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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





(Mark one)

|x | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2008

or



| ̈ | Transition Report Under 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)                          

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

Securities registered under Section 12(b) of the Exchange Act:



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of each exchange on which registered
|Common stock, $0.01 par value |  | New York Stock Exchange                  

Securities registered under Section 12(g) of the Exchange Act:

None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933 (the Securities Act):    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 (the Exchange Act):    Yes   ̈    No  x

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

Indicate by check mark if
disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ̈

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



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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing of the issuers common stock on June 30, 2008 as reported on NYSE Arca,
was approximately $438 million. Shares of common stock held by each executive officer and director and by each person who may be deemed to be an affiliate of the registrant have been excluded from this computation. The determination of affiliate
status for this purpose is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of
registrants common stock as of March 13, 2009 was 65,138,877 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement relating to its 2009 Annual Stockholders Meeting are incorporated by reference into
Part III of this Annual Report on Form 10-K.









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Table of Contents



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I   |  | 3                                                                                                           
|         |  |                                                                                                             
|ITEM 1.  |  | Business                                                                                                     |  | 3   
|ITEM 1A. |  | Risk Factors                                                                                                 |  | 43  
|ITEM 1B. |  | Unresolved Staff Comments                                                                                    |  | 57  
|ITEM 2.  |  | Properties                                                                                                   |  | 57  
|ITEM 3.  |  | Legal Proceedings                                                                                            |  | 58  
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 58  
|         | 
|PART II  |  | 59                                                                                                          
|         |  |                                                                                                             
|ITEM 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 59  
|ITEM 6.  |  | Selected Financial Data                                                                                      |  | 62  
|ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 63  
|ITEM 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 91  
|ITEM 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 92  
|ITEM 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 92  
|ITEM 9A. |  | Controls and Procedures                                                                                      |  | 92  
|ITEM 9B. |  | Other Information                                                                                            |  | 94  
|         | 
|PART III |  | 95                                                                                                          
|         |  |                                                                                                             
|ITEM 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 95  
|ITEM 11. |  | Executive Compensation                                                                                       |  | 95  
|ITEM 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 95  
|ITEM 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 95  
|ITEM 14. |  | Principal Accounting Fees and Services                                                                       |  | 95  
|ITEM 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 95  
|         |  | SIGNATURES                                                                                                   |  | 102 
|         |  | Audited Consolidated Financial Statements                                                                    |  | F-1 
|         |  | SCHEDULE I                                                                                                   |  | F-67



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PART I

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 Item 1A. Risk Factors and elsewhere
in this report.



|ITEM 1. | Business.
|------- | ---------

Unless the context requires
otherwise, all references in this annual 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
clean, renewable geothermal electric power plants and bottom-cycling operations. 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 Well to Wheels strategy in an effort to produce a positive impact on the environment and
economically beneficial results for our stockholders. By executing our Well to Wheels strategy, we aim to become both a producer of clean, geothermal electric power as well as a provider of electric and hybrid-electric vehicle
technologies and products.

Power Systems Segment

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.

We have initiated the
development of eight geothermal projects in our Power Systems segment to date. We completed the major construction of the cooling towers and transmission lines and installed the power generating



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units at our first 10 megawatt (MW) geothermal power plant, located in Beaver County, Utah, in October 2008. We refer to this project as the
Thermo No. 1 project or the Thermo No. 1 geothermal power plant. We placed the plant in service in the first quarter of 2009 and we expect the Thermo No. 1 geothermal power plant to become operational at or near full capacity in the
first part of 2009. For a discussion of the revenues, profit/loss and total assets of the Power Systems segment for the years ended December 31, 2008, 2007 and 2006, please see Note 19, Business Segments to our audited consolidated
financial statements.

We have either obtained or are in the process of obtaining permits for the development of seven other geothermal
power projects we have initiated in the United States. These projects are located in Utah, Nevada, New Mexico and Oregon. We believe that the geothermal resource for each of these projects has the potential to provide at least enough geothermal
energy for a commercial power plant of approximately 10 to 11 MW of net electrical power. However, we expect that some of the project sites that we intend to develop, have potential resources to generate significantly more than 10 MW of net
electrical power. For example, the Thermo No. 1 project area appears to have the potential to support many additional plants similar in design to the Thermo No. 1 geothermal power plant. Therefore, we are evaluating opportunities to build
additional plants near the Thermo No. 1 project. We expect that other project sites we have selected to develop could also prove to have resources that could support multiple plants. We intend to seek to maximize the full power generating
potential of all the sites we select for project development. For additional information on our potential geothermal resources and our development plans, see Our Potential Geothermal Resources and Development of Geothermal Power
Plants below.

Historically, federal and state governments have provided incentives and mandates for the development of renewable
resources, including geothermal projects. The recently approved American Recovery and Reinvestment Act of 2009 (the Recovery Act) provides for a number of additional grants and tax incentives to help fund renewable energy projects. Some
of the provisions included in the legislation provide for grants of up to 30% of the cost of construction, loan guarantees and additional tax benefits. We believe that these provisions could help to make financing more readily available for
renewable energy projects, and we intend to utilize them as much as possible.

Our ability to complete the development of our geothermal
power projects is dependent on our ability to obtain adequate financing to fund those projects. We intend to evaluate a variety of alternatives to finance the development of our projects. These alternatives could include project financing and tax
equity financing arrangements under our existing commitment letter (the Commitment Letter) with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), government funding from grants, loan guarantees or
private activity bonds, joint ventures, the sale of one or more of our projects or interests therein, 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 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.

We recently retained Calyon Securities (USA) Inc. (Calyon) to explore potential strategic relationships that could provide additional options
for funding, implementing and accelerating our development efforts. The potential for significant additional power production from the geothermal resource that we identified and evaluated as part of our Thermo No. 1 project has generated a
number of inquiries from potential financial partners wishing to explore a purchase, joint venture or other transaction in connection with the further development of this large resource. We engaged Calyon to help us evaluate the proposals and
negotiate any potential funding, development, or asset sale structures that we believe would enhance our ability to complete our objectives. We continue to work with Calyon to advance this process.

With the completion of the major construction items of the Thermo No. 1 geothermal power plant, we believe we have demonstrated our ability to
quickly develop geothermal power projects using our rapid



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deployment business model. We believe the demand for clean, renewable energy will continue to increase, and we believe we are well positioned to play a
meaningful role in providing clean, renewable power to consumers. Not everything has been in keeping with our original timeframes and cost expectations. Some of our projects have experienced longer development timelines or higher costs than
originally planned. Moreover, the current economic conditions in the United States and around the world make it more difficult to secure the financing and complete the other various steps necessary to develop our projects. Nevertheless, we intend to
continue to focus on the rapid deployment of our geothermal power projects.

We believe that some of our projects will allow for expansions
of the power plants through bottom-cycling operations. When the temperature of the geothermal fluids produced from the well field is sufficiently high, the geothermal fluids which are discharged from the plant can potentially carry
enough heat to generate additional electricity. In a bottom-cycling operation, the discharged geothermal fluids are passed through additional generating units to generate electricity without the risk and expense of drilling new wells.

We also believe the technologies used in our geothermal power projects can also be used to generate electricity from waste heat associated with certain
industrial operations. We intend to explore opportunities to expand our Power Systems segment to include the development of facilities that utilize waste heat to generate electricity. We believe there are a number of companies that could benefit
from these waste heat recovery facilities, including cement plants, conventional power plants, steel mills, and others, which would serve to reduce their overall long-term energy costs.

Transportation & Industrial Segment

Our Transportation & Industrial segment
focuses on commercializing our electric motor, generator and drive technologies, such as our series plug-in hybrid vehicle (PHEV) with range extender technologies, into applications. In 2008, we began work to integrate a Symetron
traction motor, generator and controller drive in a SUV demonstration vehicle expected to achieve 100 mpg equivalent to demonstrate the benefits of our plug-in electric drive system in SUV and light truck applications. Our plug-in electric drive
system is designed to allow light trucks and SUVs to achieve the equivalent of over 100 mpg in typical local daily driving with near zero emissions, by using electricity instead of petroleum as the primary fuel. Pacific Gas & Electric of
California agreed in February 2008 to initially purchase two test vehicles. The SUV demonstration vehicle is being built in cooperation with a leading global OEM. During 2007 and early 2008, we entered into several other agreements and collaborative
arrangements with large manufacturers to explore additional potential applications of our motor and drive technologies, including a collaborative arrangement with Hyundai Heavy Industries (HHI) of Korea and a license agreement with
Wilson Automotive of Canada.

We intend to continue to explore opportunities to commercialize our motor and drive technologies. However,
the recent economic downturn has had a dramatic and adverse effect on the automotive industry and other large industrial manufacturers that would otherwise 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. In light of the current economic conditions, we have reduced our resources committed to new developmental efforts. We intend to evaluate the
prospects for our technologies 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. For a discussion of the revenues, profit/loss and total assets of the
Transportation & Industrial segment for the years ended December 31, 2008, 2007 and 2006, please see Note 19, Business Segments in our audited consolidated financial statements.

Operating History, Corporate Structure and Capital Requirements

Consistent with our limited operating history, we have generated limited revenues from operations. While our Power Systems segment has begun to generate nominal revenue from the operation of our Thermo No. 1



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geothermal power plant, we do not expect to generate material revenues from this segment until we develop additional plants and place them in service. To
date, our Transportation & Industrial segment has generated only a limited amount of revenue from research and development subcontracts administered through contractors for certain government agencies. Future revenues from our
Transportation & Industrial segment will depend on our ability to commercialize our Symetron technologies, and we cannot predict when those efforts will be successful, if at all.

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

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

Given our current business strategy, we will need to secure additional financing in order to execute our plans and continue our operations. We may
acquire this additional funding through the issuance of debt, preferred stock, equity or a combination of these instruments. We also intend to evaluate a variety of alternatives to finance the development of our geothermal power projects. These
alternatives could include project financing and tax equity financing under our Commitment Letter, government funding from grants, loan guarantees or private activity bonds, joint ventures, the sale of one or more of our projects or interests
therein, entry into prepaid 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. 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 revenues we are able to generate. We cannot be certain that funding will be
available to us 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 be unable to execute out plans or continue our operations.

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

Industry Overview

Our Power Systems segment is
seeking to employ a rapid deployment strategy to develop geothermal power plants. Geothermal energy is one of several clean, renewable energy sources that are part of the renewable energy industry. Our Transportation & Industrial segment is
focused on commercializing technologies that improve electric motors and related components with a particular emphasis on electric and hybrid electric vehicle propulsion systems.

The Renewable Energy Industry and Geothermal Energy

The global demand for electrical power has
continued to grow significantly each year. In recent years, concerns about CO2 emissions from fossil-fuel power plants and the potential effect of CO2 emissions on global climate change, together with concerns about sustainability and the United
States dependence on foreign energy



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sources have led to an increased emphasis on domestic renewable energy. Renewable energy sources generally include: geothermal, solar, wind, biomass, fuel
cells using renewable fuels, ocean wave, ocean thermal, and tidal current.

A number of states and the District of Columbia offer some form
of regulation or financial incentive related to the increased use of renewable energy. Among the most wide-reaching regulations, currently adopted by 31 states and the District of Columbia, is the establishment of Renewable Portfolio Standards
(RPS), which either mandate or set goals that electrical utilities operating in a state obtain a minimum level of energy from renewable energy sources by a stated deadline. Eligible sources of renewable energy vary by state, but
generally include geothermal and certain of the other renewable energy sources described above. For example, California, one of the primary states to which we intend to sell our renewable power, has one of the most ambitious RPS in the country.
Californias RPS is to achieve a 20 percent renewable supply by 2010, with a mandate to achieve 33 percent by the end of 2020. In addition to the state regulations and financial incentives, the federal government is considering a national RPS
mandate and has provided tax incentives, grants and loan guarantees to encourage the development of renewable energy sources.

The need for
utilities to meet RPS requirements and the available state and federal incentives, among other factors, have led to a significant increase in the development of renewable energy projects based on a variety of energy sources. While geothermal is only
one of several renewable energy sources, we believe geothermal projects offer several advantages over other types of renewable energy. Geothermal power plants can provide a reliable, continuous power supply in contrast to wind and solar sources that
can only produce energy when an abundance of sun or wind is available. Intermittent resources such as wind and solar have to be firmed by arranging for power supply when the resource is not available. This adds to the cost of power for
utilities. A continuous source of firm power is called base load energy. Geothermal plants, based on modern technologies, can provide base load power with virtually no emissions. These factors make geothermal energy attractive to utilities and other
purchasers of renewable energy.

Geothermal energy is derived from the natural heat of the earth that has been transferred from the core of
the earth to hot or molten rocks nearer to the surface. The heat resource can be used to generate electricity through a transfer medium such as water. When water comes sufficiently close to hot or molten rock it is super heated and ascends toward
the surface of the earth. Geothermal fluids cannot be transported economically over longer distances due to heat and pressure loss. Therefore, geothermal power plants must normally be located within approximately one to two miles of the geothermal
production wells. Geothermal energy projects typically have higher capital costs compared to fossil fuel power plants. However, geothermal power plants tend to have significantly lower variable operating costs due primarily to the elimination of
fuel expense.

Advances in heat transfer technology, such as the binary cycle technology utilized in our plant designs, have made it
possible to generate electricity from lower temperature sources of geothermal heat that were previously unusable for such purposes. Binary cycle technology can utilize water-based geothermal resources with temperatures ranging from approximately 200
to 350 degrees Fahrenheit. Binary cycle technology is a closed-loop heat transfer system, in which the hot water from the geothermal resource is cycled or pumped to the surface through production wells and channeled through surface pipes
into heat transfer equipment. In a binary system, the geothermal water never comes into direct contact with the blades of the turbine generator. The geothermally-heated water is used to heat an organic compound or working fluid located
in the power generating units, which then vaporizes (at a lower temperature than boiling water) into a gas to turn the turbine generator. After the heat transfer process is complete, all of the geothermal water remains in the pipes at a cooler
temperature for reinjection into the ground to renew the geothermal resource. All of the geothermal water is then returned to the geothermal heat resource under the earths surface through a reinjection well to ensure that the heat resource is
properly maintained. As a result, no water is permanently extracted from the earth. In light of the nature of the heat transfer and the fact that all of the geothermal water is returned to the heat source, the resource is considered
fully renewable and can be used in a sustainable manner for long periods of time.



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Geothermal power currently represents less than 1% of the total electrical power produced in the United
States. However, recent studies by the National Renewable Energy Laboratory and the Massachusetts Institute of Technology suggest that geothermal energy could become a significant source of electrical energy, growing to as much as 10% of the United
States overall electrical power production.

Transportation and Other Electric Motor Industries

Many of the same concerns that have led to an increased focus on renewable energy have also led to an increased focus on energy efficiency and
conservation. Manufacturers and users of generators, alternators, motors and adjustable-speed drive systems continue to seek improved operating efficiencies and higher power and torque outputs. Many large industries such as automotive, heating,
ventilating and air conditioning (HVAC), public transportation, military and others use induction motors and drives as well as generators and alternators. Each of these industries is large and requires different specifications to meet
their application requirements. AC induction motors, for example, are the workhorses of industry and are found throughout factories, buildings and residences. Power electronic drives are used to control the speed and performance of AC induction
motors in order to save energy. With the cost of electrical energy continuing to rise, end-user demand for higher efficiency electric motors, generators and adjustable-speed motor-drive systems is steadily increasing. At the same time, in order to
minimize power plant emissions and reduce electrical power demand, government agencies are increasingly mandating higher efficiency electric motor and motor-drive system standards.

Through internal and collaborative research and development, our Transportation & Industrial segment has developed several innovations in
electric motors, generators and their associated power electronic drives and controller technologies that allow for increased torque, power and efficiency. These technologies can be applied to industrial AC induction motors and drives, permanent
magnet synchronous motors, AC generators and automotive alternators for use in industrial and transportation applications, hybrid-electric and electric vehicle propulsion systems, and other applications where the efficiency of electricity-to-motion
or motion-to-electricity power conversions can be improved.

We believe our SymetronTMtechnologies are particularly well-suited for PHEV propulsion systems. PHEV systems are one of the new areas of focus among many auto companies
for the next generation of hybrid vehicles. We are collaborating with other companies to develop a PHEV integrated master control hardware and software system and have developed our own electric vehicle propulsion system incorporating our
technologies. We have also entered into licensing and business cooperation agreements for the right to incorporate our technologies into the production of AC motors and both 12-volt and 24-volt high output brushless claw-pole alternators, including
our proprietary Intelligent Voltage Regulator (IVR).

Business Strategy

Our primary energy technology objectives are to be a leading developer of geothermal power plants and a leading developer and licensor of technologies
that improve the performance of electric motors, generators, drives and related components. We believe the growing demand for clean, renewable energy sources and the increased emphasis on energy efficiency and conservation present significant growth
opportunities for both of our business segments. We intend to pursue our objective through the following strategies:

Focus on Development of Geothermal
Power Plants

Our Power Systems segment has initiated the development of eight geothermal projects in the United States to date,
including our Thermo No. 1 project, which we expect to be operational at or near full capacity in the first part of 2009. We have either obtained or are in the process of obtaining permits for the development of seven other geothermal power
projects we have initiated. These seven projects are in various stages of development, and we currently expect to complete these projects in 2009 and 2010. The timing for development of these projects, however, will depend significantly on our
ability to obtain financing for these projects. From the



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potential geothermal resources we have acquired, we intend to continue to identify properties that we believe can be developed rapidly and efficiently. We
intend to initiate the development of several new projects each year, and we expect to maintain a portfolio or series of projects in development at all times. However, the number of projects we initiate each year, will depend on a number of factors,
including the availability of adequate financing, the availability of adequate geothermal resources, the demand for renewable power, the total number of projects we have under development at one time, and our available resources to devote to our
project development efforts.

Refine Rapid Deployment Strategy

We have established an important strategic relationship with UTC Power (UTCP), a United Technologies company, that we expect will evolve and expand over time. Through this relationship, we are able to
order and begin manufacturing the major components of a geothermal power plant before the well field drilling is completed. By using the modular power generating units, we believe we can complete the construction of most of our power plants in
twelve to eighteen months from the time we determine, with a high degree of confidence, that sufficient geothermal resources exist at the project site to support a geothermal power plant and begin drilling the well field. A typical 10 to 11 MW net
generating geothermal power plant will use about fifty, 280 KW UTCP PureCycle modular power generating units. These units can be aggregated into a working facility in a relatively short time frame compared to a traditional steam plant, which can
require three years or longer to complete. We utilized this rapid deployment model in connection with the construction of our Thermo No. 1 geothermal power plant. We intend to further refine and improve the speed and efficiency of this rapid
deployment model as we develop additional projects.

We believe that other equipment suppliers may be able to provide generation units
which meet our standards and fit into our rapid deployment strategy. In an effort to reduce our dependence on any one turbine supplier, we have been in discussions with alternate suppliers and may, in the future, purchase generation units from other
suppliers in addition to UTCP.

