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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended June 30, 2010

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 200, Provo, UT |  | 84604     
|(Address of principal executive offices)        |  | (Zip Code)

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





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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

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

The number of shares outstanding of the registrants common stock as of August 9, 2010 was 92,660,339 shares.









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##### Table of Contents

Raser Technologies, Inc.

Form 10-Q for the Period Ended June 30, 2010

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 |  | 16      
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 28      
|Item 4. Controls and Procedures                                                               |  | 29      
|                                                                                              | 
|Part II. Other Information                                                                    |  | 29      
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 29      
|Item 1A. Risk Factors                                                                         |  | 30      
|Item 5. Other Information                                                                     |  | 45      
|Item 6. Exhibits                                                                              |  | 45      
|                                                                                              | 
|SIGNATURES                                                                                    |  | 47      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                      |  | June 30,2010 |              |   | December 31,2009 |  
|Assets                                                                                                                                                                |  |              |              |   |                  |   |              |  
|Current assets:                                                                                                                                                       |  |              |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                             |  | $            | 327,007      |   |                  | $ | 41,782       |  
|Restricted cash                                                                                                                                                       |  |              | 29,282,811   |   |                  |   | 76,921       |  
|Federal grant receivable                                                                                                                                              |  |              |             |   |                  |   | 32,990,089   |  
|Trade accounts and notes receivable, net                                                                                                                              |  |              | 550,197      |   |                  |   | 336,788      |  
|Restricted short-term marketable securities (held to maturity)                                                                                                        |  |              |             |   |                  |   | 2,191,339    |  
|Prepaid expenses and short-term deposits                                                                                                                              |  |              | 1,315,909    |   |                  |   | 1,050,590    |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total current assets                                                                                                                                                  |  |              | 31,475,924   |   |                  |   | 36,687,509   |  
|Restricted cash                                                                                                                                                       |  |              | 901,014      |   |                  |   | 9,074,770    |  
|Land                                                                                                                                                                  |  |              | 1,811,063    |   |                  |   | 1,811,063    |  
|Geothermal property, plant and equipment, net                                                                                                                         |  |              | 30,100,000   |   |                  |   | 80,433,597   |  
|Power project leases and prepaid delay rentals                                                                                                                        |  |              | 6,804,849    |   |                  |   | 6,530,946    |  
|Geothermal well field development-in-progress                                                                                                                         |  |              | 988,275      |   |                  |   | 885,586      |  
|Power project construction-in-progress                                                                                                                                |  |              | 8,402,356    |   |                  |   | 8,278,500    |  
|Equipment, net                                                                                                                                                        |  |              | 523,143      |   |                  |   | 606,421      |  
|Intangible assets, net                                                                                                                                                |  |              | 1,535,372    |   |                  |   | 1,552,425    |  
|Deferred financing costs, net                                                                                                                                         |  |              | 6,173,466    |   |                  |   | 6,928,593    |  
|Other assets                                                                                                                                                          |  |              | 1,241,086    |   |                  |   | 1,402,752    |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total assets                                                                                                                                                          |  | $            | 89,956,548   |   |                  | $ | 154,192,162  |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|                                                                                                                                                                      |  |             
|Liabilities and Stockholders Equity (Deficit)                                                                                                                        |  |              |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                  |  |              |              |   |                  |   |              |  
|Accounts payable and accrued liabilities                                                                                                                              |  | $            | 10,108,942   |   |                  | $ | 16,677,632   |  
|15.00% senior secured note, net of discount of $388,837 and $1,232,846, respectively                                                                                  |  |              | 19,611,163   |   |                  |   | 18,767,154   |  
|Unsecured line of credit, net of discount of $1,459 and $33,399, respectively                                                                                         |  |              | 5,191,279    |   |                  |   | 5,528,553    |  
|Short-term portion of long-term notes                                                                                                                                 |  |              | 1,088,685    |   |                  |   | 1,937,290    |  
|Short-term 7.00% senior secured note (non-recourse), net of discounts of $2,853,419 and $, respectively                                                              |  |              | 24,094,617   |   |                  |   |             |  
|Deferred revenue and credits                                                                                                                                          |  |              | 369,967      |   |                  |   | 200,000      |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                             |  |              | 60,464,653   |   |                  |   | 43,110,629   |  
|Asset retirement obligation                                                                                                                                           |  |              | 2,959,793    |   |                  |   | 2,749,342    |  
|Long-term 7.00% senior secured note (non-recourse), net of discounts of $1,405,416 and $4,469,481, respectively                                                       |  |              | 8,372,024    |   |                  |   | 24,772,966   |  
|Long-term 8.00% convertible senior notes                                                                                                                              |  |              | 55,000,000   |   |                  |   | 55,000,000   |  
|Warrant liabilities                                                                                                                                                   |  |              | 3,770,885    |   |                  |   | 11,724,219   |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total liabilities                                                                                                                                                     |  |              | 130,567,355  |   |                  |   | 137,357,156  |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Contingencies and commitments, (Notes A, B, D)                                                                                                                        |  |              |              |   |                  |   |              |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized;                                                                                                         |  |              |              |   |                  |   |              |  
|Series A-1 cumulative convertible preferred stock, 5,000 shares authorized, issued and outstanding, net of discount of $563,966;
liquidation preference of $5,000,000 |  |              | 4,436,034    |   |                  |   |             |  
|Stockholders equity (deficit):                                                                                                                                       |  |              |              |   |                  |   |              |  
|Common stock, $.01 par value, 250,000,000 shares authorized, 90,989,961 and 79,266,927 shares issued and outstanding,
respectively                                    |  |              | 909,900      |   |                  |   | 792,669      |  
|Additional paid in capital                                                                                                                                            |  |              | 136,525,465  |   |                  |   | 125,757,611  |  
|Accumulated deficit                                                                                                                                                   |  |              | (182,482,206 | ) |                  |   | (109,715,274 | )
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total stockholders equity (deficit)                                                                                                                                  |  |              | (40,610,807  | ) |                  |   | 16,835,006   |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  
|Total liabilities and stockholders equity (deficit)                                                                                                                  |  | $            | 89,956,548   |   |                  | $ | 154,192,162  |  
|                                                                                                                                                                      |  |              |              |   |                  |   |              |  

See accompanying notes to condensed consolidated financial statements.



3



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##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                             |  | Three months ended June 30, |             |   | Six months ended June 30, |  
|                                                                                             |  | 2010                        |             |   | 2009                      |   |            | 2010 |  |   | 2009        |  
|Revenue                                                                                      |  | $                           | 1,016,797   |   |                           | $ | 407,241    |      |  | $ | 2,028,922   |   |  | $ | 407,241     |  
|Cost of revenue                                                                              |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Direct costs                                                                                 |  |                             | 1,302,055   |   |                           |   | 857,645    |      |  |   | 2,679,697   |   |  |   | 857,645     |  
|Depreciation and amortization                                                                |  |                             | 611,410     |   |                           |   | 710,775    |      |  |   | 1,224,882   |   |  |   | 710,775     |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Gross margin                                                                                 |  |                             | (896,668    | ) |                           |   | (1,161,179 | )    |  |   | (1,875,657  | ) |  |   | (1,161,179  | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                             |  |                             |             |  
|Operating expenses                                                                           |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|General and administrative                                                                   |  |                             | 2,139,228   |   |                           |   | 2,775,815  |      |  |   | 4,590,948   |   |  |   | 5,281,332   |  
|Power project development                                                                    |  |                             | 2,137,552   |   |                           |   | 3,425,070  |      |  |   | 3,390,409   |   |  |   | 5,538,410   |  
|Research and development                                                                     |  |                             | 347,268     |   |                           |   | 569,934    |      |  |   | 604,237     |   |  |   | 1,227,567   |  
|Impairment of Thermo No. 1 plant                                                             |  |                             | 52,189,174  |   |                           |   |           |      |  |   | 52,189,174  |   |  |   |            |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Total operating expenses                                                                     |  |                             | 56,813,222  |   |                           |   | 6,770,819  |      |  |   | 60,774,768  |   |  |   | 12,047,309  |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Operating loss                                                                               |  |                             | (57,709,890 | ) |                           |   | (7,931,998 | )    |  |   | (62,650,425 | ) |  |   | (13,208,488 | )
|Interest income                                                                              |  |                             | 9,030       |   |                           |   | 26,425     |      |  |   | 29,435      |   |  |   | 88,804      |  
|Interest expense                                                                             |  |                             | (2,437,355  | ) |                           |   | (3,817,327 | )    |  |   | (5,471,564  | ) |  |   | (5,232,945  | )
|Make-whole fee                                                                               |  |                             | (7,031,703  | ) |                           |   |           |      |  |   | (7,031,703  | ) |  |   |            |  
|Gain on derivative instruments                                                               |  |                             | 5,148,923   |   |                           |   | 7,942,193  |      |  |   | 5,732,781   |   |  |   | 6,999,354   |  
|Other                                                                                        |  |                             |            |   |                           |   |           |      |  |   | (244,531    | ) |  |   | (131,412    | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Loss before income taxes                                                                     |  |                             | (62,020,995 | ) |                           |   | (3,780,707 | )    |  |   | (69,636,007 | ) |  |   | (11,484,687 | )
|Tax benefit (expense)                                                                        |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |            |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                                                                     |  | $                           | (62,020,995 | ) |                           | $ | (3,780,707 | )    |  | $ | (69,636,007 | ) |  | $ | (11,484,687 | )
|Preferred dividend                                                                           |  |                             | (1,832,891  | ) |                           |   |           |      |  |   | (2,960,824  | ) |  |   |            |  
|Deemed dividend  accretion of discount of Series A-1 cumulative convertible preferred stock |  |                             | (104,795    | ) |                           |   |           |      |  |   | (170,100    | ) |  |   |            |  
|Non-controlling interest in the Thermo No. 1 subsidiary                                      |  |                             |            |   |                           |   | (204,960   | )    |  |   |            |   |  |   | 1,054,971   |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net loss applicable to common stockholders                                                   |  | $                           | (63,958,681 | ) |                           | $ | (3,985,667 | )    |  | $ | (72,766,931 | ) |  | $ | (10,429,716 | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Loss per common share-basic and diluted                                                      |  | $                           | (0.72       | ) |                           | $ | (0.06      | )    |  | $ | (0.87       | ) |  | $ | (0.16       | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Weighted average common shares-basic and diluted                                             |  |                             | 88,363,000  |   |                           |   | 65,489,000 |      |  |   | 83,715,000  |   |  |   | 64,922,000  |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                               |  |                          |             |   |      |   |             |  
|---------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                               |  | Six Months
EndedJune 30, |            
|                                                                                               |  | 2010                     |             |   | 2009 |  
|Cash flows from operating activities:                                                          |  |                          |             |   |      |   |             |  
|Net loss                                                                                       |  | $                        | (69,636,007 | ) |      | $ | (11,484,687 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                    |  |                          |             |   |      |   |             |  
|Depreciation, amortization and accretion expense                                               |  |                          | 1,477,197   |   |      |   | 980,802     |  
|Deferred financing costs amortization                                                          |  |                          | 1,872,165   |   |      |   | 3,135,422   |  
|Preferred warrants issuance costs                                                              |  |                          | 607,300     |   |      |   |            |  
|Impairment of Thermo No. 1 plant                                                               |  |                          | 52,189,174  |   |      |   |            |  
|Gain on derivative instrument                                                                  |  |                          | (5,732,781  | ) |      |   | (6,999,354  | )
|Impairment of abandoned patent applications                                                    |  |                          | 79,665      |   |      |   | 69,639      |  
|Common stock, stock options and warrants issued for services                                   |  |                          | 1,079,150   |   |      |   | 2,044,552   |  
|Loss on disposal of assets                                                                     |  |                          | 629         |   |      |   | 37,075      |  
|Gain on extinguishment of debt                                                                 |  |                          |            |   |      |   | (68,588     | )
|Bad debt expense                                                                               |  |                          |            |   |      |   | 145,403     |  
|Increase in accounts receivable                                                                |  |                          | (213,408    | ) |      |   | (209,608    | )
|(Increase) decrease in other assets                                                            |  |                          | (273,552    | ) |      |   | (531,642    | )
|Increase (decrease) in accounts payable and accrued liabilities                                |  |                          | 5,255,371   |   |      |   | (626,360    | )
|Increase in deferred revenue                                                                   |  |                          | 169,967     |   |      |   |            |  
|                                                                                               |  |                          |             |   |      |   |             |  
|Net cash used in operating activities                                                          |  |                          | (13,125,130 | ) |      |   | (13,507,346 | )
|                                                                                               |  |                          |             |   |      |   |             |  
|Cash flows from investing activities:                                                          |  |                          |             |   |      |   |             |  
|Proceeds from securities held to maturity                                                      |  |                          | 2,200,000   |   |      |   | 2,200,000   |  
|Proceeds from federal grant                                                                    |  |                          | 32,990,089  |   |      |   |            |  
|Decrease in deposits                                                                           |  |                          | 152,112     |   |      |   | 956,821     |  
|Increase (decrease) in restricted cash                                                         |  |                          | (21,032,135 | ) |      |   | 10,960,263  |  
|Increase in intangible assets                                                                  |  |                          | (73,557     | ) |      |   | (14,806     | )
|Purchase of equipment                                                                          |  |                          | (30,708     | ) |      |   | (340,696    | )
|Proceeds from sale of equipment                                                                |  |                          |            |   |      |   | 10,501      |  
|Well field development costs                                                                   |  |                          | (3,330,784  | ) |      |   | (7,996,320  | )
|Construction costs                                                                             |  |                          | (4,001,962  | ) |      |   | (13,831,317 | )
|Power project lease acquisitions                                                               |  |                          | (165,139    | ) |      |   | (62,000     | )
|Power project equipment deposits                                                               |  |                          |            |   |      |   | 7,056,375   |  
|                                                                                               |  |                          |             |   |      |   |             |  
|Net cash provided by (used in) investing activities                                            |  |                          | 6,707,916   |   |      |   | (1,061,179  | )
|                                                                                               |  |                          |             |   |      |   |             |  
|Cash flows from financing activities:                                                          |  |                          |             |   |      |   |             |  
|Proceeds from sale of Series A-1 cumulative convertible preferred stock and preferred warrants |  |                          | 4,619,437   |   |      |   |            |  
|Principal payments of 7.00% senior secured notes (non-recourse)                                |  |                          | (379,196    | ) |      |   | (326,261    | )
|Incurrence of deferred financing fees                                                          |  |                          | (30,546     | ) |      |   | (320        | )
|Proceeds from 10.0% line of credit                                                             |  |                          | 125,000     |   |      |   | 13,373,000  |  
|Principal payment of the 10.0% line of credit                                                  |  |                          | (278,718    | ) |      |   |            |  
|Proceeds from at-the-market transactions                                                       |  |                          | 1,526,223   |   |      |   |            |  
|Proceeds from registered direct offerings                                                      |  |                          | 1,120,239   |   |      |   |            |  
|                                                                                               |  |                          |             |   |      |   |             |  
|Net cash provided by financing activities                                                      |  |                          | 6,702,439   |   |      |   | 13,046,419  |  
|                                                                                               |  |                          |             |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                                           |  |                          | 285,225     |   |      |   | (1,522,106  | )
|Cash and cash equivalents at beginning of period                                               |  |                          | 41,782      |   |      |   | 1,534,820   |  
|                                                                                               |  |                          |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                                     |  | $                        | 327,007     |   |      | $ | 12,714      |  
|                                                                                               |  |                          |             |   |      |   |             |  

See accompanying notes to condensed consolidated financial statements.



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A. Basis
of Presentation

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of
the information and notes required by GAAP for complete financial statements. The accompanying condensed consolidated balance sheet as of December 31, 2009 has been derived from audited financial statements at that date but does not include all
of the information and notes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission (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, 2009. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending
December 31, 2010 or any other period.

Certain reclassifications have been made in the prior years condensed
consolidated financial statements to conform to the current year presentation, which has no impact on the net loss for any period presented. Events subsequent to June 30, 2010, were evaluated until the time our Quarterly Report on Form 10-Q was
filed with the SEC on August 11, 2010.

Overview

We are an environmental energy technology company focused on geothermal power development and technology licensing. We operate two
business segments: Power Systems and Transportation & Industrial. Our Power Systems segment develops geothermal electric power plants and is exploring opportunities to partner with developers to take advantage of potential solar and wind
resources at some of our geothermal project sites. Our Transportation & Industrial segment focuses on using our Symetron family of technologies 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 business strategy to produce a positive impact on the environment and economically beneficial results for our stockholders.

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. We have incurred substantial losses since inception, and we are not operating at cash breakeven. Our ability to secure liquidity in the form of
additional financing or otherwise remains crucial for the execution of our business plan and our ability to continue as a going concern. Our current cash balance, together with cash anticipated to be provided by operations, will not be sufficient to
satisfy our anticipated cash requirements for normal operations, accounts payable and capital expenditures for the foreseeable future. Obligations that may exert further pressure on our liquidity situation include (i) the obligation to repay
the remaining amounts borrowed under our Unsecured Line of Credit Agreement and Promissory Note (Promissory Note); (ii) the obligation to pay interest on our outstanding convertible notes; (iii) any amounts we may be obligated
to pay Pratt & Whitney Power Systems (PWPS) for the turbines installed at the Thermo No. 1 plant; (iv) the obligation to pay Merrill Lynch a redemption amount of $20.0 million plus accrued interest on or before
June 30, 2011; and (v) the obligation to pay up to $6.0 million to Prudential pursuant to a Forbearance Agreement dated July 9, 2010, which is described below. On June 29, 2010, the Promissory Note was assigned by Radion Energy,
LLC, a related party, to two separate entities that are not related to us.



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



The amount and timing of our future capital needs will depend on many factors, including
the timing of our development efforts, opportunities for strategic transactions, and the amount and timing of any cash flows we are able to generate. We cannot be certain that funding will be available to us on reasonable terms or at all. In
addition, there can be no assurance that we will be able to obtain additional financing, reduce expenses or successfully complete other steps to continue as a going concern. If we are unable to obtain sufficient funds to satisfy our future cash
requirements, we may be forced to curtail or cease operations, dispose of assets or seek extended payment terms from our vendors. Such events would materially and adversely affect our financial position and results of operations

Significant Accounting Policies

Preferred Stock

On February 3, 2010, we completed an offering of 5,000 shares of Series A-1 Cumulative Convertible Preferred Stock (the
Preferred Stock). The initial carrying amount of the Preferred Stock issued in February 2010 was at the fair value on the date of issuance, net of closing costs and our issuance costs. As part of the Preferred Stock offering, we issued
warrants to purchase up to 14,000 additional shares of the Preferred Stock (the Preferred Warrants). The Preferred Warrants have an exercise price of $1,000 per share. The consideration for the February 2010 sale of the Preferred Stock
included a forgiveness of liquidated damages totaling $1.0 million associated with delays in registering the resale of certain shares of common stock previously issued to the purchaser of the Preferred Stock. The Preferred Stock cannot be converted,
redeemed or exercised into more than 9.90% of the beneficial ownership of the holder immediately after such conversion, redemption or exercise (the Maximum Number) unless the Preferred Stock holder provides us with written notice of its
desire to increase the Maximum Number. Upon receipt of the written notice, the Maximum Number would be increased sixty-five days after we receive such notice. The Preferred Stock is subject to conditional redemption features at the sole discretion
of the holder resulting in classification as temporary equity until converted or redeemed. The portion of the issuance costs related to the Preferred Stock was netted against the proceeds received. The fair value of the Preferred Stock is accreted
through retained earnings to the stated value over the period from the date of issuance to the earliest redemption date.

The
Preferred Stock provides for the payment of a stock dividend on a quarterly basis. The stock dividend is recorded as a decrease to retained earnings at fair value of the stock issued at the time of the dividend with the corresponding increase in
additional paid in capital.

