##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended September 30, 2008

or



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

Commission File Number: 001-32661





RASER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)







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

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

N/A

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





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



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

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

The number of shares outstanding of registrants common stock as of November 12, 2008 was 59,124,305 shares.









---

##### Table of Contents

Raser Technologies, Inc.

Form 10-Q

Table of Contents



|                              |  |                                                                                       |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                       |  | Page No.
|Part I. Financial Information |  | 3                                                                                    
|Item 1.                       |  | Financial Statements                                                                  |  | 3       
|                              |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|                              |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 44      
|Item 4.                       |  | Controls and Procedures                                                               |  | 44      
|Part II. Other Information    |  | 46                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                     |  | 46      
|Item 1A.                      |  | Risk Factors                                                                          |  | 46      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 55      
|Item 6.                       |  | Exhibits                                                                              |  | 55      
|SIGNATURES                    |  | 56                                                                                   



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



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

RASER TECHNOLOGIES, INC.
AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                   |  | September 30,2008 |             |   | December 31,2007 |  
|Assets                                                                                                                             |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                    |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                          |  | $                 | 5,507,579   |   |                  | $ | 5,912,210   |  
|Restricted cash                                                                                                                    |  |                   | 75,704      |   |                  |   | 75,000      |  
|Accounts receivable                                                                                                                |  |                   | 5,879       |   |                  |   | 12,200      |  
|Unbilled receivable                                                                                                                |  |                   |            |   |                  |   | 192,157     |  
|Note receivable and accrued interest, net                                                                                          |  |                   | 143,629     |   |                  |   | 506,273     |  
|Restricted short-term marketable securities (held to maturity)                                                                     |  |                   | 4,444,782   |   |                  |   |            |  
|Other current assets                                                                                                               |  |                   | 474,418     |   |                  |   | 725,648     |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                               |  |                   | 10,651,991  |   |                  |   | 7,423,488   |  
|Restricted cash                                                                                                                    |  |                   | 9,715,701   |   |                  |   |            |  
|Restricted long-term marketable securities (held to maturity)                                                                      |  |                   | 4,311,090   |   |                  |   |            |  
|Land                                                                                                                               |  |                   | 1,812,358   |   |                  |   |            |  
|Unproved property and prepaid delay rentals                                                                                        |  |                   | 6,369,278   |   |                  |   | 6,153,688   |  
|Geothermal well field development                                                                                                  |  |                   | 34,868,438  |   |                  |   | 4,750,525   |  
|Power project construction-in-progress                                                                                             |  |                   | 49,244,524  |   |                  |   | 603,814     |  
|Equipment, net                                                                                                                     |  |                   | 638,713     |   |                  |   | 680,188     |  
|Intangible assets, net                                                                                                             |  |                   | 1,431,505   |   |                  |   | 515,037     |  
|Deferred financing and offering costs, net                                                                                         |  |                   | 11,050,303  |   |                  |   |            |  
|Power project development deposits                                                                                                 |  |                   | 10,602,090  |   |                  |   | 3,562,500   |  
|Other assets                                                                                                                       |  |                   | 1,093,851   |   |                  |   | 95,213      |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                       |  | $                 | 141,789,842 |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                               |  |                   |             |   |                  |   |             |  
|Current liabilities:                                                                                                               |  |                   |             |   |                  |   |             |  
|Accounts payable and accrued expenses                                                                                              |  | $                 | 39,312,431  |   |                  | $ | 4,246,783   |  
|Short-term portion of long-term notes                                                                                              |  |                   | 3,245,402   |   |                  |   |            |  
|Note payable                                                                                                                       |  |                   | 933,333     |   |                  |   |            |  
|Deferred revenue                                                                                                                   |  |                   | 200,000     |   |                  |   |            |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                          |  |                   | 43,691,166  |   |                  |   | 4,246,783   |  
|Asset retirement obligation                                                                                                        |  |                   | 60,893      |   |                  |   | 86,193      |  
|Long-term 7.00% senior secured note (non-recourse)                                                                                 |  |                   | 25,304,950  |   |                  |   |            |  
|Long-term 8.00% convertible senior notes                                                                                           |  |                   | 55,000,000  |   |                  |   |            |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                  |  |                   | 124,057,009 |   |                  |   | 4,332,976   |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Minority interest                                                                                                                  |  |                   | 4,901,070   |   |                  |   |            |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Contingencies and commitments, (see Notes C, J, K and L)                                                                           |  |                   |             |   |                  |   |             |  
|Stockholders equity:                                                                                                              |  |                   |             |   |                  |   |             |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued and outstanding                                     |  |                   |            |   |                  |   |            |  
|Common stock, $.01 par value, 250,000,000 shares authorized, 59,011,107 and 55,923,705 shares issued and outstanding,
respectively |  |                   | 590,111     |   |                  |   | 559,237     |  
|Additional paid in capital                                                                                                         |  |                   | 83,693,741  |   |                  |   | 70,114,893  |  
|Accumulated deficit                                                                                                                |  |                   | (30,972,177 | ) |                  |   | (30,972,177 | )
|Accumulated deficit after re-entry into development stage                                                                          |  |                   | (40,479,912 | ) |                  |   | (20,250,476 | )
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                         |  |                   | 12,831,763  |   |                  |   | 19,451,477  |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                         |  | $                 | 141,789,842 |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |                   |             |   |                  |   |             |  

See accompanying notes to condensed consolidated financial statements.



3



---

##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed
Consolidated Statements of Operations

(Unaudited)



|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|------------------------------------------------ |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | -------------------------------------------------------------------------------------------- | ----------- | - |  | - | ----------- | -
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  | For the periodafter re-entryinto developmentstage (October 1,2006
throughSeptember 30, 2008) |            
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   | 
|                                                 |  | Three months ended September 30, |            |   | Nine months ended September 30, |   |           
|                                                 |  | 2008                             |            |   | 2007                            |   |            | 2008 |  |   | 2007        |   | 
|Revenue                                          |  | $                                | 30,000     |   |                                 | $ | 49,887     |      |  | $ | 166,423     |   |  | $                                                                                            | 202,212     |   |  | $ | 531,212     |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Operating expense                                |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Cost of sales                                    |  |                                  |           |   |                                 |   | 49,887     |      |  |   | 74,112      |   |  |                                                                                              | 543,679     |   |  |   | 746,036     |  
|General and administrative                       |  |                                  | 2,447,878  |   |                                 |   | 1,920,526  |      |  |   | 7,562,902   |   |  |                                                                                              | 7,353,982   |   |  |   | 21,365,701  |  
|Power project development                        |  |                                  | 3,232,729  |   |                                 |   | 708,010    |      |  |   | 8,012,210   |   |  |                                                                                              | 1,572,271   |   |  |   | 10,649,525  |  
|Research and development                         |  |                                  | 970,925    |   |                                 |   | 939,839    |      |  |   | 3,134,138   |   |  |                                                                                              | 2,521,610   |   |  |   | 7,467,285   |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Total operating expenses                         |  |                                  | 6,651,532  |   |                                 |   | 3,618,262  |      |  |   | 18,783,362  |   |  |                                                                                              | 11,991,542  |   |  |   | 40,228,547  |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Operating loss                                   |  |                                  | (6,621,532 | ) |                                 |   | (3,568,375 | )    |  |   | (18,616,939 | ) |  |                                                                                              | (11,789,330 | ) |  |   | (39,697,335 | )
|Interest income                                  |  |                                  | 94,030     |   |                                 |   | 195,856    |      |  |   | 265,306     |   |  |                                                                                              | 597,385     |   |  |   | 1,222,474   |  
|Interest expense                                 |  |                                  | (1,077,695 | ) |                                 |   |           |      |  |   | (2,180,976  | ) |  |                                                                                              |            |   |  |   | (2,180,976  | )
|Other                                            |  |                                  |           |   |                                 |   |           |      |  |   | 75,775      |   |  |                                                                                              | (31,159     | ) |  |   | (51,473     | )
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Loss before income taxes and minority interest   |  |                                  | (7,605,197 | ) |                                 |   | (3,372,519 | )    |  |   | (20,456,834 | ) |  |                                                                                              | (11,223,104 | ) |  |   | (40,707,310 | )
|Tax benefit (expense)                            |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |                                                                                              |            |   |  |   |            |  
|Minority interest                                |  |                                  | 227,398    |   |                                 |   |           |      |  |   | 227,398     |   |  |                                                                                              |            |   |  |   | 227,398     |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Net loss applicable to common stockholders       |  | $                                | (7,377,799 | ) |                                 | $ | (3,372,519 | )    |  | $ | (20,229,436 | ) |  | $                                                                                            | (11,223,104 | ) |  | $ | (40,479,912 | )
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Loss per common share-basic and diluted          |  | $                                | (0.13      | ) |                                 | $ | (0.06      | )    |  | $ | (0.36       | ) |  | $                                                                                            | (0.21       | ) |  |   |             |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  
|Weighted average common shares-basic and diluted |  |                                  | 57,785,000 |   |                                 |   | 55,086,000 |      |  |   | 56,646,000  |   |  |                                                                                              | 53,641,000  |   |  |   |             |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |                                                                                              |             |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



4



---

##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed
Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -------------------------------------------------------------------------------------------- |  | - | ----------- | -
|                                                                            |  |                                 |             |   |      |   |             | For the periodafter re-entryinto developmentstage (October 1,2006
throughSeptember 30, 2008) | 
|                                                                            |  |                                 |             |   |      |   |            
|                                                                            |  | Nine Months Ended September 30, |             |  
|                                                                            |  | 2008                            |             |   | 2007 |   |            
|Cash flows from operating activities:                                       |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Net loss                                                                    |  | $                               | (20,229,436 | ) |      | $ | (11,223,104 | )                                                                                            |  | $ | (40,479,912 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Depreciation, amortization and accretion expense                            |  |                                 | 224,965     |   |      |   | 200,148     |                                                                                              |  |   | 552,777     |  
|Deferred financing costs amortization                                       |  |                                 | 320,814     |   |      |   |            |                                                                                              |  |   | 320,814     |  
|Bad debt expense                                                            |  |                                 | 27,216      |   |      |   |            |                                                                                              |  |   | 27,216      |  
|Write off of abandoned patent applications                                  |  |                                 | 11,534      |   |      |   | 102,358     |                                                                                              |  |   | 142,311     |  
|Write off of abandoned unproved property                                    |  |                                 | 283,903     |   |      |   |            |                                                                                              |  |   | 283,903     |  
|Loss (gain) on disposal of assets                                           |  |                                 | 8,448       |   |      |   | (100        | )                                                                                            |  |   | 11,332      |  
|Gain on completion of contract                                              |  |                                 | (75,357     | ) |      |   |            |                                                                                              |  |   | (75,357     | )
|Minority interest in operations of subsidiary                               |  |                                 | (227,398    | ) |      |   |            |                                                                                              |  |   | (227,398    | )
|Common stock, stock options and warrants issued for services                |  |                                 | 2,638,765   |   |      |   | 3,892,113   |                                                                                              |  |   | 9,887,500   |  
|Decrease (increase) in accounts receivable                                  |  |                                 | (5,880      | ) |      |   | 15,750      |                                                                                              |  |   | (2,330      | )
|Decrease (increase) in unbilled receivable                                  |  |                                 | 192,157     |   |      |   | (108,629    | )                                                                                            |  |   |            |  
|Decrease (increase) in other assets                                         |  |                                 | 168,978     |   |      |   | (294,715    | )                                                                                            |  |   | 54,316      |  
|Decrease (increase) in interest receivable                                  |  |                                 | (66,102     | ) |      |   | 404,522     |                                                                                              |  |   | 192,321     |  
|Increase in accounts payable and accrued liabilities                        |  |                                 | 6,488,338   |   |      |   | 1,940,225   |                                                                                              |  |   | 10,164,245  |  
|Decrease in unearned revenues                                               |  |                                 |            |   |      |   | (24,433     | )                                                                                            |  |   |            |  
|Increase in deferred revenues                                               |  |                                 | 200,000     |   |      |   |            |                                                                                              |  |   | 200,000     |  
|(Decrease) increase in asset retirement obligation                          |  |                                 | (26,453     | ) |      |   |            |                                                                                              |  |   | 59,740      |  
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Net cash used in operating activities                                       |  |                                 | (10,065,508 | ) |      |   | (5,095,865  | )                                                                                            |  |   | (18,888,522 | )
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Cash flows from investing activities:                                       |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Purchase of restricted marketable equity securities                         |  |                                 | (8,687,175  | ) |      |   |            |                                                                                              |  |   | (8,687,175  | )
|Increase in notes receivable                                                |  |                                 | (142,500    | ) |      |   | (500,000    | )                                                                                            |  |   | (642,500    | )
|Proceeds from note receivable                                               |  |                                 | 350,000     |   |      |   | 5,547,552   |                                                                                              |  |   | 5,897,552   |  
|Increase in deposits                                                        |  |                                 | (440,573    | ) |      |   | (185,847    | )                                                                                            |  |   | (655,710    | )
|Decrease (increase) in restricted cash                                      |  |                                 | (9,716,405  | ) |      |   | 300,000     |                                                                                              |  |   | (9,391,405  | )
|Increase in intangible assets                                               |  |                                 | (946,910    | ) |      |   | (89,192     | )                                                                                            |  |   | (1,090,732  | )
|Purchase of equipment                                                       |  |                                 | (180,679    | ) |      |   | (186,640    | )                                                                                            |  |   | (505,976    | )
|Proceeds from the sale of equipment                                         |  |                                 | 2,403       |   |      |   | 5,000       |                                                                                              |  |   | 7,403       |  
|Acquisition of unproved property                                            |  |                                 | (490,858    | ) |      |   | (897,640    | )                                                                                            |  |   | (5,911,659  | )
|Acquisition of land                                                         |  |                                 | (1,811,063  | ) |      |   |            |                                                                                              |  |   | (1,811,063  | )
|Well field development costs                                                |  |                                 | (24,127,329 | ) |      |   | (2,530,383  | )                                                                                            |  |   | (28,877,854 | )
|Construction-in-progress costs                                              |  |                                 | (19,382,251 | ) |      |   |            |                                                                                              |  |   | (19,986,065 | )
|Power project equipment deposits                                            |  |                                 | (7,056,375  | ) |      |   |            |                                                                                              |  |   | (10,618,875 | )
|Power project development deposits                                          |  |                                 | (3,242,612  | ) |      |   | (3,716,878  | )                                                                                            |  |   | (3,603,915  | )
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Net cash provided by (used in) investing activities                         |  |                                 | (75,872,327 | ) |      |   | (2,254,028  | )                                                                                            |  |   | (85,877,974 | )
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Cash flows from financing activities:                                       |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Proceeds from exercise of common stock warrants                             |  |                                 | 27,854      |   |      |   | 6,404,788   |                                                                                              |  |   | 6,453,897   |  
|Proceeds from exercise of common stock options                              |  |                                 | 650,744     |   |      |   | 264,625     |                                                                                              |  |   | 1,570,669   |  
|Proceeds from the issuance of 8.00% convertible senior notes                |  |                                 | 55,000,000  |   |      |   |            |                                                                                              |  |   | 55,000,000  |  
|Proceeds from the issuance of 7.00% senior secured note (non-recourse)      |  |                                 | 26,130,874  |   |      |   |            |                                                                                              |  |   | 26,130,874  |  
|Proceeds from ATM equity financing                                          |  |                                 | 24,160,319  |   |      |   |            |                                                                                              |  |   | 24,160,319  |  
|Purchase of forward stock purchase transaction                              |  |                                 | (15,000,000 | ) |      |   |            |                                                                                              |  |   | (15,000,000 | )
|Purchase of call spread option transaction                                  |  |                                 | (5,850,000  | ) |      |   |            |                                                                                              |  |   | (5,850,000  | )
|Incurrence of deferred financing fees                                       |  |                                 | (4,161,587  | ) |      |   |            |                                                                                              |  |   | (4,161,587  | )
|Proceeds from issuance of note payable                                      |  |                                 | 900,000     |   |      |   |            |                                                                                              |  |   | 900,000     |  
|Proceeds from minority interest capital contribution                        |  |                                 | 3,675,000   |   |      |   |            |                                                                                              |  |   | 3,675,000   |  
|Proceeds from the sale of common stock in private equity placement          |  |                                 |            |   |      |   | 11,853,751  |                                                                                              |  |   | 11,853,751  |  
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Net cash provided by financing activities                                   |  |                                 | 85,533,204  |   |      |   | 18,523,164  |                                                                                              |  |   | 104,732,923 |  
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                 | (404,631    | ) |      |   | 11,173,271  |                                                                                              |  |   | (33,573     | )
|Cash and cash equivalents at beginning of period                            |  |                                 | 5,912,210   |   |      |   | 3,351,568   |                                                                                              |  |   | 5,541,152   |  
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                               | 5,507,579   |   |      | $ | 14,524,839  |                                                                                              |  | $ | 5,507,579   |  
|                                                                            |  |                                 |             |   |      |   |             |                                                                                              |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



5



---

##### Table of Contents

RASER TECHNOLOGIES, INC. & SUBSIDIARIES

(a development stage enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A. Basis of Presentation

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

The accompanying condensed consolidated balance sheet as of December 31, 2007 has been
derived from audited financial statements and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations
of the SEC. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of our management, are necessary to present fairly the results of our operations for the
periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2007. The results of
operations for the three and nine months ended September 30, 2008, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008 or any other period.

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

Development Stage Enterprise

We
currently operate as a development stage enterprise as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. In 2005, we transitioned from a
development stage to an operating stage enterprise for accounting purposes. In the fourth quarter of 2006, our management reassessed our operations and determined that we should report as a development stage enterprise effective October 1,
2006. The decision was primarily based upon the fact that anticipated licensing revenue from the transportation and industrial technology segment did not materialize as expected, our determination that our efforts to license our technologies would
take longer than originally anticipated, and a shift in our primary business focus to geothermal power systems development, requiring us to raise additional capital and perform many development stage activities that do not immediately generate
revenues. Accordingly, the condensed consolidated statements of operations and cash flows include cumulative balances from the re-entry into the development stage date of October 1, 2006 to September 30, 2008.

We have raised additional capital to fund our geothermal power systems development activities and
our other operations. We raised $12.5 million in a private placement of common stock that closed on March 30, 2007 and $6.3 million from subsequent exercises of warrants issued in connection with the private placement. We raised an additional
$50.0 million from the issuance of 8.00% Convertible Senior Notes due 2013 (the Convertible Notes), which closed on March 26, 2008, and $5.0 million in connection with the issuance of additional Convertible Notes pursuant to the
initial purchasers exercise of its overallotment option, which closed on April 1, 2008. On June 17, 2008, we entered into an ATM Equity Offering Sales Agreement (the Sales Agreement) with Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which we were able to offer and sell through Merrill Lynch, as our sales agent, from time to time, shares of our common stock with an aggregate sales price of up to $25,000,000
(the ATM Program). Sales of shares under the ATM Program were made by means of ordinary brokers transactions on the NYSE Arca exchange at market prices. Merrill Lynch received from us a commission of 2.00%, based on the gross sales
price per share, for any shares sold through it as our agent under the Sales Agreement. We began selling shares pursuant to the ATM Program during the third quarter of 2008, and we sold 732,000 shares pursuant to the ATM Program for an aggregate of
$7.2 million. After deducting commissions of $0.1 million, we received net proceeds of $7.1 million from the sale of these shares. On August 15, 2008, we entered into an Amendment to the ATM Equity OfferingSMSales Agreement with Merrill Lynch, pursuant to which we sold to Merrill Lynch 1,986,173 shares of our common stock in connection with a public offering of such shares at a public
offering price per share of $8.95. Merrill Lynch acted as underwriter of the offering. The net proceeds from the sale of the 1,986,173 shares, after deducting Merrill Lynchs underwriting discount of $695,161, and the offering expenses payable
by us were approximately $17.1 million. The 1,986,173 shares, together with the 732,000 shares previously sold pursuant to the Sales Agreement, constituted all $25.0 million of the shares of common stock contemplated to be sold pursuant to the Sales
Agreement.

We expect to obtain project financing for each geothermal power project that we develop. During the third quarter of 2008, we
obtained project financing for our geothermal project near Beaver, Utah, which we refer to as the Thermo No. 1 project. The project financing arrangements for the Thermo No. 1 project included approximately $31.2 million of permanent
non-recourse debt financing for the Thermo No. 1 project with a fixed annual interest rate of 7.00%. Our subsidiary, Thermo No. 1 BE-01, LLC (Thermo Subsidiary), received proceeds from the debt financing of approximately $26.1
million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0



6



---

##### Table of Contents

million. After the effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. From the
proceeds of the debt financing, we received approximately $14.1 million from our Thermo Subsidiary as repayment for construction costs at the Thermo No. 1 project that were incurred by us prior to closing the project financing. In addition,
pursuant to the project financing agreements, our Thermo Subsidiary received a capital contribution of $3.7 million from the minority member (the Class A member) of the Thermo Subsidiary. See Note H. Long-Term Senior Secured Note
(non-recourse) and Convertible Senior Notes for further discussion of the financing arrangements for the Thermo No. 1 project. In October 2008, our Thermo Subsidiary received the balance of the amount due under the financing agreement in the
form of an additional $20.8 million capital contribution from the Class A member.