Continue to Finance the Development of Geothermal Power Plants through Various Arrangements

Sufficient financing to complete the development of each of our geothermal power projects is critical to the success of our strategy. We believe capital
will be a gating factor for completing a number of geothermal projects in 2009 and beyond. While the current financing environment is difficult due to economic conditions, the current economic recession has also resulted in lower commodity prices
and construction costs. Further, the recently approved American Recovery and Reinvestment Act of 2009 (the Recovery Act) provides for a number of grants and tax incentives to help fund renewable energy projects. Some of the provisions
included in the legislation provide for grants of up to 30% of the cost of construction, loan guarantees and additional tax benefits. We believe that these stimulus provisions could help to make financing or other types of funding more readily
available for renewable energy projects. The Recovery Act includes provisions that:



| |  |  | Extend the 10-year production tax credit (PTC) for qualified geothermal facilities placed in service through 2013.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Permit taxpayers to elect to claim an investment tax credit (ITC) in place of the PTC for certain projects, including, geothermal energy facilities
placed in service from 2009 through 2013. The amount of the ITC would generally be 30 percent of the qualifying costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Modify the ITC by eliminating the reduction of the ITC for property financed by subsidized energy financing or tax-exempt private activity bonds.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Permit a developer to receive a grant from the United States Treasury Department in place of claiming tax credits for certain properties placed in service in 2009
and 2010 that would otherwise qualify for the PTC or ITC. Property placed in service after 2010, but on or before the applicable credit termination date, could qualify for the grants as long as construction began in 2009 or 2010. The amount of a
grant would generally be equal to the amount of the ITC for which the project would have otherwise been eligible.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Extend first-year bonus depreciation to property placed in service in 2009. This means an owner of qualifying property placed in service in 2009 could deduct 50
percent of the adjusted basis of the property in 2009. The remaining 50 percent would be depreciated using the 5-year Modified Accelerated Cost Recovery System (MACRS).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Authorize an additional $1.6 billion of Clean Renewable Energy Bonds (CREBs) to finance facilities that generate electricity from certain renewable
resources.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Authorize an additional $6 billion in loan guarantees for qualified facilities.
| | - |  | -------------------------------------------------------------------------------

Prior to obtaining financing for each of our projects, we also seek to enter into a power purchase agreement with investor-owned or municipal-owned
utilities. The long-term contractual arrangement to sell power facilitates a number of funding mechanisms. Some utilities may arrange to pay part of the purchase price of the power up front in order to assist with the financing of construction and
development of the power plant. This arrangement is referred to as a prepaid power purchase agreement. Each project generally consists of three phases. During the first phase, the site is identified and evaluated. During the second phase, the power
plant, transmission lines and pipelines are constructed and the production and reinjection wells are drilled. The third and final phase is the production phase, during which the power plant is operated over its useful life. A different mix of
financing alternatives is available for the various development phases and activities. To date, we have funded the site identification and evaluation phase of each project, as well as the drilling of production and reinjection wells, primarily from
our funds available for general corporate purposes, which we have obtained principally from the issuance of convertible debt and equity securities from time to time. However, we intend to explore other potential alternatives to finance the drilling
of production and reinjection wells for our projects, including drilling-specific investment funds, government grants, loan guarantees and private activity bonds, joint ventures or other strategic transactions. With respect to the construction of
the power plant, transmission lines and pipelines for our projects, we intend to seek financing on a project by project basis in accordance with our Commitment Letter with Merrill Lynch, which sets forth general terms relating to the structuring and
financing of up to 155 MW of geothermal power plants to be developed by us. The Commitment Letter generally contemplates a combination of project financing and tax equity financing, but could incorporate other forms of financing. In addition to
seeking financing under the Commitment Letter, we intend to explore prepaid power purchase agreements, joint ventures, stimulus funding and other arrangements, which may provide additional sources of financing for the different phases of our
projects.

Expand Power Systems Segment to Include Development of Bottom Cycling and Waste Heat Recovery Facilities

We believe that some of our projects will allow for expansions of the power plants through bottom-cycling operations. When the temperature of
the geothermal fluids produced from the well field is sufficiently high, the geothermal fluids which are discharged from the plant can potentially carry enough heat to generate additional electricity. In a bottom-cycling operation, the discharged
geothermal fluids are passed through additional generating units to generate electricity without the risk and expense of drilling new wells.

We also believe the technologies used in our geothermal power projects can also be used to generate electricity from waste heat associated with certain industrial operations. We intend to explore opportunities to expand our Power Systems
segment to include the development of facilities that utilize waste heat to generate electricity. We believe there are a number of companies that could benefit from these waste heat recovery facilities, including cement plants, conventional power
plants, steel mills, and others, which would serve to reduce their overall long-term energy costs.

Continue to Identify and Acquire Potential
Geothermal Resources

We have accumulated domestic geothermal interests in Nevada, New Mexico, Oregon and Utah. We believe we have
aggregated one of the largest portfolios of potential geothermal resources in the country. With the help of internal and external geologists, we intend to continue to identify, evaluate and acquire additional interests in



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properties that have the potential to provide sufficient geothermal energy to operate geothermal power plants. We intend to target well-studied properties
with known geothermal anomalies. Generally, we intend to seek resources that have been previously passed over for development by other companies but are suitable for binary cycle plants, which have lower grade heat characteristics than those
required for traditional geothermal power generating technologies. If we discover or acquire heat resources that have higher temperatures than those most suitable for binary cycle technology, we intend to evaluate the use of traditional flash
technology to generate power from these resources.

In addition to our geothermal interests in the United States, in September 2008 we and
Indonesia Power were selected as low bidders on a geothermal project in Indonesia. As a result, both companies were awarded a concession by the Indonesian government that includes approximately 100,000 acres of land that contains potential
geothermal resources. We are in the process of finalizing a joint venture agreement with Indonesia Power to evaluate the geothermal resources and develop a geothermal power project. We expect this joint venture agreement to be finalized during the
first or second quarter of 2009.

Commercialize Electric Powertrain Propulsion Solutions for the Transportation Industry

We intend to continue our efforts to market the technologies developed by our Transportation & Industrial business and our manufacturing partners
to the global transportation industry in the areas of electric and hybrid electric vehicles. We believe these technologies are suited for use in industrial and transportation applications, hybrid-electric and electric vehicle propulsion systems, and
other applications where the improvement in efficiency and power torque density of electricity-to-motion or motion-to-electricity power conversions provides a competitive advantage. We believe that manufacturers of electric motors and industries
that make extensive use of electric motors and drives can utilize our Symetron technologies to improve the efficiency of electric motors, generators and related power electronic adjustable-speed drive systems without a significant increase in
their manufacturing costs. To date, we have entered into three Symetron licensing or cooperative development agreements to explore these types of applications of our technologies.

Pursue Acquisitions Opportunistically

We may explore opportunities to acquire technologies or
resources that complement or enhance our existing asset base. In addition, we may pursue acquisitions that accelerate our plans to develop geothermal power plants.

Our Business Segments

Power Systems

We have accumulated a large portfolio of geothermal interests in four western continental states as well as a concession to develop certain geothermal property in Indonesia. These geothermal interests are important to
our ability to develop geothermal power plants. We intend to continue to identify, evaluate and acquire additional interests in properties that have the potential to provide sufficient geothermal energy to operate geothermal power plants. We intend
to target well-studied properties with known geothermal anomalies. Generally, we intend to seek geothermal resources that have been passed over for development by other companies but are suitable for binary cycle plants, which have lower grade heat
requirements than traditional geothermal power generating technologies. If we discover or acquire heat resources that have higher temperatures than those most suitable for binary cycle technology, we intend to evaluate the use of traditional flash
technology to generate power from these resources.

We have initiated the development of eight geothermal projects in our Power Systems
segment to date. We completed the major construction of the cooling towers and transmission lines and installed the power generating units at our first net 10 MW geothermal power plant, located in Utah, in October 2008. We refer to this project as
the Thermo No. 1 project or the Thermo No. 1 geothermal power plant. The plant was placed in service in the first quarter of 2009. We expect the Thermo No. 1 geothermal power plant to become operational at or near full capacity in the
first part of 2009.



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We have either obtained or are in the process of obtaining permits for the development of seven other
geothermal power projects we have initiated. These projects are located in Utah, Nevada, New Mexico and Oregon. We believe that the geothermal resource for each of these projects has the potential to provide at least enough geothermal energy for a
power plant of approximately 10 MW. However, we expect that some of the project sites that we intend to develop, have potential resources to generate significantly more than 10 MW of net electrical power. For example, the Thermo No. 1 project
area appears to have the potential to support additional plants. Therefore, we are evaluating opportunities to build additional plants near the Thermo No. 1 project. We expect that other project sites we have selected to develop could also
prove to contain resources that could support multiple plants. We intend to seek to maximize the full power generating potential of all the sites we select for project development. For additional information on our potential geothermal resources and
our development plans, see Our Potential Geothermal Resources and Development of Geothermal Power Plants below.

Our ability to complete the development of our geothermal power projects is dependent on our ability to obtain adequate financing to fund the projects. We intend to evaluate a variety of alternatives to finance the development of our
projects. These alternatives could include project financing and tax equity financing arrangements under our existing Commitment Letter with Merrill Lynch, government grants, loan guarantees and private activity bonds, joint ventures, the sale of
one or more of our projects or interests therein, 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 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.

We recently retained Calyon to explore potential strategic relationships that could provide additional options for funding, implementing and accelerating our development efforts. The potential for significant
additional power production from the geothermal resource that we identified and evaluated as part of our Thermo No. 1 project has generated a number of inquiries from potential financial partners wishing to explore a purchase, joint venture or
other transaction in connection with the further development of this large resource. We engaged Calyon to help us evaluate the proposals and negotiate any potential funding, development, and asset sale structures that we believe would enhance our
ability to complete our objectives. We continue to work with Calyon to advance this process.

With the completion of the major construction
items of the Thermo No. 1 plant, we believe we have demonstrated our ability to quickly develop geothermal power projects using our rapid deployment business model. We believe the demand for clean, renewable energy will continue to increase,
and we believe we are well positioned to play a meaningful role in providing clean, renewable power to consumers. Not everything has been in keeping with our original timeframes and cost expectations. Some of our projects have experienced longer
development timelines or higher costs than originally planned. Moreover, the current economic conditions in the United States and around the world make it more difficult to secure the financing and complete the other various steps necessary to
develop our projects. Nevertheless, we intend to continue to focus on the rapid deployment of our geothermal power projects.

We expect to
generate revenues and cash flows from two primary sources from our geothermal power plants. First, we expect to generate revenues through power purchase agreements with utilities from the sale of electrical power generated by the power plants.
Second, we expect to receive revenue and cash flows in the form of fees and distributions from our projects primarily related to the tax structuring of the projects. We expect that tax equity partners who are in a position to benefit from the tax
benefits associated with the geothermal power plants we plan to develop will make capital contributions to fund a portion of our projects and related fee payments and distributions. We expect to share the power sales revenues and tax benefits with
the tax equity partner in consideration for fees and other distributions. During the first ten years of the life of a power plant for



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which we claim the production tax credit, the tax equity partner would receive a larger percentage of the tax benefits as part of its equity interest in
consideration for payments made to the operating entity. After the first ten years of operations, when most of the tax benefits have been exhausted, we would expect to receive most of the excess cash flows generated by the operating entity, while
the tax equity partner would continue to receive a small percentage of excess cash flows. The exact terms of these arrangements, however, will depend on negotiations with individual tax equity partners and may vary from project to project. These
techniques for tax equity financing have traditionally been applied to wind power projects, but we believe that they are applicable and available to geothermal power projects. The American Recovery and Reinvestment Act of 2009 (the Recovery
Act) recently extended the placed-in-service sunset date for the geothermal production tax credit through 2013. The Recovery Act also allows the owner of a qualified geothermal project to elect to receive a cash grant from the United States
Treasury in lieu of claiming the production tax credit if the project is placed in service in 2009 or 2010, or if construction begins in 2009 or 2010 and the project is placed in service before 2014. We intend to pursue these tax credits and grants
where appropriate to help fund a number of our geothermal projects under development. However, any actual cash payments will be subject to the United States Treasury finalizing the program rules and procedures for making such cash grants. As a
result, we cannot predict when funds from these grants might be available to fund our projects.

Transportation & Industrial

Our Transportation & Industrial segment has developed unique innovations for AC electric
motors, generators, power electronic drives and controllers, and series PHEVs. The electromagnetic machine and power electronic drive technologies are trademarked under the name SymetronTM. Our innovations in these areas allow for increased torque, power and efficiency. These technologies can be applied to AC induction, permanent-magnet synchronous, and hybrid
reluctance electric motors, generators and power electronic drives, automotive alternators and integrated starter alternators. We believe these technologies are particularly suited for use in industrial and transportation applications,
hybrid-electric and electric vehicle propulsion systems, and other applications where the efficiency of electricity-to-motion or motion-to-electricity power conversions can be improved.

In 2007, we signed a world-wide licensing agreement with Wilson Auto Electric to manufacture and sell high-output brushless truck and automotive
alternators. We also entered into a collaborative arrangement with FEV, a large automotive design and vehicle integration supplier, and a major automotive manufacturer to integrate our technology into a demonstration model full-size sport-utility
PHEV. This demonstration PHEV project was subsequently expanded to include the production of two additional demonstration vehicles to be built for Pacific Gas and Electric (PG&E). PG&E ordered the two vehicles with the intent to
test and evaluate them for potential future use in their fleet. Additionally, in January 2008 we signed a business cooperation agreement with Hyundai Heavy Industries (HHI) relating to the potential manufacture and sale of AC induction
motors, generators and drives incorporating our technologies for use in industries such as geothermal power generation, HVAC, refrigeration and other applications.

During 2009, our Transportation & Industrial segment plans to continue to focus primarily on commercializing the applications contemplated by the FEV, HHI and other pending agreements. However, 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. In the interim, we have taken steps to reduce the resources committed to new developmental efforts. 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.



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Our Potential Geothermal Resources

We have accumulated a large portfolio of geothermal interests in four western states in the United States that we believe have the potential to provide sufficient geothermal energy to operate binary cycle geothermal
power plants. In addition to our geothermal interests in the United States, in September 2008 we and Indonesia Power were selected as successful bidders on a geothermal project in Indonesia. As a result, both companies were awarded a concession by
the Indonesian government that includes approximately 100,000 acres of land that contains potential geothermal resources. We are in the process of finalizing a joint venture agreement with Indonesia Power to evaluate the geothermal resources and
develop a geothermal power project. We expect this joint venture agreement to be finalized during the first or second quarter of 2009.

With the help of internal and external geologists, we intend to continue to identify, evaluate and acquire interests in additional properties with potential geothermal resources. We target properties with known geothermal anomalies and
lower heat characteristics than those required for traditional geothermal power generating technologies. We attempt to target properties that we believe are likely to be suitable for binary cycle power generation. The properties we target must also
be in close proximity to existing transmission lines so that a power plant may be connected to the power grid without unreasonable expense.

Typically, when we acquire an interest in a property with potential geothermal resources, we do so by entering into a geothermal lease with the owner of the property. Under the terms of the typical lease, the owner of the property grants us
the right to explore and develop the geothermal resources on the property. These leases are generally long term in nature and may be renewed at the expiration of the term. We generally pay upfront lease bonuses and annual delay rentals for the
leases until a geothermal power plant is placed in service. If a plant is placed in service on a property, we are obligated to pay royalties to the owner of the property on all power produced.

In addition to entering into long-term geothermal leases for properties with potential geothermal resources, we have acquired interests in several
properties where wells have been drilled on, or in the vicinity of, the properties. In addition, we have acquired interests in three properties where the geothermal resources have sustained established greenhouse operations. The acquisition of
properties with established geothermal resources significantly reduces the exploration risk and the amount of development time that is required to place the planned geothermal power plant into operation. Therefore, we intend to continue to explore
opportunities to acquire interests in properties with established geothermal resources and properties with operating wells. Properties with established geothermal resources usually cost more to acquire, but the amount of time and capital for well
field development and the risks associated with such development are generally reduced.

Unless a property already contains an established
geothermal well, we cannot be sure that a property will ultimately provide a sufficient geothermal resource to operate a binary cycle geothermal power plant without drilling or other testing. The costs associated with drilling and testing varies
from property to property and can often be significant. Generally, drilling and testing must be at least partially completed before project-specific financing is available from tax equity partners or other third-parties. As a result, we potentially
must fund the costs associated with drilling, testing, and other up-front development activities from other funds available to us or by separately financing these activities.

For additional information on the property interests we have acquired and the properties on which we are currently conducting drilling and testing, see
Development of Geothermal Power Plants below.

Development of Geothermal Power Plants

Each geothermal power project we develop consists of three phases. During the first phase, the site is identified and evaluated. During the second phase,
the power plant, transmission lines and pipelines are constructed and the production and reinjection wells are drilled. The third and final phase is the production phase, during which the power plant is operated over its useful life. We consider
development to mean the time



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after initial exploration is complete but before the plant is placed into service. The order in which certain development activities are conducted may vary
depending on the unique characteristics of each site.

Site Identification and Evaluation

We utilize our in-house full-time geologists, independent geologists, in-house and independent transmission specialists, ARC-GIS specialists and others on
our development team to help identify and locate areas that are favorable to development. We are primarily interested in securing locations that we believe contain the targeted geothermal activity; present a favorable development environment
(considering permitting requirements, topography, site access, etc.), and allow transmission access to favorable power markets.

As part of
our site identification and evaluation process, we perform certain internal reviews and we contract with independent third party transmission, geologic and geothermal consultants to provide independent analysis. These reviews can typically be
categorized as either (i) preliminary site identification reviews which are used to either identify parcels of land for which we want to pursue leases or to identify parcels within an already leased area that are of high interest (a
Preliminary Site Review); or (ii) a resource evaluation and internally-generated basic economic analysis (a Resource Evaluation).

A Preliminary Site Review will generally take into account well drilling logs, if available, geophysical features, geological samples, geothermal anomalies such as hot springs, other readily available geologic studies
and data from third-party mining operations. We will also do a basic review of accessibility to the power grid and prepare maps of the property owners in the area through a search of title records or tax plats. The Preliminary Site Review does not
generally entail new geologic surveys or other reviews that are more costly. The purpose of such a study is to identify areas of high interest for the lowest cost possible. We generally initiate a Preliminary Site Review after we have either
identified an area that we think may be of interest, or after we have been approached by a landowner or other third party about an area. The purpose of these studies is typically to decide if we want to pursue a geothermal lease in the area and
undertake the next phase of geologic study and review. Often times, these sites were previously passed over for geothermal development by other companies but which can now be economically developed due to, among other things new technologies. The
Preliminary Site Reviews are generally performed by our in-house geologists or by Dr. Carl Austin, a third-party geothermal engineer with whom we contract. A review of transmission is prepared by our in-house transmission specialists, or our
independent transmission consultants, ZGlobal Engineering and Energy Services. These reviews can take the form of a formal report or may simply be presented to management orally.

When a Preliminary Site Review identifies an area to be of high interest, we begin the process of lease acquisition. Suitable geothermal resources are
located on federal, state, or private lands. Once the land owners are identified, we enter into either public or private geothermal and/or surface leases with those land owners. Public land leases are normally obtained either directly or through a
public auction. Occasionally, we may determine that it is more economically feasible to purchase the land directly instead of entering into a lease agreement. For additional information on the property interests we have acquired, see Our
Potential Geothermal Resources above.

A Resource Evaluation is typically a more detailed review of the prospects of a resource and
the likelihood that the resource contains a developable geothermal resource. As part of this more detailed review, we will generally perform, or hire others to perform, additional geologic and geophysical studies like: (i) well or hot spring
sampling and geochemical analysis of the samples; (ii) on-site geologic mapping (generally done via a detailed walk-through of the area); (iii) gravity, ground magnetic, telluric-magnetotelluric, self-potential and/or seismic surveys; and
(iv) drilling of thermal-gradient wells or exploratory slim holes. Often times, at least some of these geophysical studies have already been performed and it is often not necessary, or advisable due to cost, to perform all of them.
Depending on the nature of the studies which have already been performed and which studies we determine to be necessary or advisable, a Resource Evaluation can cost anywhere from several thousand dollars to several hundred thousand dollars.