USTDA Grant

One of our geothermal interests consists of a geothermal concession in Indonesia. We and Indonesia Power submitted a joint application for
a U.S. Trade and Development Agency (USTDA) grant for an exploration program on the land subject to the concession, and on March 29, 2010, we received notice from the USTDA that we had received a grant of up to $934,000. In April
2010, we signed an agreement with Indonesia Power to be the sole source contractor for the exploration program and began conducting exploration activities. Under the grant, USTDA will reimburse us up to $934,000 which is 70% of the overall estimated
costs of $1,343,000 to be incurred for the exploration program. Accordingly, 30%, or $409,000, of the overall costs required as part of the cost matching provision will not be reimbursed. Any costs incurred in excess of $1,343,000 will also not be
reimbursed. Since the purpose of the USTDA grant is to reimburse us for current exploration (research and development) related expenditures, we will recognize the amount reimbursable to us as a reduction of current or future related expenses, in the
period when the related qualifying expense is recognized.

Concentration of Credit Risk

Our current revenues consist entirely of payments from the City of Anaheim for power generated by our Thermo No. 1 plant in
accordance with our power purchase agreement with the City of Anaheim. Due to the fact that we currently have a single customer, our ability to realize accounts receivable from power sales are dependent on the continued ability of the City of
Anaheim to make timely payments.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued updated guidance to
amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy
(including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In
addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of
assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Level 2 and Level 3 fair value measurements. This update will become effective with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide
the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective with the interim and annual reporting period beginning January 1, 2011. We will not be required to provide the amended
disclosures for any previous periods presented for comparative purposes. Although we will be required to provide additional disclosures, adoption of this update will not have a material effect on our consolidated financial statements.

In April 2010, the FASB issued updated guidance that sets forth the criteria that should be met for determining whether the
milestone method of revenue recognition is appropriate for research and development arrangements. Specifically, consideration that is contingent upon the completion of a milestone may be recognized in its entirety as revenue in the period that
milestone has been achieved if the milestone, in its entirety, meets all of the criteria to be considered substantive at the inception of an arrangement. This guidance is effective prospectively for milestones achieved in fiscal years, and interim
periods within those years, beginning on or after June 15, 2010 and applies to research or development deliverables under which the performance obligation is satisfied over a period of time and a portion, or all, of the consideration is
contingent upon uncertain future events or circumstances. A reporting entitys decision to use the milestone method of revenue recognition is a policy election. Since we do not currently have contracts that would qualify for the election of the
milestone method, the adoption of this guidance will not have a material effect on our consolidated financial statements.

B. Contingencies
and Commitments

Guarantees

We have a variety of obligations under the financing arrangements for our Thermo No. 1 plant (the Thermo Financing
Agreements). The Thermo Financing Agreements have been amended a number of times. Most recently, the Thermo Financing Agreements were amended by an Amendment, Consent and Forbearance Agreement (the Forbearance Agreement) executed
by The Prudential Insurance Company of America and Zurich American Insurance Company (the Thermo Lenders), Deutsche Bank Trust Company Americas, as Administrative Agent, and us on July 9, 2010. In connection with the Forbearance
Agreement, on July 9, 2010, we entered into a Second Amendment to Account and Security Agreement with Deutsche Bank Trust Company Americas (the Second Amendment, and together with the Forbearance Agreement, the Amendments).

Pursuant to the Amendments, the Thermo Lenders received an immediate payment of $27.0 million out of the Thermo No. 1 escrow
account and waived compliance with certain debt-related covenants and obligations for the next year. This amount includes a principal reduction of $20.0 million of our debt and a make-whole fee for non-performance of $7.0 million. During the next
year, but no later than June 29, 2011, the Thermo Lenders are entitled to receive an additional payment of up to $6.0 million plus the expenses of the administrative lender and agents (the Additional Payment) for full satisfaction of all
amounts owed to them.

The Amendments contemplate that we will satisfy the Additional Payment using proceeds from the sale of
all or part of our interest in the Thermo No. 1 plant, but the Amendments permit us to satisfy the Additional Payment by using cash from other sources, if available. If the sale includes all of our interests in the Thermo No. 1 plant, the Thermo
Lenders are entitled to receive 50% of the proceeds of such a sale up to a maximum of $6.0 million plus the expenses of the administrative lender and agents. If the sale includes only a portion of our interests in Thermo No. 1, we are obligated to
pay the Thermo Lenders $6.0 million plus the expenses of the administrative lender and agents. On July 9, 2010, we made a payment of $27.0 million out of the Thermo No. 1 escrow account to the Thermo Lenders, including outstanding principal, accrued
interest totaling $20.0 million and the agreed upon make-whole amount totaling $7.0 million. After providing for this payment to the Thermo Lenders, approximately $3.0 million in the Thermo No. 1 plant escrow account remained in escrow to be used
for the operation of the Thermo No. 1 plant and other related expenses.

If the Additional Payment is not paid prior to June
29, 2011, then the Thermo No. 1 project would be obligated for the full payment of the original principal amount of $9.8 million, plus accrued interest at a rate of 7% per annum. Although this deficiency would be an obligation of our Thermo No. 1
subsidiary, the Thermo Lenders could potentially bring a claim under the Guaranty Agreement or EPC Agreement against us as described below. Due to the payments to the Thermo Lenders in accordance with the Forbearance Agreement, the funds in the
project escrow accounts were insufficient to pay any amounts to Merrill Lynch. Therefore, we became obligated to pay $20.0 million owed to Merrill Lynch to settle the prior redemption of its interest in the Thermo No. 1 subsidiary on or before June
30, 2011 and, we recorded the related liability accordingly.

The Thermo Financing Agreements also include an engineering,
procurement and construction agreement (the EPC Agreement) with Thermo No. 1 BE-01, LLC (Thermo Subsidiary). Pursuant to the EPC Agreement, we agreed to oversee the engineering, procurement and construction of the Thermo No.
1 plant. In addition, we guaranteed the completion of the plant construction and the payment of all services performed by the subcontractors. All intercompany transactions related to the EPC Agreement are eliminated in consolidation of the financial
statements. As part of the Forbearance Agreement and assuming an additional Credit Agreement Default or Credit Agreement Event of Default (each as defined in the Thermo Financing Documents) does not occur or any party does not take action against
Thermo No. 1, we do not have any further liabilities as a result of our failure to achieve Final Completion as long as we make the Additional Payment to the Thermo Lenders on or before June 29, 2011. We have essentially completed our construction
phase at the Thermo No. 1 project. However, we may continue to make improvements to the Thermo No. 1 plant in the future to improve its output.

The Thermo Financing Agreements include a guaranty (the Guaranty Agreement). Under the Guaranty Agreement, we guaranteed the
full payment of any drilling costs in excess of the original drilling account escrow of



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



$5.7 million that may be required to achieve Final Completion (as defined in the Thermo Financing Agreements, as amended) by June 30, 2010. Through June 30, 2010, we had contributed an
additional $16.4 million to the drilling account escrow for completion of the well field. The drilling costs are accrued and capitalized in the period in which they are incurred.

In addition to the Thermo Financing Agreements, we entered into an agreement with PWPS relating to the generating units purchased and
installed at the Thermo No. 1 plant. Pursuant to the agreement, we retained approximately $4.3 million of the purchase price of the generating units pending the successful completion of the Thermo No. 1 plant. We are allowed to keep the retained
portion of the purchase price as a liquidated damages payment if certain performance conditions related to the generating units are not met. As of June 30, 2010, the Thermo No. 1 plant was generating below targeted levels and had not achieved
successful completion. As a result, we believe we may be entitled to keep the retained portion of the purchase price as liquidated damages. However, PWPS disputes our claim to the retained portion of the purchase price. Our ability to keep any
portion of the retained amount will depend upon the resolution of the dispute with PWPS.

Our agreement with PWPS also
provides for the payment by us to PWPS of liquidated damages if the Thermo No. 1 plant is not successfully completed as a result of any reason not related to the generating units. To secure this potential obligation, we provided a security interest
to PWPS in five patents relating to our Transportation and Industrial segment. We believe that any action by PWPS would be without merit and would be vigorously contested. Accordingly, we estimate the maximum potential obligation and the related
fair value of the obligation to be immaterial at this time. Accordingly, we had not recorded a liability relating to this potential obligation at June 30, 2010.

C. Property, Plant and Equipment

We periodically review our long-lived assets, including our well field drilling costs, geothermal power plant and transmission line
construction costs, equipment and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We evaluate, at each balance sheet date, whether events and circumstances
have occurred that indicate possible impairment.

Although we placed the Thermo No. 1 plant in service in the first
quarter of 2009 for accounting purposes, we were unable to operate the plant at designed capacity due primarily to mechanical deficiencies of the power generating units, lower than anticipated well field temperature and flow from certain wells and
other inefficiencies which occurred as a result of overall design of the plant. Accordingly, we initiated several actions to improve the electrical output of the plant and the resource. These efforts included reworking certain production wells, the
installation of bottom cycling operations and the replacement of recirculation pumps on each of the generating units with more efficient pumps. These efforts culminated in June 2010, at which time we evaluated the actual impact of these initiatives
and the resulting overall performance of the plant. The results of this evaluation indicate that plant performance may improve from the current output level of approximately 6.6 megawatts, but most likely will not achieve originally designed
electrical output levels. After evaluating the performance of the plant, we determined an evaluation of possible impairment of the Thermo No. 1 plant as of June 30, 2010 was warranted.

Based upon the impairment analysis, we determined that the Thermo No. 1 plant was impaired as of
June 30, 2010. Accordingly, we computed the projected discounted future operating cash flows of the Thermo No. 1 plant using a discount rate that reflects the average cost of funds for our Thermo Subsidiary and determined that we incurred
a loss resulting from the impairment totaling $52.2 million. This analysis required us to exercise significant judgments including, among other items, estimating that our geothermal power plant will produce electricity over the next 33.5 years,
assuming our power purchase agreement will be renewed on



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



similar terms upon expiration in 2028 and estimating operating and capital costs over the remaining useful life of the plant, the estimated cost of capital improvements required to upgrade the
facility to produce 12 MW, the estimated cost of capital and the estimated selling price of the Thermo No. 1 plant at the end of its estimated useful life. Accordingly, we recognized an impairment of the Thermo No. 1 plant and
expensed $52.2 million of capitalized costs during the second quarter of 2010. The effect of the impairment expense on net loss per share of common stock was $0.59 and $0.62 per share for the three months and six months ending June 30, 2010.
Since the basis in the Thermo No. 1 plant decreased significantly as a result of the impairment, the new basis of $30.1 million will be depreciated on a straight-line basis over the remaining estimated useful life of the plant or 33.5 years.
The reduction of the basis in the Thermo No. 1 plant on future periods will be to reduce quarterly depreciation expense from approximately $0.6 million per quarter to $0.2 million per quarter.

The table below sets forth the capitalized costs relating to our property, plant and equipment, after reducing the costs for the
impairment of the Thermo No. 1 plant as of June 30, 2010 and reducing the costs for the amount of the federal grant received as of December 31 2009, respectively:



|                                              |  |              |            |   |                  |   |            |  
|--------------------------------------------- |  | ------------ | ---------- | - | ---------------- | - | ---------- | -
|                                              |  | June 30,2010 |            |   | December 31,2009 |  
|Thermo No. 1 Plant:                           |  |              |            |   |                  |   |            |  
|Power project lease acquisitions              |  | $            | 919,792    |   |                  | $ | 2,514,581  |  
|Well field drilling costs                     |  |              | 11,688,317 |   |                  |   | 31,813,747 |  
|Power plant                                   |  |              | 16,827,944 |   |                  |   | 43,046,062 |  
|Transmission equipment                        |  |              | 1,927,957  |   |                  |   | 5,301,379  |  
|Accumulated depreciation                      |  |              | (1,264,010 | ) |                  |   | (2,242,172 | )
|                                              |  |              |            |   |                  |   |            |  
|Geothermal property, plant and equipment, net |  | $            | 30,100,000 |   |                  | $ | 80,433,597 |  
|                                              |  |              |            |   |                  |   |            |  

D. Equity

June 2010 Registered Direct Offerings

On June 18, 2010, we sold 1,278,555 shares of our common stock to War Chest Capital Partners in a registered direct offering for
$750,000. The net offering proceeds to us from the sale of our common stock, after deducting estimated offering expenses payable by us, were approximately $725,000.

On June 28, 2010, in a separate registered direct offering, we sold an additional 818,833 shares of our common stock to War Chest
Capital Partners for $400,000. The net offering proceeds to us from the sale of our common stock, after deducting estimated offering expenses payable by us, were approximately $390,000.

April 2010 Controlled Equity Offering

On April 7, 2010, we entered into a controlled equity offering sales agreement (the Sales Agreement) with Cantor
Fitzgerald & Co. (Cantor), which provided for the sale of up to $25.0 million of our common stock from time to time through Cantor acting as agent and/or principal. As of May 7, 2010, we had sold 1,802,100 shares pursuant
to the Sales Agreement for an aggregate of approximately $1.7 million. After deducting commissions, we received net proceeds of approximately $1.6 million from the sale of these shares. On May 10, 2010, we ceased selling shares of our common
stock pursuant to the controlled equity offering. We also provided notice to Cantor that we were terminating the Sales Agreement and that we had no further intention of selling shares of our common stock through the controlled equity offering.

2008 Fletcher Warrants

On April 1, 2010, Fletcher International, Ltd. (Fletcher) exercised certain warrants on a cashless, net settlement basis.
Pursuant to the cashless exercise of the warrants, Fletcher received 6,794,442 shares of our common stock. Except for certain rights Fletcher may assert to obtain shares of an acquiring companys common stock in connection with a change of
control provision included in the warrants, Fletcher cannot exercise the warrants for any additional shares of our common stock.



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Employee and Director Option Grants, Share Grants and Deferred Stock Unit Grants

During the three months ended June 30, 2010, our Compensation Committee granted to five new employees and 38
existing employees a total of 1,040,000 options to purchase shares of our common stock at exercise prices ranging from $0.54 to $0.59 per share. During the three months ended June 30, 2010, employees forfeited options to purchase 3,825 shares
of our common stock and 21,975 options to purchase shares of our common stock expired. During the three months ended June 30, 2010, no shares of our common stock were issued as a result of option or warrant exercises by our employees or
directors.

On June 8, 2010, the Board of Directors approved certain revisions to the Director Compensation Plan. The
revisions permit non-employee directors to elect to receive all or a portion of the number of shares of restricted stock granted to each non-employee director annually (based upon the fair value of $95,000) on the date of the Annual Meeting of the
Stockholders in the form of deferred stock units (DSUs) rather than restricted stock. The DSUs permit the non-employee directors to defer delivery of the shares of common stock until a specified date or the date when the director
terminates service as a board member. Such DSUs cover the same number of shares as the restricted stock awards and have the same one-year vesting period. On June 9, 2010, four of the five non-employee directors elected to receive DSUs instead
of restricted stock. Accordingly, we granted a total of 730,800 DSUs to members of our Board of Directors under the Director Compensation Plan. One of the non-employee directors voluntarily waived the 2010 annual grant of restricted shares.

On June 25, 2010, we delivered a total of 130,000 shares of our common stock to the members of our Board of Directors as
a result of completing the requisite vesting period under our Director Compensation Plan. These shares were originally granted to our Board of Directors on June 25, 2009.

No shares of our common stock were granted to our employees during the three months ended June 30, 2010.

E. Net Loss per Common Share

The following table sets forth the number of shares that would be outstanding if the outstanding securities convertible into common stock
were converted into common stock, whether the convertible securities were in the money or out of the money based upon the closing market price on June 30, 2010:



|                                                                              |  |                |  |                   
|----------------------------------------------------------------------------- |  | -------------- |  | ------------------
|                                                                              |  | In the Money |  | Out of the Money
|Warrants granted                                                              |  |               |  | 9,384,877         
|Vested employee options                                                       |  |               |  | 2,373,006         
|Unvested employee options                                                     |  | 480,000        |  | 1,895,472         
|Vested contractor options                                                     |  |               |  | 95,000            
|Unvested contractor options                                                   |  |               |  | 85,000            
|Convertible notes - maximum number of shares that can be converted            |  |               |  | 5,960,121         
|Convertible preferred shares - maximum number of shares that can be converted |  |               |  | 1,000,000         
|Preferred warrants - maximum number of shares that can be converted           |  |               |  | 2,800,000         

The following
table sets forth the number of shares that would be outstanding if outstanding securities convertible into common stock were converted into common stock, whether the convertible securities were in the money or out of the
money based upon the closing market price on June 30, 2009:



|                                                                 |  |                |  |                   
|---------------------------------------------------------------- |  | -------------- |  | ------------------
|                                                                 |  | In the Money |  | Out of the Money
|Warrants granted                                                 |  | 5,861,622      |  | 5,667,894         
|Vested employee options                                          |  |               |  | 2,032,987         
|Unvested employee options                                        |  |               |  | 981,571           
|Vested contractor options                                        |  |               |  | 85,000            
|Unvested contractor options                                      |  |               |  | 95,000            
|Convertible notes maximum number of shares that can be converted |  |               |  | 5,960,121         

Unvested stock grants totaling 745,800 and 145,000 were outstanding on June 30, 2010 and 2009,
respectively. The warrants and options above were not included in the calculation of diluted net loss per share because their effect was anti-dilutive. The Preferred Stock and the Preferred Warrants contain provisions whereby the holders of the
Preferred Stock and the Preferred Warrants may participate in dividends that we pay to the holders of our common stock. Accordingly, the Preferred Stock and the Preferred Warrants meet the definition of participating securities. We determined that,
under the two-class method, the effect of the participating securities on the net loss per share computation was also anti-dilutive.



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



F. Fair Value Measurements

The Accounting Standards Codification provides guidance regarding fair value measurements, establishes a common definition for fair value
to be applied to guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The guidance does not require any new fair value measurements, but rather applies to
all other accounting guidance that requires or permits fair value measurements.

The guidance utilizes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:



| |  |  | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for
similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table represents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at their
entirety based upon their lowest level of input that is significant to the fair value measurement at June 30, 2010:



|                                       |  |         |            |         |   |         |  |       |           |  |   |           
|-------------------------------------- |  | ------- | ---------- | ------- | - | ------- |  | ----- | --------- |  | - | ----------
|                                       |  | Level 1 |            | Level 2 |   | Level 3 |  | Total
|Cash and cash equivalents              |  | $       | 327,007    |         | $ |        |  | $     |          |  | $ | 327,007   
|Restricted cash                        |  |         | 30,106,714 |         |   | 77,111  |  |       |          |  |   | 30,183,825
|                                       |  |         |            |         |   |         |  |       |           |  |   |           
|Total assets                           |  | $       | 30,433,721 |         | $ | 77,111  |  | $     |          |  | $ | 30,510,832
|                                       |  |         |            |        
|Merrill Lynch 2008 Contingent Warrants |  | $       |           |         | $ |        |  | $     | 214,885   |  | $ | 214,885   
|Preferred Warrants                     |  |         |           |         |   |        |  |       | 3,556,000 |  |   | 3,556,000 
|                                       |  |         |            |         |   |         |  |       |           |  |   |           
|Total liabilities                      |  | $       |           |         | $ |        |  | $     | 3,770,885 |  | $ | 3,770,885 

Cash and cash
equivalents and restricted cash measured using Level 1 inputs consist primarily of money market accounts that are traded on active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving
identical instruments.

Restricted cash measured using Level 2 inputs consist of certificates of deposit. Valuations are
generally obtained from third party pricing services for or comparable instruments (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.

