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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB

(Mark One)



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



For the quarterly period ended September 30, 2005



or



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



For the transition period from
 to



Commission file number: 000-30657



RASER TECHNOLOGIES, INC.

(Exact name
of small business issuer as specified in its charter)



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



5152 North Edgewood
Drive, Suite 375

Provo, Utah 84604

(Address of principal executive offices)



Issuers telephone number: (801) 765-1200



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈



There were 50,392,505 shares of the
registrants common stock, par value $0.01, on November 1, 2005.



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



Transitional Small Business Disclosure Format (Check one): Yes ̈No  x.



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##### Table of Contents

Raser Technologies, Inc.

Form 10-QSB



Table of Contents



|                              |  |                                                                                                                      |  |         
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                      |  | Page No.
|Part I. Financial Information |  | 1                                                                                                                   
|                              |  |                                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                                 |  | 1       
|                              |  |                                                                                                                     
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                                 |  | 1       
|                              |  | Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and September 30, 2004 |  | 2       
|                              |  | Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and September 30, 2004  |  | 3       
|                              |  | Condensed Consolidated Statements Of Cash Flows for the Nine Months Ended September 30, 2005 and September 30, 2004  |  | 4       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                 |  | 5       
|                              |  |                                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 11      
|                              |  |                                                                                                                     
|Item 3.                       |  | Controls and Procedures                                                                                              |  | 33      
|                              | 
|Part II. Other Information    |  | 34                                                                                                                  
|                              |  |                                                                                                                     
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                          |  | 34      
|                              |  |                                                                                                                     
|Item 5.                       |  | Other Information                                                                                                    |  | 34      
|                              |  |                                                                                                                     
|Item 6.                       |  | Exhibits                                                                                                             |  | 36      
|                              | 
|SIGNATURES                    |  | 38                                                                                                                  



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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



RASER TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ---------------- | - | ---------- | -
|                                                                                                                                              |  | September 30, 2005 |             |   | December 31,2004 |  
|ASSETS                                                                                                                                        |  |                    |             |   |                  |   |            |  
|Current assets:                                                                                                                               |  |                    |             |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                     |  | $                  | 19,430,685  |   |                  | $ | 2,665,486  |  
|Restricted cash                                                                                                                               |  |                    | 406,682     |   |                  |   |           |  
|Short-term investments                                                                                                                        |  |                    | 533,512     |   |                  |   |           |  
|Accounts Receivable                                                                                                                           |  |                    | 188,985     |   |                  |   |           |  
|Other Current Assets                                                                                                                          |  |                    | 238,485     |   |                  |   |           |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|Total current assets                                                                                                                          |  |                    | 20,798,349  |   |                  |   | 2,665,486  |  
|Equipment, net                                                                                                                                |  |                    | 496,085     |   |                  |   | 112,800    |  
|Patent and trademarks, net                                                                                                                    |  |                    | 214,161     |   |                  |   | 144,053    |  
|Other assets                                                                                                                                  |  |                    | 11,110      |   |                  |   | 74,215     |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|Total assets                                                                                                                                  |  | $                  | 21,519,705  |   |                  | $ | 2,996,554  |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                          |  |                    |             |   |                  |   |            |  
|Current liabilities:                                                                                                                          |  |                    |             |   |                  |   |            |  
|Accounts payable                                                                                                                              |  | $                  | 1,039,684   |   |                  | $ | 20,622     |  
|Accrued liabilities                                                                                                                           |  |                    | 78,310      |   |                  |   | 4,375      |  
|Unearned Revenues                                                                                                                             |  |                    |            |   |                  |   | 10,000     |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|Total current liabilities                                                                                                                     |  |                    | 1,117,994   |   |                  |   | 34,997     |  
|Commitments and contingencies:                                                                                                                |  |                    |             |   |                  |   |            |  
|Stockholders equity:                                                                                                                         |  |                    |             |   |                  |   |            |  
|Series B Convertible Preferred stock; $0.01 par value, 5,000,000 shares authorized, 1,134 shares issued and outstanding on
December 31, 2004. |  |                    |            |   |                  |   | 11         |  
|Series C Convertible Preferred stock; $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding                           |  |                    |            |   |                  |   |           |  
|Common stock; $0.01 par value; 250,000,000 shares authorized 50,388,505 and 48,722,160 shares issued and outstanding,
respectively.           |  |                    | 503,885     |   |                  |   | 487,221    |  
|Additional paid in capital                                                                                                                    |  |                    | 34,988,423  |   |                  |   | 10,526,221 |  
|Accumulated deficit                                                                                                                           |  |                    | (15,090,597 | ) |                  |   | (8,051,896 | )
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|Total stockholders equity                                                                                                                    |  |                    | 20,401,711  |   |                  |   | 2,961,557  |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  
|Total liabilities and stockholders equity                                                                                                    |  | $                  | 21,519,705  |   |                  | $ | 2,996,554  |  
|                                                                                                                                              |  |                    |             |   |                  |   |            |  



See accompanying notes
to condensed consolidated financial statements



-1-



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##### Table of Contents

RASER TECHNOLOGIES, INC.

Condensed Consolidated Statements Of Operations

(Unaudited)



|                                                                                                                     |  |                                 |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                     |  | Three Months EndedSeptember 30, |           
|                                                                                                                     |  | 2005                            |            |   | 2004 |  
|Revenue                                                                                                              |  | $                               | 134,774    |   |      | $ | 20,000     |  
|Cost of sales                                                                                                        |  |                                 | 147,672    |   |      |   |           |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Gross margin/(loss)                                                                                                  |  |                                 | (12,898    | ) |      |   | 20,000     |  
|Operating Expenses:                                                                                                  |  |                                 |            |   |      |   |            |  
|General and administrative                                                                                           |  |                                 | 2,113,742  |   |      |   | 1,540,946  |  
|Research and development                                                                                             |  |                                 | 517,267    |   |      |   | 415,708    |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Total operating expenses                                                                                             |  |                                 | 2,631,009  |   |      |   | 1,956,654  |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Operating loss                                                                                                       |  |                                 | (2,643,907 | ) |      |   | (1,936,654 | )
|Interest income                                                                                                      |  |                                 | 189,172    |   |      |   | 3,474      |  
|Interest expense                                                                                                     |  |                                 |           |   |      |   | (2,500     | )
|Loss on the sale of securities                                                                                       |  |                                 | (1,326     | ) |      |   |           |  
|Loss on the disposal of assets                                                                                       |  |                                 | (986       | ) |      |   |           |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Loss before income taxes                                                                                             |  |                                 | (2,457,047 | ) |      |   | (1,935,680 | )
|Income tax benefit                                                                                                   |  |                                 |           |   |      |   |           |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Net loss                                                                                                             |  | $                               | (2,457,047 | ) |      | $ | (1,935,680 | )
|Dividends paid on Series B preferred stock                                                                           |  |                                 |           |   |      |   | (19,839    | )
|Deemed dividend related to warrants issued with preferred stock and beneficial conversion feature of preferred stock |  |                                 |           |   |      |   | (4,240,500 | )
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Net loss applicable to common shareholders                                                                           |  | $                               | (2,457,047 | ) |      | $ | (6,196,019 | )
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Loss per common share  basic and diluted                                                                            |  | $                               | (0.05      | ) |      | $ | (0.13      | )
|                                                                                                                     |  |                                 |            |   |      |   |            |  
|Weighted average common shares  basic and diluted                                                                   |  |                                 | 50,398,000 |   |      |   | 47,472,000 |  
|                                                                                                                     |  |                                 |            |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements



-2-



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##### Table of Contents

RASER TECHNOLOGIES, INC.

Condensed Consolidated Statements Of Operations

(Unaudited)



|                                                                                                                     |  |                                |             |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ---- | - | ---------- | -
|                                                                                                                     |  | Nine Months EndedSeptember 30, |            
|                                                                                                                     |  | 2005                           |             |   | 2004 |  
|Revenue                                                                                                              |  | $                              | 283,735     |   |      | $ | 30,000     |  
|Cost of sales                                                                                                        |  |                                | 263,114     |   |      |   |           |  
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Gross margin                                                                                                         |  |                                | 20,621      |   |      |   | 30,000     |  
|Operating Expenses:                                                                                                  |  |                                |             |   |      |   |            |  
|General and administrative                                                                                           |  |                                | 5,952,680   |   |      |   | 3,763,395  |  
|Research and development                                                                                             |  |                                | 1,484,228   |   |      |   | 1,240,133  |  
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Total operating expenses                                                                                             |  |                                | 7,436,908   |   |      |   | 5,003,528  |  
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Operating loss                                                                                                       |  |                                | (7,416,287  | ) |      |   | (4,973,528 | )
|Interest income                                                                                                      |  |                                | 379,896     |   |      |   | 3,474      |  
|Interest expense                                                                                                     |  |                                |            |   |      |   | (203,333   | )
|Loss on the sale of securities                                                                                       |  |                                | (1,326      | ) |      |   |           |  
|Loss on the disposal of assets                                                                                       |  |                                | (986        | ) |      |   |           |  
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Loss before income taxes                                                                                             |  |                                | (7,038,703  | ) |      |   | (5,173,387 | )
|Income tax benefit                                                                                                   |  |                                |            |   |      |   |           |  
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Net loss                                                                                                             |  | $                              | (7,038,703  | ) |      | $ | (5,173,387 | )
|Dividends paid on Series B preferred stock                                                                           |  |                                | (7,536      | ) |      |   | (19,839    | )
|Deemed dividend related to warrants issued with preferred stock and beneficial conversion feature of preferred stock |  |                                | (5,596,486  | ) |      |   | (4,240,500 | )
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Net loss applicable to common shareholders                                                                           |  | $                              | (12,642,725 | ) |      | $ | (9,433,726 | )
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Loss per common share  basic and diluted                                                                            |  | $                              | (0.25       | ) |      | $ | (0.20      | )
|                                                                                                                     |  |                                |             |   |      |   |            |  
|Weighted average common shares  basic and diluted                                                                   |  |                                | 49,709,000  |   |      |   | 46,982,000 |  
|                                                                                                                     |  |                                |             |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements



-3-



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##### Table of Contents

RASER TECHNOLOGIES, INC.