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We generally ask for a formal report to be prepared as part of a Resource Evaluation, but before such a
report is finalized we will have several interim meetings to discuss relevant findings. It is possible that if the interim findings are favorable enough, we will begin permitting and possibly even drilling before a final report is prepared. This was
the case with our Thermo No. 1 project as discussed below. The key question we are looking to answer with a high degree of confidence in a Resource Evaluation is can this resource support a 10 MW geothermal project. If the results of the
Resource Evaluation are inconclusive, we may seek additional exploratory work to be performed or we may abandon the prospect. If the results of the Resource Evaluation are favorable, however, we will begin development of a 10 MW project by securing
permits and drilling our first full-sized production well. While the drilling of slim holes may be appropriate at certain sites, we do not believe it necessary to drill slim holes at all sites in order to determine with a high degree of confidence
that a suitable geothermal resource exists. To date, we have contracted with The Energy and Geoscience Institute at the University of Utah, GeothermEx, Inc. and others to prepare this type of resource evaluation.

The process of site identification and resource evaluation is a fluid process that is managed by experienced geologists, geothermal experts, and our
internal development staff. As noted above, many of the sites we have pursued were passed over by other developers in the past after numerous studies had been performed. Because of this, there is oftentimes sufficient data already available to
conclude with a high degree of confidence that a 10 MW project is commercially viable with little additional study or review by our team. In these instances we may not necessarily strictly follow this two-phase review process.

The high degree of confidence threshold reflects a conclusion reached by management based on judgment, experience and available information,
which typically includes internal and external evaluations of the potential resource and, in some cases, could include the evaluation of non-production slim holes drilled at the site. While managements conclusion necessarily reflects
managements assessment that a property contains a commercially viable geothermal resource, this conclusion is not based on a precise statistical measurement of probability. Further, managements conclusion is not necessarily based on an
independent feasibility study or a systematic drilling program intended to definitively establish the size and characteristics of the potential resource, and we believe we can reach a conclusion with respect to a site without necessarily drilling
non-production slim holes. Managements conclusion does, however, reflect our belief that, with a high degree of confidence, the resource will support one or more power plants, justifying the commitment of substantial resources to begin the
process to construct the power plant, transmission lines, production and reinjection wells and pipelines.

Well Drilling and Plant Construction

The second phase of project development consists of a variety of activities, including permitting, drilling of production and reinjection
wells, and construction of the power plant, transmission lines and pipelines. The determination to proceed with this phase of development is based on obtaining sufficient third-party evaluation and analysis supporting the conclusion, with a high
degree of confidence, that the given site contains adequate renewable geothermal resources to continually produce electricity without any substantial degradation in the heat resource.

During the second phase of development, we initiate a number of activities concurrently. We start acquiring the necessary water rights, file for
interconnection and transmission agreements and begin acquiring rights of way as necessary for transmission lines. We also prepare all necessary environmental reviews and reports and begin negotiations for power purchase agreements.

As a component of our rapid deployment business model, when an independent geologist is able to readily identify the general location of the geothermal
resource and its characteristics with a high degree of confidence, we omit drilling slim holes and begin drilling larger diameter production holes to be used as either production or reinjection wells for the production of electricity. The purpose of
drilling the production and reinjection wells is to prepare the established geothermal resource for use in the commercial production of electricity. The number of



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production and reinjection wells required for each project will vary based upon the combined gross generating capacity of the power generating units used at
each power plant and the combined production capability of the production wells. Generally, project-specific financing is not available until the well field has been at least partially drilled and a power purchase agreement is in place for a
project. To date, we have funded the site identification and evaluation phase of each project, as well as the drilling of production and reinjection wells, primarily from our funds available for general corporate purposes, which we have obtained
principally from the issuance of convertible debt and equity securities from time to time. However, we intend to explore other potential alternatives to finance the drilling of production and reinjection wells for our projects, including
drilling-specific investment funds, joint ventures or other strategic transactions.

After a well is drilled and tested, it will be
classified as either (i) a production well; (ii) a reinjection well; or (iii) a non-commercial well. A production well is one that is capable of producing sufficient water flow and heat to generate electricity when run through a
geothermal turbine. A reinjection well is one which demonstrates the necessary permeability to allow reinjection of the geothermal fluids discharged from the plant in a manner in which we believe will not detrimentally impact the geothermal resource
or our production wells. A non-commercial well is one that does not currently demonstrate sufficient heat, water flow or permeability to be either a production well or reinjection well, or which provides inconclusive results but which we have
determined to not pursue at that time for a variety of reasons including availability of funding for additional testing or drilling.

With
sufficient drilling of the well field and a power purchase agreement in place, we next seek funding from third parties for the plant construction phase of the project. Third party financing sources generally require resource validation by an
independent geologist prior to releasing the funds to complete the construction portion and drilling portion of the project. The third party financing companies generally contract with independent geothermal engineers to independently validate and
quantify the power producing potential of the resource. The independent geothermal engineers also help monitor the drilling of the production and reinjection wells necessary to produce electricity. After each well is completed, we perform tests of
the heat and volume of flow of the water for the financiers. Based upon the results of our testing, the independent engineers estimate the electricity generating capacity of each well. When the total production capacity of the production and
reinjection wells included in the applicable project achieve the electricity generating capacity needed for the planned power plant, the well field is considered completed. If the total production capacity of the wells is insufficient to generate
the electrical capacity of the constructed geothermal power plant, additional wells are typically drilled accordingly.

With the
preliminary results from the wells, we can determine the economic terms associated with the power plant development and the subsequent sale of the power. Accordingly, we believe that we should generally be able to obtain third party financing to
complete the plant construction phase of our projects. Other than certain excluded financings, our Commitment Letter with Merrill Lynch gives Merrill Lynch the exclusive right, but not the obligation, to finance our first 100 MW of projects. We
intend to seek financing on a project by project basis in accordance with the Commitment Letter. The Commitment Letter generally contemplates a combination of project financing and tax equity financing, but could incorporate other forms of
financing. In addition to seeking financing under the Commitment Letter, we intend to explore prepaid power purchase agreements, joint ventures and other arrangements, which may provide additional sources of financing for the plant construction
phase of our projects. The tax incentives associated with these renewable energy projects have placed in service deadlines. We have incurred and may incur in the future, significant additional costs during this phase in order to meet a
placed in service deadline.

While the total development time will vary from project to project, we believe we can complete the development
of most projects, including well field development and plant construction, in twelve to eighteen months from the time we begin drilling the well field. This rapid deployment is made possible by conducting a number of development steps simultaneously
and using modular generating units manufactured by UTCP. A typical net 10 MW geothermal power plant will use about 50 modular power generating units that can be aggregated into a working facility in a relatively short time frame compared to a
traditional steam plant, which



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can require three years or longer to complete. We utilized this rapid deployment model in connection with the construction of our Thermo No. 1 plant. We
intend to further refine and improve the speed and efficiency of this rapid deployment model as we develop additional projects.

Production Phase

The third and final phase of development is the production phase. During the production phase, the power plant is operated over its useful
life. We expect to generate revenues and cash flows from two primary sources during the production phase of a project. First, we expect to generate revenues through power purchase agreements with utilities from the sale of electrical power generated
by the power plant. Second, we expect to generate revenues and cash flows in the form of fees and distributions from our projects, which we expect to be funded primarily by contributions made by tax equity partners. See Our Business
SegmentsPower Systems above and Tax Incentives and Financing below.

Current Geothermal Power Projects

We have initiated the development of eight geothermal projects in our Power Systems segment to date. We placed the Thermo No. 1
geothermal power plant in service in the first quarter of 2009 and have either obtained or are in the process of obtaining permits for the development of the other seven geothermal power projects we have initiated. The current status of development
for each of these eight projects is described below:



| |  |  | Thermo No. 1 Plant (Utah)We completed major construction of the cooling towers and transmission lines and installed the power generating units at the
Thermo No. 1 geothermal power plant, located in Beaver County, Utah, in the fourth quarter of 2008. We expect the Thermo No. 1 geothermal power plant to become operational at or near full capacity in the first part of 2009. We have
obtained all necessary permits to develop and operate the plant.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2007, with the help of external consulting
geologists, we began evaluating preliminary geologic studies of possible geothermal resources near Beaver, Utah referred to as the Thermo Known Geothermal Resource Area (the Thermo KGRA). The area in and around the Thermo KGRA was
targeted initially because multiple geologic studies had been performed over many years in the area, and because a geothermal well had been drilled in the area that reached a temperature of 345 degrees Fahrenheit. Our consulting geologists reviewed
numerous studies on the area, including gravity, ground magnetic, telluric-magnetotelluric and self-potential surveys. They also reviewed data from dozens of thermal-gradient wells that have been drilled in and around the Thermo KGRA. After
analyzing all of the available data, our consulting geologists concluded that the Thermo area was a high-prospect area and likely suitable for at least a 10 MW geothermal power plant.

After identifying the Thermo prospect area, we began acquiring the exclusive geothermal rights to land located in the Thermo prospect area. Beginning in
April 2007, we entered into several lease agreements with the State of Utah School and Institutional Trust Lands Administration (the State) for geothermal rights in the Thermo area totaling approximately 5,500 acres. The initial term of
the geothermal leases is 10 years, subject to extension for as long as we are actively pursuing or generating electricity from geothermal resources from the leased lands. Annual delay rental payments on the State leases are $1.00 per acre and are
due on each anniversary date until production begins. If a geothermal power plant is constructed which utilizes geothermal resources covered by the leases, royalties are paid based on a percentage of electrical sales from the plant. The leases
provide for rights to the geothermal resource and rights to utilize the surface as necessary for the development of the geothermal rights.

Additionally, in September, 2007, we entered into a lease agreement with a private landowner to obtain the geothermal rights on approximately 11,000 acres of land located in the Thermo area. Through this lease, we acquired a 75% undivided
interest in the geothermal rights on the properties. We are in the process of acquiring the remaining 25% undivided interest via a lease with another private entity, which we expect to finalize in the first quarter of 2009. The expenses associated
with the negotiation,



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document preparation, due diligence and other acquisition related activities were capitalized as part of the land acquisition. The initial term of the lease
with a 75% undivided interest is ten years. Cumulative annual delay rental payments on the lease with a 75% undivided interest are $1.00 per acre and are due on each respective anniversary date until production has begun. If a geothermal power plant
is constructed which utilizes geothermal resources covered by the lease, royalties are owed to the landowner based on a percentage of electrical sales from the plant. The lease provide for rights to the geothermal resource and rights to utilize the
surface as necessary for the development of the geothermal rights. We expect the lease on the remaining 25% undivided interest to have a five year initial term with other provisions similar to the 75% lease.

While the leases mentioned above cover most of the area we consider to be the heart of the Thermo geothermal resource, we have signed additional
agreements with private landowners and the State in the vicinity of the Thermo area covering an additional approximately 35,000 acres. We anticipate that we will dedicate a small portion (likely less than 1,000 acres) of our leased acreage for each
individual 10-11 MW project we develop. We expect that a parcel of approximately 640800 acres will be ultimately dedicated to the Thermo No. 1 geothermal power plant. The Thermo No. 1 project can be accessed utilizing public roads
suitable for unrestricted ground transportation.

After acquiring the appropriate geothermal leases, we tasked our external geologic
consultants with performing a Resource Evaluation as described above. During the evaluation process, we obtained a high degree of confidence supporting the conclusion that the Thermo No. 1 site contained a commercially viable geothermal
resource to continually produce electricity without any substantial degradation in the heat resource. Therefore, in November 2007, prior to the completion of the final Resource Evaluation report, we omitted drilling slim holes and began drilling
larger diameter production and reinjection wells for the production of electricity. Shortly thereafter, we received the written Resource Evaluation report. We continued drilling and after completing the drilling of several wells, we commissioned an
independent geothermal engineer to issue an additional report on the wells and the overall resource. The report, issued in August of 2008, concluded that parts of our Thermo leasehold are underlain by a relatively large geothermal reservoir and that
the resource underlying the proposed project site could support a 10 MW project. The report also concluded that the overall Thermo resource could likely support well over 200 MW of power generation. The reservoir is contained within relatively thin
intervals in Paleozoic rock (predominantly limestone, dolomite and quartzite).

On March 10, 2008, prior to obtaining the geothermal
engineers report, we executed a renewable power purchase and sale agreement (the Thermo PPA) with the City of Anaheim, California. Subject to certain conditions, the Thermo PPA provides for the delivery by the Thermo No. 1
plant of up to 11 megawatts of geothermal renewable power for 20 years. Subject to certain exceptions, we are required to begin delivering electricity from the power plant no later than May 15, 2009. The Thermo PPA provides for a selling price
of $78 per megawatt hour with a two percent per annum increase over the term of the Thermo PPA. Under the Thermo PPA, the City of Anaheim will also pay for the wheeling costs, or cost for transmission, of the electricity from the Thermo
No. 1 power plant to the City of Anaheim.

In May 2008, concurrent with the drilling of the wells, we began construction of the Thermo
No. 1 geothermal power plant and began receiving the 50 modular UTCP power generating units. We were able to obtain the financing to complete the construction of the Thermo No. 1 geothermal power plant with the related equipment,
transmission lines, substations and pipelines from the well heads to the UTCP power generating units from Merrill Lynch. For further discussion of the financing arrangement, please refer to The Thermo Financing section below.

We completed the major construction of the cooling towers, transmission lines and setting of the UTCP generating units at the Thermo No. 1
geothermal power plant in October of 2008. Commissioning testing of the UTCP generating units was completed in the first quarter of 2009 using two production wells and one reinjection well that we had connected to the plant. Accordingly, in 2009 we
will



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reclassified the cost of the related leases, wells, transmission lines and substations and construction in progress as geothermal property, plant and
equipment on the balance sheet. At December 31, 2008, the total capitalized costs of the Thermo No. 1 project was $88.1 million consisting of $53.6 million in plant construction and transmission line and interconnection costs, $30.7
million in well field development costs, and $3.8 million in land and lease acquisition and other costs. These costs will be amortized over the estimated useful life of the geothermal power plant, which is expected to be approximately 35 years.
Amortization will begin in the first quarter of 2009. We expect that additional construction and drilling costs will be incurred during 2009 so that the power plant will be able to operate at or near full capacity at a cost of approximately $9.5 to
$14.0 million. We expect the Thermo No. 1 geothermal power plant to become operational at or near full capacity in the first part of 2009.

We have drilled five production wells and two reinjection wells that we expect to utilize for the plant when it is operating at full capacity. We have recently finished drilling an additional well that we expect to use as a production well
for the Thermo No. 1 project. Of these wells, we believe that one may eventually be transferred to and used as a production well for Thermo No. 2. This decision is dependent upon the performance of the existing wells and the testing of the
recently completed well.

The expected production wells have demonstrated flow temperatures in commercially productive ranges of
approximately 230 degrees Fahrenheit to 300 degrees Fahrenheit. The Thermo wells have shown a tendency to heat up over time and we expect the production wells for the Thermo No. 1 project to deliver temperatures in the 250 degrees Fahrenheit to
300 degrees Fahrenheit range. The geothermal resources utilized by the plant are believed to be renewable so long as the plant is operated at or below the maximum level studies indicate that the resource will support, all of the geothermal fluids
are recycled without losses, and the hydrological balance of the geothermal resource is properly maintained.

In addition to the wells
described above, we have drilled two wells that we, in consultation with our drilling and geothermal consultants, have determined to be non-commercial wells at this time. The first of these two wells is the first well that we drilled on the site.
This well exhibited positive early testing and appeared to be a good production well. However, the well became partially obstructed during the final stages of the drilling process. Shortly thereafter, we terminated our relationship with our original
drilling contractor and hired a new contractor to re-drill the well. The re-drilled well again exhibited strong signs of being a good production well but again encountered problems during the final stages of drilling, and became partially
obstructed. Even with the obstruction, the well still exhibited signs of being useful for commercial production. In the fourth quarter of 2008, however, acting on the advice of our consultants, we determined that it would be better to abandon the
well and drill an entirely new well adjacent to this abandoned well. The new well is the recently completed well mentioned above and we are currently evaluating the viability of this well.

The other well we have determined to be a non-commercial well at this time, but we believe that we may be able to stimulate this well in the future
through a variety of commonly-used well stimulation techniques.

We are also currently evaluating the expansion of the Thermo No. 1
plant by including a bottom-cycling operation in which the discharged geothermal water from the main plant is cascaded through a second set of power generating units, extracting more heat to generate additional power. The expanded project is
referred to as the Thermo No. 1A project. The economics of the Thermo No. 1A project would benefit from the transmission infrastructure, cooling towers and established well field already in place at the Thermo No. 1 plant. The Thermo
No. 1A project may be able to generate up to an additional 5 MW of power. We expect that, if feasible, Thermo No. 1A will enhance the economics of Thermo No. 1 because of project cost savings from eliminating drilling, transmission
upgrades, and cooling tower costs.

We have experienced certain delays and cost overruns on the Thermo No. 1 project. The Thermo
No. 1 geothermal power plant is the first ever large-scale commercial application of the UTCP generation



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units and the first plant built under our rapid-deployment approach so such delays and overruns are not entirely unexpected. 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.
| | - |  | ------------------------------------------------------------------------------------------------------

Construction:



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



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



| |  |  | High demand for steel, concrete and other commodities caused prices to increase.
| | - |  | --------------------------------------------------------------------------------



| |  |  | Accelerated construction schedule required overtime and other additional costs.
| | - |  | -------------------------------------------------------------------------------

Equipment:



| |  |  | Expenses associated with installing UTCP 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.
| | - |  | --------------------------------------------------------------------------------

The Thermo No. 1 geothermal power plant is accessible by road suitable for unrestricted ground transportation. The plant is interconnected to a power
line along Thermo Road owned by Rocky Mountain Power.



| |  |  | Lightning Dock Plant (New Mexico): We are in the process of obtaining the final, necessary permits for the Lightning Dock plant. Numerous exploratory wells
and two production wells were drilled prior to our acquiring the site. We broke ground at the site and have begun taking delivery of the UTCP generating units that will be used in the Lightning Dock plant. We have received 48 UTCP units and most of
the essential major equipment needed for construction of the geothermal project. We anticipate that we will start drilling additional production and injection wells in the second quarter of 2009 assuming final permits are approved. We currently
expect to complete construction of the Lightning Dock plant in the fourth quarter of 2009 or the first quarter of 2010 depending on how long it takes for certain final permits to be approved.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2007, we entered into an agreement to acquire GeoLectric, LLC. This agreement was later superseded by our agreement to purchase a BLM lease and other
miscellaneous assets totaling $4,140,000 from a subsidiary of GeoLectric, LLC (the Purchase). The expenses associated with the negotiation, document preparation, due diligence and other acquisition related activities were capitalized as
part of the land acquisition. The Purchase was subject to the BLMs approval of the assignment of the BLM Lease from the subsidiary of GeoLectric, LLC to us. On December 13, 2007, the BLM approved the assignment of the BLM Lease to us,
which fulfilled the condition required to complete the Purchase pursuant to the terms of the agreement. Under the assigned BLM Lease, we obtained rights to begin development of one or more geothermal power plants on the property located on
approximately 2,500 acres in Hidalgo County, New Mexico. We also obtained the exclusive rights to the geothermal energy resource contained on the property. The initial lease term of the assigned BLM Lease began in January 1979 and has been extended
based upon certain conditions in the lease until January 2024. Annual delay rental payments of $5,000 are required on each anniversary date until



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geothermal power production has begun. If a geothermal power plant is constructed which utilizes geothermal resources covered by the lease, royalties are
owed to the BLM based on a percentage of electrical sales from the plant. We have capitalized certain legal fees directly associated with completing the Purchase and obtaining the BLM lease. We also capitalized the obligations we assumed to plug
certain abandoned wells located on the property.

With respect to the same 2,500 acres in Hidalgo County, New Mexico, in January 2008, we
also entered into a surface access and use lease agreement, or surface lease agreement, with a private property owner in New Mexico (the New Mexico Property Owner) and paid $320,000 to obtain surface right-of-way access and drilling
rights. The term of the surface lease agreement continues until our geothermal rights respective to the BLM lease have expired. Pursuant to the surface lease agreement, we also obtained rights to certain water rights for the project.