Warrants

Certain of our warrants contain anti-dilution features that protect the holders from a decline in the stock price (down round
provisions). As a result, the following warrants were not indexed to our common stock and are recorded as derivative liabilities:



| |  |  | Contingent Warrants issued to Merrill Lynch, exercisable for 1,350,000 shares of our common stock, that expire January 16, 2015.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Preferred Warrants that are exercisable from time to time in full or in part in two tranches of up to 7,000 shares of the Preferred Stock for each
tranche. The first tranche of up to 7,000 shares of the Preferred Stock are exercisable on or before August 3, 2010 (subject to extension under certain circumstances) so long as the Prevailing Market Price (as defined in the Certificate of
Rights and Preferences of the Preferred Stock) rises above $2.00 per share prior to August 2, 2010. Otherwise, the first tranche of up to 7,000 shares of Preferred Stock for up to $7.0 million are exercisable on or before February 3, 2011
(subject to extension under certain circumstances). The second tranche of up to $7.0 million are exercisable on or before February 3, 2011 (subject to extension under certain circumstances) so long as the Prevailing Market Price rises above
$2.00 per share prior to February 3, 2011. Otherwise, the second tranche of up to 7,000 shares of Preferred Stock for up to $7.0 million are exercisable on or before February 4, 2013 (subject to extension under certain circumstances).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We measured the fair value of these warrants at quarter end and the fair
value of the warrants exercised by Fletcher on April 1, 2010, and recorded a net $5.1 million gain on derivatives for the quarter ended June 30, 2010 and recorded the liabilities associated with these warrants at their respective fair
values as of June 30, 2010. We determined the fair values of these securities using the Binomial Lattice valuation model.



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Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Asset Retirement Obligations

We estimate asset retirement obligations in accordance with the Accounting Standards Codification. We utilize an income valuation
technique to determine the fair value of the liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account our credit risk, the time value of money, and the current economic state, to the undiscounted
expected abandonment cash flows. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. There were no asset retirement obligations measured at fair
value within the accompanying condensed consolidated balance sheets at June 30, 2010.

Recurring Level 3 Activity,
Reconciliation and Basis for Valuation

The table below provides a reconciliation of the beginning and ending balances
for the major classes of assets and liabilities measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the quarter for all financial assets and liabilities categorized as Level 3 as of
June 30, 2010.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (in thousands):



|                                                                    |  |       |            |  
|------------------------------------------------------------------- |  | ----- | ---------- | -
|                                                                    |  | Total |           
|Assets:                                                             |  |       |            |  
|Balance as of January 1, 2010                                       |  | $     |           |  
|Total realized and unrealized gains (losses)                        |  |       |           |  
|                                                                    |  |       |            |  
|Balance as of June 30, 2010                                         |  | $     |           |  
|Liabilities:                                                        |  |       |            |  
|Balance as of January 1, 2010                                       |  | $     | 11,724,219 |  
|Fair value of the Preferred Warrants issued on February 3, 2010     |  |       | 4,438,000  |  
|Net decrease in fair value of derivative warrants (unrealized gain) |  |       | (5,732,780 | )
|Fair value of 2008 Fletcher Warrants exercised on April 1, 2010     |  |       | (6,658,554 | )
|                                                                    |  |       |            |  
|Balance as of June 30, 2010                                         |  | $     | 3,770,885  |  

The carrying value
and estimated fair value of our debt instruments at June 30, 2010 were as follows:



|                                                   |  |                     |            |                   |   |                     |  |               |            |  |   |            
|-------------------------------------------------- |  | ------------------- | ---------- | ----------------- | - | ------------------- |  | ------------- | ---------- |  | - | -----------
|                                                   |  | June 30, 2010       |            | December 31, 2009
|                                                   |  | EstimatedFair Value |            | Carrying Cost     |   | EstimatedFair Value |  | Carrying Cost
|Short-term 10.0% amended unsecured line of credit* |  | $                   | 5,164,000  |                   | $ | 5,192,738           |  | $             | 5,560,000  |  | $ | 5,561,952  
|Long-term 15.0% promissory note **                 |  |                     | 20,300,000 |                   |   | 20,000,000          |  |               | 18,767,154 |  |   | 20,000,000 
|Long-term 9.5% senior secured note***              |  |                     | 33,500,000 |                   |   | 36,725,475          |  |               | 26,030,000 |  |   | 30,072,969 
|Long-term 8.0% convertible senior notes            |  |                     | 21,450,000 |                   |   | 56,088,685          |  |               | 24,750,000 |  |   | 56,106,767 
|                                                   |  |                     |            |                   |   |                     |  |               |            |  |   |            
|Total Liabilities                                  |  | $                   | 80,414,000 |                   | $ | 118,006,898         |  | $             | 75,107,154 |  | $ | 111,741,688
|                                                   |  |                     |            |                   |   |                     |  |               |            |  |   |            



|* | Represents face value of debt without consideration of the deferred financing costs of $1,459 and $33,399 at June 30, 2010 and December 31, 2009,
respectively.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Represents the face value of the debt without consideration of the imputed interest rate of 15% from December 11, 2009 to June 30, 2010 resulting in a
discount of $388,837 and $1,232,846 at June 30, 2010 and December 31, 2009, respectively.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | Represents face value of debt without consideration of the original issue discount of $4,258,835 and $4,469,481 at June 30, 2010 and December 31, 2009,
respectively. Due to the original issue discount, cash proceeds of debt are less than the face value of the debt. Therefore, the effective interest rate of 9.5% is greater than the 7.0% stated rate.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The estimated value of our short-term 10.00% amended unsecured line of credit, long term 15.00% promissory note, and long-term 9.50%
senior secured note was determined by management who based its judgment relating to fair value on discounted cash flow analysis that were developed with the assistance of a third-party valuation consultant. Our cash flow model utilized the projected
cash outflows and a discount rate, which was derived from market and non-market inputs. Our estimate of the value of our short-term 10.00% amended unsecured line of credit, long term 15.00% promissory note, and long-term 9.50% senior secured note
depends on judgments relating to the projected cash flows and discount rate. If these judgments prove to be incorrect, it could have a material effect on our results of operations and financial position.



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



To estimate the fair value of our long-term 8.00% convertible senior note, we used a
third party pricing service that estimated the fair value based upon theoretical values based on assumptions that market participants would use to price the convertible notes.

In accordance with the current accounting guidance, we have not applied the fair value measurement provisions to nonfinancial assets and
nonfinancial liabilities included in consolidated condensed balance sheets above.

G. 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 the Accounting Standards Codification which establishes reporting standards for disclosure of operating segments. All consolidating items and corporate administrative costs are included in Corporate and Other.

Accordingly, the presentation below comprises financial information relating to our segments for the three and six months
ended June 30, 2010 and 2009, respectively:



|                                                   |  |                            |            |   |               |   |             |                    |  |   |            |   |  |   |             |  
|-------------------------------------------------- |  | -------------------------- | ---------- | - | ------------- | - | ----------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|As of and for the Three Months Ended
June 30, 2010 |  | Transportation &Industrial |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|Revenues                                           |  | $                          |           |   |               | $ | 1,016,797   |                    |  | $ |           |   |  | $ | 1,016,797   |  
|Segment Operating Loss                             |  |                            | (349,493   | ) |               |   | (55,223,394 | )                  |  |   | (2,137,003 | ) |  |   | (57,709,890 | )
|Depreciation, Amortization and Accretion           |  |                            | 35,579     |   |               |   | 681,435     |                    |  |   | 19,009     |   |  |   | 736,023     |  
|Impairment of Thermo No. 1 Plant                   |  |                            |           |   |               |   | 52,189,174  |                    |  |   |           |   |  |   | 52,189,174  |  
|Interest Expense                                   |  |                            |           |   |               |   | 1,214,111   |                    |  |   | 1,223,244  |   |  |   | 2,437,355   |  
|Make-Whole Fee                                     |  |                            |           |   |               |   | 7,031,703   |                    |  |   |           |   |  |   | 7,031,703   |  
|Fixed Asset Purchases                              |  |                            | 1,499      |   |               |   | 7,366       |                    |  |   | 18,276     |   |  |   | 27,141      |  
|Geothermal Well Field Drilling Purchases           |  |                            |           |   |               |   | 60,465      |                    |  |   |           |   |  |   | 60,465      |  
|Power Project Construction-in-Progress Purchases   |  |                            |           |   |               |   | 848,374     |                    |  |   |           |   |  |   | 848,374     |  
|Total Assets                                       |  | $                          | 329,305    |   |               | $ | 87,120,538  |                    |  | $ | 2,506,705  |   |  | $ | 89,956,548  |  
|                                                   |  |                            |            |  
|As of and for the Three Months Ended
June 30, 2009 |  | Transportation &Industrial |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|Revenues                                           |  | $                          |           |   |               | $ | 407,241     |                    |  | $ |           |   |  | $ | 407,241     |  
|Segment Operating Loss                             |  |                            | (585,064   | ) |               |   | (4,586,248  | )                  |  |   | (2,760,686 | ) |  |   | (7,931,998  | )
|Depreciation, Amortization and Accretion           |  |                            | 46,963     |   |               |   | 722,248     |                    |  |   | 22,968     |   |  |   | 792,179     |  
|Interest Expense                                   |  |                            |           |   |               |   | 762,733     |                    |  |   | 3,054,594  |   |  |   | 3,817,327   |  
|Fixed Asset Purchases                              |  |                            |           |   |               |   | 210,610     |                    |  |   |           |   |  |   | 210,610     |  
|Geothermal Well Field Drilling Purchases           |  |                            |           |   |               |   | 2,355,211   |                    |  |   |           |   |  |   | 2,355,211   |  
|Power Project Construction-in-Progress Purchases   |  |                            |           |   |               |   | 905,252     |                    |  |   |           |   |  |   | 905,252     |  
|Total Assets                                       |  | $                          | 565,372    |   |               | $ | 139,672,259 |                    |  | $ | 6,957,038  |   |  | $ | 147,194,669 |  
|                                                   |  |                            |            |  
|As of and for the Six Months Ended
June 30, 2010   |  | Transportation &Industrial |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|Revenues                                           |  | $                          |           |   |               | $ | 2,028,922   |                    |  | $ |           |   |  | $ | 2,028,922   |  
|Segment Operating Loss                             |  |                            | (689,401   | ) |               |   | (57,455,240 | )                  |  |   | (4,505,784 | ) |  |   | (62,650,425 | )
|Depreciation, Amortization and Accretion           |  |                            | 74,048     |   |               |   | 1,364,160   |                    |  |   | 38,989     |   |  |   | 1,477,197   |  
|Impairment of Thermo No. 1 Plant                   |  |                            |           |   |               |   | 52,189,174  |                    |  |   |           |   |  |   | 52,189,174  |  
|Interest Expense                                   |  |                            |           |   |               |   | 2,670,799   |                    |  |   | 2,800,765  |   |  |   | 5,471,564   |  
|Make-Whole Fee                                     |  |                            |           |   |               |   | 7,031,703   |                    |  |   |           |   |  |   | 7,031,703   |  
|Fixed Asset Purchases                              |  |                            | 1,499      |   |               |   | 8,902       |                    |  |   | 20,307     |   |  |   | 30,708      |  
|Geothermal Well Field Drilling Purchases           |  |                            |           |   |               |   | 243,149     |                    |  |   |           |   |  |   | 243,149     |  
|Power Project Construction-in-Progress Purchases   |  |                            |           |   |               |   | 3,052,415   |                    |  |   |           |   |  |   | 3,052,415   |  
|Total Assets                                       |  | $                          | 329,305    |   |               | $ | 87,120,538  |                    |  | $ | 2,506,705  |   |  | $ | 89,956,548  |  
|                                                   |  |                            |            |  
|As of and for the Six Months Ended
June 30, 2009   |  | Transportation &Industrial |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|Revenues                                           |  | $                          |           |   |               | $ | 407,241     |                    |  | $ |           |   |  | $ | 407,241     |  
|Segment Operating Loss                             |  |                            | (1,312,059 | ) |               |   | (6,699,588  | )                  |  |   | (5,196,840 | ) |  |   | (13,208,487 | )
|Depreciation, Amortization and Accretion           |  |                            | 96,768     |   |               |   | 725,916     |                    |  |   | 46,350     |   |  |   | 869,034     |  
|Interest Expense                                   |  |                            |           |   |               |   | 1,166,347   |                    |  |   | 4,066,598  |   |  |   | 5,232,945   |  
|Fixed Asset Purchases                              |  |                            |           |   |               |   | 258,195     |                    |  |   | 73,686     |   |  |   | 331,881     |  
|Geothermal Well Field Drilling Purchases           |  |                            |           |   |               |   | 7,768,483   |                    |  |   |           |   |  |   | 7,768,483   |  
|Power Project Construction-in-Progress Purchases   |  |                            |           |   |               |   | 7,876,716   |                    |  |   |           |   |  |   | 7,876,716   |  
|Total Assets                                       |  | $                          | 565,372    |   |               | $ | 139,672,259 |                    |  | $ | 6,957,038  |   |  | $ | 147,194,669 |  



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements(Continued)

(Unaudited)



H. Supplemental Cash Information

For the six months ended June 30, 2010



| |  |  | We paid $3,747,887 for interest and $0 for income taxes.
| | - |  | --------------------------------------------------------



| |  |  | We recorded three non-cash payments totaling $217,400 for 196,215 unrestricted shares of our common stock to settle outstanding invoices from various
service providers for the construction of our Thermo No. 1 geothermal power plant and development of other geothermal projects. The non-cash payments approximated the fair market value of the shares on the date the shares were granted.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accounts payable and accrued liabilities certain capitalized well field development and construction costs that were not paid as of
June 30, 2010. These accrued capitalized costs were omitted from the statement of cash flows as non-cash items totaling $6.2 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded two non-cash quarterly dividend payments for the Preferred Stock totaling $170,100 for which we issued 270,923 shares of our common stock
to the holder of the Preferred Stock. The non-cash payments approximated the fair value of the shares on the date the shares were issued.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the six months ended June 30, 2009



| |  |  | We paid $3,274,490 for interest and $400 for income taxes.
| | - |  | ----------------------------------------------------------



| |  |  | We recorded four non-cash payments totaling $37,900 for 9,835 shares of our common stock issued to settle four outstanding invoices from a service
provider for consulting relating to our PHEV project. The non-cash payments were equal to the fair market value of the shares on the date the shares were granted.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $150,000 non-cash payment for 34,483 shares of our common stock issued to settle an outstanding invoice from a service provider for
construction of our Thermo No. 1 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 $2,000,000 non-cash payment for 574,713 shares of our common stock issued to settle an outstanding invoice from a service provider for
construction of our Thermo No. 1 geothermal power plant. The non-cash payment approximated the fair market value of the shares on the date the shares were granted.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $950,000 non-cash payment for 263,108 shares of our common stock issued to settle a promissory note with a former merger candidate that
was settled on January 27, 2009. The non-cash payment resulted in a gain on extinguishment of debt totaling $68,588.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded five non-cash payments totaling $3,500,000 for 70,197 restricted shares of our common stock, 1,004,094 unrestricted shares of our common
stock, and 122,603 warrants to acquire shares of our common stock issued to settle an outstanding invoice from a service provider for construction of our Thermo No. 1 geothermal power plant. The non-cash payments approximated the fair market
value of the shares on the date the shares were granted.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accounts payable and accrued liabilities certain capitalized well field development and construction costs that were not paid as of
June 30, 2009. These accrued capitalized costs were omitted from the statement of cash flows as non-cash items totaling $16.5 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

I. Subsequent Events

As
discussed in Note B. Contingencies and Commitments Guarantees above, on July 9, 2010 we entered into the Amendments relating to the repayment of a substantial portion of the debt financing for the Thermo No. 1 plant.
Pursuant to the Amendments, the Thermo Lenders received an immediate payment of $27.0 million out of the Thermo No. 1 plant escrow account and waived compliance with certain debt-related covenants and obligations for the next year. Since the
amount of principal paid to the Thermo Lenders resulted in a 67% reduction of the principal balance of the original debt instrument, we also reduced the unamortized deferred financing fees and original issue discount associated with the original
debt instrument and recorded interest expense of approximately $6.0 million on July 9, 2010.

During the next year, but no later than June 29, 2011, the Thermo Lenders are entitled to receive an
additional payment of up to $6.0 million plus the expenses of the administrative lender and agents, or the Additional Payment. The Amendments contemplate that we will satisfy the Additional Payment using proceeds from the sale of all or part of our
interest in the Thermo No. 1 plant, but the Amendments permit us to satisfy the Additional Payment by using cash from other sources, if available. If the sale includes all of our interests in the Thermo No. 1 plant, the Thermo Lenders are
entitled to receive 50% of the proceeds of such a sale up to a maximum of $6.0 million plus the expenses of the administrative lender and agents. If the sale includes only a portion of our interests in the Thermo No. 1 plant, we are obligated
to pay the Thermo Lenders $6.0 million plus the expenses of the administrative lender and agents.

As required by the FASB
Accounting Standards Codification, we did not meet the criteria to classify the Thermo No. 1 plant as held for sale until the third quarter of 2010. Accordingly, we classified the Thermo No. 1 plant as held for use
at June 30, 2010.

In July 2010, we sold 1,670,378 shares of our common stock to War Chest Capital Partners and Iroquois
Master Fund, LTD. in a registered direct offering for $750,000. The net offering proceeds to us from the sale of our common stock, after deducting estimated offering expenses payable by us, were approximately $740,000.

On August 5, 2010, we amended our Unsecured Line of Credit Agreement and Promissory Note by entering into Amendment No. 2 to Unsecured
Line of Credit and Promissory Note (Amendment No. 2) with Evergreen Clean Energy Fund, LLC and Bombay Investments (collectively, the LOC Lenders). The rights, interests and privileges to our Unsecured Line of Credit Agreement
and Promissory Note were previously held by Radion Energy, LLC, which is controlled by our Chairman, Kraig Higginson. Radion Energy, LLCs rights under the Unsecured Line of Credit Agreement and Promissory Note were assigned to the LOC Lenders
on June 29, 2010. On June 30, 2010, the principal and accrued interest payable under the Unsecured Line of Credit Agreement and Promissory Note was $5.2 million. The Amendment No. 2 extends the maturity date of the Unsecured Line of Credit Agreement
and Promissory Note from July 31, 2010 to October 31, 2010 in consideration for a two percent (2%) increase to the principal amount owing under the Unsecured Line of Credit Agreement and Promissory Note, which increased the amount that we owe to the
LOC Lenders to $5.3 million.



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##### Table of Contents

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

SPECIAL NOTE 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 or
dispositions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as believes, expects, may, will,
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 considered in light of the risks set forth in Part II Item 1A. Risk
Factors and elsewhere in this report.

Unless the context requires otherwise, all references in this quarterly report
to Raser, the Company, we, us, our company, Raser Technologies or our refer to Raser Technologies, Inc. and its consolidated subsidiaries.

Overview

We are an
environmental energy technology company focused on geothermal power development and technology licensing. We operate two business segments: Power Systems and Transportation & Industrial. Our Power Systems segment develops geothermal
electric power plants and is exploring opportunities to partner with developers to take advantage of potential solar and wind resources at some of our geothermal project sites. Our Transportation & Industrial segment focuses on using our
Symetron family of technologies 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
business strategy to produce a positive impact on the environment and economically beneficial results for our stockholders.

We have initiated the development of eight geothermal power plant projects in our Power Systems segment to date. We have placed one power
plant in service to date, which we refer to as our Thermo No. 1 plant, and we are currently selling electricity generated by the Thermo No. 1 plant. Although we placed the Thermo No. 1 plant in service in the first quarter of 2009 for
accounting purposes, we were unable to operate the plant at designed capacity due primarily to mechanical deficiencies of the power generating units, lower than anticipated well field temperature and flow from certain wells and other inefficiencies
which occurred as a result of overall design of the plant. Accordingly, we initiated several actions to improve the electrical output of the plant and the resource. These efforts included reworking certain production wells, the installation of
bottom cycling operations and the replacement of recirculation pumps on each of the generating units with more efficient pumps. These efforts culminated in June 2010, at which time we evaluated the actual impact of these initiatives and the
resulting overall performance of the plant. The results of this evaluation indicate that plant performance may improve from the current output level of approximately 6.6 megawatts, but most likely will not



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##### Table of Contents

achieve originally designed electrical output levels. After evaluating the performance of the plant, we determined an evaluation of possible impairment of the Thermo No. 1 plant as of
June 30, 2010 was warranted. Based upon the impairment analysis, we determined that the Thermo No. 1 plant was impaired as of June 30, 2010. Accordingly, we computed the projected discounted future operating cash flows of the Thermo
No. 1 plant using a discount rate that reflects the average cost of funds for Thermo No. 1 BE-01, LLC (Thermo Subsidiary) and determined that we incurred a loss resulting from the impairment totaling $52.2 million. This
analysis required us to exercise significant judgments including, among other items, estimating that our geothermal power plant will produce electricity over the next 33.5 years, assuming our power purchase agreement will be renewed on similar terms
upon expiration in 2028 and estimating operating and capital costs over the remaining useful life of the plant and the estimated selling price of the Thermo No. 1 plant at the end of its estimated useful life. Accordingly, we recognized an
impairment of the Thermo No. 1 plant and expensed $52.2 million of capitalized costs during the second quarter of 2010.

