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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





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, 2008

or



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

Commission File Number: 001-32661





RASER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 87-0638510                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5152 North Edgewood Drive, Suite 375, Provo, UT                |  | 84604                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (801) 765-1200

N/A

(Former name, former address,
and former fiscal year, if changed since last report)





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 (or for such shorter period that the registrant was required to file such reports), 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, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                             |  | Accelerated filer  x        
|Non-accelerated filer   ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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

The number of shares outstanding of registrants common stock as of August 8, 2008 was 56,922,684 shares.









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##### Table of Contents

Raser Technologies, Inc.

Form 10-Q

Table of Contents



|                                                                                              |  |         
|--------------------------------------------------------------------------------------------- |  | --------
|                                                                                              |  | Page No.
|Part I. Financial Information                                                                 |  | 3       
|Item 1. Financial Statements                                                                  |  | 3       
|Condensed Consolidated Balance Sheets                                                         |  | 3       
|Condensed Consolidated Statements of Operations                                               |  | 4       
|Condensed Consolidated Statements of Cash Flows                                               |  | 5       
|Notes to Condensed Consolidated Financial Statements                                          |  | 6       
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24      
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 38      
|Item 4. Controls and Procedures                                                               |  | 38      
|Part II. Other Information                                                                    |  | 39      
|Item 1. Legal Proceedings                                                                     |  | 39      
|Item 1A. Risk Factors                                                                         |  | 39      
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 47      
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 47      
|Item 6. Exhibits                                                                              |  | 48      
|SIGNATURES                                                                                    |  | 49      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                   |  |              |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                   |  | June 30,2008 |             |   | December 31,2007 |  
|Assets                                                                                                                             |  |              |             |   |                  |   |             |  
|Current assets:                                                                                                                    |  |              |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                          |  | $            | 5,092,226   |   |                  | $ | 5,912,210   |  
|Restricted cash                                                                                                                    |  |              | 75,000      |   |                  |   | 75,000      |  
|Accounts receivable                                                                                                                |  |              | 5,880       |   |                  |   | 12,200      |  
|Unbilled receivable                                                                                                                |  |              |            |   |                  |   | 192,157     |  
|Note receivable and accrued interest, net                                                                                          |  |              | 142,500     |   |                  |   | 506,273     |  
|Restricted short-term marketable securities (held to maturity)                                                                     |  |              | 4,428,960   |   |                  |   |            |  
|Power project equipment deposits                                                                                                   |  |              | 5,036,500   |   |                  |   |            |  
|Other current assets                                                                                                               |  |              | 3,038,843   |   |                  |   | 725,648     |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total current assets                                                                                                               |  |              | 17,819,909  |   |                  |   | 7,423,488   |  
|Restricted long-term marketable securities (held to maturity)                                                                      |  |              | 4,293,208   |   |                  |   |            |  
|Land                                                                                                                               |  |              | 33,952      |   |                  |   |            |  
|Unproved property and prepaid delay rentals                                                                                        |  |              | 6,447,151   |   |                  |   | 6,153,688   |  
|Geothermal well field development                                                                                                  |  |              | 20,008,352  |   |                  |   | 4,750,525   |  
|Power project construction-in-progress                                                                                             |  |              | 19,638,949  |   |                  |   | 603,814     |  
|Equipment, net                                                                                                                     |  |              | 674,624     |   |                  |   | 680,188     |  
|Intangible assets, net                                                                                                             |  |              | 516,053     |   |                  |   | 515,037     |  
|Deferred financing costs, net                                                                                                      |  |              | 2,433,857   |   |                  |   |            |  
|Power project development deposits                                                                                                 |  |              | 502,926     |   |                  |   | 3,562,500   |  
|Other assets                                                                                                                       |  |              | 1,093,851   |   |                  |   | 95,213      |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total assets                                                                                                                       |  | $            | 73,462,832  |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|                                                                                                                                   |  |             
|Liabilities and Stockholders (Deficit) Equity                                                                                     |  |              |             |   |                  |   |             |  
|Current liabilities:                                                                                                               |  |              |             |   |                  |   |             |  
|Accounts payable                                                                                                                   |  | $            | 8,290,813   |   |                  | $ | 3,623,359   |  
|Accrued liabilities                                                                                                                |  |              | 20,224,901  |   |                  |   | 623,424     |  
|Note payable                                                                                                                       |  |              | 920,833     |   |                  |   |            |  
|Deferred revenue                                                                                                                   |  |              | 200,000     |   |                  |   |            |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total current liabilities                                                                                                          |  |              | 29,636,547  |   |                  |   | 4,246,783   |  
|Asset retirement obligation                                                                                                        |  |              | 60,893      |   |                  |   | 86,193      |  
|Long-term 8.00% convertible senior notes                                                                                           |  |              | 55,000,000  |   |                  |   |            |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total liabilities                                                                                                                  |  |              | 84,697,440  |   |                  |   | 4,332,976   |  
|Contingencies and commitments, (see Notes C, I, J and K)                                                                           |  |              |             |   |                  |   |             |  
|Stockholders (deficit) equity:                                                                                                    |  |              |             |   |                  |   |             |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued and outstanding.                                    |  |              |            |   |                  |   |            |  
|Common stock, $.01 par value, 250,000,000 shares authorized, 56,145,267 and 55,923,705 shares issued and outstanding,
respectively |  |              | 561,453     |   |                  |   | 559,237     |  
|Additional paid in capital                                                                                                         |  |              | 52,278,230  |   |                  |   | 70,114,893  |  
|Accumulated deficit                                                                                                                |  |              | (30,972,177 | ) |                  |   | (30,972,177 | )
|Accumulated deficit after re-entry into development stage                                                                          |  |              | (33,102,114 | ) |                  |   | (20,250,476 | )
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total stockholders (deficit) equity                                                                                               |  |              | (11,234,608 | ) |                  |   | 19,451,477  |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total liabilities and stockholders (deficit) equity                                                                               |  | $            | 73,462,832  |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |              |             |   |                  |   |             |  

See accompanying notes to condensed consolidated financial statements.



3



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | --------------------------------------------------------------------------------------- |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                 |  | Three months ended June 30, |            |   | Six months ended June 30, |   |            | For the periodafter re-entryinto developmentstage (October 1,2006 throughJune 30, 2008) | 
|                                                 |  | 2008                        |            |   | 2007                      |   |            | 2008                                                                                    |  |   | 2007        |   | 
|Revenue                                          |  | $                           | 5,880      |   |                           | $ | 28,562     |                                                                                         |  | $ | 136,423     |   |  | $ | 152,325    |   |  | $ | 501,212     |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|                                                 |  |                             |            |   |                          
|Operating expense                                |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Cost of sales                                    |  |                             |           |   |                           |   | 27,662     |                                                                                         |  |   | 74,112      |   |  |   | 493,792    |   |  |   | 746,036     |  
|General and administrative                       |  |                             | 2,224,758  |   |                           |   | 2,027,518  |                                                                                         |  |   | 5,005,414   |   |  |   | 5,433,456  |   |  |   | 18,808,213  |  
|Power project development                        |  |                             | 3,102,037  |   |                           |   | 619,371    |                                                                                         |  |   | 4,889,091   |   |  |   | 864,262    |   |  |   | 7,526,406   |  
|Research and development                         |  |                             | 1,194,030  |   |                           |   | 785,472    |                                                                                         |  |   | 2,163,213   |   |  |   | 1,581,771  |   |  |   | 6,496,360   |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Total operating expenses                         |  |                             | 6,520,825  |   |                           |   | 3,460,023  |                                                                                         |  |   | 12,131,830  |   |  |   | 8,373,281  |   |  |   | 33,577,015  |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Operating loss                                   |  |                             | (6,514,945 | ) |                           |   | (3,431,461 | )                                                                                       |  |   | (11,995,407 | ) |  |   | (8,220,956 | ) |  |   | (33,075,803 | )
|Interest income                                  |  |                             | 111,542    |   |                           |   | 217,590    |                                                                                         |  |   | 171,276     |   |  |   | 401,528    |   |  |   | 1,128,444   |  
|Interest expense                                 |  |                             | (1,037,770 | ) |                           |   |           |                                                                                         |  |   | (1,103,282  | ) |  |   |           |   |  |   | (1,103,282  | )
|Other                                            |  |                             |           |   |                           |   | (10,146    | )                                                                                       |  |   | 75,775      |   |  |   | (31,158    | ) |  |   | (51,473     | )
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Loss before income taxes                         |  |                             | (7,441,173 | ) |                           |   | (3,224,017 | )                                                                                       |  |   | (12,851,638 | ) |  |   | (7,850,586 | ) |  |   | (33,102,114 | )
|Tax benefit (expense)                            |  |                             |           |   |                           |   |           |                                                                                         |  |   |            |   |  |   |           |   |  |   |            |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Net loss applicable to common stockholders       |  | $                           | (7,441,173 | ) |                           | $ | (3,224,017 | )                                                                                       |  | $ | (12,851,638 | ) |  | $ | (7,850,586 | ) |  | $ | (33,102,114 | )
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Loss per common share-basic and diluted          |  | $                           | (0.13      | ) |                           | $ | (0.06      | )                                                                                       |  | $ | (0.23       | ) |  | $ | (0.15      | ) |  |   |             |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Weighted average common shares-basic and diluted |  |                             | 56,118,000 |   |                           |   | 54,311,000 |                                                                                         |  |   | 56,070,000  |   |  |   | 52,906,000 |   |  |   |             |  
|                                                 |  |                             |            |   |                           |   |            |                                                                                         |  |   |             |   |  |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | --------------------------------------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                            |  | Six Months Ended June 30, |             |   | For the periodafter re-entryinto developmentstage (October 1,2006 throughJune 30, 2008) |  
|                                                                            |  | 2008                      |             |   | 2007                                                                                    |   |           
|Cash flows from operating activities:                                       |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Net loss                                                                    |  | $                         | (12,851,638 | ) |                                                                                         | $ | (7,850,586 | ) |  | $ | (33,102,114 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Depreciation, amortization and accretion expense                            |  |                           | 150,036     |   |                                                                                         |   | 132,262    |   |  |   | 477,848     |  
|Deferred financing costs amortization                                       |  |                           | 126,630     |   |                                                                                         |   |           |   |  |   | 126,630     |  
|Bad debt expense                                                            |  |                           | 27,216      |   |                                                                                         |   |           |   |  |   | 27,216      |  
|Impairment of abandoned patent applications                                 |  |                           | 11,534      |   |                                                                                         |   | 100,577    |   |  |   | 142,311     |  
|Impairment of abandoned unproved property                                   |  |                           | 180,250     |   |                                                                                         |   |           |   |  |   | 180,250     |  
|Loss (gain) on disposal of assets                                           |  |                           | 4,063       |   |                                                                                         |   | (100       | ) |  |   | 6,947       |  
|Gain on completion of contract                                              |  |                           | (75,357     | ) |                                                                                         |   |           |   |  |   | (75,357     | )
|Common stock, stock options and warrants issued for services                |  |                           | 1,680,350   |   |                                                                                         |   | 3,082,241  |   |  |   | 8,929,085   |  
|Decrease (increase) in accounts receivable                                  |  |                           | (5,880      | ) |                                                                                         |   | 69,150     |   |  |   | (2,330      | )
|Decrease (increase) in unbilled receivable                                  |  |                           | 192,157     |   |                                                                                         |   | (127,892   | ) |  |   |            |  
|Increase in other assets                                                    |  |                           | (46,299     | ) |                                                                                         |   | (320,061   | ) |  |   | (160,961    | )
|Decrease (increase) in interest receivable                                  |  |                           | (30,654     | ) |                                                                                         |   | 404,522    |   |  |   | 227,769     |  
|Increase in accounts payable                                                |  |                           | 2,612,910   |   |                                                                                         |   | 161,329    |   |  |   | 5,976,343   |  
|Increase in accrued liabilities                                             |  |                           | 2,684,906   |   |                                                                                         |   | 293,770    |   |  |   | 2,997,380   |  
|Decrease in unearned revenues                                               |  |                           |            |   |                                                                                         |   | (24,433    | ) |  |   |            |  
|Increase in deferred revenues                                               |  |                           | 200,000     |   |                                                                                         |   |           |   |  |   | 200,000     |  
|(Decrease) increase in asset retirement obligation                          |  |                           | (26,453     | ) |                                                                                         |   |           |   |  |   | 59,740      |  
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Net cash used in operating activities                                       |  |                           | (5,166,229  | ) |                                                                                         |   | (4,079,221 | ) |  |   | (13,989,243 | )
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|                                                                            |  |                           |            
|Cash flows from investing activities:                                       |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Purchase of marketable equity securities                                    |  |                           | (8,687,175  | ) |                                                                                         |   |           |   |  |   | (8,687,175  | )
|Increase in notes receivable                                                |  |                           | (142,500    | ) |                                                                                         |   |           |   |  |   | (642,500    | )
|Proceeds from note receivable                                               |  |                           | 350,000     |   |                                                                                         |   | 5,547,552  |   |  |   | 5,897,552   |  
|Decrease (increase) in deposits                                             |  |                           | 83,140      |   |                                                                                         |   |           |   |  |   | (131,997    | )
|Decrease in restricted cash                                                 |  |                           |            |   |                                                                                         |   | 300,000    |   |  |   | 325,000     |  
|Increase in intangible assets                                               |  |                           | (25,130     | ) |                                                                                         |   | (81,458    | ) |  |   | (168,952    | )
|Purchase of equipment                                                       |  |                           | (138,605    | ) |                                                                                         |   | (106,333   | ) |  |   | (463,902    | )
|Proceeds from the sale of equipment                                         |  |                           |            |   |                                                                                         |   | 5,000      |   |  |   | 5,000       |  
|Acquisition of unproved property                                            |  |                           | (499,158    | ) |                                                                                         |   | (175,807   | ) |  |   | (5,919,959  | )
|Acquisition of real property                                                |  |                           | (33,952     | ) |                                                                                         |   |           |   |  |   | (33,952     | )
|Well field development costs                                                |  |                           | (9,849,837  | ) |                                                                                         |   | (349,638   | ) |  |   | (14,600,362 | )
|Construction-in-progress costs                                              |  |                           | (1,946,484  | ) |                                                                                         |   |           |   |  |   | (2,550,298  | )
|Project power equipment deposits                                            |  |                           | (5,036,500  | ) |                                                                                         |   |           |   |  |   | (8,599,000  | )
|Project power development deposits                                          |  |                           | (2,722,366  | ) |                                                                                         |   | (1,653,128 | ) |  |   | (3,083,669  | )
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Net cash provided by (used in) investing activities                         |  |                           | (28,648,567 | ) |                                                                                         |   | 3,486,188  |   |  |   | (38,654,214 | )
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|                                                                            |  |                           |            
|Cash flows from financing activities:                                       |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Proceeds from exercise of common stock warrants                             |  |                           | 18,554      |   |                                                                                         |   |           |   |  |   | 6,444,597   |  
|Proceeds from exercise of common stock options                              |  |                           | 486,744     |   |                                                                                         |   | 73,000     |   |  |   | 1,406,669   |  
|Proceeds from the issuance of 8.00% convertible senior notes                |  |                           | 55,000,000  |   |                                                                                         |   |           |   |  |   | 55,000,000  |  
|Purchase of forward stock purchase transaction                              |  |                           | (15,000,000 | ) |                                                                                         |   |           |   |  |   | (15,000,000 | )
|Purchase of call spread option transaction                                  |  |                           | (5,850,000  | ) |                                                                                         |   |           |   |  |   | (5,850,000  | )
|Incurrence of deferred financing fees                                       |  |                           | (2,560,486  | ) |                                                                                         |   |           |   |  |   | (2,560,486  | )
|Proceeds from issuance of a note payable                                    |  |                           | 900,000     |   |                                                                                         |   |           |   |  |   | 900,000     |  
|Proceeds from the sale of common stock in private equity placement          |  |                           |            |   |                                                                                         |   | 11,853,751 |   |  |   | 11,853,751  |  
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Net cash provided by financing activities                                   |  |                           | 32,994,812  |   |                                                                                         |   | 11,926,751 |   |  |   | 52,194,531  |  
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                        |  |                           | (819,984    | ) |                                                                                         |   | 11,333,718 |   |  |   | (448,926    | )
|Cash and cash equivalents at beginning of period                            |  |                           | 5,912,210   |   |                                                                                         |   | 3,351,568  |   |  |   | 5,541,152   |  
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                         | 5,092,226   |   |                                                                                         | $ | 14,685,286 |   |  | $ | 5,092,226   |  
|                                                                            |  |                           |             |   |                                                                                         |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

RASER TECHNOLOGIES, INC. & SUBSIDIARIES

(a development stage enterprise)

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 accompanying condensed balance sheet as of December 31, 2007 has been derived from
audited financial statements and the unaudited interim condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote
disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles 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-K for the year ended December 31, 2007. The results of operations for the three
and six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008 or any other period.

Certain reclassifications have been made in the prior years consolidated financial statements to conform to the current year presentation.

Development Stage Enterprise

We
currently operate as a development stage enterprise as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. In 2005, we transitioned from a
development stage to an operating stage enterprise for accounting purposes. In the fourth quarter of 2006, our management reassessed our operations and determined that we should report as a development stage enterprise effective October 1,
2006. The decision was primarily based upon the fact that anticipated licensing revenue from the transportation and industrial technology segment did not materialize as expected, and our determination that our efforts to license our technologies
would take longer than originally anticipated.

Additionally, we are currently utilizing some of our resources to research and locate high
probability areas for geothermal activity. We continue developing relationships in order to acquire mineral and geothermal rights, through long-term geothermal lease agreements, that enable us to explore, drill and construct geothermal power plants
on leased property. To fund these and our other operations, we raised capital totaling $12.5 million in a private placement of common stock that closed on March 30, 2007 and $6.3 million from subsequent exercises of warrants issued in
connection with the private placement. We raised additional capital totaling $50 million from the issuance of 8.00% Convertible Senior Notes due 2013 (the Convertible Notes), which closed on March 26, 2008, and $5 million in
connection with the issuance of additional Convertible Notes pursuant to the initial purchasers exercise of its overallotment option, which closed on April 1, 2008.

On June 17, 2008, we entered into an ATM Equity Offering Sales Agreement (the Sales Agreement) with Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which we may offer and sell through Merrill Lynch, as our sales agent, from time to time, shares of our common stock with an aggregate sales price of up to $25,000,000 (the
ATM Program). Sales of shares under the ATM Program are made by means of ordinary brokers transactions on the NYSE Arca exchange at market prices. Merrill Lynch receives from us a commission of 2.00%, based on the gross sales price
per share, for any shares sold through it as our agent under the Sales Agreement. No shares were sold under the ATM Program during the quarter ended June 30, 2008. We began selling shares pursuant to the ATM Program during the third quarter of
2008. As of August 8, 2008, we had sold 732,000 shares pursuant to the ATM Program for an aggregate of $7.2 million. After deducting commissions, we received net proceeds of $7.1 million from the sale of these shares.

We also intend to raise additional capital through project financing arrangements, including tax equity financing of certain tax benefits associated with
these renewable energy plants. In light of the status of our power plant development efforts and our need to raise additional capital, we believe that we are still considered a development stage company. Accordingly, the condensed consolidated
statements of operations and cash flows include cumulative balances from the re-entry into the development stage date of October 1, 2006 to June 30, 2008.



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Liquidity

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As
discussed above, we re-entered the development stage in October 2006. As reflected in the accompanying condensed consolidated financial statements, as of June 30, 2008, we had cash and cash equivalents on hand of $5.1 million. Cash used in
operations totaled approximately $2.4 million for the quarter ended June 30, 2008 and the accumulated deficit and deficit accumulated after re-entry into development stage totaled $64.1 million. We have incurred substantial losses since
inception and we are not operating at cash breakeven.

Our continuation as a going concern is dependent on efforts to raise additional
capital, increase revenues, reduce expenses, and ultimately achieve profitable operations. If we are unable to raise sufficient, additional capital on reasonable terms, liquidity concerns may require us to curtail operations, liquidate or sell
assets or pursue other actions that could adversely affect future operations.

As a result of the private placement of the Convertible
Notes, our independent registered public accounting firm reissued their report with respect to our 2007 financial statements on April 1, 2008 to remove an explanatory paragraph that expressed substantial doubt about our ability to continue as a
going concern. Since that time, we have used a substantial portion of the proceeds from the issuance of the Convertible Notes to fund our operations and development efforts, including the ongoing construction of the Thermo project. We had
anticipated that the construction financing for our Thermo project would close sooner than it has. However, due to delays in meeting certain conditions precedent and other factors, construction financing for the Thermo project has been delayed. We
elected to use development funds for construction purposes in order to keep the Thermo project progressing. As a result, our cash and cash equivalents are being depleted, and we need to close the construction funding for the Thermo project and raise
additional funds to continue operating as a going concern.

We have raised, and we expect to continue to raise, additional funds from the
sale of shares of our common stock through the ATM Program. However, from time to time we may need to suspend sales of common stock under the ATM Program due to market conditions or other factors beyond our control. In addition, the gross proceeds
we can raise pursuant to the ATM Program are limited to $25 million, of which we had already raised $7.2 million as of August 8, 2008. Therefore, in order to execute our business strategy and continue our operations, we will likely need to seek
funding from other sources through the issuance of debt, preferred stock, equity or a combination of these instruments. We cannot be certain, however, that funding from these sources will be available on reasonable terms or at all. If we are unable
to secure adequate funds on a timely basis on terms acceptable to us, we may need to modify our current plans for plant construction, well field development and other development activities, or extend the time frame over which these activities will
take place.

