | - |  | -------------------------------------



| |  |  | Valuation allowance against deferred income taxes,
| | - |  | --------------------------------------------------



| |  |  | Stock based compensation, and
| | - |  | -----------------------------



| |  |  | Business combinations.
| | - |  | ----------------------

Revenue Recognition. We
recognize revenue in accordance with SAB 104, as amended. Revenue recognition in accordance with SAB 104 can be complex. We intend to earn revenue through various sources. The primary sources of anticipated revenue are: fees for engineering
services, fees for the license of technology, and royalty fees.

Recognition of revenue related to engineering services will depend on
whether the revenue is contingent on deliverables by us in any way. If the fee is non-refundable, we have no specific milestones to meet, and there are no required performance criteria, we recognize the revenue as the cost is incurred to complete
the project on a percent of completion basis. If there are specific milestones that must be met before payment becomes due, we recognize the revenue at the completion of each milestone. Costs incurred to achieve the milestones are deferred until the
recognition of the related revenue unless such costs are determined not to be recoverable. If there are specific performance criteria, revenue is recognized when the customer agrees that the specific performance criteria have been met. Costs
incurred to achieve the performance criteria are deferred and recognized concurrent with the recognition of revenue unless they are determined to be unrecoverable. If the fee is entirely cost based, we recognize revenue as the cost is incurred to
complete the project.

Recognition of license fee revenue will occur when a signed agreement exists with the customer, the price is fixed
or determinable, we have delivered the license to the customer, collection of the license fee is reasonably assured, and we have no ongoing or future service obligation. If the license agreement requires us to provide services in connection with the
license over a period of time, the license fee revenue will be recognized ratably over the contractual period.

Recognition of royalty
revenue will occur as soon as the production quantity on which the payment is to be based is known. It is anticipated that some customers may report production on a lag of one month or more, resulting in revenue recognition lagging customer
production by the lag time.

Allowance for Uncollectible Accounts. Contractual rights to future payments associated with trade
accounts receivable and notes receivable are evaluated to determine the likelihood of collecting amounts due. The evaluation includes a review of available financial information related to the debtors ability to pay, historical payment
pattern, security positions, government regulations, most recent communications and an assessment of current economic conditions in determining the net realizable value of our receivables. We also review our allowance for uncollectible accounts in
aggregate for adequacy following this assessment. Any charges associated with a perceived collection risk of our note receivable with Amp Resources would be recognized as a reserve for uncollectible accounts and would be included in general and
administrative expense.

Specific attention is given in the second quarter to our outstanding note receivable in light of the proposed
acquisition of Amp Resources and its purported termination. We have carefully considered the value of the assets and technologies owned by Amp Resources, the status of the Amp Resources projects with



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respect to the January 1, 2008 placed in service deadline for production tax credits, the security position of our note with respect to other debtors of
Amp Resources and the recent cash position of Amp Resources. Our assessment as of the June 30, 2006 balance sheet date is that the note receivable and accrued interest will be collectible according to the terms of the note. Accordingly, we
believe that having no allowance for uncollectible accounts fairly represent the underlying collection risks associated with outstanding receivables.

Valuation Allowance Against Deferred Income Taxes. Deferred income tax assets and liabilities are recorded when there is a difference between the financial reporting and tax treatment of financial transactions.
We recorded a valuation allowance to offset the entire net deferred tax asset as of June 30, 2006 and December 31, 2005. The valuation allowance was recorded due to the losses incurred and the uncertainties regarding the future taxable
income and recoverability of such deferred tax assets. We will continue to evaluate the estimated recoverability of deferred tax assets.

Stock Based Compensation. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). Under the revised standard, companies may
no longer account for share-based compensation transactions, such as stock options, restricted stock, and potential payments under programs such as the Companys Amended and Restated 2004 Long-Term Incentive Plan using the intrinsic value
method as defined in APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Instead, companies are required to account for such equity transactions using an approach in which the fair value of an award is estimated
at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. However, compensation expense
already recognized is not adjusted if market conditions are not met, such for stock options which expire out-of-the-money, or options which expire unexercised. The new standard was adopted using the modified prospective method and
beginning with the first quarter of 2006, the Company reflects compensation expense in accordance with SFAS 123R transition provision. Under the modified prospective method, the effect of the standard is recognized in the period of adoption and in
future periods. Prior periods have not been restated to reflect the impact of adopting the new standard.

Stock options and warrants
granted to non-employees for services are accounted for in accordance with SFAS No. 123R which requires expense recognition based on the fair value of the options and warrants granted. We calculate the fair value of options and warrants granted
by using the Black-Scholes option pricing model.

We have issued shares of common stock as payment for services and have entered into
agreements to issue stock to certain employees over a specified vesting period. Stock issued for services, to both employees and non-employees, is valued based on the fair value on the date the commitment to issue the stock has occurred. Expense is
measured based on the value of the stock issued, or to be issued, and is recognized as the required time passes for the individual to earn the specified shares of stock.

Business Combinations. If the proposed acquisition of Amp Resources were to close, it would be accounted for using the purchase method of accounting. Consideration would include the common stock and cash paid
and the value of any options assumed, less any cash acquired, and would exclude contingent employee compensation payable in cash and any debt assumed. Costs incurred in the process of completing the acquisition would be deferred on the balance sheet
and capitalized if the transaction is completed.

Consistent with this policy, approximately $162,000 of acquisition costs were deferred in
the first quarter of 2006 in anticipation of the Amp Resources acquisition, and then subsequently expensed in the second quarter when the completion of the acquisition became less probable. Additional expense of approximately $645,000 were incurred
in the second quarter of 2006 in preparation for this acquisition, resulting in total acquisition related expense of approximately $807,000 in the second quarter.



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During the third quarter of 2005, approximately $987,000 in expense was recognized as a result of our
early discussions regarding an acquisition of Amp Resources, including a payment of $750,000 for investment banking fees to JP Morgan Securities, Inc.

Results of Operations.

During the quarter ended June 30, 2006, we focused on further development of our core
SymetronTMtechnologies and preparation for testing at customer locations. These efforts resulted in early stage
evaluation of our technologies and are expected to lead to licensing discussions in the coming months.

We continue to focus on three
primary markets: transportation, industrial motors, and power generation. A brief description of our efforts in each of these markets is included below.

Transportation Market

We began marketing of our SymetronTMenhanced alternator design to component manufacturers during the second quarter of 2006. We intend to expand the scope of our selling efforts during the third
quarter as we search for the appropriate industry entry point for licensing of our alternator technology. We have filed several patents during the second quarter to protect our intellectual property in this area.

Customer testing, (Phase II or Install Testing), of our P-50 ISA design is now scheduled for the third quarter of 2006. This ISA is designed for a
commercial automobile, and we believe it can be scaled up to suit truck and construction equipment sized applications.

We have begun work
on a larger ISA under our Cooperative Research and Development Agreement (CRADA) with the Army on the first task of a multi-year development proposal. Congress has added funds for follow-on tasks covering the development of an ISA for the Hummer and
larger military vehicle applications, although we have not yet been selected as a recipient of the additional funds. We are awaiting final contract action for current year funding.

Industrial Market

Our efforts to tailor our technology into a flexible modular (FLEXMODTM) controller design under a grant from the United States Department of Energy (DOE) as a subcontractor to our
partner in this effort, Advanced Energy, continued throughout the second quarter of 2006. The testing protocol for this contract calls for evaluation of FLEXMODTMon 5HP, 20HP and 50HP motors as compared to current industry state-of-the-art motor-controller combinations. Sample data from our initial testing illustrating the improvement from a
FLEXMODTMcontroller as compared to a premier high-performance industrial drive from ABB as a baseline reference
point are shown in the following chart.



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LOGO

Higher efficiency controllers are capable of causing an electric motor to perform a given amount of work while
consuming less energy, or to perform more work with a given energy input. This chart shows the capability improvement in terms of higher efficiency that was achieved with our FLEXMODTMcontroller.

We anticipate completion of
FLEXMODTMtesting under this contract during the third quarter of 2006. Upon completion, we will issue a test report
to Advanced Energy, and assist Washington State University in their evaluation of the potential impact of the FLEXMODTMtechnology.

Power Generation Market

On January 19, 2006, we entered into a definitive agreement (the Merger Agreement) to acquire Amp Resources, a private company with technologies focused on power generation. Under the terms of the
Merger Agreement, we agreed to acquire Amp Resources and its portfolio of technologies for heat transfer and renewable power generation. We also agreed to assume ownership of multiple, long-term geothermal energy sales contracts with public and
private utilities. Also under the Merger Agreement, Amp Resources equityholders were to receive up to 10 million shares of our common stock and approximately $38 million in cash. We would also assume Amp Resources liabilities and
approximately $50 million in debt that we intended to retire within 12 months of closing. Upon the close of the transaction, Amp Resources equityholders would own approximately 16% of our common stock on a fully diluted basis.

The Merger Agreement provides that either party may terminate the agreement if the proposed acquisition of Amp Resources has not closed by April 23,
2006 or, in the event that shareholder approval is required, May 31, 2006, except that the right to terminate the Merger Agreement is not available to a party whose action of failure to act has been a principal cause of or resulted in the
failure of the proposed acquisition of Amp Resources to occur on or before the end date and such action or failure to act constitutes a breach of the Merger Agreement. Amp Resources subsequently signed an agreement to extend this termination date to
June 15, 2006. On June 16, 2006, Amp Resources delivered a termination notice of the Merger Agreement. We believe the contractual conditions for termination have not been met and are exploring our options and evaluating our rights with
respect to the Merger. The parties continue to discuss alternatives regarding the transactions contemplated by the Merger Agreement.

The
proposed acquisition of Amp Resources and its purported termination involve other risks and uncertainties that are more fully set forth under the caption Risks Related to the Proposed Acquisition of Amp Resources and its Purported
Termination under Risk Factors in Item 1A of Part II of this report.