Due to the economic downturn, a difficult financing environment, difficulties experienced at the Thermo No. 1 plant and other
factors, we have had to adjust our development plans. We had anticipated to be in a position to move forward with the simultaneous development of the other seven sites we have initiated. In light of current conditions, we believe in the near term we
need to focus most of our time and resources on the one or two projects we believe are best positioned for development. Thus, we intend to focus on improving the electrical output from our Thermo No. 1 plant and completing the well field
development at our Lightning Dock and/or Thermo No. 2 and No. 3 projects. We will continue to undertake permitting at the other sites we have initiated. Additionally, we are soliciting the sale of Thermo No. 1 or an interest therin
and exploring the potential sale of one or more of our other geothermal power projects or interests therein.

In connection
with the development of our geothermal power projects, we intend to explore opportunities to partner with developers to take advantage of potential solar and wind resources at some of our geothermal project sites. We believe certain geothermal sites
we intend to develop may be suitable for solar or wind generation. If so, we may be able to improve the overall utilization of transmission lines and other infrastructure investments associated with these projects. Until we conduct further analysis,
however, we cannot predict whether any of our sites will be suitable for complementary solar or wind generating facilities.

Our ability to develop our power projects is dependent on our ability to obtain adequate financing to fund those projects. Additionally,
we are soliciting the sale of Thermo No. 1 or an interest therin and exploring the potential sale of one or more of our other projects or interests therein. We also intend to evaluate a variety of alternatives to finance the development of our
projects. These alternatives could include government funding from grants, loan guarantees or private activity bonds, joint ventures, pre-paid power purchase agreements 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. 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 ability to secure liquidity in the form of additional financing or otherwise remains crucial for the execution of our business plans
and our ability to continue as a going concern. Our current cash balance, together with cash anticipated to be provided by operations, will not be sufficient to satisfy our anticipated cash requirements for normal operations, accounts payable and
capital expenditures for the foreseeable future. Obligations that may exert further pressure on our liquidity situation include (i) the obligation to repay the remaining amounts borrowed under our Unsecured Line of Credit Agreement and
Promissory Note; (ii) the obligation to pay interest on our outstanding convertible notes; (iii) any amounts we may be obligated to pay Pratt & Whitney Power Systems (PWPS) for the turbines installed at the Thermo
No. 1 plant; (iv) the obligation to pay Merrill Lynch a redemption amount of $20.0 million plus accrued interest on or before June 30, 2011; and (v) the obligation to pay up to $6.0 million to Prudential pursuant to a
Forbearance Agreement dated July 9, 2010, which is described below. On June 29, 2010, the Promissory Note was assigned by Radion Energy, LLC, a related party, to two separate entities that are not related to us.

The amount and timing of our future capital needs will depend on many factors, including the timing of our development efforts,
opportunities for strategic transactions, and the amount and timing of any cash flows we are able to generate. We cannot be certain that funding will be available to us on reasonable terms or at all.



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Recent Developments

On June 28, 2010, we signed a non-binding Memorandum of Understanding (MOU) with Hyundai Heavy Industries. The
non-binding MOU reflects Hyundais and our intent to collaborate to jointly develop renewable energy and electric vehicles. The MOU is subject to termination for any reason upon thirty days prior written notice, and the MOU terminates
automatically on December 31, 2010 if we are unable to reach a definitive, binding agreement with Hyundai relating to the terms specified in the MOU. The MOU is intended to set into play a broader long-term relationship to develop renewable
energy in the western U.S. utilizing our resource portfolio and Hyundais renewable energy equipment manufacturing capabilities and to develop the first phase of commercial production of electric fleet vehicles utilizing Hyundais high
tech engineering and manufacturing capability and our powertrain technology. The MOU discusses the potential development of a five MW solar power generation project and the production of three extended range electric (E-REV) trucks.

On July 9, 2010, we entered into an Amendment, Consent and Forbearance Agreement (the Forbearance Agreement)
with Prudential Insurance Company of America, Zurich American Insurance Company (the Thermo Lenders) and Deutsche Bank Trust Company Americas relating to the repayment of a substantial portion of the debt financing for the Thermo
No. 1 plant. Pursuant to the Forbearance Agreement, on July 9, 2010, we made a payment of $27.0 million including outstanding principal and accrued interest totaling $20.0 million and the agreed upon make-whole amount totaling $7.0 million
to the Thermo Lenders. Concurrent with the payment, the Thermo Lenders waived compliance with certain debt-related covenants and obligations until June 29, 2011.

Under the Forbearance Agreement, we are required to offer the Thermo No. 1 plant for sale prior to June 29, 2011. If the sale
includes all of our interests in the Thermo No. 1 plant, the Thermo Lenders are entitled to receive 50% of the proceeds of such a sale up to a maximum of $6.0 million plus certain administrative expenses. If the sale includes only a portion of
our interests in the Thermo No. 1 plant or if we are unable to sell the Thermo No. 1 plant, we will be obligated to pay the Thermo Lenders $6.0 million plus certain administrative expenses. If we are unable to pay the Thermo Lenders $6.0
million by June 29, 2011, we will be obligated to pay the July 9, 2010 principal balance of $ 9.8 million plus accrued interest under the terms of the original debt instrument.

We are currently exploring opportunities to sell Thermo No. 1, or an interest therein as contemplated by the Forbearance Agreement.
We believe a sale of, or a portion, of Thermo No. 1 could provide us with sufficient proceeds to satisfy our outstanding obligations under the Forbearance Agreement as well as our obligations to Merrill Lynch and any amounts we may be obligated
to pay PWPS. If, after providing for these obligations, we have additional remaining proceeds from the sale of Thermo No. 1, we intend to explore opportunities to redeem our outstanding convertible notes or satisfy other outstanding
obligations. If we are able to successfully sell the Thermo No. 1 and apply the proceeds to repay all or a substantial portion of our outstanding liabilities, we believe we will be in a better position to seek financing for the construction of
one or more additional geothermal power plants and execute our business plan.

In July 2010, we announced that Pacific
Gas & Electric (PG&E) will be the first company in the United States to take delivery of our new E-REV fleet trucks, which are designed to achieve an average of 100 miles per gallon in typical daily driving when recharged at
night from a typical household outlet. The E-REV pick-up truck can nominally drive the first 40 miles on powerful lithium-ion batteries and targets continued driving over 300 miles by generating its own electricity from a small onboard
gasoline-powered generator or range extender. We expect to deliver to PG&E the first two E-REV fleet trucks modified with our E-REV powertrain for initial testing and demonstration before the end of 2010. We expect to then build up
to 30 more test and validation vehicles in 2011 for internal and fleet testing, followed by initial production fleet deliveries in 2012 and potential retail customer vehicles in 2013.

On August 5, 2010, we amended our Unsecured Line of Credit Agreement and Promissory Note by entering into Amendment No. 2 to
Unsecured Line of Credit Agreement and Promissory Note (the Amendment No. 2) with Evergreen Clean Energy, LLC and Bombay Investments (collectively, the LOC Lenders). The rights, interests and privileges to our Unsecured
Line of Credit Agreement and Promissory Note were previously held by Radion Energy, LLC, which is controlled by our Chairman, Kraig Higginson. Radion Energy, LLCs rights under the Unsecured Line of Credit Agreement and Promissory Note were
assigned to the LOC Lenders on June 29, 2010. On June 30, 2010, the principal and accrued interest payable under the Unsecured Line of Credit Agreement and Promissory Note was $5.2 million. The Amendment No. 2 extends the maturity
date from July 31, 2010 to October 31, 2010 in consideration for a two percent (2%) increase to the principal amount owing under the Unsecured Line of Credit Agreement and Promissory Note, which increased the amount that we owe to the
LOC Lenders to $5.3 million.

Current Geothermal Power Projects

Our development activities during the second quarter of 2010 consisted primarily of efforts to increase the power output of the Thermo
No. 1 plant. The original financing agreements for the Thermo No. 1 project (the Thermo Financing Agreements) contained a conditional redemption provision whereby the Thermo No. 1 geothermal power plant was required to
achieve Final Completion as



18



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defined in the Thermo Financing Agreements by a specific date. The Final Completion date was extended to June 30, 2010 pursuant to the amendments to the Thermo Financing Agreements that we
entered into in December 2009. The Final Completion date was further extended to July 9, 2010 pursuant to amendments to the Thermo Financing Agreements that we entered into in June 2010.

In February of 2010, we received $33.0 million in grant proceeds from the U.S. Treasury under the Recovery Act (the Grant).
Approximately $3.8 million of the grant funds were released to us, as owner of the project. The remainder of the grant funds was placed in escrow to be released to the other parties that provided the debt and equity financing for the project based
on the electrical output, operational costs of the plant and certain other factors. On July 9, 2010, we entered into the Forbearance Agreement pursuant to which the Thermo Lenders received a payment of $27.0 million out of the escrow and waived
compliance with certain debt-related covenants and obligations until June 29, 2011. During the next year, but no later than June 29, 2011, the lenders are entitled to receive an additional payment of up to $6.0 million plus the expenses of
the administrative lender and agents. The Forbearance Agreement contemplates that we will satisfy this additional payment by using proceeds from the sale of all or part of our interest in Thermo No. 1. After providing for the $27.0 million
payment to the lenders, approximately $3.0 million remained in the Thermo No. 1 escrow account to be used for the operation of Thermo No. 1 and other related expenses. Because the amount contained in the Thermo No. 1 escrow account
was insufficient to fully satisfy the lenders, to the extent we are obligated to pay PWPS any additional amounts for the turbines in production at the Thermo No. 1 plant, such payments shall be made out of our general corporate funds. In
addition, we are obligated to pay Merrill Lynch its redemption amount of $20.0 million pursuant to the terms of a promissory note on or before June 30, 2011.

During the second quarter of 2010, we also continued permitting activities and initiated drilling with respect to our Lightning Dock
project. The initial drilling activities have consisted of re-entering and testing an existing well at the site. If the results of this testing are favorable, we intend to seek financing to develop the well field for this project, after which we
would seek construction financing for the power plant. Ultimately, we believe the Lightning Dock project could support a power plant that could generate up to 15 MW.

Other than incremental permitting work, we did not conduct any development activities during the second quarter of 2010 at the other
projects we have initiated for development. Including the eight projects we have initiated for development, we have identified 18 projects for potential development. However, we do not expect to increase our development efforts for these projects
until we have made further progress at the Lightning Dock project and have sufficient resources to devote to other projects.

The timing for construction and completion of each of our projects 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 both the well-field development phase and the plant construction phase of each project. Uncertainties associated with these factors
could result in unexpected delays.

Results of Operations



|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                             |  | Three months ended June 30, |             |   | Six months ended June 30, |  
|                                                                                             |  | 2010                        |             |   | 2009                      |   |            | 2010 |  |   | 2009        |  
|Revenue                                                                                      |  | $                           | 1,016,797   |   |                           | $ | 407,241    |      |  | $ | 2,028,922   |   |  | $ | 407,241     |  
|Cost of revenue                                                                              |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Direct costs                                                                                 |  |                             | 1,302,055   |   |                           |   | 857,645    |      |  |   | 2,679,697   |   |  |   | 857,645     |  
|Depreciation and amortization                                                                |  |                             | 611,410     |   |                           |   | 710,775    |      |  |   | 1,224,882   |   |  |   | 710,775     |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Gross margin                                                                                 |  |                             | (896,668    | ) |                           |   | (1,161,179 | )    |  |   | (1,875,657  | ) |  |   | (1,161,179  | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|                                                                                             |  |                             |             |  
|Operating expenses                                                                           |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|General and administrative                                                                   |  |                             | 2,139,228   |   |                           |   | 2,775,815  |      |  |   | 4,590,948   |   |  |   | 5,281,332   |  
|Power project development                                                                    |  |                             | 2,137,552   |   |                           |   | 3,425,070  |      |  |   | 3,390,409   |   |  |   | 5,538,410   |  
|Research and development                                                                     |  |                             | 347,268     |   |                           |   | 569,934    |      |  |   | 604,237     |   |  |   | 1,227,567   |  
|Impairment of Thermo No. 1 plant                                                             |  |                             | 52,189,174  |   |                           |   |           |      |  |   | 52,189,174  |   |  |   |            |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Total operating expenses                                                                     |  |                             | 56,813,222  |   |                           |   | 6,770,819  |      |  |   | 60,774,768  |   |  |   | 12,047,309  |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Operating loss                                                                               |  |                             | (57,709,890 | ) |                           |   | (7,931,998 | )    |  |   | (62,650,425 | ) |  |   | (13,208,488 | )
|Interest income                                                                              |  |                             | 9,030       |   |                           |   | 26,425     |      |  |   | 29,435      |   |  |   | 88,804      |  
|Interest expense                                                                             |  |                             | (2,437,355  | ) |                           |   | (3,817,327 | )    |  |   | (5,471,564  | ) |  |   | (5,232,945  | )
|Make-whole fee                                                                               |  |                             | (7,031,703  | ) |                           |   |           |      |  |   | (7,031,703  | ) |  |   |            |  
|Gain on derivative instruments                                                               |  |                             | 5,148,923   |   |                           |   | 7,942,193  |      |  |   | 5,732,781   |   |  |   | 6,999,354   |  
|Other                                                                                        |  |                             |            |   |                           |   |           |      |  |   | (244,531    | ) |  |   | (131,412    | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Loss before income taxes                                                                     |  |                             | (62,020,995 | ) |                           |   | (3,780,707 | )    |  |   | (69,636,007 | ) |  |   | (11,484,687 | )
|Tax benefit (expense)                                                                        |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |            |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                                                                     |  | $                           | (62,020,995 | ) |                           | $ | (3,780,707 | )    |  | $ | (69,636,007 | ) |  | $ | (11,484,687 | )
|Preferred dividend                                                                           |  |                             | (1,832,891  | ) |                           |   |           |      |  |   | (2,960,824  | ) |  |   |            |  
|Deemed dividend  accretion of discount of Series A-1 cumulative convertible preferred stock |  |                             | (104,795    | ) |                           |   |           |      |  |   | (170,100    | ) |  |   |            |  
|Non-controlling interest in the Thermo No. 1 subsidiary                                      |  |                             |            |   |                           |   | (204,960   | )    |  |   |            |   |  |   | 1,054,971   |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net loss applicable to common stockholders                                                   |  | $                           | (63,958,681 | ) |                           | $ | (3,985,667 | )    |  | $ | (72,766,931 | ) |  | $ | (10,429,716 | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Loss per common share-basic and diluted                                                      |  | $                           | (0.72       | ) |                           | $ | (0.06      | )    |  | $ | (0.87       | ) |  | $ | (0.16       | )
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Weighted average common shares-basic and diluted                                             |  |                             | 88,363,000  |   |                           |   | 65,489,000 |      |  |   | 83,715,000  |   |  |   | 64,922,000  |  
|                                                                                             |  |                             |             |   |                           |   |            |      |  |   |             |   |  |   |             |  



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##### Table of Contents

Comparison of Three Months Ended June 30, 2010 and 2009

Revenue

During the three months ended June 30, 2010, we recognized revenue totaling $1.0 million compared to $0.4 million of revenue during
the same period in 2009. During the second quarter of 2009, we began selling electricity generated by our Thermo No. 1 geothermal power plant to the City of Anaheim. During the second quarter of 2010, we generated and sold approximately 11,462
MW hours of electricity compared to 4,876 MW hours of electricity during the same period in 2009.

Cost of revenue.
Cost of revenue for the three months ended June 30, 2010 totaled $1.9 million compared to $1.6 million for the same period in 2009. The increase in cost of revenue for 2010 was due to a full quarter of sales of electricity from the Thermo
No. 1 plant during the second quarter of 2010. Cost of revenue for the three months ended June 30, 2010 includes increases in, parasitic load costs of $0.1 million, maintenance costs for the well field totaling $0.2 million and maintenance
costs for generating units of $0.1 million. The increases in cost of revenue are partially offset by a decrease in depreciation expense of $0.1 million due to a reduction of the basis in the Thermo No. l plant by 30% due to receipt of the federal
grant in 2009 that also reduced the amount of depreciation expense over the estimated useful life of the plant. Although, the gross margin was negative for the quarter ended June 30, 2010, we anticipate that certain operating and consulting
expenses and parasitic load costs related to the Thermo No. 1 plant will decline sufficiently such that revenue generated by the sale of electricity from the Thermo No. 1 plant will exceed the cost of revenue in future periods.

Operating Expenses

General and Administrative.General and administrative expenses decreased by approximately $0.6 million to $2.1 million for the
three months ended June 30, 2010 as compared to the three months ended June 30, 2009. Non-cash employee compensation associated with general and administrative employees decreased $0.2 million from $0.5 million for the three months ended
June 30, 2009 to $0.3 million for the quarter ended June 30, 2010. The decrease was primarily due to general staff reductions and accounting adjustments for forfeitures of non-cash compensation awards. Employment and office related
expenses also decreased by approximately $0.1 million due to timing of our payment of the Delaware franchise tax and recognition of the entire prior year annual expense in the second quarter of 2009. Professional services also decreased by $0.3
million during the second quarter of 2010 compared to the second quarter of 2009, primarily reflecting a decrease in printing charges for the distribution of our 2010 Annual Report due to requiring electronic notice and access for the voting at the
2010 Annual Meeting of Stockholders and decreased legal and accounting fees primarily due to efficiencies achieved relating to our SEC filings during the three months ended June 30, 2010.

Power Project Developments.Power project development expenses during the three months ended June 30, 2010 totaled $2.1
million compared to $3.4 million for the three months ended June 30, 2009. During the second quarter of 2010, employment related costs decreased approximately $0.4 million due primarily to reassigning responsibilities for certain employees
resulting in a change in classification from power project development costs to cost of revenues. Equity based non-cash employee compensation associated with power project development employees and other operating costs for the three months ended
June 30, 2010 remained relatively flat as compared to the second quarter of 2009. Other operating costs for the three months ended June 30, 2010 decreased by approximately $1.6 million as compared to the three months ended June 30,
2009. The decrease was due primarily to a cancellation fee relating to a deposit refund from PWPS in 2009. These decreases are partially offset by an increase of $0.7 million relating to



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drilling an exploratory well at our Lightning Dock project. In May 2010, we began to drill a previously plugged exploratory well at the Lightning Dock Project to confirm our understanding of the
Lightning Dock resource. The costs associated with this well are expensed as occurred until the production level is verified and we begin the well field development stage of this project.

Research and Development. Research and Development expense decreased from $0.6 million in the three months ended June 30,
2009 to $0.3 million for the three months ended June 30, 2010. Equity based non-cash employee compensation associated with research and development employees decreased by $0.1 million during the three months ended June 30, 2010
compared to the same period in 2009. This was due primarily to decreased headcount as a result of our decision to reduce the cash requirements associated with the research and development activities at our design center. Professional services
decreased during the three months ended June 30, 2010 by approximately $0.1 million as compared to the three months ended June 30, 2009. This decrease was primarily due to a reduction of consulting work relating to enhancements of our PHEV
Hummer demonstration vehicle. The portion of engineering expenses relating to testing of materials remained relatively flat during the three months ended June 30, 2010 over the comparable 2009 period.