In August 2008, we paid $1,200 as a lease bonus and entered into a ground lease agreement for 20 acres with the New Mexico Property Owner. The term of the
ground lease agreement is indefinite, as long as the power plant, transmission and related facilities on the leased property are producing or capable of producing electricity from geothermal resources. No annual payments are required for the ground
lease agreement. Under the ground lease agreement, we obtained the right to construct and operate a geothermal power plant and transmission facilities on the property.

The New Mexico resource is one of the most well-studied moderate-temperature geothermal resources in the country. The New Mexico resource is located in a topographic low, bounded on the west by the Peloncillo
Mountains and on the east by the Pyramid Mountains. Relatively young basaltic volcanism is widespread in the area. Rocks exposed in the bordering mountain ranges include granodiorite, Paleozoic and Mesozoic sedimentary rocks,
Tertiary/Cretaceous volcanic rocks, Tertiary intrusive rocks, and Tertiary conglomerate. The prominent features of the valley are the north east trending Animus Valley and western faults, which displace the Tertiary volcanic tuft in fractured
basement rocks creating an ideal location for geothermal activity. The New Mexico property can be accessed by road suitable for unrestricted ground transportation and is approximately 14 miles from the nearest transmission lines. Based on the leases
described above, we believe we have secured the necessary surface rights and rights of way to construct the power plant. We believe that we can obtain the necessary rights of way to construct an interconnection line to connect the planned power
plant to the existing nearby transmission lines. The source of water to be used at the property is an underground well located at the site. There is a greenhouse operation and a fish farm nearby that utilize the geothermal resource for direct-use
heating. During the summer of 2008, two UTCP PureCycle units were installed at the local greenhouse operation.

Prior to our purchase of the
Lightning Dock leases, multiple wells had been drilled on the leased property exhibiting temperatures in the range of 250 to 308 degrees Fahrenheit. Previous studies indicate that an operational production well on the leased property has the
potential to generate approximately 7 MW of electricity. Based upon the available studies and on the evaluation completed by our external geologic consultants, we concluded with a high degree of confidence that a commercially viable geothermal
resource exists beneath the Lightning Dock project surface. We have submitted permits for drilling and storm water discharge and are in the process of finalizing other environmental permits to be able to begin drilling at the site. However, to date,
we have not drilled production or reinjection wells on this site. We are awaiting final approval to proceed with permitting from the local government officials, pending a ruling relating to a protest filed by a nearby land owner.

In addition to working on permitting for the Lightning Dock project, we are also finalizing engineering designs for the project. The Lightning Dock plans
and specifications are based on the Thermo No. 1 plans and specifications with certain changes and modifications based on lessons learned during the construction of the Thermo No. 1 project.

The power generated from the facility will be sold to the Salt River Project Agricultural Improvement and Power District in Phoenix, Arizona pursuant to a
20-year power purchase agreement.



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In addition to the lease acquisition costs totaling $4.7 million, we have taken delivery of 48 UTCP
PureCycle power generating units, components for the cooling towers and other transmission equipment totaling $18.1 million. We currently anticipate that the total costs of the completed Lightning Dock geothermal power plant will range from $50.0 to
$60.0 million, including the costs of well field development and transmission line construction.



| |  |  | Thermo No. 2 and No. 3 Plants (Utah): Based on our Preliminary Site Review, the written Resource Evaluation report on the Thermo resource,
and the report prepared by our consulting reservoir engineers, we concluded with a high degree of confidence that the Thermo area contained a commercially viable geothermal resource which could support additional power plants. When it became clear
that the geothermal resource located on our leased lands in the Thermo area could support more than just the Thermo No. 1 project, we began preliminary planning for the Thermo No. 2 and Thermo No. 3 projects including preparing permit
applications, securing water rights, filing for transmission interconnection, securing rights of way for the expected new transmission line, and beginning environmental work. These permits include, among others, air quality permits, hazardous
materials permits, and storm water discharge permits. While construction of the Thermo No. 1 geothermal power plant has been ongoing, we have begun obtaining the necessary permits for the Thermo No. 2 project and the Thermo No. 3
project. As noted above, we believe that we may be able to transfer one or more production wells away from the Thermo No. 1 project and to the Thermo No. 2 project. We expect to complete construction of the Thermo No. 2 and No. 3
plants between late 2009 and the end of the second quarter of 2010. The Thermo No. 2 geothermal power plant is expected to be located on an approximately 480 acre portion of the 11,000 acre private lease and the Thermo No. 3 geothermal
power plant is expected to be located on an approximately 480 acre parcel of the States land each of which are described above in the Thermo No. 1 Plant (Utah) description. The Thermo No. 2 and Thermo No. 3 projects
can be accessed utilizing public roads suitable for unrestricted ground transportation. As of March 11, 2009, we have not entered into power purchase agreements for the sale of the power to be generated from the Thermo No. 2 and Thermo
No. 3 geothermal power plants.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For additional information regarding a description of the Thermo area, the terms and
conditions associated with the applicable geothermal lease agreements, and a discussion of the studies performed to obtain a high degree of confidence that a commercially viable geothermal resource exists in the Thermo area, please see the
description of the Thermo No. 1 Plant (Utah) above. The Thermo No. 2 and 3 project sites are accessible utilizing public roads suitable for unrestricted ground transportation. The Thermo No. 1 project was able to
interconnect to the Rocky Mountain Power system via an approximately 6 mile long transmission line that we built. We anticipate that some additional lines will need to be built for Thermo No. 2 and 3 and that these projects will be
interconnected to the Rocky Mountain Power system or another nearby transmission system.



| |  |  | Klamath Falls Plant (Oregon): We have obtained the necessary zoning permit and drilling permit to drill the first well at our Klamath Falls project. We are
in the process of obtaining the necessary water change permit for reinjecting water into the ground, along with permits for construction, air quality and other permits necessary to begin construction of our geothermal power plant. We have performed
some preparations at the site, but have not begun drilling activities. We currently anticipate that we will begin drilling activities in 2009. The timing of beginning and completing the construction of the Klamath Falls plant will in large part
depend upon the timing of available financing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With the assistance of external consultants, we identified a site near
Klamath Falls, Oregon for evaluation. We undertook a Preliminary Site Review, and based upon data obtained from an independent geochemistry study and operating relatively shallow wells that currently have temperatures of approximately 195 degrees
Fahrenheit are used to supply a greenhouse operation in the area, we determined to proceed with the Klamath Falls project. These wells have been in commercial use for greenhouse operations for approximately twenty-five years. In January 2008, we
paid $10,000 as a lease bonus and entered into a geothermal lease with private land owners for 984 acres approximately 13 miles south of Klamath Falls, Oregon. The leased property is a farm that contains a



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residential house, barns, hay storage sheds, greenhouses and a bio diesel plant. Under the lease agreement, we obtained the right to begin development and
construction of geothermal power plants. The initial lease term is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rental payments of $1,000 are due on each
anniversary date until production begins. If a geothermal power plant is constructed which utilizes geothermal resources covered by the lease, royalties are owed to the landowner based on a percentage of electrical sales from the plant.

Upon signing the lease, we retained independent geological consulting firms to perform a Resource Evaluation to further evaluate the information known
about the Klamath Basin and conduct additional geologic and geophysical surveys to determine drilling targets. The independent geologists concluded that geothermal fluids at the Klamath Falls project site are fault-controlled deeply circulating
waters that have encountered temperatures up to about 248 degrees Fahrenheit. The hot wells in the Klamath Falls project area, ranging from 194 degrees Fahrenheit to 199 degrees Fahrenheit, are associated with a fault that generally bounds in the
range. This fault is part of the fault system that runs through an area where opal and silica veins are found in both sandstone and basalt. Hydrothermal alteration and self-potential anomalies are also found in this area. The geologists concluded
that the coalescence of these factors suggest that hot water is circulating throughout the fault system. Based upon the studies and evaluations completed by our external geologic consultants, we received a high degree of confidence that a
commercially viable geothermal resource exists beneath the Klamath Falls project surface.

The Klamath Falls project can be accessed by road
suitable for unrestricted ground transportation and is approximately 6 miles from the nearest appropriate transmission interconnection location. We have begun the process of securing rights of way for the proposed transmission line to interconnect
the project to the grid.

In addition to the lease acquisition costs for the Klamath Falls project totaling $10,000, we have incurred
permitting costs totaling $75,600.



| |  |  | Truckee Plant (Nevada): We have obtained the drilling, construction, air quality, water reinjection, water quality and other permits that are necessary to
begin drilling at the Truckee site. We are in the process of obtaining the environmental assessment from the BLM that will enable us to construct the Truckee plant. We drilled the first well at this site in the fourth quarter of 2007. However, the
results of the first well have been inconclusive. We will have additional independent geologic studies performed before we proceed with any additional drilling. With other projects showing greater geothermal resources, we have sought financing for
our other projects ahead of the Truckee project. Further development on the Truckee resource will be dependent upon more positive geological studies and the availability of financing for the resource.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With the assistance of external consultants, we identified a site in Nye County, Nevada known as the Big Smoky Valley for evaluation. We and our external
geologic consultants prepared a Preliminary Site Review of the entire valley by gathering historic geophysical data that was available for the Big Smoky Valley area. For example, regional-scale gravity data, audio-magnetotelluric, magnetotelluric
soundings, and telluric profiles were completed as part of a USGS exploration program in 1976. Additional gravity profiles and limited electrical resistivity and shallow temperature measurements were completed by the Nevada Bureau of Mines under a
Department of Energy program. The most recent geophysical surveys completed include a ground magnetic survey. As part of the Preliminary Site Review we also analyzed land positions and transmission access.

Based on the results of the Preliminary Site Review we identified three areas to pursue within the valley: the Truckee project area, the Devils
Canyon project area, and the Trail Canyon project area. The Truckee project is located near the mid-point of the Big Smoky Valley on generally flat to gently sloping land. We identified certain private and federal lands in the area to pursue. In
December 2006, we paid $25,000 in cash, as a lease bonus, to cover the first year rental obligation, and issue to the owner 25,000 restricted shares of our common stock that had a fair value of $115,250 on the grant date



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to obtain the right to begin development and construction of geothermal power plants on three ranches in central Nevada consisting of approximately 11,600
acres. In August 2007, we also granted to the private property owner 35,000 options at a strike price of $15.10 representing the closing market price on the date of the grant as consideration to cancel previously awarded contingently vesting stock.
The fair value of the 35,000 options was recorded as power project leases totaling $424,000. Annual delay rental payments total $34,800 on each anniversary date until production of electricity begins. If a geothermal power plant is constructed which
utilizes geothermal resources covered by the lease, royalties are owed to the landowner based on a percentage of electrical sales from the plant. The terms of the lease agreement are for 50 years subject to extension for as long as we are actively
pursuing or generating resources from the leased lands. Under the same lease agreement, we also obtained a grant of geothermal and surface rights, if any, held by a property owner with respect to three million additional acres of land currently used
for ranching in central Nevada. During the fourth quarter of 2008, we began the necessary due diligence to determine if the property owner has any geothermal rights with respect to these three million acres of land. We expect to complete our due
diligence in the first or second quarter of 2009.

In June 2007, we paid $40,000 to the private land owner that held the geothermal rights
and entered into a geothermal lease agreement for the same 11,600 acres described above. Under the terms of this lease agreement, there are no delay rental payments. Of the 11,600 acres of leased property, approximately 1,000 acres have been
designated for the Truckee project. In September 2007, we participated in a United States Bureau of Land Management (BLM) auction to obtain the geothermal development rights for certain parcels of land in the Truckee project site. We
successfully won the bid for one parcel of land and entered into a 10-year lease agreement with the BLM covering a total of approximately 5,000 acres. Our payment obligation under this lease was $55,000, which was paid in the third quarter of 2007.
Pursuant to the terms of the BLM leases, annual delay rental payments total $15,000. If a geothermal power plant is constructed which utilizes geothermal resources covered by the lease, royalties are owed to the BLM based on a percentage of
electrical sales from the plant.

After we acquired the geothermal rights to the Truckee project, we contracted with external geologic
consultants to perform a Resource Evaluation and assist with the determination of the drilling locations. Based upon a completed study and evaluation by our external geologic consultants, we received a high degree of confidence that a commercially
viable geothermal resource exists beneath the Truckee project surface. As a result, we omitted drilling slim holes, and began drilling a production well in late 2007 to a depth of approximately 7,000 feet. Preliminary testing of the well indicated
that temperatures were within commercial ranges but the flow data was inconclusive as to whether the well could be used to produce electricity. Since the results of the well were inconclusive, we determined to allow the well to stabilize and
redirect efforts toward the Thermo No. 1 project and delay further testing of the Truckee well and drilling of the Truckee resource.

As of December 31, 2008, we performed an impairment review of the Truckee well in accordance with FAS 144, Impairment of Long-Lived Assets and determined that it should be impaired. The circumstances that led to the
impairment of the Truckee well are primarily due to the current world-wide economic conditions that have led to tightening credit markets. Because of the tightening credit markets, we determined that our access to capital may be constrained in
the future. Accordingly, we prioritized our cash uses, concentrating our efforts on our largest known resources. As a result, the future undiscounted cash flows from the Truckee well have become uncertain because of the re-prioritization of our
projects based upon the changing economic conditions. Therefore, we considered our ability to secure sufficient financing necessary to continue drilling at the Truckee project and determined it was uncertain if we would be able to finance
continued drilling at the Truckee project in the near term in addition to our other projects of higher priority. Because of this uncertainty, we expensed $3.0 million in the Power Systems segment in the fourth quarter of 2008. However,
management believes that the Truckee well could still be used in the production of electricity as either a production or reinjection well in the future should the appropriate financing be obtained.



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The Truckee project can be accessed by road suitable for unrestricted ground transportation and is
approximately one mile from the nearest appropriate transmission interconnection location.

In addition to the lease acquisition costs for
the Truckee project totaling $734,500, we incurred drilling costs totaling $3.0 million. As of December 31, 2008, we determined that the value of this well had been impaired due to our current cash requirements and the need to raise additional
capital to continue with the Truckee project. Accordingly, the costs were expensed at December 31, 2008. However, if we are able to secure additional financing and continue development of the Truckee project, we believe it is likely that the
Truckee well will be suitable as a reinjection well, but until more detailed testing is performed on the well we will not know if it will be a production well, a reinjection well or will be abandoned.



| |  |  | Devils Canyon Plant (Nevada): We have obtained drilling permits for up to eight production wells and three reinjection wells at our Devils Canyon
project. We are in the process of obtaining the necessary environmental assessment permit from the BLM, water change permit for reinjecting water into the ground, construction, air quality, environmental and other permits necessary to begin
construction of our geothermal power plant. We have not yet begun drilling activities. We currently anticipate that we will begin drilling activities in 2009. The timing of beginning and completing the construction of the Devils Canyon plant
will in large part depend upon the timing of available financing.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Devils Canyon project is located in the
southern part of the Big Smoky Valley, Nye County, Nevada on generally flat to gently sloping land. Based upon the Preliminary Site Review we performed on the Big Smoky Valley described above, we identified the Devils Canyon area as an area of
high interest. The Devils Canyon area exhibits several geothermal anomalies including an active hot spring. A geothermal well drilled on an adjacent property in 1963 exhibited temperatures of 265 degrees Fahrenheit. Based on these positive
signs, we determined to proceed with the Devils Canyon project. We have also obtained subsequent external studies from independent consultants concluding that the Devils Canyon resource equilibrium temperatures are likely in the 240-270
degrees Fahrenheit range and that the resource is fault controlled. Currently, additional geologic studies and other preparations are being done on the site.

In February 2007, we entered into a lease agreement with a private property owner covering approximately 155 acres in Devils Canyon. Under the lease agreement, we obtained the right to begin development and
construction of geothermal power plants. The initial term of the lease agreement is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Concurrently, we were assigned the rights of
the private property owners BLM lease covering 240 acres. Under the lease agreement, we obtained the right to begin development and construction of geothermal power plants. The remaining term of the BLM lease agreement is four years, subject
to extension for as long as we are actively pursuing or generating resources from the leased lands. In June 2008, we leased an additional 600 acres of private land from another private landowner adjacent to our previously leased property. Under the
lease agreement, we obtained the right to begin development and construction of geothermal power plants. The initial term of the lease agreement is 50 years, subject to extension for as long as we are actively pursuing or generating resources from
the leased lands. Annual delay rental payments of $20,000 are due on each anniversary date until production begins.

Our Devils Canyon
geothermal leases are located on ranches that contain a shed with no other structures.

In December 2008, we purchased a cold water well
containing certain water rights on property that we had leased for geothermal development. We expect this well to provide a portion of the water needed to operate the Devils Canyon plant.

The Devils Canyon project can be accessed by road suitable for unrestricted ground transportation and is less than one mile from the nearest
appropriate transmission interconnection location. We have



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begun the process of securing rights of way for the proposed transmission line to interconnect the project to the grid.

In addition to the lease acquisition costs for the Devils Canyon project totaling $45,600, we incurred permitting costs totaling $77,100.



| |  |  | Trail Canyon Plant (Nevada): We have not yet obtained any permits for the Trail Canyon project. We are in the process of obtaining the necessary
environmental assessment permit from the BLM, and are moving forward with drilling permits, the water change permit for re-injecting water into the ground, construction, air quality and other permits necessary to begin construction of our geothermal
power plant. Accordingly, we have not yet begun drilling activities. We currently anticipate that we will begin drilling activities in 2009 or 2010. The timing of beginning and completing the construction of the Devils Canyon plant will in
large part depend upon the timing of available project financing.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Trail Canyon project is located in the northern
part of the Big Smoky Valley on generally flat to gently sloping land. As part of our Preliminary Site Review of the Big Smoky Valley, we identified the Trail Canyon area as a high-prospect area. Data obtained from external studies indicate the
existence of several geothermal anomalies and an active hot spring with promising geochemistry temperatures in the 260 degrees Fahrenheit range. We expect to undertake additional studies to determine the highest prospect drill sites in 2009.

After the Preliminary Site Review, we began acquiring land on or near the Trail Canyon project site. In January 2007, we paid $5,000 and
issued 5,000 restricted shares of our common stock to a private land owner and entered into a geothermal lease agreement on 635 acres of private land in the Trail Canyon area. The terms of the lease agreement are for 50 years, subject to extension
for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rentals total $635 on each anniversary date of the lease until production of electricity begins. In addition, concurrent with entering into this
lease agreement, the private land owner assigned to us a BLM lease in the Trail Canyon project for the same 635 acres. The BLM lease contains the rights to develop and construct a geothermal power plant. The term of the a BLM lease is 10 years,
subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rentals for the BLM lease total $635 due on each anniversary date until production of electricity begins. If a geothermal power
plant is constructed which utilizes geothermal resources covered by these leases, royalties are owed to the respective landowners based on a percentage of electrical sales from the plant.

In September 2007, we participated in a United States Bureau of Land Management (BLM) auction to obtain the geothermal development rights for
certain parcels of land in the Trail Canyon project site. We successfully won the bid for one parcel of land and entered into a 10-year lease agreement with the BLM covering a total of approximately 1,900 acres. Our payment obligation under this
lease was $126,800, which was paid in the third quarter of 2007. Pursuant to the terms of the BLM leases, annual delay rental payments total $5,700. If a geothermal power plant is constructed which utilizes geothermal resources covered by the lease,
royalties are owed to the BLM based on a percentage of electrical sales from the plant.

In August and November 2007, we paid a total of
$5,000 and entered into seven separate lease agreements with seven private land owners of the same private property near the Truckee project drilling site consisting of 4,444 acres to obtain the right to develop and construct a geothermal power
plant. The terms of the lease agreements are for 50 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Pursuant to the terms of this lease agreement, annual delay rentals total $4,444
on each anniversary date until production of a geothermal power plant begins. If a geothermal power plant is constructed which utilizes geothermal resources covered by the leases, royalties are owed to the respective landowners based on a percentage
of electrical sales from the plant.