These financial statements do not include any adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not change which assets and liabilities are required to be recorded at fair value, but the application of SFAS 157 could change
practices in determining fair value. We adopted this guidance effective January 1, 2008. In February 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which delays the effective date for SFAS 157
for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until our 2009 fiscal year.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 expands the use of fair value accounting
but does not affect existing standards, which require financial assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use a fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. We adopted SFAS 159 effective January 1, 2008, and elected not to measure any of our currently eligible financial assets and liabilities at
fair value.

Concentration of Credit Risk

We maintain our cash in deposit accounts in one bank in Utah. At times, cash balances may exceed federally insured limits. We also maintain cash in one money market account, not affiliated with the bank, which earns a variable interest
rate. The money market variable interest rate on June 30, 2008 was 2.46%. The average money market variable interest rate for the quarter ended June 30,



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2008 was 2.49%. We reviewed the underlying investments included in the money market account and concluded that the money market account is properly
classified as a cash equivalent for financial statement purposes. We have not experienced losses in such accounts, and we believe that we are not exposed to any significant credit risk relating to our money market account.

Concurrent with the issuance of our Convertible Notes, we entered into a Pledge and Escrow Agreement that required us to utilize approximately $8.7
million of our gross proceeds to purchase a portfolio of U.S. Treasury Strips that were placed in escrow to secure the payment of the first four interest payments on the Convertible Notes. Since these U.S. Treasury Strips are backed by the U.S.
government, we believe that we are not exposed to any significant credit risk relating to these government securities.

We generated
revenue in 2008 primarily from one government contractor. We believe that we are not exposed to any significant credit risk on cash and accounts receivable.

B. Restricted Short-Term and Long-Term Marketable Securities

On March 26, 2008, we sold $50 million aggregate
principal amount of our Convertible Notes pursuant to the terms of a purchase agreement, dated March 19, 2008 (the Purchase Agreement), between Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the Initial Purchaser or Merrill Lynch), and us. On April 1, 2008, we sold an additional $5.0 million aggregate principal amount of the Convertible Notes pursuant to the exercise of the Initial
Purchasers overallotment option. The accrued interest payments on the Convertible Notes are due semi-annually on October 1 and April 1 of each year from October 1, 2008 until April 1, 2013. In connection with the issuance
of the Convertible Notes, we entered into a Pledge and Escrow Agreement with the Initial Purchaser that required us to use approximately $8.7 million of the proceeds from the issuance of the Convertible Notes to purchase low-risk government
securities that were pledged to secure the first four interest payments on the Convertible Notes.

On March 26, 2008, we used
approximately $7.9 million of the proceeds from the Convertible Notes to purchase four discounted U.S. Treasury Strips that have coupon dates and coupon amounts that correspond with the amount of interest payable at each semi-annual payment date of
the Convertible Notes. On April 1, 2008, we also purchased additional U.S. Treasury Strips totaling approximately $0.8 million to secure the first four interest payments on the additional $5.0 million of Convertible Notes. Under the Pledge and
Escrow Agreement, we are required to hold these securities to maturity. Accordingly, the discounts are amortized over the period of the coupon and recognized as interest income. At June 30, 2008 the short-term and long-term marketable
securities were classified as follows:



|                       |  |                 |           |      |   |             |  |              |  |   |          
|---------------------- |  | --------------- | --------- | ---- | - | ----------- |  | ------------ |  | - | ---------
|Maturity               |  | PrincipalAmount |           | Cost |   | Coupon Date |  | CouponAmount
|Short-term portion:    |  |                 |           |      |   |             |  |              |  |   |          
|09/30/08               |  | $               | 2,056,000 |      | $ | 2,042,718   |  | 10/01/08     |  | $ | 2,055,556
|09/30/08               |  | $               | 206,000   |      |   | 204,776     |  | 10/01/08     |  | $ | 206,000  
|03/31/09               |  | $               | 2,000,000 |      |   | 1,967,720   |  | 04/01/09     |  | $ | 2,000,000
|03/31/09               |  | $               | 200,000   |      |   | 197,320     |  | 04/01/09     |  | $ | 200,000  
|                       |  |                 |           |      |   |             |  |              |  |   |          
|                       |  |                 |           |      |   | 4,412,534   |  |              |  |   |          
|Discount amortization  |  |                 |           |      |   | 16,426      |  |              |  |   |          
|                       |  |                 |           |      |   |             |  |              |  |   |          
|Total at June 30, 2008 |  |                 |           |      | $ | 4,428,960   |  |              |  |   |          
|                       |  |                 |           |      |   |             |  |              |  |   |          
|                       |  |                 |           |     
|Long-term portion:     |  |                 |           |      |   |             |  |              |  |   |          
|09/30/09               |  | $               | 2,000,000 |      | $ | 1,951,280   |  | 10/01/09     |  | $ | 2,000,000
|09/30/09               |  | $               | 200,000   |      |   | 195,860     |  | 10/01/09     |  | $ | 200,000  
|03/15/10               |  | $               | 2,000,000 |      |   | 1,933,080   |  | 04/01/10     |  | $ | 2,000,000
|03/15/10               |  | $               | 200,000   |      |   | 194,420     |  | 04/01/10     |  | $ | 200,000  
|                       |  |                 |           |      |   |             |  |              |  |   |          
|                       |  |                 |           |      |   | 4,274,640   |  |              |  |   |          
|Discount amortization  |  |                 |           |      |   | 18,568      |  |              |  |   |          
|                       |  |                 |           |      |   |             |  |              |  |   |          
|Total at June 30, 2008 |  |                 |           |      | $ | 4,293,208   |  |              |  |   |          
|                       |  |                 |           |      |   |             |  |              |  |   |          

C. Unproved Property and Prepaid Delay Rentals

During the second quarter of 2007, we paid $25,000 to a property owner in California who granted us an option to further pursue the acquisition of 640
acres of geothermal property. In August 2007, we exercised the option and paid $75,000 for the right to develop the geothermal resources on 640 acres in California. Under our binding letter agreement with the property owner and



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pursuant to our exercise of the option, we agreed to create a joint venture agreement to hold permits and development rights that we would fully control.
However, during the second quarter of 2008, management determined that we would no longer pursue the development of geothermal resources on the 640 acres in California and terminated our agreement. Accordingly, the capitalized unproved property
costs relating to this project were expensed totaling $115,000.

In January 2008, we paid $7,500 to enter into a binding option agreement
to purchase 100% of the membership interests of Eureka Green Systems, LLC (Eureka), which is a 49% member of an entity that has acquired leases around a proven geothermal resource in northern Utah. In July 2008, we received notice that
the majority member of Eureka had re-organized its ownership. Based upon this notice, we terminated the binding option agreement and received a refund of the $7,500.

In January 2008, we entered into a surface access and use lease agreement with a property owner in New Mexico and paid $320,000 to obtain surface right of way access and drilling rights to develop our geothermal power
plant in Hidalgo County, New Mexico. The term of the lease agreement continues until our geothermal rights respective to BLM lease #NM 34790 have expired. Pursuant to the lease agreement, we also obtained water rights to use in our operations at
$0.50 per acre foot of water with a minimum annual fee of $1,000.

In January 2008, we paid $25,000 to enter into a binding option
agreement with a land owner in Utah. Under the terms of the binding option agreement, 90 days from the execution of the agreement, we had the option to lease certain geothermal rights on the property totaling 108 acres. Based upon managements
further evaluation of the property, we decided not to exercise this option and terminated the binding option agreement. Accordingly, the capitalized unproved property costs relating to this project were expensed totaling $25,000.

In January 2008, we paid $10,000 as a lease bonus and entered into a geothermal lease with private land owners for 984 acres in Oregon. Under the lease
agreement, we obtained the right to begin development and construction of geothermal power plants. The initial lease term is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands.

During the first quarter of 2008, we paid $40,000 to enter into two separate binding option agreements with two private property owners in
Utah. Under the terms of the binding option agreements, 90 days from the execution of the agreements, we had options to lease certain geothermal and water rights on the properties totaling 147 acres. Based upon managements further evaluation
of the properties, we decided not to exercise these options and terminated our binding option agreements. Accordingly, the capitalized unproved property costs relating to this project were expensed totaling $40,000.

In April 2008, we paid $34,000 to enter into 17 geothermal lease agreements for certain properties in Utah. Under these lease agreements, we obtained the
right to begin development and construction of geothermal power plants on approximately 33,400 acres. The initial lease term for these Utah properties is 10 years, subject to certain extension provisions.

In the second quarter of 2008, we paid $30,000 as lease bonuses and entered into two geothermal leases with two separate private land owners for 1,160
acres in Nevada. One of these leases has an initial term of 10 years and the other lease has a term of 15 years. In each case, the leases are subject to certain extension provisions. We also paid $21,000 as lease bonuses and entered into two
geothermal leases with two separate private land owners for 470 acres in Utah. One of these leases has an initial term of 10 years and the other lease has a term of 20 years. In each case, the leases are subject to certain extension provisions.
Under each of the Utah and Nevada lease agreements, we obtained the right to begin development and construction of geothermal power plants.

The following represent capitalized costs by geographical area as of June 30, 2008:



|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          
|--------------------- |  | ------- | --- |  | --------------------------------------------- | --------- | ----------------------- | - | --------------------- |  | - | ---------
|State                 |  | Acreage |     |  | CapitalizedAcquisitionCosts(UnprovedProperty) |           | PrepaidDelayRentalCosts |   | TotalCapitalizedCosts
|California            |  |        | (a) |  | $                                             | 95,466    |                         | $ | 35,376                |  | $ | 130,842  
|Nevada                |  | 33,560  | (b) |  |                                               | 1,366,305 |                         |   | 50,000                |  |   | 1,416,305
|New Mexico            |  | 2,500   |     |  |                                               | 4,665,072 |                         |   |                      |  |   | 4,665,072
|Utah                  |  | 134,026 | (c) |  |                                               | 185,975   |                         |   |                      |  |   | 185,975  
|Washington and Oregon |  | 78,898  |     |  |                                               | 48,957    |                         |   |                      |  |   | 48,957   
|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          
|Total                 |  | 248,984 |     |  | $                                             | 6,361,775 |                         | $ | 85,376                |  | $ | 6,447,151
|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          



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The following represent capitalized costs by geographical area as of December 31, 2007:



|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          
|--------------------- |  | ------- | --- |  | --------------------------------------------- | --------- | ----------------------- | - | --------------------- |  | - | ---------
|State                 |  | Acreage |     |  | CapitalizedAcquisitionCosts(UnprovedProperty) |           | PrepaidDelayRentalCosts |   | TotalCapitalizedCosts
|California            |  | 640     | (a) |  | $                                             | 210,076   |                         | $ | 70,750                |  | $ | 280,826  
|Nevada                |  | 32,400  | (b) |  |                                               | 1,323,075 |                         |   | 50,000                |  |   | 1,373,075
|New Mexico            |  | 2,500   |     |  |                                               | 4,346,608 |                         |   |                      |  |   | 4,346,608
|Utah                  |  | 100,819 | (c) |  |                                               | 114,222   |                         |   |                      |  |   | 114,222  
|Washington and Oregon |  | 77,914  |     |  |                                               | 38,957    |                         |   |                      |  |   | 38,957   
|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          
|Total                 |  | 214,273 |     |  | $                                             | 6,032,938 |                         | $ | 120,750               |  | $ | 6,153,688
|                      |  |         |     |  |                                               |           |                         |   |                       |  |   |          



|(a) | Acreage excludes interest in approximately 11,000 acres of mineral rights in the State of California. Delay rentals totaling $35,357 relating to the mining rights have been prepaid
for the remaining of 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | We also have rights to pursue three million additional acres of land with respect to which the land owner may have geothermal rights.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(c) | In September 2007, we entered into a geothermal resources lease agreement for the right to develop the geothermal resource on certain property in Utah with a party that holds an
undivided 75% interest on 11,294 acres.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Once a viable resource is verified by an independent geothermal engineer, the
unproved property is classified as proved property and capitalized costs will be amortized. Management is currently assessing which generally accepted accounting principle method to use for depletion. As of June 30, 2008, all
properties but two were still in the exploratory phase and none had been fully evaluated for viability, generating capacity, or potential reserves.

As part of the overall consideration for a geothermal lease agreement entered into with a private land owner in Nevada, we issued 1,000 restricted shares of our common stock. The fair value of the stock grant was $9,930 on the grant date.
This cost has been capitalized and classified as unproved property.

Certain legal fees incurred in connection with acquiring our
geothermal lease agreements have been capitalized as unproved property totaling $55,700. We also agreed to pay $50,000 as an advance against future delay rentals and/or royalties beginning in the second year of one of the lease agreements in Nevada.
Unproved property and prepaid delay rentals are not amortized.

D. Geothermal Well Field Development

During the second quarter of 2008, we continued developing our well fields in Nevada and Utah. We received appropriate permits and drilled one well in
Nevada and five wells in Utah. We also began the permitting process to develop well fields at two additional sites in Nevada, one additional site in Utah, one site in New Mexico and one site in Oregon. We capitalized intangible drilling costs
primarily relating to permit preparation, equipment rental, certain direct labor and overhead charges and other services, and we capitalized tangible drilling costs for items such as pipes, wellheads, rings, and drilling pads. The following table
sets forth our capitalized well field development costs by geographical locations as of June 30, 2008:



|                                                                                                                               |  |                          |            |                        |   |                       |  |   |           
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | ---------------------- | - | --------------------- |  | - | ----------
|State                                                                                                                          |  | Intangible DrillingCosts |            | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada                                                                                                                         |  | $                        | 2,759,122  |                        | $ | 384,174               |  | $ | 3,143,296 
|New Mexico                                                                                                                     |  |                          | 197,238    |                        |   |                      |  |   | 197,238   
|Utah                                                                                                                           |  |                          | 14,804,811 |                        |   | 1,809,253             |  |   | 16,614,064
|Washington and Oregon                                                                                                          |  |                          | 53,754     |                        |   |                      |  |   | 53,754    
|                                                                                                                               |  |                          |            |                        |   |                       |  |   |           
|Total                                                                                                                          |  | $                        | 17,814,925 |                        | $ | 2,193,427             |  | $ | 20,008,352
|                                                                                                                               |  |                          |            |                        |   |                       |  |   |           
|The following table sets forth our capitalized
well field development costs by geographical locations as of December 31, 2007:
|State                                                                                                                          |  | Intangible DrillingCosts |            | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada                                                                                                                         |  | $                        | 2,632,305  |                        | $ | 384,174               |  | $ | 3,016,479 
|New Mexico                                                                                                                     |  |                          | 12,168     |                        |   |                      |  |   | 12,168    
|Utah                                                                                                                           |  |                          | 1,473,420  |                        |   | 248,458               |  |   | 1,721,878 
|                                                                                                                               |  |                          |            |                        |   |                       |  |   |           
|Total                                                                                                                          |  | $                        | 4,117,893  |                        | $ | 632,632               |  | $ | 4,750,525 
|                                                                                                                               |  |                          |            |                        |   |                       |  |   |           



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The one well we have drilled in Nevada and five wells drilled in Utah had not yet been fully evaluated
for geothermal viability, generating capacity, or potential reserves as of June 30, 2008.

E. Power Project Construction-in-Progress

During the second quarter of 2008, we began construction on our first geothermal power plant in Utah, which we refer to as the Thermo
Project. We have received completed geothermal power plant blue print designs, commenced construction of the plant, and have taken possession of 45 completed turbines which are being stored at a warehouse in Utah until the plant is ready for these
units to be installed.

In order to connect our geothermal power plant to the existing power lines, we must construct transmission lines
from our geothermal power plant to the local utility interconnection point. We also must construct a substation at or near the facility that will increase the voltage from the generation facility to match local utility transmission voltages. We will
need to construct approximately 6.5 miles of transmission lines for the Thermo project. As of June 30, 2008, we had not begun construction on these transmission lines; however, we had capitalized certain costs incurred during the second quarter
to obtain right-of-way easements to construct and utilize these transmission lines. Construction of the transmission lines was completed in July 2008.

Power project construction-in-progress consisted of the following at June 30, 2008:



|                                            |  |               |            |                   |   |        
|------------------------------------------- |  | ------------- | ---------- | ----------------- | - | -------
|                                            |  | June 30, 2008 |            | December 31, 2007
|Power plant construction-in-progress        |  | $             | 19,600,612 |                   | $ | 603,814
|Transmission lines construction-in-progress |  |               | 38,336     |                   |   |       
|                                            |  |               |            |                   |   |        
|Total                                       |  |               | 19,638,948 |                   |   | 603,814
|Accumulated depreciation                    |  |               |           |                   |   |       
|                                            |  |               |            |                   |   |        
|Net power project construction-in-progress  |  | $             | 19,638,948 |                   | $ | 603,814
|                                            |  |               |            |                   |   |        

The amounts set forth in the table above consist primarily of costs incurred for the construction
of the Thermo project. Power project construction-in-progress also includes $105,228 of costs incurred for certain power plant equipment that is being manufactured for our Lightning Dock project in New Mexico. Amounts capitalized as power project
construction-in-progress will not be depreciated until the applicable geothermal power plant is placed in service.

F. Note Payable

On February 15, 2008, we executed a promissory note, whereby we agreed to pay to Lightening Dock Geothermal, Inc. (Lender) $900,000 in
principal plus $50,000 in interest on or before January 5, 2009. The promissory note is secured by a mortgage agreement whereby, our BLM lease #NM 34790 is assigned as security against an event of default by us. In the event that we cannot pay
the promissory note when due, an event of default would occur. Under the mortgage agreement, we would have 15 business days to cure such event of default or the Lender may exercise any or all of its rights, remedies and recourses including, but not
limited to, foreclosure and sale of the BLM lease #NM 34790. Accrued interest payable on this promissory note at June 30, 2008 totaled $20,833.

G.
Asset Retirement Obligation

Pursuant to the purchase of a BLM lease in New Mexico, we agreed to assume certain plug and abandon
obligations for certain wells on the leased land. Management determined that the present value of the total estimated costs to plug and abandon the wells was $89,193. In February 2008, we plugged and abandoned 11 of the well sites at a cost of
$26,453. No additional wells were required to be plugged and abandoned during the second quarter of 2008.

H. Convertible Senior Notes

On March 26, 2008, we sold $50.0 million aggregate principal amount of our 8.00% Convertible Notes due 2013 pursuant to the terms of the Purchase
Agreement between the Initial Purchaser and us. Based upon the timing of the issuance, the carrying value at June 30, 2008 approximates fair market value. We granted the Initial Purchaser of the Convertible Notes a 30-day overallotment option
to purchase up to an additional $5.0 million aggregate principal amount of the Convertible Notes. On April 1, 2008, we sold an additional $5.0 million aggregate principal amount of the Convertible Notes pursuant to the exercise of the Initial
Purchasers overallotment option. The Convertible Notes were offered through the Initial Purchaser only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. Six qualified institutional
buyers purchased the Convertible Notes. The net proceeds from the sale of the Convertible Notes, after deducting the Initial Purchasers discount of $2.2 million, totaled $52.8 million. The Initial Purchasers discount of $2.2 million has
been capitalized as a deferred financing fee and will be amortized as additional interest expense over the five-year term of the Convertible Notes.



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The Convertible Notes bear interest at a rate of 8.00% per annum, which is payable semi-annually.
The Convertible Notes are convertible, at the holders option, at an initial conversion rate of 108.3658 shares of common stock per $1,000 principal amount of Convertible Notes, which represents a 20% conversion premium based on the last
reported sale price of $7.69 per share of our common stock on March 19, 2008. Conversion of all Convertible Notes will result in the issuance of up to a maximum of 5,960,121 shares of our common stock. As of June 30, 2008, none of the
Convertible Notes had been converted. The Convertible Notes are unsecured and rank on parity with all of our other existing and future unsecured indebtedness.

We used approximately $8.7 million of the proceeds from the Convertible Notes to purchase four discounted U.S. Treasury Strips that have coupon dates and coupon amounts that correspond with the amount of interest
payable at each semi-annual payment date of the Convertible Notes. Under the Pledge and Escrow Agreement, we are required to hold these securities to maturity. For additional information, see Note B. Restricted Short-Term and Long-Term Marketable
Securities above.

Concurrently, with the pricing of the Convertible Notes, we entered into a call spread option transaction (see Note J.
Stockholders (Deficit) Equity below) and a confirmation of a forward stock purchase transaction (see Note J. Stockholders (Deficit) Equity below) with an affiliate of the Initial Purchaser of the Convertible Notes. We used approximately
$15.0 million of the net proceeds from the offering to repurchase shares of our common stock pursuant to the forward stock purchase transaction and approximately $5.9 million of net proceeds to fund the call spread option transaction. We intend to
use the remaining net proceeds from the offering for general corporate purposes and to continue well field and other development activities for the geothermal power plants we intend to develop.

I. Contingencies and Commitments

During the first
quarter of 2008, we leased a warehouse located in Tooele County, Utah. We are using the warehouse to store geothermal power plant turbines we have purchased for installation at the Thermo project. The warehouse has approximately 22,239 square feet
with monthly rent of $4,448. Expansion increments are 2,880 square feet, 3,240 square feet, and 3,600 square feet at $0.20 per square foot. The warehouse lease expired on July 31, 2008, upon which the lease converted to a month to month lease.
We expect that the lease will be renewed or that alternative space will be obtained. The leased facilities are well maintained and in good condition.

Total rent expense for all of our office space, warehouse and testing facility leases for the three months and six months ended June 30, 2008 was approximately $76,600, and $152,000, respectively. Total rent
expense for all of our office space, warehouse and testing facility leases for the three months and six months ended June 30, 2007 was approximately $62,500, and $125,200, respectively.

On April 21, 2008, our wholly-owned subsidiary entered into a Road Construction and Maintenance Agreement with Beaver County, Utah to post an
improvement bond, or mutually agreed upon equivalent, in the amount of $100,000. We are currently in the process of securing the improvement bond.