Impairment of the Thermo No. 1 Plant. During the three months ended June 30, 2010, we recognized an impairment of our
Thermo No. 1. plant totaling $52.2 million. We did not recognize an impairment of our long-lived assets during the three months ended June 30, 2009. After evaluating the performance of the plant, we determined an evaluation of possible
impairment of the Thermo No. 1 plant as of June 30, 2010 was warranted. Based upon the impairment analysis, we determined that the Thermo No. 1 plant was impaired as of June 30, 2010. Accordingly, we computed the projected
discounted future operating cash flows of the Thermo No. 1 plant using a discount rate that reflects the average cost of funds for our Thermo Subsidiary and determined that we incurred a loss resulting from the impairment totaling $52.2
million. This analysis required us to exercise significant judgments including, among other items, estimating that our geothermal power plant will produce electricity over the next 33.5 years, assuming our power purchase agreement will be renewed on
similar terms upon expiration in 2028 and estimating operating and capital costs over the remaining useful life of the plant and the estimated selling price of the Thermo No. 1 plant at the end of its estimated useful life.

Interest and Other Income.

Interest income for the three months ended June 30, 2010 remained relatively flat at $9,000 as compared to the same period in 2009
reflecting relatively level average monthly cash balances and interest rates. Interest expense during the three months ended June 30, 2010 decreased $1.4 million over the three months ended June 30, 2009 primarily due to a decrease in
amortization of deferred financing fees associated with the Thermo No. 1 plant during the three months ended June 30, 2010. Once the plant was placed into service in the first quarter of 2009, we no longer capitalized interest expense
associated with the financing for the construction of the plant. During the three months ended June 30, 2010 we also incurred a $7.0 million make-whole fee in accordance with the original Thermo Financing Agreements that resulted from being
unable to operate the Thermo No. 1 plant at designed capacity. These increases are partially offset by a decrease in the gain on derivative totaling $2.8 million during the three months ended June 30, 2010 compared to the second quarter of
2009. The decrease is due primarily to Fletcher exercising the remaining 6.8 million shares of the 2008 Fletcher Warrant on April 1, 2010. Accordingly, the fair value of those warrants are no longer included in our quarter fair value
estimates and are no longer classified as liabilities.

Non-controlling Interest.

Non-controlling interest decreased by $0.2 million during the three months ended June 30, 2010 compared to the three months ended
June 30, 2009. The decrease resulted from the withdrawal of Merrill Lynch as a Class A Member from the Thermo Subsidiary and the redemption of its interest in the Thermo Subsidiary in connection with amendments to the Thermo No. 1
financing arrangements in December 2009. As a result, we own 100% of the Thermo Subsidiary thereby eliminating the non-controlling interest.

Preferred Stock Dividends.

During the first quarter of 2010, we sold 5,000 shares of our Series A-1 Cumulative Convertible Preferred Stock (the Preferred
Stock) and paid a dividend to the holder of the Preferred Stock in shares of our common stock on June 30, 2010 totaling $0.1 million. We also recorded a deemed dividend relating to the accretion of the discount of the Preferred Stock
totaling $1.8 million. No Preferred Stock dividends or deemed dividends were recorded for the three months ended June 30, 2009.



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Comparison of Six Months Ended June 30, 2010 and 2009

Revenue

During the six months ended June 30, 2010, we recognized revenue totaling $2.0 million compared to revenue of $0.4 million during the
same period in 2009. During the second quarter of 2009, we began selling electricity generated by our Thermo No. 1 geothermal power plant to the City of Anaheim. During the six months ended June 30, 2010, we generated and sold
approximately 23,004 MW hours of electricity compared to 4,876 MW hours of electricity during the same period in 2009.

Cost of revenue. Cost of revenue for the six months ended June 30, 2010 totaled $3.9 million compared to $1.6 million for the
same period in 2009. The increase in cost of revenue for 2010 was due to the increase sales of electricity from the Thermo No. 1 plant during the six months ended June 30, 2010 as compared to the same prior year period. Cost of revenue for
the six months ended June 30, 2010 includes increases in depreciation expense of $0.5 million, parasitic load costs of $0.5 million, consulting and insurance costs of $0.8 million, maintenance costs for the well field and generating units of
$0.5 million. Although, the gross margin was negative for the six months ended June 30, 2010, we anticipate that certain operating and consulting expenses and parasitic load costs will decline sufficiently such that revenue generated by the
sale of electricity from the Thermo No. 1 plant will exceed the cost of revenue in future periods.

Operating
Expenses

General and Administrative.General and administrative expenses decreased by approximately $0.7
million from $5.3 million for the six months ended June 30, 2009 as compared to $4.6 million for the six months ended June 30, 2010. Non-cash employee compensation associated with general and administrative employees decreased $0.4 million
from $1.1 million for the six months ended June 30, 2009 to $0.7 million for the six months ended June 30, 2010. The decrease was primarily due to general staff reductions and accounting adjustments for forfeitures of non-cash compensation
awards. Employment and office related expenses also decreased by approximately $0.1 million due to timing of our payment of the Delaware franchise tax and recognition of the entire prior year annual expense in the first half of 2009. Professional
services also decreased by $0.2 million during the six months ended June 30, 2010 compared to the same period in 2009, primarily reflecting a decrease in printing charges for the distribution of our 2010 Annual Report due to requiring
electronic notice and access for the voting at the 2010 Annual Meeting of Stockholders. We also incurred increased executive search fees for our new CEO and CFO totaling $0.2 million which were offset by decreased legal and accounting fees totaling
$0.2 million primarily due to efficiencies achieved relating to our SEC filings during the six months ended June 30, 2010.

Power Project Developments.Power project development expenses during the six months ended June 30, 2010 totaled $3.4 million
compared to $5.5 million for the six months ended June 30, 2009. During the second quarter of 2010, professional services decreased by approximately $0.4 million and employment related costs also decreased approximately $0.7 million due
primarily to a difference in the classification of employment and direct consulting costs from power project development costs to cost of revenues beginning in the second quarter of 2009. The change in classification resulted from the
Thermo No.1 plant beginning operations in the second quarter of 2009. Equity based non-cash employee compensation associated with power project development employees decreased by approximately $0.2 million primarily due to accounting
adjustments for forfeitures of non-cash compensation awards during the six months ended June 30, 2010 as compared to the same prior year period. Other operating costs for the six months ended June 30, 2010 decreased by approximately $1.5
million as compared to the six months ended June 30, 2009. The decrease was due primarily to a cancellation fee relating to a deposit refund from PWPS in 2009.

Research and Development. Research and Development expense decreased from $1.2 million in the six months ended June 30, 2009
to $0.6 million for the six months ended June 30, 2010. Equity based non-cash employee compensation associated with research and development employees decreased by $0.3 million during the six months ended June 30, 2010 compared to the same
period in 2009. This was due primarily to decreased headcount as a result of our decision to reduce the cash requirements associated with the research and development activities at our design center. Because we reduced employment levels at the
design center, cash based employee compensation associated with research and development employees decreased $0.3 million during the six months ended June 30, 2010 compared to the second quarter of 2009. This decrease was partially offset by
increased professional services of approximately $0.1 million during the six months ended June 30, 2010 compared to the same period in 2009 due primarily to additional consulting work relating to enhancements of our PHEV Hummer demonstration
vehicle. The portion of engineering expenses relating to testing of materials remained relatively flat during the six months ended June 30, 2010 compared to the same period in 2009.

Impairment of the Thermo No. 1 Plant. During the six months ended June 30, 2010, we
recognized an impairment of our Thermo No. 1. plant totaling $52.2 million. We did not recognize an impairment of our long-lived assets during the six months ended June 30, 2009. After evaluating the performance of the plant, we determined
an evaluation of possible impairment of the Thermo No. 1 plant as of June 30, 2010 was warranted. Based upon the impairment analysis, we determined that the Thermo No. 1 plant was impaired as of June 30, 2010. Accordingly, we
computed the projected discounted future operating cash flows of the Thermo No. 1 plant using a discount rate that reflects the average cost of funds for our Thermo subsidiary and determined that we incurred a loss resulting from the impairment
totaling $52.2 million. This analysis required us to exercise significant judgments including, among other items, estimating that our geothermal power plant will produce electricity over the next 33.5 years, assuming our power purchase



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agreement will be renewed on similar terms upon expiration in 2028 and estimating operating and capital costs over the remaining useful life of the plant and the estimated selling price of the
Thermo No. 1 plant at the end of its estimated useful life.

Interest and Other Income.

Interest income for the six months ended June 30, 2010 decreased slightly by $0.1 million as compared to the same period in 2009
reflecting relatively lower average monthly cash balances and interest rates. Interest expense during the six months ended June 30, 2010 increased $0.2 million over the six months ended June 30, 2009 primarily due an increase in
amortization of deferred financing fees relating to the 2010 Fletcher Preferred Stock offering. During the six months ended June 30, 2010 we also incurred a $7.0 million make-whole fee in accordance with the original Thermo Financing Agreements
that resulted from being unable to operate the Thermo No. 1 plant at designed capacity. Gain on derivative decreased $1.3 million during the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due primarily
to Fletcher exercising the remaining 6.8 million shares of the warrant that we issued to Fletcher in 2008 on April 1, 2010. Accordingly, the fair value of those warrants are no longer included in our quarter fair value estimates and are no
longer classified as liabilities. Other expenses increased by $0.1 million during the six months ended June 30, 2010 compared to the same period in 2009 due primarily to our recognizing a previously disputed penalty arising from liquidated
damages we owed to Fletcher as a result of our failure to comply with certain registration requirements relating to a prior financing transaction.

Non-controlling Interest.

Non-controlling interest decreased by $1.1 million during the six months ended June 30, 2010 compared to the six months ended
June 30, 2009. The decrease resulted from the withdrawal of Merrill Lynch as Class A Member from the Thermo Subsidiary and the redemption of its interest in the Thermo Subsidiary in connection with amendments to the Thermo No. 1
financing arrangements in December 2009. As a result, we own 100% of the Thermo Subsidiary thereby eliminating the non-controlling interest.

Preferred Stock Dividends.

During the six months ended June 30, 2010, we sold 5,000 shares of our Preferred Stock and paid two dividends to the holder of the
Preferred Stock in shares of our common stock on March 31, 2010 and June 30, 2010 totaling $0.2 million. We also recorded a deemed dividend relating to the accretion of the discount of the Preferred Stock totaling $3.0 million. No
Preferred Stock dividends or deemed dividends were recorded for the six months ended June 30, 2009.

Liquidity and Capital Resources



|                                 |  |              |            |                   |   |           
|-------------------------------- |  | ------------ | ---------- | ----------------- | - | ----------
|Cash and Cash Equivalents        |  | June 30,2010 |            | December 
31,2009
|Cash                             |  | $            | 320,355    |                   | $ | 19,833    
|Money Market Account             |  |              | 6,652      |                   |   | 21,949    
|                                 |  |              |            |                   |   |           
|Total                            |  | $            | 327,007    |                   | $ | 41,782    
|Restricted Cash                  |  |              | 30,183,825 |                   |   | 9,151,691 
|Restricted Marketable Securities |  |              |           |                   |   | 2,191,339 
|                                 |  |              |            |                   |   |           
|Total                            |  | $            | 30,183,825 |                   | $ | 11,343,030

Liquidity
and Certain Commitments

At June 30, 2010, we had approximately $0.3 million in cash and cash equivalents. Our
operating activities used approximately $13.1 million and $13.5 million of cash during the six months ended June 30, 2010 and 2009, respectively. We have incurred substantial losses since inception, and we are not operating at cash breakeven.

Of our restricted cash balance at June 30, 2010, $27.0 million was paid on July 9, 2010 to the debt holder of the
7.00% senior secured note (non-recourse) to reduce the outstanding principal and interest balance of the note by approximately $20.0 million and to settle the agreed upon make-whole amount of approximately $7.0 million. Approximately $3.0 million of
the restricted cash balance will be used for the operations of the Thermo No. 1 plant and related expenses. $0.1 million has been invested in a certificate of deposit for the sole purpose of covering the credit limit of our corporate credit
card to minimize the credit risk to our bank. Another $0.1 million has been invested into a restricted money market account for the purpose of securing the cost of drilling bonds required by our Lightning Dock project in New Mexico.



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At June 30, 2010, we had approximately $10.1 million in accounts payable and accrued
expenses, which reflects a decrease in accounts payable and accrued expenses of approximately $6.6 million from December 31, 2009. The decrease in accounts payable and accrued expenses during the six month period was due primarily to the normal
payments of outstanding vendor payables totaling $5.4 million, the forgiveness of liquidated damages of $1.0 million by Fletcher, as described above, and the issuance of common stock to three vendors to settle outstanding payables totaling $0.2
million.

Approximately $4.3 million of the $10.1 million of accounts payable and accrued expenses represents the disputed
remaining balance potentially owed to PWPS for power generating units purchased for our Thermo No. 1 plant. The amount potentially owed to PWPS is expected to be paid upon successful completion of tests to be performed on the units. The
remaining balance of the accounts payable and accrued expenses consists of amounts owed for well field development, other equipment and construction costs for the Thermo No. 1 plant and for general and administrative costs.

Our ability to secure liquidity in the form of additional financing or otherwise remains crucial for the execution of our plans and our
ability to continue as a going concern. Our current cash balance, together with cash anticipated to be provided by operations, will not be sufficient to satisfy our anticipated cash requirements for normal operations, accounts payable and capital
expenditures for the foreseeable future. Obligations that may exert further pressure on our liquidity situation include (i) the obligation to repay the remaining amounts borrowed under our Unsecured Line of Credit Agreement and Promissory Note;
(ii) the obligation to pay interest on our outstanding convertible notes; (iii) any amounts we are obligated to pay PWPS for the turbines in production at the Thermo No. 1 plant; (iv) the obligation to pay Merrill Lynch its
redemption amount of $20.0 million plus accrued interest on or before June 30, 2011; and (v) the obligation to pay up to $6.0 million to Prudential pursuant to the Forbearance Agreement.

We no longer have restricted marketable securities set aside to fund the interest payments due on the convertible notes. As a result, we
will need to fund interest payments on the convertible notes from other sources. The convertible notes bear interest at the rate of 8.0% year, payable semiannually on April 1 and October 1 of each year. The convertible notes mature on
April 1, 2013.

Our independent registered public accounting firms report on our financial statements as of
December 31, 2009 expressed doubt about our ability to continue as a going concern. The report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern due to our incurring
significant losses, the use of significant cash in operations, and the lack of sufficient capital, as of the date the report was issued, to support our business plan through the end of 2010 or later.

We are not currently generating significant revenues, and our cash and cash equivalents will continue to be depleted by our ongoing
development efforts, as well as our general and administrative expenses. 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 are soliciting the
sale of Thermo No. 1, or an interest therein and exploring the potential sale of one or more of our other projects or interests therein. We may also seek additional funding through the issuance of debt, preferred stock, equity or a combination
of these instruments. We may also seek to obtain financing through government funding from grants, loan guarantees and private activity bonds, joint ventures, the sale of one or more of our projects or interests therein, entry into pre-paid power
purchase agreements 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, we may
encounter difficulties in raising additional funds because of the deficiency notice that we received from the New York Stock Exchange (the NYSE) on April 27, 2010 (the April Deficiency Notice), and the deficiency notice
that we received from the NYSE on July 30, 2010 (the July Deficiency Notice). We received the April Deficiency Notice because we fell below the continued listing standard regarding price criteria for common stock under
Section 802.01C of the NYSEs Listed Company Manual. Section 802.01 C requires that a companys common stock have a minimum average closing price of $1.00 per share during a consecutive 30-day trading period. Under the
NYSEs rules, we have six months from the date of the April Deficiency Notice to bring our average common stock price over a 30-day trading period back above $1.00 or we will be delisted from the NYSE. We received the July Deficiency Notice
because our total market capitalization is less than $50.0 million over a 30-day trading period and our stockholders equity is less than $50.0 million, which is below the criteria established by the NYSE pursuant to Sections 801 and 802 of the
NYSEs Listed Company Manual. As of July 26, 2010, our 30-day trading period average market capitalization was approximately $49.3 million and our stockholders deficit as of June 30, 2010 was $40.6 million. Under the NYSEs
rules, we have



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45 days from the date of the July Deficiency Notice to submit a business plan to the NYSE that discusses how we will regain compliance with the criteria established in Sections 801 and 802 within
18 months of our receipt of the July Deficiency Notice. After reviewing our business plan, the NYSE will either accept the business plan and will monitor our progress on a quarterly basis, or the NYSE will reject our business plan and subject us to
suspension by the NYSE and delisting by the SEC.

Recent Financing Activities

In April 2010, we announced that we had filed a prospectus supplement under which we may sell shares of common stock having an aggregate
offering price of up to $25.0 million, from time to time, through a Controlled Equity Offering, or at-the-market program. Since the offering was announced on April 8, 2010, we sold 1,802,100 shares of our common stock and we
received proceeds, net of commissions, totaling approximately $1.6 million. On May 10, 2010, we ceased selling shares of our common stock pursuant to the controlled equity offering. We also provided notice to Cantor Fitzgerald & Co.
that we were terminating the Sales Agreement and that we had no further intention of selling shares of our common stock through the controlled equity offering.

Most recently, on June 22, 2010, we completed the sale of $750,000 of our common stock to War Chest Capital Partners. Our proceeds
from the sale of our common stock on June 22, 2010 were approximately $725,000, after deducting fees and expenses. On June 30, 2010, we completed the sale of $400,000 of our common stock to War Chest Capital Partners. Our proceeds from the
sale of our common stock on June 28, 2010 were approximately $390,000, after deducting fees and expenses. In July 2010, we completed the sale of $750,000 of our common stock to War Chest Capital Partners and Iroquois Master Fund, LTD. Our
proceeds from the sale of our common stock in July 2010 were approximately $740,000, after deducting fees and expenses.

Although we were able to obtain limited financing through the sources described above, these sources of funding alone will be
insufficient for us to properly execute our current business plan. We have substantial short-term and long-term obligations, and need to obtain additional financing to meet these obligations. However, the current economic environment makes it
challenging for us to obtain the financing that we need, on terms acceptable to us. If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we will be unable to satisfy our existing obligations, or execute our plans.
In such case, we would be required to curtail or cease operations, liquidate or sell assets, 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, or pursue other actions that could adversely affect future operations.

Consolidated
Statements of Cash Flows

Operating Activities. Cash consumed by operating activities for the six months ended
June 30, 2010 consisted primarily of a net loss of approximately $69.6 million, adjusted for non-cash expenses of, approximately $1.1 million of stock-based compensation and stock issued for services, deferred financing amortization relating to
raising capital through debt issuances totaling $1.9 million and depreciation, amortization and accretion expenses totaling $1.5 million. We also adjusted our net loss by for additional non-cash expenses of approximately $0.6 million due primarily
to the issuance costs relating to the issuance in February 2010 of the preferred warrants we issued as part of the Preferred Stock offering, which allow for the purchase of up 14,000 additional shares of the Preferred Stock (the Preferred
Warrants). Accounts receivable and deferred credits also increased by approximately $0.2 million due primarily to invoicing the USTDA for initial milestones completed relating to our exploration program in Indonesia. After evaluating the
performance of the plant, we determined an evaluation of possible impairment of the Thermo No. 1 plant as of June 30, 2010 was warranted. Based upon the impairment analysis, we determined that the Thermo No. 1 plant was impaired as of
June 30, 2010 and recorded a non-cash impairment expense of $52.2 million.

Accounts payable and accrued liabilities
decreased $6.6 million from December 31, 2009 to $10.1 million at June 30, 2010. The decrease in accounts payable and accrued expenses during the six month period was due primarily to the normal payments of outstanding vendor payables
totaling $5.4 million, the forgiveness of liquidated damages of $1.0 million by Fletcher, as described above, and the issuance of common stock to three vendors to settle outstanding payables totaling $0.2 million. Other assets increased by $0.3
million due primarily to the timing of receipt of the War Chest registered offering which was received on July 1, 2010. We also adjusted our net loss for the net gain on derivatives totaling $5.7 million that was recognized due to the net
decreases in the fair value of our warrants and the Preferred Warrants, which were issued to the holder of the Preferred Stock, that have been classified as liabilities.