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Spending

For the quarter ended June 30, 2006, our recorded net loss was $5,028,646. During the second quarter of 2006, the monthly cash expenditure rate for operations increased to approximately $0.9 million per month, from a rate of
approximately $0.5 million per month in the second quarter of 2005, and increased from approximately $0.6 million per month in the first quarter of 2006. Compared to the first quarter of 2006, the increase is primarily due to higher legal costs
related to the proposed Amp Resources acquisition. Compared to the second quarter of 2005, the higher spending rate reflects both the proposed Amp Resources acquisition and increased employment levels.

As a company heavily involved in research and development and without an established revenue stream, we have made use of equity-based compensation in
several instances to conserve cash. The quarter ended June 30, 2006 included non-cash equity-based compensation expenses to employees of approximately $2.6 million. Of the equity-based employee compensation, approximately $1.6 million is
related to stock grants, and approximately $1.0 million is associated with the issuance of stock options to our employees. The quarter ending June 30, 2005 included non-cash equity-based compensation expenses to employees of approximately $1.1
million and non-cash equity-based compensation of approximately $0.1 million for contracted services.

Comparison of Periods Ended June 30, 2006
and 2005

Revenue

During the three
months and six months ending June 30, 2006, we recognized revenue of $34,409 and $68,145 respectively as a result of our contract with Advanced Energy. This contract allows for reimbursement of a percentage of our incurred costs, and is
accounted for on a percent completion basis. We recognized revenue totaling $148,961 for both the three months and six months ending June 30, 2005 from a combination of sources, including our contract with Advanced Energy, our Small Business
Innovative Research Grant with the U.S. Army, and various other contracts.

Operating expenses

Cost of sales. We reported cost of sales for the three months and six months ending June 30, 2006 of $208,547 and $264,131, respectively. We
reported cost of sales totaling $115,442 for both the three months and six months ending June 30, 2005. Cost of sales includes the labor, materials and overhead expenses required to perform the work on our contracts with Advanced Energy and the
U.S. Army.

General and administrative.General and administrative expenses include expenses related to our marketing, sales,
accounting, legal, investor relations, human resources and other administrative functions. Any expenses previously deferred as part of an anticipated business combination were expensed when the expected successful completion of the agreement was no
longer likely to occur. Approximately $0.8 million has been expensed in the second quarter of 2006 as a result of recent developments in the proposed Amp Resources acquisition. As we incur additional expense related to the proposed Amp Resources
acquisition, we will continue to expense them as incurred until the high likelihood of successfully completing the transaction would allow us to capitalize these expenditures.

General and administrative expense increased from approximately $2.1 million in the second quarter of 2005 to approximately $4.3 million in the second
quarter of 2006. The second quarter of 2006 included equity-based non-cash employee compensation expense of approximately $2.3 million compared to equity-based non-cash employee compensation expense of approximately $1.0 million in the year-ago
quarter. Equity-based non-cash service provider compensation decreased by approximately $0.1 million from the quarter ended June 30, 2005 to the current year period. Professional service expense also increased by approximately $1.0 million in
the second quarter of 2006 compared to the second quarter of 2005, primarily reflecting acquisition related expenditures that were expensed during the quarter.



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General and administrative expense increased from approximately $3.8 million in the first half of 2005 to
approximately $6.6 million in the first half of 2006. The first six months of 2006 included equity-based non-cash employee compensation expense of approximately $3.4 million compared to equity-based non-cash employee compensation expense of
approximately $1.4 million in the six months ending June 30, 2005. Equity-based non-cash service provider compensation decreased by approximately $0.5 million from the six months ended June 30, 2005 to the current year period. Other
employment related cost increased by approximately $0.1 million from the year-ago period reflecting higher salaries and employment levels. Professional service expense also increased by approximately $1.0 million in the six months ended
June 30, 2006 compared to prior year period.

Research and development. A significant portion of our expenditures are research
and development oriented. All research and development expenditures are being recognized and expensed in the period in which they occur. Total engineering expenses are split between cost of sales, and research and development based on the
engineering effort expended and the material expense incurred during the quarter.

Research and development expenses were approximately
$0.8 million in the second quarter of 2006, an increase of approximately $0.4 million from the second quarter of 2005. Engineering expenses in the second quarter of 2006 included equity-based non-cash compensation expense of approximately $0.3
million compared to approximately $0.1 million in the second quarter of 2005. Other employee related expenses increased by approximately $0.2 million compared to the prior year quarter, reflecting increased staffing and salary levels in our
engineering organization.

Research and Development expense increased from $1.0 million in the first half of 2005 to $1.7 million in the
first half of 2006. Equity based employee compensation increased by approximately $0.4 million from the six month period ended June 30, 2005 to the current year period reflecting the expensing of options and new equity grants to attract key
employees. Cash based employee compensation increased by approximately $0.4 million from the six month period ended June 30, 2005 to the current year period reflecting higher employment and salary levels. The portion of engineering expenses
that could be attributed to Cost of Sales was higher in the six months ended June 30, 2006 than the comparable 2005 period by approximately $0.1 million.

Interest and other income. Interest income remained flat at approximately $0.2 million in the second quarter of 2006 as compared to the second quarter of 2005. Interest income for the six months ended
June 30, 2006 increased approximately $0.2 million over the same prior year period reflecting the higher cash balances and higher commercial interest rates available. Interest income in the second quarter of 2006 includes approximately $0.1
million related to loans to Amp Resources.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through borrowings and sales of equity. In the second quarter of 2005, we issued 20,000 shares of
Series C preferred stock through a private offering for net proceeds of approximately $18.4 million. These shares of Series C preferred stock were subsequently converted into 1,051,919 shares of common stock.

As of June 30, 2006, we had approximately $8.2 million of cash and restricted cash. Our monthly expenditures, excluding the loans to AMP Resources, were
approximately $0.9 million during the second quarter of 2006. We anticipate generating additional revenues in the next 12 months, however there can be no assurance that we will be successful in securing contracts that will generate revenue. In
addition, there can be no assurance that we will be able to collect the loans provided to AMP Resources. If we are unable to generate additional revenue or collect the loans made to AMP Resources, we will be forced to raise additional capital or
reduce expenditures to continue as a going concern during the next 12 months. Raising additional capital could have a dilutive effect on existing shareholders. Reduction of expenditures could have a negative impact on our business as it may reduce
research and development of our products, sales and marketing activities, and other areas that we believe are essential to our ultimate success.

Operating Activities. Our operating activities consumed approximately $3.9 million and approximately $2.7 million of cash during the six months ended June 30, 2006 and 2005, respectively.

Cash consumed by operating activities in 2006 consisted primarily of a net loss of approximately $8.1 million, adjusted for approximately $4.0 million of
stock-based compensation and stock issued for services. Accrued liabilities decreased by approximately $0.7 million during the six months ended June 30, 2006, reflecting a withholding tax payment in connection with a net share grant to a former
employee of approximately $1.0 million that was incurred late in the first quarter of 2006 and subsequently paid in early April. Approximately $0.8 million in the six months ended 2006 was related to an unsuccessful acquisition, and consequently
reflected as an investing activity rather than an operating activity. Current assets increased by approximately $0.3 million in the first six months of 2006 reflecting an increase in prepaid insurance and interest receivable.



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Net cash consumed by operating activities in the first half of 2005 consisted primarily of a net loss of
approximately $4.6 million, adjusted for approximately $2.0 million of stock-based compensation, and stock and stock options issued for services. Current assets increased by approximately $0.3 million in the first six months of 2005 reflecting an
increase in prepaid insurance.

Investing Activities.We purchase investments in marketable debt securities as a means of
temporarily investing the proceeds from financings until the funds are needed for operating purposes. Due to the nature of these investments, we consider it reasonable to expect that their fair market values will not be significantly impacted by a
change in interest rates, and that they can be liquidated for cash at short notice. Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers
an appropriate yield in relationship to our investment guidelines and market conditions. Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality issuers.

Investing activities consumed approximately $6.0 million in the six months ended June 30, 2006, reflecting disbursements under a promissory note
receivable of approximately $5.5 million, offset by the sale of short-term investments of approximately $0.5 million. Approximately $0.8 million in the six months ended 2006 was related to an unsuccessful acquisition, and consequently reflected as
an investing activity rather than an operating activity. Additionally, we spent approximately $0.2 million on equipment and fees relating to filings for patents and trademarks.

Investing activities consumed approximately $21.5 million during the first six months of 2005. We purchased short term securities with the proceeds of
our Series C Convertible Preferred financing and other available cash during the first half of 2005 totaling approximately $20.8 million. We purchased a certificate of deposit to secure our employee credit card facility for approximately $0.4
million during the six months ended June 30, 2005. Capital expenditures totaled approximately $0.3 million in the first six months of 2005.

Financing Activities. Financing activities provided approximately $0.2 million and $21.7 million of cash in the six months ending June 30, 2006 and 2005, respectively. Financing activity in 2006 consisted of the exercise of
common stock options and warrants. Financing activity in 2005 consisted of approximately $18.4 million in net proceeds from our Series C Convertible Preferred financing, approximately $3.0 million from the exercise of common stock warrants and $0.4
million from the exercise of employee stock options.

As of June 30, 2006, we had stockholders equity of approximately $14.4
million and approximately $8.2 million in cash and restricted cash. While we believe that our current cash on hand, together with cash anticipated to be provided by customer sales, will be sufficient to satisfy our anticipated cash requirements for
normal operations and capital expenditures for the next 12 months, we will consider additional sources of equity or debt financing in order to:



| |  |  | Complete the announced acquisition of Amp Resources, or any alternative transaction and develop any assets or businesses acquired, although there is a substantial risk that the
acquisition will not be completed;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Execute on our growth strategy, including any revised growth strategy we adopt if the proposed acquisition of Amp Resources is not completed;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide flexibility in negotiating customer agreements;
| | - |  | -------------------------------------------------------



| |  |  | Expand our sales and marketing efforts;
| | - |  | ---------------------------------------



| |  |  | Accelerate the development of our technologies;
| | - |  | -----------------------------------------------



| |  |  | Enhance our intellectual property position;
| | - |  | -------------------------------------------



| |  |  | Consider strategic acquisitions and alliances;
| | - |  | ----------------------------------------------



| |  |  | Meet the capital requirements for national stock exchanges; and
| | - |  | ---------------------------------------------------------------



| |  |  | Develop more demonstration vehicles and other applications.
| | - |  | -----------------------------------------------------------



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To complete the acquisition of Amp Resources announced on January 19, 2006, we would have to provide
$38 million of cash at closing and assume approximately $50 million in debt. We are exploring several options for financing this transaction, or alternative transactions, including loans secured by power plant assets and equity financing. Amp
Resources has purported to terminate the acquisition and there is a substantial risk that it will not be completed.