Condensed Consolidated Statements Of Cash Flows

(Unaudited)



|                                                                            |  |                                |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |           
|                                                                            |  | 2005                           |            |   | 2004 |  
|Cash flows from operating activities:                                       |  |                                |            |   |      |   |            |  
|Net loss                                                                    |  | $                              | (7,038,703 | ) |      | $ | (5,173,387 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |            |   |      |   |            |  
|Depreciation and Amortization expense                                       |  |                                | 65,559     |   |      |   | 10,484     |  
|Loss on disposal of assets                                                  |  |                                | 986        |   |      |   |           |  
|Loss on the sale of securities                                              |  |                                | 1,326      |   |      |   |           |  
|Common stock, stock options and warrants issued for services                |  |                                | 2,639,744  |   |      |   | 2,994,790  |  
|Beneficial conversion feature                                               |  |                                |           |   |      |   | 200,000    |  
|Increase in accounts receivable                                             |  |                                | (188,985   | ) |      |   |           |  
|Increase in other current assets                                            |  |                                | (238,485   | ) |      |   | (88,479    | )
|Increase in accounts payable                                                |  |                                | 1,019,062  |   |      |   | 10,655     |  
|Increase/(decrease) in accrued liabilities                                  |  |                                | 73,935     |   |      |   | (18,191    | )
|(Decrease) / increase in unearned revenues                                  |  |                                | (10,000    | ) |      |   | 10,000     |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash used in operating activities                                       |  |                                | (3,675,561 | ) |      |   | (2,054,128 | )
|                                                                            |  |                                |            |   |      |   |            |  
|Cash flows from investing activities:                                       |  |                                |            |   |      |   |            |  
|Purchase of short-term investments                                          |  |                                | (534,838   | ) |      |   |           |  
|Increase in restricted cash                                                 |  |                                | (406,682   | ) |      |   |           |  
|Increase in patents and trademarks                                          |  |                                | (83,599    | ) |      |   | (79,045    | )
|Purchase of equipment                                                       |  |                                | (437,412   | ) |      |   | (79,160    | )
|Proceeds from the sale of fixed assets                                      |  |                                | 1,073      |   |      |   |           |  
|Decrease in other assets                                                    |  |                                | 63,105     |   |      |   |           |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash used in investing activities                                       |  |                                | (1,398,353 | ) |      |   | (158,205   | )
|                                                                            |  |                                |            |   |      |   |            |  
|Cash flows from financing activities:                                       |  |                                |            |   |      |   |            |  
|Proceeds from convertible debenture                                         |  |                                |           |   |      |   | 200,000    |  
|Proceeds from exercise of common stock warrants                             |  |                                | 2,963,050  |   |      |   |           |  
|Proceeds from exercise of common stock options                              |  |                                | 481,570    |   |      |   |           |  
|Preferred stock dividend                                                    |  |                                | (7,536     | ) |      |   | (19,839    | )
|Proceeds from the sale of common stock                                      |  |                                |           |   |      |   | 1,044,666  |  
|Proceeds from the sale of Series B preferred stock                          |  |                                |           |   |      |   | 3,896,355  |  
|Proceeds from the sale of Series C preferred stock                          |  |                                | 18,402,029 |   |      |   |           |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                                | 21,839,113 |   |      |   | 5,121,182  |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net increase in cash                                                        |  |                                | 16,765,199 |   |      |   | 2,908,849  |  
|Cash and cash equivalents, beginning of period                              |  |                                | 2,665,486  |   |      |   | 231,703    |  
|                                                                            |  |                                |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                    |  | $                              | 19,430,685 |   |      | $ | 3,140,552  |  
|                                                                            |  |                                |            |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements



-4-



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##### Table of Contents

RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Basis of Presentation



Raser Technologies, Inc. (the Company, we, our or us) has prepared the accompanying condensed consolidated
financial statements without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the
opinion of our management, are necessary to present fairly the results of our operations for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the
notes thereto included in our Form 10-KSB for the year ended December 31, 2004. The results of operations for the three and nine months ended September 30, 2005, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2005 or any other period.



Net Loss
Per Common Share



Basic net loss per common share
(Basic EPS) is computed by dividing net loss available to common stockholders 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. Stock options and warrants exercisable into 1,629,447 and 1,447,691 shares of our common stock at September 30, 2005 and 2004, respectively, were not included in the calculation of diluted net
loss per share because their effect was anti-dilutive. Preferred shares and debt convertible into zero and 1,311,571 shares at September 30, 2005 and 2004, respectively, were also excluded from diluted weighted average shares because their
effect was anti-dilutive.



Stock Based Compensation



In March 2004, our Board of Directors (the Board) adopted the
Raser Technologies, Inc. Amended and Restated 2004 Long-Term Incentive Plan (the Plan), and in May 2004, our board recommended and the stockholders approved the Plan. The Plan was adopted to facilitate (1) grants of a wider range of
stock incentive awards, including restricted stock, stock appreciation rights, performance shares and performance units, (2) an automatic annual increase to the number of shares of common stock reserved for issuance under the Plan beginning in
2005 equal to the lesser of 1,750,000 shares of common stock, 3% of the outstanding shares of common stock on the first of each fiscal year, or an amount determined by the Board, and (3) optional non-employee directors with automatic,
nondiscretionary annual stock option grants. As of September 30, 2005, we were authorized to issue up to 3,211,664 shares of common stock pursuant to the Plan.



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##### Table of Contents

RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements  continued

(Unaudited)



We account for our stock-based employee compensation issued to directors, officers and employees
under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and have adopted the disclosure only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost is recognized in the financial statements when options granted under the plan have an
exercise price equal to or greater than the market value of the underlying common stock on the date of grant. During the three months and the nine months ended September 30, 2005 we granted options to purchase an aggregate of 170,000 and
452,000 shares, respectively, to our employees, directors and service providers. During the three months and the nine months ended September 30, 2004 we granted options to purchase an aggregate of 50,000 and 910,000 shares, respectively, to our
employees and directors. The following table illustrates the effect on net loss and loss per share as if we had applied the fair value based method to stock-based employee compensation in each period utilizing the Black-Scholes option pricing model,
a generally accepted valuation model for determining the fair value of options.



|                                                                                                                                            |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                            |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                                                                                                                            |  | 2005                            |            |   | 2004                            |   |            | 2005 |  |   | 2004        |  
|Net Loss applicable to common shareholders as reported                                                                                      |  | $                               | (2,457,047 | ) |                                 | $ | (6,196,019 | )    |  | $ | (12,642,725 | ) |  | $ | (9,423,726  | )
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                                 |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (405,883   | ) |                                 |   | (115,383   | )    |  |   | (1,117,415  | ) |  |   | (2,066,285  | )
|                                                                                                                                            |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Pro forma net loss                                                                                                                          |  | $                               | (2,862,930 | ) |                                 | $ | (6,311,402 | )    |  | $ | (13,760,140 | ) |  | $ | (11,490,011 | )
|Loss per share                                                                                                                              |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic  as reported                                                                                                                         |  | $                               | (0.05      | ) |                                 | $ | (0.13      | )    |  | $ | (0.25       | ) |  | $ | (0.20       | )
|Basic  pro forma                                                                                                                           |  | $                               | (0.06      | ) |                                 | $ | (0.13      | )    |  | $ | (0.28       | ) |  | $ | (0.24       | )
|Diluted  as reported                                                                                                                       |  | $                               | (0.05      | ) |                                 | $ | (0.13      | )    |  | $ | (0.25       | ) |  | $ | (0.20       | )
|Diluted  pro forma                                                                                                                         |  | $                               | (0.06      | ) |                                 | $ | (0.13      | )    |  | $ | (0.28       | ) |  | $ | (0.24       | )



Convertible Debenture



On June 2, 2004, we issued $200,000 in Debentures
designated as 5% Senior Subordinated Convertible Debentures (Debentures) with principal and interest due at the earlier of (a) 180 days from the date of issuance, or (b) five days after effectiveness of a registration statement
under which the debtholder would be entitled to piggy-back registration rights. The debtholder had the option of converting the Debentures into shares of our common stock at a fixed price of $2.00 per share. Because the conversion price
of the debenture was below the market price of $4.70 on June 2, 2004, we recorded a beneficial conversion feature of $200,000, thus resulting in interest expense of $200,000 in addition to a nominal rate of 5%. In addition, we were required to
issue to the debtholder a warrant to purchase one share of common stock for every one share issuable upon conversion with an exercise price per share equal to $3.50. The warrants had a term of three years and a cash-only exercise provision. Subject
to certain conditions, the holder of the warrant was entitled to piggy-back registration rights with respect to the warrants and the underlying shares of common stock. All of the warrants related to this debt offering were exercised in
the fourth quarter of 2004.



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RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements  continued

(Unaudited)



Preferred Stock  Series B



During the third quarter of 2004 we issued preferred stock designated as Series B Convertible Preferred Stock, $0.01 par
value. This preferred stock issue was sold at a price of $1,000 per share. Each share was convertible at a price of $3.50 per share, so that one preferred share was convertible into 285.71 common shares. Fractional shares quantities were paid in
cash at the conversion price. In the aggregate, 1,211,561 common shares were issued upon the conversion of the Series B Convertible Preferred Stock, 887,566 in the fourth quarter of 2004 and 323,995 in the first quarter of 2005. All shares of Series
B Convertible Preferred Stock were converted into common stock by January 20, 2005.



The Series B Convertible Preferred Stock carried a dividend rate of 7%, and we had the option of paying this dividend in cash or shares of common stock. We elected to pay the dividend in cash. A total of 302,893
cash-only exercise warrants have been granted to holders of Series B Convertible Preferred Stock with an exercise price of $8.55 per common share. $3,896,355 was raised in this offering, net of issuance expense. In connection with this offering, we
recorded a deemed dividend related to warrants issued with the Series B Convertible Preferred Stock and a beneficial conversion feature of the Series B Convertible Preferred Stock for a combined total of $4,240,500. This amount was
reflected as additional net loss to compute net loss applicable to common shareholders.