Cash consumed by operating activities for the six months ended June 30, 2009 consisted primarily of a net loss of approximately
$11.5 million, adjusted for approximately $2.0 million of stock-based compensation and stock issued for services, deferred financing amortization relating to raising capital through debt issuances totaling $3.1 million and depreciation, amortization
and accretion expenses totaling $1.0 million. Accounts payable and accrued liabilities decreased $42.3 million to $22.2 million at June 30, 2009, which included a $26.4 million reduction in accounts payable as a result of the PWPS Agreement, as
described above. Accounts receivable from the City of Anaheim increased by $0.2 million relating to the generation of electricity by our Thermo No. 1 plant.



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Other assets decreased by approximately $0.4 million due to the refund of a deposit relating to completion of the Thermo No. 1 transmission lines. We also adjusted our net loss for an
unrecognized gain on derivatives totaling $7.0 million due to decreases in the fair value of our warrants that have been classified as liabilities due to price reset features contained in the warrants.

Investing Activities. We purchase investments in marketable debt securities as a means of temporarily investing the proceeds from
financings until the funds are needed for operating purposes. Due to the nature of these investments, we consider it reasonable to expect that their fair market values will not be significantly impacted by a change in interest rates, and that they
can be liquidated for cash on short notice. Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to
our investment guidelines and market conditions. Concentration of credit risk is normally managed by diversifying investments among a variety of high credit-quality issuers. As of June 30, 2010, over 98% of our cash, cash equivalents and
restricted cash, of $30.1 million, is deposited in money market accounts invested with JP Morgan Funds earning 0.1 percent interest. Cash from our checking account is swept nightly into a variable rate interest bearing account earning 0.5 percent
per annum. Our checking account balance totaled $0.3 million at June 30, 2010.

Investing activities provided
approximately $6.7 million of cash in the six months ended June 30, 2010. During the six months ended June 30, 2010, we received proceeds from the federal grant totaling $33.0 million and certain deposits were applied to well field
drilling costs totaling $0.2 million. On June 30, 2010, we received proceeds from the maturity of our marketable securities held to maturity totaling $2.2 million that were used to pay the April 1, 2010 interest payment on the convertible
notes. Our net restricted cash decreased approximately $21.0 million during the six months ended June 30, 2010. We paid $4.0 million for construction costs relating to the Thermo No. 1 plant and $3.3 million relating to drilling the Thermo
No. 1 well field. We also purchased approximately 40,000 acres of leased property in Utah through a BLM auction totaling $0.2 million. We also purchased certain water rights and easements in New Mexico related to our Lightning Dock project
totaling $0.1 million.

Investing activities used $1.1 million of cash in the six months ended June 30, 2009, primarily
as a result of entering into the PWPS Agreement described above. Pursuant to the PWPS Agreement, we received $7.1 million as a net refund of deposits previously paid to UTCP, the predecessor of PWPS. In addition, our marketable equity securities
matured totaling $2.2 million that were used to pay the April 1, 2009 interest payment of the convertible notes. We received certain refunded deposits that were applied to our well field drilling totaling $1.0 million. We have also purchased
two new power project leases totaling $0.1 million in Oregon and Utah. During the first half of 2009, we also paid $13.8 million for construction costs relating to the Thermo No. 1 geothermal power plant and $8.0 million relating to drilling
the Thermo No. 1 well field. As a result, these construction and well field expenses were primarily paid through our Thermo No. 1 restricted cash account totaling $11.0 million.

Financing Activities. Financing activities provided approximately $6.7 million and $13.0 million of cash in the six months ended
June 30, 2010 and 2009, respectively.

During the six months ended June 30, 2010, we completed an offering of 5,000
shares of the Preferred Stock and issued the Preferred Warrants to purchase an additional 14,000 shares of Preferred Stock for a total purchase price of $5,000,000. The net proceeds, after deducting the underwriter fees and other estimated offering
expenses payable by us were approximately $4.6 million. We also received proceeds from our Unsecured Line of Credit Agreement and Promissory Note totaling $0.1 million as a bridge financing for certain administrative expenses. During the six months
ended June 30, 2010, we made principal payments against the outstanding Unsecured Line of Credit Agreement and Promissory Note totaling $0.4 million and against the 7.0% senior secured note (non-recourse) totaling $0.2 million. In April 2010,
we announced that we initiated an at-the-market program which we could sell shares of common stock having an aggregate offering price of up to $25.0 million. Under the at-the-market program, we sold shares of our common stock
and we received proceeds, net of commissions, totaling approximately $1.6 million. On May 10, 2010, we ceased selling shares of our common stock pursuant to the controlled equity offering. During the six months ended June 30, 2010, we
completed the sale of $1.2 million of our common stock to War Chest Capital Partners. Our proceeds from the sale of our common stock, after deducting fees and expenses totaled $1.1 million.

During the six months ended June 30, 2009, we obtained the Unsecured Line of Credit Agreement and Promissory Note to provide working
capital for general corporate purposes. As of June 30, 2009, we had borrowed a total of $13.4 million under the Unsecured Line of Credit Agreement and Promissory Note. During the six months ended June 30, 2009, our Thermo Subsidiary also
made principal payments of $0.3 million on the 7.00% senior secured note (non-recourse).

Dividends.We are required to
pay a quarterly dividend to the holders of our Preferred Stock, payable in cash or shares of common stock equal to an annual rate of the London Interbank Rate (LIBOR) plus 8%, but in no event higher than 14%, subject to adjustment. We
are limited in dividend payments that we can make to our common stockholders unless such dividend payment is made equally to the holders of the Preferred Stock as if such holders had converted or redeemed (whichever is greater) their Preferred Stock
for shares of our common stock immediately prior to the payment of such dividend. We have never declared or paid any cash



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dividends with respect to our common stock. We currently anticipate that we will retain all future earnings for the operation and expansion of our business and do not intend to declare dividends
with respect to our common stock in the foreseeable future. On June 30, 2010, the quarterly dividend payment totaled $0.1 million. In accordance with the sales agreement, we settled the quarterly dividend with the issuance of 200,466 shares of
our common stock. We also recorded a deemed dividend relating to the accretion of the discount of the Preferred Stock totaling $1.8 million.

During the six months ended June 30, 2010, there were no dividend payments to our common stockholders.

Off-Balance Sheet Arrangements

As of June 30, 2010, we had the following off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of SEC
Regulation S-K.

In addition to the Thermo Financing Agreements, we entered into an agreement with PWPS relating to the
generating units purchased and installed at the Thermo No. 1 plant. Pursuant to the agreement, we retained approximately $4.3 million of the purchase price of the generating units pending the successful completion of the Thermo No. 1
plant. We are allowed to keep the retained portion of the purchase price as a liquidated damages payment if certain performance conditions related to the generating units are not met. As of June 30, 2010, the Thermo No. 1 plant was
generating below targeted levels and had not achieved successful completion. As a result, we believe we may be entitled to keep the retained portion of the purchase price as liquidated damages. However, PWPS disputes our claim to the retained
portion of the purchase price. Our ability to keep any portion of the retained amount will depend upon the resolution of the dispute with PWPS.

Our agreement with PWPS also provides for the payment by us to PWPS of liquidated damages if the Thermo No. 1 plant is not
successfully completed as a result of any reason not related to the generating units. To secure this potential obligation, we provided a security interest to PWPS in five patents relating to our Transportation and Industrial segment. We believe the
likelihood that we will be obligated to pay liquidated damages to PWPS is remote. Accordingly, we estimate the maximum potential obligation and the related fair value of the obligation to be immaterial at this time. Accordingly, we had
not recorded a liability relating to this potential obligation at June 30, 2010.

Contractual Obligations and Commitments

We lease our corporate office located at 5152 North Edgewood Drive, Suite 200, Provo, Utah. Our corporate office lease
expires on December 31, 2011. We also lease our Symetron testing facility in Utah County, Utah. Our testing facility lease is a rolling two month lease which originally expired on May 31, 2010 and has been extended on a month to
month basis. The corporate offices and facilities are well maintained and in good condition.

On June 25, 2010, we
entered into a sublease for offices in West Bloomfield, Michigan. Our office lease expires on September 25, 2010 with an option to extend the lease for an additional three months.

During 2008, we entered into an agreement with a private land owner adjacent to our geothermal leased property in Hidalgo County, New
Mexico. Under the agreement, we are permitted to store our power generating units, cooling tower equipment, pumps and other equipment that have been delivered to New Mexico for construction of our Lightning Dock geothermal power plant. All equipment
is stored outside and the agreement continues on a month-to-month basis until all equipment is removed from the property.

Total rent expense for all of our office space, testing facilities and outdoor storage site leases for the six months ended June 30,
2010 and 2009 was approximately $246,300 and $375,400, respectively.

The table below summarizes our operating lease
obligations pursuant to our non-cancelable leases, our long-term debt and our executed purchase obligations as of June 30, 2010:



|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |           |  |   |           
|--------------------------------------- |  | ---------------------- | ----------- | --------------- | - | ----------- |  | ----------- | ---------- | ---------------- | - | --------- |  | - | ----------
|                                        |  | Payments due by period
|                                        |  | Total                  |             | Less than1 year |   | 1 to 3years |  | 3 to 5years |            | More than5 years
|Operating Lease Obligations             |  | $                      | 646,782     |                 | $ | 430,781     |  | $           | 216,001    |                  | $ |          |  | $ |          
|Long Term Debt (principal and interest) |  |                        | 148,249,669 |                 |   | 12,525,967  |  |             | 93,174,077 |                  |   | 5,515,607 |  |   | 37,034,018
|Purchase Obligations                    |  |                        | 14,475,198  |                 |   | 5,574,796   |  |             | 3,062,059  |                  |   | 3,249,473 |  |   | 2,588,870 
|Asset Retirement Obligations            |  |                        | 2,959,793   |                 |   | 225,285     |  |             |           |                  |   |          |  |   | 2,734,508 
|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |           |  |   |           
|Total                                   |  | $                      | 166,331,442 |                 | $ | 18,756,829  |  | $           | 96,452,137 |                  | $ | 8,765,080 |  | $ | 42,357,396
|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |           |  |   |           



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The contractual purchase obligations set forth above are not recorded as liabilities in our
consolidated financial statements. 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. Amounts payable pursuant to our operating leases are
expensed during the reporting period in which the amounts are due and payable. The operating lease obligations include operating leases for our corporate headquarters, Michigan offices and our testing facility.

The purchase obligations set forth in the table above include our amended agreements with PWPS for the purchase of power generating units
and certain other agreements with vendors of equipment and services. As of June 30, 2010, we were obligated to pay the vendors approximately $5.6 million in 2010; $1.5 million in 2011; $1.6 million in 2012; $1.6 million in 2013; and $1.6
million in 2014, as reflected in the table above. Since our geothermal lease agreements are not considered to be operating leases the purchase obligations also include delay rental payments that we have agreed to make in order to maintain our
granted rights to the leased properties.

The asset retirement obligations set forth in the table above include our future
obligation to dismantle the geothermal power plant, plug and abandon our production-sized wells that we have drilled and restore the property to its original state at the end of the power plants useful life which is estimated at 35 years. We
have also incurred an obligation to plug and abandon certain wells at our Lightning Dock project and our Thermo No. 1 plant within one year. Therefore, we have estimated the present value of the asset retirement liabilities for the Thermo
No. 1 plant and for each of the respective wells. In connection with our asset retirement obligation, we have posted drilling bonds with the Nevada Department of Minerals totaling $50,000, the Utah Division of Water Rights totaling $50,000, the
State of New Mexico Oil Conservation Division totaling $65,000 and the Oregon Department of Geology & Mineral Industries totaling $25,000 to ensure that we comply with the local plug and abandonment requirements associated with drilling
wells.

We have employment commitments with our chief executive officer and our chief financial officer. However, amounts due
under these employment contracts are not reflected in the table above.

Recently Issued Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued updated guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these
transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure
requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than
each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update
will become effective with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become
effective with the interim and annual reporting period beginning January 1, 2011. We will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional
disclosures, adoption of this update will not have a material effect on our consolidated financial statements.

In
April 2010, the FASB issued updated guidance that sets forth the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate for research and development arrangements. Specifically,
consideration that is contingent upon the completion of a milestone may be recognized in its entirety as revenue in the period that milestone has been achieved if the milestone, in its entirety, meets all of the criteria to be considered substantive
at the inception of an arrangement. This guidance is effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 and applies to research or development
deliverables under which the performance obligation is satisfied over a period of time and a portion, or all, of the consideration is contingent upon uncertain future events or circumstances. A reporting entitys decision to use the milestone
method of revenue recognition is a policy election. Since we do not currently have contracts that would qualify for the election of the milestone method, the adoption of this guidance will not have a material effect on our consolidated financial
statements.



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

Disclosures About Market Risk

We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do
not enter into derivative or other financial instruments for trading or speculative purposes.



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Changes in interest rates may also affect our ability to obtain tax equity financing for the
development of power projects. In general, as interest rates rise, the tax equity investors hurdle rate for their investments increases. As the hurdle rate increases, the amount of tax credit equity that can be raised for a project decreases.

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 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures
must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2010, 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 Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure.

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. There was no change in our internal control over financial reporting that occurred during the second quarter of 2010 that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

PART II. OTHER INFORMATION



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

On
August 17, 2009, Kay Mendenhall (Mendenhall), an individual, and Spindyne, Inc. (Spindyne), a Utah corporation, filed a complaint in Fourth Judicial District Court, Utah County, Utah against Jack H. Kerlin, an
individual, Kraig Higginson, an individual, and Raser Technologies, Inc. Mendenhall and Spindyne allege that, around the time that Raser was formed, Kerlin, on behalf of Spindyne, assigned to Raser the rights to use certain proprietary technology
that was owned by Spindyne. Mendenhall and Spindyne allege that they were not properly compensated for that technology. In general, the complaint alleges, among other claims, breach of contract, breach of implied covenant of good faith and fair
dealing, and intentional interference with contract and prospective economic relations. The complaint seeks damages in an amount to be determined at trial for the value of the alleged technology. Neither Spindyne nor Mendenhall have any relationship
with us or Mr. Higginson, our Chairman. The alleged technology at issue in the complaint is not currently in use and has never been used by us or, to the knowledge of the Company, Mr. Higginson. We, along with Messers Higginson and Kerlin,
filed a motion to dismiss the complaint, which was granted by the Fourth Judicial Court on May 5, 2010. The plaintiffs filed a notice of appeal on June 3, 2010. The appeal is currently pending.

On May 26, 2009, Bakersfield Pipe and Supply, Inc. (Bakersfield) filed a complaint in Fifth Judicial District Court,
Beaver County, Utah against Thermo No. 1 BE-01, LLC, Intermountain Renewable Power, LLC and Raser Technologies, Inc., alleging breach of contract and attempting to foreclose on a mechanics lien. During the first quarter of 2010, the court
declared judgment in favor of Bakersfield in the amount of $1.1 million, plus interest from the date of the judgment. As of May 8, 2010, we had paid $1.5 million to Bakersfield in full satisfaction of the judgment against us. We have no
remaining obligations to Bakersfield, and the mechanics lien has been released.

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



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

The
following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions, beliefs 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 will need to secure additional financing and if we are unable to secure adequate funds on terms acceptable to us, we will be
unable to support our business requirements, build our business or continue as a going concern.

At June 30, 2010,
we had approximately $0.3 million in cash and cash equivalents and $30.2 million in restricted cash. As such, our cash balances are not sufficient to satisfy our anticipated cash requirements for normal operations and capital expenditures for the
foreseeable future. Our operating activities used approximately $23.5 million of cash for the year ended December 31, 2009 and approximately $13.1 million of cash during the six months ended June 30, 2010. We have incurred substantial
losses since inception and we are not operating at cash breakeven. Obligations that may exert further pressure on our liquidity situation include (i) the obligation to repay the remaining amounts borrowed under our Unsecured Line of Credit
Agreement and Promissory Note; (ii) the obligation to pay interest on our outstanding convertible notes; (iii) any amounts we may be obligated to pay PWPS for the turbines installed at the Thermo No. 1 plant; (iv) the obligation
to pay Merrill Lynch a redemption amount of $20.0 million plus accrued interest on or before June 30, 2011; and (v) the obligation to pay up to $6.0 million to Prudential pursuant to the Forbearance Agreement. On June 29, 2010,
the Unsecured Line of Credit Agreement and Promissory Note was assigned by Radion Energy, LLC, a related party, to two separate entities that are not related to us.

From time to time, we have raised additional capital through the sale of equity and equity-related securities. Most recently, on
June 22, 2010, we completed the sale of $750,000 of our common stock to War Chest Capital Partners. Our proceeds from the sale of our common stock on June 22, 2010 were approximately $725,000, after deducting fees and expenses. On
June 30, 2010, we completed the sale of $400,000 of our common stock to War Chest Capital Partners. Our proceeds from the sale of our common stock on June 28, 2010 were approximately $390,000, after deducting fees and expenses. In July
2010, we completed the sale of $750,000 of our common stock to War Chest Capital Partners and Iroquois Master Fund, LTD. Our proceeds from the sale of our common stock in July 2010 were approximately $740,000, after deducting fees and expenses.

Our continuation as a going concern is dependent on efforts to secure additional funding, increase
revenues, reduce expenses, and ultimately achieve profitable operations. The current economic environment will make it challenging for us to access the funds that we need, on terms acceptable to us, to successfully pursue our development plans and
operations. The cost of raising capital in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly. If we are unable to raise sufficient, additional
capital on reasonable terms, we may be unable to satisfy our existing obligations, or to execute our plans. In such case, we would be required to curtail or cease operations, liquidate or sell assets, modify our current plans for plant construction,
well field development or other development activities, or pursue other actions that would adversely affect future operations. Further, 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 SymetronTMtechnologies.

In order to execute our business strategy and continue our business operations, we will need to secure 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 pre-paid
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. We cannot be certain that funding that we seek from any of these
sources will be available on reasonable terms or at all.

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 acquire 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.



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We may also seek to secure additional financing by incurring indebtedness. However, as a
result of concerns about the stability of financial markets generally, and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity on terms that are similar to existing debt, and reduced, or in some cases ceased, to provide funding to borrowers. In addition, 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.

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. We have had difficulty raising the capital we need in the current economic environment,
and our future attempts to secure 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 success of our 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.

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 or reduce the amount of tax equity that can be obtained as these
investors seek higher rates of return for the tax equity they invest.

The United States Congress recently passed the Recovery
Act that was subsequently signed into law by President Obama. The Recovery Act provides certain economic incentives, such as clean energy grants, that are designed to provide developers of geothermal and other clean energy projects with cash to help
fund the projects. These incentives are designed, in part, to address some of the current problems in the tax equity markets and provide an alternative funding mechanism. Accordingly, part of our short-term strategy to obtain additional funding
includes applications for loan guarantees and government grants.

In February of 2010, we received the Grant from the U.S.
Treasury under the Recovery Act totaling $33.0 million. Approximately $3.8 million of the grant funds were released to us, as owner of the project. The remainder of the grant funds was placed in escrow to be released to the other parties that
provided the debt and equity financing for the project based on the electrical output, operational costs of the plant and certain other factors. On July 9, 2010, we entered into the Forbearance Agreement pursuant to which the lenders of the
debt financing for the Thermo No. 1 plant received a payment of $27.0 million out of the escrow and waived compliance with certain debt-related covenants and obligations until June 29, 2011. During the next year, but no later than
June 29, 2011, the lenders are entitled to receive an additional payment of up to $6.0 million plus the expenses of the administrative lender and agents. The Forbearance Agreement contemplates that we will satisfy this additional payment by
using proceeds from the sale of all or part of our interest in the Thermo No. 1 plant. After providing for the $27.0 million payment to the lenders, approximately $3.0 million in the Thermo No. 1 plant escrow account remained in escrow to
be used for the operation of the Thermo No. 1 plant and other related expenses. Because the amount contained in the Thermo No. 1 plant escrow account was insufficient to fully satisfy the lenders, to the extent we are obligated to pay PWPS
any additional amounts for the turbines in production at the Thermo No. 1 plant, such payments shall be made out of our general corporate funds. In addition, we are obligated to pay Merrill Lynch its redemption amount of $20.0 million
pursuant to the terms of a promissory note on or before June 30, 2011.



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One of our applications for loan guarantees was denied and we were not awarded small grants
for three projects that we applied for in connection with certain exploration activities. We cannot predict whether we will be able to successfully obtain additional grants or loan guarantees under these new government programs.