Contingent Options and Share Grants

We previously entered into a geothermal project alliance agreement whereby a service
provider agreed to provide engineering advice to us relating to geothermal drilling and geothermal power plant construction. As part of the consideration for the agreement, we committed to grant 5,000 shares of common stock upon issuance of a
certificate of completion with respect to each of the first three specific projects. During the second quarter of 2008, management assessed the likelihood of completing the contingent requirements and concluded that the completion of the first
geothermal power plant was considered probable in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly, we recognized equity compensation for the second quarter of 2008 totaling
$15,783. For the other two specific projects, management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5,
Accounting for Contingencies. Accordingly, we did not recognize equity compensation for the other two specific projects during the six months ended June 30, 2008.

We previously granted options to purchase 50,000 shares of our common stock to a key power systems executive. Vesting of these options is contingent upon
successfully placing each of our first three geothermal power plants in service. The options with respect to one third of the shares will vest upon the successful placement of each of the three geothermal power plants in service. The option exercise
price is $7.20 per share, which was the closing market price on the grant date. Failure to successfully place any of the first three geothermal power plants in service will result in the forfeiture of the unvested contingent options specifically pro
rated toward that geothermal power plant. During the second quarter of 2008, management assessed the likelihood of completing the contingent requirements and concluded that the completion of the first geothermal power plant is considered
probable in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly, we recognized equity compensation for the second quarter of 2008 totaling $32,337. For the other two specific projects,
management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly,
we did not recognize equity compensation for the other two specific projects during the six months ended June 30, 2008.



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##### Table of Contents

As of June 30, 2008, we did not have any letters of credit or repurchase obligations.

J. Stockholders (Deficit) Equity

Stock-Based Compensation
Plans

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 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 day 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,
2008, we were authorized to issue up to 7,943,173 shares of common stock pursuant to the Plan.

In 2006, the Compensation Committee of our
Board approved a new compensation plan for our outside directors. The standard equity package under the new plan consists of annual stock awards, with each award having a nominal value of $95,000 as of the date of our annual meeting of stockholders.
The actual share award is rounded to the nearest round lot of 100 shares, and the shares are delivered to the outside director one year after the date of the annual meeting. Current outside directors were allowed to transition to the new plan by
making an election within 30 days of the plans adoption by the Compensation Committee or within 30 days of our annual meeting of stockholders in subsequent years. Any director electing to adopt the new plan retained all outstanding options
held by him that were vested at the time of such election and forfeited all outstanding options held by him that were not vested at the time of such election. Three of the eligible outside directors adopted the new plan in a prior year. Each of
these directors received a stock award of 12,700 shares for 2007. These shares were delivered to each outside director in June 2008, one year after the 2007 annual meeting of stockholders.

In May 2008, each of our three outside directors who elected to adopt the new plan received a stock award of 9,500 shares for 2008. These shares will be
delivered to each director on May 28, 2009, one year after the 2008 annual meeting of stockholders. If the director resigns prior to the delivery date, the shares will be forfeited and not delivered.

Employee and Director Share Grants and Option Grants

No shares of common stock were granted to employees during the three and six months ended June 30, 2008 and 2007, respectively. We granted to our employees and directors options to purchase an aggregate of 340,000 and 412,000 shares of
common stock in the three and six months ended June 30, 2008, respectively. We granted to our employees and directors options to purchase an aggregate of 30,000 and 785,000 shares of common stock in the three and six months ended June 30,
2007, respectively.

During the three and six months ended June 30, 2008 and 2007, no vested options were forfeited or expired. During
the three and six months ended June 30, 2008, zero and 41,375 unvested options were forfeited by employees, respectively. During the three and six months ended June 30, 2007, zero and 8,000 unvested options were forfeited by employees,
respectively.

Third Party Share Grants

On January 4, 2008, in settlement of two separate outstanding invoices totaling $370,000, we issued 22,217 restricted shares of our common stock to a service provider for design and engineering services related to our geothermal power
plant development efforts and 3,565 restricted shares of our common stock to another service provider for certain permitting activities. The fair value of the restricted shares on the grant date equaled the amounts outstanding on the separate
invoices.

On February 2, 2008, in settlement of an outstanding invoice totaling $450,000, we issued 45,732 restricted shares of our
common stock to a service provider for design and engineering services related to our geothermal power plant development efforts. The fair value of the restricted shares on the grant date equaled the amount outstanding on the invoice.

On June 5, 2008, we issued 1,000 restricted shares of our common stock as part of the overall consideration to acquire a 10-year geothermal lease
with a private land owner in Nevada. The common stock had a fair value of $9,930 on the grant date. These costs have been capitalized and classified as unproved property and prepaid delay rentals.



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##### Table of Contents

Third Party Option and Warrant Grants

Stock options and warrants granted to non-employees for services are accounted for in accordance with EITF 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services which requires expense recognition based on the fair value of the options. We calculate the fair value of options and warrants that have
been granted by using the Black-Scholes pricing model. During the three and six months ended June 30, 2008 and 2007, we granted no options to third parties to purchase shares of our common stock, respectively. See discussion of contingently
vesting warrants issued during 2007 and 2008 in Note K below.

The maximum term of each option is ten years. With respect to stock options
granted during the three months and six months ended June 30, 2008 and 2007, the assumptions used in the Black-Scholes option-pricing model were as follows:



|                                  |  |                             |   |  |                           |   |  |           |   |  |           |  
|--------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | --------- | - |  | --------- | -
|                                  |  | Three months ended June 30, |   |  | Six months ended June 30, |  
|                                  |  | 2008                        |   |  | 2007                      |   |  | 2008      |   |  | 2007      |  
|Risk-free interest rate           |  | 2.71-3.66                   | % |  | 4.53-5.05                 | % |  | 2.67-3.66 | % |  | 4.51-5.05 | %
|Expected dividend yield           |  | 0.0                         | % |  | 0.0                       | % |  | 0.0       | % |  | 0.0       | %
|Volatility                        |  | 98-99                       | % |  | 99-100                    | % |  | 98-99     | % |  | 99-101    | %
|Expected exercise life (in years) |  | 6.0                         |   |  | 6.0                       |   |  | 6.0       |   |  | 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 our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock. Expected exercise life is based on
management estimates of future attrition and early exercise rates, giving consideration to employee exercise behavior.

During the three
and six months ended June 30, 2008, we issued 625 and 103,125 shares of common stock as a result of option exercises, and 1,990 and 3,990 shares of common stock as a result of warrant exercises, respectively. During the three and six months
ended June 30, 2007, we issued zero and 20,000 shares of common stock as a result of option exercises, and no shares of common stock as a result of warrant exercises, respectively.

The total intrinsic value of options exercised in the three and six months ended June 30, 2008 was approximately $1,171 and $147,159, respectively.
The cash received from exercises of options during the three and six months ended June 30, 2008 was approximately $3,869 and $486,744, respectively. The total intrinsic value of options exercised in the three and six months ended June 30,
2007 was approximately zero and $71,925, respectively. The cash received from exercises of options during the three and months ended June 30, 2007 was approximately zero and $73,000, respectively.

In the three and six months ended June 30, 2008, the intrinsic value of warrants exercised was approximately $7,781 and $31,681, respectively, and
cash received from the warrants exercised totaled $9,254 and $18,554, respectively. There were no warrants exercised during the three and six months ended June 30, 2007, respectively.

The activity for stock options and warrants during the first six months of 2008 is summarized as follows:



|                                |  |                               |   |  |                                |       |                          |   |          
|------------------------------- |  | ----------------------------- | - |  | ------------------------------ | ----- | ------------------------ | - | ---------
|                                |  | Number of Optionsand Warrants |   |  | Weighted AverageExercise Price |       | Aggregate IntrinsicValue
|Outstanding at January 1, 2008: |  | 2,910,566                     |   |  | $                              | 8.14  |                          |   |          
|Granted                         |  | 3,872,000                     |   |  |                                | 15.25 |                          |   |          
|Exercised                       |  | (104,500                      | ) |  |                                | 4.71  |                          |   |          
|Expired or forfeited            |  |                              |   |  |                                |      |                          |   |          
|                                |  |                               |   |  |                                |       |                          |   |          
|Outstanding at March 31, 2008:  |  | 6,678,066                     |   |  | $                              | 12.34 |                          | $ | 5,868,835
|Granted                         |  | 345,000                       |   |  |                                | 9.43  |                          |   |          
|Exercised                       |  | (2,615                        | ) |  |                                | 5.01  |                          |   |          
|Expired or forfeited            |  | (91,375                       | ) |  |                                | 12.00 |                          |   |          
|                                |  |                               |   |  |                                |       |                          |   |          
|Outstanding at June 30, 2008:   |  | 6,929,076                     |   |  | $                              | 12.16 |                          | $ | 8,375,327
|                                |  |                               |   |  |                                |       |                          |   |          
|Exercisable at March 31, 2008:  |  | 1,552,216                     |   |  | $                              | 7.22  |                          | $ | 4,388,990
|                                |  |                               |   |  |                                |       |                          |   |          
|Exercisable at June 30, 2008:   |  | 1,647,526                     |   |  | $                              | 7.39  |                          | $ | 6,001,972
|                                |  |                               |   |  |                                |       |                          |   |          



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##### Table of Contents

The following tables summarize certain stock option and warrant information at June 30, 2008:

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



|                         |  |           |  |                                  |  |                                |       |                |   |          
|------------------------ |  | --------- |  | -------------------------------- |  | ------------------------------ | ----- | -------------- | - | ---------
|Range of exercise prices |  | Number    |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsicvalue
|$ 3.00 - $5.75           |  | 1,249,243 |  | 6.61                             |  | $                              | 4.32  |                | $ | 6,769,647
|$ 6.00 - $11.00          |  | 1,127,000 |  | 8.74                             |  |                                | 8.32  |                |   | 1,605,680
|$11.01 - $17.20          |  | 3,819,500 |  | 6.91                             |  |                                | 14.50 |                |   |         
|$18.25 - $25.95          |  | 733,333   |  | 6.56                             |  |                                | 19.29 |                |   |         
|                         |  |           |  |                                  |  |                                |       |                |   |          
|Total                    |  | 6,929,076 |  | 7.12                             |  | $                              | 12.16 |                | $ | 8,375,327
|                         |  |           |  |                                  |  |                                |       |                |   |          

Outstanding Options and Warrants Fully Vested and Exercisable



|                         |  |           |  |                                  |  |                                |       |                |   |          
|------------------------ |  | --------- |  | -------------------------------- |  | ------------------------------ | ----- | -------------- | - | ---------
|Range of exercise prices |  | Number    |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsicvalue
|$ 3.00 - $5.75           |  | 948,493   |  | 5.96                             |  | $                              | 4.10  |                | $ | 5,350,166
|$ 6.00 - $11.00          |  | 370,350   |  | 7.95                             |  |                                | 7.98  |                |   | 651,806  
|$11.01 - $17.20          |  | 295,350   |  | 7.72                             |  |                                | 15.11 |                |   |         
|$25.95                   |  | 33,333    |  | 6.80                             |  |                                | 25.95 |                |   |         
|                         |  |           |  |                                  |  |                                |       |                |   |          
|Total                    |  | 1,647,526 |  | 6.74                             |  | $                              | 7.39  |                | $ | 6,001,972
|                         |  |           |  |                                  |  |                                |       |                |   |          

The following table summarizes the non-vested stock options at June 30, 2008:

Non-Vested Option Grants



|                              |  |                   |   |  |                                             |      
|----------------------------- |  | ----------------- | - |  | ------------------------------------------- | -----
|                              |  | Number of Options |   |  | Weighted averageper option fairmarket value
|Non-vested at January 1, 2008 |  | 1,395,925         |   |  | $                                           | 7.73 
|Granted                       |  | 172,000           |   |  |                                             | 11.40
|Vested                        |  | (157,075          | ) |  |                                             | 6.40 
|Forfeited                     |  |                  |   |  |                                             |     
|                              |  |                   |   |  |                                             |      
|Non-vested at March 31, 2008: |  | 1,410,850         |   |  | $                                           | 8.32 
|Granted                       |  | 340,000           |   |  |                                             | 7.54 
|Vested                        |  | (92,925           | ) |  |                                             | 8.63 
|Forfeited                     |  | (91,375           | ) |  |                                             | 12.00
|                              |  |                   |   |  |                                             |      
|Non-vested at June 30, 2008:  |  | 1,566,550         |   |  | $                                           | 7.92 
|                              |  |                   |   |  |                                             |      

The following table summarizes the non-vested stock awards at June 30, 2008:

Non-Vested Share Awards



|                                |  |                  |   |  |                                            |      
|------------------------------- |  | ---------------- | - |  | ------------------------------------------ | -----
|                                |  | Number of Shares |   |  | Weighted averageper share fairmarket value
|Outstanding at January 1, 2008: |  | 44,850           |   |  | $                                          | 8.54 
|Granted                         |  | 71,514           |   |  |                                            | 11.47
|Vested                          |  | (74,680          | ) |  |                                            | 11.62
|Forfeited                       |  |                 |   |  |                                            |     
|                                |  |                  |   |  |                                            |      
|Outstanding at March 31, 2008:  |  | 41,684           |   |  | $                                          | 8.03 
|Granted                         |  | 29,500           |   |  |                                            | 9.95 
|Vested                          |  | (39,767          | ) |  |                                            | 7.74 
|Forfeited                       |  |                 |   |  |                                            |     
|                                |  |                  |   |  |                                            |      
|Outstanding at June 30, 2008:   |  | 31,417           |   |  | $                                          | 10.20
|                                |  |                  |   |  |                                            |      



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##### Table of Contents

As of June 30, 2008, there was $11,030,271 (pre-tax) and $306,424 (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 2.36 years. As of June 30, 2008, the following table summarizes the
unrecognized compensation expense expected to be recognized in future periods.



|                   |  |                                          |           
|------------------ |  | ---------------------------------------- | ----------
|                   |  | Stock-basedcompensationexpense (pre-tax)
|Remainder of 2008: |  | $                                        | 1,886,407 
|2009               |  |                                          | 3,575,182 
|2010               |  |                                          | 3,161,913 
|2011               |  |                                          | 1,475,753 
|2012               |  |                                          | 1,019,092 
|2013               |  |                                          | 218,348   
|                   |  |                                          |           
|Total:             |  | $                                        | 11,336,695
|                   |  |                                          |           

Contingent Options Grant

On January 14, 2008, the Compensation Committee granted options to purchase 100,000 shares of our common stock to a key power systems employee. Vesting of these options is contingent upon successfully achieving
certain sales levels. The option price is $16.50 per share, which was the closing market price on the grant date. Failure to successfully attain the predetermined sales levels will result in forfeiture of the unvested contingent options. At
June 30, 2008, management assessed the likelihood of completing the contingent requirements in accordance with the definition in SFAS No. 5 Accounting for Contingencies. Based on this assessment, management concluded that it
was reasonably possible that a geothermal power plant will be placed in service under the employees supervision and that the required sales level can be met. Accordingly, we did not recognize equity compensation during the six
months ended June 30, 2008.

Call Spread Option Transaction

Concurrent with the issuance of the Convertible Notes, we entered into a call spread option transaction with an affiliate of Merrill Lynch. The call spread option transaction was intended to reduce the potential
dilution of our common stock upon conversion of the Convertible Notes. The Convertible Notes are convertible at any time prior to maturity at a conversion rate of 108.3658 shares per $1,000 principal amount of Convertible Notes, which represents a
conversion price of $9.23 per share, subject to adjustment. The call spread option transaction allows us to receive up to 934,118 shares of our common stock at $9.23 per share from the call spread option transaction holder, equal to the amount of
our common stock related to the excess conversion value that we would deliver to the holders of the Convertible Notes upon conversion. The number of shares that we would receive pursuant to the call spread option transaction declines after the
market price exceeds $11.15 per share to reflect the aggregate market value of $10.4 million of our common stock. The call spread option transaction will terminate upon the earlier of the maturity date of the related Convertible Notes or the first
day all of the related Convertible Notes are no longer outstanding due to conversion or otherwise.

In accordance with the provisions of
EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, we recorded the $5,850,000 cost of the call spread option transaction as a net reduction in additional paid
in capital on the Condensed Consolidated Balance Sheet for the quarter ended March 31, 2008 and will not recognize subsequent changes in fair value.

Forward Stock Purchase Transaction

Concurrent with the issuance of the Convertible Notes, we entered into a forward stock
purchase transaction with Merrill Lynch under which we are entitled to receive from Merrill Lynch 1.95 million shares of our common stock on or about the maturity date of the Convertible Notes. The forward stock purchase transaction was also
intended to reduce the potential dilution of our common stock that would result from the conversion of the Convertible Notes into shares of our common stock. The Convertible Notes are convertible at any time prior to maturity at a conversion rate of
108.3658 shares per $1,000 principal amount of Convertible Notes, which represents a conversion price of $9.23 per share, subject to adjustment.

We accounted for the forward stock purchase transaction pursuant to guidance in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, Accordingly, the
$15.0 million cost of the forward stock purchase transaction was recorded as a reduction to additional paid in capital in the Balance Sheet during the first quarter of 2008 and we will not recognize subsequent changes in fair value.



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##### Table of Contents

K. Warrants

Contingent Warrants

On January 16, 2008, we granted to Merrill Lynch warrants to purchase up to 3,700,000 shares of
our common stock, subject to vesting requirements associated with the financing of our geothermal power plants. The warrants will vest and become exercisable in increments over the term of the Commitment Letter based on the actual funding provided.
In accordance with the anti-dilution protection included in the warrants, the issuance of the Convertible Notes resulted in a reduction of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of $14.43 to $18.70.
The warrants expire on January 16, 2015 and would generate proceeds totaling $56.6 million if all of the warrants vest and are exercised.

In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, because the performance criteria related to the vesting
of the warrants has not been completed, we have not recognized the fair value of these warrants as deferred financing costs. The fair value of any warrants that vest will be capitalized and recorded as deferred financing costs.

The number of warrants that vest in connection with a project funding will depend on the amount of funding provided. No more than 3,700,000 warrants may
vest pursuant to the financing of the first 100 MW of power projects funded under the Merrill Lynch Commitment Letter. The following table sets forth the general terms of the vesting schedule and the exercise price (as adjusted through June 30,
2008) applicable to each portion of warrants to vest in accordance with the schedule:



|                                                                                                                                                                                                                                                                                                                                                                    |  |               |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -----
|Vesting Schedule                                                                                                                                                                                                                                                                                                                                                    |  | ExercisePrice
|Concurrent with the closing of each funding with respect to any portion of the first 10 MWs of geothermal power projects, warrants vest and
become exercisable for the purchase of 300,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter.                                                         |  | $             | 14.43
|                                                                                                                                                                                                                                                                                                                                                                    | 
|Concurrent with the closing of each funding with respect to any portion of the next 10 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 150,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 14.43
|                                                                                                                                                                                                                                                                                                                                                                    | 
|Concurrent with the closing of each funding with respect to any portion of the next 30 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 100,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 14.43
|                                                                                                                                                                                                                                                                                                                                                                    | 
|Concurrent with the closing of each funding with respect to any portion of the next 50 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 50,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter.  |  | $             | 18.70
|                                                                                                                                                                                                                                                                                                                                                                    | 
|Concurrent with the closing of the funding with respect to the final MW (i.e., the one hundredth MW) of geothermal power projects after taking
into account the projects previously funded, warrants vest and become exercisable for the purchase of 200,000 shares of common stock.                                                                                |  | $             | 18.70

The applicable exercise prices set forth above will be subject to further reductions to the extent
we sell shares of our common stock at an effective price per share less than the exercise prices applicable to the warrants at the time such shares are issued, including any such sales pursuant to the ATM Program.

We have agreed to grant additional warrants to Merrill Lynch upon funding of any of the additional 55 MW of geothermal power projects with respect to
which Merrill Lynch has a right of first refusal. The exercise price of any such additional warrants will be based on the volume weighted average price of our common stock over a 20 consecutive trading day period prior to the issuance of such
warrants.



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##### Table of Contents

Contingent Warrants Call Provision

Any vested warrants may be called for cancellation by us if certain conditions have been met. In general, warrants may be called for cancellation if during any period (a Call Measurement Period) of twenty
(20) consecutive trading days concluding at any time after the date such warrants first become subject to being called for cancellation (the Call Period) the closing price of the common stock exceeds a specified price (the
Trigger Price). The following table sets forth the general terms under which the warrants may be called for cancellation:



|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                         |  |              |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -----
|Warrants Subject to Being Called for Cancellation                                                                                                                                                                                                                                                                   |  | Call Period                                                                                                                             |  | TriggerPrice
|The first 395,000 warrants to vest and become exercisable in accordance with the vesting schedule (the First Series of Warrants).                                                                                                                                                                                 |  | Any time after the later of (x) thirty (30) days after the date of the first funding under the Commitment Letter and (y) March 1, 2008. |  | $            | 23.66
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 395,000 warrants to vest and become exercisable after the First Series of Warrants in accordance with the vesting schedule (the Second Series of Warrants).                                                                                                                                              |  | Any time after the later of (x) ninety (90) days after the date of the first funding under the Commitment Letter and (y) May 1, 2008.   |  | $            | 23.66
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 395,000 warrants to vest and become exercisable after the Second Series of Warrants in accordance with the vesting schedule (the Third Series of Warrants).                                                                                                                                              |  | At any time after the later of (x) 150 days after the date of the first funding under the Commitment Letter and (y) July 1, 2008.       |  | $            | 23.66
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 395,000 warrants to vest and become exercisable after the Third Series of Warrants in accordance with the vesting schedule (the Fourth Series of Warrants).                                                                                                                                              |  | At any time after the later of (x) 210 days after the date of the first funding under the Commitment Letter and (y) September 1, 2008.  |  | $            | 39.43
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 395,000 warrants to vest and become exercisable after the Fourth Series of Warrants in accordance with the vesting schedule (the Fifth Series of Warrants).                                                                                                                                              |  | At any time after January 16, 2009.                                                                                                     |  | $            | 39.43
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 987,500 warrants to vest and become exercisable after the Fifth Series of Warrants in accordance with the vesting schedule (the Sixth Series of Warrants).                                                                                                                                               |  | At any time after January 16, 2011.                                                                                                     |  | $            | 59.14
|                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                        
|The next 987,500 warrants to vest and become exercisable after the Sixth Series of Warrants in accordance with the vesting schedule (the Seventh Series of Warrants). Because the
Commitment Letter was not signed before December 31, 2007, only 737,500 of the Seventh Series of Warrants are eligible to vest. |  | At any time after January 16, 2013.                                                                                                     |  | $            | 78.85

In order to call any or all of a series of warrants for cancellation, we must provide written
notice to the holder that we intend to cancel any or all of such warrants (a Notice of Intention to Cancel) prior to 6:30 p.m. New York City time on the third (3rd) trading day immediately following the end of the relevant Call
Measurement Period. After receipt of such notice, the holder has ten (10) trading days to exercise the warrants subject to the Notice of Intention to Cancel. If the holder does not exercise such warrants during the ten (10) trading day
period, we may cancel the warrants upon delivery of notice to the holder.