Liquidity

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. As discussed above, we re-entered the development stage in October 2006. As reflected in the accompanying condensed consolidated financial statements, as of
September 30, 2008, we had cash and cash equivalents on hand of $5.5 million. Cash used in operations totaled approximately $4.9 million for the quarter ended September 30, 2008 and the accumulated deficit and deficit accumulated after
re-entry into development stage totaled $71.5 million. We have incurred substantial losses since inception and we are not operating at cash breakeven.

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

As a result of the private placement of the Convertible Notes, our independent registered public accounting firm reissued its report with respect to our
2007 financial statements on April 1, 2008 to remove an explanatory paragraph that expressed substantial doubt about our ability to continue as a going concern. Although we raised substantial proceeds during the nine months ended
September 30, 2008, as described above, we have used or committed a substantial portion of these proceeds to fund our operations and development efforts. Further, we are not currently generating significant revenues, and our cash and cash
equivalents will continue to be depleted by our ongoing development efforts. Until we are in a position to generate significant revenues, we will need to continue to raise additional funds to continue operating as a going concern. We may seek this
additional funding through the issuance of debt, preferred stock, equity or a combination of these instruments. We may also acquire financing through a joint venture, the sale of one or more of our projects or interests therein, entry into a prepaid
power purchase agreement with utilities or municipalities, or a merger and/or other transaction, a consequence of which could include the sale or issuance of stock to third parties. The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

New Accounting Pronouncements

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

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

No other new accounting pronouncement issued or effective during the current fiscal year had or is expected to have a material impact on our consolidated financial statements.

Concentration of Credit Risk

We maintain a portion
of our available unrestricted cash in deposit accounts in one bank in Utah. At times, cash balances in these accounts may exceed federally insured limits. From time to time, we invest a portion of our unrestricted cash in an AIM Funds money market
account, which is not affiliated with the bank where we maintain our deposit accounts. The money market account earns interest based on a variable rate. At September 30, 2008, our balance in the money market account was $4.6 million and the
interest rate applicable to the money market account was 2.35% per annum. The average interest rate applicable to the money market account during the quarter ended September 30, 2008 was 2.36% per annum.



7



---

##### Table of Contents

Cash from our checking account is swept nightly into an interest bearing account. At September 30,
2008, we had a balance of $0.9 million in this sweep account and the interest rate applicable to the sweep account was 2.10% per annum.

We invest our restricted cash balances in a money market fund managed by JP Morgan Fund. At September 30, 2008, we had a balance of $9.7 million invested in this money market fund and the interest rate applicable to the fund was
2.23% per annum.

Project financing proceeds received by our subsidiaries are subject to the terms and conditions of those
arrangements. On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into various definitive agreements (the Thermo Financing Agreements) that provide debt financing and tax
equity capital for the Thermo No. 1 project totaling $50.6 million. Pursuant to the Thermo Financing Agreements, the funds received can only be used for the purposes permitted by the Thermo Financing Agreements. Any funds not specifically
allocated are restricted and can be used only by our Thermo Subsidiary for certain operating expenses. An independent administrative agent has been appointed to administer all of the Thermo Subsidiarys cash deposits and disbursements. The
independent administrative agent has deposited the cash into a money market fund, which earns interest at a variable rate. At September 30, 2008, the interest rate applicable to this money market fund was 2.23% per annum.

We reviewed the underlying investments included in the money market accounts described above and concluded that the money market accounts are properly
classified as cash equivalents for financial statement purposes. Due to the nature of the investments included in these money market accounts, we consider it reasonable to expect that the fair market values of these investments will not be
significantly impacted by a change in interest rates, and that they can be liquidated for cash on short notice. We have not experienced losses in our money market accounts, and we believe that we are not exposed to any significant credit risks
relating to our money market accounts.

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

During the nine months ended September 30, 2008, we generated revenue primarily from one government contractor. We do not believe we are exposed to
any significant credit risk associated with our accounts receivable.

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

On March 26, 2008, we sold $50.0 million aggregate principal amount of our Convertible Notes pursuant to the terms of a purchase agreement, dated
March 19, 2008 (the Purchase Agreement), between Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the Initial Purchaser or Merrill Lynch) and us. On April 1,
2008, we sold an additional $5.0 million aggregate principal amount of the Convertible Notes pursuant to the exercise of the Initial Purchasers overallotment option. The accrued interest payments on the Convertible Notes are due semi-annually
on October 1 and April 1 of each year from October 1, 2008 until April 1, 2013.

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



|                            |  |                 |           |      |   |             |  |              |  |   |          
|--------------------------- |  | --------------- | --------- | ---- | - | ----------- |  | ------------ |  | - | ---------
|Maturity                    |  | PrincipalAmount |           | Cost |   | Coupon Date |  | CouponAmount
|Short-term portion:         |  |                 |           |      |   |             |  |              |  |   |          
|09/30/08                    |  | $               | 2,056,000 |      | $ | 2,042,718   |  | 10/01/08     |  | $ | 2,055,556
|09/30/08                    |  | $               | 206,000   |      |   | 204,776     |  | 10/01/08     |  | $ | 206,000  
|03/31/09                    |  | $               | 2,000,000 |      |   | 1,967,720   |  | 04/01/09     |  | $ | 2,000,000
|03/31/09                    |  | $               | 200,000   |      |   | 197,320     |  | 04/01/09     |  | $ | 200,000  
|                            |  |                 |           |      |   |             |  |              |  |   |          
|                            |  |                 |           |      |   | 4,412,534   |  |              |  |   |          
|Discount amortization       |  |                 |           |      |   | 32,248      |  |              |  |   |          
|                            |  |                 |           |      |   |             |  |              |  |   |          
|Total at September 30, 2008 |  |                 |           |      | $ | 4,444,782   |  |              |  |   |          
|                            |  |                 |           |      |   |             |  |              |  |   |          



8



---

##### Table of Contents

|                            |  |                 |           |      |   |             |  |              |  |   |          
|--------------------------- |  | --------------- | --------- | ---- | - | ----------- |  | ------------ |  | - | ---------
|Maturity                    |  | PrincipalAmount |           | Cost |   | Coupon Date |  | CouponAmount
|Long-term portion:          |  |                 |           |      |   |             |  |              |  |   |          
|09/30/09                    |  | $               | 2,000,000 |      | $ | 1,951,280   |  | 10/01/09     |  | $ | 2,000,000
|09/30/09                    |  | $               | 200,000   |      |   | 195,860     |  | 10/01/09     |  | $ | 200,000  
|03/15/10                    |  | $               | 2,000,000 |      |   | 1,933,080   |  | 04/01/10     |  | $ | 2,000,000
|03/15/10                    |  | $               | 200,000   |      |   | 194,420     |  | 04/01/10     |  | $ | 200,000  
|                            |  |                 |           |      |   |             |  |              |  |   |          
|                            |  |                 |           |      |   | 4,274,640   |  |              |  |   |          
|Discount amortization       |  |                 |           |      |   | 36,450      |  |              |  |   |          
|                            |  |                 |           |      |   |             |  |              |  |   |          
|Total at September 30, 2008 |  |                 |           |      | $ | 4,311,090   |  |              |  |   |          
|                            |  |                 |           |      |   |             |  |              |  |   |          

Interest payments on the Convertible Notes totaling $2,261,556 were due and paid on October 1, 2008.

C. Unproved Property and Prepaid Delay Rentals

During the second quarter of 2007, we paid $25,000 to a property owner in California who granted us an option to further pursue the acquisition of geothermal rights on 640 acres of property. In August 2007, we exercised the option and paid
$75,000 for the right to develop the geothermal resources on this property. However, during the second quarter of 2008, we determined that we would no longer pursue the development of the geothermal resources on this property and terminated our
agreement with the property owner. Accordingly, we expensed $115,000 of capitalized unproved property costs relating to this project.

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

In January 2008, we entered into a surface access and use lease agreement with a property owner in New Mexico and paid $320,000 to obtain
surface right of way access and drilling rights to develop a geothermal power plant in Hidalgo County, New Mexico. The term of the lease agreement continues until our geothermal rights respective to a BLM lease have expired. Pursuant to the lease
agreement, we also obtained certain water rights at $0.50 per acre foot of water with a minimum annual fee of $1,000. In August 2008, we paid $1,200 as a lease bonus and entered into a ground lease for 20 acres with the same property owner in New
Mexico. The term of the lease agreement is indefinite, as long as the power plant, transmission and related facilities on the lease property are producing or capable of producing electricity from geothermal sources. Under the ground lease, we
obtained the right to construct and operate a geothermal power plant and transmission facilities on the property. The New Mexico resource is one of the most well-studied low-temperature geothermal resources in the country. Multiple wells have
been drilled on the leased property exhibiting temperatures in the range of 250 to 300 degrees Fahrenheit. Studies indicate that an operational production well on the leased property has the potential to generate approximately 7 MW of
electricity. We are finalizing the permitting process for this project and have begun purchasing the key components of the plant, including the UTC PureCycle units and cooling tower components. There is a greenhouse operation and a fish
farm nearby that utilize the geothermal resource for direct-use heating. During the summer of 2008, two UTC PureCycle units were installed at the local greenhouse operation and are currently producing power.

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

In January
2008, we paid $10,000 as a lease bonus and entered into a geothermal lease with the owners of 984 acres of private property in Oregon. Under the lease agreement, we obtained the right to begin development and construction of geothermal power plants
on the property. The initial lease term is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. It is well known that this area in Oregon is a geothermally active area. While there are
no existing wells on the leased property, the leased property is adjacent to a large-scale greenhouse operation with six operating shallow wells exhibiting temperatures as high as 200 degrees Fahrenheit. We are finalizing permitting for a power
project on the leased property, and we are in the process of acquiring rights-of-way easements for a transmission interconnection. We have also conducted extensive geologic studies to determine the highest prospect areas for drilling. We expect
to begin drilling potential wells for this project in 2009.



9



---

##### Table of Contents

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

In April 2008, we paid $34,000 to enter into 17 geothermal lease agreements for certain properties in Utah. Under these lease agreements, we obtained the
right to begin development and construction of geothermal power plants on approximately 33,400 acres of private property. The initial lease term for these Utah properties is 10 years, subject to certain extension provisions. The Utah leased
properties were selected based on a number of factors that indicate the potential for geothermal resources. These leases are located throughout central and southern Utah and include properties that range from low-probability prospects to
high-probability prospects. Although some drilling data exists for some of the leased properties, there are no established geothermal resources on these properties. We intend to evaluate these properties for potential future development.

In the second quarter of 2008, we paid $30,000 as lease bonuses and entered into two geothermal leases with two separate private land owners for 1,160
acres in Nevada. One of these leases has an initial term of 10 years and the other lease has a term of 15 years. In each case, the leases are subject to certain extension provisions. We also paid $21,000 as lease bonuses and entered into two
geothermal leases with two separate private land owners for 470 acres in Utah. One of these leases has an initial term of 10 years and the other lease has a term of 20 years. In each case, the leases are subject to certain extension provisions.
Under each of the Utah and Nevada lease agreements, we obtained the right to begin development and construction of geothermal power plants on the properties. While there are no existing wells or established geothermal resources on the leased
property, the leased property is located in a well-studied area with multiple existing wells, one of which has shown temperatures of 265 degrees Fahrenheit at shallow depths. We are in the process of obtaining the necessary permits to begin drilling
on the leased property.

Based on information obtained during the development of the Thermo No. 1 project, we believe the Thermo area
has strong potential to support additional projects. Therefore, we have obtained additional geothermal leases in the vicinity of the Thermo No. 1 project. In the third quarter of 2008, we paid $61,250 as lease bonuses and entered into three
geothermal leases with three separate private land owners for approximately 30,590 acres near the Thermo No. 1 project. Two of the leases have an initial term of 20 years and the other lease has a term of five years. In each case, the leases
are subject to certain extension provisions. Under each lease, we obtained the rights to begin development and construction of geothermal power plants on the properties. Although the leased properties are near our Thermo No. 1 project, which
has an established geothermal resource, there are no existing wells or established geothermal resources on the leased properties. We intend to further evaluate these properties for potential future development.

The following table sets forth our property acquisition costs by geographical area as of September 30, 2008:



|                                                                                                            |  |         |     |  |                                               |           |                         |   |         |                       |  |   |          
|----------------------------------------------------------------------------------------------------------- |  | ------- | --- |  | --------------------------------------------- | --------- | ----------------------- | - | ------- | --------------------- |  | - | ---------
|State                                                                                                       |  | Acreage |     |  | CapitalizedAcquisitionCosts(UnprovedProperty) |           | PrepaidDelayRentalCosts |   |         | TotalCapitalizedCosts
|Nevada                                                                                                      |  | 33,560  | (a) |  | $                                             | 1,366,305 |                         | $ | 50,000  |                       |  | $ | 1,416,305
|New Mexico                                                                                                  |  | 2,500   |     |  |                                               | 4,666,272 |                         |   |        |                       |  |   | 4,666,272
|Utah                                                                                                        |  | 162,664 | (b) |  |                                               | 237,744   |                         |   |        |                       |  |   | 237,744  
|Washington and Oregon                                                                                       |  | 78,898  |     |  |                                               | 48,957    |                         |   |        |                       |  |   | 48,957   
|                                                                                                            |  |         |     |  |                                               |           |                         |   |         |                       |  |   |          
|Unproved property acquisition costs                                                                         |  | 277,622 |     |  | $                                             | 6,319,278 |                         | $ | 50,000  |                       |  | $ | 6,369,278
|                                                                                                            |  |         |     |  |                                               |           |                         |   |         |                       |  |   |          
|                                                                                                           
|The following table sets forth our property acquisition costs by geographical area as of December 31, 2007:
|                                                                                                            |  |         |     | 
|State                                                                                                       |  | Acreage |     |  | CapitalizedAcquisitionCosts(UnprovedProperty) |           | PrepaidDelayRentalCosts |   |         | TotalCapitalizedCosts
|California                                                                                                  |  | 640     | (c) |  | $                                             | 210,076   |                         | $ | 70,750  | (d)                   |  | $ | 280,826  
|Nevada                                                                                                      |  | 32,400  | (a) |  |                                               | 1,323,075 |                         |   | 50,000  |                       |  |   | 1,373,075
|New Mexico                                                                                                  |  | 2,500   |     |  |                                               | 4,346,608 |                         |   |        |                       |  |   | 4,346,608
|Utah                                                                                                        |  | 100,819 | (b) |  |                                               | 114,222   |                         |   |        |                       |  |   | 114,222  
|Washington and Oregon                                                                                       |  | 77,914  |     |  |                                               | 38,957    |                         |   |        |                       |  |   | 38,957   
|                                                                                                            |  |         |     |  |                                               |           |                         |   |         |                       |  |   |          
|Total                                                                                                       |  | 214,273 |     |  | $                                             | 6,032,938 |                         | $ | 120,750 |                       |  | $ | 6,153,688
|                                                                                                            |  |         |     |  |                                               |           |                         |   |         |                       |  |   |          



|(a) | In December 2006, we paid $25,000 in cash, as a lease bonus, to cover the first year rental obligation, and issue to the owner 25,000 restricted shares of Raser common stock that
had a fair value of $115,250 on the grant date to obtain the right to begin development and construction of geothermal power plants on three ranches in central Nevada consisting of approximately 11,600 acres. Under the same lease agreement, we also
obtained a grant of geothermal and surface rights, if any, held by a property owner with respect to three million additional acres of land currently used for ranching in central Nevada. We have not yet performed the necessary due diligence to
determine what, if any, geothermal rights the property owner has with respect to these three million acres of land. As a result, our ability to ultimately lease any geothermal and surface rights on this land is uncertain. We expect to conduct due
diligence to determine what, if any, geothermal rights the property owner has with respect to the three million acres of land during the fourth quarter of 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

##### Table of Contents

|(b) | Includes a geothermal resource lease agreement with a party that holds an undivided 75% interest on 11,294 acres of land in Utah.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(c) | Acreage excludes interests in approximately 11,000 acres of mineral rights in the State of California. These mineral rights represented mining claims that we staked adjacent to our
previously optioned property in California. As noted above, during the second quarter of 2008, management decided not to pursue the project and expensed the related acquisition costs. During the third quarter, management decided to also abandon the
mining claims and expensed the related acquisition costs totaling $95,466.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Delay rentals totaling $70,750 relating to the mining rights were prepaid in 2007 and expensed in 2008.
|--- | -------------------------------------------------------------------------------------------------------

In connection with the lease of 11,600 acres in Nevada, we also obtained a grant of the geothermal and surface rights, if any, held by the property owner
with respect to an additional three million acres of land in central Nevada that is currently used for ranching. We have not performed the necessary due diligence to determine what, if any, geothermal rights the property owner has with respect to
these three million acres of land. As a result, our ability to ultimately lease any geothermal and surface rights on this land is uncertain. We expect to conduct due diligence to determine what, if any, geothermal rights the property owner has with
respect to the three million acres of land during the fourth quarter of 2008.

Once a viable resource is verified by an independent
geothermal engineer, the unproved property is classified as proved property. Because geothermal resources are renewable, we do not believe it is appropriate to apply principles of depletion to the costs associated with our proved
geothermal resources. Instead, we intend to amortize/depreciate the capitalized costs related to the geothermal resources used by each geothermal power plant, together with the costs of the applicable geothermal plant, over the useful life of such
power plant which is generally expected to be 35 years. As of September 30, 2008, we have begun drilling one well on one property in Nevada (the Truckee project) and ten wells on one property in Utah (the Thermo No. 1 project). We have not
completed our evaluation for viability, generating capacity, or potential reserves of the Truckee project. In August 2008, we received, however, a report from independent engineers verifying the viability, generating capacity and potential reserves
for the Thermo No. 1 project. Accordingly, the acquisition cost of the leased property for the Thermo No. 1 project has been reclassified totaling $1,295.

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

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

Collateralized Leases

On May 16, 2008, we and our Thermo Subsidiary entered into a financing commitment letter (the Thermo Commitment) with Merrill Lynch
relating to the project financing and tax equity funding for the Thermo No. 1 project. On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing Agreements
that provide debt financing and tax equity capital for the Thermo No. 1 project.

Pursuant to the Thermo Financing Agreements, we
agreed to contribute, as Class B membership equity interests, seven geothermal leases held by certain of our wholly owned subsidiaries to the Thermo Subsidiary. One of the geothermal leases contains the property totaling 1,507 acres on which we had
drilled ten wells that are being developed as either production wells or re-injection wells for the Thermo No. 1 project. The other six geothermal leases represent parcels of land surrounding the Thermo No. 1 project area totaling 8,892
acres (Collateral Parcels). The Thermo Subsidiary also granted to Deutsche Bank (the Collateral Agent) a security interest and continuing lien on all of our right, title and interest in the seven contributed geothermal leases
to be held as collateral by the Collateral Agent to secure prompt and complete payment when any and all of the obligations become due.



11



---

##### Table of Contents

Pursuant to the Thermo Financing Agreements, the Collateral Agent is instructed to release all liens and
return the Collateral Parcels to us when construction of the geothermal power plant is deemed to be substantially complete. Additionally, the Collateral Agent is further instructed to remove all liens on approximately 867 acres of the remaining
leased property upon receiving certification from an independent geothermal engineer, at any time after 18 months, that the geothermal resource is expected to remain viable long-term.