Off-Balance Sheet Arrangements

As of June 30, 2006, we had no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of SEC Regulation S-K.

Contractual Obligations and Commitments

We have a contractual obligation to pay $750,000 in investment banking fees to JP Morgan Securities, Inc. upon closing of the acquisition transaction with Amp Resources.

As of June 30, 2006, we did not have any letters of credit, guarantees, or repurchase obligations.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

In addition to the risks inherent in its operations, we are exposed to financial, market, political and economic risks. The following discussion provides information regarding our exposure to the risks of changing interest rates.

We hold interest rate contracts for purposes other than trading. They are used primarily to safeguard Company cash and earn a market rate
of interest.

As of June 30, 2006 we had approximately $7.8 million in cash and equivalents that were invested primarily in money
market accounts until needed for operating and other activities. Current money market rates are approximately 5.2%. If interest rates decline by 1%, the amount of interest earned on our money market balances would be approximately $80,000 lower over
a twelve month period.

As of June 30, 2006 we had lent approximately $5.5 million in a note receivable to Amp Resources. This note is
at a fixed interest rate of 10% per annum, compounded annually. There is a possibility that Amp Resources will default on the loans and we could lose the entire amount invested, particularly if the Amp Resources acquisition is not completed.

We are exposed to credit loss in the event of nonperformance by counterparties on the above instruments. If the proposed Amp Resources
acquisition were completed, a portion or all of the Amp Resources promissory note could be offset as part of the purchase price.



|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Evaluation of disclosure controls
and procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.



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Based on that evaluation, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

In the second quarter of 2006, we hired a controller to formalize documentation of our financial processes and improve our segregation
of duties during the period covered by this Quarterly Report on Form 10-Q.

We are currently evaluating the impact on our internal controls
over financial reporting of the proposed acquisition of Amp Resources and any related transactions that may result from ongoing discussions with Amp Resources and other business alliance relationships that we may develop.

Pursuant to the Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission promulgated pursuant to that act, our management will be
required to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2006, and we are required to disclose managements assessment of the effectiveness of our internal control over financial reporting,
including any material weakness (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) in our internal control over financial reporting. If our management concludes that there
are one or more material weaknesses in our internal control over financial reporting, our management will not be permitted to conclude that our internal control over financial reporting is effective. It is possible that any control deficiencies
identified, either individually or in combination, might constitute significant deficiencies (within the meaning of PCAOB Auditing Standard No. 2) or material weaknesses in our internal control over financial reporting. As a result,
if we fail to adequately remediate such control deficiencies before December 31, 2006, and if management or our auditors conclude that they give rise to or otherwise constitute material weaknesses, our management will not be permitted to
conclude that our internal control over financial reporting is effective.



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PART II. OTHER INFORMATION



|Item 1A. | Risk Factors.
|-------- | -------------

SET FORTH BELOW AND ELSEWHERE IN
THIS QUARTERLY REPORT ON FORM 10-Q, AND IN OTHER DOCUMENTS WE FILE WITH THE SEC, ARE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS AND RESULTS TO DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS QUARTERLY REPORT. BECAUSE OF THE FOLLOWING FACTORS, AS WELL AS OTHER VARIABLES AFFECTING OUR OPERATING RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED A RELIABLE INDICATOR OF FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE
HISTORICAL TRENDS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.

Risks Related to the Proposed Acquisition of Amp Resources and its Purported
Termination

Amp Resources has purported to terminate the proposed acquisition, and there can be no assurance that the proposed acquisition or any
alternative transaction with Amp Resources will be consummated.

On January 19, 2006, we entered into an Agreement and Plan of
Acquisition with Amp Resources, (the Merger Agreement). Pursuant to the terms of the Merger Agreement, the completion of our acquisition of Amp Resources is subject to various closing conditions, including (i) the redemption of all
of the outstanding Series B-1 membership interests of Amp Resources, (ii) that we obtain funding from third parties in an amount sufficient to consummate the redemption of all of the outstanding Series B-1 membership interests of Amp Resources,
(iii) customary regulatory approvals and (iv) expiration of the applicable waiting period under the Hart-Scott-Rodino Act.

The
Merger Agreement (as amended by a Letter Agreement dated May 1, 2006) further provides that either party may terminate the agreement if the proposed acquisition of Amp Resources has not closed by June 15, 2006, except that the right to
terminate the Merger Agreement is not available to a party whose action or failure to act has been a principal cause of or resulted in the failure of the proposed acquisition of Amp Resources to occur on or before the end date and such action or
failure to act constitutes a breach of the Merger Agreement. Amp Resources delivered a termination notice of the Merger Agreement on June 15, 2006. We believe that the contractual conditions for termination have not been met, and we are
continuing to explore our options and evaluate our rights under the agreement. We are also continuing discussions with Amp Resources regarding the transactions contemplated by the Merger Agreement and alternative transactions. While we do not concur
with Amp Resources position that it had the right to terminate the Merger Agreement the resolution of that difference of opinion is uncertain.

There is a substantial risk that the proposed acquisition or any alternative transaction may not be consummated. We can give no assurances about the outcome of our ongoing discussions or the expected benefits of any
eventual arrangement with Amp Resources. We face the risks that we may be unable to resolve our differences with Amp Resources, and that the proposed acquisition of Amp Resources or any alternative transaction may not be consummated. Any failure to
resolve our differences with Amp Resources could cause us to become involved in litigation that would be costly and consume substantial management time. In particular, we may choose to take legal action against Amp Resources and other parties to the
Merger Agreement in an effort to enforce our rights thereunder. Litigation is by nature uncertain, and could produce negative results, including one or more successful counter claims by other parties, regardless of our views of the merits of our
position. Although we are continuing discussions with Amp Resources regarding the acquisition and alternative transactions, there can be no assurance that we will complete any transaction with Amp Resources, or that any transaction ultimately
completed will benefit us. In any such case, the substantial expenses and management time we have devoted to the proposed transactions and on-going talks with Amp Resources would have been a distraction from our business, we would not obtain any of
the anticipated benefits of the proposed transactions, and we may be unable to recover the loans we have made to Amp Resources when due or otherwise.



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If the Amp Resources acquisition or any alternative transaction is not completed, our stock price may
decline and our business could otherwise be materially adversely affected. In addition, we would need to reevaluate our growth strategy, and our stock price could decline further if we were unable to effectively formulate, communicate and execute on
a revised growth strategy. Until the situation regarding Amp Resources is resolved we will face substantial uncertainty, which may cause our stock price to continue to experience substantial volatility. Further, our business may be harmed to the
extent that potential customers, suppliers and others believe that we cannot effectively compete in the marketplace without consummating a transaction with Amp Resources.

You should read the following risk factors, which deal in large part with risks that would affect us in the event we acquire Amp Resources, in light of the substantial risk that such acquisition will not be
consummated.

Our proposed acquisition of Amp Resources or any alternative transaction, if completed, could be difficult to integrate, disrupt our
business, dilute stockholder value or divert management attention, which would have a material adverse impact on our business.

The
proposed Amp Resources acquisition or any alternative transaction, if ultimately completed, would result in significant expense to us and could disrupt our ongoing business and distract our management and employees. We might have difficulty
integrating the acquired technology, employees and operations in connection with the proposed Amp Resources acquisition or an alternative transaction. In addition, the key personnel of Amp Resources might decide not to work for us. The proposed Amp
Resources acquisition would also involve risks associated with the acquired business, including environmental hazards, such as discharges of hazardous substances and historic disposal activities. In order to operate Amp Resources as a successful
business we would need to:



| |  |  | obtain necessary power generation equipment, governmental permits and approvals, electrical transmission agreements, water supply and wastewater discharge agreements, site
agreements and construction contracts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | effectively operate geothermal power plants, which are subject to numerous operational risks, including breakdown or failure of power generation equipment, transmission lines, and
performance below expected levels of output or efficiency;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | attract and retain key personnel and third party firms to complete construction of the plants in a timely and cost effective manner; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into and maintain power purchase agreements on commercially reasonable terms and secure the performance by the power purchasers of their contractual obligations under these
contracts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of these risks, we may not be able to achieve the expected benefits of the Amp Resources acquisition
even if it is ultimately completed. There is substantial risk that it will not be completed. If we are unsuccessful in completing or integrating the Amp Resources acquisition, we would be required to reevaluate our growth strategy and we would have
incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the Amp Resources acquisition without obtaining any of the anticipated benefits.

The successful integration of Amp Resources would require, among other things, integration of Amp Resources operations, technologies, policies and
personnel with our business. Assuming we complete the transaction, we might not achieve successful integration in a timely manner, or at all, and we might not realize the anticipated benefits and synergies of the acquisition to the extent, or in the
timeframe, anticipated. We would also face challenges inherent in efficiently managing an increased number of employees and operations, including the need to develop appropriate systems, policies, benefits and compliance programs. The inability to
manage the increased size and complexity of any eventual combined company effectively could have a material adverse effect on our business after the acquisition, if completed.



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The Amp Resources acquisition, if completed, would involve the acquisition of significant tangible and
intangible assets. We currently record in our statements of operations ongoing amortization of intangible assets, and may need to recognize similar charges in connection with any eventual Amp Resources acquisition and possibly any future
acquisitions. In addition, we may need to record write-downs from future impairments of identified tangible and intangible assets and goodwill. These accounting charges would increase a reported loss, or reduce any future reported earnings. In
addition, we would require additional funds to consummate the Amp Resources acquisition or an alternative transaction, which may require us to incur debt or issue additional equity securities as consideration, which could cause our shareholders to
suffer significant dilution.

Assuming we complete the proposed Amp Resources acquisition, Amp Resources would require substantial additional capital to
support its operations and this capital may not be available on terms acceptable to us, if at all.