We issued 109,800 cash-only exercise warrants to the financing broker as payment in connection with this financing. These warrants have an exercise price of $8.55 per common share.



On September 24, 2004 we filed with the SEC a Registration Statement on
Form SB-2 covering the resale of 2,671,110 shares of common stock pursuant to the terms of a certain Registration Rights Agreement entered into by us in connection with our Series B Convertible Preferred Stock financing. On October 6, 2004,
this registration statement was declared effective by the SEC.



Preferred
Stock  Series C



On April 11, 2005, we issued
20,000 shares of preferred stock designated as Series C Convertible Preferred Stock to a group of accredited investors at a price of $1,000 per share and aggregate net proceeds of approximately $18.4 million.



In connection with the Series C Convertible Preferred Stock, we issued
warrants exercisable into 166,666 shares of common stock at an exercise price of $24 per share. The fair value of the warrants, based on the Black-Scholes option pricing model, was determined to be $1,381,595. After allocating this amount to the
warrants, the beneficial conversion feature of the Series C Convertible Preferred Stock was determined to be $4,214,891; resulting in a combined deemed dividend and beneficial conversion feature of $5,596,486. This amount was reflected as additional
net loss to compute net loss applicable to common shareholders in the second quarter of 2005.



The shares of Series C Convertible Preferred Stock were convertible at the option of the holders into shares of common stock, and were initially convertible into 833,332 shares of common stock at an initial conversion
price of $24.00 per share, which was calculated at a 9% discount to the average closing price for



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RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements  continued

(Unaudited)



the 10-trading day period ending on March 31, 2005. A total of 3,568 shares of Series C Convertible Preferred Stock were converted at a conversion price
of $24.00 per share into 148,666 common shares during the optional conversion period in the second quarter of 2005.



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



In accordance with the Share Contribution Agreement between the Company and Mr. Kraig T. Higginson, Executive Chairman of the Companys Board of Directors, 218,587 common shares were transferred by Mr. Higginson to the
Company to offset the dilutive effects of the conversion of shares of Series C Convertible Preferred Stock into shares of our common stock on the Mandatory Conversion Date. This transfer by Mr. Higginson was recorded as a capital contribution
which was offset by an additional common stock issuance of an identical amount related to the shares required to be issued in accordance with the Reset Provision. Therefore, there was no net effect on stockholders equity.



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



We have granted registration rights for all shares included in our
registration statement on Form SB-2 filed on April 20, 2005 and offered for resale by that prospectus, including the shares of our common stock underlying the Series C Convertible Preferred Stock. In accordance with our agreement with the
selling shareholders, we are required to timely obtain and maintain effectiveness of the registration statement, or we will be liable to the selling shareholders as liquidated damages an amount equal to 0.67 of one percent of the aggregate purchase
price of the Series C Convertible Preferred Stock for every 30 day period, or part thereof, that we are delinquent in meeting our registration obligations. This registration statement was declared effective by the Securities and Exchange Commission
on May 4, 2005.



On August 24, 2005, we filed
prospectus supplements with the Securities and Exchange Commission to incorporate into our Registration Statements on Form SB-2 our Quarterly Report on Form 10-QSB dated June 30, 2005. We have confirmed that all shareholders of Series C
Convertible Preferred Stock had converted their shares by the end of the third quarter of 2005, and that all warrants related to the Series C Convertible preferred stock offering have expired. Accordingly, we do not currently plan to maintain the
effectiveness of the Registration Statement on Form SB-2, filed on April 20, 2005.



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RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements  continued

(Unaudited)



Short-Term Investments



On September 30, 2005, we held certain investments in marketable debt securities as a means of temporarily investing
the proceeds from financings until the funds are needed for operating purposes. These investments are being accounted for as available for sale securities under Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. As a result, the investments are reflected at their fair value, based on quoted market prices, with unrealized gains and losses less applicable deferred income taxes,
recorded in accumulated other comprehensive income until the investments are sold, at which time the realized gains and losses are included in the results of operations.



Our available-for-sale securities consist of U.S. government obligations, U.S. agency obligations and taxable municipal
auction rate securities with a BBB+ or better credit rating, and totaled approximately $534,000 as of September 30, 2005. We had no assets classified as short-term investments, available-for-sale at September 30, 2004. Due to
the nature of these instruments, 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 upon short notice. The interest yield on
marketable securities averaged 3.5% during the third quarter of 2005. There were no unrealized holding gains or losses on these available-for-sale securities as of September 30, 2005. At September 30, 2005 the estimated fair value of these
securities was equal to the approximated cost. All income generated from these investments was recorded as interest income.



Our investments in state and local government and corporate issues are principally investments in Auction Rate Securities (ARS), for which the
interest rates are reset periodically through a Dutch auction process, generally every seven to forty nine days. Although original maturities of these instruments are generally longer than one year, we have the right to sell these securities each
auction date.



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



Equity Ownership and Employment Dispute



On
April 30, 2005, we resolved an equity ownership and employment dispute which resulted in a non-cash charge to earnings in the amount of $660,250 in the second quarter of 2005. The employee was previously granted an option to purchase 100,000
shares of common stock under our 2004 Long-Term Incentive Plan. Of the 100,000 shares subject to the option, 55,556 shares had vested. An additional 25,000 shares were vested by the compensation committee of the Board of Directors in connection with
the resolution of the equity ownership and employment dispute.



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RASER TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements  continued

(Unaudited)



Supplemental Cash Information



We had no cash paid for interest expense and made no income tax payments in the nine months ended September 30, 2005.
We paid $2,500 for interest on a convertible debenture and made no income tax payments in the nine months ended September 30, 2004.



During the nine months ended September 30, 2005, we had preferred stock conversions to a par value of $13,759 or 1,375,914 shares of common stock
from our Series C Convertible preferred stock offering.



Subsequent Events



None.



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



Cautionary Statement Regarding Forward-Looking Statements



This section of our quarterly report should be read in conjunction with the accompanying Condensed Consolidated Financial
Statements and related notes included elsewhere in this report. In addition to historical information, this quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements relate to our, and in some cases our customers or partners, future plans, objectives, expectations, intentions and financial performance and the assumptions that
underlie these statements. These forward-looking statements include, without limitation, statements concerning our expectations, beliefs or intentions regarding our ability to develop products and technologies acceptable to industry, establish and
maintain relationships with licensees and other users of our technology and products and raise capital, as well as our research and development expenses, our initial customer funding, our ability to manage our expected growth and to ensure the
effectiveness of our internal controls, our beliefs regarding the size of the commercial markets for our technologies, our ability to develop, test and market commercial applications of our technologies, our ability to develop prototypes
incorporating our technologies for our customers and potential customers, our beliefs regarding potential efficiency improvements offered by the commercial applications of our technologies, our ability to secure and defend patents and the adequacy
of our capital resources to fund operations and growth. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those set forth in the following discussion and under the caption Risk Factors
of this section and elsewhere in this quarterly report.



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



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



Overview



We are a technology licensing company offering innovations in electromagnetic technology for both electricity-to-motion and
motion-to-electricity applications. We have developed several innovations in electric motors and controllers that increase torque, power and efficiency. We call our technology developments SymetronTMand label motors and controllers enhanced by the technology as SymetronTMenhanced motors and controllers. We have also applied our technologies to alternators and generators, where



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the efficiency of these motion-to-electricity systems can be improved. We also intend to acquire and develop companies and technologies that are
complementary to our existing technologies.



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



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



The Alternator Market is a large commodity market for mobile electric power. The consumer trend toward more comforts in transportation continues to manifest itself in sound systems, navigation systems, and other
powered features that increase demand on the vehicles power infrastructure. Approximately 6-8% of a vehicles fuel is used to power its electrical system. Greater efficiency from an alternator would provide more power while producing less
drag on the engine. We are developing our designs to offer value in standard alternators which comprise a large part of the market, and integrated starter-alternators (ISAs) for the growing mild-hybrid market. The size of the opportunity
in this market is significant since approximately 75 million alternators produced globally each year, and growing at a rate of approximately 2.5% annually. The targeted ISA market is relatively new and expected to grow at a rate of
approximately 70% per year for the next several years. Cost and size are the main technical differentiators in the alternator market. We believe that our SymetronTMtechnologies offer the possibility of smaller, less expensive alternators operating at a higher operating efficiency than current offerings.



The trend in the industrial vehicles market, which includes forklifts, is
moving toward all electric vehicles in order to reduce emissions indoors, and improve vehicle economy. In the electric forklift market, over the last few years, the inverter-driven AC induction motor has clearly been established as the technology of
choice due to its durability and operational economy. We believe that our high torque, high efficiency AC induction technology is ideally suited for this market. The forklift market is currently about 300,000 vehicles per year in North America
alone, and is projected to grow at approximately 2.9% through 2011. We believe that our motor and motor drive technologies will offer significant benefits in this traction drive application.



In Medium and Heavy-Duty Trucks (ranging from small delivery trucks to
18-wheel big rigs), new government regulations, particularly in the United States and Europe, are driving companies to invest heavily in research and development with the goal of developing more environmentally friendly electrically-driven
equipment. Sales growth, particularly in the United States in recent years, has been driven by new engines created to meet emissions regulations. For fleet owners, fuel represents a large and growing percentage of overall expenses, which has risen
dramatically during the current year. Approximately 1.5 million vehicles are manufactured globally in this size range, and the market has been growing at an approximate rate of 3% per year rate for the past several years. In addition to
alternators and ISAs mentioned above, we are developing our P2 drive motor for potential integration into full Electric Vehicle propulsion systems including full and strong hybrid automotive vehicles.



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Hybrid Electric Vehicles are becoming increasingly popular in the United States with approximately 90,000
hybrid cars sold in 2004, and 1.5 million predicted sales by 2010. With gas prices expected to remain high, many consumers are opting for more fuel efficient cars such as hybrid vehicles. U.S. Government studies have shown that most consumers
average less than 50 miles per day for their personal driving. We believe that our SymetronTMAC induction motor
technologies can help to provide a solution in this market which includes a low cost, high mileage offering through a dual mode Plug-In Hybrid Electric Vehicle, (PHEV). We are a founding member of the Plug-In Hybrid Development
Consortium, which seeks to shorten the development cycle for new hybrid automobile offerings, thereby accelerating the commercialization of dual mode PHEV technology.