D. Geothermal Well Field Development

We have either obtained or are in the process of obtaining
permits for the development of eight geothermal projects located in Utah, Nevada, New Mexico and Oregon. During the third quarter of 2008, we continued developing well fields on certain properties in Nevada and Utah. We received appropriate permits
and drilled one well at our Truckee project in Nevada and ten wells at our Thermo No. 1 project in Utah. We also began the permitting process to develop well fields at two additional sites in Nevada, two additional sites in Utah, one site in
New Mexico and one site in Oregon. We capitalized intangible drilling costs primarily relating to permit preparation, equipment rental, certain direct labor and overhead charges and other services, and we capitalized tangible drilling costs for
items such as pipes, wellheads, rings, and drilling pads. The following table sets forth our capitalized well field development costs by geographical area as of September 30, 2008:



|                      |  |                          |            |                        |   |                       |  |   |           
|--------------------- |  | ------------------------ | ---------- | ---------------------- | - | --------------------- |  | - | ----------
|State                 |  | Intangible DrillingCosts |            | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada                |  | $                        | 2,798,202  |                        | $ | 384,174               |  | $ | 3,182,376 
|New Mexico            |  |                          | 256,074    |                        |   |                      |  |   | 256,074   
|Utah                  |  |                          | 27,937,859 |                        |   | 3,427,783             |  |   | 31,365,642
|Washington and Oregon |  |                          | 64,346     |                        |   |                      |  |   | 64,346    
|                      |  |                          |            |                        |   |                       |  |   |           
|Total                 |  | $                        | 31,056,481 |                        | $ | 3,811,957             |  | $ | 34,868,438
|                      |  |                          |            |                        |   |                       |  |   |           

The following table sets forth our capitalized well field development costs by geographical
locations as of December 31, 2007:



|           |  |                          |           |                        |   |                       |  |   |          
|---------- |  | ------------------------ | --------- | ---------------------- | - | --------------------- |  | - | ---------
|State      |  | Intangible DrillingCosts |           | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada     |  | $                        | 2,632,305 |                        | $ | 384,174               |  | $ | 3,016,479
|New Mexico |  |                          | 12,168    |                        |   |                      |  |   | 12,168   
|Utah       |  |                          | 1,473,420 |                        |   | 248,458               |  |   | 1,721,878
|           |  |                          |           |                        |   |                       |  |   |          
|Total      |  | $                        | 4,117,893 |                        | $ | 632,632               |  | $ | 4,750,525
|           |  |                          |           |                        |   |                       |  |   |          

As of September 30, 2008, we had drilled one well at our Truckee project in Nevada, which has
not been fully evaluated for geothermal viability, generating capacity, or potential reserves. We incurred costs of $3.0 million in connection with this well. As of September 30, 2008, we have drilled ten wells at our Thermo No. 1 project
in Utah. In August 2008, we received a report from independent engineers verifying the viability, generating capacity and potential reserves for the Thermo No. 1 project. As of September 30, 2008, the well field development costs for the
Thermo No. 1 project totaled $31.2 million. These costs will be amortized over the expected life of the geothermal power plant when it is placed in service.

E. Power Project Construction-in-Progress

During the third quarter of 2008, we continued construction at the Thermo
No. 1 project. Major construction at the plant was completed in October of 2008, and the plant is expected to be fully operational by the end of 2008.

As of September 30, 2008, pursuant to purchase agreements with a manufacturer, we had taken delivery of 84 generating units for use in the geothermal power plants we are developing. Fifty of these generating
units have been installed at the Thermo No. 1 project, and two additional generating units are being stored for use as replacement generating units for the Thermo No. 1 project. The other 32 generating units are being stored at the
Lightning Dock project pending installation at that project.



12



---

##### Table of Contents

In order to connect a geothermal power plant to the existing power lines, we must construct transmission
lines from the plant to the local utility interconnection point. We also must construct a substation at or near the facility that will increase the voltage from the generation facility to match local utility transmission voltages. We completed
construction of approximately 6.5 miles of transmission lines for the Thermo No. 1 project in July 2008. We capitalized approximately $2.1 million of costs associated with the construction of these transmission lines.

Power project construction-in-progress consisted of the following at September 30, 2008 (by project):



|                                            |  |                    |            |                   |   |        
|------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | -------
|                                            |  | September 30, 2008 |            | December 31, 2007
|Thermo No. 1 project:                       |  |                    |            |                   |   |        
|Power plant construction-in-progress        |  | $                  | 33,422,715 |                   | $ | 603,814
|Transmission lines construction-in-progress |  |                    | 2,088,079  |                   |   |       
|Accumulated depreciation                    |  |                    |           |                   |   |       
|                                            |  |                    |            |                   |   |        
|Total Thermo No. 1 project                  |  |                    | 35,510,794 |                   |   | 603,814
|                                            |  |                    |            |                   |   |        
|Lightning Dock project:                     |  |                    |            |                   |   |        
|Power plant construction-in-progress        |  | $                  | 12,453,912 |                   | $ |       
|Transmission lines construction-in-progress |  |                    |           |                   |   |       
|Accumulated depreciation                    |  |                    |           |                   |   |       
|                                            |  |                    |            |                   |   |        
|Total Lightning Dock project                |  |                    | 12,453,912 |                   |   |       
|                                            |  |                    |            |                   |   |        
|Other projects:                             |  |                    |            |                   |   |        
|Power plant construction-in-progress        |  | $                  | 1,279,818  |                   | $ |       
|Transmission lines construction-in-progress |  |                    |           |                   |   |       
|Accumulated depreciation                    |  |                    |           |                   |   |       
|                                            |  |                    |            |                   |   |        
|Total other projects                        |  |                    | 1,279,818  |                   |   |       
|                                            |  |                    |            |                   |   |        
|Net power project construction-in-progress  |  | $                  | 49,244,524 |                   | $ | 603,814
|                                            |  |                    |            |                   |   |        

Amounts capitalized as power project construction-in-progress will not be depreciated until the
applicable geothermal power plant is placed in service.

F. Note Payable

On February 15, 2008, we executed a promissory note, whereby we agreed to pay to Lightening Dock Geothermal, Inc. (Lender) $900,000 in
principal plus $50,000 in interest on or before January 5, 2009. The promissory note is secured by a mortgage agreement whereby, our BLM lease is assigned as security against an event of default by us. In the event that we cannot pay the
promissory note when due, an event of default would occur. Under the mortgage agreement, we would have 15 business days to cure such event of default or the Lender may exercise any or all of its rights, remedies and recourses including, but not
limited to, foreclosure and sale of the BLM lease. Accrued interest payable on this promissory note at September 30, 2008 totaled $33,333.

G.
Asset Retirement Obligation

Pursuant to the purchase of our BLM lease in New Mexico, we agreed to assume certain plug and abandon
obligations for certain wells on the leased land. Management determined that the present value of the total estimated costs to plug and abandon the wells was $86,193. In February 2008, we plugged and abandoned 11 of the well sites at a cost of
$26,453. No additional wells were required to be plugged and abandoned during the third quarter of 2008.



13



---

##### Table of Contents

H. Long-Term Senior Secured Note (non-recourse) and Convertible Senior Notes

On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing
Agreements that provide debt financing and tax equity capital for the Thermo No. 1 project. According to the Thermo Financing Agreements, the project financing arrangements for the Thermo No. 1 project included approximately $31.1 million
of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed annual interest rate of 7.00% over 18 years. Our Thermo Subsidiary received proceeds from the debt financing of approximately $26.1 million for construction of
the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. Pursuant to the
Thermo Financing Agreements, the debt financing for the Thermo No. 1 project is held by our Thermo Subsidiary, which is responsible for debt service, all maintenance and operations expenses, and the payment of various fees and distributions to
us and Merrill Lynch. Accordingly, if our Thermo Subsidiary defaulted on the loan, there would be no recourse to us to pay the unpaid balance.

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

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

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

I. Minority Interest

In conjunction with the Thermo No. 1 project financing, our Thermo Subsidiary issued new member units to Merrill Lynch L.P. Holdings Inc. (Class A Investor) who contributed $24.5 million in exchange for an equity interest,
of which $3.7 million was received on September 8, 2008 and the remaining balance of $20.8 million was received on October 20, 2008.

The Thermo Financing Agreements provide for the allocation of 99% of profits and losses to the Class A Investor until the Class A Investor earns a target rate of return. Upon reaching the target rate of return, the Class A
Investors allocation of profits and losses will be reduced to 5.00%.

Because we maintained a 75% voting interest in our Thermo
Subsidiary, we will continue to consolidate 100% of the assets and liabilities of our Thermo Subsidiary. The Class A Investors interest in our Thermo Subsidiary is reflected as Minority Interest in our consolidated balance
sheet and statement of operations.

In conjunction with the issuance of Class A member interest, our share of our Thermo
Subsidiarys net equity was reduced by $1.4 million. In accordance with SEC Staff Accounting Bulletin Topic 5H, we elected to record the $1.4 million as a reduction in paid in capital.

J. Contingencies and Commitments

Contingent Options and Share
Grants

We previously entered into a geothermal project alliance agreement whereby a service provider agreed to provide engineering
advice to us relating to geothermal drilling and geothermal power plant construction. As part of the consideration for the agreement, we agreed to grant 5,000 shares of common stock upon issuance of a certificate of completion with respect to each
of the first three specific projects. During the second quarter of 2008, management assessed the likelihood of completing the contingent requirements



14



---

##### Table of Contents

and concluded that the completion of the first geothermal power plant was considered probable in accordance with the definition in SFAS
No. 5, Accounting for Contingencies. Accordingly, we recognized equity compensation for the three and nine months ended September 30, 2008 totaling $13,380 and $29,118, respectively. For the other two specific projects,
management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly,
we did not recognize equity compensation for the other two specific projects during the nine months ended September 30, 2008.

We
previously granted options to purchase 50,000 shares of our common stock to a key executive in our power systems segment. Vesting of these options is contingent upon successfully placing each of our first three geothermal power plants in service.
The options will vest with respect to one third of the shares each time one of the three geothermal power plants is successfully placed in service. The option exercise price is $7.20 per share, which was the closing market price on the grant date.
Failure to successfully place any of the first three geothermal power plants in service will result in the forfeiture of one third of the unvested contingent options. During the second quarter of 2008, management assessed the likelihood of
completing the contingent requirements and concluded that the completion of the first geothermal power plant was considered probable in accordance with the definition in SFAS No. 5, Accounting for Contingencies.
Accordingly, we recognized equity compensation for the three and nine months ended September 30, 2008 totaling $32,337 and $64,674, respectively. For the other two specific projects, management assessed the likelihood of completing the
contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly, we did not recognize equity compensation for the
other two specific projects during the nine months ended September 30, 2008.

Guarantees

On August 31 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing
Agreements. The Thermo Financing Agreements included an equity capital contribution agreement (the ECCA) between our Thermo Subsidiary and Merrill Lynch L.P. Holdings, Inc. (ML Holdings). Pursuant to the ECCA, our Thermo
Subsidiary agreed to fund any drilling costs in excess of the original drilling account escrow of $5.7 million established to complete the well field drilling of the Thermo No. 1 project (the Drilling Escrow Top Up). In conjunction
with independent geothermal engineers, we have performed monthly reviews of our estimated cost to complete the well field for production. Through November 12, 2008, we have contributed an additional $3.3 million to the drilling account escrow
for completion of the well field.

The Thermo Agreements include a guaranty agreement dated August 31, 2008 among our Thermo
Subsidiary, the Class A investors of our Thermo Subsidiary, and us. Under the guaranty agreement, we guarantee the full payment of the Drilling Escrow Top Up. Our liability under this agreement will continue until the guaranteed obligation is
satisfied in full. We expect to complete our drilling at the Thermo No. 1 project during the fourth quarter of 2008.

The Thermo
Financing Agreements, also include an engineering, procurement and construction agreement (the EPC Agreement) with our Thermo Subsidiary. Pursuant to the EPC Agreement, we agreed to oversee the engineering, procurement and construction
of the geothermal power plant for the Thermo No. 1 project. In addition, we guaranteed the completion of the geothermal power plant construction and the payment of all services performed by the subcontractors. We expect to make the payments to
the subcontractors, including cost overruns, if any, in the ordinary course of business. All intercompany transactions related to the EPC Agreement are eliminated in consolidation of the financial statements.

In connection with the Thermo Financing Agreements, we also entered into an amended and restated purchase contract (the Amended and Restated
Purchase Contract) with UTC Power, a United Technologies Company (UTC) relating to the purchase of generating units for the Thermo No. 1 project. Under the terms of the Amended and Restated Purchase Contract, UTC has agreed to
allow us to retain a certain portion of the purchase price of the generating units pending the successful completion of the Thermo No. 1 project. If the Thermo No. 1 project is not successfully completed as a result of a problem with the
generating units, then we will keep the retained portion of the purchase price as a liquidated damages payment. If the Thermo No. 1 project is not successfully completed as a result of any other reason, we will reimburse UTC for any liquidated
damages paid by UTC. To secure payment of our obligations to reimburse UTC under the Amended and Restated Purchase Contract, we provided a security interest to UTC in five patents relating to our transportation and industrial segment. We believe
that the likelihood that we will be obligated to reimburse UTC for liquidated damages under the Amended and Restated Purchase Contract is remote. Accordingly, we estimate the maximum potential obligation and the related fair value of the
obligation under the Amended and Restated Purchase Contract to be immaterial at this time. Therefore, no liability had been recorded at September 30, 2008.

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

K. Stockholders
Equity

Stock-Based Compensation Plans

In March 2004, our Board of Directors (the Board) adopted the Raser Technologies, Inc. Amended and Restated 2004 Long-Term Incentive Plan (the Plan), and in May 2004 our stockholders approved the Plan. The Plan was
adopted to facilitate (1) grants of a wider range of stock incentive awards, including restricted stock, stock appreciation rights, performance shares and



15



---

##### Table of Contents

performance units, (2) an automatic annual increase to the number of shares of common stock reserved for issuance under the Plan beginning in 2005 equal
to the lesser of 1,750,000 shares of common stock, 3% of the outstanding shares of common stock on the first day of each fiscal year, or an amount determined by the Board, and (3) optional automatic, nondiscretionary annual stock option grants
for employees and non-employee directors. As of September 30, 2008, we were authorized to issue up to 7,943,173 shares of common stock pursuant to the Plan.

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

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

Employee and Director Share Grants and Option Grants

No shares of common stock were granted to employees during the three and nine months ended September 30, 2008, respectively. 5,000 shares of common stock were granted to an employee during the three months and nine months ended
September 30, 2007, respectively. We granted to our employees and directors options to purchase an aggregate of 125,950 and 537,950 shares of common stock in the three and nine months ended September 30, 2008, respectively. We granted to
our employees and directors options to purchase an aggregate of 207,500 and 992,500 shares of common stock in the three and nine months ended September 30, 2007, respectively.

During the three and nine months ended September 30, 2008 and 2007, 3,000 and 2,000 vested options expired, respectively. During the three and nine
months ended September 30, 2008, zero and 41,375 unvested options were forfeited by employees, respectively. During the three and nine months ended September 30, 2007, 2,500 and 10,500 unvested options were forfeited by employees,
respectively.

Third Party Share Grants

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

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

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

On September 25, 2008, in partial settlement of an outstanding invoice, we granted 100,000 restricted shares of our common stock to a service
provider for design and engineering services related to our geothermal power plant development efforts. The 100,000 shares represented the fair value of the amount to be applied towards the outstanding invoice on the date of the grant. The fair
value of these shares totaled $419,000.

Third Party Option and Warrant Grants

Stock options and warrants granted to non-employees for services are accounted for in accordance with EITF 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services which requires expense recognition based on the fair value of the options. We calculate the fair value of options and certain warrants
that have been granted by using the Black-Scholes pricing model. During the three and nine months ended September 30, 2008 we granted no options to third parties to purchase shares of our common stock, respectively. During the three and nine
months ended September 30, 2007, we issued 35,000 options to a property owner as consideration for surface rights to a geothermal property in central Nevada, respectively. See discussion of contingently vesting warrants issued during 2007 and
2008 and utilization of a binomial lattice model to calculate their fair value in Note L. Warrants below.



16



---

##### Table of Contents

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



|                                  |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|--------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | --------- | - |  | --------- | -
|                                  |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                                  |  | 2008                             |   |  | 2007                            |   |  | 2008      |   |  | 2007      |  
|Risk-free interest rate           |  | 2.79-3.39                        | % |  | 4.17-5.05                       | % |  | 2.61-3.66 | % |  | 4.17-5.05 | %
|Expected dividend yield           |  | 0.0                              | % |  | 0.0                             | % |  | 0.0       | % |  | 0.0       | %
|Volatility                        |  | 97-99                            | % |  | 99                              | % |  | 97-99     | % |  | 99-101    | %
|Expected exercise life (in years) |  | 6.0                              |   |  | 6.0                             |   |  | 6.0       |   |  | 6.0       |  

The risk-free interest rate is based on a yield curve of interest rates at the time of the grant
based on the contractual life of the option. Expected dividend yield is based on our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock. Expected exercise life is based on
management estimates of future attrition and early exercise rates, giving consideration to employee exercise behavior.

During the three
and nine months ended September 30, 2008, we issued 45,000 and 148,125 shares of common stock as a result of option exercises, and 2,000 and 5,990 shares of common stock as a result of warrant exercises, respectively. During the three and nine
months ended September 30, 2007, we issued 52,500 and 72,500 shares of common stock as a result of option exercises, and 1,065,155 shares of common stock as a result of warrant exercises, respectively.

The total intrinsic value of options exercised in the three and nine months ended September 30, 2008 was approximately $14,400 and $161,558,
respectively. The cash received from exercises of options during the three and nine months ended September 30, 2008 was approximately $164,000 and $650,744, respectively. The total intrinsic value of options exercised in the three and nine
months ended September 30, 2007 was approximately $460,994 and $532,919, respectively. The cash received from exercises of options during the three and nine months ended September 30, 2007 was approximately $191,625 and $264,625,
respectively.

In the three and nine months ended September 30, 2008, the intrinsic value of warrants exercised was approximately
$12,350 and $44,031, respectively, and cash received from the warrants exercised totaled $9,300 and $27,854, respectively. The intrinsic value of the warrants exercised totaled $8,103,702 during the three and nine months ended September 30,
2007, respectively. Cash received from warrants exercised totaled $6,404,788 during the three and nine months ended September 30, 2007, respectively.

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



|                                   |  |                               |   |  |                                |       |                          |   |          
|---------------------------------- |  | ----------------------------- | - |  | ------------------------------ | ----- | ------------------------ | - | ---------
|                                   |  | Number of Optionsand Warrants |   |  | Weighted AverageExercise Price |       | Aggregate IntrinsicValue
|Outstanding at January 1, 2008:    |  | 2,910,566                     |   |  | $                              | 8.14  |                          |   |          
|Granted                            |  | 3,872,000                     |   |  |                                | 15.25 |                          |   |          
|Exercised                          |  | (104,500                      | ) |  |                                | 4.71  |                          |   |          
|Expired or forfeited               |  |                              |   |  |                                |      |                          |   |          
|                                   |  |                               |   |  |                                |       |                          |   |          
|Outstanding at March 31, 2008:     |  | 6,678,066                     |   |  | $                              | 12.34 |                          | $ | 5,868,835
|Granted                            |  | 345,000                       |   |  |                                | 9.43  |                          |   |          
|Exercised                          |  | (2,615                        | ) |  |                                | 5.01  |                          |   |          
|Expired or forfeited               |  | (91,375                       | ) |  |                                | 12.00 |                          |   |          
|                                   |  |                               |   |  |                                |       |                          |   |          
|Outstanding at June 30, 2008:      |  | 6,929,076                     |   |  | $                              | 12.16 |                          | $ | 8,375,327
|Granted                            |  | 125,950                       |   |  |                                | 5.40  |                          |   |          
|Exercised                          |  | (47,000                       | ) |  |                                | 3.69  |                          |   |          
|Expired or forfeited               |  | (3,000                        | ) |  |                                | 16.10 |                          |   |          
|                                   |  |                               |   |  |                                |       |                          |   |          
|Outstanding at September 30, 2008: |  | 7,005,026                     |   |  | $                              | 12.10 |                          | $ | 6,058,982
|                                   |  |                               |   |  |                                |       |                          |   |          
|Exercisable at March 31, 2008:     |  | 1,552,216                     |   |  | $                              | 7.22  |                          | $ | 4,388,990
|                                   |  |                               |   |  |                                |       |                          |   |          
|Exercisable at June 30, 2008:      |  | 1,647,526                     |   |  | $                              | 7.39  |                          | $ | 6,001,972
|                                   |  |                               |   |  |                                |       |                          |   |          
|Exercisable at September 30, 2008: |  | 3,012,451                     |   |  | $                              | 10.57 |                          | $ | 4,258,391
|                                   |  |                               |   |  |                                |       |                          |   |          



17



---

##### Table of Contents

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

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



|                         |  |           |  |                                  |  |                                |       |                |   |          
|------------------------ |  | --------- |  | -------------------------------- |  | ------------------------------ | ----- | -------------- | - | ---------
|Range of exercise prices |  | Number    |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsicvalue
|$ 3.00 - $5.75           |  | 1,319,693 |  | 6.71                             |  | $                              | 4.42  |                | $ | 5,389,392
|$ 6.00 - $11.00          |  | 1,135,500 |  | 8.50                             |  |                                | 8.33  |                |   | 669,590  
|$11.01 - $17.20          |  | 3,816,500 |  | 6.66                             |  |                                | 14.29 |                |   |         
|$18.25 - $25.95          |  | 733,333   |  | 6.31                             |  |                                | 18.65 |                |   |         
|                         |  |           |  |                                  |  |                                |       |                |   |          
|Total                    |  | 7,005,026 |  | 6.93                             |  | $                              | 11.92 |                | $ | 6,058,982
|                         |  |           |  |                                  |  |                                |       |                |   |          

Outstanding Options and Warrants Fully Vested and Exercisable



|                         |  |           |  |                                  |  |                                |       |                |   |          
|------------------------ |  | --------- |  | -------------------------------- |  | ------------------------------ | ----- | -------------- | - | ---------
|Range of exercise prices |  | Number    |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsicvalue
|$ 3.00 - $5.75           |  | 909,493   |  | 5.73                             |  | $                              | 4.13  |                | $ | 3,975,588
|$ 6.00 - $11.00          |  | 396,700   |  | 7.80                             |  |                                | 8.03  |                |   | 282,803  
|$11.01 - $17.20          |  | 1,672,925 |  | 6.53                             |  |                                | 14.37 |                |   |         
|$25.95                   |  | 33,333    |  | 6.55                             |  |                                | 25.95 |                |   |         
|                         |  |           |  |                                  |  |                                |       |                |   |          
|Total                    |  | 3,012,451 |  | 6.46                             |  | $                              | 10.57 |                | $ | 4,258,391
|                         |  |           |  |                                  |  |                                |       |                |   |          