Each of Amp Resources
geothermal power production projects under development or construction will require substantial capital investment. If we do ultimately consummate the acquisition with Amp Resources or an alternative transaction, we may need to engage in equity or
debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could
have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential acquisitions. Any such debt may impair our ability to obtain future additional financing for working capital,
capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of cash flows, if any, from our operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to us for
other purposes and could make us more vulnerable to industry downturns and competitive pressures. In addition, we may not be able to obtain additional financing on terms favorable to us if at all. If we were unable to obtain adequate financing on
terms satisfactory to us, when we require it, our ability to support the business of Amp Resources and our ability to achieve the desired effects of the proposed merger with Amp Resources or any alternative transaction would be significantly
limited.

Assuming we complete the proposed Amp Resources acquisition or an alternative transaction, we may incur indebtedness in connection with such
transaction, which would likely result in the imposition of restrictions that would impair our ability to operate our business.

In
order to obtain sufficient funds to redeem all of the outstanding Series B-1 membership interests of Amp Resources as required pursuant to the Merger Agreement, or to meet operating or other requirements in connection with the acquisition or an
alternative transaction, we may incur a significant amount of debt, which could constrict our liquidity, result in substantial cash outflows, and adversely affect our financial health and ability to obtain financing in the future. This debt may
impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of cash flows, if any, from our operations may be dedicated to interest
payments and debt repayment, thereby reducing the funds available to us for other purposes and could make us more vulnerable to industry downturns and competitive pressures. Any failure by us to satisfy our obligations with respect to these
potential debt obligations would likely constitute a default under such credit facilities.

Assuming we complete the proposed Amp Resources acquisition
or an alternative transaction, we may sell equity securities to finance the redemption of certain outstanding Series B-1 membership interests of Amp Resources or to meet other liquidity needs, which would result in dilution to our existing
shareholders.

The Merger Agreement requires us to redeem of certain outstanding Series B-1 membership interests of Amp Resources. In
order to effect this redemption, or to meet operating or other requirements in connection with the acquisition or an alternative transaction, we would be required to raise additional capital,



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which may be accomplished through the issuance of additional equity securities. The issuance of additional shares of our equity securities would cause our
shareholders to experience significant dilution.

Assuming we complete the proposed Amp Resources acquisition, our ability to utilize the net operating
loss carry forwards acquired in connection with such acquisition may be limited.

The federal net operating loss carry forwards that
could be acquired through the Amp Resources acquisition, if completed, would be subject to limitations on how much may be utilized on an annual basis. The use of the net operating loss carry forwards may have additional limitations resulting from
certain future ownership changes or other factors under Section 382 of the Internal Revenue Code. If these net operating loss carry forwards were further limited, and we had taxable income which exceeded the available net operating loss carry
forwards for that period, we would incur an income tax liability even though net operating loss carry forwards may be available in future years prior to their expiration, and our future cash flow, financial position and financial results may be
negatively impacted.

Assuming we complete the proposed Amp Resources acquisition, we may not complete the construction of all four Amp Resources
geothermal resource projects in time to qualify for the tax credits provided for in the 2005 Energy Bill.

The Energy Bill of 2005
provided for production tax credits on new energy production from geothermal power plants that are placed in service prior to January 1, 2008. Recently introduced federal legislation has proposed to extend the placed in service deadline by up
to three years, but there is no guarantee that this legislation will pass, or if it passes, that the geothermal projects being acquired will qualify for the production tax credits. The acquisition agreement with Amp Resources includes
representations that all four of these plants can be constructed and placed in service by December of 2007. However, construction of power plants is an expensive and complicated activity, requiring the coordination of many contractors, securing of
government permits, the acquisition or development of transmission capacity and securing of land and water rights from both private landowners and government agencies. Assuming we complete the proposed Amp Resources acquisition, the failure to
complete the activities required to place the plants in service prior to January 1, 2008, would preclude us from obtaining the Energy Bill tax credits, which would likely have a negative impact on our financial results and a material adverse
effect on our business. The financial implications of failing to meet the Energy Bill deadline, or the perception that such deadline will not be met, could cause the trading price of our common stock to decline.

If we complete the proposed acquisition of Amp Resources, our business would be more complex, putting strains on management, and potentially requiring management
changes for us to be successful.

If we consummated the acquisition of Amp Resources, upon completion of such acquisition and throughout
an intense construction period, the management issues encountered would be more complex and might require us to make management changes including hiring additional people, and replacing some key positions. The same may be true in the event that we
complete an alternative transaction with Amp Resources. The occurrence of key personnel changes or the perception that key personnel will be added or replaced could have a negative effect on our financial results and the trading price of our common
stock.

Risks Related to our Business and Ownership of our Common Stock

We have limited operating experience and revenue, are not currently profitable, expect to continue to incur net losses in the near future, and may never achieve or maintain profitability. If we cannot achieve and
maintain profitability, our stock price is likely to decline.

We are a technology licensing company with a limited operating history,
and from our inception, we have had very limited revenue from operations. We have not yet commercially licensed our technologies. Our early stage of development means that there is limited historical information available upon which you can base
your evaluation of our business and prospects, and that we have limited insight into how market and technology trends may affect our business. The revenue and income potential of our business is unproven and



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the markets we seek to address are very competitive and rapidly evolving. You should consider and evaluate our business and prospects in light of the risks,
expenses, challenges and uncertainty that we face as an early stage company seeking to develop new technology and products in a competitive and rapidly evolving market.

Since our inception, we have incurred significant net losses, including a net loss of approximately $8.0 million for the six months ended June 30, 2006. As a result of ongoing operating losses, we had an
accumulated deficit of approximately $25.0 million on cumulative revenues of approximately $430,000 as of June 30, 2006. Our losses have resulted principally from limited revenue and the research and development and general and administrative
expenses associated with our operations. We expect to incur additional losses for the next several quarters. We cannot assure an investor that we will be able to successfully develop new technology or products, or if developed, that this technology
or any products will be commercially viable. We expect to incur substantial additional operating losses as a result of increases in expenses for research and product development, manufacturing, and selling, general and administrative costs. In
addition, we continue to incur significant expenses to comply with our obligations as a public company. We may never achieve profitability. We are likely to need additional funding for our operations and we cannot assure you that it will be
available on commercially reasonable terms, or at all. Our ability to achieve profitability will depend upon many factors, including our ability to:



| |  |  | develop commercially viable technology by designing and engineering the SymetronTMmotor, controller, alternator, integrated starter alternator and generator technologies for license on a commercial scale;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | convince our potential customers of the benefits of our technology or products, if any;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establish relationships with motor and power generator manufacturers, automobile manufacturers, producers of electricity and other forms of power, the military, government, and
other systems integrators for the license or sale of our technology or products, if any;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | avoid infringing and successfully defend any allegations of infringing the intellectual property rights of others;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | defend our intellectual property from infringement by others;
| | - |  | -------------------------------------------------------------



| |  |  | comply with applicable governmental regulations; and
| | - |  | ----------------------------------------------------



| |  |  | hire, train and retain qualified personnel.
| | - |  | -------------------------------------------

We may be unable to
successfully license our intellectual property. If we cannot successfully license our intellectual property, we will not be able to generate revenues, our stock price will decline and we may be unable to continue operating.

Our current long-term business strategy is based almost entirely upon the licensing of our intellectual property, specifically SymetronTM, to electric motor, controller, alternator and generator manufacturers, suppliers and system integrators. We expect the sales
cycle with respect to the license of our technology to be lengthy and there can be no assurance that we will achieve license sales in the time frames that we expect. If we are unable to successfully license our intellectual property or technology to
these businesses or others, we will be unable to generate revenues under our current business model, our stock price would likely decline, and we may be unable to continue operating or would be required to develop a new long-term business strategy.

We are currently focusing on commercialization of our technologies in the transportation, industrial and power generation markets. We
cannot predict the rate at which market acceptance of our technologies will develop in these markets, if at all. Additionally, we may focus our product commercialization activities on a particular industry or industries, which may not develop as
rapidly as other industries, if at all. The



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commercialization of our products or the licensing of our intellectual property in an industry or industries that are not developing as rapidly as other
industries could harm our business, prospects, financial condition and results of operations.

We are likely to need to raise additional capital in the
future and if we are unable to secure adequate funds on terms acceptable to us, we will be unable to support our business requirements, build our business or, potentially, continue as a going concern.

As of June 30, 2006, we had approximately $8.2 million of cash and restricted cash. Our monthly expenditures, excluding loans to Amp Resources, were
approximately $0.9 million during the second quarter of 2006. We anticipate generating additional revenues in the next 12 months, however there can be no assurance that we will be successful in securing contracts that will generate revenue. There is
a possibility that Amp Resources will default on our loans to it and we could lose the entire amount invested, particularly if the Amp Resources acquisition is not completed. The outstanding balance of our loans to Amp Resources was approximately
$5.5 million at June 30, 2006. If we are unable to generate additional revenue or collect loans made to Amp Resources, we will be forced to raise additional capital or reduce expenditures to continue as a going concern during the next 12 months.
Raising additional capital could have a dilutive effect on or otherwise affect existing shareholders, as described in more detail below. Reduction of expenditures could have a negative impact on our business as it may reduce research and development
of our products, sales and marketing activities, and other areas that we believe are essential to our ultimate success.

The amount and
timing of our future capital needs depend on many factors, including the timing of our development efforts, opportunities for strategic transactions and the successful commercial licensing of our technologies. Regardless of the more immediate
factors discussed above, we will likely need to raise additional capital to further develop and market our technologies and continue our operations. For example, we would need to raise additional capital to complete our potential acquisition of Amp
Resources, and we might need to raise capital to complete any alternative transaction.

If we raise additional capital through the issuance
of equity or securities convertible into equity, our shareholders may experience dilution. Those securities may have rights, preferences or privileges senior to those of the holders of the common stock. For example, in our September 2004 financing,
we issued Series B Convertible preferred stock which included a 7% dividend and anti-dilution protection to account for certain future dilutive issuances, if any. In addition, in our recent financing, we issued Series C Convertible preferred stock
which included anti-dilution protection to account for certain future dilutive issuances, if any. In addition, the Series C Convertible preferred stock issued in our recent financing was converted into 1,051,919 shares of common stock.