In the industrial sector, Heating, Ventilating and Air Conditioning, (HVAC) is one of the largest end-users of
AC electric motors and variable frequency drives. Commercial HVAC motors fit our target profile of applications that require variable-speed electric motors that could benefit from an increase in efficiency. The U.S. market for HVAC equipment is
expected to show strong growth in both commercial and residential segments, and global growth will likely be even stronger. It is predicted that the global and the North American market for HVAC AC Variable Frequency Drives will grow at a rate of
10.1% and 7.4% respectively in the next few years. Competition in the HVAC industry centers on price and efficiency. We believe that our work on the SymetronTMmotor drive technology under the United States Department of Energy grant being administered through Advanced Energy may afford us the opportunity to offer efficiency increases to existing motors in
this industry.



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



Risk Factors



An investment in our common stock involves a high degree of risk. Investors are encouraged to carefully consider the information under Risk
Factors below before making an investment decision in our common stock.



Moreover, investors should carefully consider that the public trading market for our common stock is limited and our common stock has historically experienced significant volatility and our common stock is likely to
experience significant price and volume fluctuations in the future. The limited trading volume of our common stock has in the past and is likely in the future, to cause the stock price to fluctuate dramatically over short periods of time. Price
levels of our common stock, as with other technology companies in the past, may not bear any relation to our past or present operating results or the underlying intrinsic value of the company. As a result, an investor cannot be assured that our
stock price will continue to trade at current levels, that the current levels reflect the intrinsic value of the company or that our stock price will not decline in the future.



History and background



The Company was organized under the laws of the State of Utah on July 18, 2003, as a successor to Raser Technologies, LLC, a Utah limited liability
company. Effective July 22, 2003, the Company and Raser Technologies, LLC, executed an Agreement and Plan of Merger pursuant to which Raser Technologies, LLC, was merged with the Company, with the Company being the surviving entity (the
Plan). Under the Plan,



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each one percent of ownership interest in Raser Technologies, LLC, was converted into 360,000 shares of common stock of the Company. As a result, following
the completion of the Plan, there were 36,000,000 shares of the Companys common stock issued and outstanding.



Under the Plan, the Company succeeded to all rights, contracts, assets and liabilities of Raser Technologies, LLC, including Raser Technologies,
LLCs U.S. patent application with respect to its SymetronTMmotor system technology. For the purposes of this
Quarterly Report, all references to the Company shall include Raser Technologies, LLC, as applicable.



Effective as of October 14, 2003, Wasatch Web Advisors, Inc., a Utah corporation (WWA), the Company, and the common shareholders and
preferred shareholders of the Company executed an Agreement and Plan of Reorganization (the Reorganization Agreement), whereby WWA agreed to acquire (i) 100% of the issued and outstanding shares of common stock of the Company in
exchange for 38,950,000 post-split shares of WWAs common stock, or approximately 87% of its post-Reorganization Agreement outstanding common stock; and (ii) 100% of the issued and outstanding preferred stock of the Company in exchange for
300,000 shares of WWAs preferred stock (the Reorganization). This transaction was accounted for as a reverse acquisition with the Company considered the accounting acquirer. Therefore, the financial statements reflect the
historical operations of the Company and its predecessor, Raser Technologies LLC, since inception and those of the consolidated entity from the date of the reverse acquisition, October 14, 2003. In connection with this transaction, WWA also
issued 540,000 shares of common stock as settlement for $270,000 of debt and 2,967,286 shares of common stock for consulting services.



Immediately after the closing, 44,756,000 post-Reorganization shares of WWAs common stock were outstanding, along with 300,000 shares of its
preferred stock. Effective as of October 14, 2003, the Company changed its name to Raser Technologies Operating Company, Inc. and WWA changed its name to Raser Technologies, Inc. As a result of the Reorganization, the
Company became a wholly-owned subsidiary of WWA and WWAs business operations became those of the Company.



On April 28, 2004, our shareholders adopted an amendment to our Articles of Incorporation to increase the number of authorized shares of capital
stock from 55,000,000 shares to 105,000,000 shares of capital stock divided into 100,000,000 shares of common stock and 5,000,000 shares of preferred stock, with rights privileges and preferences to be set by our Board of Directors.



On June 28, 2005, our shareholders adopted an amendment to our Articles
of Incorporation to increase the number of authorized shares of capital stock from 105,000,000 shares to 255,000,000 shares of capital stock divided into 250,000,000 shares of common stock and 5,000,000 shares of preferred stock with rights
privileges and preferences to be set by our Board of Directors.



In addition, we expect to continue to explore strategic transactions that may involve the acquisition of technologies or companies that are complementary to our existing technologies, or other arrangements that leverage synergistic
opportunities and relationships. We cannot currently predict how any one or more such transactions, if consummated, would affect our future sources of revenue or our operating model.



Sources of revenue



We expect to derive the large majority of our revenue from sales of technology licenses and collection of royalty payments. We are offering our
technologies through our direct sales force as well as through selected sales agents familiar with rotating electromagnetic technology and specific industries. We



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also derive revenue from engineering activities designed to demonstrate our technologies in specific applications.



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



Licenses of our technology to potential customers will typically result from the entry of the potential customer into our
Test Demonstration Program. Our Test Demonstration Program involves four phases described as follows: (1) Paper Test  an initial indication of engineered value to the customer which is provided through our computer modeling capabilities.
(2) Install Test  a customer specific demonstration of the SymetronTMadvanced motor technology into a
motor of the customers choosing. (3) System Test  an application specific installation of our technology into the customers product. (4) License  an agreement whereby the customer will acquire specified rights to
manufacture or use the SymetronTMadvanced motor technology. Many customers have joined the program, most of which
are in early stages of Phase 1 or Phase 2 development. It is our intent to accelerate the progress of customers through the Test Demonstration Program during 2005. We believe that we will be delivering prototypes to customers for installation tests
during the fourth quarter of 2005.



Revenue recognition



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



Losses since inception and limited operating history



We have incurred significant costs to develop our technology and products,
to recruit and train personnel for our engineering, sales, marketing, professional services and administration departments, and to build and promote our brand. As a result, we have incurred significant losses since our inception and had an
accumulated deficit of approximately $15 million as of September 30, 2005.



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



Dividends related to convertible preferred stock



As a result of the warrants granted in connection with our sale of Series C
Convertible preferred stock and the beneficial conversion feature inherent in the conversion rights and preferences of Series C preferred stock, we recognized a deemed dividend of $5,596,486 in the second quarter of 2005. This deemed dividend was
calculated based on the conversion price compared to the market price on the dates of issuance of the preferred shares.



We paid cash dividends of $19,839 and $7,536 in the nine months ended September 30, 2004 and 2005 respectively to the Series B preferred
shareholders. All remaining outstanding shares of our Series B preferred stock were converted into shares of common stock during the first quarter of 2005, thereby concluding our dividend obligation related to Series B preferred stock.



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Critical accounting policies



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



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



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



| |  |  | Stock based compensation.
| | - |  | -------------------------



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



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



Recognition of license fee revenue will depend on whether the license is time
restricted and on other specific terms and conditions of the license agreements.



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



Valuation Allowance Against Deferred Income Taxes. Deferred income tax assets and liabilities are recorded when there is a difference between the financial reporting and tax treatment of financial transactions. We recorded a
valuation allowance to offset the entire net deferred tax asset as of September 30, 2005 and December 31, 2004. The valuation allowance was recorded due to the losses incurred and the uncertainties regarding the future taxable income and
recoverability of such deferred tax assets. We will continue to evaluate the estimated recoverability of deferred tax assets.



Stock Based Compensation. We account for stock options granted to employees under the recognition and measurement principles of APB Opinion no. 25,
Accounting for Stock Issued to Employees,



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and related Interpretations, and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. As noted in the Recent Accounting Pronouncements section, the FASB recently issued SFAS No. 123(R). This new pronouncement will require us to record compensation expense equal to the fair
value of stock options granted to employees, beginning in the first quarter of 2006. We anticipate valuing such stock options using the Black-Scholes option pricing model.



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



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



Results of Operations.



During the quarter ended September 30, 2005, we focused on further development of our core SymetronTMtechnologies, preparing for testing at independent laboratories and creating test demonstration platforms to illustrate the
viability of our technologies in a system. These efforts are expected to result in shipment of prototype devices to customer laboratories for evaluation in the fourth quarter of 2005.



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



Transportation
Market



We continued to refine and develop our possible
alternator designs during the third quarter. We have built a working model for one of our potential designs which produced more electrical current at typical operating speeds than the traditional design. We anticipate shipping a prototype to the
customer for testing during the fourth quarter of 2005. We believe that our alternator design would be scalable across the range of traditional transportation applications.



We believe that Integrated Starter Alternators (ISAs) will become an increasingly larger market over the coming years. ISAs
offer the immediate benefit of combining the starter and the alternator in existing vehicle configurations into one device. They are also a step in the direction toward hybrid vehicles, where an electric motor can be used for limited vehicle drive
functions like launch assist. We are in the process of developing ISAs for transportation applications in three general size categories: (1) less than 15KW, (2) 15 to 30KW and (3) over 30KW.



We completed Phase I of the Small Business Innovative Research grant from the
U.S. Army during the third quarter. This grant was originally targeted at ISAs in the 15 to 30KW range, but was expanded during the third quarter to encompass applications over 30KW in capacity. Our final report for Phase I was delivered to the Army
on schedule in August, and we anticipate government appropriations for the next step



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in this process during the fourth quarter of 2005. At Army discretion, these funds could be committed in the first quarter of 2006.



Development of an ISA design for the smaller, less than 15KW size range was
accelerated during the third quarter. We expect to deliver a working prototype to a major automotive manufacturer during the fourth quarter to prepare for testing in their laboratory in the first quarter of 2006.



We made progress during the third quarter in expanding the control strategy
for our P2 traction drive motor to encompass a full range of operation. We expect to test the motor over this full range during the first quarter of 2006 in support of our efforts to market our SymetronTMtechnologies.