In May 2008, we paid $15,000 as a lease bonus and entered into a geothermal lease with private land
owners for 560 acres in the Trail Canyon project. Under the lease agreement, we obtained the right to



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begin development and construction of geothermal power plants. The initial lease term is 15 years, subject to extension for as long as we are actively
pursuing or generating resources from the leased lands. The annual delay rental payments total $5,000 on each anniversary date until production of electricity begins. If a geothermal power plant is constructed which utilizes geothermal resources
covered by the leases, royalties are owed to the respective landowners based on a percentage of electrical sales from the plant.

The Trail
Canyon project can be accessed by road suitable for unrestricted ground transportation and is approximately three miles from the nearest appropriate transmission interconnection location. We have begun the process of securing rights of way for the
proposed transmission line to interconnect the project to the grid.

In addition to the lease acquisition costs for the Trail Canyon project
totaling $179,600, we incurred permitting costs totaling $139,800.

The following map indicates the geographical locations of each of our
projects:

LOGO

As described above, we have initiated two additional projects in the Thermo area because that area appears to
have the potential to support additional plants. We believe that the geothermal resource for each of these projects has the potential to provide at least enough geothermal energy for a commercial power plant of



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approximately 10 to 11 MW of net electrical power. Like the Thermo No. 1 project, however, we expect that other project sites we develop will have
potential resources to generate more than 10 MW of net electrical power. We intend to seek to maximize the full power generating potential of all the sites we select for development.

The timing for construction and completion of each of the projects described above will depend on a number of factors, including the receipt of necessary
permits, timely granting of interconnection and transmission access, and the ability to obtain adequate financing for both the well-field development phase and the plant construction phase of each project. Uncertainties associated with these factors
could result in unexpected delays. In addition, the feasibility of a number of the projects described above is still subject to further geological testing and/or drilling to determine whether an adequate geothermal resource exists to support a
geothermal power plant.

In addition to the projects currently under development, we intend to initiate the development of additional
projects each year. However, the number of projects we initiate each year will depend on a number of factors, including the availability of adequate financing, the availability of adequate geothermal resources, the demand for renewable power, the
number of projects we have under development, and our available resources to devote to our project development efforts.

Tax Incentives

In order to promote the production of renewable energy, including geothermal energy, the federal government has created incentives within the United
States Internal Revenue Code. 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 reduced and there could be reductions in our overall profitability or the amount of funding available from tax equity partners.

Available federal tax incentives include 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. In addition, the American Recovery and Reinvestment Act of 2009 (the Recovery Act) recently extended the availability of the production tax credit (PTC) for geothermal projects placed in service before
2014 and created a new grant program for certain projects that are placed in service in, or for which construction begins in, 2009 or 2010.

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. The ITC is subject to recapture if the property
eligible for the credit is sold or otherwise disposed of 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 $21.00 (as adjusted for inflation) 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. Also pursuant to the Recovery Act, an owner may elect to receive a grant from the United States Treasury Department in lieu of claiming either the ITC or the PTC. 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 later of the date of the application for the grant or the date the project is placed in
service.

Owners of projects also are permitted to depreciate for tax purposes most of the cost of the power plant on an accelerated basis.
Generally, that depreciation occurs over a five year period. Under the Recovery Act, property placed in service during 2009 generally is entitled to additional bonus depreciation in which 50% of the adjusted basis of the property is
deducted in 2009 and the remaining 50% of the adjusted basis of the property is depreciated over the five-year accelerated tax depreciation schedule.

All of these programs are subject to review and change by Congress from time to time. In addition, several of the programs are currently scheduled to expire, and continuation of those incentives will require
affirmative



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Congressional action. Moreover, there are ambiguities as to how some of the provisions of the Recovery Act will operate, including the grant program for
which there is not yet administrative guidance.

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 deductions and credits. 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 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 credits and
other 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.

In addition to the federal tax incentives, certain state tax benefits may be available for some of our geothermal power projects. These incentives vary state by state and generally range from sales and property tax
exemptions to state production tax credits.

The current economic conditions in the United States and around the world are likely to make
it more difficult to secure the financing necessary to develop our projects. Weak economic conditions generally reduce the demand for tax-driven investments because many potential investors have or expect to have little or no tax liability that can
be reduced by such investments. While the demand for these types of investments is significantly lower than it has been in recent years, we believe the tax incentives available to our geothermal power projects remain an attractive investment option
for companies that are in a position to benefit from these tax incentives.

Financing

To date, we have financed our operations principally through the sale of equity and equity related securities, and borrowings under our line of credit. We
also financed the plant construction phase of our Thermo No. 1 project through a combination of debt financing and tax equity capital that we obtained in accordance with the Commitment Letter. We have incurred losses since inception and we are
not operating at cash flow breakeven. Our cash balance at year end is not sufficient to fully fund our business plan or to satisfy our cash requirements for our anticipated additional land acquisitions, development activities and business growth
over the next twelve months.

The execution of our business plan and the funding of our capital expenditures are dependent on our ability
to obtain additional financing for our activities, including power plant development. In addition, the availability of such financing will affect the timing, pace, scope and amount of our capital expenditures. We believe we will be able to finance
our activities through financing of tax benefits by tax equity partners, debt or equity financing, project financing, government funding from grants, loan guarantees or private activity bonds, joint ventures, the sale of one or more of our projects
or interests therein, 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, or a combination of these sources.
There can be no assurance, however, 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.

As described above, an important part of our strategy for obtaining the necessary capital to fund the development of geothermal power plants is to
develop strategic alliances with utilities that need the clean renewable power and tax equity partners who are in a position to take advantage of certain tax benefits associated with the geothermal power plants we intend to develop. Through these
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pursuant to prepaid power purchase agreements and tax equity financing agreements. We also intend to pursue government funding from grants, loan guarantees
or other incentives. We believe that we can obtain prepaid power purchase agreements with the purchasing utility to assist in the financing of the construction of geothermal power plants. We believe that in the current economic environment, the
combination of prepaid power purchase agreements with the 30% renewable energy grants that are currently being offered by the government, may provide additional sources of capital to help fund our development efforts. However, until financing can be
obtained through these types of alternatives, we will also need to fund certain early-stage development activities, such as permitting, analysis of the well field and the negotiation of the power purchase agreements for the plant. We will need to
fund these expenditures from our existing cash balances, additional debt or equity financing, joint ventures, the sale of one or more of our projects or interests therein, or a merger and/or other transaction. Although we believe that we will be
able to obtain sufficient financing to successfully implement our business plan, we cannot provide any assurances that we will be able to obtain financing on favorable terms or at all.

Our Commitment Letter with Merrill Lynch sets forth general terms relating to the structuring and financing of up to 155 MW of geothermal power plants we
intend to develop. Each project funded under the Commitment Letter is held in a special purpose entity. These entities are responsible for the debt service, all maintenance and operations expenses and various fees and distributions to us. We act as
engineering, procurement and construction contractor and operator of each of the projects.

In accordance with the Commitment Letter, we
obtained financing commitments from Merrill Lynch to provide non-recourse financing for our Thermo No. 1 project in Utah, our Lighting Dock project in New Mexico, and our Truckee project in Nevada. The financing arrangements for the Thermo
No. 1 project, which were finalized during the third quarter of 2008, and the status of the other financing commitments, are described below.

The
Thermo Financing

On May 16, 2008, pursuant to the Commitment Letter, we and our fully-consolidated subsidiary, Thermo No. 1
BE-01, LLC (the Thermo Subsidiary) entered into a financing commitment letter (the Thermo Commitment) with Merrill Lynch relating to the project financing and tax equity funding for the Thermo No. 1 project. On
August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into definitive agreements (the Thermo Financing Agreements) that provide debt financing and tax equity capital for the
Thermo No. 1 project.

Pursuant to the Thermo Financing Agreements, we agreed to serve as the engineering, procurement and
construction contractor and guaranteed the completion of the construction of the Thermo No. 1 project. The useful life of the Thermo No. 1 geothermal power plant is expected to be approximately 35 years. The useful life of the geothermal
resource is expected to be fully renewable and not limited to the useful life of the Thermo No. 1 geothermal power plant.

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



| |  |  | The Thermo Financing Agreements provided for approximately $31.2 million of permanent non-recourse debt financing for the Thermo No. 1 geothermal power plant
with a fixed annual interest rate of 7.00%. The Thermo Subsidiary received proceeds from the debt financing of approximately $26.1 million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0
million. After the effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. From the proceeds of the debt financing, we received approximately $14.1 million from the Thermo
Subsidiary as repayment for construction costs at the Thermo No. 1 project that were incurred by us prior to closing the project financing. The Thermo
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Subsidiary is responsible for debt service and is expected to retire the debt through sculpted principal payments over 18 years. The sculpted principal
payments provide for larger principal payments than normal amortization in the earlier years when project cash flows are greatest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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

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

The Lightning Dock Commitment

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

The Lightning Dock Commitment provides for up to approximately $43.0 million of
construction and term debt financing and up to approximately $27.0 million of tax equity capital. Under the Lightning Dock Commitment, we expect approximately $16.0 million of the tax equity financing will be used to pay down the construction debt
at the time the plant is placed in service. Further, we expect the term debt will fully amortize



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over 17 years of operations. Generally, the finance structure is designed to distribute a significant portion of the first ten years of cash flows to us in
the form of distributions and fees during the first two years of operations based upon both the successful completion of the Lightning Dock project and attainment of on-going operational targets. Once the debt for the Lightning Dock project has been
retired and most of the tax benefits have been utilized, we expect that 95% of all of the remaining cash flows of the Lightning Dock project will flow to us. It is the intention of the parties that the power generation facilities will qualify to
receive tax credits and other benefits under the provisions of the Internal Revenue Code.

The Lightning Dock Commitment is subject to
market conditions, due diligence, receipt of all necessary internal approvals by both us and Merrill Lynch, Merrill Lynchs satisfaction with the structure of the tax equity financing, the negotiation and execution of definitive documentation
and the satisfaction of certain other conditions. The Lightning Dock Commitment expired on December 1, 2008. However, we intend to work with Merrill Lynch towards formally extending the expiration date of this commitment in the future and
finalizing arrangements for Lightning Dock in 2009 when final permits are approved.

The Truckee Commitment

The Truckee Commitment expired by its terms on June 30, 2008. Since the Truckee Commitment was negotiated, we have initiated the development of
several other projects, and a number of these projects are expected to be developed more rapidly than the Truckee project. Therefore, in the fourth quarter of 2008, we determined to postpone our discussions with Merrill Lynch regarding an extension
of the Truckee commitment. We intend to continue our development efforts at the Truckee project and seek a new financing commitment from Merrill Lynch once those development efforts progress to the point when financing is needed for construction of
a plant and related development activities.

Potential Additional Financing Commitments

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

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

Structuring Fees and Other Consideration

As part of the Commitment Letter, we have agreed to pay Merrill Lynch certain non-refundable structuring fees in connection with the closing of each
funding transaction. The structuring fees will initially be 4%, but will



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decrease for future financings once the cumulative financing commitment under the Commitment Letter reaches certain levels.

As additional consideration, we granted Merrill Lynch warrants to purchase our common stock. The warrants will vest and become exercisable in increments
over the term of the Commitment Letter based on the actual funding provided. The exercise price of the warrants is subject to adjustment upon any dilutive issuance by us. In accordance with the anti-dilution protection included in the warrants, the
issuance of the Convertible Notes and the issuance of common stock during the third quarter of 2008 and the issuance of common stock in connection with our private placement of common stock during the fourth quarter of 2008 resulted in a reduction
of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of $13.24 to $16.90. On August 31, 2008, warrants to purchase 1,350,000 shares of our common stock vested in connection with the closing of the project
financing arrangements for the Thermo No. 1 project.

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

The SymetronTMFamily of Technologies

Our
SymetronTMtechnologies consist of electromagnetic machine and power electric logic and topology innovations developed for electric motors,
generators and their associated drives and controllers. These innovations can increase torque, power and efficiency of such machines and drive systems. These efficiency and power torque density improvements can increase a motors continuous
power rating as well as decrease its power consumption during periods of high torque output using conventional materials and manufacturing processes.

We believe that our motor and drive technologies are scalable and can apply to radial, axial and pancake shaped motors. These concepts have also been applied to alternators and generators with observed increases in
efficiency and power density.

Raser Series Demonstration PHEV

We have entered into a collaborative arrangement with FEV, a large automotive parts and vehicle
integration supplier, and a major automotive manufacturer to integrate our SymetronTMtechnologies into a demonstration model full-size sports
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driving range of 35 miles and an average driving fuel economy of 100 miles per gallon for the average American driver. This demonstration vehicle will
utilize an enhanced motor, generator and power electronic drive controller for its electric powertrain. We intend to incorporate a newly-developed plug-in hybrid master controller with integrated software to control the vehicles propulsion
generation, transmission, power management, motion control and other electrical subsystems. The recent economic challenges that have dramatically impacted the automotive industry may further delay or eliminate the resources available to complete
this project. We intend to continue to work closely with FEV and the automotive manufacturer in an effort to complete the project in 2009.

Motor and
Drive Technology

An induction motor drive/controller controls the performance of an AC induction motor, including its speed, torque and
direction of rotation. In an integrated starter alternator (ISA), the controller also serves to control the flow of regenerated electric power back from the ISA to the batteries and to regulate the voltage output of the ISA when in
generation mode. We believe our technologies can be used to increase the operating efficiency of both the driven motor and the drives power converter, optimizing the utilization of its power devices.

During 2006, under a STAC grant administered by the United States Department of Energy, we
developed a flexible modular power electronic motor controller based upon efficiency optimized motor control technology (FlexModTM) for
variable-torque HVAC applications. Independent testing conducted by the testing firm Advanced Energy demonstrated an improvement of up to 10% when compared to leading variable drive systems. We intend to explore opportunities to license our
technologies to manufacturers of HVAC AC drives and equipment.

Integrated Starter Alternators (ISA)

An ISA serves the combined function of the starter motor and the alternator or generator in an automobile. We intend to explore opportunities to license
our technologies relating to ISAs for use in PHEV, electric, hybrid electric and fuel-cell powered automobiles, as well as certain other applications. The target applications for our AC induction and permanent-magnet motor designs include mild
hybrid traction drives such as are used in mild hybrid belt-starter applications and integrated in-line transmission assemblies. In the last half of 2006 we were awarded a contract with ARINC, to complete follow-on tasks to our prior development
work with the United States Army to develop an integrated starter alternator (ISA) for a military HMMWV hybrid vehicle. During 2007, we successfully completed the first three payment milestones of this follow-on task with ARINC. In the
first half of 2008, we completed this phase of the project and demonstrated two working ISA prototypes for use in prototype vehicles for the United States Army.

Alternators/Intelligent Voltage Regulators (IVR)

Alternators:We have licensed our SymetronTMtechnologies for use in brushless claw-pole alternators for automobiles, trucks, buses
and other vehicles through our license agreement with Wilson Auto Electric, a leading re-manufacturer of automotive alternators. Wilson successfully completed durability testing in field and laboratory and is in the process of implementing their
commercialization plan for later this year.

Efficiency Optimized Line-Driven AC Motor Technology (EO)

High-Efficiency AC Induction Motors: In cooperation with Hyundai Heavy Industries (HHI) one of the worlds largest manufacturing
companies, we have sought to develop an enhanced line-driven AC induction generator and an AC induction motor for HVAC chiller applications. We anticipate these generators and motors will demonstrate that our technologies can increase the efficiency
of line-driven AC induction motors and generators without increasing manufacturing costs. If tests of these units are successful, we intend to explore opportunities to license our technologies to other manufacturers of high efficiency AC induction
motors and generators.



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In January 2008, we signed a business cooperation agreement with HHI under which HHI will manufacture and
sell Symetron-enhanced AC motors, generators and drives for use in geothermal energy generation plant, HVAC and refrigeration equipment, and other industrial applications.

Patents and Other Intellectual Property Rights

Our Power Systems segment utilizes certain patented
heat transfer technologies and proprietary plant designs in our geothermal power plant projects, including a binary cycle technology. Through a strategic alliance with UTCP, we purchase PureCycle geothermal power generating units for use in our
geothermal power projects. The PureCycle geothermal power generating units utilize a proprietary binary cycle technology developed by UTCP.

In addition to our agreement to purchase UTCPs PureCycle power generating units, we have a
license to use Kalina-cycle heat transfer technologies from a third party licensor. Five United States patents have been issued to the licensor, and one is pending, with respect to these technologies. We may use these technologies primarily within
the United States, and we believe the patents are sufficient to protect the proprietary nature of the technologies covered by our license. Our Power Systems segment also intends to explore ways to incorporate our SymetronTMtechnologies into the motors, generators and drives used in the geothermal power plants we intend to develop. We believe these technologies can be applied in
a number of ways to make geothermal power plants more efficient. Our SymetronTMtechnologies are further described above.

Our Transportation & Industrial segment has developed intellectual property that focuses
on innovations we developed for electric motors and their associated drives and controllers. The electromagnetic machine and power electronic drive technology is trademarked under the names SymetronTM and RaserTM.

The United States Patent and Trademark Office has issued seven patents to us, including two for resonant motors (U.S. Patent Nos. 6,847,186 and
7,034,498); one for resonant unipolor generators (U.S. Patent No. 7,459,823); one for electromagnetic motors (U.S. Patent No. 7,034,499); one for motor controllers (U.S. Patent No. 7,026,785); one for pancake motors (U.S. Patent
No. 7,116,029); and one for hydrodynamic slip rings (U.S. Patent No. 7,019,431). We have filed additional patent applications and expect to continue to file new patent applications as we continue to refine our PHEV project.

We regularly review our patented technologies, the patent applications we have filed and the patent applications we have been preparing to file in order
to assess the commercial viability of each patent or application. Based upon the results of this assessment, we may shift commercialization efforts away from some of our patented technologies and focus efforts on commercialization of others.

We rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others to establish and
protect proprietary rights. Applications for patent protection for key technologies are made on a global basis. We require technical personnel to sign confidentiality agreements that contractually obligate them to assign new intellectual property to
us. Legal expertise has been engaged to help process applications to protect our intellectual property. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without
authorization. In addition, others may independently develop substantially similar intellectual property.

Research and Development

Our Transportation & Industrial segment has sought to develop and demonstrate new applications for our motor and drive/controller-related
technologies as well as our new extended range PHEV-based product and solution technologies. We have made periodic introductions of new motor and generator-related technologies, application of technologies to manufacturers test applications,
testing and performance evaluations of these technologies and participation in the design and engineering of related projects for original equipment manufacturers (OEMs).



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

Our research and development costs for the years ended December 31, 2008, 2007 and 2006 totaled $4, 762,733, $3,390,688 and $3,893,540,
respectively. Due to the current economic weakness in the automotive industry and impact on other manufacturers, we have reduced our resources committed to further research and develop new solutions based on our technologies. We believe future
research and development expenditures are required in order to develop additional extended range technologies primarily relating to plug-in hybrid electric vehicles and electric and electric-hybrid propulsion systems, integrated starter alternators,
or ISAs, AC electric motors, generators and power electronic AC drives. However, for the foreseeable future, particularly until economic conditions improve, we intend to focus our efforts on commercializing already licensed technologies and
technologies developed by our manufacturing partners.

Suppliers and Key Relationships

During the second quarter of 2007, we executed three purchase agreements with UTCP relating to the purchase of generating units for the geothermal power
plants we intend to develop. In April 2008, we executed a fourth purchase agreement with UTCP relating to the purchase of additional power generating units. Concurrent with the execution of the April 2008 agreement we paid a down payment of $5.0
million. On August 31, 2008, we executed a fifth purchase agreement with UTCP relating to the purchase of additional generating units. Concurrent with the execution of the fifth purchase agreement, we paid a down payment of $2.3 million. On
December 23, 2008, the first purchase agreement with UTCP was terminated and the other four purchase agreements with UTCP were amended into three separate purchase agreements to properly reflect the actual distribution of the generating units
to the Thermo No. 1 project site and establish greater flexibility for distribution of the generating units to future projects.