If we raise additional capital by incurring indebtedness, this could constrict our liquidity, result in substantial cash outflows, and adversely
affect our financial health and ability to obtain financing in the future. Any such debt may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a
substantial portion of cash flows, if any, from our operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to us for other purposes and could make us more vulnerable to industry downturns and
competitive pressures. Any failure by us to satisfy our obligations with respect to these potential debt obligations would likely constitute a default under such credit facilities.

Additional financing may not be available to us on favorable terms, if at all. If we are unable to obtain financing, or to obtain it on acceptable terms,
we may be unable to successfully support our business requirements, build our business or continue as a going concern.

We may enter into strategic
transactions that result in significant cost and expense, but do not produce additional revenues.

Our success depends on our ability to
execute our business strategy of licensing our intellectual property to electric motor and controller manufacturers, suppliers and system integrators. Our strategy of licensing our intellectual property or technology may involve entering into
strategic transactions. In executing these strategic transactions, we may expend significant financial and management resources and incur other significant costs and expenses. There is no assurance that the execution of these strategic transactions
will result in additional revenues. Any failure to enter into strategic transactions that lead to additional revenues could harm our business, prospects, financial condition and results of operations.

We may pursue strategic acquisitions that could have an adverse impact on our business if unsuccessful.

In addition to our proposed acquisition of Amp Resources, we may pursue the acquisition of new or complementary business or technologies. Acquisitions
could result in difficulties assimilating acquired operations and products, and result in the diversion of capital and managements attention away from other business issues and opportunities. Integration of acquired companies may result in
problems related to integration of technology and management teams. We may not successfully integrate acquisitions, personnel or products that we may acquire in the future. If we fail to successfully integrate acquisitions, our business could be
materially harmed. Furthermore, acquisitions of new or complementary businesses or technologies could also result in changes to our business or operating model, which may be difficult to execute. In addition, any acquisitions may not be successful
in achieving our desired strategic objectives, which would also cause our business to suffer. For example, Amp Resources has purported to terminate our proposed acquisition, and there is a substantial risk that this proposed acquisition will not be
completed. Acquisitions can also lead to large non-cash charges that can have an adverse effect on our results of operations as a result of write-offs for items such as acquired in-process research and development, impairment of goodwill or the
recording of deferred stock-based compensation.

We may issue company stock as consideration for acquisitions, joint ventures or other
strategic transactions, and the use of common stock as purchase consideration will dilute each of our current stockholders interest. In addition, we may obtain debt financing in connection with an acquisition. Any such debt financing could
involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential
acquisitions. In addition, such debt financing may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of cash flows, if
any, from our operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to us for other purposes and could make us more vulnerable to industry downturns and competitive pressures.

We may be unable to successfully obtain research and development funding opportunities from military and government programs.

A substantial portion of our revenue to date has come from two government sponsored development contracts. Our Small Business Innovative Research (SBIR)
grant was concluded in the second quarter of 2005 resulting in approximately $70,000 of revenue in 2005. Our FLEXMODTM technology packaging contract with Advanced Energy is funded by the Department of Energy, through the State Technologies
Advancement Collaborative (STAC) has provided approximately $305,000 in revenue throughout 2005 and 2006.



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Our near term strategy includes research and development funding opportunities from military and
government programs. If we cannot successfully obtain research and development funding opportunities from military and government programs, or meet deadlines imposed under those programs, we may have less funding which could make it more difficult
to sustain our long term licensing strategy, our stock price could decline and we may be unable to continue operating or would be required to develop a new near-term business strategy.



The market price for our common stock has experienced significant price and volume volatility in
recent periods and is likely to continue to experience significant volatility in the future. Such volatility may cause investors to experience dramatic declines in our stock price from time to time, may impair our ability to raise additional capital
and may otherwise harm our business.

The closing price of our common stock has fluctuated from a low of $7.00 per share to a high of
$22.51 per share during the six month period ending on June 30, 2006. Our stock price has in the past and is likely in the future to experience significant volatility as a result of numerous factors, many of which are outside of our control,
including, but not limited to the following:



| |  |  | developments regarding our potential acquisition of Amp Resources, its purported termination, or our ongoing discussions with Amp Resources;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | changes in market valuations or earnings of our competitors or other technology companies;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | changes in market perception of our potential earnings, prospects or value;
| | - |  | ---------------------------------------------------------------------------



| |  |  | actual or perceived developments in our business or in the markets we seek to address;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | fluctuations in our operating results;
| | - |  | --------------------------------------



| |  |  | changes in financial estimates or investment recommendations by securities analysts who follow our business;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | technological advances or introduction of new products by us or our competitors;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the degree of market acceptance of our technology and our ability to license such technology at rates favorable to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the loss of key personnel;
| | - |  | --------------------------



| |  |  | the high costs associated with transfer and relocation of new personnel;
| | - |  | ------------------------------------------------------------------------



| |  |  | our sale of common stock or other securities in the future;
| | - |  | -----------------------------------------------------------



| |  |  | additional dilution that could result from adopted employee compensation plans of acquired companies;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | public announcements regarding material developments in our business, including acquisitions or other strategic transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | public announcements regarding material transactions or other developments involving our strategic partners, customers or competitors that are perceived by the market to affect our
business prospects;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | intellectual property or litigation developments;
| | - |  | -------------------------------------------------



| |  |  | changes in business or regulatory conditions;
| | - |  | ---------------------------------------------



| |  |  | trading patterns of holders of our common stock;
| | - |  | ------------------------------------------------



| |  |  | the trading volume of our common stock;
| | - |  | ---------------------------------------



| |  |  | short-selling and similar activities with respect to our common stock; and
| | - |  | --------------------------------------------------------------------------



| |  |  | disruption in the geopolitical environment, including war in the Middle East or elsewhere or acts of terrorism in the United States or elsewhere.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Moreover, the volatility in our stock price has been exacerbated by having relatively limited trading volume, which can cause significant price movements
in our stock price to result from even modest volumes of trading activity. As such, we cannot assure you that our stock price will continue to trade at current price levels in the future or that recent price levels reflect our intrinsic value. In
addition, following periods of volatility in the market price of a companys securities, a company can face increased risk that securities litigation or governmental investigations or enforcement proceedings may be instituted against it. Any
such litigation, and investigation or other procedures, regardless of merits, could materially harm our business and cause our stock price to decline due to potential diversion of management attention and harm to our business reputation. As a
result, before making an investment decision regarding our common stock, investors are urged to consider carefully the risks associated with investing in a stock like ours that has experienced recent price and volume volatility and is likely to
continue to experience significant such volatility in the future.

The listing of our shares of common stock on NYSE Arca may result in increased
trading volume volatility with respect to our common stock, which may cause a decrease in our stock price.

For most of the 2005 fiscal
year, our common stock traded on the Over the Counter Bulletin Board. On November 3, 2005, shares of our common stock began trading on ArcaEx, under the ticker symbol of



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RZ. Prior to the listing of our common stock on ArcaEx, there had been a limited public market for our common stock. On March 7, the NYSE
Group, Inc., a for-profit, publicly-owned company, was formed out of the merger of the New York Stock Exchange and Archipelago Holdings, Inc.The listing of our common stock on NYSE Arca may result in increased trading volume volatility with respect
to our shares of common stock. Increased trading volume volatility with respect to our shares of common stock may cause greater volatility in our stock price, which may result in a lower market price for our common stock. In the past, following
periods of volatility in the market price of a public companys securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of managements
attention and resources.

If we fail to comply with NYSE Arca listing standards and maintain our listing on NYSE Arca, our business could be materially
harmed and our stock price could decline.

In October of 2005 we received approval to list shares of our common stock on ArcaEx and on
November 3, 2005, shares of our common stock began trading on ArcaEx. On March 7, 2006, the NYSE Group, Inc., a for-profit, publicly-owned company, was formed out of the merger of the New York Stock Exchange and Archipelago Holdings, Inc.
Pursuant to the Sarbanes-Oxley Act of 2002, national securities exchanges, including NYSE Arca, have adopted more stringent listing requirements. Even though we have been approved to list shares of common stock on NYSE Arca, we cannot assure you
that we will be able to maintain our compliance with all of the listing standards of the NYSE Group, or that we will be able to maintain our listing with NYSE Arca as a member of the NYSE Group. Any failure by us to maintain our listing on NYSE Arca
could materially harm our business, cause our stock price to decline, and make it more difficult for you to sell your shares.

We do not have an active,
liquid trading market for our common stock and you may have difficulty selling your shares.

Our common stock has for much of our
history been treated as a penny stock as that term is defined in SEC Rule 3a51-1. Section 15(g) of the Exchange Act and Rule 15g-2 of the Securities and Exchange Commission require brokers and dealers effecting transactions in any
penny stock for or with the account of a customer to provide the customer with a document disclosing the risks of investing in penny stocks and to obtain a manually signed and dated written receipt of the document before making any transaction in a
penny stock for the customers account.

In addition, SEC Rule 15g-9 prohibits brokers and dealers from selling penny stocks or
effecting the purchase of penny stocks unless the broker or dealer has approved the investors account for transactions in penny stocks by obtaining, among other things, information concerning the investors financial situation, investment
experience and investment objectives and making a determination as to whether transactions in penny stocks are suitable for the investor in accordance with SEC rules and regulations.

In the past, compliance with these requirements have made it difficult to establish an active, liquid trading market in our common stock, and you may
have difficulty selling your shares. Historically, the public market for our common stock has been very limited. For example, the average reported volume of trading in our common stock over the January through June 2006 period was approximately
68,000 shares per day.

For most of the 2005 fiscal year, our common stock traded on the Over the Counter Bulletin Board (OTC:BB). In
October of 2005 we received approval to list shares of our common stock on ArcaEx, and on November 3, 2005 shares of our common stock began trading on that exchange under the ticker symbol of RZ. On March 7, 2006, the NYSE Group, Inc., a
for-profit, publicly-owned company, was formed out of the merger of the New York Stock Exchange and Archipelago Holdings, Inc. We cannot predict that an active, liquid trading market will develop or that the market will be able to sustain
transactions by larger institutional investors. Accordingly, investors may have difficulty accumulating a significant position in our stock or in selling a substantial number of shares in a short period of time.