We announced our participation as a founding member of the Advanced Hybrid Vehicle Development Consortium during the third quarter. The consortium is
intended to close the gap between automotive vehicle designers and automotive suppliers in order to accelerate development and introduction of a commercially viable Plug-in Hybrid Electric Vehicle, (PHEV). We believe that our SymetronTMtechnology is ideally positioned to meet the needs of the PHEVs of the future.



Industrial Market



Our efforts to tailor our technology into a flexible modular (FLEXMODTM) controller design under a grant from the United States Department of Energy (DOE) through our partner in this effort, Advanced Energy, continued
throughout the quarter. We believe that this electric motor drive technology will improve the efficiency of existing motors in a wide variety of industrial applications. We are on schedule to complete this contract during the first quarter of 2006.



In anticipation of a successful development effort, we have
begun to accept paper tests for industrial applications from several commercial accounts.



Power Generation Market



We have evaluated and expect to continue to evaluate potential acquisitions in the energy sector. We believe that one of the potential synergies for us in the energy sector is the possibility of applying our SymetronTMtechnologies to the industrial motors in a power generation facility. Operating these motors at a higher efficiency would
consume less of the power generated by the plant, resulting in more power saleable to the utility. A second expected benefit would be longer life of the motors, reducing the maintenance expense and deferring replacement cost. We also believe that
our SymetronTMtechnologies could be applied to the power generation process itself, resulting in a more efficient
process for converting motion to energy, and increasing the potential gross power output of the plant.



Other Projects



Our
work in connection with our snowmobile project and our Raser Blue race car has provided us with significant benefits from an engineering perspective in knowledge and experience gained through operating an electric motor in a vehicle
drive system. We continue to pursue funding opportunities for development of a commercially successful snowmobile project. Until such funding is available, we are concentrating our resources on areas that have greater commercial potential.



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Spending



For the quarter ended September 30, 2005, our recorded net loss was $2,457,047. During the third quarter of 2005, the monthly cash expenditure rate
for operations decreased to $447,000 per month, from a rate of $630,000 per month in the second quarter of 2005, and increased from $306,000 per month in the third quarter of 2004. Compared to the second quarter of 2005, the decrease reflects an
annual payment for insurance premiums paid in the second quarter of 2005, increased capital spending on patent and trademark applications and a decrease in working capital. Compared to the third quarter of 2004, the increase reflects higher
employment levels and increased spending for prototypes.



As a
company heavily involved in research and development and without an established revenue stream, we have made use of equity based compensation in several instances to conserve cash. The nine months ended September 30, 2005 included non-cash equity
based compensation expenses to employees of $1,439,419, non-cash equity based compensation of $540,075 for contracted services and non-cash equity based expense of $660,250 to settle an ownership and employment dispute with an employee. The nine
months ending September 30, 2004 included non-cash equity based compensation expenses to employees of $2,610,910 and non-cash equity based compensation of $383,880 for contracted services.



On a year-to-date basis, our recorded net loss was $7,038,703. During the
first nine months of 2005 the monthly cash expenditure rate for operations increased to $501,000 per month, from a rate of $246,000 for the first nine months of 2004. The year-over-year increase reflects higher employment levels and increased
spending for insurance, travel, project materials, professional services and capital spending.



Financing



Our Series C
Convertible Preferred Stock financing was completed during the second quarter of 2005, providing approximately $18.4 million of net proceeds. The funds will be used for general corporate purposes, including the acceleration of development, testing
and commercialization of our technologies.



Our Series B
Convertible Preferred Stock financing was completed during the third quarter of 2004, providing approximately $3.9 million of net proceeds. The funds were used for general corporate purposes.



Comparison of Periods Ended September 30, 2005 and 2004



Revenue



We recognized $20,000 of revenue during the third quarter of 2004 from an engineering contract. During the third quarter of
2005, we recognized $134,774 of revenue from our contract with the U.S. Department of Energy through Advanced Energy and our Small Business Innovative Research grant with the U.S. Army.



We have recognized revenue of $283,735 for the first nine months of 2005, primarily resulting from our contracts with
Advanced Energy and the U.S. Army. We recognized $30,000 of revenue in the first nine months of 2004 from an engineering contract.



Our Phase I contract with the U.S. Army was completed in the third quarter of 2005, and the contract with Advanced Energy to complete work for the U.S.
Department of Energy is expected to extend into 2006.



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Operating expenses



Cost of sales. We reported cost of sales for the three months and nine months ended September 30, 2005 of $147,672 and $263,114 respectively.
Cost of sales includes the labor, materials and overhead expenses required to perform the work on our contracts with the U.S. Army and Advanced Energy. We reported $0 cost of sales in the comparable 2004 period.



General and administrative.General and administrative expense
increased from $1,540,946 in the third quarter of 2004 to $2,113,742 in the third quarter of 2005. The third quarter of 2005 includes $930,369 of expense related to a contemplated acquisition. These acquisition costs were expensed due to the
uncertainty of ultimately completing the acquisition. The third quarter of 2005 included non-cash employee compensation expense of $330,119 compared to non-cash employee compensation expense of $956,328 in the year-ago quarter. Employment cost
increased by $45,700 from the year ago quarter reflecting higher salaries and employment levels. Expenses related to depreciation, insurance and compliance all increased from the year ago quarter.



General and administrative expense increased from $3,763,395 in the first
nine months of 2004 to $5,952,680 in the first nine months of 2005. Cash employment costs in 2005 were higher than the 2004 period by approximately $487,000. Non-cash employee compensation was $1,141,869 in the first nine months of 2005, down from
$1,950,079 in the first nine months of 2004. Expense of $930,369 related to a contemplated acquisition was recognized in 2005 due to the uncertainty of completing the acquisition. The 2005 period included a non-cash equity based charge of $660,250
to settle an ownership and employment dispute. Equity based consulting service expense increased by $156,700 from 2004 to 2005. Expense associated with our participation in the trade shows in Monaco and Detroit added approximately $100,000 to our
2005 expenses. Insurance costs were higher in 2005 by approximately $229,000 compared to 2004. In addition, expenses related to depreciation, insurance and compliance all increased from 2004 to 2005.



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



Research and development expenses were $517,267 in the third quarter of 2005, an increase of $101,559 from the third quarter of 2004. Engineering expenses in the third quarter of 2005 included non-cash compensation
expense of $145,050 compared to $203,331 in the third quarter of 2004. The increase over the year-ago quarter also reflects increased staffing levels and salary levels in our engineering organization of approximately $75,000. We spent approximately
$110,000 more for development of prototypes and testing services in the third quarter of 2005 as compared to the third quarter of 2004.



Research and development expense increased from $1,240,133 in the first nine months of 2004 to $1,484,228 in the first nine months of 2005. Non-cash
equity compensation expense of $297,550 was recognized in 2005, compared to $660,831 for engineering employees in the first nine months of 2004. Cash compensation increased by $326,000 driven by higher employment levels and salary increases.
Professional services expenses increased by $72,000 compared to 2004. Office expenses and travel associated with the higher staffing levels increased from 2004 by $128,000. Project material expenses and product testing services were higher in the
2005 period by approximately $255,000.



Interest and other
income. Interest expense in the third quarter of 2004 was $2,500 to holders of the convertible debenture. Interest income in the third quarter of 2005 was $189,172 which reflects an increase in short term investments resulting from the Series C
preferred stock financing completed during the second quarter of 2005. Interest income in the third quarter of 2004 was $3,474. We also recognized a loss on the



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sale of securities of $1,326 and a loss on the disposal of assets in the third quarter of 2005 resulting from the disposal of obsolete computer equipment.



Interest income for the first nine months of 2005 was $379,896
compared to $3,474 in the first nine months of 2004 reflecting a higher cash balance and higher interest rates in 2005. Interest expense in the first nine months of 2004 was $203,333 reflecting a non-cash charge of $200,000 for the beneficial
conversion feature on a convertible debt instrument and $3,333 of cash interest payments on that debt.



Liquidity and Capital Resources



Since inception, we have funded our operations primarily through borrowings and equity investments. In 2003, we converted $270,000 of debt to 540,000 common shares. Also in 2003, the Company issued 930,000 shares of Series A preferred
stock in a private offering for net proceeds of $930,000. These shares were subsequently converted into 1,550,000 shares of our common stock at approximately $0.81 per share. In June of 2004, we took on $200,000 of debt in the form of a bridge loan
that was subsequently converted into 100,000 shares of common stock. Warrants associated with the bridge loan were exercised in the fourth quarter of 2004, contributing $350,000 in exchange for 100,000 shares of common stock. In the third quarter of
2004, we issued 4,240.5 shares of Series B preferred stock through a private offering for net proceeds of $3.9 million. These shares of Series B preferred stock were subsequently converted into 1,211,564 shares of common stock. The
exercise of warrants associated with the Series B preferred stock contributed $43,661 in 2004, $2,195,996 in the first quarter of 2005, $758,505 in the second quarter of 2005, and $8,550 in the third quarter of 2005. In the second quarter of
2005, we issued 20,000 shares of Series C preferred stock in a private offering for net proceeds of $18.4 million. 3,568 shares of Series C preferred stock were converted into 148,666 shares of common stock during the second quarter of 2005. The
remaining 16,432 shares of Series C preferred stock were converted into 903,253 shares of common stock during the third quarter of 2005.



Our operating activities consumed approximately $3.7 million and $2.1 million of cash during the nine months ended September 30, 2005 and 2004,
respectively. Cash consumed by operating activities in the first nine months of 2005 consisted primarily of a net loss of $7.0 million, adjusted for $2.6 million of stock-based compensation, including stock and stock options issued for services.
Investing activities consumed approximately $1.4 million in the first nine months of 2005. The use of cash in investing activities consisted of approximately $407,000 purchase of a pledged certificate of deposit to support our credit card facility,
approximately $84,000 for legal work associated with the filing of patents and trademarks, and approximately $535,000 to purchase marketable securities. 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 at short notice. Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in
relationship to our investment guidelines and market conditions. Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality issuers.



We had capital expenditures of $437,000 in the first nine months of 2005, up from $79,000 in the first nine-months of 2004.
The increase was associated with providing a new information technology infrastructure and modeling tools as well as office accommodations and testing facilities for our expanding staff.