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

Non-Vested Option Grants



|                                  |  |                   |   |  |                                             |      
|--------------------------------- |  | ----------------- | - |  | ------------------------------------------- | -----
|                                  |  | Number of Options |   |  | Weighted averageper option fairmarket value
|Non-vested at January 1, 2008     |  | 1,395,925         |   |  | $                                           | 7.73 
|Granted                           |  | 172,000           |   |  |                                             | 11.40
|Vested                            |  | (157,075          | ) |  |                                             | 6.40 
|Forfeited                         |  |                  |   |  |                                             |     
|                                  |  |                   |   |  |                                             |      
|Non-vested at March 31, 2008:     |  | 1,410,850         |   |  | $                                           | 8.32 
|Granted                           |  | 340,000           |   |  |                                             | 7.54 
|Vested                            |  | (92,925           | ) |  |                                             | 8.63 
|Forfeited                         |  | (91,375           | ) |  |                                             | 12.00
|                                  |  |                   |   |  |                                             |      
|Non-vested at June 30, 2008:      |  | 1,566,550         |   |  | $                                           | 7.92 
|Granted                           |  | 125,950           |   |  |                                             | 4,25 
|Vested                            |  | (64,925           | ) |  |                                             | 8.91 
|Forfeited                         |  |                  |   |  |                                             |     
|                                  |  |                   |   |  |                                             |      
|Non-vested at September 30, 2008: |  | 1,627,575         |   |  | $                                           | 7.60 
|                                  |  |                   |   |  |                                             |      

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

Non-Vested Share Awards



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



18



---

##### Table of Contents

|                                   |  |                  |   |  |                                            |      
|---------------------------------- |  | ---------------- | - |  | ------------------------------------------ | -----
|                                   |  | Number of Shares |   |  | Weighted averageper share fairmarket value
|Outstanding at June 30, 2008:      |  | 31,417           |   |  | $                                          | 10.20
|Granted                            |  | 100,000          |   |  |                                            | 4.51 
|Vested                             |  | (100,667         | ) |  |                                            | 4.57 
|Forfeited                          |  |                 |   |  |                                            |     
|                                   |  |                  |   |  |                                            |      
|Outstanding at September 30, 2008: |  | 30,750           |   |  | $                                          | 10.14
|                                   |  |                  |   |  |                                            |      

As of September 30, 2008, there was $10,680,891 (pre-tax) and $222,414 (pre-tax) of
unrecognized compensation expense related to non-vested stock option and stock award grants, respectively. This expense is expected to be recognized over a weighted average period of 2.04 years. As of September 30, 2008, the following table
summarizes the unrecognized compensation expense expected to be recognized in future periods.



|                   |  |                                          |           
|------------------ |  | ---------------------------------------- | ----------
|                   |  | Stock-basedcompensationexpense (pre-tax)
|Remainder of 2008: |  | $                                        | 969,991   
|2009               |  |                                          | 3,682,332 
|2010               |  |                                          | 3,244,063 
|2011               |  |                                          | 1,582,902 
|2012               |  |                                          | 1,126,242 
|2013               |  |                                          | 297,775   
|                   |  |                                          |           
|Total:             |  | $                                        | 10,903,305
|                   |  |                                          |           

Call Spread Option Transaction

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

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

Forward Stock Purchase Transaction

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

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



19



---

##### Table of Contents

L. Warrants

Contingent Warrants

On January 16, 2008, we granted to Merrill Lynch warrants to purchase up to 3,700,000 shares of
our common stock, subject to vesting requirements associated with the financing of our geothermal power plants. The warrants will vest and become exercisable in increments over the term of the Commitment Letter based on the actual funding provided.
In accordance with the anti-dilution provisions included in the warrants, the issuance of the Convertible Notes and the issuance of common stock during the third quarter of 2008 resulted in a reduction of the original strike prices of the warrants
from a range of $14.98 to $19.71 to a range of $14.21 to $18.30. The warrants expire on January 16, 2015 and would generate proceeds totaling $52.6 million if all of the warrants vest and are exercised.

Warrants to purchase 1,350,000 shares of our common stock vested in connection with the closing of the project financing arrangements for the Thermo
No. 1 project. These warrants are immediately exercisable and have a current exercise price of $14.21. In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the performance criteria related to the vesting of the warrants has been completed. Since the vesting of warrants was a result of closing the project financing, we allocated the fair value between
the net proceeds of the debt and the amount of equity contribution in our Thermo Subsidiary. We used a binomial lattice option-pricing model to calculate the fair value of the vested warrants. Accordingly, the fair value of the vested warrants
allocated to the issuance of debt totaled $3,999,334 and the fair value of the vested warrants allocated to the equity contribution in our Thermo Subsidiary totaled $3,749,728.

However, since the performance criteria related to the vesting of the remaining unvested warrants has not been completed, we have not recognized the fair
value of the unvested warrants as deferred financing costs. The fair value of any of the remaining unvested warrants that vest in the future will be capitalized and recorded as deferred financing costs.

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



|                                                                                                                                                                                                                                                                                                                                                                    |  |               |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -----
|Vesting Schedule                                                                                                                                                                                                                                                                                                                                                    |  | ExercisePrice
|Concurrent with the closing of the funding with respect to the Thermo No. 1 project, warrants vested and became exercisable for the
purchase of 1,350,000 shares of common stock.                                                                                                                                                                                   |  | $             | 14.21
|Concurrent with the closing of each funding with respect to any portion of the next 10 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 150,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 14.21
|Concurrent with the closing of each funding with respect to any portion of the next 30 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 100,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 14.21
|Concurrent with the closing of each funding with respect to any portion of the next 50 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 50,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter.  |  | $             | 18.30
|Concurrent with the closing of the funding with respect to the final MW (i.e., the one hundredth MW) of geothermal power projects after taking
into account the projects previously funded, warrants vest and become exercisable for the purchase of 200,000 shares of common stock.                                                                                |  | $             | 18.30

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

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



20



---

##### Table of Contents

Contingent Warrants Call Provision

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



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

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

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

The 3,700,000 warrants expire on January 16, 2015. With respect to the vesting of the
1,350,000 warrants on the closing date of the Merrill Lynch financing, the assumptions used in the binomial lattice option-pricing model were as follows:



|                            |  |      |  
|--------------------------- |  | ---- | -
|Risk-free interest rate     |  | 3.39 | %
|Expected dividend yield     |  | 0.0  | %
|Volatility                  |  | 91   | %
|Time to maturity (in years) |  | 7.0  |  

The risk-free interest rate is based on a yield curve of interest rates at the time of the grant
based on the contractual life of the option. Expected dividend yield is based on our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock.



21



---

##### Table of Contents

Contingent Warrant Registration Rights Agreement

In connection with the Commitment Letter and the issuance of warrants to purchase up to 3,700,000 shares of our common stock, we entered into a
registration rights agreement that provides the holder of the warrants with certain rights to register the resale of the warrants and the shares of common stock issuable upon exercise of the warrants. Upon a series of warrants vesting, we are
obligated to register the shares underlying the vested warrants for resale pursuant to the exercise of such warrants and cause the registration statement to remain continuously effective until all vested warrants are exercised or expired. Merrill
Lynch agreed to permit us to defer our obligation to register the resale of the warrants that vested in connection with the funding of the Thermo No. 1 project until such registration is requested by Merrill Lynch. We do not believe the
proposed merger of Merrill Lynchs parent with Bank of America Corporation will alter our understanding or Merrill Lynchs understanding of our outstanding obligations under the registration rights agreement with Merrill Lynch. Management
currently believes that the likelihood we will fail to register the shares in accordance with the registration rights agreement or fail to cause the registration statement to remain continuously effective is remote as defined in SFAS
No. 5 Accounting for Contingencies. Accordingly, no accrued liability is deemed necessary.

M. Net Loss Per Common Share

Basic net loss per common share (Basic EPS) is computed by dividing the net loss by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the weighted average dilutive common share
equivalents then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect. Common share equivalents consist of shares issuable upon the exercise of options and warrants
to purchase common stock, the conversion of any convertible debentures and related accrued interest, and shares issuable upon conversion of any preferred stock.

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



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  | 25,243         |  | 3,715,000         
|Vested employee options   |  | 1,023,800      |  | 503,408           
|Unvested employee options |  | 704,650        |  | 922,925           
|Vested contractor options |  | 75,000         |  | 35,000            

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



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  | 35,804         |  |                  
|Vested employee options   |  | 1,086,125      |  | 169,458           
|Unvested employee options |  | 1,075,875      |  | 272,875           
|Vested contractor options |  | 247,000        |  | 35,000            

Unvested and fully-vested and undelivered stock grants totaling 30,750 and 85,517 were outstanding
on September 30, 2008 and 2007, respectively. None of these contingent shares have met the performance criteria for vesting. These warrants, options and share grants were not included in the calculation of diluted net loss per share because
their effect was anti-dilutive. Our common stock underlying the call spread option transaction and forward stock purchase transaction would be recorded as treasury stock when delivered and; therefore, would be excluded from the calculation of
diluted net loss per share because their effect is anti-dilutive.

N. Fair Value

Transition Impact

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



22



---

##### Table of Contents

Fair Value Measurement

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

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

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

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

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



|                          |  |         |            |         |   |         |  |       |   |  |   |           
|------------------------- |  | ------- | ---------- | ------- | - | ------- |  | ----- | - |  | - | ----------
|                          |  | Level 1 |            | Level 2 |   | Level 3 |  | Total
|Cash and cash equivalents |  | $       | 5,507,579  |         | $ | 0       |  | $     | 0 |  | $ | 5,507,579 
|Restricted cash           |  |         | 9,715,701  |         |   | 75,704  |  |       | 0 |  |   | 9,791,405 
|                          |  |         |            |         |   |         |  |       |   |  |   |           
|Total assets              |  | $       | 15,223,280 |         | $ | 75,704  |  | $     | 0 |  | $ | 15,298,984
|                          |  |         |            |         |   |         |  |       |   |  |   |           

O. Business Segments

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

The presentation below comprises financial information relating to our segments for the three and nine
months ended September 30, 2008 and 2007, respectively:



|                                                        |  |                                        |           |   |               |   |             |                    |  |   |            |   |  |   |             |  
|------------------------------------------------------- |  | -------------------------------------- | --------- | - | ------------- | - | ----------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|                                                        |  | Transportationand IndustrialTechnology |           |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|As of and for the Three Months Ended September 30, 2008 |  |                                        |           |   |               |   |             |                    |  |   |            |   |  |   |             |  
|Revenues                                                |  | $                                      |          |   |               | $ | 30,000      |                    |  | $ |           |   |  | $ | 30,000      |  
|Segment Operating Loss                                  |  |                                        | (978,844  | ) |               |   | (3,202,729  | )                  |  |   | (2,439,959 | ) |  |   | (6,621,532  | )
|Depreciation and Amortization                           |  |                                        | 52,018    |   |               |   | 5,427       |                    |  |   | 17,483     |   |  |   | 74,928      |  
|Fixed Asset Purchases                                   |  |                                        | 11,226    |   |               |   |            |                    |  |   | 30,848     |   |  |   | 42,074      |  
|Well Field Development Purchases                        |  |                                        |          |   |               |   | 14,860,086  |                    |  |   |           |   |  |   | 14,860,086  |  
|Construction-in-progress Purchases                      |  |                                        |          |   |               |   | 29,605,575  |                    |  |   |           |   |  |   | 29,605,575  |  
|Total Assets                                            |  | $                                      | 700,057   |   |               | $ | 114,109,968 |                    |  | $ | 23,792,548 |   |  | $ | 138,602,573 |  
|                                                        |  |                                        |           |  
|As of and for the Three Months Ended September 30, 2007 |  |                                        |           |   |               |   |             |                    |  |   |            |   |  |   |             |  
|Revenues                                                |  | $                                      | 49,887    |   |               | $ |            |                    |  | $ |           |   |  | $ | 49,887      |  
|Segment Operating Loss                                  |  |                                        | (984,772  | ) |               |   | (710,854    | )                  |  |   | (1,872,749 | ) |  |   | (3,568,375  | )
|Depreciation and Amortization                           |  |                                        | 44,934    |   |               |   | 2,844       |                    |  |   | 20,108     |   |  |   | 67,886      |  
|Fixed Asset Purchases                                   |  |                                        | 40,751    |   |               |   |            |                    |  |   | 37,253     |   |  |   | 78,004      |  
|Well Field Development Purchases                        |  |                                        |          |   |               |   | 2,180,745   |                    |  |   |           |   |  |   | 2,180,745   |  
|Total Assets                                            |  | $                                      | 1,309,673 |   |               | $ | 8,533,706   |                    |  | $ | 15,133,819 |   |  | $ | 24,977,198  |  



23



---

##### Table of Contents

|                                                       |  |                                        |            |   |               |   |             |                    |  |   |            |   |  |   |             |  
|------------------------------------------------------ |  | -------------------------------------- | ---------- | - | ------------- | - | ----------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|                                                       |  | Transportationand IndustrialTechnology |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|As of and for the Nine Months Ended September 30, 2008 |  |                                        |            |   |               |   |             |                    |  |   |            |   |  |   |             |  
|Revenues                                               |  | $                                      | 136,423    |   |               | $ | 30,000      |                    |  | $ |           |   |  | $ | 166,423     |  
|Segment Operating Loss                                 |  |                                        | (3,095,230 | ) |               |   | (8,091,820  | )                  |  |   | (7,429,889 | ) |  |   | (18,616,939 | )
|Depreciation and Amortization                          |  |                                        | 147,069    |   |               |   | 15,417      |                    |  |   | 62,479     |   |  |   | 224,965     |  
|Fixed Asset Purchases                                  |  |                                        | 82,510     |   |               |   | 23,522      |                    |  |   | 74,647     |   |  |   | 180,679     |  
|Well Field Development Purchases                       |  |                                        |           |   |               |   | 30,117,913  |                    |  |   |           |   |  |   | 30,117,913  |  
|Construction-in-progress Purchases                     |  |                                        |           |   |               |   | 48,640,710  |                    |  |   |           |   |  |   | 48,640,743  |  
|Total Assets                                           |  | $                                      | 700,057    |   |               | $ | 114,109,968 |                    |  | $ | 23,792,548 |   |  | $ | 138,602,573 |  
|                                                       |  |                                        |            |  
|As of and for the Nine Months Ended September 30, 2007 |  |                                        |            |   |               |   |             |                    |  |   |            |   |  |   |             |  
|Revenues                                               |  | $                                      | 202,212    |   |               | $ |            |                    |  | $ |           |   |  | $ | 202,212     |  
|Segment Operating Loss                                 |  |                                        | (3,100,746 | ) |               |   | (1,580,682  | )                  |  |   | (7,107,902 | ) |  |   | (11,789,330 | )
|Depreciation and Amortization                          |  |                                        | 135,311    |   |               |   | 8,411       |                    |  |   | 56,426     |   |  |   | 200,148     |  
|Fixed Asset Purchases                                  |  |                                        | 116,660    |   |               |   | 1,447       |                    |  |   | 68,533     |   |  |   | 186,640     |  
|Well Field Development Purchases                       |  |                                        |           |   |               |   | 2,530,383   |                    |  |   |           |   |  |   | 2,530,383   |  
|Total Assets                                           |  | $                                      | 1,309,673  |   |               | $ | 8,533,706   |                    |  | $ | 15,133,819 |   |  | $ | 24,977,198  |  

P. Income Taxes

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

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

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

Q. Supplemental Cash Information

For the nine months
ended September 30, 2008:



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



| |  |  | We recorded in accrued liabilities certain capitalized well field development expenditures that were not paid as of September 30, 2008. These accrued
capitalized costs included both tangible and intangible drilling costs and were omitted from the statement of cash flows as non-cash items totaling $5,987,546.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accrued liabilities and accounts payable certain capitalized power systems equipment and contractor fees that were not paid as of September 30,
2008. These accrued expenses included equipment such as pumps, cooling towers, generating units and related construction costs for a geothermal power plant under construction. These accrued capitalized costs were omitted from the statement of cash
flows as non-cash items totaling $24,504,780.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We recorded a $419,000 non-cash payment for 100,000 shares of our common stock issued to settle a portion of an outstanding invoice from a service provider for
design and engineering services relating to construction of a geothermal power plant. The non-cash payment was equal to the fair market value of the shares on the date the shares were granted.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

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



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



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

For the nine months ended September 30, 2007:



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



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

R. Recent Accounting
Pronouncements

SFAS 162

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

SFAS 161

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

SFAS 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). In SFAS 160, the FASB established accounting and
reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parents ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any
retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for annual periods beginning on or after December 15, 2008. Retroactive application of SFAS 160 is
prohibited. We are currently evaluating the requirements of SFAS 160 and the potential impact on our financial statements.

SFAS 141(R)

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



25



---

##### Table of Contents

EITF 07-1

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

EITF 07-5

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

EITF 08-3

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

FSP EITF 03-6-1

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

FSP FAS 142-3

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

FSP FAS 133-1 and FIN 45-4

In September 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4 Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4), which requires
additional disclosures for sellers of credit derivative instruments and certain guarantees. FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities and FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34 by requiring additional disclosures for certain guarantees and credit derivatives sold including: maximum potential amount of future payments, the related fair value, and the current payment/performance risk. The
FASB also clarified the effective date for FAS Statement No. 161. FSP FAS 133-1 and FIN 45-4 shall be effective for the reporting period ending after November 15, 2008. Earlier adoption is recommended. Management does not anticipate that
implementation of this pronouncement will have a material impact on our financial statements.



26



---

##### Table of Contents

S. Subsequent Events

During the third quarter of 2008, we obtained project financing for the Thermo No. 1 project. The project financing arrangements for the Thermo No. 1 project contemplated a capital contribution of
approximately $24.5 million from the Class A member of the Thermo Subsidiary. At the initial funding in September 2008, the Thermo Subsidiary received $3.7 million of the total capital contribution. On October 20, 2008, the Thermo Subsidiary
received an additional capital contribution of $20.8 million from the Class A member, representing the remaining balance of the total capital contribution contemplated by the project financing arrangements for the Thermo No. 1 project.

On October 31, 2008, we granted 112,782 restricted shares of our common stock to ICPE, Inc. pursuant to a settlement of an
outstanding invoice for professional services relating to design and engineering services for a geothermal power plant that we intend to construct. The 112,782 shares represented the fair value of the amount to be applied towards the outstanding
invoice on the date of the grant. The fair value of these shares totaled $450,000.

On November 13, 2008, we entered into an agreement
relating to the private placement of $20.0 million of our common stock. The shares are being sold to a single institutional accredited investor pursuant to a transaction exempt from the registration requirements of the Securities Act of 1933, as
amended. At the initial closing, scheduled for November 14, 2008, the investor has agreed to purchase 2.0 million shares of our common stock for an aggregate purchase price of $10.0 million, or $5.00 per share, representing a premium of 43% over the
closing price of our common stock on November 12, 2008. At a second closing, scheduled for December 12, 2008, the investor has agreed to purchase an additional $10.0 million of our common stock at a purchase price equal to 110% of the average of the
daily market prices of our common stock for the ten (10) business days ending on December 11, 2008. Each closing is subject to the satisfaction of certain customary conditions. In connection with the private placement transactions, we have also
granted the purchaser a warrant to purchase up to $20.0 million of additional shares of our common stock at a price per share equal to the lesser of (i) six dollars ($6.00) or (ii) a price equal to the average of the daily market prices of our
common stock for the forty (40) business days ending on the third business day prior to the exercise of the warrant, less $0.60. After a period of nine months, or earlier if certain conditions occur, the investor will have the right to exercise the
warrant on a cashless, net settlement basis. The warrant will vest with respect to $10.0 million of common stock upon completion of the first closing and the remaining $10.0 million will vest upon completion of the second closing. The warrant will
have a term of ten years. We estimate that the aggregate net proceeds from the private placement transactions, excluding any potential proceeds associated with the exercise of the warrant, will be approximately $18.7 million after deducting
estimated fees and expenses.



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

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

Overview

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

We are incorporated in Delaware. We are the successor to Raser Technologies, Inc., a Utah
corporation, which was formerly known as Wasatch Web Advisors, Inc. Wasatch Web Advisors acquired 100% of our predecessor corporation in a reverse acquisition transaction in October of 2003. Prior to that transaction, our predecessor corporation was
a privately-held company.

We have initiated the development of eight geothermal projects in our Power Systems segment to date, and we are
currently in the development stage of drilling wells and constructing geothermal power plants to further develop viable geothermal resources. We have accumulated a large portfolio of geothermal interests in five western continental states. These
geothermal interests are important to our ability to develop geothermal power plants. We continue to accumulate additional interests in geothermal resources for potential future projects.