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If we are unable to effectively and efficiently maintain our controls and procedures to avoid deficiencies, there
could be a material adverse effect on our operations or financial results.

As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These requirements may place a strain on our systems and resources. The Securities Exchange Act requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Pursuant to the
Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission promulgated pursuant to that Act, our management will be required to evaluate the effectiveness of our internal control over financial reporting as of December 31,
2006, and we are required to disclose managements assessment of the effectiveness of our internal control over financial reporting, including any material weakness (within the meaning of Public Company Accounting oversight Board
(PCAOB) Auditing Standard No. 2) in our internal control over financial reporting. We are currently reviewing and further documenting our internal control procedures. In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required.

In connection with the audit of our 2004 financial statements, our management and Audit Committee were notified by our independent accountants, Tanner LC, of deficiencies that existed in the design or operation of our internal control over
financial reporting that it considered to be material weaknesses. The deficiencies related to internal control and disclosure control over stock-based compensation, reporting of equity transactions and certain disclosures in the
footnotes to the consolidated financial statements. The deficiency in our internal control over stock-based compensation and equity transactions related to the failure to properly record issuances of stock, the failure to timely report certain
transactions on Forms 3, 4, or 5, and the failure to properly itemize equity transactions in the statement of stockholders equity. The deficiency in our disclosure controls was related to the stock option disclosures required by Statement of
Financial Accounting Standards (SFAS) No. 148.

The deficiencies were detected in the audit process and were appropriately recorded
and disclosed in our annual report on Form 10-KSB for 2004. We have taken several steps during 2005 to remedy, and subsequently in 2005 and 2006 to improve, our disclosure controls and our internal controls over financial reporting, however we
cannot assure you that the revised controls and procedures will be effective in remedying all of the identified deficiencies. If we fail to adequately address these deficiencies, it could have a material adverse effect on our business, results of
operations and financial condition. Ultimately, if not corrected, any deficiencies could prevent us from releasing our financial information and Securities and Exchange reports in a timely manner, making the required certifications regarding, and
complying with our other obligations with respect to, our consolidated financial statements and internal controls under the Sarbanes-Oxley Act. Any failure to maintain the adequacy of our internal control over financial reporting and provide
accurate financial statements may subject us to litigation and would cause the trading price of our common stock to decrease substantially. Inferior controls and procedures could also subject us to a risk of delisting by a national exchange and
cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Our major shareholder and Executive Chairman of the Board of Directors, Kraig T. Higginson, has in the past used his personal ownership of shares in the Company to benefit the Company without compensation.

Mr. Higginson has in the past provided some of his beneficially owned shares to employees of the Company in lieu of direct employment arrangements
between the Company and the employee. He also pledged his personal holdings in a Share Contribution Agreement in connection with the Companys Series C Preferred Stock offering in April 2005. Mr. Higginson is under no obligation to pledge
his personal ownership position for the benefit of the Company in the future. The cessation of his actions to support Company initiatives with his personal holdings or the perception that this cessation could occur might have a negative effect on
the financial performance of the Company and consequently on the trading price of our common stock.



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We are deploying new technology and, to date, we have not yet commercially licensed our technologies and we may not be
able to successfully develop other technologies.

Our SymetronTMtechnologies are new and commercially unproven. We are still in the early stages of commercializing our technology in automotive, industrial and power
generation applications. While we have completed some laboratory testing, our technologies have not yet been durability tested for long-term applications and we can provide no assurance that they will prove suitable for our target market segments.
Our potential product applications require significant and lengthy product development efforts, and to date, we have not developed any commercially available products. During our product development process, we may experience technological issues
that we may be unable to overcome. Because of these uncertainties, none of our potential technology may be commercially licensed. If we are not able to successfully license our technology, we will be unable to generate revenue or build a sustainable
or profitable business.

We will need to achieve commercial acceptance of our technology to obtain licensing revenue and achieve profitability.

Even if our technology is a technical success, we may not successfully develop licensing arrangements with potential customers or
commercially viable products on a timely basis, if at all. It may be years before our technology is proven viable for our target market segments, if at all, and even longer before we have licensing arrangements in place. Superior competitive
technologies may be introduced or potential customer needs may change resulting in our technology or products being unsuitable for commercialization. Our revenue growth and achievement of profitability will depend substantially on our ability to
introduce new technology into the marketplace that we are able to successfully commercialize. We may need to incur additional expense to add to our sales force, engage sales agents or incur other selling expenses to license our technologies or sell
our products. If we are unable to cost effectively achieve commercial acceptance of our technology, our business will be materially and adversely affected. Even if our potential technology achieves commercial acceptance, the size of the potential
markets for our technology may prove to be insufficient to permit us to generate significant revenue or achieve profitability.

Technological advances
in our industry could render our technology and products obsolete, which would harm our business.

Our failure to further refine our
technology and develop and introduce new products could cause our technology to become obsolete, which would harm our business. Our industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and
development to keep pace with technological advances in the industry and to effectively compete in the future. Our development efforts may be rendered obsolete by the technological advances of others and other technologies may prove more
advantageous than our technology, including advances developed internally by our potential customers and partners.

We face competition from companies
in multiple industries, as well as from the internal efforts of potential partners and, if we fail to compete effectively, our business would suffer.

The market for electric motors, alternators, ISAs and motor controllers is intensely competitive. We believe our potential technology will face significant competition from existing manufacturers in our current target
markets, including motor, controller, alternator, generator and transportation vehicle manufacturers. We may also face significant competition from our future partners. If our potential partners improve or develop technology that competes directly
with our technology, our business would be harmed. We also face numerous challenges associated with overcoming the following:



| |  |  | Our competitors, as well as our potential partners, may have access to substantially greater financial, engineering, manufacturing and other resources than we do, which may enable
them to react more effectively to new market opportunities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Many of our competitors and potential partners have greater name recognition and market presence than we do, which may allow them to market themselves more effectively to new
customers or partners.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our potential partners may have better access to information regarding their own manufacturing processes, which may enable them to develop products that can be more easily
incorporated into the partners products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We rely on key personnel and the loss of key personnel or the inability to attract, train,
and retain key personnel could have a negative effect on our business.

We believe our future success will depend to a significant
extent on the continued service of our executive officers and other key personnel. Of particular importance to our continued operations are our executive management and technical staff. We do not have key person life insurance for any of our other
executive officers, technical staff or other employees. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decide to join a competitor or otherwise compete directly or indirectly with us, our
business could be harmed.

Our future success also depends on our ability to attract, train, retain and motivate highly skilled technical
and sales personnel. Competition for personnel is intense, and qualified personnel are likely to remain a limited resource for the foreseeable future. We may not be successful in attracting, training, retaining and motivating personnel in the
future, which would impair our ability to maintain and grow our business.

Our limited cash resources have in the past required us to rely
heavily on equity compensation to hire and retain key personnel, and we expect this to continue in the future, which may result in significant non-cash compensation expenses and dilution to our shareholders.

We rely on our intellectual property rights, and our inability to protect these rights could impair our competitive advantage, divert management attention, require
additional development time and resources or cause us to incur substantial expense to enforce our rights, which could harm our ability to compete and generate revenue.

Our success is dependent upon protecting our proprietary technology. We rely primarily on a combination of copyright, patent, trade secret and trademark laws, as well as confidentiality procedures and contractual
provisions to protect our proprietary rights. These laws, procedures and provisions provide only limited protection. We have applied for patent protection on most of our key technologies. To date, five (5) U.S. patents have been issued and one
(1) U.S. patent application has been approved but has not yet been issued. Twelve (12) additional U.S. patent applications are pending. We cannot be certain that our pending patent applications will result in issued patents or that the
claims allowed are or will be sufficiently broad to protect the inventions derived from our technology or prove to be enforceable in actions against alleged infringers. Also, additional patent applications that we may file for our current and future
technologies may not be issued. We have also applied for registration of trademarks which may never be granted registration.

The
contractual provisions we rely on to protect our trade secrets and proprietary information, such as our confidentiality and non-disclosure agreements with our employees, consultants and other third parties, may be breached and our trade secrets and
proprietary information disclosed to the public. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our technology or products or to obtain and use information that we regard as proprietary. In
particular, we may provide our licensees with access to proprietary information underlying our licensed applications which they may improperly appropriate. Additionally, our competitors may independently design around patents and other proprietary
rights we hold.

Policing unauthorized use of our technology may be difficult and some foreign laws do not protect our proprietary rights
to the same extent as United States laws. Litigation may be necessary in the future to



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enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial
costs and diversion of resources and management attention.

If third parties assert that our technologies or products infringe their intellectual
property rights, our reputation and ability to license our technology or sell any products could be harmed. In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights.

We may be subject to infringement claims, whether the claims have merit or not, as the number of products and competitors in our
industry segment grows, and the functionality of products in different industry segments overlaps. If third parties assert that our current or future products infringe their proprietary rights, there could be costs and damages associated with these
claims, whether the claims have merit or not, which could harm our business. Any future claims could harm our relationships with existing customers and may deter future customers from licensing our products. In addition, in any potential dispute
involving our intellectual property, our potential customers or distributors of our products could also become the target of litigation, which could trigger indemnification obligations in certain of our license and service agreements and harm our
relationships with any such customers or distributors. Any such claims, with or without merit, could be time consuming, result in costly litigation, including costs related to any damages we may owe resulting from such litigation, cause product
shipment delays or result in loss of intellectual property rights which would require us to obtain licenses which may not be available on acceptable terms or at all.

We could incur significant expenses if products built with our technology contain defects.

Products
such as those built with our technology are subject to product liability lawsuits for any defects that they may contain. Detection of any significant defects may result in, among other things, loss of, or delay in, market acceptance and sales of our
products, diversion of development resources, injury to our reputation, or increased service and warranty costs. A material product liability claim could harm our business, result in unexpected expenses and damage our reputation.

The markets for our technologies are heavily influenced by federal, state and local government regulations and policies.