Subject to our obtaining financing and payment of the purchase price, these purchase agreements
provide for the delivery of PureCycle® modular units for the Thermo No. 1 geothermal power plants and other plants that we intend to build. In total, we expect these systems will
generate approximately 50 MW of net renewable electrical power. The modular UTCP Pure Cycle power generation equipment enables us to construct power plants utilizing heat from geothermal resources with cooler to lower temperatures than conventional
equipment at a fraction of the time otherwise required. Our agreements with UTCP contemplate a long-term relationship in developing geothermal resources as well as potential exchanges of technology.

In the first quarter of 2009, UTCPs parent company, United Technologies, Inc., announced that it would transfer the PureCycle line of products to
another of its subsidiaries, Pratt Power. We do not anticipate that this transfer will negatively impact our access to the PureCycle units or the guarantees that UTCP has provided for those units.

We believe that other equipment suppliers may be able to provide generation units which meet our standards and fit into our rapid deployment strategy. In
an effort to reduce our dependence on any one turbine supplier, we have been in discussions with alternate suppliers and may, in the future, purchase generation units from other suppliers in addition to UTCP.

In the second quarter of 2007, we also signed a Geothermal Project Alliance Agreement and a Consulting Services Agreement with Cummins &
Barnard, Inc. (C&B), a full service engineering consulting company. Under these agreements, C&B will provide program management and construction services for the development of our first three geothermal power plants. In January
2008, HDR, a leading architecture, engineering and consulting firm, acquired C& B and changed their name to HDR- Cummins & Barnard (HDR-C&B). New



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HDR-C&B management has indicated that they remain committed to the original agreement and continue to provide the program management and construction
services for the development of our first three geothermal power plants. Except for the three plants covered by the agreements with HDR-C&B, we do not currently have any agreements in place for the program management and construction services
relating to any of the other projects we intend to develop.

Drilling operations are necessary to develop the well field for each
geothermal power project we develop. We utilize various suppliers to obtain the appropriate permits, rent drilling equipment, perform drilling services, provide casing and other tangible assets for the well and provide well testing services. Should
one supplier fail to meet our purchasing requirements, we are confident that other suppliers could be identified and the appropriate items procured and obtained without significant delays. Patterson-UTI Energy, Inc., a publicly-traded drilling
company, has performed the majority of our drilling services to date.

In the fourth quarter of 2007, we announced that we had entered into
a collaborative arrangement with a major global automotive manufacturer and FEV Engineering to produce and demonstrate a PHEV incorporating Symetron electric motor, generator and power electronic drive technology and our new PHEV master
control system and architecture. The vehicle is targeted to provide more than 100 miles per gallon of gasoline for the typical driver in the United States while dramatically reducing harmful fuel emissions. Completion of the demonstration vehicle is
expected in 2009; however, failure to meet the statement of work requirements will result in the arrangement being terminated.

Competition

Our Power Systems segment primarily competes in the power generation industry. Competition in the power generation industry is
characterized by intense competition from not only large power plants burning fossil fuels, but from other companies trying to develop clean, renewable energy from sources such as geothermal, solar, wind farms, ethanol plants, hydro-electric power
plants and other sources of clean energy. In the last year, competition from the wind and solar power generation industry has increased. While we anticipate that the current demand for renewable energy is large enough that this increased competition
will not significantly impact our ability to obtain new power purchase agreements, this increased competition could contribute to a reduction in electricity prices for new renewable projects. We believe this risk is substantially mitigated by the
fact the geothermal power represents a base load source of renewable energy.

In general the primary competitive factors for the geothermal
market are the ability to obtain properties with the appropriate heat sources, technologies and equipment, geographic locations of power plants, access to prime market and transmission infrastructures, and favorable regulatory and tax environments
for renewable energy. In the geothermal power generation sector, our main competitors in the United States are Ormat Technologies, Calpine, CalEnergy Generation, Terra-Gen Power and other smaller-sized developers such as U.S. Geothermal, Western
Geopower and Vulcan Power.

Our Transportation & Industrial segment competes primarily with other developers of electric
powertrains, plug-in hybrid electric vehicle (PHEV) technologies, and with other developers of technologies designed to improve the efficiency of electric motors, generators and related systems. As the market for electric and hybrid
electric vehicle propulsion systems, high performance motors, generators, drives and controllers grows, we believe that the number of competitors will increase. We also expect that manufactures of these EVs and HEVs, electric motors,
generators, drives and controllers, including many of our potential customers, will seek to develop their own technologies that would compete with our technologies. In general, the competitive factors for electric motor, generator, drive and related
technologies are efficiency, power and torque density, peak torque, costs of production, reliability and expected warranty costs.

Some of
our existing and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources than we do. Smaller



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competitors may also achieve competitive advantages by entering into strategic or commercial relationships with larger, more established and well-financed
companies. Many of our competitors could devote greater resources to plant development, marketing and research and development efforts than we can. New technologies and the continued enhancement of existing technologies also may increase competitive
pressures in the future.

Government Regulation

Power Systems

The following is a summary overview of the electric utility industry and applicable federal and state
regulations, and should not be considered a full statement of the law or all issues pertaining thereto.

We are subject to both federal and
state regulation with respect to the production, sale and distribution of electricity. Federal legislation includes the Federal Power Act (FPA), as well as the Public Utility Regulatory Policies Act of 1978 (PURPA) and the
Energy Policy Act of 2005 (EPACT 2005 ), which among other things repealed the Public Utility Holding Company Act of 1935 and enacted the Public Utility Holding Company Act of 2005 (PUHCA 2005). Our current electric
generation projects are planned to be developed as qualifying facilities (QFs) under regulations of the Federal Energy Regulatory Commission (FERC) adopted pursuant to PURPA. This legislative act encourages the
development of alternative energy sources such as geothermal, wind, biomass, solar and cogeneration.

PUHCA

Although EPACT 2005 repealed the Public Utility Holding Company Act of 1935, PUCHA 2005 granted state regulators and the FERC broad access to books and
records of non-exempt project companies. PUCHA 2005 also provided for FERC review of the allocation of costs for non-power goods or services between regulated and unregulated affiliates of such companies. Geothermal project companies can obtain an
exemption from these requirements by obtaining status as a QF under PURPA.

PURPA

As described below, PURPA provides certain benefits if a project is a QF. There are two types of QFs: cogeneration facilities and small power production
facilities. A small power production facility is a QF if (i) the facility does not exceed 80 MW, (ii) the primary energy source of the facility is biomass, waste, renewable resources, or any combination thereof, and at least 75% of the
total energy input of the facility is from these sources; and (iii) the facility has filed with FERC a notice of self-certification of qualifying status, or has filed with FERC an application for FERC certification of qualifying status, that
has been granted.

PURPA exempts QFs from most provisions of the FPA and state laws relating to the financial, organization and rate
regulation of electric utilities. In addition, FERCs regulations promulgated under PURPA require that electric utilities purchase electricity generated by QFs at a rate based on the purchasing utilitys incremental cost of purchasing or
producing energy (also known as avoided cost).

Pursuant to EPACT 2005, FERC issued a final rule that subjects QFs to FERC rate
regulation for sales of energy or capacity unless such sales are either (i) from QFs 20 MW or smaller in size; (ii) pursuant to a contract executed on or before March 17, 2006; or (iii) pursuant to a state regulatory
authoritys implementation of section 210 of PURPA. The practical effect of this final rule is to require QFs that are larger than 20 MW in size to obtain market-based rate authority from FERC for non-PURPA sales of power (i.e. power that is
sold in a manner that is not pursuant to state implementation of PURPA).

EPACT 2005 also allows FERC to terminate a utilitys PURPA
obligation to purchase energy from a QF upon a finding that the QF has nondiscriminatory access to either (i) independently administered, auction-based day ahead and real time wholesale markets for electric energy and wholesale markets for
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capacity and electric energy; (ii) transmission and interconnection services provided by a FERC-approved regional transmission entity and administered
under an open-access transmission tariff that affords nondiscriminatory treatment to all customers, and competitive wholesale markets that provide a meaningful opportunity to sell capacity and energy, including long and short term sales to buyers
other that the utility to which the QF is interconnected; or (iii) wholesale markets for the sale of capacity and energy that are at a minimum of comparable competitive quality as markets described in (i) and (ii) above. FERC adopted
a rule to implement these provisions of the EPACT 2005. This rule establishes a rebuttable presumption that a QF does have nondiscriminatory access to the relevant wholesale markets and that the utility will have no mandatory obligation if the
following conditions are present: (i) the QF is larger than 20 MW, (ii) any of the three competitive markets described above are present, and (iii) the utility has filed an open access transmission tariff pursuant to FERCs open
access regulations. The rule also creates a rebuttable presumption that for QFs larger than 20 MW, if the utility is a member of any of four regional transmission organizations or independent system operators (Midwest ISO, PJM, ISO-NE, NYISO) or
ERCOT, the QF does have nondiscriminatory access to the relevant wholesale market. The utility in those areas thus will be eligible for relief from the mandatory obligation. While the rule creates a rebuttable presumption regarding nondiscriminatory
access across all markets where there is a filed open access transmission tariff (or reciprocity tariff of a non-jurisdictional utility), the rule does not find that any markets meet the statutory criteria at this time, other than the four listed
RTO/ISOs and ERCOT. Further, the rule provides a procedure for utilities to file to obtain relief from the mandatory purchase obligation on a service territory-wide basis, and establishes procedures for affected QFs to seek reinstatement of the
purchase obligation. The rule creates a rebuttable presumption that a QF with a net capacity no greater than 20 MW does not have nondiscriminatory access to the wholesale market, and the mandatory purchase obligation remains. The rule also protects
a QFs rights under any contract or obligation for the sale of energy in effect or pending approval before the appropriate state regulatory authority or non-regulated electric utility on or before August 8, 2005.

Prior to EPACT 2005, electric utilities or electric utility holding companies could not own more than a 50% equity interest in a QF. EPACT 2005
eliminates the restriction on utility ownership of a QF.

We expect that all of the projects we intend to develop will meet the criteria
required for QFs under PURPA. However, it is possible that the utilities that purchase power from the projects could successfully obtain an elimination of the mandatory-purchase obligation in their service territories.

FPA

Pursuant to the FPA, the FERC
has exclusive rate-making jurisdiction over wholesale sales of electricity and transmission 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. QFs are generally exempt from the FPA. If any of the projects were to lose its QF status, such project could also become subject to the full scope of the FPA and applicable state regulations. The application of the FPA and other
applicable state regulations to the projects could require operations to comply with an increasingly complex regulatory regime that may be costly and greatly reduce operational flexibility. Even if a project does not lose QF status, pursuant to a
final rule issued by FERC pursuant to EPACT 2005, the project will become subject to rate regulation under the FPA unless it is 20 MW or smaller, or has a sales contract executed on or before March 17, 2006 or made pursuant to a state
regulatory authoritys implementation of section 210 of PURPA.

If a project was to become subject to FERCs ratemaking
jurisdiction under the FPA as a result of loss of QF status and the power purchase agreement remains in effect, the FERC may determine that the rates currently set forth in the power purchase agreement are not appropriate and may set rates that are
lower than the rates currently charged. In addition, the FERC may require that the project refund amounts previously paid by the relevant power purchaser to such project. Such events would likely result in a decrease in future revenues or in an
obligation to disgorge revenues previously received from the project, either of which would have an adverse effect on revenues.



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State Regulations

QFs that make only wholesale sales of electricity are not subject to rate, financial and organizational regulations applicable to electric utilities in those states. Our projects will likely sell their electrical
output under power purchase agreements to electric utilities. We expect the power purchase agreements with those utilities (except certain utilities such as municipalities that are not regulated by state utility commissions) will be submitted by the
utilities for approval by their respective state public utility commissions.

While geothermal power generation operations produce
electricity without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide, some projects may emit air pollutants in quantities that are subject to regulation under applicable
environmental air pollution laws. Such operations typically require air permits. Especially critical to geothermal operations are those permits and standards applicable to the construction and operation of geothermal wells and brine reinjection
wells. In the United States, injection wells are regulated under the federal Safe Drinking Water Act Underground Injection Control program, which we refer to as UIC. Injection wells typically fall into UIC Class V, one of the least regulated
categories, because fluids are reinjected to enhance utilization of the geothermal resource. Geothermal plants are required to comply with numerous federal, regional, state and local statutory and regulatory environmental standards and to maintain
numerous environmental permits and governmental approvals required for their operation.

Transportation & Industrial

While the activities of our Transportation & Industrial segment are not subject to direct
regulation, the commercialization of our technologies for certain applications, such as hybrid-electric vehicles, may be somewhat dependent on government regulations. The Energy Policy Act of 2005 contains numerous provisions that could affect the
pace at which hybrid-electric technology is adopted by the automobile industry. For example, the bill continued to provide tax incentives for purchasers of hybrid-electric vehicles and provided direct funding for research to advance the
commercialization of hybrid and plug-in flexible fuel vehicles. The bill also extended incentives for alternate fuel vehicles that could be considered competitors to hybrid-electric vehicles. Similarly, new government initiatives, such as the
Freedom Car and 21stCentury Truck, could play a significant role in accelerating the adoption of the applicable technologies in the
automotive and other related transportation industries.

The United States Department of Energy (DOE) is directed by the Energy
Policy and Conservation Act to consider establishing minimum efficiency standards for various consumer products, including central air conditioners and central air conditioning heat pumps. In 2004, DOE amended the minimum efficiency standards for
new central air conditioners and heat pumps. The new standards went into effect on January 23, 2006, raising the Seasonal Energy Efficiency Ratio (SEER) for residential air conditioners to 13 and increasing the Heating Seasonal
Performance Factor (HSPF) for central air conditioning heat pumps to 7.7. Likewise, under EPACT in the U.S and various directives in the EU, standard general-purpose AC induction motors are subject to minimum operating efficiency
standards. In general, higher efficiency standards for air conditioners, heat pumps and AC motors, which are currently under review at the relevant regulating agencies, could make certain applications of our technologies more attractive to
manufacturers of those systems.

Employees

As of December 31, 2008, we had 57 full-time employees, including fifteen dedicated to the Transportation & Industrial segment, twenty three dedicated to the Power Systems segment, and nineteen in the sales, marketing and
administrative departments. Currently, there are no employees under a collective bargaining agreement. We consider our employee relationships to be positive.



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Executive Officers of the Registrant

The following table sets forth the name, position and age of each of our executive officers.



|                    |  |                                              |  |    
|------------------- |  | -------------------------------------------- |  | ---
|Name                |  | Position                                     |  | Age
|Kraig T. Higginson  |  | Chairman of the Board                        |  | 54 
|Brent M. Cook       |  | Chief Executive Officer, Director            |  | 48 
|Patrick J. Schwartz |  | President                                    |  | 54 
|Martin F. Petersen  |  | Chief Financial Officer                      |  | 48 
|Richard D. Clayton  |  | Executive Vice-President and General Counsel |  | 52 
|Steven R. Brown     |  | Executive Vice-President                     |  | 50 

Kraig T. Higginson.Mr. Higginson has served as Chairman of the Board of Directors
since October 2003. He has also served as the Companys President from October 2003 to March 2004 and as the Companys Chief Executive Officer from March 2004 to January 2005. Mr. Higginson founded American Telemedia Network, Inc., a
publicly-traded corporation that developed a nationwide satellite network of data and audio-visual programming. He served as President and Chief Executive Officer of Telemedia Network from 1984 through 1988. From 1988 through 2002,
Mr. Higginson worked as a business consultant through Lighthouse Associates, an entity he controls.

Brent M. Cook.
Mr. Cook has served as a director of Raser since October 2004 and as Rasers Chief Executive Officer since January 2005. From 1996 to 2002, Mr. Cook served in various positions at Headwaters Inc. (NYSE: HW), a large publicly-traded
energy technology company, including Chief Executive Officer, President, and Chairman of the Board of Directors. Prior to his joining Headwaters Inc., Mr. Cook was Director of Strategic Accounts, Utah Operations, at PacifiCorp, which operates
as a local electric utility in seven western states. Mr. Cook spent 12 years at PacifiCorp with specific experience in transmission interconnection and power sales agreements. Mr. Cook was also employed from 2002-2005 by AMP Resources, a
geothermal power generation company that recently sold their projects to ENEL, an Italian power generation company. Mr. Cook has worked in the electrical energy and energy technology industry since 1984 and is familiar with the electrical power
industry.

Patrick J. Schwartz. Mr. Schwartz has served as President of Raser since June 2006. From 2004 to 2006,
Mr. Schwartz served as the Chief Operating Officer and a member of the Board of Directors of Evolution Academy of Utah, LLC, a for-profit organization that he co-founded which specializes in rehabilitation and education of at-risk
youth. From 2003 to 2004 Mr. Schwartz served as Chief Operating Officer for Quadex Pharmaceuticals, LLC., a privately-held pharmaceutical company that developed and markets VIROXYN (TM), a product marketed to kill the Herpes virus. From 1999 to
2002, Mr. Schwartz took a three-year sabbatical to serve as a Mission President for The Church of Jesus Christ of Latter-day Saints. After completing his sabbatical as Mission President, Mr. Schwartz consulted for various companies until
2003. Prior to 1999, Mr. Schwartz served as an executive with the Huntsman Corporation, where he was employed for approximately 25 years. His responsibilities at Huntsman included executive leadership of the global Styrenics
business during 1998, acting Managing Director of the Huntsman Southeast Asian joint-venture during 1997 and Managing Director responsible for European Operations from 1990 to 1996.

Martin F. Petersen. Mr. Petersen has served as Chief Financial Officer of the Company since January 2007. From 2005 to 2006,
Mr. Petersen was a consultant to The Event Source, a government contractor in Iraq. From 2003 to 2005, he was the Chief Financial Officer of The Event Source. From 2001 to 2002, he was the Chief Financial Officer of Found, Inc., a
venture-backed software company. From 2000 to 2001, he was Chief Financial Officer of TenFold Corporation, a publicly traded enterprise software development company. He also served as Vice President and Treasurer of Huntsman Corporation, a large,
global chemical company. Prior to Huntsman, he was a Vice President in the Investment Banking Division of Merrill Lynch & Co. He has an MBA degree from the University of Chicago, and a BA degree from Brigham Young University.



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Richard D. Clayton.Mr. Clayton has served as General Counsel and Secretary since March
2007. From 2001 to 2007, Mr. Clayton practiced corporate law with Holland & Hart, LLP, specializing in mergers and acquisitions, corporate finance, and corporate governance. He also served as a member of the board of
directors and executive vice president of Geneva Steel Company (NYSE listed), where his responsibilities included corporate finance, capital projects, energy and environmental matters. Mr. Clayton received BS degrees in accounting and finance
from the University of Utah, and a JD degree from the University of Utah.

Steven R Brown. Mr. Brown joined Raser in January
2007 and has an extensive background in the start-up of technology based companies and project management of complicated and diverse projects. From June 2000 until he joined Raser, he was the owner operator of Construction Management Services, Inc.
where he provided consulting services to government agencies, private owners, banks, law firms, and contractors throughout the United States. These services included engineering, construction management, on-site owner representation, cost
estimating, scheduling, and construction claim litigation preparation and expert witness testimony. Mr. Brown also served as Senior Vice President at Headwaters and was responsible for the development, construction and operations of twenty-four
synthetic facilities from 1995 to 2000. The facilities were constructed over a two year period with an investment of $310 million and will generate $2.5 billion of Section 29 tax credits over the ten year period of their operations.
Mr. Brown also served on Headwaters board of directors and assisted in the formulation and implementation of Headwaters technology licensing strategy. Mr. Brown has also been involved with new business development, operations,
financial analysis, and business plan development in the telecommunications, mining, engineering and constructions industries. Mr. Brown received his Bachelor of Science in Civil Engineering and Masters of Business Administration from Brigham
Young University.