Financing activities provided $21.8 million and $5.1 million of cash in the first nine months of 2005 and 2004,
respectively. The cash provided by financing activities in the nine months ended September 30,



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2005 was the result of our offering of Series C Convertible Preferred Stock that resulted in net proceeds of approximately $18.4 million and the exercise of
common stock options and warrants that resulted in net proceeds of approximately $3.4 million. The cash provided by financing activities in the nine months ended September 30, 2004 was the result of the sale of Series B Convertible Preferred
Stock that contributed net proceeds of approximately $3.9 million, common stock that contributed net proceeds of approximately $1.0 million and $200,000 from the issuance of convertible debentures.



The remaining outstanding shares of Series B preferred stock were
converted into shares of common stock on January 20, 2005 and the final dividend was paid on that date.



As of September 30, 2005, we had stockholders equity of $20.4 million and $20.4 million in cash equivalents and short-term investments. As of
December 31, 2004, we had stockholders equity of $3.0 million and $2.7 million in cash.



Balance Sheet Arrangements



As of September 30, 2005, we had no off-balance sheet arrangements as defined by Item 303(c) of Regulation S-B.



Contractual Obligations and Commitments



We have entered into operating leases for our business facility and a testing facility. There is a provision in the business facility lease that allows
for lease termination at our option without penalty on August 31, 2009. The table below summarizes our obligations pursuant to these leases assuming that all lease arrangements run to full term.



|                 |  |       |           |             |   |             |  |             |         |              |   |         |  |   |        
|---------------- |  | ----- | --------- | ----------- | - | ----------- |  | ----------- | ------- | ------------ | - | ------- |  | - | -------
|                 |  | Total |           | Currentyear |   | 1 to 3years |  | 4 to 5years |         | After 5years
|Operating Leases |  | $     | 1,036,266 |             | $ | 47,001      |  | $           | 533,761 |              | $ | 229,416 |  | $ | 116,088



During the first
quarter of 2005 we pledged a $400,000 certificate of deposit as collateral to secure a credit card purchasing arrangement to facilitate employee travel and certain purchases necessary for our business operations. As of September 30, 2005, we
did not have any other commercial commitments, such as letters of credit, guarantees, or repurchase obligations.



Risk Factors



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



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



We are a research and development company with a limited operating history, and from our inception, we have had very limited revenue from operations. Our
early stage of development means that there is limited historical information available upon which you can base your evaluation of our business and prospects and that we have less insight into how market and technology trends may affect our
business. The revenue and income potential of our business is unproven and the market we are addressing is very competitive and rapidly evolving. You should consider and evaluate our business and prospects in light of the risks, expenses, challenges
and uncertainty that we face as an early stage company seeking to develop new technology and products in a competitive and rapidly evolving market.



Since our inception, we have incurred significant net losses, including a net loss of $7,038,703 for the nine months ended September 30, 2005. As a
result of ongoing operating losses, we had an accumulated deficit of $15,090,597 as of September 30, 2005. Our losses have resulted principally from research and development and general and administrative expenses associated with our
operations. We expect to incur additional losses for the next several quarters. We cannot assure an investor that we will be able to successfully develop new technology or products, or if developed, that this technology or any products will be
commercially viable. We expect to incur substantial additional operating losses as a result of increases in expenses for research and product development, manufacturing and selling, general and administrative costs. In addition, we continue to incur
significant expenses to comply with our obligations as a public company. We may never achieve profitability. We are likely to need additional funding for our operations and we cannot assure you that it will be available on commercially reasonable
terms, if at all. Our ability to achieve profitability will depend upon many factors, including our ability to:



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



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



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



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



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



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



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



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



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



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



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



Our success depends on our ability to execute our business strategy of
licensing our intellectual property or technology to electric motor and controller manufacturers, suppliers and system integrators. Our strategy of licensing our intellectual property or technology may involve entering into strategic transactions.
In executing these strategic transactions, we may expend significant financial and management resources and incur other significant costs and expenses. For example, we have incurred significant expenses in the third quarter of 2005 in connection
with a strategic transaction that may not ultimately be consummated. There is no assurance that the execution of these strategic transactions will result in additional revenues. Any failure to enter into strategic transactions that lead to
additional revenues could harm our business, prospects, financial condition and results of operations.



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



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



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strategic transactions, and the use of common stock as purchase consideration will dilute each of our current stockholders interest.



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



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



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



On September 24, 2004, we consummated a preferred stock equity financing transaction in which we raised an aggregate of
$4,240,500 (before aggregate offering expenses of $344,145). On April 11, 2005, we completed an additional Preferred Stock equity financing transaction in which we raised an aggregate of $20,000,000 (before aggregate expenses of the offering of
$1,597,971). Our future capital needs depend on many factors, including the timing of our development efforts and the successful commercial licensing of our technologies. We will likely need to raise additional capital to further develop and market
our technologies and continue our operations. If we are unable to raise capital to fund our business, we may be forced to curtail or suspend all or a material part of our business operations, in which case our stock price would likely decline.



If we raise additional capital through the issuance of equity
or securities convertible into equity, our shareholders may experience dilution. Those securities may have rights, preferences or privileges senior to those of the holders of the common stock. For example, in our September 2004 financing, we issued
Series B Convertible Preferred Stock which included a 7% dividend and anti-dilution protection to account for certain future dilutive issuances, if any. In addition, in our recent financing, we issued Series C Convertible Preferred Stock
which included anti-dilution protection to account for certain future dilutive issuances, if any. In addition, the Series C Convertible Preferred Stock issued in our recent financing was converted into 1,051,919 shares of common stock.
Additional financing may not be available to us on favorable terms, if at all. If we are unable to obtain financing, or to obtain it on acceptable terms, we may be unable to successfully support our business requirements or build our business.



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



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



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Our stock price has in the past and is likely in the future to experience significant volatility as a
result of numerous factors, many of which are outside of our control, including, but not limited to the following:



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



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



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Throughout the third quarter of 2005, our common stock traded on the Over the Counter Bulletin Board. On November 3, 2005, shares of our common stock began trading on ArcaEx, under the ticker symbol of RZ. Prior to the
listing of our common stock on ArcaEx, there had been a limited public market for our common stock. The listing of our common stock on ArcaEx may result in increased trading volume volatility with respect to our shares of common stock. Increased
trading volume volatility with respect to our shares of common stock may cause greater volatility in our stock price, which may result in a lower market price for our common stock. In the past, following periods of volatility in the market price of
a public companys securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of managements attention and resources.



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



In October of 2005 we received approval to list shares of our common stock on ArcaEx and on November 3, 2005, shares of our common stock began trading on ArcaEx. Pursuant to the Sarbanes-Oxley Act of 2002,
national securities exchanges, including ArcaEx, have adopted more stringent listing requirements. Even though we have been approved to list shares of common stock on ArcaEx, we cannot assure you that we will be able to maintain our compliance with
all of the listing standards of ArcaEx, or that we will be able to maintain our listing on ArcaEx. Any failure by us to maintain our listing on ArcaEx could materially harm our business and cause our stock price to decline.



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



As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These
requirements may place a strain on our systems and resources. The Securities Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are currently reviewing and further documenting our internal control procedures. In order to maintain and
improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required.



In February 2005, our management and Audit Committee were notified by our independent accountants, Tanner LC, of
deficiencies that existed in the design or operation of our internal control over financial reporting that it considered to be material weaknesses. The deficiencies related to internal control and disclosure control over stock-based
compensation, reporting of equity transactions and certain disclosures in the footnotes to the financial statements. The deficiency in our internal control over stock-based compensation and equity transactions related to the failure to properly
record issuances of stock, the failure to timely report certain transactions on Forms 3, 4, or 5, and the failure to properly itemize equity transactions in the statement of stockholders equity. The deficiency in our disclosure controls was
related to the stock option disclosures required by SFAS No. 148.



While the unrecorded transactions and disclosure deficiencies were detected in the audit process and have been appropriately recorded and disclosed in our annual report on Form 10-KSB for 2004, the



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deficiencies, if not addressed, could result in accounting errors and cause future restatements of our financial statements. In order to address these
deficiencies, we are improving our internal control over financial reporting and disclosure controls and procedures. While we are committed to addressing these deficiencies by improving our controls and procedures, we cannot assure you that we will
be able to successfully implement the revised controls and procedures or that our revised controls and procedures will be effective in remedying all of the identified deficiencies. The implementation of these improvements may not be successfully
completed in a timely manner or at all, and unanticipated factors may hinder the effectiveness of these improvements. If we fail to adequately address these deficiencies, it could have a material adverse effect on our business, results of operations
and financial condition. Ultimately, if not corrected, these deficiencies could prevent us from releasing our financial information and Securities and Exchange reports in a timely manner, making the required certifications regarding, and complying
with our other obligations with respect to, our financial statements and internal controls under the Sarbanes-Oxley Act. Any failure to maintain the adequacy of our internal control over financial reporting and provide accurate financial statements
may subject us to litigation and would cause the trading price of our common stock to decrease substantially. Inferior controls and procedures could also subject us to a risk of delisting by a national exchange and cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our common stock.



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



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



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



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



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



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



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



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



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



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



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



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



We believe our future success will depend to a significant extent on the continued service of our executive officers and other key personnel. Of
particular importance to our continued operations are our executive management and technical staff. We do not have key person life insurance for any of our other executive officers, technical staff or other employees. If we lose the services of one
or more of our executive officers or key employees, or if one or more of them decide to join a competitor or otherwise compete directly or indirectly with us, our business could be harmed. Our future success also depends on our ability to attract,
train, retain and motivate highly skilled technical personnel. Competition for personnel is intense, and qualified technical personnel are likely to remain a limited resource for the foreseeable future. We may not be successful in attracting,
training, retaining and motivating personnel in the future, which would impair our ability to maintain and grow our business.



We rely on our intellectual property rights, and our inability to protect these rights could impair our competitive advantage, divert management attention, require
additional development time and resources or



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cause us to incur substantial expense to enforce our rights, which could harm our ability to compete and generate revenue.