27



---

##### Table of Contents

We have either obtained or are in the process of obtaining permits for the development of our eight
geothermal projects which are located in Utah, Nevada, New Mexico and Oregon. We believe that the geothermal resource for each of these projects has the potential to provide at least enough geothermal energy for a power plant of approximately 10
megawatts (MW). However, we expect that many of the project sites that we intend to develop, have potential resources to generate more than 10 MW of net electrical power. For example, the major construction of our first 10 MW geothermal
power plant, located in Utah, was completed in October 2008. We refer to this project as the Thermo No. 1 project. The Thermo No. 1 project is expected to be fully operational by the end of 2008 or early 2009. An independent report we obtained
on the greater Thermo No. 1 project area indicates that this area has the potential to support additional plants. Therefore, in addition to the initial 10 MW Thermo No. 1 project we intend to explore opportunities to build additional
plants near the Thermo No. 1 project. We expect that other project sites we have selected to develop could also prove to have resources that could support multiple plants. We intend to seek to maximize the full power generating potential of all
the sites we select for development.

In addition to developing our geothermal resources, we are in the process of completing other steps
necessary to enable us to further finance, construct and operate geothermal power plants. We obtained a commitment letter (the Commitment Letter) from Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill
Lynch) that sets forth general terms and conditions relating to the structuring and financing of up to 155 MW of geothermal power plants. Pursuant to the Commitment Letter, we obtained a financing commitment for the Thermo No. 1 project
and, subsequently on August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project. The project financing arrangements provided project financing and tax equity capital for the Thermo No. 1 project. We
received proceeds of approximately $29.8 million pursuant to the initial funding of the Thermo No. 1 project financing arrangements, and we received approximately $20.8 million of additional proceeds on October 20, 2008.

Pursuant to the Commitment Letter, we have received financing commitments for two other projects we intend to develop in Nevada and New Mexico. The
funding of each of these commitments is subject to the satisfaction of certain conditions. One of these financing commitments, which relates to our Truckee project in Nevada, expired on June 30, 2008. However, we and Merrill Lynch have agreed
to work towards formally extending the expiration date of this commitment.

We have also benefited from the recent extension of the
Production Tax Credit by Congress. We believe that we are able to monetize the tax benefits associated with our geothermal projects through our financing arrangements with Merrill Lynch or other institutions.

We have also entered into purchase agreements with a manufacturer of generating units that we intend to use in the geothermal power plants we are
developing. Pursuant to these agreements, we had taken delivery of 84 generating units as of September 30, 2008. Fifty of these generating units have been installed at the Thermo No. 1 project, and two additional generating units are being
stored for use as replacement generating units for the Thermo No. 1 project. The other 32 generating units are currently being stored at the Lightning Dock project pending installation at that project.

We have also entered into power purchase agreements with investor owned utilities and municipalities. During the first quarter of 2008, we entered into
power purchase agreements with the City of Anaheim, California to provide a total of 22 MW of electricity from two of our future plants. Our Thermo No. 1 project is expected to be one of the two geothermal power plants to provide electricity to the
City of Anaheim in accordance with the Anaheim power purchase agreements, and we expect to begin providing power from the Thermo No. 1 project to Anaheim beginning in the fourth quarter of 2008. In addition, on June 12, 2008, we signed a power
purchase agreement with the Salt River Project Agricultural Improvement and Power District (SRP), the nations third largest public utility, to provide 10 MW of electricity to the utility serving the Phoenix, Arizona area. Our New
Mexico power plant is expected to provide electricity for the SRP power purchase agreement. We are currently finalizing negotiations on additional power purchase agreements with investor owned utilities and other municipalities.

We believe we have made substantial progress in advancing our geothermal business. We have amassed what we believe to be one of the largest undeveloped
portfolios of geothermal resources in the United States. We have established valuable relationships and commitments with substantial, well regarded companies relating to geothermal equipment, technology, financing, and resource identification and
evaluation, among others. We have obtained project financing and tax equity capital for our Thermo No. 1 project. We have secured three power purchase agreements to provide 32 MW of electric power, and we are in various stages of negotiation to
provide an additional 110 MW of electric power. We believe we are engaged in a high growth business and are well positioned to play a meaningful role in providing clean, renewable power to consumers. Not everything has been in keeping with our
original timeframes and cost expectations. Some of our projects have experienced longer development timelines or higher costs than originally planned. However, we believe we successfully built our first power plant in a fraction of the time
typically required for other geothermal power plants. Including well field development, the Thermo No. 1 project was constructed over a period of approximately twelve months. We look forward to developing additional plants using our unique, rapid
deployment business model.

Our Transportation and Industrial Technology segment continues to focus on commercializing our Symetron
electric motor, generator and drive technologies and our series plug-in hybrid vehicle (PHEV) with range extender technologies. We are working to develop a 100 mile per gallon (mpg) light truck demonstration vehicle in
addition to a 100 mpg SUV demonstration vehicle. Our plug-in electric drive system is being designed to allow light trucks and SUVs to achieve over 100 mpg in typical local daily driving



28



---

##### Table of Contents

with near zero emissions, by using electricity instead of petroleum as the primary fuel. Pacific Gas & Electric of California agreed in February
2008 to initially purchase two of these test vehicles. The SUV demonstration vehicle that is under development is being built in cooperation with a leading global OEM. During 2007 and early 2008, we entered into several other agreements and
collaborative arrangements with large manufacturers to explore additional potential applications of our Symetron technologies, including a collaborative arrangement with Hyundai Heavy Industries (HHI) of Korea and a license
agreement with Wilson Automotive of Canada. We intend to continue to explore opportunities to commercialize our Symetron technologies.

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

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

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

The amount and timing of our future capital needs depend on many factors, including the timing of our development efforts, opportunities for strategic transactions, and the amount and timing of any revenues we are
able to generate. Given our current business strategy, however, we will need to secure additional financing in order to execute our plans and continue our operations. We may acquire this additional funding through the issuance of debt, preferred
stock, equity or a combination of these instruments. We may also seek to obtain financing through a joint venture, the sale of one or more of our projects or interests therein, entry into prepaid power purchase agreements with utilities or
municipalities, a merger and/or other transaction, a consequence of which could include the sale or issuance of stock to third parties.



29



---

##### Table of Contents

Power Plant Construction

We currently have eight geothermal projects that are either in the construction or development phase. The current status of development for each of our eight proposed geothermal plants is described below:

1. Thermo No. 1 Plant (Utah): Major construction is complete on the Thermo No. 1 plant, and we will begin the process of commissioning the
plant during the fourth quarter of 2008. We expect to have the Thermo No. 1 plant operating at full capacity by the end of 2008 or in early 2009. We are evaluating the expansion of the Thermo No. 1 plant by including a bottom-cycling operation
in which the discharged geothermal water from the main plant is cascaded through a second set of power generating units, extracting more heat to generate additional power. The expanded projected is referred to as the Thermo No. 1A project. The
Thermo No. 1A project economics is expected to benefit from the transmission infrastructure, cooling towers and established well field already in place at the Thermo No. 1 plant. The Thermo No. 1A project is expected to be able to
generate an additional 5 MW of power, expanding the net amount of power generated by the expanded Thermo No. 1 plant to approximately 15 MW. We expect that Thermo No. 1A will enhance the economics of Thermo No. 1 because of project cost savings
from eliminating drilling, transmission upgrades, and cooling tower costs.

2. Lightning Dock Plant (New Mexico): We are in the process of
obtaining the necessary permits for the Lightning Dock plant. Numerous exploratory wells and two production wells were drilled prior to our acquiring the site. We broke ground at the site and have begun taking delivery from UTC Power, a United
Technologies Company (UTC) of UTC generating units that will be used in the Lightning Dock plant. We anticipate that we will start drilling additional production and injection wells in the fourth quarter of 2008. We currently expect to
complete construction of the Lightning Dock plant in 2009.

3. Thermo No. 2 Plant (Utah): We have begun the process of obtaining the
necessary permits for the development of a second power plant in the Thermo area. We currently expect to begin drilling in the fourth quarter of 2008, and we expect to complete construction of the Thermo No. 2 plant in 2009.

4. Klamath Falls Plant (Oregon): We are in the process of obtaining the necessary permits for the Klamath Falls plant. We have performed some
preparations at the site, but have not begun drilling activities. We currently anticipate that we will begin drilling activities in the first quarter of 2009. We currently expect to begin and complete construction of the Klamath Falls plant in 2009.

5. Devils Canyon Plant (Nevada): We are completing the permitting process for this site. Currently, additional geologic studies are
being performed at the site. We are also currently performing some preparations at the site. We currently expect to begin and complete construction of the Devils Canyon plant in 2009.

6. Truckee Plant (Nevada): We are in the process of obtaining the necessary permits for the Truckee plant. We drilled the first well at this site in the
latter part of 2007. The results of the first well were inconclusive. We are having additional geologic studies performed before we proceed with any additional drilling.

7. Trail Canyon Plant (Nevada): We are completing the permitting process for this site. Currently, additional geologic studies are being performed in the general area.

8. Thermo No. 3 Plant (Utah): Based on the information we obtained in connection with the development of Thermo No. 1 plant, we are pursuing
development of additional projects in the Thermo area and are in the early stages of the permitting and entitlement processes for a third project in the Thermo No. 1 project area.

As described above, the Thermo No. 1 plant is expected to be operating at full capacity by the end of 2008 or in early 2009. The timing for
construction and completion of each of the other seven potential plants described above will depend on a number of factors, including the receipt of necessary permits, timely granting of interconnection and transmission access, and the ability to
obtain adequate financing for each project, including our ability to finance drilling costs outside of the Merrill Lynch financing. Uncertainties associated with these factors could result in unexpected delays. In addition, the feasibility of a
number of the projects described above is still subject to further geological testing and/or drilling to determine whether an adequate geothermal resource exists to support a geothermal power plant. Once we start drilling on a property, we can
typically determine within twelve to twenty-four months whether the property has any viable geothermal resources.

As discussed above, we
currently have eight geothermal power projects that are in various stages of development. Through the completion of several of these eight projects and the completion of several additional projects we expect to initiate in 2009, we expect to have
placed into service power plants having a net generating capacity of more than 100 megawatts by the end of 2009, assuming that we can obtain the appropriate financing and do not experience unexpected delays. We intend to target a goal of developing
approximately eight to ten new geothermal power plants each year.

Research and Development

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



30



---

##### Table of Contents

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

Our research and development costs for the three months ended September 30, 2008 and 2007
totaled $970,925 and $939,839, respectively, and for the nine months ended September 30, 2008 and 2007 totaled $3,134,138 and $2,521,610, respectively. Future research and development expenditures are anticipated in order to develop additional
SymetronTMand PHEV with extended range technologies primarily relating to plug-in hybrid electric vehicles and electric and electric-hybrid
propulsion systems, integrated starter alternators, or ISAs, AC electric motors, generators and power electronic AC drives. Research and development costs, relating to development of potential technologies, are expected to increase over time as
milestones in the development process are achieved.

Sources of Revenue

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

We are seeking to generate revenues from both of our business segments. Our Power Systems segment
is seeking to generate revenues from the geothermal power plants it is developing, and should begin to generate a small amount of revenues from the sale of electricity generated by the Thermo No. 1 project during the fourth quarter of 2008. Our
Transportation and Industrial Technology segment is seeking to generate revenues by licensing our SymetronTMtechnologies to third parties. We also
expect to begin to generate modest revenues in the future from contracts we have entered into for the development of extended range PHEV demonstration vehicles. We recently accepted an initial deposit of $200,000 for the production of these
vehicles. We also expect to begin to realize modest revenues from the sale of Symetron-enhanced motors and generators through our business cooperation agreement with HHI in the second quarter of 2009, although the exact amount and timing of these
revenues will be dependent on HHIs ability to implement these Symetron-enhanced designs into its manufacturing and distribution system. We also have entered into a licensing agreement with Wilson Automotive to manufacture and sell
Symetron-enhanced alternators for high-output applications. Although progress is being made by each of our business segments, significant revenues may not be generated as expected by either of our segments, if at all.

Significant Expenses

We have incurred significant
losses since our inception. As of September 30, 2008, we had incurred an accumulated deficit and deficit accumulated after re-entry into the development stage of approximately $71.5 million on cumulative revenues since inception of
approximately $1.0 million. Our net losses for the nine months ended September 30, 2008 and 2007 totaled $20.2 million and $11.2 million, respectively.

During the nine months ended September 30, 2008, the monthly accrual based expenditure rate for our operations increased to $1.8 million per month from approximately $1.0 million per month during the twelve
months ended December 31, 2007. The higher spending rate primarily reflects increased professional services associated with designing the financing and tax structures for the tax equity financing transactions contemplated by our commitment
letter with Merrill Lynch and prospecting and exploration costs associated with geothermal power plant development. We expect that our average monthly cash expenditure rate will continue to increase as we implement our plans to develop additional
geothermal power plants.

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

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

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



31



---

##### Table of Contents

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

Results of Operations



|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|------------------------------------------------ |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                 |  | Three months ended September 30, |            |   | Nine months ended September 30, |  
|                                                 |  | 2008                             |            |   | 2007                            |   |            | 2008 |  |   | 2007        |  
|Revenue                                          |  | $                                | 30,000     |   |                                 | $ | 49,887     |      |  | $ | 166,423     |   |  | $ | 202,212     |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Operating expense                                |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Cost of sales                                    |  |                                  |           |   |                                 |   | 49,887     |      |  |   | 74,112      |   |  |   | 543,679     |  
|General and administrative                       |  |                                  | 2,447,878  |   |                                 |   | 1,920,526  |      |  |   | 7,562,902   |   |  |   | 7,353,982   |  
|Power project development                        |  |                                  | 3,232,729  |   |                                 |   | 708,010    |      |  |   | 8,012,210   |   |  |   | 1,572,271   |  
|Research and development                         |  |                                  | 970,925    |   |                                 |   | 939,839    |      |  |   | 3,134,138   |   |  |   | 2,521,610   |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total operating expenses                         |  |                                  | 6,651,532  |   |                                 |   | 3,618,262  |      |  |   | 18,783,362  |   |  |   | 11,991,542  |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Operating loss                                   |  |                                  | (6,621,532 | ) |                                 |   | (3,568,375 | )    |  |   | (18,616,939 | ) |  |   | (11,789,330 | )
|Interest income                                  |  |                                  | 94,030     |   |                                 |   | 195,856    |      |  |   | 265,306     |   |  |   | 597,385     |  
|Interest expense                                 |  |                                  | (1,077,695 | ) |                                 |   |           |      |  |   | (2,180,976  | ) |  |   |            |  
|Other                                            |  |                                  |           |   |                                 |   |           |      |  |   | 75,775      |   |  |   | (31,159     | )
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Loss before income taxes and minority interest   |  |                                  | (7,605,197 | ) |                                 |   | (3,372,519 | )    |  |   | (20,456,834 | ) |  |   | (11,223,104 | )
|Income tax benefit (expense)                     |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Minority interest                                |  |                                  | 227,398    |   |                                 |   |           |      |  |   | 227,398     |   |  |   |            |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss applicable to common stockholders       |  | $                                | (7,377,799 | ) |                                 | $ | (3,372,519 | )    |  | $ | (20,229,436 | ) |  | $ | (11,223,104 | )
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Loss per common share-basic and diluted          |  | $                                | (0.13      | ) |                                 | $ | (0.06      | )    |  | $ | (0.36       | ) |  | $ | (0.21       | )
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Weighted average common sharesbasic and diluted |  |                                  | 57,785,000 |   |                                 |   | 55,086,000 |      |  |   | 56,646,000  |   |  |   | 53,641,000  |  
|                                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  

Comparison of Three Months Ended September 30, 2008 and 2007

Revenue

During the three months ended
September 30, 2008, we recognized revenue totaling $30,000, which is comparable to the revenues received during the same period in 2007. Revenues for the 2008 period were generated from a waste heat recovery study we completed for a customer.

Operating Expenses

Cost of
sales. We reported cost of sales for the three months ended September 30, 2008 and 2007 of zero and $50,000, respectively. The costs relating to performing the waste heat recovery study during the three months ended September 30, 2008
are included in power project development costs.

General and Administrative.General and administrative expenses increased to
approximately $2.4 million for the three months ended September 30, 2008 from approximately $1.9 million for the three months ended September 30, 2007. This increase was due primarily to a $0.3 million increase in professional service
expenses during the three months ended September 30, 2008 over the same period in 2007. This increase reflects increased legal and consulting fees associated with tax equity financing activities during the quarter. Other employment related
costs increased by approximately $0.1 million during the third quarter of 2008 compared to the third quarter of 2007, reflecting higher average salaries and employment levels. Equity-based non-cash employee compensation expense remained relatively
flat in the third quarter of 2008 compared to $0.6 million in same period of 2007. Office expenses increased by $0.1 million for the three months ended September 30, 2008 compared to the same period in 2007. The increase was primarily due to
increased service fees to administer the cash payments for the Thermo No. 1 project and additional office related expenses due to the hiring of additional personnel during the current year.



32



---

##### Table of Contents

Power Project Developments.Power project development expenses during the three months ended
September 30, 2008 totaled $3.2 million compared to $0.7 million for the three months ended September 30, 2007. Equity-based non-cash employee and contractor compensation for the three months ended September 30, 2008 increased
approximately $0.1 million compared to the third quarter of 2007. This increase in equity-based compensation was due to the grant of additional stock options to power project development employees during the third quarter of 2008. Employment related
costs for power project development employees increased by $0.2 million during the third quarter of 2008 over the third quarter of 2007 due to increasing employment levels to execute our business plan. During the three months ended
September 30, 2008, professional services relating to geological engineering consulting, completed transmission line capacity studies and legal fees associated with debt and tax equity financing structures contemplated by financing commitments
under our commitment letter with Merrill Lynch increased $1.9 million over the third quarter of 2007. During the third quarter of 2008, other expenses also increased by $0.3 million, compared to the same period in 2007, due primarily to the payment
of delayed rentals relating to our geothermal leases and the expensing of costs previously capitalized for certain unproved property in California and Utah that we no longer intend to develop.

Research and Development. Research and Development expense increased from $0.9 million in the three months ended September 30, 2007 to $1.0
million for the three months ended September 30, 2008. Equity based non-cash employee compensation remained relatively flat at approximately $0.1 million for each of the three months ended September 30, 2008 and 2007. Cash based employee
compensation decreased by approximately $0.1 million for the three months ended September 30, 2008 compared to the same period in 2007, reflecting a reduction in the number of employees performing research and development activities.
Professional services increased by approximately $0.2 million during the three months ended September 30, 2008 over the same period in 2007. This increase is due to the timing of consulting work performed by our PHEV consultants and the hiring
of a former key employee as a consultant. Other engineering expenses decreased approximately $0.1 million during the three months ended September 30, 2008 over the comparable 2007 period due primarily to the decreased materials consumed in
testing.

Interest and Other Income. Interest income for the three months ended September 30, 2008 decreased slightly to $0.1
million from $0.2 million for the same period in 2007. The decrease was due primarily to lower average monthly cash balances in the third quarter of 2008 compared to the 2007 period. Interest expense for the three months ended September 30,
2008 increased to $1.1 million from zero during the same period in 2007. The increase was due to accrued interest expense relating to the issuance of $55.0 million of 8.00% Convertible Senior Notes due 2013 (the Convertible Notes) and
the issuance by Thermo No. 1 BE-01, LLC (the Thermo Subsidiary) of a $31.2 million non-recourse 7.00% Senior Secured Note due 2026 in connection with the project financing for the Thermo No. 1 project (the Thermo
Note).

Minority Interest.Minority interest for the three months ended September 30, 2008 includes the portion of the
net loss allocated to a third party that owns a minority equity interest in our Thermo Subsidiary totaling $0.2 million. There was no minority interest in 2007.

Comparison of Nine Months Ended September 30, 2008 and 2007

Revenue

During the nine months ended September 30, 2008, we recognized revenue totaling $0.2 million, which was consistent with the same period in 2007.
During the first quarter of 2008, we completed the ARINC subcontract, which began in October 2006. We accounted for this subcontract on the percentage of completion basis. In addition to revenues from the ARINC subcontract, revenues for the nine
months ended September 30, 2008 reflect the sale of two prototype motors during the second quarter and from a waste heat recovery study we completed for a customer, as described above.