The terms of the warrants provide for anti-dilution protection,
which adjusts the exercise price of each warrant, from time to time upon the occurrence of certain events, including stock splits, dividends, recapitalizations and similar events.

Upon the occurrence of such events, the exercise price of the warrants will be appropriately adjusted. As of June 30, 2008, no warrants had vested
or become exercisable by Merrill Lynch.

Contingent Warrant Registration Rights Agreement

In connection with the Commitment Letter and the issuance of warrants to purchase up to 3,700,000 shares of our common stock, we entered into a
registration rights agreement that provides the holder of the warrants with certain rights to register the resale of the warrants and the shares of common stock issuable upon exercise of the warrants. Upon a series of warrants vesting, we are
obligated to register the shares underlying the vested warrants for resale pursuant to the exercise of such warrants and cause the registration statement to remain continuously effective until all vested warrants are exercised or expired. Management
currently believes that the likelihood we will fail to register the shares in accordance with the registration rights agreement or fail to cause the registration statement to remain continuously effective is remote as defined in SFAS
No. 5 Accounting for Contingencies. Accordingly, no accrued liability is deemed necessary.



L. 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.



18



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##### Table of Contents

The following table sets forth the number of shares that would be outstanding if outstanding securities
convertible into common stock were converted into common stock, whether the convertible securities were in the money or out of the money based upon the closing market price on June 30, 2008:



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  | 27,243         |  | 3,715,000         
|Vested employee options   |  | 1,216,600      |  | 293,683           
|Unvested employee options |  | 1,043,400      |  | 523,150           
|Vested contractor options |  | 75,000         |  | 35,000            

The following table sets forth the number of shares that would be outstanding if outstanding
securities convertible into common stock were converted into common stock, whether the convertible securities were in the money or out of the money based upon the closing market price on June 30, 2007:



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  | 1,100,959      |  |                  
|Vested employee options   |  | 1,217,750      |  | 283,842           
|Unvested employee options |  | 728,416        |  | 465,825           
|Vested contractor options |  | 247,000        |  |                  

Unvested and fully-vested and undelivered stock grants totaling 31,417 and 279,517 were
outstanding on June 30, 2008 and 2007, respectively. None of these contingent shares have met the performance criteria for vesting. These warrants, options and share grants were not included in the calculation of diluted net loss per share
because their effect was anti-dilutive. Our common stock underlying the call spread option transaction and forward stock purchase transaction would be recorded as treasury stock when delivered and; therefore, would be excluded from the calculation
of diluted net loss per share because their effect is anti-dilutive.

M. Fair Value

Transition Impact

We adopted SFAS No. 157, Fair Value Measurements effective
January 1, 2008. As a result, the effect of adopting SFAS 157 was to implement the guidelines relating the disclosure of our methodology for periodic measurement of our assets and liabilities recorded at fair market value as noted below.

Fair Value Measurement

Fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a framework for measuring fair value that
includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair
value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1Fair value is based on unadjusted quoted prices in active markets that are accessible to us for identical assets or liabilities. These
generally provide the most reliable evidence and are used to measure fair value whenever available. Our Level 1 assets primarily include our money market account that is traded on active exchange markets. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or liabilities.

Level 2Fair value is based on
significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs
include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs. Our Level 2 assets include our
restricted cash certificate of deposit. Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities (and validated through back testing to trade data or confirmation that the pricing service
significant inputs are observable) or determined through use of valuation methodologies using observable market inputs such as market interest rates.

Level 3Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect our or third party pricing service assumptions about the assumptions market participants would use
in pricing the asset or liability. Level 3 valuations are normally determined using valuation methodologies such as option pricing models, discounted cash flow models and other similar techniques. We currently do not have any Level 3 assets and
liabilities.



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##### Table of Contents

The table below presents the balances of assets and liabilities measured at fair value on a recurring
basis at June 30, 2008:



|                          |  |         |           |         |   |         |  |       |   |  |   |          
|------------------------- |  | ------- | --------- | ------- | - | ------- |  | ----- | - |  | - | ---------
|                          |  | Level 1 |           | Level 2 |   | Level 3 |  | Total
|Cash and cash equivalents |  | $       | 5,092,226 |         | $ | 0       |  | $     | 0 |  | $ | 5,092,226
|Restricted cash           |  |         | 0         |         |   | 75,000  |  |       | 0 |  |   | 75,000   
|                          |  |         |           |         |   |         |  |       |   |  |   |          
|Total assets              |  | $       | 5,092,226 |         | $ | 75,000  |  | $     | 0 |  | $ | 5,167,226
|                          |  |         |           |         |   |         |  |       |   |  |   |          

The table below presents the balances of assets and liabilities measured at fair value on a
recurring basis at March 31, 2008:



|                          |  |         |            |         |   |         |  |       |   |  |   |           
|------------------------- |  | ------- | ---------- | ------- | - | ------- |  | ----- | - |  | - | ----------
|                          |  | Level 1 |            | Level 2 |   | Level 3 |  | Total
|Cash and cash equivalents |  | $       | 21,377,606 |         | $ | 0       |  | $     | 0 |  | $ | 21,377,606
|Restricted cash           |  |         | 0          |         |   | 75,000  |  |       | 0 |  |   | 75,000    
|                          |  |         |            |         |   |         |  |       |   |  |   |           
|Total assets              |  | $       | 21,377,606 |         | $ | 75,000  |  | $     | 0 |  | $ | 21,452,606
|                          |  |         |            |         |   |         |  |       |   |  |   |           

N. Business Segments

The basis for presenting segment information results generally is consistent with our overall operating practices. We report operating segment information in accordance with Financial Accounting Standard Board
Statement No. 131, Disclosure About Segments of an Enterprise and Related Information, which establishes reporting standards for disclosure of operating segments. All consolidating items and corporate administrative costs are
included in Corporate and Other.

Accordingly, the presentation below comprises financial information relating to our segments for the
three and six months ended June 30, 2008 and 2007, respectively:



|                                                   |  |                                        |            |   |               |   |            |                    |  |   |            |   |  |   |             |  
|-------------------------------------------------- |  | -------------------------------------- | ---------- | - | ------------- | - | ---------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|As of and for the Three Months Ended June 30, 2008 |  | Transportationand IndustrialTechnology |            |   | Power Systems |   |            | Corporate andOther |  |   | Total      |  
|Revenues                                           |  | $                                      | 5,880      |   |               | $ |           |                    |  | $ |           |   |  | $ | 5,880       |  
|Segment Operating Loss                             |  |                                        | (1,199,684 | ) |               |   | (3,102,021 | )                  |  |   | (2,213,240 | ) |  |   | (6,514,945  | )
|Depreciation and Amortization                      |  |                                        | 45,758     |   |               |   | 4,855      |                    |  |   | 23,121     |   |  |   | 73,734      |  
|Fixed Asset Purchases                              |  |                                        | 46,324     |   |               |   | 14,166     |                    |  |   | 15,037     |   |  |   | 75,527      |  
|Total Assets                                       |  | $                                      | 721,132    |   |               | $ | 55,814,836 |                    |  | $ | 16,991,864 |   |  | $ | 73,527,832  |  
|                                                   |  |                                        |            |  
|As of and for the Three Months Ended June 30, 2007 |  |                                        |            |   |               |   |            |                    |  |   |            |  
|Revenues                                           |  | $                                      | 28,562     |   |               | $ |           |                    |  | $ |           |   |  | $ | 28,562      |  
|Segment Operating Loss                             |  |                                        | (928,559   | ) |               |   | (622,215   | )                  |  |   | (1,880,687 | ) |  |   | (3,431,461  | )
|Depreciation and Amortization                      |  |                                        | 43,411     |   |               |   | 2,844      |                    |  |   | 18,850     |   |  |   | 65,105      |  
|Fixed Asset Purchases                              |  |                                        | 57,657     |   |               |   |           |                    |  |   | 13,785     |   |  |   | 71,442      |  
|Total Assets                                       |  | $                                      | 1,043,421  |   |               | $ | 2,599,985  |                    |  | $ | 15,390,913 |   |  | $ | 19,034,319  |  
|                                                   |  |                                        |            |  
|As of and for the Six Months Ended June 30, 2008   |  |                                        |            |   |               |   |            |                    |  |   |            |  
|Revenues                                           |  | $                                      | 136,423    |   |               | $ |           |                    |  | $ |           |   |  | $ | 136,423     |  
|Segment Operating Loss                             |  |                                        | (2,112,436 | ) |               |   | (4,796,874 | )                  |  |   | (5,021,097 | ) |  |   | (11,930,407 | )
|Depreciation and Amortization                      |  |                                        | 87,917     |   |               |   | 9,990      |                    |  |   | 52,129     |   |  |   | 150,036     |  
|Fixed Asset Purchases                              |  |                                        | 71,284     |   |               |   | 23,522     |                    |  |   | 43,799     |   |  |   | 138,605     |  
|Total Assets                                       |  | $                                      | 721,132    |   |               | $ | 55,814,836 |                    |  | $ | 16,991,864 |   |  | $ | 73,527,832  |  
|                                                   |  |                                        |            |  
|As of and for the Six Months Ended June 30, 2007   |  |                                        |            |   |               |   |            |                    |  |   |            |  
|Revenues                                           |  | $                                      | 152,325    |   |               | $ |           |                    |  | $ |           |   |  | $ | 152,325     |  
|Segment Operating Loss                             |  |                                        | (2,108,671 | ) |               |   | (869,829   | )                  |  |   | (5,242,456 | ) |  |   | (8,220,956  | )
|Depreciation and Amortization                      |  |                                        | 84,856     |   |               |   | 5,567      |                    |  |   | 41,839     |   |  |   | 132,262     |  
|Fixed Asset Purchases                              |  |                                        | 73,605     |   |               |   | 1,447      |                    |  |   | 25,281     |   |  |   | 100,333     |  
|Total Assets                                       |  | $                                      | 1,043,421  |   |               | $ | 2,599,985  |                    |  | $ | 15,390,913 |   |  | $ | 19,034,319  |  



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##### Table of Contents

O. Income Taxes

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a companys financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires a company to determine whether it is more likely than not that a tax position will
be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The application of
income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding the income tax exposures. Interpretations of and
guidance surrounding income tax laws and regulations change over time. As such, changes in the subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income.

At the adoption date of January 1, 2007, we had no unrecognized tax benefit which would affect the effective tax rate if recognized. There has been
no significant change in the unrecognized tax benefit during the year ended December 31, 2007 and for the six months ended June 30, 2008.

We classify interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of June 30, 2008, we had no accrued interest or penalties related to uncertain
tax positions. The tax year 2007 federal return remains open to examination and the tax years 2004-2007 remain open to examination by other taxing jurisdictions to which we are subject. The Internal Revenue Service completed their examination of our
2005 federal tax return during the second quarter of 2008 without any material adjustments.

P. Supplemental Cash Information

For the six months ended June 30, 2008:



| |  |  | No cash was paid for interest and $400 was paid for income taxes.
| | - |  | -----------------------------------------------------------------



| |  |  | We recorded in accrued liabilities certain capitalized well field development expenditures that were not paid as of June 30, 2008. These accrued capitalized
costs included both tangible and intangible drilling costs and were omitted from the statement of cash flows as non-cash items totaling $5,405,935.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accrued liabilities and accounts payable certain capitalized power systems equipment and contractor fees that were not paid as of June 30, 2008.
These accrued expenses included equipment such as pumps, cooling towers, turbines and related construction costs for a geothermal power plant under construction. These accrued capitalized costs were omitted from the statement of cash flows as
non-cash items totaling $12,755,586.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accounts payable and accrued liabilities certain capitalized commissions that were not paid as of June 30, 2008. These accrued commissions were
incurred upon the signing of the power purchase agreements with the City of Anaheim and the Salt River project. The accrued commissions were omitted from the statement of cash flows as non-cash items totaling $956,941.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $450,000 non-cash payment for 45,732 shares of our common stock issued to settle an outstanding invoice from a service provider for design and
engineering services relating to construction of a geothermal power plant. The non-cash payment was equal to the fair market value of the shares on the date the shares were granted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $318,814 non-cash payment for 22,217 shares of our common stock issued to settle an outstanding invoice from a service provider for design and
engineering services relating to construction of a geothermal power plant. The non-cash payment was equal to the fair market value of the shares on the date the shares were granted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $51,158 non-cash payment for 3,565 shares of our common stock issued to settle an outstanding invoice for professional services related to obtaining
the proper permits that enable us to drill for geothermal resources. The non-cash payment was equal to the fair market value of the shares on the date the shares were granted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $9,930 non-cash payment for 1,000 shares of our restricted common stock issued to acquire the geothermal mineral rights on properties in Nevada. The
non-cash payment was equal to the fair market value of the shares on the date the 10-year geothermal leases were signed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the six months ended June 30, 2007:



| |  |  | No cash was paid for interest and $200 was paid for income taxes.
| | - |  | -----------------------------------------------------------------



| |  |  | We recorded a $39,800 non-cash payment for 7,500 shares of our common stock issued to acquire geothermal mineral rights on properties in Nevada. The non-cash
payment was equal to the fair market value of the shares on the date the 50-year geothermal leases were signed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | We recorded a $990,000 non-cash payment for 200,000 shares of restricted common stock issued to a service provider for advisory services. The non-cash payment was
equal to the fair market value of the shares on the date the advisory services payment was approved by our Board of Directors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $110,250 non-cash payment for 15,000 shares of unrestricted common stock issued to a service provider for advisory services. The non-cash payment was
equal to the fair market value of the shares on the date the advisory services agreement was signed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Q. Recent Accounting
Pronouncements

SFAS 162

In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
SFAS 162 is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. We do not currently believe that adopting SFAS 162 will have a material impact on our Condensed Consolidated Financial Statements.

SFAS 161

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement 133 (SFAS 161).The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entitys financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and
how derivative instruments and related hedged items are accounted for under Statement 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. We are currently assessing the new disclosure requirements required by SFAS 161.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). In
SFAS 160, the FASB established accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parents ownership interest while the parent retains its controlling interest to be
accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for annual periods beginning on or after December 15,
2008. Retroactive application of SFAS 160 is prohibited. We are currently evaluating the requirements of SFAS 160 and the potential impact on our financial statements.

SFAS 141(R)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)). In SFAS 141(R), the FASB retained the fundamental requirements of Statement No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an
acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes
the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature
and financial effect of the business combination. SFAS 141(R) is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the requirements of SFAS 141(R) and the potential impact on our financial
statements.

EITF 07-1

In December
2007, the FASB issued Emerging Issues Task Force No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (EITF 07-1). EITF 07-1 prescribes the
accounting for parties of a collaborative arrangement to present the results of activities for the party acting as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, EITF No. 07-1 clarified that the determination of whether
transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer. EITF No. 07-1 is effective for
collaborative arrangements that exist on January 1, 2009 and application is retrospective. We are currently assessing the impact of adopting EITF -07-01 on our financial statements.



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EITF 07-3

In June 2007, the FASB issued Emerging Issues Task Force No. 07-3, Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). EITF
07-3 provides guidance on whether non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and
capitalized until the goods have been delivered or the related services have been rendered. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. Effective January 1, 2008, we adopted EITF 07-3 which did not materially
impact our financial position or results of operations.

EITF 07-5

In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an entity
should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also clarifies
the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the
impact of EITF 07-5 on our consolidated financial position and results of operations.

EITF 08-3

In June 2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements (EITF
08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. We are
currently assessing the impact of EITF 08-3 on our consolidated financial position and results of operations.

FSP EITF 03-6-1

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities, (FSP EITF 03-6-1), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method. FSP EITF 03-6-1 is effective January 1, 2009 and requires prior period EPS amounts presented to be adjusted retrospectively. Our grants of restricted stock
and restricted stock units contain non-forfeitable rights to dividend equivalents and are considered participating securities as defined in FSP EITF 03-6-1 and will be included in computing EPS using the two-class method beginning with the first
quarter of 2009. We believe that the adoption of FSP EITF 03-6-1 will not have a material impact on the calculation of basic or diluted EPS.

FSP FAS
142-3

In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (FSP FAS 142-3),
Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets. The intent of this pronouncement is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No. 141, Business Combinations. We are required to adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible assets
acquired after the effective date.



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##### Table of Contents

R. Subsequent Events

As discussed in Note A, on June 17, 2008, we entered into the Sales Agreement with Merrill Lynch relating to the ATM Program, pursuant to which we may offer and sell through Merrill Lynch, as our sales agent,
from time to time, shares of our common stock with an aggregate sales price of up to $25,000,000. Sales of shares under the ATM Program are made by means of ordinary brokers transactions on the NYSE Arca exchange at market prices. Merrill
Lynch receives from us a commission of 2.00%, based on the gross sales price per share, for any shares sold through it as our agent under the Sales Agreement.

No shares were sold under the ATM Program during the quarter ended June 30, 2008. We began selling shares pursuant to the ATM Program during the third quarter of 2008. As of August 8, 2008, we had sold
732,000 shares pursuant to the ATM Program for an aggregate of $7.2 million. After deducting commissions, we received net proceeds of $7.1 million from the sale of these shares.

We previously granted Merrill Lynch warrants to purchase our common stock. The warrants contain an anti-dilution provision, subject to an adjustment upon
any dilutive issuance by us. In accordance with the anti-dilution protection included in the warrants, sales of our common stock pursuant to the ATM Program have resulted in an additional reduction of the strike prices of the warrants from a range
of $14.43 to $18.70 to a range of $14.38 to $18.62 as of August 8, 2008.



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

Cautionary Statement Regarding Forward-Looking Statements

Certain information set forth in this
report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or
performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as
believes, expects, may, should, anticipates, or intends or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional
forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.

All forward-looking statements, including without limitation, managements examination of historical operating trends, are based upon our current
expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but, there can be no assurance that managements expectations, beliefs and
projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the
date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be read in conjunction with our condensed consolidated financial statements and related notes
included elsewhere in this report and should be considered in light of the risks referenced in Part II. Item 1A. Risk Factors below.

Overview

We are an environmentally focused geothermal power development and technology licensing company. We operate in two
business segments: Power Systems and Transportation and Industrial Technology. Our Power Systems segment is seeking to develop clean, renewable geothermal electric power plants and bottom-cycling operations. Our Transportation and Industrial
Technology segment focuses on using our Symetron technology to improve the efficiency of electric motors, generators and power electronic drives used in electric and hybrid electric vehicle propulsion systems. Through these two business
segments, we are employing a Well to Wheels strategy in an effort to produce a positive impact on the environment and economically beneficial results for our stockholders. By executing our Well to Wheels strategy, we aim to
become both a producer of clean, geothermal electric power as well as a licensor of technologies that enable electric and hybrid vehicles with range extenders and improve the efficiency of electric motors drive systems used in hybrid electric
vehicles and other applications.

We have initiated the development of eight geothermal projects in our Power Systems segment to date, and
we are currently in the development stage of drilling wells and constructing geothermal power plants to further develop viable geothermal resources. We have accumulated a large portfolio of geothermal interests in six western continental states.
These geothermal interests are important to our ability to develop geothermal power plants. We continue to accumulate additional interests in geothermal resources for future projects. We have either obtained or are in the process of obtaining
permits for the development of our eight geothermal projects which are located in Nevada, Utah, New Mexico and Oregon. We believe that the geothermal resource for each of these projects has the potential to provide at least enough geothermal energy
for a power plant of approximately 10 megawatts (MW). However, we expect that many of the project sites that we intend to develop, have potential resources to generate more than 10 MW of electrical power. For example, our first 10 MW
geothermal power plant is currently under construction and is located in Utah. We refer to this



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project as the Thermo project. GeothermEx. Inc. recently completed an independent report on the greater Thermo project area. The report concluded, with a 90%
confidence level, that the recoverable geothermal energy reserves of the greater Thermo project area are 138 MW and that the most likely reserve value is 238 MW, based on a minimum 20-year life. Therefore, in addition to the 10MW Thermo project we
are currently constructing, we intend to explore opportunities to build multiple plants near the Thermo project. We expect that other project sites we have selected to develop an initial 10MW power plant could also prove to have resources that could
support multiple plants. Our plan is to eventually seek to maximize the full power generating potential of all of the sites we select for development.