The progress of our technologies may be dependent on government regulations such as standards for Corporate Average Fuel Economy (CAFE), Renewable
Portfolio Standards (RPS) and the Clean Air Act. Any delays in implementation or relaxing of these standards could have a negative impact on the demand for our products and services. Any new government regulations or policies pertaining to our
technologies may result in significant additional expenses to us and our potential customers and could cause a significant reduction in demand for our technologies.

Shareholders that are neither directors nor officers will have little ability to influence the direction of our business.

Our directors, officers and other key employees collectively are holders of more than 51% of our common stock. As a result, these shareholders, if they act together, will be able to exert a significant degree of
influence over our management and over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and
officers, or the prospect of such sales, could adversely affect the market price of our common stock. Managements concentrated stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain
control of our company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over the price they paid for our stock.

The large number of shares eligible for public sale could cause our stock price to decline.

The market price of our common
stock could decline as a result of the resale of shares of common stock that were previously restricted under Rule 144. Approximately 42 million shares of Rule 144 stock passed the two year restriction under Rule 144 in the fourth quarter of
2005. As holders of these restricted



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shares file with the Securities and Exchange Commission to have the legends removed from their common stock certificates in accordance with Rule 144, the
filings are reported as insiders preparing to sell shares, regardless of the inside knowledge of the shareholder and regardless of their intention. If our officers directors or employees sell shares for tax, estate planning, portfolio management or
other purposes, such sales could be viewed negatively by investors and put downward pressure on our stock price. Approximately 17.5 million shares were free of restrictive legend as of June 30, 2006 up from approximately 3.8 million
and 11.5 million at the end of 2004 and 2005, respectively. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to decline.

We are exposed to market risk related to changes in interest rates.

We do not use derivative
financial instruments in our non-trading investment portfolio. We maintain a portfolio of highly liquid cash equivalents typically maturing in three months or less as of the date of purchase. We place our investments in instruments that meet high
credit quality standards, as specified in our investment policy guidelines.

We also from time to time, maintain short-term investments,
which are all classified as available for sale, and have been recorded at fair value, which approximates cost. Short-term investments include certificates of deposit, auction rate certificates, auction rate preferred securities, municipal preferred
securities and mutual funds. The auction rate securities are adjustable-rate securities with dividend rates that are reset periodically by bidders through periodic Dutch auctions generally conducted every 7 to 49 days by a trust company
or broker/dealer on behalf of the issuer. We believe these securities are highly liquid investments through the related auctions; however, the collateralizing securities have stated terms of up to thirty (30) years. These instruments are rated
BBB+ or higher by Standard & Poors Ratings Group, or equivalent. Our short-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations
and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Given the short-term nature of these investments, and that we have no borrowings outstanding other than short-term letters of credit, we intend to
limit our interest rate risk to movements in short term rates.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any dividends on our common stock. We intend to retain all of our earnings for the foreseeable future to finance the
operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

Our reported financial results may be adversely affected by changes in generally accepted accounting principles.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the
American Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our historical
or future financial results. For example, prior to January 1, 2006, we were not required to record stock-based compensation charges if the employees stock option exercise price is equal to or exceeds the deemed fair value of the
underlying security at the date of grant. However, effective January 1, 2006 we are required to record the fair value of stock options as an expense in accordance with recent accounting pronouncements.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

We held the 2006 Annual Meeting of Shareholders on June 27, 2006 in Provo, Utah.

At the 2006 Annual Meeting of Shareholders,
the shareholders elected the following individuals as Class I directors, to serve until the 2009 Annual Meeting of Shareholders, and until their successors are elected and qualified or until their earlier death, resignation or removal:



|                |  |            |  |               |  |               
|--------------- |  | ---------- |  | ------------- |  | --------------
|Name            |  | Votes For  |  | Votes Against |  | Votes Withheld
|Barry Markowitz |  | 33,413,964 |  | 0             |  | 11,351        
|Alan Perriton   |  | 33,413,964 |  | 0             |  | 11,351        
|Reynold Roeder  |  | 33,413,964 |  | 0             |  | 11,351        



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At the 2006 Annual Meeting of Shareholders, the shareholders also voted to retain as independent auditors
the firm of Tanner, LC, until the 2007 Annual Meeting of Shareholders, and until their successors are appointed and ratified or until their earlier resignation or removal:



|          |  |            |  |               |  |               
|--------- |  | ---------- |  | ------------- |  | --------------
|Name      |  | Votes For  |  | Votes Against |  | Votes Withheld
|Tanner LC |  | 33,412,417 |  | 4,898         |  | 8,000         



|Item 5. | Other Information.
|------- | ------------------

None.



|Item 6. | Exhibits.
|------- | ---------



| | (a) | Exhibits
| | --- | --------



|              |  |                                                                                                                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                        
|              | 
|2.1A          |  | Agreement and Plan of Reorganization dated October 2, 2003 among Wasatch Web Advisors Inc., Raser Technologies Inc. and the stockholders of Raser Technologies Inc.                                                                                                            
|              | 
|2.2P          |  | Agreement and Plan of Acquisition, dated January 19, 2006, by and among Raser Technologies, Inc., Amp Resources, LLC, Power Acquisition Corp. and John H. Stevens, as Equityholder
Representative.                                                                             
|              | 
|2.3           |  | Promissory Note Agreement, dated April 6, 2006, between Amp Resources, LLC, Highland Capital Partners VI Limited Partnership, Highland Capital Partners VI-B Limited Partnership, Highland
Entrepreneurs Fund VI Limited Partnership, SCP/AR, LLC and Raser Technologies, Inc.
|              | 
|2.4S          |  | Letter Agreement, dated May 1, 2006, by and among Raser Technologies, Inc., Amp Resources, LLC, Power Acquisition Corp. and John H. Stevens, as Equityholder Representative.                                                                                                   
|              | 
|2.5V          |  | Letter Regarding Termination of Acquisition Agreement, dated June 16, 2006.                                                                                                                                                                                                    
|              | 
|3.1BC         |  | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock.                                                                                                                                                                     
|              | 
|3.2H          |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                 
|              | 
|3.3N          |  | Amended and Restated Articles of Incorporation of the Registrant                                                                                                                                                                                                               
|              | 
|4.1H          |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                             
|              | 
|4.2D          |  | Registration Rights Agreement, dated as of July 22, 2002, among the Registration and the Purchasers (as defined therein).                                                                                                                                                      
|              | 
|4.5K          |  | Registration Rights Agreement dated April 4, 2005 by and between the registrant and certain entities identified therein.                                                                                                                                                       
|              | 
|4.6K          |  | Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.                                                                                                                                                                     
|              | 
|10.1E         |  | Securities Purchase Agreement dated July 22, 2004, among the Registrant and the Purchasers (as defined therein).                                                                                                                                                               
|              | 
|10.2F         |  | Form of Warrant to Purchase Shares of the Registrants Common Stock.                                                                                                                                                                                                           
|              | 
|10.3G         |  | Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                                                                                            
|              | 
|10.4H         |  | Form of Option Agreement for the Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                                                           
|              | 
|10.5I         |  | Restricted Stock Grant Agreement dated as of February 23, 2004 between the registrant and John C. Ritter, President.                                                                                                                                                           
|              | 
|10.6I         |  | Restricted Stock Grant Agreement dated as of February 26, 2004 between the registrant and Timothy D. Fehr, Chief Technical Officer.                                                                                                                                            



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|              |  |                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                       
|              | 
|10.7I         |  | At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement effective as of August 1, 2004 between the registrant and William Dwyer, Chief
Financial Officer.
|              | 
|10.8J         |  | At Will Employment Agreement dated January 31, 2005 between the registrant and Brent M. Cook, Chief Executive Officer.                                                                                        
|              | 
|10.9K         |  | Securities Purchase Agreement dated April 4, 2005 by and between the registrant and certain entities identified on the Schedule of Buyers therein.                                                            
|              | 
|10.10L        |  | Amended Restricted Stock Grant Agreement dated April 29, 2005 by and between the registrant and John C. Ritter.                                                                                               
|              | 
|10.11M        |  | Lease Agreement by and between the registrant and EsNET Properties L.C., effective as of March 11, 2005.                                                                                                      
|              | 
|10.12O        |  | Second Amended Restricted Stock Grant Agreement dated July 12, 2005 by and between the registrant and John C. Ritter.                                                                                         
|              | 
|10.13O        |  | Third Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and John C. Ritter.                                                                                          
|              | 
|10.14O        |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated July 29, 2005 by and between the registrant and William
Dwyer.                     
|              | 
|10.15O        |  | Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and Timothy D. Fehr.                                                                                               
|              | 
|10.16R        |  | Fifth Amended Restricted Stock Grant Agreement dated January 15, 2006 by and between the registrant and John C. Ritter.                                                                                       
|              | 
|10.17R        |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated January 31, 2006 by and between the registrant and William
Dwyer.                  
|              | 
|10.18R        |  | Amended Restricted Stock Grant Agreement dated January 31, 2006 by and between the registrant and Timothy D. Fehr.                                                                                            
|              | 
|10.19U        |  | Employment Agreement, dated June 27, 2006, between the registrant and Patrick J. Schwartz.                                                                                                                    
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).                                                                                                                             
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).                                                                                                                             
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                      

---

|A | Incorporated by reference to Exhibit 2 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on October 14, 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|B | Incorporated by reference to Exhibit 3.2 filed with the registrants Form 10-SB/A (File No. 000-30657) on June 1, 2000.
|- | -----------------------------------------------------------------------------------------------------------------------



|C | Incorporated by reference to Exhibit 10.5 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|D | Incorporated by reference to Exhibit 10.6 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|E | Incorporated by reference to Exhibit 10.1, Exhibit 10.2, Exhibit 10.3 and Exhibit 10.4 filed with the registrants Current Report on Form 8-K (File
No. 000-30657) on July 28, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|F | Incorporated by reference to Exhibit 10.7 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|G | Incorporated by reference to Appendix B filed with the registrants Schedule 14C Information Statement (File No. 000-30657) on May 14, 2004.
|- | --------------------------------------------------------------------------------------------------------------------------------------------



|H | Incorporated by reference to Exhibit 3.1B, Exhibit 3.2, Exhibit 4.1 and Exhibit 10.4 filed with the registrants Form 10-QSB (File No. 000-30657) on August 13, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|I | Incorporated by reference to Exhibit 10.5, Exhibit 10.6, and Exhibit 10.7 filed with the registrants Form 10-QSB (File No. 000-30657) on November 9, 2004.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|J | Incorporated by reference to Exhibit 10.8 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on February 4, 2005.
|- | ------------------------------------------------------------------------------------------------------------------------------------------



|K | Incorporated by reference to Exhibit 4.5, Exhibit 4.6 and Exhibit 10.9 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on April 7, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|L | Incorporated by reference to Exhibit 10.10 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 5, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------