Our success is dependent upon protecting our proprietary technology. We rely
primarily on a combination of copyright, patent, trade secret and trademark laws, as well as confidentiality procedures and contractual provisions to protect our proprietary rights. These laws, procedures and provisions provide only limited
protection. We have applied for patent protection on most of our key technologies. However, we cannot be certain that our pending patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to
protect the inventions derived from our technology or prove to be enforceable in actions against alleged infringers. Also, additional patent applications that we may file for our current and future technologies may not be issued.



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



Policing unauthorized use of our technology may be difficult and some foreign
laws do not protect our proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others.
Litigation could result in substantial costs and diversion of resources and management attention.



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



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



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



Products such as those built with our technology are subject to product liability lawsuits for any defects that they may contain. Detection of any
significant defects may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our



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reputation, or increased service and warranty costs. A material product liability claim could harm our business, result in unexpected expenses and damage our
reputation.



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



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



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



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



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



In the past, compliance with these requirements have made it difficult to establish an active, liquid trading market in our common stock, and you may have
difficulty selling your shares. Historically, the public market for our common stock has been very limited. For example, the average reported volume of trading in our common stock over the July through September period was approximately 70,000
shares per day.



Throughout the third quarter of 2005, our
common stock traded on the Over the Counter Bulletin Board (OTC:BB). In October of 2005 we received approval to list shares of our common stock on ArcaEx, and on November 3, 2005 shares of our common stock began trading on that exchange under
the ticker symbol of RZ. We cannot predict that an active, liquid trading market will develop or that the market will be able to sustain transactions by larger institutional investors. Accordingly, investors may have difficulty accumulating a
significant position in our stock or in selling a substantial number of shares in a short period of time.



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



Our directors, officers and other key employees collectively are holders of more than 51% of our common stock. As a result,
these shareholders, if they act together, will be able to exert a significant degree of influence over our management and over matters requiring shareholder approval, including the election of



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directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and officers, or the
prospect of such sales, could adversely affect the market price of our common stock. Managements concentrated stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our
company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over the price they paid for our stock.



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



The market price of our common stock could decline as a result of the resale of shares of common stock that were previously
restricted under Rule 144. Approximately 42 million shares of Rule 144 stock passed the one year restriction under Rule 144 in the fourth quarter of 2004 and will pass the two year restriction under rule 144 in the fourth quarter of 2005. As
holders of these restricted shares file with the Securities and Exchange Commission to have the legends removed from their common stock certificates in accordance with Rule 144, the filings are reported as insiders preparing to sell shares,
regardless of the inside knowledge of the shareholder and regardless of their intention. Approximately 9.4 million shares were free of restrictive legend as of November 1, 2005, up from approximately 2.2 million in the third quarter
of 2004 and approximately 3.8 million at the end of 2004. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to decline.



Any additional financing that we choose to undertake may be completed through the issuance of additional shares that would
be dilutive to current common shareholders. The dilutive effect of such a financing may cause our stock price to decline.



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



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



We maintain short-term investments, which are all classified as available for
sale, and have been recorded at fair value, which approximates cost. Short-term investments include certificates of deposit, auction rate certificates, auction rate preferred securities, municipal preferred securities and mutual funds. The auction
rate securities are adjustable-rate securities with dividend rates that are reset periodically by bidders through periodic Dutch auctions generally conducted every 7 to 49 days by a trust company or broker/dealer on behalf of the issuer.
We believe these securities are highly liquid investments through the related auctions; however, the collateralizing securities have stated terms of up to thirty (30) years. These instruments are rated BBB+ or higher by Standard &
Poors Ratings Group, or equivalent. Our short-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in
relationship to our investment guidelines and market conditions. Given the short-term nature of these investments, and that we have no borrowings outstanding other than short-term letters of credit, we are not subject to significant interest rate
risk.



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|Item 3. | Controls and Procedures
|------- | -----------------------



Evaluation of disclosure controls and procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act
of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness, design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form
10-QSB. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective with respect to timely communicating
to them and other members of management responsible for preparing periodic reports all information required to be disclosed in this report as it relates to the Company. It should be noted, that any system of controls, no matter how well
designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



Changes in internal control over financial reporting



During the quarter ended September 30, 2005, we have continued to take
steps to increase staffing in the financial management area and to enlist additional consulting support in order to improve our financial control capabilities. Additionally, we have continued to improve the supervision and training of our accounting
staff and have created periodic closing controls in order to strengthen our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three months ended September 30, 2005 that have
materially affected, or are likely to materially affect, our internal controls over financial reporting.



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PART II. OTHER INFORMATION



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



On April 11, 2005, we issued 20,000 shares of Series C Convertible Preferred Stock (the Shares) to 3 investors in exchange for aggregate
gross proceeds of $20,000,000. Pursuant to the Certificate of Designation of the Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the Certificate of Designation), the Shares are convertible into shares of
our common stock. On May 4, 2005, Kings Road Investments, one of the purchasers of the Shares, converted 648 Shares into 27,000 shares of our common stock pursuant to the Certificate of Designation. On May 4, 2005, Portside
Growth & Opportunity Fund, another of the purchasers of the Shares, converted 600 Shares into 25,000 shares of our common stock pursuant to the Certificate of Designation. On May 6, 2005, Kings Road Investments converted 600 Shares
into 25,000 shares of our common stock pursuant to the Certificate of Designation. On May 9, 2005, Portside Growth & Opportunity Fund converted 400 Shares into 16,666 shares of our common stock pursuant to the Certificate of
Designation. On June 16, 2005, Kings Road Investments converted 1,320 Shares into 55,000 shares of our common stock pursuant to the Certificate of Designation. On July 3, 2005, the Mandatory Conversion Date, Kings Road Investments
converted 15,432 Shares into 848,284 shares of our common stock pursuant to the Certificate of Designation. On July 3, 2004, SRG Capital, another of the purchasers of the Shares, converted 1,000 Shares into 54,969 shares of our common stock
pursuant to the Certificate of Designation. The shares of our common stock issued upon conversion of the Shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder.



On August 17, 2005,
we issued 25,000 shares of common stock to William Dwyer, our Chief Financial Officer, pursuant to the At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement by and between the Company and
Mr. Dwyer dated as of July 8, 2004 and amended on July 29, 2005. The Company believes that this issuance was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.



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



On July 14, 2005, the Company entered into an Amended Restricted Stock Grant Agreement (the Ritter Amendment) by and between the Company
and John C. Ritter, amending the Restricted Stock Grant Agreement dated as of February 23, 2004 by and between the Company and Mr. Ritter (the Ritter Agreement). The Ritter Amendment provides for the delay of vesting of 62,500
shares of the Companys common stock to be issued to Mr. Ritter pursuant to the Ritter Agreement (the Ritter Shares) until August 1, 2005.



On July 29, 2005, the Company entered into an Amended Restricted Stock Grant Agreement (the Ritter
Amendment) by and between the Company and John C. Ritter, amending the Restricted Stock Grant Agreement dated as of February 23, 2004 by and between the Company and Mr. Ritter (the Ritter Agreement). The Ritter Amendment
provides for the delay of vesting of 250,000 shares of the Companys common stock to be issued to Mr. Ritter pursuant to the Ritter Agreement (the Ritter Shares) until the earlier of a secondary offering by the Company or
February 1, 2006. The Ritter Amendment further provides that if vesting of the Ritter Shares does not occur until February 1, 2006, net shares would be issued to Mr. Ritter. In the event of a net share issuance pursuant to
the Ritter Agreement, the Company would withhold shares from Mr. Ritters grant equivalent to the value of Mr. Ritters tax liability arising from the vesting, and



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payroll taxes on Mr. Ritters grant would then be paid by the Company. If vesting does occur in connection with a secondary offering by the
Company, the Ritter Amendment provides that Mr. Ritter will have the right to include up to 300,000 shares in the Companys secondary offering. The foregoing description of the Ritter Amendment does not purport to be complete and is
qualified in its entirety by reference to the Ritter Amendment, a copy of which is filed as an exhibit hereto and is hereby incorporated herein by reference.



On July 29, 2005, the Company entered into an Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and
Arbitration Agreement (the Dwyer Amendment) by and between the Company and William Dwyer, amending the At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement, effective as of
August 1, 2004 by and between the Company and Mr. Dwyer (the Dwyer Agreement). The Dwyer Amendment provides for the delay of vesting of 75,000 shares of the Companys common stock to be issued to Mr. Dwyer pursuant to
the Dwyer Agreement (the Dwyer Shares) until the earlier of a secondary offering by the Company or February 1, 2006. The Dwyer Amendment further provides that if vesting of the Dwyer Shares does not occur until February 1,
2006, net shares would be issued to Mr. Dwyer. In the event of a net share issuance pursuant to the Dwyer Agreement, the Company would withhold shares from Mr. Dwyers grant equivalent to the value of Mr. Dwyers
tax liability arising from the vesting, and payroll taxes on Mr. Dwyers grant would then be paid by the Company. If vesting does occur in connection with a secondary offering by the Company, the Dwyer Amendment provides that
Mr. Dwyer will have the right to include up to 100,000 shares in the Companys secondary offering. The foregoing description of the Dwyer Amendment does not purport to be complete and is qualified in its entirety by reference to the Dwyer
Amendment, a copy of which is filed as an exhibit hereto and is hereby incorporated herein by reference.



On July 29, 2005, the Company entered into an Amended Restricted Stock Grant Agreement (the Fehr Amendment) by and between the Company
and Timothy D. Fehr, amending the Restricted Stock Grant Agreement dated as of February 25, 2004 by and between the Company and Mr. Fehr (the Fehr Agreement). The Fehr Amendment provides for the delay of vesting of 100,000
shares of the Companys common stock to be issued to Mr. Fehr pursuant to the Fehr Agreement (the Fehr Shares) until specified dates in February and March of 2006, specifically 25,000 shares on February 8, 2006, 25,000
shares on February 15, 2006, 25,000 shares on March 8, 2006 and 25,000 shares on March 15, 2006.



On October 17, 2005, we announced the signing of a Cooperative Research and Development Agreement with the U.S. Armys National Automotive
Center and their Tank Automotive Research Development and Engineering Center to collaborate in the application of electromagnetic technologies to military systems.