Operating Expenses

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

General and Administrative.General and administrative expenses increased to approximately $7.6 million for the nine months ended
September 30, 2008 from approximately $7.4 million for the nine months ended September 30, 2007. This increase was primarily due to professional services associated with equity financing structuring, which increased approximately $1.2
million during the nine months ended September 30, 2008 over the same period in 2007. Employment related costs increased by approximate $0.4 million during the first nine months of 2008 compared to the same period of 2007, reflecting higher
average salaries and employment levels. These increases were partially offset by a reduction in equity-based non-cash employee compensation expense, which declined to $1.7 million for the nine months ended September 30, 2008, compared to $2.1
million for the same period of 2007. Equity-based non-cash compensation expense was higher during the first nine months of 2007 due to the vesting of a larger number of executive stock and option grants. Equity-based non-cash service provider
compensation for the nine months ended September 30, 2008 decreased by approximately $1.0 million from the same period in 2007. No shares were issued to service providers in the first nine



33



---

##### Table of Contents

months of 2008. 200,000 shares of common stock were issued to a provider of financial advisory services during the nine months ended September 30, 2007.
Office expenses totaled $0.5 million for the nine months ended September 30, 2008, which represents an increase of $0.1 million when compared to the same period in 2007. The increase is primarily due to increased service fees to administer the
cash payments for the Thermo No. 1 project and additional office related expenses due to current year corporate expansion.

Power
Project Developments.Power project development expenses during the nine months ended September 30, 2008 totaled $8.0 million, compared to $1.6 million for the nine months ended September 30, 2007. Equity-based non-cash employee and
contractor compensation for the nine months ended September 30, 2008 increased $0.3 million over the first nine months of 2007 as a result of stock option grants to new employees. Employment related costs for power project development employees
increased during the first nine months of 2008 by $0.8 million over the same period of 2007 as we increased our work force levels to execute our business plan. During the nine months ended September 30, 2008, professional services relating to
geological engineering consulting, completed transmission line capacity studies and legal fees associated with designing debt and tax equity financing structures contemplated by financing commitments under our commitment letter with Merrill Lynch
increased $4.6 million over the same period of 2007. During the nine months ended September 30, 2008, other expenses also increased by $0.4 million as compared to the same period in 2007 due primarily to the expensing of costs previously
capitalized for certain unproved property in California and Utah that we no longer intend to develop.

Research and Development.
Research and Development expense increased from $2.5 million in the nine months ended September 30, 2007 to $3.1 million for the nine months ended September 30, 2007. Equity based non-cash employee compensation for the nine months ended
September 30, 2008 decreased by approximately $0.1 million for the nine months ended September 30, 2008 and 2007. Cash based employee compensation during the nine months ended September 30, 2008 decreased by approximately $0.2 million
compared to the nine months ended September 30, 2007, reflecting a slight reduction in the number of employees performing research and development activities. Professional services increased by approximately $0.6 million during the nine months
ended September 30, 2008 over the same period of 2007. This increase was due to the timing of consulting work performed by our PHEV consultants and the hiring of a former key employee as a consultant. The portion of engineering expenses that
could be attributed to cost of sales increased approximately $0.3 million during the nine months ended September 30, 2008 over the comparable 2007 period due primarily to the increased materials consumed in testing.

Interest and Other Income. Interest income for the nine months ended September 30, 2008 decreased to $0.3 million from $0.6 million for the
same period in 2007. The decrease was due primarily to lower average monthly cash balances over the nine months ended September 30, 2008 compared to the 2007 period. Interest expense for the nine months ended September 30, 2008 increased
to $2.2 million from zero during the same period in 2007. The increase was due to accrued interest expense relating to the issuance of the Convertible Notes and the Thermo Note.

Minority Interest. Minority interest for the nine months ended September 30, 2008 includes the portion of the net loss that is allocated to a
third party that owns a minority interest in our Thermo Subsidiary totaling $0.2 million. There was no minority interest in 2007.

Liquidity and Capital
Resources



|                                              |  |                   |           |                  |   |          
|--------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|Cash and Cash Equivalents                     |  | September 30,2008 |           | December 31,2007
|Cash                                          |  | $                 | 861,355   |                  | $ | 516,938  
|Certificate of Deposit (unrestricted portion) |  |                   |          |                  |   | 325,000  
|Money Market Account                          |  |                   | 4,646,224 |                  |   | 5,070,272
|                                              |  |                   |           |                  |   |          
|Total                                         |  | $                 | 5,507,579 |                  | $ | 5,912,210

Since inception, we have funded our operations primarily through the sale of equity instruments,
borrowings and project financing arrangements. During the third quarter of 2008, we raised net proceeds of approximately $24.2 million from the sale of shares of our common stock pursuant to an ATM Equity Offering Sales Agreement with Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated. Also during the third quarter of 2008, we obtained project financing for the Thermo No. 1 project. The project financing arrangements for the Thermo No. 1
project included approximately $31.2 million of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed annual interest rate of 7.00%. Our Thermo Subsidiary received proceeds from the debt financing of approximately
$26.1 million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing
proceeds is 9.50%. From the proceeds of the debt financing, we received approximately $14.1 million from the Thermo Subsidiary as repayment for construction costs at the Thermo No. 1 project that were incurred by us prior to closing the project
financing. In addition, pursuant to the project financing agreements, the Thermo Subsidiary received a capital contribution from the holder of Class A member interests of the Thermo Subsidiary totaling $3.7 million. The financing arrangements
for the Thermo No. 1 project are described in more detail below.

On November 13, 2008, we entered into an agreement relating to
the private placement of $20 million of our common stock. The shares are being sold to a single institutional accredited investor pursuant to a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. At the
initial closing, scheduled for November 14, 2008, the investor has agreed to purchase 2 million shares of our common stock for an aggregate purchase price of $10 million, or $5.00 per share, representing a premium of 43% over the closing price of
our common stock on November 12, 2008. At a second closing, scheduled for December 12, 2008, the investor has agreed to purchase an additional $10 million of our common stock at a purchase price equal to 110% of the average of the daily
market prices of our common stock for the ten (10) business days ending on December 11, 2008. Each closing is subject to the satisfaction of certain customary conditions. In connection with the private placement transactions, we have also
granted the purchaser a warrant to purchase up to $20 million of additional shares of our common stock at a price per share equal to the lesser of (i) six dollars ($6.00) or (ii) a price equal to the average of the daily market prices of our common
stock for the forty (40) business days ending on the third business day prior to the exercise of the warrant, less $0.60. After a period of nine months, or earlier if certain conditions occur, the investor will have the right to exercise the warrant
on a cashless, net settlement basis. The warrant will vest with respect to $10 million of common stock upon completion of the first closing and the remaining $10 million will vest upon completion of the second closing. The warrant will have a term
of ten years. We estimate that the aggregate net proceeds from the private placement transactions, excluding any potential proceeds associated with the exercise of the warrant, will be approximately $18.7 million after deducting estimated fees
and expenses.



34



---

##### Table of Contents

On March 2008, we raised gross proceeds of $50,000,000, before deducting fees and commissions from the
issuance of the Convertible Notes. We placed approximately $7.9 million of the proceeds in an escrow account to secure payment of the first four interest payments payable on the Convertible Notes. We also used approximately $15.0 million of the
proceeds to enter into a forward stock purchase transaction, pursuant to which we will repurchase shares of our common stock, and approximately $5.9 million of net proceeds to fund a call spread option transaction. On April 1, 2008, the initial
purchaser of the Convertible Notes exercised its overallotment option and we sold an additional $5.0 million aggregate principal amount of Convertible Notes. We placed approximately $0.8 million of the proceeds from the overallotment exercise in an
escrow account to secure payment of the first two years of interest payable on the additional Convertible Notes issued pursuant to the overallotment exercise.

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

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

At September 30, 2008, we had approximately $5.5 million in cash and cash equivalents. Our operating activities used
approximately $10.1 million and approximately $5.1 million of cash during the nine months ended September 30, 2008 and 2007, respectively. We have incurred substantial losses since inception and we are not operating at cash breakeven.

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

As a result of the private placement of the Convertible Notes in March 2008, our independent
registered public accounting firm reissued their report with respect to our 2007 financial statements on April 1, 2008 to remove an explanatory paragraph that expressed substantial doubt about our ability to continue as a going concern.
Although we raised substantial proceeds during the nine months ended September 30, 2008, as described above, we have used or committed a substantial portion of these proceeds to fund our operations and development efforts. Further, we are not
currently generating significant revenues, and our cash and cash equivalents will continue to be depleted by our ongoing development efforts. Until we are in a position to generate significant revenues, we will need to continue to raise additional
funds to continue operating as a going concern. We may seek this additional funding through the issuance of debt, preferred stock, equity or a combination of these instruments. We may also seek to obtain financing through a joint venture, the sale
of one or more of our projects or interests therein, entry into a pre-paid power purchase agreement with utilities or municipalities, or a merger and/or other transaction, a consequence of which could include the sale or issuance of stock to third
parties. We cannot be certain that funding from any of these sources will be available on reasonable terms or at all. If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we may need to curtail or cease operations,
modify our current plans for plant construction, well field development and other development activities, or extend the time frame over which these activities will take place.

In addition to funding for general corporate purposes, well field development and certain other general development expenses, we will need to finance
each of the geothermal power projects we intend to develop. As more fully described below, we have entered into a Commitment Letter (the Commitment Letter) with Merrill Lynch. The Commitment Letter sets forth certain general terms
relating to the structure and financing of up to 155 MW of geothermal power plants we intend to develop. As more fully described below, we have obtained financing for the Thermo No. 1 project pursuant to the Commitment letter, and we are
seeking to fund additional projects in accordance with the Commitment Letter. The timing of the funding for additional projects will depend on the progress of our development at the potential sites, and our ability to satisfy any applicable
conditions under the terms of the Commitment Letter and the related financing commitments.

We do not believe the announced merger of
Merrill Lynchs parent company with Bank of America Corporation will adversely affect our relationship with Merrill Lynch or our plans to develop and finance geothermal power projects. We continue to work closely with Merrill Lynch regarding
the potential funding of additional projects in accordance with our Commitment Letter with Merrill



35



---

##### Table of Contents

Lynch. Although we do not believe that the merger of Merrill Lynchs parent with Bank of America Corporation will alter Merrill Lynchs ability or
willingness to provide or arrange funding for our projects under the Commitment Letter or otherwise adversely affect our relationship with Merrill Lynch, the merger could have unanticipated consequences that we cannot predict. If unanticipated
consequences of the merger adversely affect Merrill Lynchs ability or willingness to provide or arrange funding for our projects, we will need to seek funding from other sources, which could adversely affect the timing and costs of our future
projects. We intend to continue discussions with other potential sources of capital interested in investing in geothermal energy. We believe there are a number of potential capital sources that would be interested in participating as an additional
partner in the financing of our future plants.

As part of our geothermal power project development efforts, we have made a variety of
financial commitments. Currently, our most significant financial commitments relate to our obligations under our purchase agreements with UTC and other vendors. These purchase agreements allow us to order and purchase generating units, transformers,
pumps, cooling towers, transmission lines, power substations, fire safety equipment and other major electronic components for use in our geothermal power plants. The purchase obligations set forth above include a series of purchase and service
agreements whereby certain vendors have agreed to provide certain equipment and services to us. As of September 30, 2008, we were obligated to pay the vendors approximately $53.9 million in 2008; $19.0 million in 2009; $4.5 million in 2010;
$4.6 million in 2011; and $4.7 million in 2012.

During the third quarter of 2008, we amended one of our purchase agreements with UTC
relating to the purchase of 50 PureCycle generating units for the Thermo No. 1 project. Under the terms of the Amended and Restated Purchase Contract, UTC has agreed to allow us to retain a certain portion of the purchase price of the
generating units pending the successful completion of the Thermo No. 1 project. If the Thermo No. 1 project is not successfully completed as a result of a problem with the generating units, we will keep the retained portion of the purchase
price as a liquidated damages payment. If the Thermo No. 1 project is not successfully completed as a result of any other reason, we will reimburse UTC for any liquidated damages paid by UTC.

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

Accordingly, we have reached an agreement, in principle, with the party to whom the majority of the obligations are owed. Under the agreement, both parties have agreed that no additional payments for certain equipment will be required
beyond the initial deposits until the closing of project financing is obtained for each respective project. Both parties are working towards formalizing the agreement which is anticipated to be executed during the fourth quarter of 2008.

In connection with the purchase of a BLM lease for the Lightning Dock project in New Mexico, we also executed a promissory note in February 2008
whereby we agreed to pay to the seller $900,000 in principal plus $50,000 in interest charges on or before January 5, 2009. We expect to fund these obligations primarily through the project financing we intend to seek for the Lightning Dock
project. However, we may need to obtain financing for all or a portion of these commitments from other sources. We also have obligations to pay delay rentals and other expenses associated with the geothermal resources on properties in which we have
acquired an interest. Generally, these obligations will not be financed as part of a financing commitment for a specific power project, and we will need to finance the payment of these obligations from other sources.

Our Commitment Letter with Merrill Lynch

On
January 16, 2008, we, together with our wholly-owned subsidiary, Truckee Geothermal No. 1 SV-01, LLC, entered into the Commitment Letter with Merrill Lynch. The Commitment Letter sets forth general terms relating to the structuring and
financing of up to 155 MW of geothermal power plants we intend to develop. We have obtained financing commitments from Merrill Lynch to provide non-recourse financing for our Thermo No. 1 project in Utah, our Lighting Dock project in New
Mexico, and our Truckee project in Nevada. During the third quarter of 2008, we finalized the project financing arrangements for the Thermo No. 1 project as described below.

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



36



---

##### Table of Contents

The Thermo Financing

On May 16, 2008, pursuant to the Commitment Letter, we and our Thermo Subsidiary entered into a financing commitment letter (the Thermo Commitment) with Merrill Lynch relating to the project financing
and tax equity funding for the Thermo No. 1 project. On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into definitive agreements (the Thermo Financing Agreements)
that provide debt financing and tax equity capital for the Thermo No. 1 project.

Pursuant to the Thermo Financing Agreements, we have
agreed to serve as the engineering, procurement and construction contractor and have guaranteed the completion of the construction of the Thermo No. 1 project. The useful life of the Thermo No. 1 project is expected to be approximately 35
years. The useful life of the geothermal resource is expected to be renewable and have a much longer life than the Thermo No. 1 project.

The Thermo No. 1 project is held by the Thermo Subsidiary, which is responsible for debt service, all maintenance and operations expenses, and the payment of various fees and distributions to us and Merrill Lynch. The following
provides further details concerning the terms and conditions of the Thermo Financing Agreements:



| |  |  | The Thermo Financing Agreements provided for approximately $31.2 million of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed
annual interest rate of 7.00%. The Thermo Subsidiary received proceeds from the debt financing of approximately $26.1 million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the
effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. From the proceeds of the debt financing, we received approximately $14.1 million from the Thermo Subsidiary as repayment for
construction costs at the Thermo No. 1 project that were incurred by us prior to closing the project financing. Thermo is responsible for debt service and is expected to retire the debt through sculpted principal payments over 18 years. The
sculpted principal payments provide for larger principal payments than normal amortization in the earlier years when project cash flows are heaviest.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the Thermo Financing Agreements, tax equity capital for the tax benefits associated with the Thermo No. 1 project was provided to Thermo by ML Holdings,
of which Merrill Lynch funded approximately $3.7 million, at the initial funding. The balance of the tax equity capital, totaling approximately $20.8 million, was funded in October 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We expect to receive $5.0 million in development distributions from the Thermo Subsidiary, 25% of which is expected to be paid to us on the first anniversary of the
date the Thermo No. 1 project is completed, with the balance to be due and payable 18 months after completion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We also expect to receive approximately $0.6 million annually from Thermo for our services as managing member and operator of the Thermo No. 1 project.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to the date when the Class A member achieves its target rate of return (the flip date), we will be eligible to receive a management bonus if
the Thermo No. 1 project performs better than expected.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Annual operating and maintenance costs for the Thermo No. 1 project are expected to be approximately $2.5 million and are expected to be paid by Thermo from
its operating revenues. These costs include a manufacturers guarantee and maintenance agreement provided by UTC.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any residual cash flows available after paying all expenses and debt service will be distributed 99% to Merrill Lynch and 1% to us prior to the equity flip date,
which is anticipated to occur between the seventh and tenth year of operation, after which the distribution split will be 5% to Merrill Lynch and 95% to us. Post-flip date distributable cash flows are expected to average approximately $1.7 million
per year until the debt services is completed in year eighteen and approximately $6.0 million per year after the eighteenth year for the rest of the useful life of the Thermo No. 1 project.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our equity contribution to Thermo of approximately $29.0 million was comprised primarily of the completed well field.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

In connection with the Thermo Financing Agreements and the Thermo No. 1 project financing, we and our affiliates have entered into certain other
ancillary agreements, including a Pledge Agreement with Deutsche Bank to secure the payment and performance of the Thermo No. 1 project under the Credit Agreement. The Pledge Agreement grants Deutsche Bank a continuing security interest in and
lien on certain membership interests or other interests in the Thermo No. 1 project. We have also entered into a Guaranty Agreement in favor of the Thermo No. 1 project and ML Holdings, pursuant to which we guarantee certain obligations of
certain parties to the Thermo Financing Agreements.



37



---

##### Table of Contents

The Lightning Dock Commitment

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

The Lightning Dock Commitment provides for up to
approximately $43.0 million of construction and term debt financing and up to approximately $27.0 million of tax equity capital. Under the Lightning Dock Commitment, we expect approximately $16.0 million of the tax equity financing will be used to
pay down the construction debt at the time the plant is placed in service. Further, we expect the term debt will fully amortize over 17 years of operations. Generally, the finance structure is designed to distribute a significant portion of the
first ten years of cash flows to us in the form of development fees during the first two years of operations based upon both the successful completion of the Lightning Dock project and attainment of on-going operational targets. Once the debt for
the Lightning Dock project has been retired and most of the tax benefits have been utilized, we expect that 95% of all of the remaining cash flows of the Lightning Dock project are expected to flow to us. It is the intention of the parties that the
power generation facilities will qualify to receive tax credits and other benefits under the provisions of the Internal Revenue Code.

The
Lightning Dock Commitment is subject to market conditions, due diligence, receipt of all necessary internal approvals by both us and Merrill Lynch, Merrill Lynchs satisfaction with the structure of the tax equity financing, the negotiation and
execution of definitive documentation and the satisfaction of certain other conditions. We expect to close this financing in early 2009.

The Truckee Commitment

The Truckee Commitment expired by its terms on June 30, 2008. However, we and Merrill Lynch
have agreed to work towards formally extending the expiration date of this commitment in the future. The Truckee Commitment originally provided for up to $44.0 million, including approximately $38.4 million in the form of 15-year fully amortizing
notes, to fund approximately $33.0 million of total construction costs, plus reserve accounts, accrued interest, transaction fees and other costs. The balance of the commitment is attributable to a letter of credit to be required under a power
purchase agreement. The Truckee Commitment contemplated that the interest rate payable by us on the amortizing notes would equal LIBOR plus 500 basis points, swapped to a fixed rate of interest, determined at the time of funding. We anticipate that
the Truckee Commitment would have a tax equity component similar to the Thermo Commitment and the Lightning Dock Commitment.

Potential
Additional Financing Commitments

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

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

Structuring Fees and Other Consideration

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

As additional
consideration, we granted Merrill Lynch warrants to purchase our common stock. The warrants will vest and become exercisable in increments over the term of the Commitment Letter based on the actual funding provided. The exercise price of the
warrants is subject to adjustment upon any dilutive issuance by us. In accordance with the anti-dilution protection included in the warrants, the issuance of the Convertible Notes and the issuance of common stock during the third quarter of 2008
resulted in a reduction of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of $14.21 to $18.30. On August 31, 2008, warrants to purchase 1,350,000 shares of our common stock vested in connection with the
closing of the project financing arrangements for the Thermo No. 1 project.



38



---

##### Table of Contents

In general, warrants that vest in connection with the funding of earlier projects will be greater in
number and have a lower exercise price, and warrants that vest in connection with the funding of later projects will be fewer in number and have a higher exercise price. Under certain circumstances, a reduced percentage of the warrants will vest if
we reject a Merrill Lynch funding proposal for a project and subsequently obtain funding for such project from another party or, in certain circumstances, from Merrill Lynch. Any vested warrants may be called for cancellation by us if certain
conditions have been met, including minimum market price requirements relating to our common stock. We have agreed to grant additional warrants to Merrill Lynch upon funding of any of the additional 55 MW of geothermal power projects with respect to
which Merrill Lynch has a right of first refusal. The exercise price of any such additional warrants will be based on the volume weighted average price of our common stock over a 20 consecutive trading day period prior to the issuance of such
warrants. Pursuant to a registration rights agreement between us and Merrill Lynch, we have agreed to file one or more registration statements covering the resale of the warrants issued pursuant to the Commitment Letter, as well as the resale of the
shares of common stock issuable pursuant to the exercise of such warrants. When a series of warrants vests, we are obligated to register these securities for resale and cause the registration statement to remain continuously effective until all
vested warrants and the shares of common stock issuable upon exercise of the warrants covered by such registration statement have been sold or may be sold without restriction pursuant to Rule 144 of the Securities Act of 1933, as amended. Merrill
Lynch agreed to permit us to defer our obligation to register the resale of the warrants that vested in connection with the funding of the Thermo No. 1 project until such registration is requested by Merrill Lynch. We do not believe the
proposed merger of Merrill Lynchs parent with Bank of America Corporation will alter our understanding or Merrill Lynchs understanding of our outstanding obligations under the registration rights agreement with Merrill Lynch.