Although we are seeking loan guarantees and grants from the government, we will still need to obtain financing from other sources for the
development of our projects. Many of our projects will require funding for early-stage development activities, such as drilling, as well as more traditional project financing for the construction of the power plant.

In December 2009, we terminated our Commitment Letter with Merrill Lynch to finance up to 155 MW of future projects. The Commitment
Letter was terminated as part of an overall restructuring of the project finance and tax equity agreements for the Thermo No. 1 plant. We are currently seeking other financing arrangements to fund the development of additional projects.

Early-stage development activities, such as drilling at potential project sites, preliminary engineering, permitting, legal
fees and other expenses can be difficult to finance. Project financing is not typically available for these preliminary activities. As a result, we have generally had to fund these activities out of funds available for general corporate purposes. On
December 7, 2009, we entered into a Co-Development Agreement with Evergreen Clean Energy, LLC (Evergreen), which could provide an alternative source of funding for drilling or other early-stage development activities at certain
projects. Evergreens funding obligations with respect to each site selected for development are subject to the satisfaction of a number of conditions, including satisfactory due diligence, the completion of certain milestones, the granting of
a security interest, and the negotiation of definitive agreements relating to the financing of each project. Under the terms of the Co-Development Agreement, Evergreen would receive warrants to purchase shares of our common stock in connection with
the funding of each project selected for development. The total amount of warrants to be issued will be dependent upon the amount of funding provided.

Evergreen is a newly formed clean-energy fund in the process of raising capital for its first investments in renewable energy projects.
Evergreen has informed us that it is in discussions with institutional investors interested in making capital commitments to Evergreen. In connection with these discussions, we have provided diligence materials to Evergreen and Evergreens
potential investors relating to our Thermo and Lightning Dock projects. The ability of Evergreen to perform its obligations and provide funding for one or more of our projects under the Co-Development Agreement is dependent upon Evergreens
ability to obtain sufficient capital commitments from investors. Evergreens efforts to raise the funds it is seeking are beyond our control, and we cannot predict whether Evergreen will be able to successfully raise sufficient capital to fund
one or more of our projects.

The terms of our outstanding Preferred Stock and certain other rights we have granted
security holders may make it more difficult for us to sell additional securities.

Certain terms and conditions
included in securities that we have sold, or rights granted to purchasers of securities we have sold, may make it more difficult for us to negotiate and complete sales of our securities in the future. The terms of our outstanding securities could
also require us to issue additional shares to purchasers of securities we have sold, or adjust the price of outstanding warrants to purchase our common stock.

The terms of our outstanding Preferred Stock provide that each share of Preferred Stock is entitled to a quarterly dividend, payable in
cash or shares of our common stock at an annual rate equal to the 3-month LIBOR plus 8%, but in no event higher than 14%. The terms of the Preferred Stock restrict our ability to pay dividends to our common stockholders unless we are current in our
dividend obligations to the Preferred Stock and any dividend payment to our common stockholders is made equally to the holders of the Preferred Stock as if such holders had converted or redeemed their Preferred Stock for shares of our common stock.
In addition, the holders of the Preferred Stock may redeem the shares of Preferred Stock at the earlier of July 28, 2010 or the date on which the price of our common stock exceeds $2.00 per share, or the date of a public announcement of the
intention or agreement to engage in a transaction or series of transactions that may result in a change of control. The preferential dividend and redemption rights of the Preferred Stock may make investments in our securities less attractive to
potential investors.

The holders of the Preferred Stock are also entitled to voting rights that require the majority vote of
the outstanding Preferred Stock prior to making certain amendments or changes to our certificate of incorporation or bylaws, including the terms of the Preferred Stock. A majority vote of the Preferred Stock is also required prior to any future
issuance of our securities, subject to certain exceptions, including an exception that allows us to issue up to $25.0 million of our securities as long as we have given the holders of the Preferred Stock the exclusive right to purchase such
securities prior to their issuance. We cannot predict whether we will be able to obtain any approvals required by these voting requirements, and the uncertainties associated with these voting requirements could adversely affect our ability to
negotiate with potential investors.

In connection with an offering of securities that we completed in July 2009, we granted
the purchasers of those securities the right, subject to certain exceptions, to participate in any future equity financing by us prior to December 30, 2010. The participation right allows the investors to purchase up to 35% of any equity
securities we offer. These participation rights may make investments in our securities less attractive to potential investors and could adversely affect our ability to negotiate with potential investors.



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Outstanding warrants to purchase 1,350,000 shares of our common stock provide for
anti-dilution protection, which adjusts the exercise price of each warrant, from time to time upon the occurrence of certain events, including the issuance of shares of common stock at a price lower than the exercise price, stock splits, dividends,
recapitalizations and similar events. These price adjustment provisions may result in dilution to potential investors, which could make investments in our securities less attractive to potential investors, and could adversely affect our ability to
negotiate with potential investors.

While we have issued all of the shares underlying the warrant that we issued to Fletcher
in 2008 if we announce an event that results in the change of control of our company, Fletcher would be entitled to exert certain rights to purchase a certain quantity of shares of the acquiring company. The ability of Fletcher to exert this right
could make investments in our securities less attractive to potential investors, and could adversely affect our ability to negotiate with potential investors.

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. To date, we have placed one geothermal power plant in service, and we continue our efforts to ramp up production of that plant. However, our ability to successfully complete that plant and develop additional projects is uncertain.

In connection with our first power plant, Thermo No. 1, we have experienced unexpected difficulties and delays in
developing a well field that will produce sufficient heat to operate the plant at full capacity. While we have gained valuable experience that could benefit future projects, we could experience similar unexpected difficulties at future projects,
which could adversely affect the economics of those projects. As a result, we cannot be certain that we will be able to operate any of our plants at full capacity on an economic basis.

Our success in developing a particular geothermal project is contingent upon, among other things, locating and developing a viable
geothermal site, negotiation of satisfactory engineering, procurement and construction agreements, negotiation of satisfactory power purchase agreements, receipt of required governmental permits, obtaining interconnection rights, obtaining
transmission service rights, obtaining adequate financing, and the timely implementation and satisfactory completion of construction. We may be unsuccessful in accomplishing any of these necessary requirements or doing so on a timely basis.

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 applicable to common stockholders of approximately $20.2 million and $72.8
million for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively. As a result of ongoing operating losses, we had an accumulated deficit of approximately $182.5 million on cumulative revenues from inception
of approximately $5.2 million as of June 30, 2010. In addition, at June 30, 2010, we had negative working capital totaling $30.0 million.

Under our current growth plan, we do not expect that our revenues and cash flows will be sufficient to cover our expenses unless we are
able to successfully place a 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 at prices that support our
operating and financing costs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 our projects or to successfully utilize new incentive provisions being implemented by the United States government;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | manage construction, drilling and operating costs associated with our geothermal power projects;
| | - |  | ------------------------------------------------------------------------------------------------



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| |  |  | successfully license commercial applications of our motor, generator and drive technologies;
| | - |  | --------------------------------------------------------------------------------------------



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



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



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

Our independent registered public accounting firms report on our 2009 financial statements questions our ability to continue
as a going concern.

Our independent registered public accounting firms report on our financial statements as of
December 31, 2009 and 2008 and for the three year period ended December 31, 2009 expresses doubt about our ability to continue as a going concern. Their report includes an explanatory paragraph stating that there is 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 2010.

We will need to secure additional financing in the future and if we are unable to secure adequate funds on terms acceptable to us, we
will be unable to support our business requirements, build our business or continue as a going concern. Accordingly, we can offer no assurance that the actions we plan to take to address these conditions will be successful. Inclusion of a
going concern qualification in the report of our independent accountants or any future report may 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, 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, lenders may simply be unwilling or unable to provide financing.

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 declined significantly over the last twelve months. The closing price fluctuated
from a low of $0.51 per share to a high of $2.58 per share during the period from July 1, 2009 to June 30, 2010. 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.

In addition, if the market
price for our common stock remains below $5.00 per share, our common stock may be deemed to be a penny stock, and therefore subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example,
broker-dealers must make a special suitability determination for the purchaser and have received the purchasers written consent to the transaction prior to sale. Also, a disclosure schedule must be delivered to each purchaser of a penny stock,
disclosing sales commissions and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price



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information for the penny stock held in the account and information on the limited market in penny stocks. Because of these additional conditions, some brokers may choose to not effect
transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock.

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. In addition, in connection with future equity financing transactions, we may be required to issue additional shares of stock to investors who purchased securities from us in prior
transactions, and future equity financings may result in adjustments to the exercise price of our outstanding warrants. These factors could also contribute to volatility in our stock price.

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

Our geothermal power projects 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.

Federal and state energy regulation is subject to frequent 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 financial performance of geothermal power plants may be adversely affected by changes in certain laws and regulations, including tax laws.

In order to promote the production of renewable energy, including geothermal energy, the federal government has created several
significant tax incentives. These tax incentives are instrumental to our ability to finance and develop geothermal power plants by providing increased economic benefits. If the available tax incentives were reduced or eliminated, the economics of
the projects would be adversely affected and there could be reductions in our overall profitability or the amount of funding available from tax equity partners. Some projects may not be viable without these tax incentives.

Available federal tax incentives include deductibility of intangible drilling costs, accelerated depreciation, depletion allowances and
the investment tax credit (ITC), all of which currently are permanent features of the Internal Revenue Code with respect to geothermal power projects. In addition, the Recovery Act extended the availability of the PTC for geothermal
projects placed in service before 2014 and created a new grant program for geothermal projects that are placed in service in 2009 or 2010, regardless of when construction begins, or for which construction begins in 2009 or 2010 and which are placed
in service before 2014.

The ITC is claimed in the year in which the qualified project is placed in service, and the amount of
the credit is a specified percentage (10% or 30%) of the eligible costs of the facility. All or some of the ITC is subject to recapture if the property eligible for the credit is sold or otherwise disposed, or ceases to be eligible property, within
five years after being placed in service. In lieu of claiming the ITC, a project owner generally can claim the PTC during the first ten years after the project is placed in service. The amount of the PTC is adjusted for inflation. For 2009, the
amount was $21.00 per megawatt hour of electricity produced from the facility and sold to unrelated parties. As extended by the Recovery Act, the PTC applies to qualifying facilities that are placed in service before 2014. The amount of the PTC also
is subject to phase-out if the national average price of electricity produced from qualified energy resources exceeds an inflation adjusted threshold.

In addition, pursuant to the Recovery Act, an owner may elect to receive a grant from the U.S. Treasury Department in lieu of claiming
either the ITC or the PTC. For a geothermal project, the amount of the grant is 30% of the cost of qualifying geothermal property placed in service in 2009 or 2010, or placed in service before 2014 if construction begins in 2009 or 2010. Grants are
to be paid 60 days after the date the U.S. Treasury Department deems the application is properly submitted and complete. All or some of the grant is subject to recapture if the property eligible for the grant is sold or otherwise disposed, or ceases
to be eligible property within, five years after being placed in service. None of the grant should be included in federal taxable income, but may be included in applicable state taxable income.

Owners of projects also are permitted to depreciate for tax purposes most of the cost of the power plant on an accelerated basis,
generally, over a five-year period. If an owner elects to receive a grant from the U.S. Treasury Department in lieu of claiming either the ITC or PTC, or if the owner elects to receive the ITC, the basis of the property for depreciation purposes is
reduced by an amount equal to 50 percent of the grant or ITC, whichever is applicable.

All of these programs are subject to
review and change by Congress from time to time. For example, recent legislation has been introduced to remove equipment sourced outside of the United States from the eligible basis used in calculating the Section 1603 grant. In addition,
several of the programs are currently scheduled to expire, and continuation of those incentives will require affirmative Congressional action. Moreover, there are ambiguities as to how some of the provisions of the Recovery Act will operate.



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Many of the tax incentives associated with geothermal power projects generally are
beneficial only if the owners of the project have sufficient taxable income to utilize the tax incentives. Due to the nature and timing of these tax incentives, it is likely that the tax incentives available in connection with our geothermal power
plants (other than the grant in lieu of the ITC and PTC) will exceed our ability to efficiently utilize these tax benefits for at least 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 an unrelated industry may be willing to finance the development of a geothermal
power plant in exchange for receiving the benefit of the tax incentives, which it could then use to reduce the tax liability associated with its regular operations.

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 tax subsidies currently 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, flow-constrained wells, wells that become obstructed during drilling, uncontrolled releases of pressure and temperature decline, and
other factors, all of which can increase our operating costs and capital expenditures or reduce the efficiency of our power plants. In addition, the high temperature and high pressure in geothermal energy resources requires special resource
management and monitoring. Because geothermal resources are complex geological structures, we can only estimate their geographic area. The viability of geothermal projects depends on different factors directly related to the geothermal resource,
such as the heat content (the relevant composition of temperature and pressure) flow of the geothermal resource, the useful life (commercially exploitable life) of the resource and operational factors relating to the extraction of geothermal fluids.
Although we believe our geothermal resources will be fully renewable if managed appropriately, 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 geothermal power plants depends on the continued availability of
adequate geothermal resources. Although we believe our geothermal resources will be fully renewable if managed properly, 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 ability to operate a geothermal plant at full capacity depends significantly on the characteristics of the production wells we drill
to use for the plant. The wells need to provide sufficient heat at flow rates that can be maintained without a significant increase in the parasitic load associated with the plant. The parasitic load refers to the amount of electricity used by the
plant and well field to maintain operations. A significant portion of the parasitic load results from pumps and other equipment used to maintain the flow of geothermal water from the earth through the plant and back into the earth through
reinjection wells. Generally, water with a higher temperature will allow the plant to operate with a slower rate of flow, which results in a decrease in the parasitic load because less electricity is required to maintain the necessary flow rate.
Water with lower temperatures, on the other hand, requires a higher flow rate to operate the plant, which increases the parasitic load. Unless the water produced by a well is hot enough to increase the amount of power generated by the plant without
a corresponding increase to the parasitic load, the well will not result in a net increase in the amount of power available for sale from the plant. Therefore, the overall temperature of the water produced by the production wells is critical to our
ability to operate the plant at full capacity. Similarly, a deeper resource increases parasitic load because the pumps have to lift the water a greater distance. We cannot be certain whether wells will increase net production at a plant until the
wells are brought online and the impact to the parasitic load at the plant has been determined.



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We have experienced certain delays and cost overruns on the Thermo No. 1 plant,
and we may experience similar delays and cost overruns on subsequent projects.

We completed major construction of the
cooling towers and transmission lines and installed the power generating units at the Thermo No. 1 plant in the fourth quarter of 2008. We completed the commissioning of the plant in the first quarter of 2009. In April 2009, we began selling
electricity generated by the Thermo No. 1 plant to the City of Anaheim pursuant to a power purchase agreement we previously entered into with Anaheim.

During the three months ended June 30, 2010, we delivered 11,462 MW hours of electricity to the City of Anaheim. Although we placed
the Thermo No. 1 plant in service in the first quarter of 2009 for accounting purposes, we were unable to operate the plant at designed capacity due primarily to mechanical deficiencies of the power generating units, lower than anticipated well
field temperature and flow from certain wells and other inefficiencies which occurred as a result of overall design of the plant. Accordingly, we initiated several actions to improve the electrical output of the plant and the resource. These efforts
included reworking certain production wells, the installation of bottom cycling operations and the replacement of recirculation pumps on each of the generating units with more efficient pumps. These efforts culminated in June 2010, at which time we
evaluated the actual impact of these initiatives and the resulting overall performance of the plant. The results of this evaluation indicate that plant performance may improve from the current output level of approximately 6.6 megawatts, but most
likely will not achieve originally designed electrical output levels.

The Thermo No. 1 plant is the first ever
large-scale commercial application of the PWPS Pure-Cycle units and the first plant built under our rapid-deployment approach so delays and overruns are not entirely unexpected. Some of the key drivers of the delays and cost overruns are as follows:

Well Field Development:



| |  |  | Increased costs to broaden previous well field plans.
| | - |  | -----------------------------------------------------



| |  |  | Complications encountered by drilling contractors.
| | - |  | --------------------------------------------------



| |  |  | High demand for drilling services and related materials due to the rapid increase in the price of oil.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Higher than expected loads for well field pumps.
| | - |  | ------------------------------------------------

Construction:



| |  |  | Wider than necessary step-outs for injection wells, which increased piping and electrical costs, due to concerns of lenders.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Construction of primary access road improvements to accommodate wider access to Thermo No. 1 than previously anticipated.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional costs incurred to connect piping from additional production wells to the plant.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Additional costs incurred relating to establishing the greater Thermo area.
| | - |  | ---------------------------------------------------------------------------



| |  |  | Increased prices for steel, concrete and other commodities due to high demand.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Payment of overtime and other additional costs in order to accelerate the construction schedule.
| | - |  | ------------------------------------------------------------------------------------------------

Equipment:



| |  |  | Expenses associated with installing PWPS power generating units for the first time, which allowed us to identify design changes for the benefit of
future plants.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Transmission:



| |  |  | In anticipation of future plants, we built a larger transmission infrastructure.
| | - |  | --------------------------------------------------------------------------------

If we are unable to find adequate solutions for the problems we are encountering with the construction and operation of the Thermo
No. 1 plant, we may experience similar delays and cost overruns on subsequent projects.



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Our Power Systems segment operations may be materially adversely affected if we fail
to properly manage and maintain our geothermal resources.

Our geothermal power plants use geothermal resources to
generate electricity. When we develop a geothermal power plant, we conduct hydrologic and geologic studies. Based on these studies, we consider all of the geothermal resources used in our power plants to be fully renewable.

Unless additional hydrologic and geologic studies confirm otherwise, there are a number of events that could have a material adverse
effect on our ability to generate electricity from a geothermal resource and/or shorten the operational duration of a geothermal resource, which could cause the applicable geothermal resource to become a non-renewable wasting asset. These events
include:



| |  |  | Any increase in power generation above the amount our hydrological and geological studies indicate that the applicable geothermal resource will
support;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to recycle all of the geothermal fluids used in connection with the applicable geothermal resource; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Failure to properly maintain the hydrological balance of the applicable geothermal resource.
| | - |  | --------------------------------------------------------------------------------------------

While we intend to properly manage and maintain our geothermal resources in order to ensure that they are fully renewable, our ability to
do so could be subject to unforeseen risks and uncertainties beyond our control.

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

Our Power Systems segment intends to utilize certain heat transfer technologies in its geothermal power projects. One of the providers of
these heat transfer technologies is PWPS. PWPS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.

PWPSs heat transfer technologies have a limited operating history and have only been deployed in a limited
number of geothermal power projects. Although we are using these technologies in our Thermo No. 1 plant, that power plant has only been operating for a short time. As a result, we cannot be certain that PWPSs heat transfer technologies or
other vendors heat transfer technologies can be successfully implemented. If we are not able to successfully utilize heat transfer technologies in our geothermal power projects and we are unable to utilize appropriate substitute technologies,
we may be unable to develop our 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.

Our geothermal power projects are 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 developed by our Power Systems segment 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 developed by our Power Systems segment 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, water treatment chemicals 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.



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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 develops 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, 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 (deficit), net income/loss or earnings/loss per share.

Our foreign
projects expose us to risks related to the application of foreign laws, taxes, economic conditions, labor supply and relations, political conditions, and policies of foreign governments, any of which risks may delay or reduce our ability to profit
from such projects.