Available Information

Our internet address is www.rasertech.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). The public may also
read and copy any materials filed with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this Form 10-K is not
incorporated by reference into this Form 10-K unless expressly noted.



|ITEM 1A. | Risk Factors.
|-------- | -------------

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

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

We have a limited operating history and, from our inception, we have earned limited revenue from operations. We have incurred
significant net losses in each year of our operations, including a net loss of approximately $45.5 million for the year ended December 31, 2008. As a result of ongoing operating losses, we had an accumulated deficit and deficit after re-entry
into development stage of approximately $96.7 million on cumulative revenues from inception of approximately $1.0 million as of December 31, 2008.

Under our current growth plan, we do not expect that our revenues will be sufficient to cover our expenses unless we are able to successfully place a number of power plants in service. As a result, we expect to
continue to



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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;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------

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 December 31, 2008, we had approximately $1.5 million in cash and cash equivalents. Our operating activities used approximately $22.9 million and
approximately $6.8 million of cash during the years ended December 31, 2008 and 2007, respectively. We have incurred substantial losses since inception and we are not operating at cash breakeven.

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

From time to time, we have raised additional capital through the sale of equity and equity-related securities. Most recently, on November 14, 2008, we sold 2,000,000 shares of our common stock at a fixed price of
$5.00 per share, or an aggregate purchase price of $10.0 million, in a private placement transaction. We also sold 2,360,417 shares of our common stock on December 12, 2008 for $4.23654 per share, or an aggregate purchase price of $10.0
million. We paid commissions of $1,232,000 to a placement agent in connection with the closing of the private placement transactions.

In
February 2009, we also entered into an unsecured line of credit arrangement, pursuant to which we may borrow up to $15.0 million, subject to the final approval of each advance by the lenders party to the line of credit



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arrangement. Pursuant to the Thermo Financing Agreements, we received a capital contribution for minority interest in our Thermo Subsidiary totaling $3.7
million. Under the same Thermo Financing Agreements, we also entered into an 18 year non-recourse senior secured note bearing annual interest at 7.00% and received net proceeds totaling $26.1 million.

In addition, we obtained project financing for our Thermo No. 1 project, which included the repayment of approximately $14.1 million of construction
costs previously incurred by us for construction of the project. In order to execute our business strategy and continue our business operations, however, we will need to 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 from any of these sources will be available on reasonable terms or at all.
If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we may need to modify our current plans for plant construction, well field development and other development activities, extend the time frame over which these
activities will take place or cease operations.

On March 19, 2008, we raised gross proceeds of $50.0 million, before deducting fees
and commissions from the issuance of the Convertible Notes. We placed approximately $7.9 million of the proceeds in an escrow account to secure payment of the first four interest payments payable on the Convertible Notes. We also used approximately
$15.0 million of the proceeds to enter into a forward stock purchase transaction, pursuant to which we will repurchase shares of our common stock, and approximately $5.9 million of net proceeds to fund a call spread option transaction. On
April 1, 2008, the initial purchaser of the Convertible Notes exercised its overallotment option and we sold an additional $5.0 million aggregate principal amount of Convertible Notes. We placed approximately $0.8 million of the proceeds from
the overallotment exercise in an escrow account to secure payment of the first two years of interest payable on the additional Convertible Notes issued pursuant to the overallotment exercise.

Our Commitment Letter with Merrill Lynch sets forth certain general terms relating to the structure and financing of up to 155 MW of geothermal power
plants we intend to develop. Pursuant to the Commitment Letter, we have obtained project financing for our Thermo No. 1 project. Pursuant to the Commitment Letter we have also received financing commitments for two other projects: one in Nevada
and one in New Mexico. The financing commitments for the New Mexico and Nevada projects expired on December 1, 2008 and June 30, 2008, respectively. We and Merrill Lynch have agreed to work towards formally extending the expiration date of
the Lightning Dock commitment in the future. Since the Truckee commitment was negotiated, we have initiated the development of several other projects, and a number of these projects are expected to be developed more rapidly than the Truckee project.
Therefore, in the fourth quarter of 2008, we determined to postpone our discussions with Merrill Lynch regarding an extension of the Truckee commitment. We intend to continue our development efforts at the Truckee project and seek a new financing
commitment from Merrill Lynch once those development efforts progress to the point when financing is needed for construction of a plant and related development activities. If Merrill Lynch elects to provide or arrange a financing commitment with
respect to any additional projects, such financing commitment will be subject to satisfactory due diligence, the execution of a separate commitment letter relating to such project and certain other conditions. Even if we are able to obtain funding
for the development of additional projects pursuant to the Commitment Letter, we will need additional financing to cover general operating expenses and certain development expenses that are not covered by the Commitment Letter.

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



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provisions, the exercise price of the applicable warrants will be adjusted if we issue equity securities or securities convertible into equity securities at
a price lower than the exercise price of the applicable warrants.

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

Our independent registered public accounting firms report on our 2008 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, 2008 and
2007 and for the three year period ended December 31, 2008 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 2009.

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, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, recent international conflicts, recent terrorist and military
activity, and the impact of natural disasters and public health emergencies. If the current market conditions continue or worsen, our business, operations and financial condition will likely be materially and adversely affected.

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

Longer term disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to capital needed for our operations and development plans. If we are unable to obtain adequate
financing, we could be forced to reduce, delay or cancel planned capital expenditures, sell assets or seek additional equity capital, or



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pursue other actions that could adversely affect future operations. Failure to obtain sufficient financing or a reduction of expenditures may cause delays
and make it more difficult to execute our plans to develop geothermal power plants in accordance with our expectations. It would also make it more difficult to conduct adequate research and development and other activities necessary to commercialize
our Symetron technologies.

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

The closing price of our common stock fluctuated from a low of $2.47 per share to a high of $17.09 per share from
January 1, 2008 to December 31, 2008. Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside of our control, including the level of short sale transactions. As a result, the
market price of our stock may not reflect our intrinsic value. In addition, following periods of volatility in our stock price, there may be increased risk that securities litigation, governmental investigations or enforcement proceedings may be
instituted against us. Any such litigation, and investigation or other procedures, regardless of merits, could materially harm our business and cause our stock price to decline due to potential diversion of management attention and harm to our
business reputation.

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

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

We are devoting a substantial amount of our available resources to the power production development activities of our Power Systems segment. 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 develop additional projects is uncertain. 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. Generally, we must also incur significant expenses for preliminary engineering, permitting, legal fees and other expenses before we can even determine whether a project is feasible.
Project financing is not typically available for these preliminary activities.

Financing needed to develop geothermal power projects may be
unavailable.

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

Market conditions and other factors may not permit us to obtain financing for geothermal projects on terms favorable to
us. Our ability to arrange for financing on a substantially non-recourse or limited recourse basis, and the costs of such financing, are dependent on numerous factors, including general economic and capital market conditions, credit availability
from banks, investor confidence, the 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



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existence of tax and securities laws which are conducive to raising capital. If we are not able to obtain financing for our projects on a substantially
non-recourse or limited recourse basis, or if we are unable to secure capital through partnership or other arrangements, we may have to finance the projects using recourse capital such as direct equity investments, which would have a dilutive effect
on our common stock. Also, in the absence of favorable financing or other capital options, we may decide not to pursue certain projects. Any of these alternatives could have a material adverse effect on our growth prospects and financial condition.

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

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

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

The United States Congress recently passed the American Recovery and Reinvestment Act of 2009 (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. Because this legislation is new, many of the details regarding the availability of grants or other incentives are unknown. Therefore, we cannot predict whether the
Recovery Act will have a positive effect on our ability to obtain financing for our projects.



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

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

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 incentives within the United States Internal Revenue Code. 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 reduced 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 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. In addition, the Recovery Act recently
extended the availability of the production tax credit (PTC) for geothermal projects placed in service before 2014 and created a new grant program for certain projects that are placed in service in, or for which construction begins in,
2009 or 2010.

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. The ITC is subject to recapture if the property eligible for the credit is sold or otherwise disposed of 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 $21.00 (as adjusted for inflation) 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. Also pursuant to the Recovery Act, an owner may elect to receive a grant from the United States Treasury
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or the PTC. 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 later of the date of the application for the grant or the date the project is placed in service.

Owners of projects also are permitted to depreciate for tax purposes most of the cost of the power plant on an accelerated basis. Generally, that
depreciation occurs over a five year period. Under the Recovery Act, property placed in service during 2009 generally is entitled to additional bonus depreciation in which 50% of the adjusted basis of the property is deducted in 2009 and
the remaining 50% of the adjusted basis of the property is depreciated over the five-year accelerated tax depreciation schedule.

All of
these programs are subject to review and change by Congress from time to time. 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, including the grant program for which there is not yet administrative guidance.

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 deductions and credits. 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 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 credits and other tax incentives to offset taxable income associated with their operations unrelated to our geothermal power plants. For example, a
corporation in a different industry may be willing to finance the development of a geothermal power plant in consideration 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, 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



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on different factors directly related to the geothermal resource, such as the heat content (the relevant composition of temperature and pressure) of the
geothermal resource, the useful life (commercially exploitable life) of the resource and operational factors relating to the extraction of geothermal fluids. 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
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 UTCP. UTCPs heat transfer technologies are designed to enable the generation of power from geothermal
resources that are lower in temperature than those resources used in traditional flash steam geothermal projects.

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



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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.

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
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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 six issued United States patents, seven pending United States patent applications, four pending international patent
applications and one pending foreign patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to protect the inventions derived from our technology or prove to be enforceable in actions against
alleged infringers. Also, additional patent applications that we may file for our current and future technologies may not be issued. We have received three trademark registrations in the 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.



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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. These partners may have better access to information regarding



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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 2008 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



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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.

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

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

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

Our future success also depends on our ability to attract, train, retain and motivate highly skilled technical and
sales 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.

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 40.6 million shares were free of restrictive legend as of December 31, 2008, up from approximately 29.9 million and
19.4 million as of December 31, 2007 and 2006, respectively. The occurrence of such sales, or the perception that such sales could occur, may cause our stock price to decline.

Our reported financial results may be adversely affected by changes in 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



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principles or interpretations could have a significant effect on our financial results. For example, prior to January 1, 2007, we were not required to
record liabilities relating to uncertainties in our income tax positions until a determination was made by the IRS disallowing the deductions. However, for periods after January 1, 2007 we are required to determine whether it is
more-likely-than-not that a tax position is sustainable and measure the tax position to recognize in the financial statements in accordance with recent accounting pronouncements.



|ITEM 1B. | Unresolved Staff Comments.
|-------- | --------------------------

On August 19,
2008, we received a comment letter from the Securities and Exchange Commission Staff (the Staff) related to a review of our Annual Report on Form 10-K for the year ended December 31, 2007, as amended. We have exchanged
correspondence with the Staff several times, and we are in the process of responding to the most recently received correspondence from the Staff. In its most recent correspondence, the Staffs comments related generally to our disclosures
regarding our geothermal resources and related property interests, the status of our geothermal power projects and the various development activities, and the accounting policies applied to our geothermal projects and related financing arrangements.
We believe we have addressed the Staffs material comments in this filing. However, the Staffs review of our filings is not complete, and the Staff may have further comments.



|ITEM 2. | Properties.
|------- | -----------

We lease our corporate office located
at 5152 North Edgewood Drive, Suite 200, Provo, Utah. On January 1, 2009, we entered into a new lease agreement that expanded the corporate office space from 11,400 square feet to 19,300 square feet. Monthly rent also increased from
approximately $19,900 per month to approximately $34,400 per month. The new lease expires on December 31, 2011.

We also lease our
Symetron testing facility in Utah County, Utah. The testing facility has approximately 12,000 square feet with monthly rent of approximately $6,400. The testing facility lease expires on June 1, 2009. We are currently evaluating whether
to extend this lease. The corporate offices and facilities are well maintained and in good condition.

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 with monthly rent computed on a per unit basis of approximately $8,400 per month. The agreement continues on a month to month
basis until all equipment is removed from the property.



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We have entered into various geothermal and surface rights lease agreements, primarily through our
wholly-owned subsidiaries, in which we obtained the right to develop and construct geothermal power plants. These leased properties are included in our Power Systems segment and are classified as power project leases. The following table
sets forth our geothermal leases at December 31, 2008:



|                           |  |         |  |                                     |          
|-------------------------- |  | ------- |  | ----------------------------------- | ---------
|State                      |  | Acreage |  | Power Project LeaseAcquisitionCosts
|Nevada                     |  |         |  |                                     |          
|Truckee Area               |  | 16,600  |  | $                                   | 734,544  
|Devils Canyon Area        |  | 995     |  |                                     | 45,680   
|Trail Canyon Area          |  | 10,640  |  |                                     | 179,593  
|Other Areas                |  | 5,325   |  |                                     | 437,912  
|                           |  |         |  |                                     |          
|Total Nevada               |  | 33,560  |  | $                                   | 1,397,729
|                           |  |         |  |                                     |          
|New Mexico                 |  |         |  |                                     |          
|Lightning Dock Area        |  | 2,520   |  | $                                   | 4,751,863
|                           |  |         |  |                                     |          
|Total New Mexico           |  | 2,520   |  | $                                   | 4,751,863
|                           |  |         |  |                                     |          
|Utah                       |  |         |  |                                     |          
|Thermo Area                |  | 25,644  |  | $                                   | 2,051,076
|Other projects             |  | 135,651 |  |                                     | 369,975  
|                           |  |         |  |                                     |          
|Total Utah                 |  | 161,295 |  | $                                   | 2,421,051
|                           |  |         |  |                                     |          
|Oregon                     |  |         |  |                                     |          
|Klamath Falls Area         |  | 984     |  | $                                   | 10,000   
|                           |  |         |  |                                     |          
|Total Oregon               |  | 984     |  | $                                   | 10,000   
|                           |  |         |  |                                     |          
|Total Power Project Leases |  | 198,359 |  | $                                   | 8,580,643
|                           |  |         |  |                                     |          

The Thermo Area as used in this table includes the Thermo No. 1 project and
parcels which are in the closest proximity to the Thermo No. 1 project. This acreage does not include other leases which we consider part of the greater Thermo area. Our holdings in the immediate vicinity of the Thermo No. 1 project and in the
greater Thermo area total approximately 51,000 acres.

As described above, our portfolio of potential geothermal interests consists of
interests in a large number of properties. We acquired many of our interests in these properties at a relatively low cost based on a very preliminary evaluation of geothermal potential. Generally, we do not consider a geothermal lease or other
interest to be material to our operations unless we have determined to initiate the development of a geothermal power project that is dependent on the applicable lease or interest. Information with respect to each of our material property interests
is set forth in Item 1BusinessCurrent Geothermal Power Projects of this report.



|ITEM 3. | Legal Proceedings.
|------- | ------------------

We have applied to the United
States Patent and Trademark Office for federal trademark registration of our name, RASER, in connection with a number of goods and services including, among other things, electric motors for machines. In connection with our application no.
78/339,071, in 2007, Razor USA LLC initiated an opposition proceeding (Opposition) before the administrative body the Trademark Trial and Appeals Board (TTAB). During the fourth quarter of 2008, the opposition was withdrawn
in view of settlement. Accordingly, application no. 78/339,071 has been allowed.

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



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

There were no matters submitted to security holders during the fourth quarter of the year ended December 31, 2008.



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PART II



|ITEM 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|------- | -------------------------------------------------------------------------------------------------------------

Market Information.

Our common stock is listed on the
NYSE exchange under the trading symbol of RZ.

Below are the high and
low closing sales prices for Raser common stock for each quarter of 2008 and 2007. Closing prices were obtained from the ArcaEx®, now NYSE Arca. and, since December 22,
2008 from NYSE.



|                                 |  |     |       |      |   |      
|-------------------------------- |  | --- | ----- | ---- | - | -----
|Fiscal 2008                      |  | Low |       | High
|Quarter ended March 31, 2008     |  | $   | 7.30  |      | $ | 17.09
|Quarter ended June 30, 2008      |  |     | 7.87  |      |   | 11.37
|Quarter ended September 30, 2008 |  |     | 4.10  |      |   | 11.70
|Quarter ended December 31, 2008  |  |     | 2.47  |      |   | 8.35 
|                                 |  |    
|Fiscal 2007                      |  | Low |       | High
|Quarter ended March 31, 2007     |  | $   | 4.89  |      | $ | 7.49 
|Quarter ended June 30, 2007      |  |     | 5.24  |      |   | 9.06 
|Quarter ended September 30, 2007 |  |     | 7.12  |      |   | 15.35
|Quarter ended December 31, 2007  |  |     | 10.00 |      |   | 18.11

On March 13, 2009, the closing price for Raser common stock was $3.64 per share.

Holders.

As of December 31, 2008 there were
approximately 338 holders of record of our common stock. This does not include an indeterminate number of stockholders who may hold their shares through a broker-dealer in street name.

Dividends.

We have never declared or paid any cash
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 in the foreseeable future. There are no material
restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock.

Securities Authorized For Issuance under Equity
Compensation Plans.

The following table sets forth the number of shares of our common stock underlying outstanding options and warrants
that have been issued under our equity compensation plans as of December 31, 2008:



|                                                        |  |                                                                                          |  |                                                                            |      |                                                                                                                                          |          
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                           |  | Number ofsecurities to beissued uponexercise ofoutstandingoptions, warrantsand
rights(a) |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights(b) |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))(c)
|Equity compensation plan approved by security holders   |  | 3,353,783                                                                                |  | $                                                                          | 8.37 |                                                                                                                                          | 3,012,104
|Other equity issuances outside of the compensation plan |  | 11,198,775                                                                               |  | $                                                                          | 8.62 |                                                                                                                                          |         
|                                                        |  |                                                                                          |  |                                                                            |      |                                                                                                                                          |          
|Total                                                   |  | 14,552,558                                                                               |  | $                                                                          | 8.57 |                                                                                                                                          | 3,012,104



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In March 2004, our Board of Directors adopted the Raser Technologies, Inc. Amended and Restated 2004
Long-Term Incentive Plan (the Plan), and in May 2004, our board recommended and our stockholders approved the Plan. The Plan was adopted to facilitate (1) grants of a wider range of stock incentive awards, including restricted
stock, stock appreciation rights, performance shares and performance units, (2) an automatic annual increase to the number of shares of common stock reserved for issuance under the Plan beginning in 2005 equal to the lesser of 1,750,000 shares
of common stock, 3% of the outstanding shares of common stock on the first day of each fiscal year, or an amount determined by the Board of Directors, and (3) optional automatic, nondiscretionary annual stock option grants for employees and
non-employee directors. As of December 31, 2008, we were authorized to issue up to 7,943,173 shares of common stock pursuant to the Plan.

From time to time, the Board of Directors approves, based upon the recommendation of management, the issuance of warrants or other securities to vendors, service providers, or individual participants in approved company financings as equity
compensation. On January 16, 2008, we granted to Merrill Lynch warrants to purchase up to 3,700,000 shares of our common stock, subject to vesting requirements associated with the financing of our geothermal power plants. The warrants vest and
become exercisable in increments over the term of the Commitment Letter based on the actual funding provided. On September 8, 2008, warrants to purchase 1,350,000 shares of our common stock vested in connection with the closing of the project
financing arrangements for the Thermo No. 1 project. These warrants are immediately exercisable and have a current exercise price of $13.24.