Consolidated Statements of Cash Flows

Operating Activities. Cash consumed by operating activities for the nine months ended September 30, 2008 consisted primarily of a net loss of approximately $20.2 million, adjusted for approximately $2.6 million of stock-based
compensation and stock issued for services. Accounts payable and accrued liabilities increased from $4.2 million at December 31, 2008 to $39.3 million at September 30, 2008 due primarily to accrued expenses for well field development,
geothermal power plant construction, transmission line construction, and the purchase of power systems equipment. The portion of accrued liabilities relating to well field development, construction-in-progress and power systems equipment, totaling
$30.5 million, has been reclassified as a non-cash item to decrease the change in accrued liabilities. Net accounts receivable increased $0.1 million reflecting the completion of the ARINC subcontract. Deferred revenues increased by approximately
$0.2 million, reflecting a down payment received for our anticipated PHEV. Minority interest in operations of our subsidiary totaled $0.2 million at September 30, 2008, representing the allocated loss since the time a minority interest in the
Thermo Subsidiary was acquired by a third party in connection with the equity financing arrangements for the Thermo No. 1 project.

Cash consumed by operating activities for the nine months ended September 30, 2007 consisted primarily of a net loss of approximately $11.2 million, adjusted for approximately $3.9 million of stock-based compensation and stock issued
for services. Interest receivable at September 30, 2007 decreased by approximately $0.4 million resulting from the collection of the note receivable paid in full by a former merger candidate. Accrued liabilities increased $0.3 million due to
the timing of payments for certain professional services contracts. Other current assets at September 30, 2007 increased $0.3 million due to increased prepaid software maintenance and directors and officers insurance coverage.

Investing Activities. We purchased investments in marketable debt securities as a means of temporarily investing the proceeds from financings
until the funds are needed for operating purposes. In addition, we finalized the project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing Agreements that provide debt financing and tax equity capital for
the Thermo No. 1 project totaling $50.6 million. Pursuant to the Thermo Financing Agreements, the funds received can only be used for the purposes permitted by the Thermo Financing Agreements. Any funds not specifically allocated are restricted
and can be used only by our Thermo Subsidiary for certain operating expenses. An independent administrative agent has been appointed to administer all of the Thermo Subsidiarys cash deposits and disbursements. The independent administrative
agent has deposited the cash into a money market fund, which earns interest at a variable rate. At September 30, 2008, the interest rate applicable to this money market fund was 2.23% per annum.

We maintain a portion of our available unrestricted cash in deposit accounts in one bank in Utah. At times, cash balances in these accounts may exceed
federally insured limits. From time to time, we invest a portion of our unrestricted cash in an AIM Funds money market account, which is not affiliated with the bank where we maintain our deposit accounts. The money market account earns interest
based on a variable rate. At September 30, 2008, our balance in the money market account was $4.6 million and the interest rate applicable to the money market account was 2.35% per annum. The average interest rate applicable to the money
market account during the quarter ended September 30, 2008 was 2.36% per annum. Cash from our checking account is swept nightly into an interest bearing account. At September 30, 2008, we had a balance of $0.9 million in this sweep
account and the interest rate applicable to the sweep account was 2.10% per annum. We invest our restricted cash balances in a money market fund managed by JP Morgan Fund.



39



---

##### Table of Contents

At September 30, 2008, we had a balance of $9.7 million invested in this money market fund and the interest rate applicable to the fund was
2.23% per annum. Due to the nature of the investments included in the money market accounts, we consider it reasonable to expect that the fair market values of these investments will not be significantly impacted by a change in interest rates,
and that they can be liquidated for cash on short notice.

Investing activities consumed approximately $75.9 million in the nine months
ended September 30, 2008, reflecting deposits of $7.1 million for the purchase of electric generating units for use in the geothermal power plants we intend to develop in the future. During the first nine months of 2008, we also purchased $24.1
million of equipment for geothermal well field development projects, primarily in Utah, and we incurred construction costs on our first geothermal power plant totaling $19.4 million. We deposited approximately $3.2 million primarily with drilling
vendors, transmission line contractors, and utilities to conduct transmission line capacity and routing studies on our behalf. We paid $1.8 million for land and $0.9 million for water rights in the Thermo No. 1 project area primarily for
transmission line easements and for water use operations. We also paid $0.5 million in connection with the acquisition of leases and the exercise of certain options relating to interests in unproved geothermal properties in Oregon, Nevada and Utah.
In connection with the issuance of the Convertible Notes, we invested a portion of the proceeds totaling $8.7 million into four discounted U.S. Treasury Strips that mature separately on each of the first four semi-annual interest payment dates of
the Convertible Notes. The U.S. Treasury Strips were placed into an escrow account to secure the first four interest payments on the Convertible Notes. These expenditures were partially offset by cash provided by investing activities, including the
net change in the notes receivable totaling $0.4 million. In connection with the Thermo Financing Agreements, the funds received through the financing were deposited into restricted money market fund accounts for the purposes of paying for the well
field costs to complete the drilling and certain equipment costs to complete the construction of the geothermal power plant. We prepaid commissions arising from entering into the City of Anaheim power purchase agreement totaling $0.4 million and at
September 30, 2008, the restricted cash totaled $9.7 million. We have also made deposits to manufacture prototypes of our Transportation and Industrial Technology segment designs totaling $0.2 million.

Investing activities provided approximately $2.3 million of cash in the nine months ended September 30, 2007, reflecting collection in full of a
promissory note receivable of approximately $5.5 million and a change in the status of $0.3 million of a certificate of deposit from restricted to unrestricted. We have made deposits of $3.7 million towards the purchase of generating units to
generate electricity from geothermal resources and toward certain bonding requirements. We have also made deposits of $0.2 million toward the purchase of certain testing equipment. We have purchased certain equipment for development of a well
field in Nevada totaling $2.5 million. We also acquired leases for unproved geothermal properties totaling $0.9 million and made a down payment towards the purchase of a potential acquisition candidate totaling $0.5 million. Additionally, we spent
approximately $0.2 million on equipment and fees relating to filings for patents and trademarks.

Financing Activities.
Financing activities provided approximately $85.5 million and $18.5 million of cash in the nine months ended September 30, 2008 and 2007, respectively. We completed the issuance of the Convertible Notes and the related overallotment option
totaling $55.0 million on April 1, 2008. In connection with the sale of the Convertible Notes, we incurred financing fees of $2.2 million, which was paid to Merrill Lynch. We also entered into a call spread option transaction and a forward
stock purchase transaction totaling $5.9 million and $15.0 million, respectively. We used the remaining net proceeds from the offering for general corporate purposes and to continue well field and other development activities for our geothermal
power projects. In connection with the purchase of a BLM lease in New Mexico, we entered into a promissory note payable and received cash for $0.9 million in February 2008. On June 17, 2008, we entered into an ATM Equity Offering Sales
Agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which we were able to offer and sell through Merrill Lynch, as our sales agent, from time to time, shares of our common stock with
an aggregate sales price of up to $25,000,000. During the third quarter of 2008, we raised net proceeds totaling $24.2 million from our participation in the ATM equity program. In addition, during the third quarter of 2008, pursuant to the Thermo
Financing Agreements, we received a capital contribution for minority interest in our Thermo Subsidiary totaling $3.7 million. Under the same Thermo Financing Agreements, we also entered into an 18 year permanent non-recourse senior secured note
bearing annual interest at 7.00% and received net proceeds totaling $26.1 million. We incurred deferred financing costs related to the execution of the Thermo Financing Agreements totaling $4.2 million. During the nine months ended
September 30, 2008, we also received approximately $0.7 million from the exercise of other outstanding stock options and warrants.

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

As of September 30, 2008, we had stockholders equity of approximately $12.8 million as compared to stockholders equity
totaling $19.5 million at December 31, 2007. The decrease in stockholders equity primarily arose from entering into a call spread option transaction for $5.9 million and a forward stock purchase transaction for $15.0 million in connection
with our issuance of the Convertible Notes during the first quarter of 2008. The effect of purchasing the call spread option transaction and forward stock purchase transaction was a reduction in the additional paid-in capital account totaling $20.9
million.



40



---

##### Table of Contents

Our cash balance, together with cash provided by our recent financing activities and customer sales will
not be sufficient to satisfy our anticipated cash requirements for normal operations and capital expenditures through September 30, 2009. As described above, we will need to secure additional financing in order to execute our plans and continue
our operations.

From time to time, the project financing arrangements relating to our geothermal projects may affect our overall
short-term liquidity and needs for financing. For example, the Thermo Financing Agreements include an engineering, procurement and construction agreement (the EPC Agreement), pursuant to which we agreed to oversee the engineering,
procurement and construction of the geothermal power plant for the Thermo No. 1 project. In addition, we guaranteed the completion of the geothermal power plant construction and the payment of all services performed by the subcontractors. We expect
to make the payments to the subcontractors, including cost overruns, if any, in the ordinary course of business. While all intercompany transactions related to the EPC Agreement are eliminated in the consolidation of our financial statements, our
obligations under the EPC Agreement may require us to make payments with unrestricted cash prior to the time the necessary conditions are fulfilled to allow for the release of restricted cash amounts from the proceeds of the project financing
arrangements.

Dividends.We did not declare or pay any dividends on our outstanding common stock during 2007 or the first nine
months of 2008. We do not expect to pay any dividends in the near future.

Off-Balance Sheet Arrangements

As of September 30, 2008, we had the following off-balance sheet arrangements as defined by Item 303(a)(4)(II) of Regulation S-K.

In connection with the Thermo Financing Agreements, we entered into an Amended and Restated Purchase Contract with UTC relating to the purchase of
generating units for the Thermo No. 1 project. Under the terms of the Amended and Restated Purchase Contract, UTC has agreed to allow us to retain a certain portion of the purchase price of the generating units pending the successful completion
of the Thermo No. 1 project. If the Thermo No. 1 project is not successfully completed as a result of a problem with the generating units, then we will keep the retained portion of the purchase price as a liquidated damages payment. If the
Thermo No. 1 project is not successfully completed as a result of any other reason, we will reimburse UTC for any liquidated damages paid by UTC. To secure payment of our obligations to reimburse UTC under the Amended and Restated Purchase
Contract, we provided a security interest to UTC in five patents relating to our Transportation and Industrial segment. We are unable to estimate the maximum potential obligation we may have for future reimbursement payments under the Amended and
Restated Purchase Contract at this time. We believe that the likelihood that we will be obligated to reimburse UTC for liquidated damages under the Amended and Restated Purchase Contract is remote and, accordingly, no liability was
recorded for the quarter ended September 30, 2008.

Contractual Obligations and Commitments

During the first quarter of 2008, we leased a warehouse located in Tooele County, Utah. We used the warehouse to store geothermal power plant generating
units we purchased for installation at the Thermo No. 1 project. The warehouse has approximately 22,239 square feet with monthly rent of $4,448. The warehouse lease expired on July 31, 2008, upon which the lease converted to a month to
month lease. During the third quarter of 2008 all of our generating units previously stored at this facility were moved to our construction site at the Thermo No. 1 project for installation. We expect to store additional units for future
projects at this location and we expect that the lease will be renewed or that alternative space will be obtained. The leased facilities are well maintained and in good condition.

Total rent expense for all of our office space, warehouse and testing facilities leases for the three months and nine months ended September 30,
2008 was approximately $79,000 and $231,000, respectively. Total rent expense for all of our office space, warehouse and testing facilities leases for the three months and nine months ended September 30, 2007 was approximately $73,000, and
$198,000, respectively.

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

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



|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           
|--------------------------- |  | ---------------------- | ----------- | --------------- | - | ----------- |  | ----------- | ---------- | ---------------- | - | ---------- |  | - | ----------
|                            |  | Payments due by period
|                            |  | Total                  |             | Less than 1year |   | 1 to 3years |  | 3 to 5years |            | More than5 years
|Operating Lease Obligations |  | $                      | 3,669,096   |                 | $ | 542,880     |  | $           | 1,300,503  |                  | $ | 640,579    |  | $ | 1,185,134 
|Long Term Debt              |  |                        | 137,854,930 |                 |   | 5,412,000   |  |             | 13,200,000 |                  |   | 59,400,000 |  |   | 59,842,930
|Purchase Obligations        |  |                        | 90,610,493  |                 |   | 53,902,676  |  |             | 28,113,942 |                  |   | 8,593,875  |  |   |          
|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           
|Total                       |  | $                      | 232,134,519 |                 | $ | 59,857,556  |  | $           | 42,614,445 |                  | $ | 68,634,454 |  | $ | 61,028,064
|                            |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           

The contractual obligations set forth above are not recorded as liabilities in our consolidated
financial statements. Amounts payable pursuant to our operating leases are expensed during the reporting period in which the amounts are due and payable. Our equipment purchase obligations are recorded as liabilities when the equipment is received
by us or the risk of loss has been legally transferred to us. The operating lease obligations include operating leases for our corporate headquarters and a testing facility. There is a provision in the corporate headquarters lease that allows for
lease termination at our option without penalty on August 31, 2009. We have subleased additional space at our corporate headquarters pursuant to a sublease that expired on July 31, 2008. The sublease is currently leased on a month to month
basis. The operating lease obligations also include rent payments we have agreed to make in connection with certain geothermal lease agreements.



41



---

##### Table of Contents

On August 31, 2008, we executed a fourth purchase agreement with UTC relating to the purchase of
additional generating units for the geothermal power plants we intend to develop. Concurrent with the execution of the fourth purchase agreement, we paid a down payment of $2.3 million. Under the fourth purchase agreement, we are obligated to pay
the remaining $17.1 million over the next five years, which obligations are included in the table above.

The purchase obligations set
forth in the table above include a series of purchase and service agreements whereby certain vendors have agreed to provide certain equipment and services to us. As of September 30, 2008, we were obligated to pay the vendors approximately $53.9
million in 2008; $19.0 million in 2009; $4.5 million in 2010; $4.6 million in 2011; and $4.7 million in 2012, as reflected in the table above.

Recently
Issued Accounting Pronouncements

SFAS 162

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

SFAS 161

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

SFAS 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51 (SFAS 160). In SFAS 160, the FASB established accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parents ownership interest while the
parent retains its controlling interest to be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for annual
periods beginning on or after December 15, 2008. Retroactive application of SFAS 160 is prohibited. We are currently evaluating the requirements of SFAS 160 and the potential impact on our financial statements.

SFAS 141(R)

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

EITF 07-1

In December 2007, the FASB issued EITF No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). EITF 07-1 prescribes
the accounting for parties of a collaborative arrangement to present the results of activities for the party acting as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP
or, in



42



---

##### Table of Contents

the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting
policy election. Further, EITF 07-1 clarified the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue 01-9, Accounting for Consideration Given
by a Vendor to a Customer. EITF 07-1 is effective for collaborative arrangements that exist on January 1, 2009 and application is retrospective. We are currently assessing the impact of adopting EITF 07-01 on our financial statements.

EITF 07-5

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

EITF 08-3

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

FSP EITF 03-6-1

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

FSP FAS 142-3

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



43



---

##### Table of Contents

FSP FAS 133-1 and FIN 45-4

In September 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4 Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and
FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4), which requires additional disclosures for sellers of credit derivative instruments and
certain guarantees. FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities and FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 by requiring additional disclosures for
certain guarantees and credit derivatives sold including: maximum potential amount of future payments, the related fair value, and the current payment/performance risk. The FASB also clarified the effective date for FAS Statement No. 161. FSP
FAS 133-1 and FIN 45-4 shall be effective for the reporting period ending after November 15, 2008. Earlier adoption is recommended. Management does not anticipate that implementation of this pronouncement will have a material impact on our
financial statements.



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

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

As of September 30, 2008, we had approximately $5.5 million in cash and cash equivalents, including $9.8 million in restricted cash,
that were invested primarily in low risk money market accounts and certificates of deposit until needed for operating and other activities. Current money market rates range from approximately 2.23% to 2.35%. The money market interest rates have
declined from 2.46% over the last three months. If interest rates continue to decline by another 1%, the amount of interest earned on our money market balance would be approximately $153,000 lower over a twelve month period. A review of our money
market accounts indicated that no impairment occurred during the nine months ended September 30, 2008 and no write-down in fair value is considered necessary.

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

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

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



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

Evaluation of Disclosure Controls and
Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and
evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.



44



---

##### Table of Contents

Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of
September 30, 2008, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

We continued to formalize documentation and perform testing of our financial processes during the period covered by this Quarterly Report on Form 10-Q.
In January 2008, we enhanced our financial reporting capabilities by converting our accounting system to an accounting software package that enables us to more efficiently account for multiple entities. During the conversion period, we implemented
certain measures to ensure that the system of internal control remained effective such as daily reconciliations of data input and the roll-forward of prior period gain/loss balances. During the third quarter of 2008, pursuant to the terms of certain
financing agreements we entered into with Merrill Lynch, Pierce, Fenner & Smith Incorporated, for the tax equity financing of the Thermo Subsidiary, an independent administrative agent has been appointed to administer the cash management
process for all cash deposits and disbursements for the Thermo Subsidiary. We remain responsible for approving purchases, invoices for payment and reconciling the bank accounts. We believe that implementation of this control helps ensure that the
system of internal controls remains effective for the daily operations of the Thermo Subsidiary. No other change in our internal control over financial reporting occurred during the nine months ended September 30, 2008 that materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.



45



---

##### Table of Contents

PART II. OTHER INFORMATION



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

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

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



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

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

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

We have a limited operating history and, from our inception, we have earned limited revenue from operations. We have incurred
significant net losses in each year of our operations, including a net loss of approximately $20.2 million for the nine months ended September 30, 2008. As a result of ongoing operating losses, we had an accumulated deficit and deficit after
re-entry into development stage of approximately $71.5 million on cumulative revenues from inception of approximately $1.0 million as of September 30, 2008.

Under our current growth plan, we do not expect that our revenues will be sufficient to cover our expenses unless we are able to successfully place a significant number of power plants in service. As a result, we
expect to continue to incur substantial losses until we are able to generate significant revenues. Our ability to generate significant revenues and become profitable will depend on many factors, including our ability to:



| |  |  | secure adequate capital;
| | - |  | ------------------------



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



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



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



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



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



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



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



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



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



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



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

We
will need to secure additional financing and if we are unable to secure adequate funds on terms acceptable to us, we will be unable to support our business requirements, build our business or continue as a going concern.

At September 30, 2008, we had approximately $5.5 million in cash and cash equivalents. Our operating activities used approximately $10.1 million and
approximately $5.1 million of cash during the nine months ended September 30, 2008 and 2007, respectively. We have incurred substantial losses since inception and we are not operating at cash breakeven.



46



---

##### Table of Contents

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

Since June 30, 2008, we have raised net proceeds of approximately $24.2 million from the sale of shares of our common stock. Pursuant to the Thermo
Financing Agreements, we received a capital contribution for minority interest in our Thermo Subsidiary totaling $3.7 million. Under the same Thermo Financing Agreements, we also entered into an 18 year non-recourse senior secured note bearing
annual interest at 7.00% and received net proceeds totaling $26.1 million.

In addition, we obtained project financing for our Thermo
No. 1 project, which included the repayment of approximately $14.1 million of construction costs previously incurred by us for construction of the project. In order to execute our business strategy and continue our business operations, however,
we will need to seek additional funding from other sources through the issuance of debt, preferred stock, equity or a combination of these instruments. We may also seek to obtain financing through a joint venture, the sale of one or more of our
projects or interests therein, entry into a pre-paid power purchase agreement with utilities or municipalities, a merger and/or other transaction, a consequence of which could include the sale or issuance of stock to third parties. We cannot be
certain that funding from any of these sources will be available on reasonable terms or at all. If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we may need to modify our current plans for plant construction,
well field development and other development activities, extend the time frame over which these activities will take place or cease operations.

Our Commitment Letter with Merrill Lynch sets forth certain general terms relating to the structure and financing of up to 155 MW of geothermal power plants we intend to develop. Pursuant to the Commitment Letter, we have obtained project
financing for our Thermo No. 1 project. Pursuant to the Commitment Letter we have also received financing commitments for two other projects in Nevada and New Mexico. The funding of the New Mexico project commitment remains subject to certain
conditions. The Nevada project commitment expired on June 30, 2008. However, we and Merrill Lynch have agreed to work towards formally extending the expiration date of this commitment. If Merrill Lynch elects to provide or arrange a financing
commitment with respect to any additional projects, such financing commitment will be subject to satisfactory due diligence, the execution of a separate commitment letter relating to such project and certain other conditions. Even if we are able to
obtain funding for the development of additional projects pursuant to the Commitment Letter, we will need additional financing to cover general operating expenses and certain development expenses that are not covered by the Commitment Letter.

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

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

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

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

On
March 26, 2008, we received approximately $48.0 million in net proceeds from the private placement of $50,000,000 aggregate principal amount of our 8.00% Convertible Senior Notes due 2013 (the Convertible Notes) and $4.8 million of
additional net proceeds on April 1, 2008 pursuant to the exercise of the initial purchasers overallotment option. We placed approximately $8.7 million of the proceeds in an escrow account to secure payment of the first four interest
payments payable on the Convertible Notes.