We have accumulated a large portfolio of geothermal interests in four western continental states
and a geothermal concession in Indonesia. 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. Our foreign
operations are subject to regulation by various foreign governments and regulatory authorities and are subject to the application of foreign laws. Such foreign laws or regulations may not provide for the same type of legal certainty and rights, in
connection with our contractual relationships in such countries, as are afforded to our projects in the United States, which may adversely affect our ability to receive revenues or enforce our rights in connection with our foreign operations.
Furthermore, existing laws or regulations may be amended or repealed, and new laws or regulations may be enacted or issued. In addition, the laws and regulations of some countries may limit our ability to hold a majority interest in some of the
projects that we may develop or acquire, thus limiting our ability to control the development, construction and operation of such projects. Our foreign operations are also subject to significant political, economic and financial risks, which vary by
country, and include:



| |  |  | changes in government policies or personnel;
| | - |  | --------------------------------------------



| |  |  | changes in general economic conditions;
| | - |  | ---------------------------------------



| |  |  | restrictions on currency transfer or convertibility;
| | - |  | ----------------------------------------------------



| |  |  | changes in labor relations;
| | - |  | ---------------------------



| |  |  | political instability and civil unrest;
| | - |  | ---------------------------------------



| |  |  | changes in the local electricity market;
| | - |  | ----------------------------------------



| |  |  | breach or repudiation of important contractual undertakings by governmental entities; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | expropriation and confiscation of assets and facilities.
| | - |  | --------------------------------------------------------

Our foreign projects may expose us to risks related to fluctuations in currency rates, which may reduce our profits from such
projects.

Risks attributable to fluctuations in currency exchange rates can arise when any of our foreign subsidiaries
borrow funds or incur operating or other expenses in one type of currency but receive revenues in another. In such cases, an adverse change in exchange rates can reduce such subsidiarys ability to meet its debt service obligations, reduce the
amount of cash and income we receive from such foreign subsidiary or increase such subsidiarys overall expenses. In addition, the imposition by foreign governments of restrictions on the transfer of foreign currency abroad, or restrictions on
the conversion of local currency into foreign currency, would have an adverse effect on the operations of our foreign projects and foreign manufacturing operations, and may limit or diminish the amount of cash and income that we receive from such
foreign projects and operations.

A significant portion of our net revenue is attributed to payments made by power
purchasers under power purchase agreements. The failure of any such power purchaser to perform its obligations under the relevant power purchase agreement or the loss of a power purchase agreement due to a default would reduce our net income and
could materially and adversely affect our business, financial condition, future results and cash flow.

A significant
portion of our net revenue is attributed to revenues derived from power purchasers under the relevant power purchase agreements. The City of Anaheim has accounted for 100%, of our revenues for the three months ended June 30, 2010. We do not
make any representations as to the financial condition or creditworthiness of any purchaser under a power purchase agreement, and nothing in this quarterly report should be construed as such a representation.



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There is a risk that the City of Anaheim or any future power purchasers may not fulfill
their respective payment obligations under their power purchase agreements. If any of the power purchasers fails to meet its payment obligations under its power purchase agreements, it could materially and adversely affect our business, financial
condition, future results and cash flow.

If any of our domestic projects loses its current qualifying facility status
under PURPA, or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded to qualifying facilities, our domestic operations could be adversely affected.

Most of our domestic projects are qualifying facilities pursuant to PURPA and are eligible for regulatory exemptions from most provisions
of the Federal Power Act (FPA) and certain state laws and regulations, which largely exempt the projects from the FPA, and certain state and local laws and regulations regarding rates and financial and organizational requirements for
electric utilities.

If any of our domestic projects were to lose its qualifying facility status, such project could become
subject to the full scope of the FPA and applicable state regulation. The application of the FPA and other applicable state regulation to our domestic projects could require our operations to comply with an increasingly complex regulatory regime
that may be costly and greatly reduce our operational flexibility.

In addition, pursuant to the FPA, Federal Energy
Regulatory Commission (FERC) has exclusive rate-making jurisdiction over wholesale sales of electricity and transmission of public utilities in interstate commerce. These rates may be based on a cost of service approach or may be
determined on a market basis through competitive bidding or negotiation. Qualifying facilities are largely exempt from the FPA. If a domestic project were to lose its qualifying facility status, it would become a public utility under the FPA, and
the rates charged by such project pursuant to its power purchase agreements would be subject to the review and approval of FERC. FERC, upon such review, may determine that the rates currently set forth in such power purchase agreements are not
appropriate and may set rates that are lower than the rates currently charged. In addition, FERC may require that some or all of our domestic projects refund amounts previously paid by the relevant power purchaser to such project. Such events would
likely result in a decrease in our future revenues or in an obligation to disgorge revenues previously received from our domestic projects, either of which would have an adverse effect on our revenues. Even if a project does not lose its qualifying
facility status, pursuant to a final rule issued by FERC for projects above 20 MW, if a projects power purchase agreement is terminated or otherwise expires, and the subsequent sales are not made pursuant to a states implementation of
PURPA, that project will become subject to FERCs ratemaking jurisdiction under the FPA. Moreover, a loss of qualifying facility status also could permit the power purchaser, pursuant to the terms of the particular power purchase agreement, to
cease taking and paying for electricity from the relevant project or, consistent with FERC precedent, to seek refunds of past amounts paid. This could cause the loss of some or all of our revenues payable pursuant to the related power purchase
agreements, result in significant liability for refunds of past amounts paid, or otherwise impair the value of our projects. If a power purchaser were to cease taking and paying for electricity or seek to obtain refunds of past amounts paid, there
can be no assurance that the costs incurred in connection with the project could be recovered through sales to other purchasers or that we would have sufficient funds to make such payments. In addition, the loss of qualifying facility status would
be an event of default under the financing arrangements currently in place for some of our projects, which would enable the lenders to exercise their remedies and enforce the liens on the relevant project.

Pursuant to the Energy Policy Act of 2005, FERC was also given authority to prospectively lift the mandatory obligation of a utility
under PURPA to offer to purchase the electricity from a qualifying facility if the utility operates in a workably competitive market. Existing power purchase agreements between a qualifying facility and a utility are not affected. If the utilities
in the regions in which our domestic projects operate were to be relieved of the mandatory purchase obligation, they would not be required to purchase energy from the project in the region under Federal law upon termination of the existing power
purchase agreement or with respect to new projects, which could materially and adversely affect our business, financial condition, future results and cash flow.

Some of our leases will terminate if we do not achieve commercial production during the primary term of the lease, thus requiring
us to enter into new leases or secure rights to alternate geothermal resources, none of which may be available on terms as favorable to us as any such terminated lease, if at all.

Most of our geothermal resource leases are for a fixed primary term, and then continue for so long as we achieve commercial production or
pursuant to other terms of extension. The land covered by some of our leases is undeveloped and has not yet achieved commercial production of the geothermal resources. Leases that cover land which remains undeveloped and does not achieve commercial
production and leases that we allow to expire, will terminate. In the event that a lease is terminated and we determine that we will need that lease once the applicable project is operating, we would need to enter into one or more new leases with
the owner(s) of the premises that are the subject of the terminated lease(s) in order to develop geothermal resources from, or inject geothermal resources into, such premises or secure rights to alternate geothermal resources or lands suitable for
injection, all of which may not be possible or could result in increased cost to us, which could materially and adversely affect our business, financial condition, future results and cash flow.



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Claims have been made that some geothermal plants cause seismic activity and related
property damage.

There are approximately two-dozen geothermal plants operating within a fifty-square-mile region in
the area of Anderson Springs, in Northern California, and there is general agreement that the operation of these plants causes a generally low level of seismic activity. Some residents in the Anderson Springs area have asserted property damage
claims against those plant operators. There are significant issues whether the plant operators are liable, and to date no court has found in favor of such claimants. While we do not believe the areas that we are developing, as noted above, will
present the same geological or seismic risks, there can be no assurance that we would not be subject to similar claims and litigation, which may adversely impact our operations and financial condition.

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

A significant part of our long-term business strategy for our Transportation & Industrial
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.

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 & Industrial segment.

The recent economic downturn has had a dramatic, adverse effect on the automotive industry and other large industrial manufacturers that
would be in a position to use and benefit from our technologies. As a result, we believe our ability to commercialize our Symetron technologies will be limited until economic conditions improve. We intend to evaluate the prospects for our
Transportation & Industrial segment on an ongoing basis. If we believe there are attractive opportunities, we will devote the resources to pursue those opportunities to the extent we believe appropriate. If, on the other hand, we determine
that the risks and uncertainties for this business segment are too great in light of the current economic climate, we may choose to further reduce the resources devoted to these efforts. We may also be required to develop a new long-term business
strategy for the Transportation & Industrial segment, or discontinue operating this business segment.

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

The success of our Transportation & Industrial 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 issued United States patents or our pending United States and international 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,



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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 United States and ten trademark
registrations internationally. We have also applied for five additional trademark registrations in the United States 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.

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 & Industrial segment could incur significant expenses
if products built with our technology contain defects.

If our Transportation & Industrial 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 & Industrial 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.



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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 & Industrial 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.

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 2009 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 New York Stock Exchange and cause investors to lose confidence in our reported financial information, which could have a negative effect on
the trading price of our common stock.

We recently received two deficiency notices from the New York Stock Exchange
stating that we are not in compliance with certain of its listing standards. If we fail to cure these listing standard deficiencies and maintain our listing on the New York Stock Exchange, our business could be materially harmed and our stock price
could decline.

Our shares of common stock are listed on the NYSE. Pursuant to the Sarbanes-Oxley Act of 2002, national
securities exchanges, including the NYSE, have adopted more stringent listing requirements. On April 27, 2010, we received notice from the NYSE that we had fallen below the continued listing standard regarding price criteria for common stock
under Section 802.01C of the NYSEs Listed Company Manual (the April Deficiency Notice). Section 802.01 C requires that a companys common stock have a minimum average closing price of $1.00 per share during a
consecutive 30-day trading period. Under the NYSEs rules, we have six months



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from the date of the April Deficiency Notice to bring our average common stock price over a 30-day trading period back above $1.00 or we will be delisted from the NYSE. In addition, on
July 30, 2010 we received notice from the NYSE (the July Deficiency Notice) that we had fallen below the continued listing criteria under Sections 801 and 802 of the NYSEs Listed Company Manual because our total market
capitalization is less than $50.0 million over a 30-day trading period and our stockholders equity is less than $50.0 million. As of July 26, 2010, our 30-day trading period average market capitalization was approximately $49.3 million
and our stockholders deficit as of June 30, 2010 was $40.6 million. Under the NYSEs rules, we have 45 days from the date of the July Deficiency Notice to submit a business plan to the NYSE that discusses how we will regain
compliance with the criteria established in Sections 801 and 802 within 18 months of our receipt of the July Deficiency Notice. After reviewing our business plan, the NYSE will either accept the business plan and will monitor our progress on a
quarterly basis, or the NYSE will reject our business plan and subject us to suspension by the NYSE and delisting by the SEC.

We may not be able to cure our current listing standard deficiencies or maintain our compliance with all of the other listing standards
of the NYSE. Any failure by us to maintain our listing on the NYSE 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 current 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 certain key positions. On August 5, 2009, our Chief Executive
Officer resigned due to health reasons. He has since been replaced by Nick Goodman effective January 25, 2010. On January 15, 2010 our former Chief Financial Officer resigned. On March 22, 2010, John T. Perry began his duties as our
new Chief Financial Officer. The replacement of our Chief Executive Officer and our Chief Financial Officer could result in transitional issues that could make it more difficult to execute our business plans in a timely manner.

Our future success also depends on our ability to attract, train, retain and motivate highly skilled technical and administrative
personnel. Since we have 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.

We may record impairment charges which would adversely impact our results of operations.

We review our intangible assets and long-lived assets for impairment annually and whenever events or changes in circumstances indicate
that the carrying amounts of these assets may not be recoverable as required by generally accepted accounting principles.

One
potential indicator of impairment is whether our fair value, as measured by our market capitalization, has remained below our net book value for a significant period of time. Whether our market capitalization triggers an impairment charge in any
future period will depend on the underlying reasons for the decline in stock price, the significance of the decline, and the length of time the stock price has been trading at such prices.

In the event that we determine in a future period that impairment exists for any reason, we would record an impairment charge in the
period such determination is made, which would adversely impact our financial position and results of operations.

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. In addition, if our officers, directors or employees sell previously restricted 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 80.2 million shares were free of restrictive legend as of June 30, 2010, up from approximately
67.2 million as of December 31, 2009. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to decline.



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On February 3, 2010, we completed the sale of 5,000 shares of the Preferred Stock,
pursuant to which we raised $5.0 million, before deducting underwriters fees, legal fees and other expenses. Each share of the Preferred Stock will pay a quarterly dividend, payable in cash or shares of common stock equal to an annual rate of
LIBOR plus 8%, but in no event higher than 14%, subject to adjustment. Each share of the Preferred Stock will be convertible into shares of our common stock at a price of $5.00 per share, such price being subject to adjustment for stock splits,
combinations, stock dividends and the like. The holders of the Preferred Stock will have the right to redeem the shares of the Preferred Stock purchased at the earlier of six months after the issue date or the date on which the price of our common
stock equals or exceeds $2.00 per share, or the date of a public announcement of the intention or agreement to engage in a transaction or series of transactions that may result in a change of control of our Company. The redemption price for each
share of the Preferred Stock into shares of our common stock will be at least $1.22 per share of our common stock, subject to adjustment under certain circumstances and (b) 120% of the Prevailing Market Price (as defined in the Certificate of
Rights and Preferences of the Preferred Stock) at the first redemption date. We also issued the Preferred Warrants to purchase up to an additional 14,000 shares of the Preferred Stock. The issuance of any additional shares of common stock pursuant
to the terms of the Preferred Stock will dilute the holders of our common stock and the possibility of these additional issuances of common stock may put downward pressure on our stock price.

Sales of a substantial number of shares of our common stock or other securities in the public markets, or the perception that these sales
may occur, could cause the market price of our common stock or other securities to decline and could materially impair our ability to raise capital through the sale of additional securities.

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

United States 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, 2009, we were required to record certain warrants with exercise price reset features as equity, if the warrants were considered to be indexed to our own stock.
However, for periods after January 1, 2009, we are required to record certain warrants with exercise price reset features as derivative liabilities and record the quarterly changes in fair market value as gains or losses in the financial
statements. A significant increase in the fair value of the warrants liability can result in a significant loss recorded during the corresponding period in the financial statements.

We have never declared or paid dividends on our common stock and we do not anticipate paying dividends on our common stock in the
foreseeable future.

Our business requires significant funding, and we currently invest more in project development
than we earn from operating our projects and sales of our technology. In addition, the agreements governing our debt and the terms of our Preferred Stock restrict our ability to pay dividends on our common stock. Therefore, we do not anticipate
paying any cash dividends on our common stock in the foreseeable future. We currently plan to invest all available funds and future earnings in the development and growth of our business. As a result, capital appreciation, if any, of our common
stock will be the sole source of potential gain for our common stockholders in the foreseeable future.



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

On
August 5, 2010, we amended our Unsecured Line of Credit Agreement and Promissory Note by entering into Amendment No. 2 to Unsecured Line of Credit and Promissory Note (the Amendment No. 2) with Evergreen Clean Energy Fund, LLC and Bombay
Investments (collectively, the LOC Lenders). The rights, interests and privileges to our Unsecured Line of Credit Agreement and Promissory Note were previously held by Radion Energy, LLC, which is controlled by our Chairman, Kraig
Higginson. Radion Energy, LLCs rights under the Unsecured Line of Credit Agreement and Promissory Note were assigned to the LOC Lenders on June 29, 2010. On June 30, 2010, the principal and accrued interest payable under the Unsecured Line of
Credit Agreement and Promissory Note was $5.2 million. The Amendment No. 2 extends the maturity date of the Unsecured Line of Credit Agreement and Promissory Note from July 31, 2010 to October 31, 2010 in consideration for a two percent (2%)
increase to the principal amount owing under the Unsecured Line of Credit Agreement and Promissory Note, which increased the amount that we owe to the LOC Lenders to $5.3 million.

A copy of the Amendment No. 2 is attached to this Quarterly Report on Form l0-Q as Exhibit 10.8 and is incorporated herein by reference.
The foregoing is only a brief description of the material terms of the Amendment No. 2, does not purport to be a complete description of the rights and obligations of the parties thereunder and such description is qualified in its entirety by
reference to the exhibit.



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



|               |  |                                                                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|10.1           |  | Subscription Agreement, dated June 18, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed June 23, 2010)                                                                                                                                                                               
|               | 
|10.2           |  | Subscription Agreement, dated June 28, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed July 2, 2010)                                                                                                                                                                                
|               | 
|10.3           |  | Schedule Z Amendment, dated as of June 30, 2010, among Thermo No. 1 BE-01, LLC, Deutsche Bank Trust Company Americas, The Prudential Insurance Company of America, Intermountain
Renewable Power, LLC, Columbia Renewable Power, LLC, Raser Technologies, Inc., and Raser Power Systems, LLC (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 7, 2010)
|               | 
|10.4           |  | Amendment, Consent and Forbearance Agreement, dated July 9, 2010 among Thermo No. 1 BE-01, LLC, The Prudential Insurance Company of America, Zurich American Insurance Company,
Deutsche Bank Trust Company Americas, and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 14, 2010)                                         



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                           
|               | 
|10.5           |  | Second Amendment to Account and Security Agreement, dated July 9, 2010, between Thermo No. 1 BE-01, LLC and Deutsche Bank Trust Company Americas (incorporated by reference to
Exhibit 10.2 to our current report on Form 8-K filed July 14, 2010)
|               | 
|10.6           |  | Subscription Agreement, dated July 14, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed July 20, 2010)                                    
|               | 
|10.7           |  | Subscription Agreement, dated July 19, 2010, between Raser Technologies, Inc. and Iroquois Master Fund, LTD. (incorporated by reference to Exhibit 10.2 to our current report on
Form 8-K filed July 20, 2010)                                    
|               | 
|10.8*          |  | Amendment No. 2 to Unsecured Line of Credit Agreement and Promissory Note, dated as of August 5, 2010, among Evergreen Clean Energy Fund, LLC, Bombay Investments, and Raser
Technologies, Inc.                                                   
|               | 
|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                                                                                                                                           



|* | To be filed herewith.
|- | ---------------------



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##### 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)                                                        
|                |  |  | 
|August 11, 2010 |  |  |  |  |  | /S/    JOHN T.
PERRY                                                
|                |  |  |  |  |  | John T. Perry,                                                      
|                |  |  |  |  |  | Chief Financial Officer
(Principal Financial and Accounting Officer)



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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|10.1           |  | Subscription Agreement, dated June 18, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed June 23, 2010)                                                                                                                                                                               
|               | 
|10.2           |  | Subscription Agreement, dated June 28, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed July 2, 2010)                                                                                                                                                                                
|               | 
|10.3           |  | Schedule Z Amendment, dated as of June 30, 2010, among Thermo No. 1 BE-01, LLC, Deutsche Bank Trust Company Americas, The Prudential Insurance Company of America, Intermountain
Renewable Power, LLC, Columbia Renewable Power, LLC, Raser Technologies, Inc., and Raser Power Systems, LLC (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 7, 2010)
|               | 
|10.4           |  | Amendment, Consent and Forbearance Agreement, dated July 9, 2010 among Thermo No. 1 BE-01, LLC, The Prudential Insurance Company of America, Zurich American Insurance Company,
Deutsche Bank Trust Company Americas, and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 14, 2010)                                         
|               | 
|10.5           |  | Second Amendment to Account and Security Agreement, dated July 9, 2010, between Thermo No. 1 BE-01, LLC and Deutsche Bank Trust Company Americas (incorporated by reference to
Exhibit 10.2 to our current report on Form 8-K filed July 14, 2010)                                                                                                                                           
|               | 
|10.6           |  | Subscription Agreement, dated July 14, 2010, between Raser Technologies, Inc. and War Chest Capital Partners (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed July 20, 2010)                                                                                                                                                                               
|               | 
|10.7           |  | Subscription Agreement, dated July 19, 2010, between Raser Technologies, Inc. and Iroquois Master Fund, LTD. (incorporated by reference to Exhibit 10.2 to our current report on
Form 8-K filed July 20, 2010)                                                                                                                                                                               
|               | 
|10.8*          |  | Amendment No. 2 to Unsecured Line of Credit Agreement and Promissory Note, dated as of August 5, 2010, among Evergreen Clean Energy Fund, LLC, Bombay Investments, and Raser
Technologies, Inc.                                                                                                                                                                                              
|               | 
|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                                                                                                                                                                                                                                                                                      



|* | To be filed herewith.
|- | ---------------------



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