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|M | Incorporated by reference to Exhibit 10.11 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 24, 2005.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|N | Incorporated by reference to Exhibit 3.3 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 8, 2005.
|- | -------------------------------------------------------------------------------------------------------------------------------------



|O | Incorporated by reference to Exhibit 10.12, Exhibit 10.13, Exhibit 10.14 and Exhibit 10.15 filed with the registrants Form 10-QSB (File No. 000-30657) on November 14,
2005.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|P | Incorporated by reference to Exhibit 2.2 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on January 25, 2006.
|- | -----------------------------------------------------------------------------------------------------------------------------------------





|R | Incorporated by reference to Exhibit 10.16, Exhibit 10.17 and Exhibit 10.18 filed with the registrants Form 10-Q (File No. 000-30657) on May 15, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|S | Incorporated by reference to Exhibit 2.3 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 22, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------





|U | Incorporated by reference to Exhibit 10.19 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on June 30, 2006.
|- | ----------------------------------------------------------------------------------------------------------------------------------------



|V | To the extent necessary or applicable, the exhibit required by Item 601 of regulation S-K is filed herewith. Such filing does not constitute an admission by the Registrant that
the Merger Agreement has effectively been terminated.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.



|              |  |  |  |                                     
|------------- |  |  |  | ------------------------------------
|              |  |  |  | RASER TECHNOLOGIES, INC.            
|              |  |  |  | (Registrant)                        
|              |  | 
|July 26, 2006 |  |  |  | /s/ Brent M. Cook                   
|(Date)        |  |  |  | Brent M. Cook,                      
|              |  |  |  | Chief Executive Officer and Director
|              |  | 
|July 26, 2006 |  |  |  | /s/ William Dwyer                   
|(Date)        |  |  |  | William Dwyer,                      
|              |  |  |  | Chief Financial Officer             



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##### Table of Contents

EXHIBIT INDEX



|(a) | Exhibits
|--- | --------



|              |  |                                                                                                                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                        
|              | 
|2.1A          |  | Agreement and Plan of Reorganization dated October 2, 2003 among Wasatch Web Advisors Inc., Raser Technologies Inc. and the stockholders of Raser Technologies Inc.                                                                                                            
|              | 
|2.2P          |  | Agreement and Plan of Acquisition, dated January 19, 2006, by and among Raser Technologies, Inc., Amp Resources, LLC, Power Acquisition Corp. and John H. Stevens, as Equityholder
Representative.                                                                             
|              | 
|2.3           |  | Promissory Note Agreement, dated April 6, 2006, between Amp Resources, LLC, Highland Capital Partners VI Limited Partnership, Highland Capital Partners VI-B Limited Partnership, Highland
Entrepreneurs Fund VI Limited Partnership, SCP/AR, LLC and Raser Technologies, Inc.
|              | 
|2.4S          |  | Letter Agreement, dated May 1, 2006, by and among Raser Technologies, Inc., Amp Resources, LLC, Power Acquisition Corp. and John H. Stevens, as Equityholder Representative.                                                                                                   
|              | 
|2.5V          |  | Letter Regarding Termination of Acquisition Agreement, dated June 16, 2006.                                                                                                                                                                                                    
|              | 
|3.1BC         |  | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock.                                                                                                                                                                     
|              | 
|3.2H          |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                 
|              | 
|3.3N          |  | Amended and Restated Articles of Incorporation of the Registrant                                                                                                                                                                                                               
|              | 
|4.1H          |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                             
|              | 
|4.2D          |  | Registration Rights Agreement, dated as of July 22, 2002, among the Registration and the Purchasers (as defined therein).                                                                                                                                                      
|              | 
|4.5K          |  | Registration Rights Agreement dated April 4, 2005 by and between the registrant and certain entities identified therein.                                                                                                                                                       
|              | 
|4.6K          |  | Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.                                                                                                                                                                     
|              | 
|10.1E         |  | Securities Purchase Agreement dated July 22, 2004, among the Registrant and the Purchasers (as defined therein).                                                                                                                                                               
|              | 
|10.2F         |  | Form of Warrant to Purchase Shares of the Registrants Common Stock.                                                                                                                                                                                                           
|              | 
|10.3G         |  | Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                                                                                            
|              | 
|10.4H         |  | Form of Option Agreement for the Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                                                           
|              | 
|10.5I         |  | Restricted Stock Grant Agreement dated as of February 23, 2004 between the registrant and John C. Ritter, President.                                                                                                                                                           
|              | 
|10.6I         |  | Restricted Stock Grant Agreement dated as of February 26, 2004 between the registrant and Timothy D. Fehr, Chief Technical Officer.                                                                                                                                            
|              | 
|10.7I         |  | At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement effective as of August 1, 2004 between the registrant and William Dwyer, Chief
Financial Officer.                                                                 
|              | 
|10.8J         |  | At Will Employment Agreement dated January 31, 2005 between the registrant and Brent M. Cook, Chief Executive Officer.                                                                                                                                                         
|              | 
|10.9K         |  | Securities Purchase Agreement dated April 4, 2005 by and between the registrant and certain entities identified on the Schedule of Buyers therein.                                                                                                                             
|              | 
|10.10L        |  | Amended Restricted Stock Grant Agreement dated April 29, 2005 by and between the registrant and John C. Ritter.                                                                                                                                                                
|              | 
|10.11M        |  | Lease Agreement by and between the registrant and EsNET Properties L.C., effective as of March 11, 2005.                                                                                                                                                                       
|              | 
|10.12O        |  | Second Amended Restricted Stock Grant Agreement dated July 12, 2005 by and between the registrant and John C. Ritter.                                                                                                                                                          
|              | 
|10.13O        |  | Third Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and John C. Ritter.                                                                                                                                                           
|              | 
|10.14O        |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated July 29, 2005 by and between the registrant and William
Dwyer.                                                                                      
|              | 
|10.15O        |  | Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and Timothy D. Fehr.                                                                                                                                                                
|              | 
|10.16R        |  | Fifth Amended Restricted Stock Grant Agreement dated January 15, 2006 by and between the registrant and John C. Ritter.                                                                                                                                                        



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##### Table of Contents

|              |  |                                                                                                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                     
|              | 
|10.17R        |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated January 31, 2006 by and between the registrant and William
Dwyer.
|              | 
|10.18R        |  | Amended Restricted Stock Grant Agreement dated January 31, 2006 by and between the registrant and Timothy D. Fehr.                                                                          
|              | 
|10.19U        |  | Employment Agreement, dated June 27, 2006, between the registrant and Patrick J. Schwartz.                                                                                                  
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).                                                                                                           
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).                                                                                                           
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                    

---

|A | Incorporated by reference to Exhibit 2 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on October 14, 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|B | Incorporated by reference to Exhibit 3.2 filed with the registrants Form 10-SB/A (File No. 000-30657) on June 1, 2000.
|- | -----------------------------------------------------------------------------------------------------------------------



|C | Incorporated by reference to Exhibit 10.5 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|D | Incorporated by reference to Exhibit 10.6 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|E | Incorporated by reference to Exhibit 10.1, Exhibit 10.2, Exhibit 10.3 and Exhibit 10.4 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on
July 28, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|F | Incorporated by reference to Exhibit 10.7 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 28, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|G | Incorporated by reference to Appendix B filed with the registrants Schedule 14C Information Statement (File No. 000-30657) on May 14, 2004.
|- | --------------------------------------------------------------------------------------------------------------------------------------------



|H | Incorporated by reference to Exhibit 3.1B, Exhibit 3.2, Exhibit 4.1 and Exhibit 10.4 filed with the registrants Form 10-QSB (File No. 000-30657) on August 13, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|I | Incorporated by reference to Exhibit 10.5, Exhibit 10.6, and Exhibit 10.7 filed with the registrants Form 10-QSB (File No. 000-30657) on November 9, 2004.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|J | Incorporated by reference to Exhibit 10.8 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on February 4, 2005.
|- | ------------------------------------------------------------------------------------------------------------------------------------------



|K | Incorporated by reference to Exhibit 4.5, Exhibit 4.6 and Exhibit 10.9 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on April 7, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|L | Incorporated by reference to Exhibit 10.10 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 5, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------



|M | Incorporated by reference to Exhibit 10.11 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 24, 2005.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|N | Incorporated by reference to Exhibit 3.3 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on July 8, 2005.
|- | -------------------------------------------------------------------------------------------------------------------------------------





|P | Incorporated by reference to Exhibit 2.2 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on January 25, 2006.
|- | -----------------------------------------------------------------------------------------------------------------------------------------



|Q | Incorporated by reference to Exhibit 2.3 filed with the registrants Form 10-Q (File No. 000-30657) on April 6, 2006.
|- | ---------------------------------------------------------------------------------------------------------------------



|R | Incorporated by reference to Exhibit 10.16, Exhibit 10.17 and Exhibit 10.18 filed with the registrants Form 10-Q (File No. 000-30657) on May 15, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|S | Incorporated by reference to Exhibit 2.3 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on May 24, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------





|U | Incorporated by reference to Exhibit 10.19 filed with the registrants Current Report on Form 8-K (File No. 000-30657) on June 30, 2006.
|- | ----------------------------------------------------------------------------------------------------------------------------------------



|V | To the extent necessary or applicable, the exhibit required by Item 601 of regulation S-K is filed herewith. Such filing does not constitute an admission by the Registrant that
the Merger Agreement has effectively been terminated.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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