47



---

##### Table of Contents

We also used approximately $15.0 million of the proceeds to enter into a forward stock purchase transaction, pursuant to which we will repurchase shares of
our common stock, and approximately $5.9 million of net proceeds to fund a call spread option transaction. As a result of the private placement, our independent registered public accounting firm reissued their report with respect to our financial
statements on April 1, 2008 to remove the explanatory paragraph. Since that time, we have used the proceeds from the issuance of the Convertible Notes to fund our operations and development efforts, including the ongoing construction of the
Thermo No. 1 project. Although we have raised additional funds from the sale of shares of our common stock and we have obtained project financing for our Thermo No. 1 project, our current revenues are not sufficient to cover our operating
and development expenses. As a result, our cash and cash equivalents are being depleted, and we need to raise additional funds to continue operating as a going concern.

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

The current worldwide political and economic conditions, specifically disruptions in the capital and credit markets, may materially and adversely affect our
business, operations and financial condition.

Recently general worldwide economic conditions have experienced a downturn due to the
credit conditions resulting from the subprime-mortgage turmoil and other factors, slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital
spending, recent international conflicts, recent terrorist and military activity, and the impact of natural disasters and public health emergencies. If the current market conditions continue or worsen, our business, operations and financial
condition will likely be materially and adversely affected.

The United States credit and capital markets have become increasingly volatile
as a result of adverse conditions that have caused the failure and near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, our
ability to obtain needed financing on favorable terms could be severely limited. In the current environment, lenders may seek more restrictive lending provisions and higher interest rates that may reduce our ability to obtain financing and increase
our costs. Also, given the increased level of recent banking failures, lenders may simply be unwilling or unable to provide financing. Although we intend to seek additional funding for our projects in accordance with our Commitment Letter with
Merrill Lynch, we cannot predict whether Merrill Lynchs ability or willingness to provide financing to us will be adversely affected if current market conditions continue or worsen.

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures
of significant financial institutions could adversely affect our access to capital needed for our operations and development plans. If we are unable to obtain adequate financing, we could be forced to reduce, delay or cancel planned capital
expenditures, sell assets or seek additional equity capital, or pursue other actions that could adversely affect future operations. Failure to obtain sufficient financing or a reduction of expenditures may cause delays and make it more difficult to
execute our plans to develop geothermal power plants in accordance with our expectations. It would also make it more difficult to conduct adequate research and development and other activities necessary to commercialize our Symetron
technologies.

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

The closing price of our common stock fluctuated from a low of $2.47 per share to a high of $17.09 per share from January 1,
2008 to November 12, 2008. Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside of our control, including the level of short sale transactions. As a result, the market price of our
stock may not reflect our intrinsic value. In addition, following periods of volatility in our stock price, there may be increased risk that securities litigation, governmental investigations or enforcement proceedings may be instituted against us.
Any such litigation, and investigation or other procedures, regardless of merits, could materially harm our business and cause our stock price to decline due to potential diversion of management attention and harm to our business reputation.

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

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

We are devoting a substantial amount of our available resources to the power production development activities of our Power Systems segment. Our success
in developing a particular geothermal project is contingent upon, among other things, locating a viable geothermal site, negotiation of satisfactory engineering, procurement and construction agreements, negotiation of satisfactory power



48



---

##### Table of Contents

purchase agreements, receipt of required governmental permits, obtaining interconnection rights, obtaining transmission service rights, obtaining adequate
financing, and the timely implementation and satisfactory completion of construction. We may be unsuccessful in accomplishing any of these necessary requirements or doing so on a timely basis. Generally, we must also incur significant expenses for
preliminary engineering, permitting, legal fees and other expenses before we can even determine whether a project is feasible. Project financing is not typically available for these preliminary activities.

Financing needed to develop geothermal power projects may be unavailable.

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

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

Other than certain excluded financings, the Commitment Letter gives Merrill Lynch the exclusive right
to provide or arrange financing for up to 100 MW of substantially similar geothermal power plants we intend to develop. Other than certain excluded financings, Merrill Lynch also has a right of first refusal with respect to the financing of an
additional 55 MW of geothermal power plants we intend to develop. Pursuant to the Commitment Letter, we have obtained project financing for our Thermo No. 1 project. Pursuant to the Commitment Letter, we have also received financing commitments
for two other projects, which remain subject to certain conditions. Any determination on the part of Merrill Lynch to provide any such financing commitment is subject to the satisfaction of certain conditions precedent and various other factors,
including but not limited to, satisfactory completion of due diligence, the absence of any material adverse change in our business, liabilities, operations, condition (financial or otherwise) or prospects, the execution of acceptable definitive
documentation, receipt of customary legal opinions acceptable to Merrill Lynch, satisfactory market conditions and necessary approvals. Accordingly, there can be no assurance that Merrill Lynch will ultimately fund the financing commitments or
provide us with additional financing commitments at any time either pursuant to the Commitment Letter or otherwise. Further, Merrill Lynchs rights under the Commitment Letter, including its right to generally match alternative financing
proposals, may make it difficult for us to obtain financing proposals from other sources.

The parent of Merrill Lynch recently agreed to
be acquired by Bank of America Corporation. This transaction is expected to close in the first quarter of 2009. While we do not expect this transaction to adversely affect our relationship with Merrill Lynch or our ability to obtain project
financing under the Commitment Letter, we are not in a position to predict what impact, if any, this transaction might have on Merrill Lynchs organizational structure, personnel, efficiency or existing or future commitments. Therefore, we
cannot be certain that the proposed acquisition will not adversely affect the timing or availability of the project financing arrangements contemplated by the Commitment Letter. Moreover, the United States financial markets are currently
experiencing a broad-based credit crisis, which could also have an adverse effect on the timing or availability of project financing.

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

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

Each of the geothermal power
projects our Power Systems segment intends to develop will likely be owned by a separate subsidiary. The geothermal power projects developed by these subsidiaries will likely be separately financed. To obtain the financing necessary to develop the
geothermal power projects, we may transfer a portion of our equity interest in the individual subsidiaries to a third party and enter into long-term fixed price power purchase agreements. Depending upon the nature of these arrangements and the
application of generally accepted accounting principles, primarily Statement of Financial Accounting Standards Board Interpretation



49



---

##### Table of Contents

Number 46R Consolidation of Variable Interest Entities (Revised December 2003)an interpretation of ARB No. 51, we may be required to
deconsolidate one or more or all of these subsidiaries, which would result in our share of the net profits or loss generated by the deconsolidated entities being presented as a net amount in our financial statements. As a result, our financial
statements would not reflect the gross revenues and expenses of the deconsolidated entities. However, we do not expect the effect of such deconsolidation, if required, to have an impact on our stockholders equity, net income/loss or
income/loss per share.

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

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

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

The federal government currently encourages production of electricity from geothermal resources through certain tax subsidies. Assuming the available tax credits remain in place as currently in effect, each geothermal
power project will be permitted to claim for federal tax purposes either an investment tax credit for approximately 10% of the cost of each new geothermal power plant or production tax credits of $20.00 (plus an annual adjustment for an
inflation factor) per megawatt hour for the first ten years of electricity output. Currently, production tax credits can only be claimed on new plants placed into service before December 31, 2010. The availability of production tax credits for
new plants put into service after 2010 will depend on whether Congress acts to make tax credits available for such plants and the President elects to sign into law the action taken by Congress.

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

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

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

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

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

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

Our Power Systems segment is involved in the
exploration, development and operation of geothermal energy resources. These activities are subject to uncertainties, which vary among different geothermal resources. These uncertainties include dry holes, uncontrolled releases of pressure and
temperature decline, all of which can increase our operating costs and capital expenditures or



50



---

##### Table of Contents

reduce the efficiency of our power plants. In addition, the high temperature and high pressure in geothermal energy resources requires special resource
management and monitoring. Because geothermal resources are complex geological structures, we can only estimate their geographic area. The viability of geothermal projects depends on different factors directly related to the geothermal resource,
such as the heat content (the relevant composition of temperature and pressure) of the geothermal resource, the useful life (commercially exploitable life) of the resource and operational factors relating to the extraction of geothermal fluids. The
geothermal resources we intend to exploit may not be sufficient for sustained generation of the anticipated electrical power capacity over time. Further, any of our geothermal resources may suffer an unexpected decline in capacity. In addition, we
may fail to find commercially viable geothermal resources in the expected quantities and temperatures, which would adversely affect our development of geothermal power projects.

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

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

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

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

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

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

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

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

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

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



51



---

##### Table of Contents

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

We are currently focusing on commercializing our SymetronTMtechnologies in the transportation and industrial markets. We cannot predict the rate at which market acceptance of our technologies will develop in these markets, if at all.
Additionally, we may focus our product commercialization activities on a particular industry or industries, which may not develop as rapidly as other industries, if at all. The commercialization of our products or the licensing of our intellectual
property in an industry or industries that are not developing as rapidly as other industries could harm our business, prospects, financial condition and results of operations.

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

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

The success of our Transportation and Industrial Technology
segment is dependent upon protecting our proprietary technology. We rely primarily on a combination of copyright, patent, trade secret and trademark laws, as well as confidentiality procedures and contractual provisions to protect our proprietary
rights. These laws, procedures and provisions provide only limited protection. We have applied for patent protection on most of our key technologies. We cannot be certain that our six issued U.S. patents, seven pending U.S. patent applications, four
pending international patent applications and one pending foreign patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to protect the inventions derived from our technology or prove to be
enforceable in actions against alleged infringers. Also, additional patent applications that we may file for our current and future technologies may not be issued. We have received three trademark registrations in the U.S. and ten trademark
registrations internationally. We have also applied for five additional trademark registrations in the U.S. and one additional trademark registration internationally which may never be granted.

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

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

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



52



---

##### Table of Contents

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

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

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

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

If our Transportation and Industrial Technology segment successfully licenses our technology, products built with that
technology may result in product liability lawsuits for any defects that they may contain. Detection of any significant defects may result in, among other things, loss of, or delay in, market acceptance and sales of our technology, diversion of
development resources, injury to our reputation, or increased service and warranty costs. A material product liability claim could significantly harm our business, result in unexpected expenses and damage our reputation.

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

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

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

We believe our Transportation and Industrial
Technology segment will face significant competition from existing manufacturers, including motor, controller, alternator, and transportation vehicle companies. We may also face significant competition from our future partners. These partners may
have better access to information regarding their own manufacturing processes, which may enable them to develop products that can be more easily incorporated into their products. If our potential partners improve or develop technology that competes
directly with our technology, our business will be harmed.

In each of our business segments, we face competition from companies that have
access to substantially greater financial, engineering, manufacturing and other resources than we do, which may enable them to react more effectively to new market opportunities. Many of our competitors may also have greater name recognition and
market presence than we do, which may allow them to market themselves more effectively to new customers or partners.

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

Our success depends on our ability to execute our business
strategies. Our Power Systems segment is seeking to develop geothermal power plants. Our Transportation and Industrial Technology segment is seeking to license our intellectual property to electric motor and controller manufacturers, suppliers and
system integrators. Executing these strategies may involve entering into strategic transactions to acquire complementary businesses or technologies. In executing these strategic transactions, we may expend significant financial and management
resources and incur other significant costs and expenses. There is no assurance that the execution of any strategic transactions will result in additional revenues or other strategic benefits for either of our business segments. The failure to enter
into strategic transactions, if doing so would enable us to better execute our business strategies, could also harm our business, prospects, financial condition and results of operations.

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



53



---

##### Table of Contents

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

As a publicly-traded company, we are subject to the
reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002. These requirements may place a strain on our systems and resources. Our management is required to evaluate the effectiveness of our internal control over financial
reporting as of each year end, and we are required to disclose managements assessment of the effectiveness of our internal control over financial reporting, including any material weakness (within the meaning of Public Company
Accounting Oversight Board, or PCAOB, Auditing Standard No. 5) in our internal control over financial reporting. On an on-going basis, we are reviewing, documenting and testing our internal control procedures. In order to maintain and improve
the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required.

No material weaknesses were identified in connection with the audit of our 2007 financial statements. However, weaknesses or deficiencies could be
identified in the future. If we fail to adequately address any deficiencies, it could have a material adverse effect on our business, results of operations and financial condition. Ultimately, if not corrected, any deficiencies could prevent us from
releasing our financial information and periodic reports in a timely manner, making the required certifications regarding, and complying with our other obligations with respect to our consolidated financial statements and internal controls under the
Sarbanes-Oxley Act. Any failure to maintain adequate internal controls over financial reporting and provide accurate financial statements may subject us to litigation and would cause the trading price of our common stock to decrease substantially.
Inferior controls and procedures could also subject us to a risk of delisting by the NYSE Arca exchange and cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our
common stock.

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

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

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

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

Our future success also depends on our
ability to attract, train, retain and motivate highly skilled technical and sales personnel. Since our Company has limited resources to attract qualified personnel, we may not be successful in recruiting, training, and retaining personnel in the
future, which would impair our ability to maintain and grow our business.

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

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

The market price of our common stock could decline as a result of the resale of shares of common stock that were previously restricted under Rule 144. If
our officers, directors or employees sell shares for tax, estate planning, portfolio management or other purposes, such sales could be viewed negatively by investors and put downward pressure on our stock price. Approximately 40.1 million
shares were free of restrictive legend as of September 30, 2008, up from approximately 28.4 million as of September 30, 2007. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to
decline.

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

U.S. generally accepted accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American
Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our financial results.
For example, prior to January 1, 2007, we were not required to record liabilities relating to uncertainties in our income tax positions until a determination was made by the IRS disallowing the deductions. However, beginning January 1,
2007 we are required to determine whether it is more-likely-than-not that a tax position is sustainable and measure the tax position to recognize in the financial statements in accordance with recent accounting pronouncements.



54



---

##### Table of Contents

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

On September 25, 2008, we granted 100,000 restricted shares of our common stock to ICPE, Inc. pursuant to a settlement of an outstanding invoice for professional services relating to design and engineering services for a geothermal
power plant that we intend to construct. The 100,000 shares represented the fair value of the amount to be applied towards the outstanding invoice on the date of the grant. The fair value of these shares totaled $419,000.

On October 31, 2008, we granted 112,782 restricted shares of our common stock to ICPE, Inc. pursuant to a settlement of an outstanding invoice for
professional services relating to design and engineering services for a geothermal power plant that we intend to construct. The 112,782 shares represented the fair value of the amount to be applied towards the outstanding invoice on the date of the
grant. The fair value of these shares totaled $450,000.

On January 16, 2008, we granted to Merrill Lynch warrants to purchase up to
3,700,000 shares of our common stock, subject to vesting requirements associated with the financing of our geothermal power plants. The warrants vest and become exercisable in increments over the term of the Commitment Letter based on the actual
funding provided. On September 8, 2008, warrants to purchase 1,350,000 shares of our common stock vested in connection with the closing of the project financing arrangements for the Thermo No. 1 project. These warrants are immediately
exercisable and have a current exercise price of $14.21. Since the vesting of warrants was a result of closing the project financing, we allocated the fair value between the net proceeds of the debt and the amount of equity contribution in our
Thermo Subsidiary. Accordingly, the fair value of the vested warrants allocated to the issuance of debt totaled $3,999,334 and the fair value of the vested warrants allocated to the equity contribution in our Thermo Subsidiary totaled $3,749,728.

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



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



|              |  |                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                             
|              | 
|1.1           |  | Amendment to the ATM Equity OfferingSMSales Agreement, dated August 15, 2008, between
Raser Technologies, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 1.1 to our current report on Form 8-K filed August 15, 2008)                                                       
|              | 
|10.1          |  | Commitment Letter, dated July 18, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Lightning Dock Geothermal HI-01, LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed July 21, 2008)                                                                              
|              | 
|10.2          |  | Account and Security Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.1 to
our current report on Form 8-K filed September 5, 2008)                                                                                                  
|              | 
|10.3          |  | Engineering, Procurement and Construction Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Technologies, Inc. (incorporated by reference to Exhibit
10.2 to our current report on Form 8-K filed September 5, 2008)                                                                                         
|              | 
|10.4          |  | Equity Capital Contribution Agreement, dated as of August 31, 2008, by and among Intermountain Renewable Power, LLC and Thermo No. 1 BE-01, LLC, on the one hand, and Merrill Lynch L.P.
Holdings Inc., on the other hand (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed September 5, 2008)                     
|              | 
|10.5          |  | Operation and Maintenance Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Power Systems, LLC (incorporated by reference to Exhibit 10.4 to our
current report on Form 8-K filed September 5, 2008)                                                                                                         
|              | 
|10.6          |  | Credit Agreement, dated as of August 31, 2008, among Thermo No. 1 BE-01, LLC, the Lenders (as defined in the Credit Agreement), and Deutsche Bank Trust Company Americas (incorporated by
reference to Exhibit 10.5 to our current report on Form 8-K filed September 5, 2008)                                                                      
|              | 
|10.7          |  | Amended and Restated Limited Liability Company Agreement of Thermo No. 1 BE-01, LLC, a Delaware limited liability company, dated as of August 31, 2008, by and between Intermountain
Renewable Power, LLC and Merrill Lynch L.P. Holdings Inc. (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K filed September 5, 2008)
|              | 
|10.8          |  | Closing Date and Funding Acknowledgment, dated August 31, 2008, by and among Thermo No. 1 BE-01, LLC, Merrill Lynch Credit Products, LLC, and Deutsche Bank Trust Company Americas
(incorporated by reference to Exhibit 10.7 to our current report on Form 8-K filed September 5, 2008)                                                            
|              | 
|23.1          |  | Consent of GeothermEx, Inc. (incorporated by reference to Exhibit 23.1 to our quarterly report on Form 10-Q, as amended, filed October 14, 2008)                                                                                                                                                                                                    
|              | 
|31.1*         |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                    
|              | 
|31.2*         |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                    
|              | 
|32.1*         |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                             



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



55



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                  |  |  |  |                                                                     
|----------------- |  |  |  | --------------------------------------------------------------------
|                  |  |  |  | RASER TECHNOLOGIES, INC. (Registrant)                               
|                  |  | 
|November 13, 2008 |  |  |  | /s/ Martin F. Petersen                                              
|(Date)            |  |  |  | Martin F. Petersen,                                                 
|                  |  |  |  | Chief Financial Officer (Principal Financial and
Accounting Officer)



56



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                             
|              | 
|1.1           |  | Amendment to the ATM Equity OfferingSMSales Agreement, dated August 15, 2008, between
Raser Technologies, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 1.1 to our current report on Form 8-K filed August 15, 2008)                                                       
|              | 
|10.1          |  | Commitment Letter, dated July 18, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Lightning Dock Geothermal HI-01, LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed July 21, 2008)                                                                              
|              | 
|10.2          |  | Account and Security Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.1 to
our current report on Form 8-K filed September 5, 2008)                                                                                                  
|              | 
|10.3          |  | Engineering, Procurement and Construction Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Technologies, Inc. (incorporated by reference to Exhibit
10.2 to our current report on Form 8-K filed September 5, 2008)                                                                                         
|              | 
|10.4          |  | Equity Capital Contribution Agreement, dated as of August 31, 2008, by and among Intermountain Renewable Power, LLC and Thermo No. 1 BE-01, LLC, on the one hand, and Merrill Lynch L.P.
Holdings Inc., on the other hand (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed September 5, 2008)                     
|              | 
|10.5          |  | Operation and Maintenance Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Power Systems, LLC (incorporated by reference to Exhibit 10.4 to our
current report on Form 8-K filed September 5, 2008)                                                                                                         
|              | 
|10.6          |  | Credit Agreement, dated as of August 31, 2008, among Thermo No. 1 BE-01, LLC, the Lenders (as defined in the Credit Agreement), and Deutsche Bank Trust Company Americas (incorporated by
reference to Exhibit 10.5 to our current report on Form 8-K filed September 5, 2008)                                                                      
|              | 
|10.7          |  | Amended and Restated Limited Liability Company Agreement of Thermo No. 1 BE-01, LLC, a Delaware limited liability company, dated as of August 31, 2008, by and between Intermountain
Renewable Power, LLC and Merrill Lynch L.P. Holdings Inc. (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K filed September 5, 2008)
|              | 
|10.8          |  | Closing Date and Funding Acknowledgment, dated August 31, 2008, by and among Thermo No. 1 BE-01, LLC, Merrill Lynch Credit Products, LLC, and Deutsche Bank Trust Company Americas
(incorporated by reference to Exhibit 10.7 to our current report on Form 8-K filed September 5, 2008)                                                            
|              | 
|23.1          |  | Consent of GeothermEx, Inc. (incorporated by reference to Exhibit 23.1 to our quarterly report on Form 10-Q, as amended, filed October 14, 2008)                                                                                                                                                                                                    
|              | 
|31.1*         |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                    
|              | 
|31.2*         |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                    
|              | 
|32.1*         |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                             



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



57