On October 26, 2005, we announced the receipt of approval to list our shares of common stock on ArcaEx. On
November 3, 2005, the Companys common stock began trading under the new ticker symbol: RZ. ArcaEx has two tiers of listing criteria which they refer to as Tier 1 and Tier 2. The Company is being listed as a Tier 1 company
which means that the listing of our common stock qualifies us as being listed on a national exchange. A national exchange listing is a significant step for us as we work toward expanding our investor base because many fund managers that are
prohibited from owning Over the Counter Bulletin Board Stocks can now consider an investment in our Company by virtue of this national exchange listing. For additional information regarding the listing of our common stock on ArcaEx, please see the
factors set forth under the caption Risk Factors in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of this Quarterly Report on Form 10-QSB.



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



(a) Exhibits



|              |  |                         |  |                                                                                                                                                                                                               
|------------- |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document
|              |  | 2.1A                    |  | Agreement and Plan of Reorganization dated October 2, 2003 among Wasatch Web Advisors Inc., Raser Technologies Inc. and the stockholders of Raser Technologies Inc.                                           
|              |  |                        
|              |  | 3.1BC                   |  | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock.                                                                                                    
|              |  |                        
|              |  | 3.2H                    |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                
|              |  |                        
|              |  | 3.3N                    |  | Amended and Restated Articles of Incorporation of the Registrant                                                                                                                                              
|              |  |                        
|              |  | 4.1H                    |  | Specimen Common Stock Certificate.                                                                                                                                                                            
|              |  |                        
|              |  | 4.2D                    |  | Registration Rights Agreement, dated as of July 22, 2002, among the Registration and the Purchasers (as defined therein).                                                                                     
|              |  |                        
|              |  | 4.3H                    |  | Form of Debenture.                                                                                                                                                                                            
|              |  |                        
|              |  | 4.4K                    |  | Form of Warrant                                                                                                                                                                                               
|              |  |                        
|              |  | 4.5K                    |  | Registration Rights Agreement dated April 4, 2005 by and between the registrant and certain entities identified therein.                                                                                      
|              |  |                        
|              |  | 4.6K                    |  | Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.                                                                                                    
|              |  |                        
|              |  | 10.1E                   |  | Securities Purchase Agreement dated July 22, 2004, among the Registrant and the Purchasers (as defined therein).                                                                                              
|              |  |                        
|              |  | 10.2F                   |  | Form of Warrant to Purchase Shares of the Registrants Common Stock.                                                                                                                                          
|              |  |                        
|              |  | 10.3G                   |  | Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                           
|              |  |                        
|              |  | 10.4H                   |  | Form of Option Agreement for the Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                          
|              |  |                        
|              |  | 10.5I                   |  | Restricted Stock Grant Agreement dated as of February 23, 2004 between the registrant and John C. Ritter, President.                                                                                          
|              |  |                        
|              |  | 10.6I                   |  | Restricted Stock Grant Agreement dated as of February 26, 2004 between the registrant and Timothy D. Fehr, Chief Technical Officer.                                                                           
|              |  |                        
|              |  | 10.7I                   |  | At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement effective as of August 1, 2004 between the registrant and William Dwyer,
Chief Financial Officer.
|              |  |                        
|              |  | 10.8J                   |  | At Will Employment Agreement dated January 31, 2005 between the registrant and Brent M. Cook, Chief Executive Officer.                                                                                        
|              |  |                        
|              |  | 10.9K                   |  | Securities Purchase Agreement dated April 4, 2005 by and between the registrant and certain entities identified on the Schedule of Buyers therein.                                                            
|              |  |                        
|              |  | 10.10L                  |  | Amended Restricted Stock Grant Agreement dated April 29, 2005 by and between the registrant and John C. Ritter.                                                                                               
|              |  |                        
|              |  | 10.11M                  |  | Lease Agreement by and between the registrant and EsNET Properties L.C., effective as of March 11, 2005.                                                                                                      
|              |  |                        
|              |  | 10.12                   |  | Second Amended Restricted Stock Grant Agreement dated July 12, 2005 by and between the registrant and John C. Ritter.                                                                                         
|              |  |                        
|              |  | 10.13                   |  | Third Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and John C. Ritter.                                                                                          
|              |  |                        
|              |  | 10.14                   |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated July 29, 2005 by and between the registrant and William
Dwyer.                     
|              |  |                        
|              |  | 10.15                   |  | Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and Timothy D. Fehr.                                                                                               
|              |  |                        
|              |  | 31.1                    |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).                                                                                                                             



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|              |  |                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).                       
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

---

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



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



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



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



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



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



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



|H | Incorporated by reference to Exhibit 3.1B, Exhibit 3.2, Exhibit 4.1, Exhibit 4.3 and Exhibit 10.4 filed with the registrants Form 10-QSB (File
No. 000-30657) on August 13, 2004.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|K | Incorporated by reference to Exhibit 4.4, Exhibit 4.5, Exhibit 4.6 and Exhibit 10.9 filed with the registrants Current Report on Form 8-K (File
No. 000-30657) on April 7, 2005.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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SIGNATURES



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



|                  |  |  |  |                                     
|----------------- |  |  |  | ------------------------------------
|                  |  |  |  | RASER TECHNOLOGIES, INC.            
|                  |  |  |  | (Registrant)                        
|                  |  | 
|November 14, 2005 |  |  |  | /s/ Brent M. Cook                   
|(Date)            |  |  |  | Brent M. Cook,                      
|                  |  |  |  | Chief Executive Officer and Director
|                  |  | 
|November 14, 2005 |  |  |  | /s/ William Dwyer                   
|(Date)            |  |  |  | William Dwyer,                      
|                  |  |  |  | Chief Financial Officer             



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##### Table of Contents

EXHIBIT INDEX



|              |  |                         |  |                                                                                                                                                                                                               
|------------- |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document
|              |  |                        
|              |  | 2.1A                    |  | Agreement and Plan of Reorganization dated October 2, 2003 among Wasatch Web Advisors Inc., Raser Technologies Inc. and the stockholders of Raser Technologies Inc.                                           
|              |  |                        
|              |  | 3.1BC                   |  | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock.                                                                                                    
|              |  |                        
|              |  | 3.2H                    |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                
|              |  |                        
|              |  | 3.3N                    |  | Amended and Restated Articles of Incorporation of the Registrant                                                                                                                                              
|              |  |                        
|              |  | 4.1H                    |  | Specimen Common Stock Certificate.                                                                                                                                                                            
|              |  |                        
|              |  | 4.2D                    |  | Registration Rights Agreement, dated as of July 22, 2002, among the Registration and the Purchasers (as defined therein).                                                                                     
|              |  |                        
|              |  | 4.3H                    |  | Form of Debenture.                                                                                                                                                                                            
|              |  |                        
|              |  | 4.4K                    |  | Form of Warrant                                                                                                                                                                                               
|              |  |                        
|              |  | 4.5K                    |  | Registration Rights Agreement dated April 4, 2005 by and between the registrant and certain entities identified therein.                                                                                      
|              |  |                        
|              |  | 4.6K                    |  | Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.                                                                                                    
|              |  |                        
|              |  | 10.1E                   |  | Securities Purchase Agreement dated July 22, 2004, among the Registrant and the Purchasers (as defined therein).                                                                                              
|              |  |                        
|              |  | 10.2F                   |  | Form of Warrant to Purchase Shares of the Registrants Common Stock.                                                                                                                                          
|              |  |                        
|              |  | 10.3G                   |  | Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                                                           
|              |  |                        
|              |  | 10.4H                   |  | Form of Option Agreement for the Amended and Restated 2004 Long Term Incentive Plan.                                                                                                                          
|              |  |                        
|              |  | 10.5I                   |  | Restricted Stock Grant Agreement dated as of February 23, 2004 between the registrant and John C. Ritter, President.                                                                                          
|              |  |                        
|              |  | 10.6I                   |  | Restricted Stock Grant Agreement dated as of February 26, 2004 between the registrant and Timothy D. Fehr, Chief Technical Officer.                                                                           
|              |  |                        
|              |  | 10.7I                   |  | At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement effective as of August 1, 2004 between the registrant and William Dwyer,
Chief Financial Officer.
|              |  |                        
|              |  | 10.8J                   |  | At Will Employment Agreement dated January 31, 2005 between the registrant and Brent M. Cook, Chief Executive Officer.                                                                                        
|              |  |                        
|              |  | 10.9K                   |  | Securities Purchase Agreement dated April 4, 2005 by and between the registrant and certain entities identified on the Schedule of Buyers therein.                                                            
|              |  |                        
|              |  | 10.10L                  |  | Amended Restricted Stock Grant Agreement dated April 29, 2005 by and between the registrant and John C. Ritter.                                                                                               
|              |  |                        
|              |  | 10.11M                  |  | Lease Agreement by and between the registrant and EsNET Properties L.C., effective as of March 11, 2005.                                                                                                      
|              |  |                        
|              |  | 10.12                   |  | Second Amended Restricted Stock Grant Agreement dated July 12, 2005 by and between the registrant and John C. Ritter.                                                                                         
|              |  |                        
|              |  | 10.13                   |  | Third Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and John C. Ritter.                                                                                          
|              |  |                        
|              |  | 10.14                   |  | Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated July 29, 2005 by and between the registrant and William
Dwyer.                     
|              |  |                        
|              |  | 10.15                   |  | Amended Restricted Stock Grant Agreement dated July 29, 2005 by and between the registrant and Timothy D. Fehr.                                                                                               
|              |  |                        
|              |  | 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).                                                                                                                             



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##### Table of Contents

|              |  |                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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



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



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



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



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



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



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



|H | Incorporated by reference to Exhibit 3.1B, Exhibit 3.2, Exhibit 4.1, Exhibit 4.3 and Exhibit 10.4 filed with the registrants Form 10-QSB (File
No. 000-30657) on August 13, 2004.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|K | Incorporated by reference to Exhibit 4.4, Exhibit 4.5, Exhibit 4.6 and Exhibit 10.9 filed with the registrants Current Report on Form 8-K (File
No. 000-30657) on April 7, 2005.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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