In addition to developing our geothermal resources, we are in the process of completing other steps necessary to enable us to further finance, construct and operate geothermal power plants. We obtained a commitment
letter from Merrill Lynch that sets forth general terms and conditions relating to the structuring and financing of up to 155 MW of geothermal power plants. Pursuant to the commitment letter, we have obtained financing commitment for three projects,
including the Thermo project (discussed below) and projects we intend to develop in Nevada and New Mexico. The funding of each of these commitments is subject to the satisfaction of certain conditions. As further described below, the financing
commitment letter for our Truckee project in Nevada expired on June 30, 2008. However, we and Merrill Lynch have agreed to work towards formally extending the expiration date of this commitment in the near future. See Liquidity and
Capital Resources, below.

We have also entered into purchase agreements with a manufacturer of turbines that we intend to use in our
geothermal power plants. As of June 30, 2008, we had taken delivery of 45 turbines pursuant to these agreements. The turbines are being stored in a warehouse pending installation at the Thermo project.

We have also entered into power purchase agreements with investor owned utilities and municipalities. During the first quarter of 2008, we entered into
power purchase agreements with the City of Anaheim, California to provide electricity from two of our future plants totaling 22 MW. Our Thermo power plant is expected to be one of the two geothermal power plants to provide electricity to the City of
Anaheim in accordance with the Anaheim power purchase agreements. In addition, on June 12, 2008, we signed a power purchase agreement with the Salt River Project Agricultural Improvement and Power District (SRP), the nations
third largest public utility, to provide 10 MW of electricity to the utility serving the Phoenix, Arizona area. Our New Mexico power plant is expected to provide electricity for the SRP power purchase agreement. We are currently negotiating
additional power purchase agreements with investor owned utilities and other municipalities.

We believe we have made substantial progress
in advancing our geothermal business. We have amassed what we believe to be one of the largest undeveloped portfolios of geothermal resources in the United States. We have established valuable relationships and commitments with substantial, well
regarded companies relating to geothermal equipment, technology, financing, and resource identification and evaluation, among others. We have secured three power purchase agreements to provide 32 MW of electric power, and we are in various stages of
negotiation to provide an additional 110 MW of electric power. We believe we are engaged in a high growth business and are well positioned to play a meaningful role in providing clean, renewable power to consumers. Not everything has been in keeping
with our original timeframes and cost expectations. Some of our projects have experienced longer development timelines than originally planned. However, we believe our first power plant is being built in a fraction of the time typically required for
other geothermal power plants, and we expect to have it placed in service later in 2008. We anticipate developing our large geothermal resource portfolio using our unique, rapid deployment business model.

Our Transportation and Industrial Technology segment continues to focus on commercializing our Symetron electric motor, generator and drive
technologies and our series plug-in hybrid vehicle (PHEV) with range extender technologies. We are working to develop a 100 mile per gallon (mpg) light truck demonstration vehicle in addition to a 100 mpg SUV demonstration
vehicle. Our plug-in electric drive system is being designed to allow light trucks and SUVs to achieve over 100 mpg in typical local daily driving with near zero emissions, by using electricity instead of petroleum as the primary fuel. Pacific
Gas & Electric of California agreed in February 2008 to initially purchase two of these test vehicles. The SUV demonstration vehicle that is under development is being built in cooperation with a leading global OEM. During 2007 and early
2008, we entered into several other agreements and collaborative arrangements with large manufacturers to explore additional potential applications of our Symetron technologies, including a collaborative arrangement with Hyundai Heavy
Industries (HHI) of Korea and a license agreement with Wilson Automotive of Canada. We intend to continue to explore opportunities to commercialize our Symetron technologies.

Consistent with our limited operating history, we have generated limited revenues from operations. We anticipate that material revenue will not be
generated from our Power Systems segment until the geothermal power plants under construction and those we intend to develop are constructed and placed in service. To date, our primary source of revenue has been from research and development
subcontracts administered through contractors for certain government agencies. Pursuant to these subcontracts, we performed engineering design, development and testing activities to demonstrate the viability of specific applications of our
technologies.



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Because we are in the stage of development, there is limited historical information upon which an
evaluation can be made regarding our business and prospects. We also have limited insight into how market and technology trends may affect our future business. The revenue and income potential of both of our business segments is unproven and the
markets in which we expect to compete are very competitive and rapidly evolving. Our business and prospects should be considered in light of the risks, expenses, cash requirements, challenges and uncertainties that exist in a development stage
company seeking to develop new technologies and products in competitive and rapidly evolving markets.

We have incurred substantial losses
since inception and we are not operating at cash breakeven. Our continuation as a going concern is dependent on efforts to raise additional capital, increase revenues, reduce expenses, and ultimately achieve profitable operations. If substantial
losses continue, or if we are unable to raise sufficient, additional capital on reasonable terms, liquidity concerns may require us to curtail operations, liquidate or sell assets or pursue other actions that could adversely affect future
operations.

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 amount and timing of any revenues we are able to generate. Given our current business strategy, however, we will need to secure additional financing in order to execute our plans and continue our
operations.

Power Plant Construction

We currently have one geothermal power plant under construction in Utah, which we refer to as the Thermo project. The Thermo project has the potential to provide approximately 10.5 MW of electricity, net of the station usage or parasitic
load needed to pump the geothermal fluids throughout the plant. We expect to complete the construction of the Thermo project during the fourth quarter of 2008, subject to the timely funding of project financing pursuant our financing commitment from
Merrill Lynch relating to the project.

In early August 2008, GeothermEx, Inc., an independent third party geothermal consultant, completed
and delivered its analysis of the Thermo well field. GeothermEx reported that well #24-34 indicated 3.6 megawatts (MW) net at the well depth level we plan to produce, with temperatures in excess of 280 degrees Fahrenheit. GeothermExs analysis
of the resource concludes that ample resources are available in the immediate vicinity of the Thermo project to support a 10 MW net plant using the closed loop binary systems planned for the Thermo project. The report also concludes that the larger
area of the Thermo resource field is most likely to sustain 238 MW gross with a 90% probability of sustaining 138 MW of geothermal energy, or enough power to supply over 100,000 homes. This indicates that the area could support several additional
plants, subject to further testing and analysis.

An independent report is required for each of our geothermal projects under the Merrill
Lynch commitment letter, and the report is a necessary milestone in order to obtain project financing. We believe the issuance of the GeothermEx report puts us in a position to finalize and close on funding for the Thermo project pursuant to our
financing commitment relating to the Thermo project. However, the ultimate timing of this funding will depend on a number of factors, some of which are beyond our control. See Liquidity and Capital Resources, below.

Certain development costs relating to the Thermo project have exceeded our original estimates. Costs incurred for well field development, pipe and other
steel components have increased. In addition, we expended more for well field activities due, in part, to our desire to gather additional data to enhance our understanding of the geothermal resource located in the greater Thermo area, beyond what is
needed for the planned 10 MW geothermal power plant. We also elected to build a larger, higher voltage transmission line to the Thermo project due to the potential for additional projects that could be supported by the indicated resource. However,
we also continue to see an increase in demand for green renewable electricity by utilities and municipalities. Market indications and pricing in approved contracts issued by utilities and municipalities have increased substantially, especially in
the California market. If these trends continue, we expect that potential future geothermal development projects will benefit from power purchase agreements that provide for the sale of power at higher prices reflecting this increased demand.

Generally, the development schedule for our other projects has been affected slightly by funding delays and other factors. However, we are
working to complete the remaining steps necessary to commence construction of several other plants. We currently expect to complete construction of our Lightning Dock project in New Mexico during the first quarter of 2009. We also currently expect
to complete the development of the remaining six plants under development during 2009.

Research and Development

Our Transportation and Industrial Technology segment is engaged in an ongoing process of researching, developing and demonstrating new applications for
our motor and drive/controller-related technologies as well as our new extended range PHEV-based product and solution technologies. These include the periodic introduction of new motor and generator-related technologies, application of applicable
technologies to manufacturers test applications, testing and performance evaluations of these technologies and participation in the design and engineering of related projects for original equipment manufacturers (OEMs).



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We devote considerable effort to further develop various technologies and to internally test, refine,
characterize and further verify the technologies. Characterization of the technology is the process by which the performance levels that can be achieved over a range of likely operating conditions are determined. This data provides a performance
description that is useful to the customer in understanding the capabilities of the motor without revealing the intellectual property underlying the improved performance levels.

Our research and development costs for the three months ended June 30, 2008 and 2007 totaled
$1,194,030 and $785,472, respectively and for the six months ended June 30, 2008 and 2007 totaled $2,163,213 and $1,581,771, respectively. Future research and development expenditures are anticipated in order to develop additional
SymetronTMand PHEV with extended range technologies primarily relating to plug-in hybrid electric vehicles and electric and electric-hybrid
propulsion systems, integrated starter alternators (ISAs), AC electric motors, generators and power electronic AC drives. Research and development costs, relating to development of potential technologies, are expected to increase over
time as milestones in the development process are achieved.

Sources of Revenue

To date, our primary source of revenue has been from research and development subcontracts, administered through contractors with certain government
agencies. Pursuant to these subcontracts, we performed engineering design, development and testing activities in an effort to demonstrate that specific applications of our technology are viable.

We are seeking to generate revenues from both of our business segments. Our Power Systems segment
is seeking to generate revenues from the geothermal power plants it intends to develop. Our Transportation and Industrial Technology segment is seeking to generate revenues by licensing our SymetronTMtechnologies to third parties. We also expect to begin to generate modest revenues in the future from contracts we have entered into for the development of extended range PHEV
demonstration vehicles. We recently accepted an initial deposit of $200,000 for the production of these vehicles. We also expect to begin to realize modest revenues from the sale of Symetron-enhanced motors and generators through our business
cooperation agreement with HHI in the fourth quarter of 2008, although the exact amount and timing of these revenues will be dependent on HHIs ability to implement these Symetron-enhanced designs into its manufacturing and distribution system.
We also have entered into a licensing agreement with Wilson Automotive to manufacture and sell Symetron-enhanced alternators for high-output applications. Although progress is being made by each of our business segments, significant revenues may not
be generated as expected by either of our segments, if at all.

Significant Expenses

We have incurred significant losses since our inception. As of June 30, 2008, we had incurred an accumulated deficit and deficit accumulated after
re-entry into the development stage of approximately $64.1 million on cumulative revenues since inception of approximately $0.9 million. Our net losses for the six months ended June 30, 2008 and 2007 totaled $12.9 million and $7.9 million,
respectively.

During the six months ended June 30, 2008, the monthly accrual based expenditure rate for operations increased to $1.7
million per month from approximately $1.0 million per month during the twelve months ended December 31, 2007. The higher spending rate primarily reflects increased professional services associated with designing the financing and tax structures
for our potential tax equity financing as contemplated by our commitment letter with Merrill Lynch and prospecting and exploration costs associated with geothermal power plant development. We expect that our average monthly cash expenditure rate
will continue to increase as we implement our plans to develop geothermal power plants.

For the six months ended June 30, 2008 and
2007, our operating expenses consisted primarily of cost of sales, general and administrative expenses, power project development expenses and research and development expenses. Cost of sales for each of the periods presented includes the direct
labor, materials and overhead expenses required to perform work on research and development subcontracts. These subcontracts are now completed and we intend to further develop certain applications our Transportation and Industrial Technology segment
is seeking to commercialize.

General and administrative expenses for all periods presented include expenses related to our marketing,
sales, accounting, legal, investor relations, human resources and other administrative functions. General and administrative expenses also include non-cash equity-based compensation paid to employees, consultants and service providers. We have made
significant use of non-cash equity-based compensation to conserve cash and provide incentives to our employees. We expect to continue to use equity-based compensation to provide incentives to our employees and certain service providers.

Power project development expenses for the six months ended June 30, 2008 and 2007 primarily include professional services for mapping,
environmental and geological studies and other prospecting costs related to the exploration for geothermal resources. Power project development expenses also include certain legal costs to design the tax equity partnership and other operating
agreements as well as certain consulting costs relating to project oversight. We expect that our power project development expenses will increase in future periods as we pursue the development of additional power projects and continue to explore for
geothermal resources.



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Research and development expenses for all periods presented primarily include the costs incurred by our
Transportation and Industrial Technology segment in connection with engineering design, development and testing of the technologies it is seeking to commercialize. Total engineering expenses for each period are allocated between cost of sales and
research and development based on the engineering time and expenses by project. Our research and development expenses are expected to increase over time as we pursue additional opportunities to commercialize our technologies.

Results of Operations



|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                 |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                                 |  | 2008                        |            |   | 2007                      |   |            | 2008 |  |   | 2007        |  
|Revenue                                          |  | $                           | 5,880      |   |                           | $ | 28,562     |      |  | $ | 136,423     |   |  | $ | 152,325    |  
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Operating expense                                |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Cost of sales                                    |  |                             |           |   |                           |   | 27,662     |      |  |   | 74,112      |   |  |   | 493,792    |  
|General and administrative                       |  |                             | 2,224,758  |   |                           |   | 2,027,518  |      |  |   | 5,005,414   |   |  |   | 5,433,456  |  
|Power project development                        |  |                             | 3,102,037  |   |                           |   | 619,371    |      |  |   | 4,889,091   |   |  |   | 864,262    |  
|Research and development                         |  |                             | 1,194,030  |   |                           |   | 785,472    |      |  |   | 2,163,213   |   |  |   | 1,581,771  |  
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Total operating expenses                         |  |                             | 6,520,825  |   |                           |   | 3,460,023  |      |  |   | 12,131,830  |   |  |   | 8,373,281  |  
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Operating loss                                   |  |                             | (6,514,945 | ) |                           |   | (3,431,461 | )    |  |   | (11,995,407 | ) |  |   | (8,220,956 | )
|Interest income                                  |  |                             | 111,542    |   |                           |   | 217,590    |      |  |   | 171,276     |   |  |   | 401,528    |  
|Interest expense                                 |  |                             | (1,037,770 | ) |                           |   |           |      |  |   | (1,103,282  | ) |  |   |           |  
|Other                                            |  |                             |           |   |                           |   | (10,146    | )    |  |   | 75,775      |   |  |   | (31,158    | )
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Loss before income taxes                         |  |                             | (7,441,173 | ) |                           |   | (3,224,017 | )    |  |   | (12,851,638 | ) |  |   | (7,850,586 | )
|Income tax benefit (expense)                     |  |                             |           |   |                           |   |           |      |  |   |            |   |  |   |           |  
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Net loss applicable to common stockholders       |  | $                           | (7,441,173 | ) |                           | $ | (3,224,017 | )    |  | $ | (12,851,638 | ) |  | $ | (7,850,586 | )
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Loss per common share-basic and diluted          |  | $                           | (0.13      | ) |                           | $ | (0.06      | )    |  | $ | (0.23       | ) |  | $ | (0.15      | )
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Weighted average common sharesbasic and diluted |  |                             | 56,118,000 |   |                           |   | 54,311,000 |      |  |   | 56,070,000  |   |  |   | 52,906,000 |  
|                                                 |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  

Comparison of Three Months Ended June 30, 2008 and 2007

Revenue

During the three months ended June 30,
2008, we recognized revenue totaling $6,000, which is comparable to the revenues received during the same period in 2007. Revenues for the 2008 period were generated from the sale of two prototype motors to a customer for testing.

Operating Expenses

Cost of sales. We reported
cost of sales for the three months ended June 30, 2008 and 2007 at zero and $28,000, respectively. The costs relating to the sale of the two prototype motors during the three months ended June 30, 2008 are included in research and
development costs.

General and Administrative.General and administrative expenses increased to approximately $2.2 million for the
three months ended June 30, 2008 from approximately $2.0 million for the three months ended June 30, 2007. This increase is due primarily to a $0.2 million increase in professional service expenses during the three months ended
June 30, 2008 over the same period in 2007. This increase reflects increased accounting fees associated with financing activities during the quarter. Other employment related costs increased by approximately $0.1 million during the second
quarter of 2008 compared to the first quarter of 2007, reflecting higher average salaries and employment levels. These increases were partially offset by a reduction in equity-based non-cash employee compensation expense, which declined to $0.5
million in the second quarter of 2008 compared to $0.6 million in same period of 2007. Equity-based non-cash compensation expense was lower during the second quarter of 2007 due to the vesting of a larger number of executive stock grants during the
prior year. Office expenses totaled $0.1 for the three months ended June 30, 2008, which remained relatively flat when compared to the same period in 2007.



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Power Project Developments.Power project development expenses during the three months ended
June 30, 2008 totaled $3.1 million as compared to $0.6 for the three months ended June 30, 2007. Equity-based non-cash employee and contractor compensation for the three months ended June 30, 2008 remained relatively flat at $0.2
million when compared to the second quarter of 2007. Employment related costs for power project development employees increased during the second quarter of 2008 by $0.3 million over the second quarter of 2007 due to increasing employment levels to
execute our business plan. During the three months ended June 30, 2008, professional services relating to geological engineering consulting, completed transmission line capacity studies and legal fees associated with designing the tax equity
and financing structures contemplated by financing commitments under our commitment letter with Merrill Lynch increased $1.8 million over the second quarter of 2007. During the second quarter of 2008, other expenses also increased by $0.2 million,
as compared to the same period in 2007, primarily due to expensing previously capitalized unproved property in California and Utah that we no longer intend to develop.

Research and Development. Research and Development expense increased from $0.8 million in the three months ended June 30, 2007 to $1.2 million for the three months ended June 30, 2007. Equity based
non-cash employee compensation remained relatively flat at approximately $0.1 million for each of the three months ended June 30, 2008 and 2007. Cash based employee compensation decreased by approximately $0.1 million from the three months
ended June 30, 2007 to the same period in 2008 reflecting a reduction in the number of employees performing research and development activities. Professional services increased by approximately $0.3 million during the three months ended
June 30, 2008 over the same period 2007. This increase is due to the timing of consulting work performed by our PHEV consultants and hiring a former key employee as a consultant. Other engineering expenses increased during the three months
ended June 30, 2008 over the comparable 2007 period by approximately $0.2 million primarily due to the increased materials consumed in testing.

Interest and Other Income. Interest income for the three months ended June 30, 2008 decreased slightly to $0.1 million from $0.2 million from the same period in 2007. The decrease was primarily due to
higher average monthly cash balances in the prior period. Interest expense for the three months ended June 30, 2008 increased to $1.0 million from zero during the same period in 2007. The increase was due to accrued interest expense relating to
the issuance of $55.0 million of convertible notes (the Convertible Notes).

Comparison of Six Months Ended June 30, 2008 and 2007

Revenue

During the six months ended
June 30, 2008, we recognized revenue totaling $0.1 million, which was consistent with the same period in 2007. During the first quarter of 2008, we completed the ARINC subcontract, which began in October 2006. We accounted for this subcontract
on the percentage of completion basis. In addition to revenues from the ARINC subcontract, revenues for the six months ended June 30, 2008 reflect the sale of two prototype motors during the second quarter, as described above.

Operating Expenses

Cost of sales. We reported
cost of sales for the six months ended June 30, 2008 and 2007 totaling $0.1 million and $0.5 million, respectively. The decrease in cost of sales for 2008 compared to the prior year is primarily related to a $342,000 loss during the first
quarter of 2007 resulting from costs greater than originally anticipated to complete the ARINC subcontract objectives. As noted above, we completed the ARINC subcontract in the first quarter of 2008.

General and Administrative.General and administrative expenses decreased to approximately $5.0 million for the six months ended June 30,
2008 from approximately $5.4 million for the six months ended June 30, 2007. This decrease is due primarily to a reduction in equity-based non-cash employee compensation expense, which declined to $1.1 million in the first six months of 2008
compared to $1.5 million in the same period of 2007. Equity-based non-cash compensation expense was higher during the first six months of 2007 due to the vesting of a larger number of executive stock and option grants. Equity-based non-cash service
provider compensation for the six months ended June 30, 2008 decreased by approximately $1.0 million from the same period in 2007 since no shares were issued to service providers in the first half of 2008. 200,000 shares of common stock were
issued to a provider of financial advisory services during the six months ended June 30, 2007. Other employment related costs increased by approximately $0.2 million during the first six months of 2008 compared to the same period of 2007,
reflecting higher average salaries and employment levels. Professional service expenses increased approximately $0.9 million during the six months ended June 30, 2008 over the same period in 2007. This increase reflects professional services
associated with equity financing structures. Office expenses totaled $0.3 million for the six months ended June 30, 2008, which remained relatively flat when compared to the same period in 2007.

Power Project Developments.Power project development expenses during the six months ended June 30, 2008 totaled $4.9 million as compared to
$0.9 million for the six months ended June 30, 2007. Equity-based non-cash employee and contractor compensation for the six months ended June 30, 2008 increased $0.1 million over the first six months of 2007 as a result of stock option
grants to new employees. Employment related costs for power project development employees increased during the first and second quarters of 2008 by $0.6 million over the same period of 2007 as we increased our work force levels to execute our
business plan. During the six months ended June 30, 2008, professional services relating to geological engineering consulting, completed



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transmission line capacity studies and legal fees associated with designing the tax equity and financing structures contemplated by financing commitments
under our commitment letter with Merrill Lynch increased $2.8 million over the same period of 2007. During the six months ended June 30, 2008, other expenses also increased by $0.2 million as compared to the same period in 2007 primarily due to
expensing previously capitalized unproved property in California and Utah that we no longer intend to develop.

Research and
Development. Research and Development expense increased from $1.6 million in the six months ended June 30, 2007 to $2.2 million for the six months ended June 30, 2007. Equity based non-cash employee compensation for the six months
ended June 30, 2008 decreased by approximately $0.1 million for the six months ended June 30, 2008 and 2007. Cash based employee compensation during the six months ended June 30, 2008 decreased by approximately $0.2 million compared
to the six months ended June 30, 2007, reflecting a slight reduction in the number of employees performing research and development activities. Professional services increased by approximately $0.4 million during the three months ended
June 30, 2008 over the same period of 2007. This increase was due to the timing of consulting work performed by our PHEV consultants and the hiring of a former key employee as a consultant. The portion of engineering expenses that could be
attributed to cost of sales increased approximately $0.4 million during the six months ended June 30, 2008 over the comparable 2007 period, primarily due to the increased materials consumed in testing.

Interest and Other Income. Interest income for the six months ended June 30, 2008 decreased to $0.2 million from $0.4 million for the same
period in 2007. The decrease was primarily due to higher average monthly cash balances in the 2007 period. Interest expense for the three months ended June 30, 2008 increased to $1.0 million from zero during the same period in 2007. The
increase was due to accrued interest expense relating to the issuance of the Convertible Notes.

Liquidity and Capital Resources



|                                              |  |              |           |                  |   |          
|--------------------------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|Cash and Cash Equivalents                     |  | June 30,2008 |           | December 31,2007
|Cash                                          |  | $            | 60,910    |                  | $ | 516,938  
|Certificate of Deposit (unrestricted portion) |  |              |          |                  |   | 325,000  
|Money Market Account                          |  |              | 5,031,316 |                  |   | 5,070,272
|                                              |  |              |           |                  |   |          
|Total                                         |  | $            | 5,092,226 |                  | $ | 5,912,210

Since inception, we have funded our operations primarily through the sale of equity instruments
and borrowings. Most recently, on June 17, 2008, we entered into an ATM Equity Offering Sales Agreement (the Sales Agreement) with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant
to which we may offer and sell through Merrill Lynch, as our sales agent, from time to time, shares of our common stock with an aggregate sales price of up to $25,000,000 (the ATM Program). Sales of shares under the ATM Program are made
by means of ordinary brokers transactions on the NYSE Arca exchange at market prices. Merrill Lynch receives from us a commission of 2.00%, based on the gross sales price per share, for any shares sold through it as our agent under the Sales
Agreement. No shares were sold under the ATM Program during the quarter ended June 30, 2008. We began selling shares pursuant to the ATM Program during the third quarter of 2008. As of August 8, 2008, we had sold 732,000 shares pursuant to
the ATM Program for an aggregate of $7.2 million. After deducting commissions, we received net proceeds of $7.1 million from the sale of these shares.

On March 2008, we raised gross proceeds of $50,000,000, before deducting fees and commissions, from the issuance of 8.00% Convertible Senior Notes due 2013 (the Convertible Notes). We placed approximately
$7.9 million of the proceeds in an escrow account to secure payment of the first four interest payments payable on the Convertible Notes. We also used approximately $15 million of the proceeds to enter into a forward stock purchase transaction,
pursuant to which we will repurchase shares of our common stock, and approximately $5.9 million of net proceeds to fund a call spread option transaction. On April 1, 2008, the initial purchaser of the Convertible Notes exercised its
overallotment option and we sold an additional $5.0 million aggregate principal amount of Convertible Notes. We placed approximately $0.8 million of the proceeds from the overallotment exercise in an escrow account to secure payment of the first two
years of interest payable on the additional Convertible Notes issued pursuant to the overallotment exercise.

Our outstanding Convertible
Notes pay interest semi-annually on April 1 and October 1 of each year at a rate of 8.00% per annum. As described above, we placed an aggregate of approximately $8.7 million in an escrow account to secure payment of the first two
years of interest payable on the Convertible Notes. The Convertible Notes are convertible, at the holders option, at an initial conversion rate of 108.3658 shares of common stock per $1,000 principal amount of Convertible Notes. The conversion
rate is subject to adjustment. If a fundamental change occurs, holders will have the right to require us to repurchase for cash all or any portion of their notes at 100% of the principal amount of the notes to be repurchased plus accrued and unpaid
interest. Holders who convert their notes in connection with certain fundamental changes may also be entitled to a make whole premium in the form of additional shares of our common stock. The maturity date of the Convertible Notes is April 1,
2013.



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In March 2007, we raised gross proceeds of $12,525,001, before deducting fees and commissions, pursuant
to the private placement of 2,693,552 shares of our common stock. In connection with the private placement, we also issued 1,037,012 warrants that were called in August 2007, resulting in additional proceeds totaling $6.3 million.

At June 30, 2008, we had approximately $5.1 million in cash and cash equivalents. Our operating activities used approximately $5.2 million and
approximately $4.1 million of cash during the six months ended June 30, 2008 and 2007, respectively. We have incurred substantial losses since inception and we are not operating at cash breakeven.

Our continuation as a going concern is dependent on efforts to raise additional capital, increase revenues, reduce expenses, and ultimately achieve
profitable operations. If we are unable to raise sufficient, additional capital on reasonable terms, liquidity concerns may require us to curtail operations, liquidate or sell assets or pursue other actions that could adversely affect future
operations.

As a result of the private placement of the Convertible Notes, our independent registered public accounting firm reissued
their report with respect to our 2007 financial statements on April 1, 2008 to remove an explanatory paragraph that expressed substantial doubt about our ability to continue as a going concern. Since that time, we have used a substantial
portion of the proceeds from the issuance of the Convertible Notes to fund our operations and development efforts, including the ongoing construction of the Thermo project. We had anticipated that the construction financing for our Thermo project
would close sooner than it has. However, due to delays in meeting certain conditions precedent and other factors, our construction financing for the Thermo project has been delayed. We elected to use development funds for construction purposes in
order to keep the Thermo project progressing. As a result, our cash and cash equivalents are being depleted, and we need to close the construction funding for the Thermo project and raise additional funds to continue operating as a going concern.

We have raised, and we expect to continue to raise, additional funds from the sale of shares of our common stock through the ATM Program.
However, from time to time we may need to suspend sales of common stock under the ATM Program due to market conditions or other factors beyond our control. In addition, the gross proceeds we can raise pursuant to the ATM Program are limited to $25
million, of which we had already sold $7.2 million as of August 8, 2008. Therefore, in order to execute our business strategy and continue our operations, we will likely need to seek funding from other sources through the issuance of debt,
preferred stock, equity or a combination of these instruments. We cannot be certain however, that funding from these sources will be available on reasonable terms or at all. If we are unable to secure adequate funds on a timely basis on terms
acceptable to us, we may need to modify our current plans for plant construction, well field development and other development activities, or extend the time frame over which these activities will take place.

In addition to funding for general corporate purposes, well field development and certain other general development expenses, we will need to finance
each of the geothermal power projects we intend to develop. As more fully described below, we have entered into a Commitment Letter (the Commitment Letter) with Merrill Lynch. The Commitment Letter sets forth certain general terms
relating to the structure and financing of up to 155 megawatts MW of geothermal power plants we intend to develop. Pursuant to the commitment letter, we have obtained financing commitments for three projects, including the Thermo project and
projects we intend to develop in Nevada and New Mexico. The funding of each of these commitments remains subject to the satisfaction of certain conditions, including satisfactory due diligence. As further described below, the financing commitment
for our Truckee project in Nevada expired on June 30, 2008. However, we and Merrill Lynch have agreed to work towards formally extending the expiration date of this financing commitment in the near future. If Merrill Lynch elects to provide or
arrange a financing commitment letter with respect to any additional projects, such financing commitment is also expected to be subject to satisfactory due diligence, the execution of a separate commitment letter relating to such project, and
certain other conditions.

We believe we are in a position to finalize and close in a timely manner on construction and permanent funding
for the Thermo project pursuant to the financing commitment relating to the Thermo project. We currently expect that we will be able to close on this funding by the end of August 2008. The timing for funding of the other financing commitments will
depend on the progress of our development at these sites.

As part of our geothermal power project development efforts, we have made a
variety of financial commitments. Currently, our most significant financial commitments relate to our obligations under our purchase agreements with UTCP and other vendors. These purchase agreements allow us to order and purchase turbine generators,
transformers, pumps, cooling towers, transmission lines, power substations, fire safety equipment and other major electronic components for use in our geothermal power plants. As of June 30, 2008, we were obligated to pay UTCP $53.8 million in
2008, $5.3 million in 2009, and $3.6 million per year beginning in 2009 and continuing through 2012. As of June 30, 2008, we are also obligated to pay certain vendors for the geothermal power plant operating equipment and transmission line
equipment totaling $4.8 million in 2008.



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To date, we have funded any required payments under our obligations to UTCP and other vendors from our
available cash and cash equivalents, including proceeds generated by the financing activities described above. However, we will need to obtain additional funding to meet these and other similar obligations. We intend to fund these obligations
primarily through project financing for individual power projects in accordance with the terms of the Commitment Letter and the related financing commitments for individual projects. However, we may also need to seek financing from other sources. If
we are unable to obtain sufficient funding to provide for the timely payment of these obligations and we are unable to renegotiate the terms of these obligations, we could be liable to UTCP and other vendors for breach of these obligations. Any
failure to make timely payments under these obligations could also adversely affect our relationships with the vendors and cause our geothermal development plans to be delayed.

In connection with the purchase of our BLM lease for the Lightning Dock project in New Mexico, we also executed a promissory note in February 2008
whereby we agreed to pay to the seller $900,000 in principal plus $50,000 in interest charges on or before January 5, 2009. We expect to fund these obligations primarily through the financing commitment we intend to seek for the Lightning Dock
project. However, we may need to obtain financing for all or a portion of these commitments from other sources.

We also have obligations
to pay delay rentals and other expenses associated with the geothermal resources on properties in which we have acquired an interest. Generally, these obligations will not be financed as part of a financing commitment for a specific power project,
and we will need to finance the payment of these obligations from other sources.

Our Commitment Letter with Merrill Lynch

On January 16, 2008, we, together with our wholly-owned subsidiary, Truckee Geothermal No. 1 SV-01, LLC (the Truckee Subsidiary),
entered into the Commitment Letter with Merrill Lynch. The Commitment Letter sets forth general terms relating to the structuring and financing of up to 155 MW of geothermal power plants we intend to develop, including a financing commitment (the
Truckee Commitment) from Merrill Lynch to provide non-recourse financing for the construction of a 10.5 MW geothermal power plant in Nye County, Nevada (the Truckee Plant), subject to certain conditions as described below. We
have subsequently obtained two additional financing commitments from Merrill Lynch to provide non-recourse financing for our Thermo project in Utah and our Lighting Dock project in New Mexico, subject to certain conditions as described below.

Each of the projects we intend to fund under the Commitment Letter will be held in a special purpose entity. These entities will be
responsible for the debt service, all maintenance and operations expenses and various fees and distributions to us. We will act as engineering, procurement and construction contractor and operator of each of the projects.

The Thermo Commitment

On
May 16, 2008, pursuant to the Commitment Letter, we and our subsidiary, Thermo No. 1 BE-01, LLC (the Thermo Subsidiary), entered into a financing commitment letter (the Thermo Commitment) with Merrill Lynch relating
to the project financing and tax equity funding for what is expected to be a 10 MW geothermal power plant near Beaver, Utah, which we refer to as the Thermo project. The Thermo Commitment provides for debt financing and tax equity capital for the
Thermo project. The tax equity capital will be provided by Merrill Lynch or, at the option of Merrill Lynch, by a third party that can utilize the tax benefits provided by the Thermo project.

The Thermo Commitment provides for up to approximately $45 million of construction and term debt financing and up to approximately $26 million of tax
equity capital. Under the Thermo Commitment, approximately $17 million of the tax equity financing will be used to pay down the construction debt at the time the plant is placed in service. The term debt will fully amortize over 17 years of
operations. Generally, the finance structure is designed to distribute a significant portion of the first ten years of cash flows to us in the form of development fees during the first two to three years of operations based upon both the successful
completion of the Thermo project and attainment of on-going operational targets. Once the debt for the Thermo project has been retired and most of the tax benefits have been utilized, 95% of all of the remaining cash flows of the Thermo project are
expected to flow to us. It is the intention of the parties that the power generation facilities will qualify to receive tax credits and other benefits under the provisions of the Internal Revenue Code.

The Thermo Commitment is subject to market conditions, due diligence, receipt of all necessary internal approvals by both us and Merrill Lynch, Merrill
Lynchs satisfaction with the structure of the tax equity financing, the negotiation and execution of definitive documentation and the satisfaction of certain other conditions. As described above, we expect that these conditions will be
satisfied and we will be in a position to close on this funding by the end of August 2008.



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The Lightning Dock Commitment

On July 18, 2008, pursuant to the Commitment Letter, we and our subsidiary, Lightning Dock Geothermal HI-01, LLC (the Lightning Dock
Subsidiary), entered into a financing commitment letter (the Lightning Dock Commitment) with Merrill Lynch relating to the project financing and tax equity funding for what is expected to be a 10 MW geothermal power plant in
Hidalgo County, New Mexico, which we refer to as the Lightning Dock project. The Lightning Dock Commitment provides for debt financing and tax equity capital for the Lightning Dock project. The tax equity capital will be provided by Merrill Lynch
or, at the option of Merrill Lynch, by a third party that can utilize the tax benefits provided by the Project.

The Lightning Dock
Commitment provides for up to approximately $43 million of construction and term debt financing and up to approximately $27 million of tax equity capital. Under the Lightning Dock Commitment, we expect approximately $16 million of the tax equity
financing will be used to pay down the construction debt at the time the plant is placed in service. Further, we expect the term debt will fully amortize over 17 years of operations. Generally, the finance structure is designed to distribute a
significant portion of the first ten years of cash flows to us in the form of development fees during the first two years of operations based upon both the successful completion of the Lightning Dock project and attainment of on-going operational
targets. Once the debt for the Lightning Dock project has been retired and most of the tax benefits have been utilized, we expect that 95% of all of the remaining cash flows of the Lightning Dock project are expected to flow to us. It is the
intention of the parties that the power generation facilities will qualify to receive tax credits and other benefits under the provisions of the Internal Revenue Code.

The Lightning Dock Commitment is subject to market conditions, due diligence, receipt of all necessary internal approvals by both us and Merrill Lynch, Merrill Lynchs satisfaction with the structure of the tax
equity financing, the negotiation and execution of definitive documentation and the satisfaction of certain other conditions.

The
Truckee Commitment

The Truckee Commitment expired by its terms on June 30, 2008. However, we and Merrill Lynch have agreed to work
towards formally extending the expiration date of this commitment in the near future. The Truckee Commitment originally provided for up to $44 million, including approximately $38.4 million in the form of 15-year fully amortizing notes, to fund
approximately $33 million of total construction costs, plus reserve accounts, accrued interest, transaction fees and other costs. The balance of the commitment is attributable to a letter of credit to be required under a power purchase agreement.
The interest rate payable by us on the amortizing notes would equal to LIBOR plus 500 basis points, swapped to a fixed rate of interest, determined at the time of funding. We anticipate that the Truckee Commitment would have a tax equity component
similar to the Thermo Commitment and the Lightning Dock Commitment.

Potential Additional Financing Commitments

Including the Thermo Commitment, the Truckee Commitment and the Lightning Dock Commitment, the Commitment Letter gives Merrill Lynch the exclusive right
to provide or arrange financing for up to 100 MW of substantially similar geothermal power plants we intend to develop, other than certain excluded financings. Merrill Lynch also has a right of first refusal with respect to the financing of an
additional 55MW of geothermal plants to be developed by us. If Merrill Lynch provides a financing commitment proposal with respect to any future projects, such financing commitment will be subject to satisfactory due diligence and certain other
conditions and the execution of a separate commitment letter relating to such project. Until Merrill Lynch has financed 20 MW of geothermal power projects under the Commitment Letter, we are generally obligated to accept any financing commitment
proposed by Merrill Lynch that has terms similar to or more favorable than the financing commitment relating to the Truckee Plant. After Merrill Lynch has financed 20 MW of geothermal power projects under the Commitment Letter, we may enter into
certain excluded financings with parties other than Merrill Lynch.

The timing of construction for the geothermal power plants we intend to
develop, as well as the specific sites we choose to develop and construct, will depend on a number of factors, including drilling results, permitting and our ability to obtain adequate financing. Although we have obtained individual financing
commitments for the Thermo project, the Truckee project and the Lightning Dock project, our development efforts at one or more of these sites may not progress as rapidly as our development efforts at other sites. As a result, we may seek to finance
and construct geothermal power plants on other sites prior to the completion of construction of one or more of these plants.

Structuring Fees and Other Consideration

As part of the Commitment Letter, we have agreed to pay Merrill Lynch certain
non-refundable structuring fees in connection with the closing of each funding transaction. The structuring fees will initially be 4%, but will decrease for future financings once the cumulative financing commitment under the Commitment Letter
reaches certain levels.



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As additional consideration, we granted Merrill Lynch warrants to purchase our common stock. The warrants
will vest and become exercisable in increments over the term of the Commitment Letter based on the actual funding provided. The exercise price of the warrants will range from $14.98 to $19.71 per share, subject to adjustment upon any dilutive
issuance by us. In accordance with the anti-dilution protection included in the warrants, the issuance of the Convertible Notes resulted in a reduction of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of
$14.47 to $18.79. Furthermore, in accordance with the anti-dilution protection included in the warrants, sales of common stock pursuant to the ATM Program resulted in an additional reduction of the original strike prices of the warrants from a range
of $14.47 to $18.79 to a range of $14.38 to $18.62 as of August 8, 2008. In general, warrants that vest in connection with the funding of earlier projects will be greater in number and have a lower exercise price, and warrants that vest in
connection with the funding of later projects will be fewer in number and have a higher exercise price. Under certain circumstances, a reduced percentage of the warrants will vest if we reject a Merrill Lynch funding proposal for a project and
subsequently obtain funding for such project from another party or, in certain circumstances, from Merrill Lynch. Any vested warrants may be called for cancellation by us if certain conditions have been met, including minimum market price
requirements relating to our common stock. We have agreed to grant additional warrants to Merrill Lynch upon funding of any of the additional 55 MW of geothermal power projects with respect to which Merrill Lynch has a right of first refusal. The
exercise price of any such additional warrants will be based on the volume weighted average price of our common stock over a 20 consecutive trading day period prior to the issuance of such warrants. Pursuant to a registration rights agreement
between us and Merrill Lynch, we have agreed to file one or more registration statements covering the resale of the warrants issued pursuant to the Commitment Letter, as well as the resale of the shares of common stock issuable pursuant to the
exercise of such warrants.

Consolidated Statements of Cash Flows

Operating Activities. Cash consumed by operating activities for the six months ended June 30, 2008 consisted primarily of a net loss of approximately $12.9 million, adjusted for approximately $1.7 million
of stock-based compensation and stock issued for services. Accounts payable and accrued liabilities increased $24.3 million to $28.5 million at June 30, 2008 due primarily to accrued expenses for well field development, geothermal power plant
construction, transmission line construction, and the purchase of power systems equipment. The portion of accrued liabilities relating to well field development, construction-in-progress and power systems equipment, totaling $19.1 million, has been
reclassified as a non-cash item to decrease the change in accrued liabilities. Net accounts receivable increased $0.1 million reflecting the completion of the ARINC subcontract. Deferred revenues increased by approximately $0.2 million, reflecting a
down payment received for our anticipated PHEV.

Cash consumed by operating activities for the six months ended June 30, 2007
consisted primarily of a net loss of approximately $7.9 million, adjusted for approximately $3.1 million of stock-based compensation and stock issued for services. Interest receivable at June 30, 2007 decreased by approximately $0.4 million
resulting from the collection of the note receivable paid in full by a former merger candidate. Accrued liabilities increased $0.3 million due to the timing of payments for certain professional services contracts. Other current assets at
June 30, 2007 increased $0.3 million due to increased prepaid software maintenance and directors and officers insurance coverage.

Investing Activities. We purchased 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 on 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 normally managed by
diversifying investments among a variety of high credit-quality issuers. However, as of June 30, 2008, cash in our money market account was invested with AIM Funds earning 2.46 percent interest and totaled $5.0 million. Cash from our checking
account is swept nightly into a variable rate interest bearing account earning 2.05 percent per annum and totaled $0.1 million at June 30, 2008.

Investing activities consumed approximately $28.6 million in the six months ended June 30, 2008, reflecting payments of $5.0 million for the purchase of electric turbines for use in the geothermal power plants we
intend to develop. During the first and second quarters of 2008, we also purchased $9.8 million of equipment for geothermal well field development projects, primarily in Utah, and we incurred construction costs on our first geothermal power plant
totaling $1.9 million. We deposited approximately $2.7 million primarily with drilling vendors, transmission line contractors, and utilities to conduct transmission line capacity and routing studies on our behalf. We also paid $0.5 million in
connection with the acquisition of leases and the exercise of certain options relating to interests in unproved geothermal properties in Oregon, Nevada and Utah. In connection with the issuance of the Convertible Notes, we invested a portion of the
proceeds totaling $8.7 million into four discounted U.S. Treasury Strips that mature separately on each of the first four semi-annual interest payment dates of the Convertible Notes. The U.S. Treasury Strips were placed into an escrow account to
secure the first four interest payments on the Convertible Notes. These expenditures were partially offset by cash provided by investing activities, including the net change in the notes receivable totaling $0.2 million. We have also made deposits
to manufacture prototypes of our Transportation and Industrial Technology segment designs totaling $0.1 million.



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Investing activities provided approximately $3.5 million in the six months ended June 30, 2007,
reflecting collection in full of a promissory note receivable of approximately $5.5 million and by changing the status of $0.3 million of a certificate of deposit from restricted to unrestricted. We have made down payments towards the purchase of 45
turbines to generate electricity from geothermal resources totaling $1.7 million and we have purchased certain equipment for development of a well field in Nevada totaling $0.3 million. We also acquired leases for unproved geothermal properties,
purchased office equipment and leasehold improvements totaling $0.3 million.

Financing Activities. Financing activities provided
approximately $33.0 million and $11.9 million of cash in the six months ended June 30, 2008 and 2007, respectively. We completed the issuance of the Convertible Notes and the related overallotment option totaling $55.0 million on April 1,
2008. In connection with the sale of the Convertible Notes, we incurred financing fees of $2.2 million, which was paid to Merrill Lynch. We also entered into a call spread option transaction and a forward stock purchase transaction totaling $5.9
million and $15.0 million, respectively. We intend to use the remaining net proceeds from the offering for general corporate purposes and to continue well field and other development activities for the geothermal power plants we intend to develop.
In connection with the purchase of our BLM lease in New Mexico, we entered into a promissory note payable and received cash for $0.9 million in February 2008. During the first quarter of 2008, we also received approximately $0.5 million from the
exercise of other outstanding stock options and warrants.

We completed the private placement of 2,693,552 shares of our common stock on
March 30, 2007. We received net proceeds of $11.9 million from this private placement transaction. As part of the private placement transaction, we issued warrants to purchase an aggregate of 1,037,012 shares of common stock at an exercise
price of $6.05 per share to the purchasers of our common stock and the placement agent. During August 2007, all of these warrants were exercised and we received approximately $6.3 million of proceeds for the purchase of the 1,037,012 shares.
Financing activity in the six months ended June 30, 2007 provided approximately $0.1 million from the exercises of options to purchase shares of our common stock.

As of June 30, 2008, we had stockholders deficit of approximately $11.2 million as compared to stockholders equity totaling $19.5 million at December 31, 2007. The stockholders deficit
primarily arose from entering into a call spread option transaction for $5.9 million and a forward stock purchase transaction for $15.0 million in connection with our issuance of the Convertible Notes during the first quarter of 2008. The effect of
purchasing the call spread option transaction and forward stock purchase transaction was a reduction in the additional paid-in capital account totaling $20.9 million.

Our cash balance, together with cash provided by the initial purchasers exercise of the overallotment option and customer sales will not be sufficient to satisfy our anticipated cash requirements for normal
operations and capital expenditures through June 30, 2009. As described above, we will need to secure additional financing in order to execute our plans and continue our operations.

Dividends.No dividends have been paid relating to either common stock or preferred stock during the fiscal year 2007 through the second quarter
of 2008. We do not expect to pay dividends on either common stock or preferred stock in the near future.

Off-Balance Sheet Arrangements

As of June 30, 2008, we had the following off-balance sheet arrangements as defined by Item 303(a)(4)(II) of Securities and Exchange
Commission (SEC) Regulation S-K.

None.

Contractual Obligations and Commitments

During the first quarter of 2008, we leased a warehouse located in Tooele County,
Utah. We are using the warehouse to store geothermal power plant turbines we have purchased for installation at the geothermal power plants we are developing in Utah. The warehouse has approximately 22,239 square feet with monthly rent of $4,448.
Expansion increments are 2,880 square feet, 3,240 square feet, and 3,600 square feet at $0.20 per square foot. The warehouse lease expired on July 31, 2008, upon which the lease converted to a month to month lease. We expect that the lease will
be renewed or that alternative space will be obtained. The leased facilities are well maintained and in good condition.

Total rent expense
for all of our office space, warehouse and testing facilities leases for the three months and six months ended June 30, 2008 was approximately $76,600, and $152,000, respectively. Total rent expense for all of our office space, warehouse and
testing facilities leases for the three months and six months ended June 30, 2007 was approximately $62,500, and $125,200, respectively.

On April 21, 2008, our wholly-owned subsidiary entered into a Road Construction and Maintenance Agreement with Beaver County, Utah to post an improvement bond, or mutually agreed upon equivalent, in the amount of $100,000. We are
currently in the process of securing the improvement bond.



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The table below summarizes our operating lease obligations pursuant to our non-cancelable leases, our
long-term debt and our executed purchase obligations as of June 30, 2008:



|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |          
|--------------------------- |  | ---------------------- | ----------- | --------------- | - | ----------- |  | ----------- | ---------- | ---------------- | - | ---------- |  | - | ---------
|                            |  | Payments due by period
|                            |  | Total                  |             | Less than 1year |   | 1 to 3years |  | 3 to 5years |            | More than5 years
|Operating Lease Obligations |  | $                      | 2,445,616   |                 | $ | 309,722     |  | $           | 1,188,792  |                  | $ | 459,051    |  | $ | 488,051  
|Long Term Debt              |  |                        | 72,662,000  |                 |   | 4,462,000   |  |             | 8,800,000  |                  |   | 59,400,000 |  |   |         
|Purchase Obligations        |  |                        | 80,198,350  |                 |   | 59,427,875  |  |             | 8,869,250  |                  |   | 7,847,040  |  |   | 4,054,185
|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |          
|Total                       |  | $                      | 155,305,966 |                 | $ | 64,199,597  |  | $           | 18,858,042 |                  | $ | 67,706,091 |  | $ | 4,542,236
|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |          

The contractual obligations set forth above are recorded as liabilities in our consolidated
financial statements. The operating lease obligations include operating leases for our corporate headquarters and a testing facility. There is a provision in the corporate headquarters lease that allows for lease termination at our option without
penalty on August 31, 2009. We have subleased additional space at our corporate headquarters pursuant to a sublease that expired on July 31, 2008. The sublease is currently leased on a month to month basis. The operating lease obligations
also include rent payments we have agreed to make in connection with certain geothermal lease agreements.

The purchase obligations set
forth above include a series of purchase and service agreements whereby certain vendors have agreed to provide certain equipment and services to us. As of June 30, 2008, we were obligated to pay the vendors approximately $59.4 million in 2008
and $5.3 million in 2009 and $3.6 million per year continuing through 2012 as reflected in the table above.

Recently Issued Accounting Pronouncements

SFAS 162

In May 2008, the FASB
issued Statement of Financial Accounting Standards No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective
60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. We do not currently believe that adopting SFAS 162 will have a material impact on our Condensed Consolidated Financial Statements.

SFAS 161

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement 133 (SFAS 161).The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entitys financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and
related hedged items are accounted for under Statement 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently assessing
the new disclosure requirements required by SFAS 161.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). In SFAS 160, the FASB established accounting and reporting
standards that require noncontrolling interests to be reported as a component of equity, changes in a parents ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained
noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for annual periods beginning on or after December 15, 2008. Retroactive application of SFAS 160 is
prohibited. We are currently evaluating the requirements of SFAS 160 and the potential impact on our financial statements.

SFAS 141(R)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)). In SFAS 141(R), the
FASB retained the fundamental requirements of Statement No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations.
However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective
for all assets acquired



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and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS 141(R) is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the requirements of SFAS 141(R) and the potential impact on our financial
statements.

EITF 07-1

In December
2007, the FASB issued Emerging Issues Task Force No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (EITF 07-1). EITF 07-1 prescribes the
accounting for parties of a collaborative arrangement to present the results of activities for the party acting as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, EITF No. 07-1 clarified that the determination of whether
transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer. EITF No. 07-1 is effective for
collaborative arrangements that exist on January 1, 2009 and application is retrospective. We are currently assessing the impact of adopting EITF -07-01 on our financial statements.

EITF 07-3

In June 2007, the FASB issued Emerging Issues Task Force No. 07-3, Accounting
for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 provides guidance on whether non-refundable advance payments for goods that will be used or
services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and capitalized until the goods have been delivered or the related services have been rendered. EITF
07-3 is effective for fiscal years beginning after December 15, 2007. Effective January 1, 2008, we adopted EITF 07-3 which did not materially impact our financial position or results of operations.

EITF 07-5

In June 2008, the FASB ratified EITF Issue
No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and
market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of EITF 07-5 on our consolidated financial position and
results of operations.

EITF 08-3

In
June 2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also
provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of EITF 08-3 on our consolidated financial position and results of
operations.

FSP EITF 03-6-1

In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1), which addresses whether
instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method. FSP EITF
03-6-1 is effective January 1, 2009 and requires prior period EPS amounts presented to be adjusted retrospectively. Our grants of restricted stock and restricted stock units contain non-forfeitable rights to dividend equivalents and are
considered participating securities as defined in FSP EITF 03-6-1 and will be included in computing EPS using the two-class method beginning with the first quarter of 2009. We believe that the adoption of FSP EITF 03-6-1 will not have a material
impact on the calculation of basic or diluted EPS.

FSP FAS 142-3

In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (FSP FAS 142-3), Determination of the Useful Life
of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. The intent of this pronouncement is to improve the consistency between the useful life of a



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recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141,
Business Combinations. We are required to adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible assets acquired after the effective date.



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

In addition to the risks inherent in our 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.

As of June 30, 2008, we had approximately $5.1 million in cash and cash equivalents, including $0.1 million in restricted cash, that
were invested primarily in low risk money market accounts and certificates of deposit until needed for operating and other activities. Current money market rates are approximately 2.46%. The money market interest rates have declined from 2.77% over
the last three months. If interest rates continue to decline by another 1%, the amount of interest earned on our money market balance would be approximately $51,000 lower over a twelve month period. A review of our money market account indicated
that no impairment occurred during the six months ended June 30, 2008 and no write-down in fair value is considered necessary.

Concurrent with the issuance of the Convertible Notes, we entered into a call spread option transaction with an affiliate of Merrill Lynch for the cost of $5.9 million. The call spread option transaction was intended to reduce the potential
dilution of our common stock upon conversion of the Convertible Notes. The Convertible Notes are convertible at any time prior to maturity at a conversion rate of 108.3658 shares per $1,000 principal amount of Convertible Notes, which represents a
conversion price of $9.23 per share, subject to adjustment. The call spread option transaction allows us to receive up to 934,118 shares of our common stock at $9.23 per share from the call spread option transaction holder, equal to the amount of
our common stock related to the excess conversion value that we would deliver to the holders of the Convertible Notes upon conversion. The number of shares that we would receive pursuant to the call spread option transaction declines after the
market price exceeds $11.15 per share to reflect the aggregate market value of $10.4 million of our common stock. The call spread option transaction will terminate upon the earlier of the maturity date of the Convertible Notes or the first day all
of the Convertible Notes are no longer outstanding due to conversion or otherwise. Our ability to receive the maximum aggregate market value of shares of our common stock pursuant to the call spread option transaction is dependent upon the
performance of our stock price and the desire of holders to convert the Convertible Notes into shares of our common stock. If holders fail to convert the Convertible Notes into shares of our common stock prior to the due date in 2013, the call
spread option transaction will expire without the shares of our common stock being delivered to us.

Concurrent with the issuance of the
Convertible Notes, we entered into a forward stock purchase transaction with Merrill Lynch at a cost of $15.0 million. Pursuant to the forward stock purchase transaction we are entitled to receive from Merrill Lynch 1.95 million shares of our
common stock on or about the maturity date of the Convertible Notes to reduce the potential dilution to our common stock upon conversion of the Convertible Notes. If the stock price falls below $7.69 per share on or about the maturity date of the
Convertible Notes, the aggregate value of our common stock received would be less than the amount paid for the forward stock purchase transaction.

We are exposed to losses in the event of nonperformance by the counterparties on the instruments described above.



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

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 as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) 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, our 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.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.

Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of June 30,
2008, our disclosure controls and procedures were, subject to the limitations noted above, 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 SEC 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.



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Changes in Internal Control Over Financial Reporting

We continued to formalize documentation and perform testing of our financial processes during the period covered by this Quarterly Report on Form 10-Q. In
January 2008, we enhanced our financial reporting capabilities by converting our accounting system to an accounting software package that enables us to more efficiently account for multiple entities. During the conversion period, we implemented
certain measures to ensure that the system of internal control remained effective such as daily reconciliations of data input and the roll-forward of prior period G/L balances. No other change in our internal control over financial reporting
occurred during the first and second quarters of 2008 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We have applied to the United
States Patent and Trademark Office for federal trademark registration of our name, RASER, in connection with a number of goods and services including, among other things, electric motors for machines. In connection with our application no.
78/339,071, Razor USA LLC has initiated an opposition proceeding (Opposition) before the administrative body the Trademark Trial and Appeals Board (TTAB). We believe that the Opposition is without merit. Because the TTAB
cannot award money damages, we believe the Opposition does not create a presently existing material loss contingency.

We are not subject
of any other legal proceedings and we are unaware of any proceedings presently contemplated against us by any federal, state or local government agency.



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

The following risk factors, among
others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in this report. If any of the following risks and uncertainties or other risks and uncertainties not
currently known to us or not currently considered to be material actually occur, our business, financial condition or operating results could be harmed substantially.

We have limited operating experience and revenue, and we are not currently profitable. We expect to continue to incur net losses for the foreseeable future, and we may never achieve or maintain profitability.

We have a limited operating history and, from our inception, we have earned limited revenue from operations. We have incurred
significant net losses in each year of our operations, including a net loss of approximately $12.9 million for the six months ended June 30, 2008. As a result of ongoing operating losses, we had an accumulated deficit and deficit after re-entry
into development stage of approximately $64.1 million on cumulative revenues from inception of approximately $0.9 million as of June 30, 2008.

Under our current growth plan, we do not expect that our revenues will be sufficient to cover our expenses for the foreseeable future. As a result, we expect to continue to incur substantial losses until we are able to generate significant
revenues. Our ability to generate significant revenues and become profitable will depend on many factors, including our ability to:



| |  |  | identify and secure productive geothermal sites;
| | - |  | ------------------------------------------------



| |  |  | verify that the properties in which we have acquired an interest contain geothermal resources that are sufficient to generate electricity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquire electrical transmission and interconnection rights for geothermal plants we intend to develop;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | enter into power purchase agreements for the sale of electrical power from the geothermal power plants we intend to develop;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into additional equity tax partner agreements with potential financing partners that will provide for the allocation of tax benefits to them and for the
contribution of capital by them to the projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | finance and complete the development of multiple geothermal power plants;
| | - |  | -------------------------------------------------------------------------



| |  |  | manage construction, drilling and operating costs associated with the geothermal power plants we intend to develop;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | successfully license commercial applications of our SymetronTMtechnologies;
| | - |  | ---------------------------------------------------------------------------



| |  |  | enforce and protect our intellectual property while avoiding infringement claims;
| | - |  | ---------------------------------------------------------------------------------



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



| |  |  | attract and retain qualified personnel.
| | - |  | ---------------------------------------



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We will need to secure additional financing 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 continue as a going concern.

At June 30,
2008, we had approximately $5.1 million in cash and cash equivalents. Our operating activities used approximately $5.2 million and approximately $4.1 million of cash during the six months ended June 30, 2008 and 2007, respectively. We have
incurred substantial losses since inception and we are not operating at cash breakeven.

Our continuation as a going concern is dependent
on efforts to raise additional capital, increase revenues, reduce expenses, and ultimately achieve profitable operations. If we are unable to raise sufficient, additional capital on reasonable terms, liquidity concerns may require us to curtail
operations, liquidate or sell assets or pursue other actions that could adversely affect future operations. Reduction of expenditures could have a negative impact on our business. A reduction of expenditures would make it more difficult for us to
execute our plans to develop geothermal power plants in accordance with our expectations. It would also make it more difficult for us to conduct adequate research and development and other activities necessary to commercialize our Symetron
technologies.

We have raised, and we expect to continue to raise, additional funds from the sale of shares of our common stock through the
ATM Program. However, from time to time we may need to suspend sales of common stock under the ATM Program due to market conditions or other factors beyond our control. In addition, the gross proceeds we can raise pursuant to the ATM Program are
limited to $25 million, of which we had already sold $7.2 million as of August 8, 2008. Therefore, in order to execute our business strategy and continue our operations, we will likely need to seek funding from other sources through the
issuance of debt, preferred stock, equity or a combination of these instruments. We cannot be certain however, that funding from these sources will be available on reasonable terms or at all. If we are unable to secure adequate funds on a timely
basis on terms acceptable to us, we may need to modify our current plans for plant construction, well field development and other development activities, or extend the time frame over which these activities will take place.

Our Commitment Letter with Merrill Lynch sets forth certain general terms relating to the structure and financing of up to 155 MW of geothermal power
plants we intend to develop. Pursuant to the Commitment Letter, we have obtained financing commitments for three projects, including one project in Utah, one project in Nevada and one project in New Mexico. The funding of each of these financing
commitments remains subject to certain conditions. If Merrill Lynch elects to provide or arrange a financing commitment with respect to any additional projects, such financing commitment will be subject to satisfactory due diligence, the execution
of a separate commitment letter relating to such project and certain other conditions. Even if we are able to obtain funding for the development of projects pursuant to the Commitment Letter, we will need additional financing to cover general
operating expenses and certain development expenses that are not covered by the Commitment Letter.

If we raise additional capital through
the issuance of equity or securities convertible into equity, our stockholders may experience dilution. Any new securities we issue may have rights, preferences or privileges senior to those of the holders of our common stock, such as dividend
rights or anti-dilution protections. We have previously issued warrants to purchase our common stock in connection with certain transactions. Some of these warrants continue to be outstanding and contain anti-dilution provisions. Pursuant to these
anti-dilution provisions, the exercise price of the applicable warrants will be adjusted if we issue equity securities or securities convertible into equity securities at a price lower than the exercise price of the applicable warrants.

We may also secure additional financing by incurring indebtedness. Any indebtedness we incur 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 would likely contain restrictive covenants that 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. Any failure by us to satisfy our obligations with respect to these potential debt obligations would likely constitute a default under such credit facilities.

Prior to the completion of the private placement of our 8.00% Convertible Senior Notes due 2013, our independent registered public accounting firms report on our 2007 financial statements questioned our
ability to continue as a going concern.

As originally issued on March 11, 2008, our independent registered public accounting
firms report on our financial statements as of and for the two year period ended December 31, 2007 expressed doubt about our ability to continue as a going concern. Their report included an explanatory paragraph stating that there was
substantial doubt about our ability to continue as a going concern due to the lack of sufficient capital, as of the date their report was issued, to support our business plan through the end of 2008.

On March 26, 2008, we received approximately $48.0 million in net proceeds from the private placement of $50,000,000 aggregate principal amount of
our 8.00% Convertible Senior Notes due 2013 and $4.8 million additional net proceeds on April 1, 2008 pursuant to the exercise of the initial purchasers overallotment option. As a result of the private placement, our independent
registered public accounting firm reissued their report with respect to our financial statements on April 1, 2008 to remove the explanatory paragraph. Since that time, we have used a substantial portion of the proceeds from the issuance of the
Convertible Notes to fund our operations and development efforts, including the ongoing construction of the Thermo project. As a result, our cash and cash equivalents are being depleted, and we need to raise additional funds to continue operating as
a going concern.



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If we are unable to secure additional financing when necessary, future reports issued by our independent
registered public accounting firm could include a going concern qualification. Inclusion of a going concern qualification in a future report issued by our independent accountants could have a negative impact on our ability to
obtain financing and may adversely impact our stock price.

The market price for our common stock has experienced significant price and volume
volatility 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 secure additional financing
and may otherwise harm our business.

The closing price of our common stock fluctuated from a low of $7.87 per share to a high of
$11.37 per share during the six months ended June 30, 2008. Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside of our control. As a result, the market price of our stock may not
reflect our intrinsic value. In addition, following periods of volatility in our stock price, there may be increased risk that securities litigation, governmental investigations or enforcement proceedings may be instituted against us. 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.

The volatility in our stock price could impair our ability to raise additional capital. Further, to the extent we do raise additional funds through
equity financing, we may need to issue such equity at a substantial discount to the market price for our stock. This, in turn, could contribute to the volatility in our stock price.

The geothermal power production development activities of our Power Systems segment may not be successful.

We are devoting a substantial amount of our available resources to the power production development activities of our Power Systems segment. Our success in developing a particular geothermal project is contingent
upon, among other things, locating a viable geothermal site, negotiation of satisfactory engineering, procurement and construction agreements, negotiation of satisfactory power purchase agreements, receipt of required governmental permits, obtaining
interconnection rights, obtaining transmission service rights, obtaining adequate financing, and the timely implementation and satisfactory completion of construction. We may be unsuccessful in accomplishing any of these necessary requirements or
doing so on a timely basis. Generally, we must also incur significant expenses for preliminary engineering, permitting, legal fees and other expenses before we can even determine whether a project is feasible. Project financing is not typically
available for these preliminary activities.

We may be unable to obtain the financing we need to develop geothermal power projects.

A substantial capital investment will be necessary to develop each geothermal power project our Power Systems segment seeks to
develop. Our continued access to capital through project financing or other arrangements is necessary for us to complete the geothermal power projects we plan to develop. Our attempts to secure the necessary capital on acceptable terms may not be
successful.

Market conditions and other factors may not permit us to obtain financing for geothermal projects on terms favorable to us.
Our ability to arrange for financing on a substantially non-recourse or limited recourse basis, and the costs of such financing, are dependent on numerous factors, including general economic and capital market conditions, credit availability from
banks, investor confidence, the continued success of current projects, the credit quality of the projects being financed, the political situation in the state in which the project is located and the continued existence of tax and securities laws
which are conducive to raising capital. If we are not able to obtain financing for our projects on a substantially non-recourse or limited recourse basis, or if we are unable to secure capital through partnership or other arrangements, we may have
to finance the projects using recourse capital such as direct equity investments, which would have a dilutive effect on our common stock. Also, in the absence of favorable financing or other capital options, we may decide not to pursue certain
projects. Any of these alternatives could have a material adverse effect on our growth prospects and financial condition.

Other than
certain excluded financings, the Commitment Letter gives Merrill Lynch the exclusive right to provide or arrange financing for up to 100 MW of substantially similar geothermal power plants we intend to develop. Other than certain excluded
financings, Merrill Lynch also has a right of first refusal with respect to the financing of an additional 55 MW of geothermal power plants we intend to develop. Pursuant to the Commitment Letter, we have obtained financing commitments for certain
of our power plant projects. Any determination on the part of Merrill Lynch to provide any such financing commitment is subject to the satisfaction of certain conditions precedent and various other factors, including but not limited to, satisfactory
completion of due diligence, the absence of any material adverse change in our business, liabilities, operations, condition (financial or otherwise) or prospects, the execution of acceptable definitive documentation, receipt of customary legal
opinions acceptable to Merrill Lynch, satisfactory market conditions and necessary approvals. Accordingly, there can be no assurance that Merrill Lynch will ultimately fund the financing commitments or provide us with additional financing
commitments at any time either pursuant to the Commitment Letter or otherwise. Further, Merrill Lynchs rights under the Commitment Letter, including its right to generally match alternative financing proposals, may make it difficult for us to
obtain financing proposals from other sources.



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In addition, the tax benefits originating from geothermal power projects are anticipated to provide a
significant portion of the funding of the geothermal projects. This tax equity has traditionally been driven by the tax liability of the major financial industry companies. Many of these financial institutions are currently experiencing
significantly reduced income or incurring substantial losses. As a result, they are seeking fewer tax-advantaged investments and this may reduce the amount of readily available tax credit equity available for our geothermal projects.

In order to finance the development of our geothermal power projects, we may transfer a portion of our equity interest in the individual projects to a third party
and enter into long-term fixed price power purchase agreements. Under generally accepted accounting principles, this may result in the deconsolidation of these subsidiaries, and the reflection of only our net ownership interests in our financial
statements.

Each of the geothermal power projects our Power Systems segment intends to develop will likely be owned by a separate
subsidiary. The geothermal power projects developed by these subsidiaries will likely be separately financed. To obtain the financing necessary to develop the geothermal power projects, we may transfer a portion of our equity interest in the
individual subsidiaries to a third party and enter into long-term fixed price power purchase agreements. Depending upon the nature of these arrangements and the application of generally accepted accounting principles, primarily Statement of
Financial Accounting Standards Board Interpretation Number 46R Consolidation of Variable Interest Entities (Revised December 2003)an interpretation of ARB No. 51(FIN 46R), we may be required to
deconsolidate one or more or all of these subsidiaries, which would result in our share of the net profits or loss generated by the deconsolidated entities being presented as a net amount in our financial statements. As a result, our financial
statements would not reflect the gross revenues and expenses of the deconsolidated entities. However, we do not expect the effect of such deconsolidation, if required, to have an impact on our stockholders equity, net loss or loss per share.

The financial performance of our Power Systems segment is subject to changes in the legal and regulatory environment.

The geothermal power projects that we plan to develop will be subject to extensive regulation. Changes in applicable laws or regulations, or
interpretations of those laws and regulations, could result in increased compliance costs and require additional capital expenditures. Future changes could also reduce or eliminate certain benefits that are currently available.

The structure of federal and state energy regulation currently is subject to challenges, modifications, the imposition of additional regulatory
requirements, and restructuring proposals. We may not be able to obtain or maintain all regulatory approvals or modifications to existing regulatory approvals that may be required in the future. In addition, the cost of operation and maintenance and
the operating performance of geothermal power plants may be adversely affected by changes in certain laws and regulations, including tax laws.

The federal government currently encourages production of electricity from geothermal resources through certain tax subsidies. Assuming the available tax credits remain in place as currently in effect, each geothermal power project will be
permitted to claim for federal tax purposes either an investment tax credit for approximately 10% of the cost of each new geothermal power plant or production tax credits of $20.00 (plus an annual adjustment for an inflation factor) per
megawatt hour for the first ten years of electricity output. Currently, production tax credits can only be claimed on new plants placed into service before December 31, 2008. The availability of production tax credits for new plants put into
service after 2008 will depend on whether Congress acts to make tax credits available for such plants and the President elects to sign into law the action taken by Congress.

The owners of a geothermal power project are also permitted to deduct most of the cost of the power plant as depreciation over five years on
an accelerated basis. The fact that the deductions are accelerated means that more of the cost is deducted in the first few years than during the remainder of the depreciation period.

The tax incentives associated with a geothermal power plant are generally only beneficial to a party with sufficient taxable income. A party with
sufficient taxable income can use the tax incentives to reduce their overall tax liability. Due to the nature and timing of the tax incentives, it is likely that the tax incentives available for the geothermal power plants we intend to develop will
exceed the taxable income produced by such power plants for several years of operations. Therefore, an important part of our strategy involves partnering with investors that are able to utilize the tax incentives to offset taxable income associated
with their operations unrelated to our geothermal power plants. For example, a corporation in the financial services industry may be willing to finance the development of a geothermal power plant for the right to receive the benefit of the tax
incentives, which it could then use to reduce the tax liability associated with its regular operations.

The value of the tax incentives
can be transferred in a variety of methods. For instance, investment and production tax credits can be transferred through tax leases in connection with financing arrangements associated with the development of the power plant.



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Tax reform has the potential to have a material effect on our business, financial condition, future
results and cash flow. Tax reform could reduce or eliminate the value of the current tax subsidies available to geothermal projects. Any restrictions or tightening of the rules for lease or partnership transactions, whether or not part of major tax
reform, could also materially affect our business, financial condition, future results and cash flow. In addition, changes to the Internal Revenue Code could significantly increase the regulatory-related compliance and other expenses incurred by
geothermal projects which, in turn, could materially and adversely affect our business, financial condition, future results and cash flow. Any such changes could also make it more difficult for us to obtain financing for future projects.

A significant part of our business strategy is to utilize the tax and other incentives available to developers of geothermal power generating plants
to attract strategic alliance partners with the capital sufficient to complete these projects. Many of the incentives available for these projects are new and highly complex. There can be no assurance that we will be successful in structuring
agreements that are attractive to potential strategic alliance partners. If we are unable to do so, we may be unable to complete the development of our geothermal power projects and our business could be harmed.

The exploration, development, and operation of geothermal energy resources by our Power Systems segment is subject to geological risks and uncertainties, which may
result in decreased performance, increased costs, or abandonment of our projects.

Our Power Systems segment is involved in the
exploration, development and operation of geothermal energy resources. These activities are subject to uncertainties, which vary among different geothermal resources. These uncertainties include dry holes, uncontrolled releases of pressure and
temperature decline, all of which can increase our operating costs and capital expenditures or reduce the efficiency of our power plants. In addition, the high temperature and high pressure in geothermal energy resources requires special resource
management and monitoring. Because geothermal resources are complex geological structures, we can only estimate their geographic area. The viability of geothermal projects depends on different factors directly related to the geothermal resource,
such as the heat content (the relevant composition of temperature and pressure) of the geothermal resource, the useful life (commercially exploitable life) of the resource and operational factors relating to the extraction of geothermal fluids. The
geothermal resources we intend to exploit may not be sufficient for sustained generation of the anticipated electrical power capacity over time. Further, any of our geothermal resources may suffer an unexpected decline in capacity. In addition, we
may fail to find commercially viable geothermal resources in the expected quantities and temperatures, which would adversely affect our development of geothermal power projects.

The operation of the geothermal power plants our Power Systems segment intends to develop will depend on the continued availability of adequate
geothermal resources. We cannot be certain that any geothermal resource will remain adequate for the life of a geothermal power plant. If the geothermal resources available to a power plant we develop become inadequate, we may be unable to perform
under the power purchase agreement for the affected power plant, which in turn could reduce our revenues and materially and adversely affect our business, financial condition, future results and cash flow. If we suffer degradation in our geothermal
resources, our insurance coverage may not be adequate to cover losses sustained as a result thereof.

Our Power Systems segment may be materially
adversely affected if we are unable to successfully utilize certain heat transfer technologies in the geothermal power projects our Power Systems segment intends to develop.

Our Power Systems segment intends to utilize certain heat transfer technologies in the geothermal power projects we intend to develop. These heat transfer
technologies were developed by UTC Power Corporation, or UTCP, a United Technologies Corporation company. UTCPs heat transfer technologies are designed to enable the generation of power from geothermal resources that are lower in temperature
than those resources used in traditional flash steam geothermal projects.

UTCPs heat transfer technologies have a limited operating
history and have only been deployed in a limited number of geothermal power projects. As a result, we cannot be certain that UTCPs heat transfer technologies can be successfully implemented in the geothermal power projects we intend to
develop. If we are not able to successfully utilize UTCPs heat transfer technologies in the geothermal power projects we intend to develop and we are unable to utilize appropriate substitute technologies, we may be unable to develop these
projects and our business, prospects, financial condition and results of operations could be harmed.

The costs of compliance with environmental laws
and of obtaining and maintaining environmental permits and governmental approvals required for construction and/or operation of geothermal power plants are substantial, and any non-compliance with such laws or regulations may result in the
imposition of liabilities which could materially and adversely affect our business, financial condition, future results and cash flow.

The geothermal power projects our Power Systems segment intends to develop will be required to comply with numerous federal, regional, state and local statutory and regulatory environmental standards. Geothermal projects must also maintain
numerous environmental permits and governmental approvals required for construction and/or operation. Environmental permits and governmental approvals typically contain conditions and restrictions, including restrictions or limits on emissions and
discharges of pollutants and contaminants, or may have limited terms. If we fail to satisfy these conditions or comply with these restrictions, or we fail to comply with any statutory or regulatory environmental standards, we may become subject to a
regulatory enforcement action and the operation of the projects could be adversely affected or be subject to fines, penalties or additional costs.



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The geothermal power projects our Power Systems segment intends to develop could expose us to significant liability
for violations of hazardous substances laws because of the use or presence of such substances.

The geothermal power projects our
Power Systems segment intends to develop will be subject to numerous federal, regional, state and local statutory and regulatory standards relating to the use, storage and disposal of hazardous substances. We may use industrial lubricants and other
substances at our projects that could be classified as hazardous substances. If any hazardous substances are found to have been released into the environment at or near the projects, we could become liable for the investigation and removal of those
substances, regardless of their source and time of release. If we fail to comply with these laws, ordinances or regulations or any change thereto, we could be subject to civil or criminal liability, the imposition of liens or fines, and large
expenditures to bring the projects into compliance. Furthermore, we can be held liable for the cleanup of releases of hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release at
that location. The cost of any remediation activities in connection with a spill or other release of such substances could be significant.

Our
Transportation and Industrial Technology segment may be unable to successfully license our intellectual property.

A significant part of our long-term business strategy for our Transportation and Industrial
Technology segment is based upon the licensing of our SymetronTMtechnologies to electric motor, controller, alternator and generator manufacturers,
suppliers and system integrators. We expect the sales cycle with respect to the licensing of our technology to be lengthy, and there can be no assurance that we will achieve meaningful licensing revenues in the time frames that we expect. If we are
unable to successfully license our intellectual property or technology to these businesses or others, our Transportation and Industrial Technology segment may be unable to generate revenues under its current business model. If we are unable to
generate license revenues, we may be required to develop a new long-term business strategy for the Transportation and Industrial Technology segment or discontinue operating this business segment.

Our SymetronTMtechnologies are relatively new and commercially unproven. While we have completed some laboratory testing, our technologies have not yet been durability tested for long-term applications. We can provide no assurance
that our technologies will prove suitable for our target business segments. Our potential product applications require significant and lengthy product development efforts. To date, we have not developed any commercially available products. It may be
years before our technology is proven viable, if at all. During our product development process, we may experience technological issues that we may be unable to overcome. Superior competitive technologies may be introduced or potential customer
needs may change resulting in our technology or products being unsuitable for commercialization. Because of these uncertainties, our efforts to license our technologies may not succeed.

We are currently focusing on commercializing our SymetronTMtechnologies in the transportation and industrial 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 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.

The demand for our technologies may be dependent on government regulations and policies such as standards for Corporate Average Fuel Economy
(CAFE), Renewable Portfolio Standards (RPS), the Clean Air Act and Section 45 of the Internal Revenue Code. Changes in these regulations and policies could have a negative impact on the demand for the power we plan to
generate and our technologies. Any new government regulations or policies pertaining to our products or technologies may result in significant additional expenses to us and our potential customers and could cause a significant reduction in demand
for our technologies and thereby significantly harm our Transportation and Industrial Technology segment.



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We may not be able to enforce or protect the intellectual property that our Transportation and Industrial
Technology segment is seeking to license.

The success of our Transportation and Industrial Technology segment 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. We cannot be certain that our six issued U.S. patents, seven pending U.S. patent applications, four pending
international patent applications and one pending foreign 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 received three trademark registrations in the U.S. and nine trademark registrations
internationally. We have also applied for five additional trademark registrations in the U.S. and two additional trademark registrations internationally which may never be granted.

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 may be 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 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 resulting in significant harm to our business.

If third parties assert that our current or future products infringe their proprietary rights, we could incur costs and damages associated with these
claims, whether the claims have merit or not, which could significantly harm our business. Any future claims could harm our relationships with existing or potential customers. In addition, in any potential dispute involving our intellectual
property, our existing or potential customers could also become the targets of litigation, which could trigger indemnification obligations under license and service agreements and harm our customer relationships. If we unsuccessfully defend an
infringement claim, we may lose our intellectual property rights, which could require us to obtain licenses which may not be available on acceptable terms or at all.

We license patented intellectual property rights from third party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects
could be harmed. Our licensor may also seek to terminate our license.

We are a party to licenses that give us rights to third-party
intellectual property that is necessary or useful to our business. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce our licensed intellectual property. Our licensors may not successfully prosecute the
patent applications to which we have licenses. Even if patents are issued in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing
these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect
our competitive business position and harm our business prospects.

Our licensors may allege that we have breached our license agreement
with them, and accordingly seek to terminate our license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our technologies, products or
services, as well as harm our competitive business position and our business prospects.

Our Transportation and Industrial Technology segment could
incur significant expenses if products built with our technology contain defects.

If our Transportation and Industrial Technology
segment successfully licenses our technology, products built with that technology may result in 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 technology, diversion of development resources, injury to our reputation, or increased service and warranty costs. A material product liability claim could significantly harm our business, result in
unexpected expenses and damage our reputation.



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We face substantial competition in each of our business segments. If we fail to compete effectively, our business
will suffer.

Our Power Systems segment faces significant competition from other companies seeking to develop the geothermal
opportunities available. Some of our competitors for geothermal projects have substantial capabilities and greater financial and technical resources than we do. As a result, we may be unable to acquire additional geothermal resources or projects on
terms acceptable to us.

Our Power Systems segment also competes with producers of energy from other renewable sources. This competition
may make it more difficult for us to enter into power purchase agreements for our projects on terms that are acceptable to us.

We believe
our Transportation and Industrial Technology segment will face significant competition from existing manufacturers, including motor, controller, alternator, and transportation vehicle companies. We may also face significant competition from our
future partners. These 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 their products. If our potential partners improve
or develop technology that competes directly with our technology, our business will be harmed.

In each of our business segments, we face
competition from companies that 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. Many of our competitors may also
have greater name recognition and market presence than we do, which may allow them to market themselves more effectively to new customers or partners.

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

Our success depends on our
ability to execute our business strategies. Our Power Systems segment is seeking to develop geothermal power plants. Our Transportation and Industrial Technology segment is seeking to license our intellectual property to electric motor and
controller manufacturers, suppliers and system integrators. Executing these strategies may involve entering into strategic transactions to acquire complementary businesses or technologies. 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 any strategic transactions will result in additional revenues or other strategic benefits for either of our
business segments. The failure to enter into strategic transactions, if doing so would enable us to better execute our business strategies, could also harm our business, prospects, financial condition and results of operations.

We may issue company stock as consideration for acquisitions, joint ventures or other strategic transactions, and the use of common stock as purchase
consideration could 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.

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 publicly-traded company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002. These requirements may
place a strain on our systems and resources. Our management is required to evaluate the effectiveness of our internal control over financial reporting as of each year end, 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. 5) in our internal control
over financial reporting. On an on-going basis, we are reviewing, documenting and testing 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.

No material weaknesses were identified in connection
with the audit of our 2007 financial statements. However, weaknesses or deficiencies could be identified in the future. If we fail to adequately address any 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 periodic 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 adequate internal controls 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 the NYSE Arca 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.



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

Our shares of common stock are listed on the
NYSE Arca exchange. Pursuant to the Sarbanes-Oxley Act of 2002, national securities exchanges, including the NYSE Arca exchange, have adopted more stringent listing requirements. Although we have been approved to list shares of common stock on the
NYSE Arca exchange, we may not be able to maintain our compliance with all of the listing standards of the NYSE Group. Any failure by us to maintain our listing on the NYSE Arca exchange could materially harm our business, cause our stock price to
decline, and make it more difficult for our stockholders to sell their shares.

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 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. In recent years we have experienced turnover in several key positions.

Our future
success also depends on our ability to attract, train, retain and motivate highly skilled technical and sales personnel. Since our Company has limited resources to attract qualified personnel, we may not be successful in recruiting, training, and
retaining 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. This practice may result in significant non-cash compensation expenses and dilution to our stockholders.

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. 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 36.4 million
shares were free of restrictive legend as of June 30, 2008, up from approximately 21.7 million as of June 30, 2007. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to decline.

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

U.S. generally accepted accounting principles 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 financial results. For example,
prior to January 1, 2007, we were not required to record liabilities relating to uncertainties in our income tax positions until a determination was made by the IRS disallowing the deductions. However, beginning January 1, 2007 we are
required to determine whether it is more-likely-than-not that a tax position is sustainable and measure the tax position to recognize in the financial statements in accordance with recent accounting pronouncements.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On June 3, 2008, we issued 1,000 restricted shares of our common stock to a private property owner in Nevada pursuant to a geothermal lease between us and the private property owner. The 1,000 shares represented part of the initial
consideration we agreed to pay the private property owner pursuant to the lease. The fair value of these shares based on the closing price of our common stock on the grant date totaled $9,930.

We believe that the offer and sale of the shares of common stock described above were exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D under the Securities Act.



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

We held the 2008 Annual Meeting of Stockholders on May 28, 2008 in Lehi, Utah. At the 2008 Annual Meeting of Stockholders, the stockholders elected the following individuals as Class III directors, to serve until (i) the 2011
Annual Meeting of Stockholders, (ii) their successors are elected and qualified or (iii) their earlier death, resignation or removal:



|                |  |            |  |               |  |               
|--------------- |  | ---------- |  | ------------- |  | --------------
|Name            |  | Votes For  |  | Votes Against |  | Votes Withheld
|Kraig Higginson |  | 41,837,267 |  | 1,425         |  | 136,714       
|Scott Doughman  |  | 41,830,992 |  | 7,700         |  | 136,714       



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At the 2008 Annual Meeting of Stockholders, the stockholders also voted to retain as independent
auditors, Hein & Associates LLP, until (i) the 2009 Annual Meeting of Shareholders, (ii) their successors are appointed and ratified or (iii) their earlier resignation or removal:



|                      |  |            |  |               |  |               
|--------------------- |  | ---------- |  | ------------- |  | --------------
|Name                  |  | Votes For  |  | Votes Against |  | Votes Withheld
|Hein & Associates LLP |  | 41,721,247 |  | 65,017        |  | 189,142       



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



|              |  |                                                                                                                                                                                                                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                
|10.1         |  | Purchase Contract, dated April 3, 2008, between UTC Power Corporation and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed April 9,
2008)                                                                                   
|              | 
|10.2          |  | Employment Agreement dated April 4, 2008 by and between Raser Technologies, Inc. and Brent M. Cook (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed May 19,
2008)                                                                                    
|              | 
|10.3         |  | Commitment Letter, dated May 16, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Thermo No. 1 BE-01, LLC (incorporated by reference to Exhibit
10.1 to our current report on Form 8-K filed May 21, 2008)                                
|              | 
|10.4         |  | Renewable Power Purchase and Sale Agreement, dated June 11, 2008, between the Salt River Project Agricultural Improvement and Power District and Lightning Dock Geothermal HI-01, LLC
(incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 13, 2008)
|              | 
|10.5          |  | Commitment Letter, dated July 18, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Lightning Dock Geothermal HI-01, LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed July 21, 2008)                 
|              | 
|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                                                                                                                                                                                



| | Confidential treatment has been requested for portions of this exhibit.
|- | -----------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------



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SIGNATURES

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



|                |  |  |  |                                                                     
|--------------- |  |  |  | --------------------------------------------------------------------
|                |  |  |  | RASER TECHNOLOGIES, INC. (Registrant)                               
|                |  | 
|August 11, 2008 |  |  |  | /s/    Martin F. Petersen                                           
|(Date)          |  |  |  | Martin F. Petersen,                                                 
|                |  |  |  | Chief Financial Officer (Principal Financial and
Accounting Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                
|10.1         |  | Purchase Contract, dated April 3, 2008, between UTC Power Corporation and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed April 9,
2008)                                                                                   
|              | 
|10.2          |  | Employment Agreement dated April 4, 2008 by and between Raser Technologies, Inc. and Brent M. Cook (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed May 19,
2008)                                                                                    
|              | 
|10.3         |  | Commitment Letter, dated May 16, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Thermo No. 1 BE-01, LLC (incorporated by reference to Exhibit
10.1 to our current report on Form 8-K filed May 21, 2008)                                
|              | 
|10.4         |  | Renewable Power Purchase and Sale Agreement, dated June 11, 2008, between the Salt River Project Agricultural Improvement and Power District and Lightning Dock Geothermal HI-01, LLC
(incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 13, 2008)
|              | 
|10.5          |  | Commitment Letter, dated July 18, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Lightning Dock Geothermal HI-01, LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed July 21, 2008)                 
|              | 
|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                                                                                                                                                                                



| | Confidential treatment has been requested for portions of this exhibit.
|- | -----------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------



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