On November 14, 2008, in connection with our $20.0 million equity financing with Fletcher International, Inc., we issued warrants to Fletcher International, Inc. to purchase up to a maximum of 7,458,532 of our common stock at a strike
price of the lesser of (a) $6.00 per share or (b) the 40 day volume weighted-average price, less $.60 per share.



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Recent Sales of Unregistered Securities.

On December 12, 2008, we granted 34,483 restricted shares of our common stock to Rollins Construction and Transportation, Inc. pursuant to a
settlement of outstanding invoices for construction services relating to construction of the Thermo No. 1 geothermal power plant. The 34,483 shares represented the fair value of the amount to be applied towards the outstanding invoice on the
date of the grant. The fair value of these shares totaled $150,000.

We believe the offer and sale of the securities described above were
exempt from the registration requirements of the Securities Act, for the private placement of these securities pursuant to Section 4(2) of the Securities Act and/or Regulation D thereunder because the securities were sold in a transaction not
involving a public offering.

LOGO

The performance graph represents our cumulative total stockholder returns through December 31, 2008, as
compared to the Standard and Poors Small Cap 600 Index, and the Standard and Poors Industrial Index.



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|ITEM 6. | Selected Financial Data.
|------- | ------------------------

The following table sets
forth our selected consolidated financial data for the years ended December 31, 2008, 2007, 2006, 2005 and 2004. We have derived the selected consolidated financial data related to the statements of operations for the years ended and as of
December 31, 2008, 2007 and 2006 from our audited consolidated financial statements set forth in Part II Item 8 of this annual report. We have derived the selected consolidated financial data related to the balance sheets for the years
ended December 31, 2006, 2005 and 2004 from our audited consolidated financial statements not included herein.

The information set
forth below should be read in conjunction with Part II Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements set forth in Part II Item 8
of this annual report.



|                                                    |  |                            |             |   |                            |   |             |                            |  |   |                            |   |  |                            |             |   |  |   |             |  
|--------------------------------------------------- |  | -------------------------- | ----------- | - | -------------------------- | - | ----------- | -------------------------- |  | - | -------------------------- | - |  | -------------------------- | ----------- | - |  | - | ----------- | -
|                                                    |  | Year EndedDecember 31,2008 |             |   | Year EndedDecember 31,2007 |   |             | Year EndedDecember 31,2006 |  |   | Year EndedDecember 31,2005 |   |  | Year EndedDecember 31,2004 |            
|Revenue                                             |  | $                          | 172,303     |   |                            | $ | 320,072     |                            |  | $ | 122,732                    |   |  | $                          | 331,735     |   |  | $ | 30,000      |  
|Operating Loss                                      |  |                            | (38,459,409 | ) |                            |   | (16,468,138 | )                          |  |   | (19,259,166                | ) |  |                            | (9,543,579  | ) |  |   | (6,791,011  | )
|Net Loss Applicable to Common Stockholders          |  |                            | (45,485,034 | ) |                            |   | (15,749,005 | )                          |  |   | (18,488,936                | ) |  |                            | (14,609,056 | ) |  |   | (11,282,781 | )
|Net Loss per Common Share (basic and fully diluted) |  |                            | (0.79       | ) |                            |   | (0.29       | )                          |  |   | (0.36                      | ) |  |                            | (0.29       | ) |  |   | (0.24       | )
|Total Long-Term Obligations                         |  |                            | 82,272,694  |   |                            |   | 86,193      |                            |  |   |                           |   |  |                            |            |   |  |   |            |  
|Total Assets                                        |  |                            | 184,024,448 |   |                            |   | 23,784,453  |                            |  |   | 11,405,447                 |   |  |                            | 19,564,651  |   |  |   | 2,996,554   |  
|Total Stockholders Equity                          |  | $                          | 6,278,322   |   |                            | $ | 19,451,477  |                            |  | $ | 10,710,201                 |   |  | $                          | 19,194,512  |   |  | $ | 2,961,557   |  



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|ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

The following managements discussion and analysis of financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions, as set forth in Part I of this report under Special Note Regarding Forward-Looking Statements. Our actual results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth in Part I Item 1A and elsewhere in this report. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with
respect to any actual or projected financial performance.

Overview

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

Sources of Revenue

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

We completed the major construction of the cooling towers
and transmission lines and installed the UTCP power generating units at our Thermo No. 1 project in October 2008. The Thermo No. 1 power plant began generating and transmitting nominal quantities of test electricity in December
2008 and is expected to become operational at or near full capacity in the first part of 2009. Our Thermo Subsidiary expects to realize revenues under the Thermo PPA during 2009. However, the expected revenues will not have a material effect on our
liquidity or our needs for additional financing. Our Transportation & Industrial segment is seeking to generate revenues by licensing our SymetronTMtechnologies to third parties. We also expect to begin to generate modest revenues in the future from contracts we have entered into for the development of extended range PHEV demonstration vehicles. We accepted an initial deposit of
$200,000 for the production of these vehicles. We also expect to begin to realize modest revenues from the sale of enhanced motors and generators through our business cooperation agreement with HHI in 2009, although the exact amount and timing of
these revenues will be dependent on HHIs ability to implement these enhanced designs into its manufacturing and distribution system. We also have entered into a licensing agreement with Wilson Automotive to manufacture and sell enhanced
alternators for high-output applications. Although progress is being made by each of our business segments, significant revenues may not be generated as expected by either of our segments, if at all.

Significant Expenses

We have incurred significant
losses since our inception. As of December 31, 2008, we had incurred an accumulated deficit and deficit accumulated after re-entry into the development stage of approximately $65.7 million on cumulative revenues since inception of approximately
$1.0 million. Our net losses for the years ended December 31, 2008, 2007 and 2006 totaled $45.5 million, $15.7 million, and $18.5 million, respectively.



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

For the year ended December 31, 2008, our operating expenses consisted primarily of cost of sales, general and administrative expenses, power project development expenses and research and development expenses. Prior to 2007, our power
project development expenses were considered immaterial and were included in general and administrative expenses. Cost of sales for each of the periods presented includes the direct labor, materials and overhead expenses required to perform work on
research and development subcontracts. These subcontracts are now completed, and we intend to further develop certain applications our Transportation & Industrial segment is seeking to commercialize.

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

Power project development expenses for the years ended December 31, 2008 and 2007 primarily include professional services for mapping, environmental
and geological studies and other prospecting costs related to the exploration for geothermal resources. Power project development expenses also include certain legal costs to design the project debt and tax equity financing structure and other
operating agreements as well as certain consulting costs relating to project oversight. We expect that our power project development expenses will increase in future periods as we pursue the development of additional power projects and continue to
explore for geothermal resources.

Research and development expenses for all periods presented primarily include the costs incurred by our
Transportation & Industrial segment in connection with engineering design, development and testing of the technologies it is seeking to commercialize. Total engineering expenses for each period are allocated between cost of sales and
research and development based on the engineering time and expenses by project. Regarding our research and development expenses, 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 may be limited until economic conditions improve. In the interim, we have taken
steps to reduce the resources committed to new developmental efforts. 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.

Critical Accounting Policies and Estimates

Certain of our accounting policies are particularly important to the understanding of our financial position and results of operations. The application of
these policies requires management to use significant judgment to determine the appropriate assumptions to be used in making certain estimates about the effects of matters that are inherently uncertain when reporting financial results. Such
estimates are based upon managements historical experience, the terms of existing contracts, managements observance of trends in the transportation, industrial



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and power production industries, information provided by our customers and information available to management from other outside sources, as appropriate.
Such policies and estimation procedures have been reviewed with our Audit Committee. We describe specific risks related to these critical accounting policies below. In addition, our significant accounting policies are more fully described in Note 1
of our audited consolidated financial statements set forth in Part II item 8 of this annual report.

Regarding all of our accounting
policies, we caution that future results rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Our critical accounting policies include the following:



| |  |  | Accounting for geothermal activities
| | - |  | ------------------------------------



| |  |  | Capitalization of costs
| | - |  | -----------------------



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



| |  |  | Investments
| | - |  | -----------



| |  |  | Allowance for uncollectible accounts
| | - |  | ------------------------------------



| |  |  | Impairment of long-lived assets (tangible and intangible)
| | - |  | ---------------------------------------------------------



| |  |  | Asset retirement obligations
| | - |  | ----------------------------



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



| |  |  | Equity based compensation
| | - |  | -------------------------



| |  |  | Business consolidations
| | - |  | -----------------------



| |  |  | Fair value measurements
| | - |  | -----------------------



| |  |  | Deferred finance costs
| | - |  | ----------------------

Accounting for Geothermal
Energy Activities

Each geothermal power project we develop consists of three phases. During the first phase, the site is identified and
evaluated. During the second phase, the power plant, transmission lines and pipelines are constructed and the production and reinjection wells are drilled. The third and final phase is the production phase, during which the power plant is operated
over its useful life.

Site Identification and Evaluation Phase. The first step in the site identification and evaluation phase is
the identification of potential project sites. As part of the identification process, we incur a variety of costs, which may include costs for topographical studies, geological and geophysical studies, rights to access and study properties,
technical materials and maps. Regardless of whether we pursue a project at a particular site, all of the costs associated with the identification of a potential site are considered exploratory in nature and are expensed as incurred.

The next step in the site identification and evaluation phase is land acquisition, pursuant to which we acquire land, lease land, or otherwise obtain the
appropriate property interests to develop a potential project. Lease acquisition costs, including lease bonuses, legal costs, permit costs, and the fair value of other forms of compensation to acquire leases are capitalized as power project leases
when incurred. The power project leases are not amortized until the related power plant is placed in service. At that time, the related power project leases are capitalized as geothermal property plant and equipment and amortized over the estimated
useful life of the geothermal power plant. From time to time, we also purchase land outright to develop. Any land we purchase outright is not amortized and is stated in our financial statements at historical cost.

Once we have acquired an interest in a geothermal property, we also incur costs to carry and maintain the undeveloped property until we are in a position
to determine whether or not to pursue a project on the property. These costs can include delay rentals, certain taxes on the properties, legal costs for title defense, and the maintenance of land and lease records. All of these costs are expensed
when incurred.



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After, or occasionally prior to, the time we acquire an interest in a property, we conduct additional
internal and external studies to determine whether to initiate the development of a project at the site. As part of this process, we may drill slim holes or conduct other activities to help identify the general location and characteristics of the
potential geothermal resource. All of these costs, including slim holes, are considered exploratory in nature and are expensed as incurred.

Construction Phase.We only decide to pursue a project at a site if we determine, with a high degree of confidence, that the site contains an adequate renewable geothermal resource to support a plant that will continually produce
electricity without any substantial degradation of the heat resource. Once we have made this determination for a site, the project begins the second development phase, which consists of drilling production and reinjection wells, as well as
constructing the power plant, transmission lines and pipelines.

Before drilling and construction can begin, we must obtain appropriate
permits. Permitting costs are capitalized as part of the project costs. We capitalize permitting costs and record them as either well field development-in-progress or construction-in-progress.

After obtaining appropriate permits, we begin to develop the well field for the project by drilling large diameter production holes. Each hole we drill
will result in either a production well, a reinjection well, or an unsuccessful well. Production wells and reinjection wells will ultimately be used in the geothermal power plant. Therefore, drilling costs for production wells and reinjection wells
are capitalized. Drilling costs associated with unsuccessful wells are expensed in the period in which we determine they cannot be used. Capitalized costs associated with well field development-in-progress are reclassified as geothermal property,
plant and equipment once the plant is placed in service and amortized over the estimated useful life of the plant, or 35 years.

Construction of the geothermal power plant, the related transmission lines and the required substation takes place either concurrently with or subsequent to the drilling of the production and reinjection wells. The costs associated with
construction of the power plant and related transmission lines are accumulated and capitalized over the construction period. We begin to depreciate the construction related costs over the estimated useful life of the plant once the power plant is
placed in service. The estimated useful life of our power plants is estimated to be 35 years.

As part of the financing for a project, we
incur costs to obtain a report from an independent engineer verifying the production capacity of the well field. The costs associated with the engineers report are expensed as consulting costs and other financing-related costs, such as legal
costs, broker fees, and accounting fees are capitalized when incurred. The tax incentives associated with these renewable energy projects have placed in service deadlines. We have incurred and may incur in the future, significant
additional costs during this phase in order to meet the placed in service deadline.

Production Phase.The final phase of a project
is the energy production phase. The energy production phase begins when the plant is completed. Operating costs incurred during the energy production phase are expensed as incurred. Prepaid commissions, if any, pursuant to power purchase agreements
relating to the project are amortized over the life of agreements. As of December 31, 2008, no geothermal power plant had been placed in service.

Capitalization of Costs

Our determination to move forward with the process to construct the power plant, transmission
lines, production wells and pipelines for a geothermal power project is based on managements determination, with a high degree of confidence, that a given site contains adequate renewable geothermal resources to support a plant that will
continually produce electricity without any substantial degradation of the heat resource. This determination involves significant management judgment and is based on the information available at the time. Once this determination has been made, we
begin to capitalize certain construction-related costs. Although managements determination to proceed with construction activities and capitalize construction-related costs is



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based on a high degree of confidence that a sufficient geothermal resource exists, the information available and the uncertainties associated with potential
geothermal resources could later prove our managements judgments to be incorrect. If managements judgments with respect to a project prove to be incorrect, we may have to write-off significant costs associated with that project that were
previously capitalized, which could have a material adverse effect on our results of operations.

Revenue Recognition

Revenue is recognized when earned in accordance with applicable accounting standards and guidance, including Staff Accounting Bulletin or SAB,
No. 104, Revenue Recognition, as amended. Although we have earned limited revenue since inception, we expect to earn revenue in the future from both of our business segments.

Revenue generated from our Power Systems segment is generated primarily through the sale of electricity in accordance with long-term power purchase
agreements entered into with investor owned utilities and municipalities. Revenues related to the sale of electricity from our geothermal power plants are recorded based upon the output delivered provided at rates specified under relevant
contract terms. We began generating and transmitting nominal quantities of test electricity at our Thermo No. 1 geothermal power plant in December 2008. The amount of test electricity transmitted was netted by
the power company against the cost of the electricity utilization during the same period. The net amount was insignificant. Therefore, no revenue was recorded in 2008.

Because revenue is recognized based upon metered output of electricity, decreases in well output or the power generating capability of the power generating units may significantly affect the amount of revenues
recognized during a specified period. However, UTCP has guaranteed, under certain conditions, that the power generating units will be operating at a minimum of 92% combined capacity. If the power generating units fail to maintain the
minimum of 92% of combined capacity, we will be entitled to certain liquidated damages based on the actual capacity achieved.

Pursuant to
the Thermo Financing Agreements described above, we have agreed to serve as the engineering, procurement and construction contractor (EPC contractor) for our Thermo Subsidiary and have guaranteed the completion of the construction of the
Thermo No. 1 project. Accordingly, as EPC contractor, we received intercompany revenues from our Thermo Subsidiary for the completion of certain construction related milestones. In addition, we have also agreed to serve as the Operations
and Management manager (O&M manager) for the Thermo No. 1 geothermal power plant. Accordingly, as O&M manager for our Thermo Subsidiary, we expect to receive quarterly fees for the services we perform. We also
expect to receive distributions from our Thermo Subsidiary related to achieving substantial completion of the Thermo No. 1 power plant and other fees for providing general administrative services. However, since the Thermo Subsidiary is a
consolidated entity, these intercompany distributions and fees are eliminated in consolidation.

Revenue is generated through our
Transportation & Industrial segment from (1) the sale of prototypes of our motors or PHEV demonstration vehicles to private companies for testing and simulation and (2) from fees and royalties generated by the sales of products
and solutions of our licensed manufacturing partners. Revenue from subcontracted engineering services is recognized under the percentage of completion method. Costs incurred to achieve the performance criteria are deferred and recognized concurrent
with the recognition of revenue unless they are determined to be unrecoverable. For contracts in which the fee is estimated to equal 100% of the cost to complete the contract, we recognize revenue as the cost is incurred to complete the project
using zero as our estimate of profit under the percentage-of-completion method. If estimated costs exceed projected revenues for a reporting period, we recognize a loss on the contract. Under the percentage of completion method, changes in the
estimated time and cost to complete the contract may affect the time period over which the unrecognized revenues and related costs are recognized.



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Revenue from the sales of prototypes is recognized when the prototype is delivered to the customer.
During 2008, we accepted an initial deposit of $200,000 for the production of two extended range PHEVs. The initial deposit is recorded as unearned revenue until the vehicles are delivered. If we are unable to deliver the vehicles, the deposit will
be returned.

Investments

We classify
investment securities as either available-for-sale or held-to-maturity. Available-for-sale securities and are recorded at fair market value, based on quoted market prices, and unrealized gains and losses are recorded as a component of
comprehensive income (loss). Realized gains and losses, which are calculated based on the specific-identification method, are recorded in operations as incurred. We did not have short-term investments classified as available-for-sale during the
years ended December 31, 2008 and 2007, respectively. Accordingly, there was no unrealized gain or loss relating to available-for-sale short-term investments recorded for the year ended December 31, 2008 or 2007, respectively.

Held-to-maturity securities include U.S. Government Strips that have coupon dates and coupon amounts that correspond with the amount of interest
payable for first four semi-annual interest payments to the holders of our Convertible Notes. The held-to-maturity securities are carried and amortized at cost.

Available-for-sale and held-to-maturity securities are assessed for impairment periodically. To determine if the impairment is other-than-temporary, we consider the duration and severity of the loss position, the
strength of the underlying collateral, the term to maturity, and credit rating. For investments that are deemed other-than-temporarily impaired, losses are recorded and payments received on these investments are recorded using the cost recovery
method. All of our current investments in securities consist of held-to-maturity securities backed by the United States government, As a result, we do not believe there was any impairment of our investments in held-to maturity securities during
2008. In determining whether there was any impairment of available-for-sale and held-to-maturity securities, we must make judgments relating to the classification of our investments as either available-for-sale or held-to-maturity. If these
judgments prove to be incorrect, it could have a material effect on our results of operations and financial position.

Allowance for Uncollectible
Accounts

Contractual rights to future payments associated with trade accounts receivable and notes receivable are evaluated to
determine the likelihood of collecting amounts due. The evaluation includes a review of available financial information related to the debtors ability to pay, historical payment pattern, security positions, government regulations, most recent
communications and an assessment of current economic conditions in determining the net realizable value of our receivables. We also review our allowance for uncollectible accounts in aggregate for adequacy following this assessment. Changes in the
customers economic environment could reduce our ability to fully collect the receivable.

Impairment of long-lived assets (tangible and
intangible)

Administrative equipment is recorded at cost and depreciated on a straight-line basis over estimated useful lives of the
assets, ranging from three to seven years. Leasehold improvements are recorded at cost and depreciated over the remaining life of the lease.

Costs of internally developing, maintaining or restoring patents and trademarks that are specifically identifiable and have determinate lives are capitalized. The costs of patents are amortized on a straight-line basis over the estimated
useful life or 20 years from the date of the first filing. The costs of trademarks are capitalized but not amortized because their useful lives are indefinite.

Costs incurred to acquire our global heat transfer technology license have been capitalized and amortized on a straight-line basis over the estimated useful life of the related patents underlying and accompanying the
license, or 11.5 years.



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We assess recoverability of our patents by determining whether the amortization of the balance over its
remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate which reflects our average cost of funds.

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.

The carrying value of other long-lived assets, such as the well field drilling costs,
geothermal power plant, transmission line construction costs, equipment and intangible assets is considered impaired in accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets when the anticipated
cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the projected discounted future operating cash
flows using a discount rate that reflects our average cost of funds. In connection with performing the FAS 144 analysis, we exercised significant judgments including the assumption that our geothermal power plant will produce electricity over 35
years and a power purchase agreement will be renewed after its expiration.

In accordance with FAS 144, we evaluated our long-lived assets
at December 31, 2008 and determined that only our well at the Truckee project location was impaired under FAS 144. We also determined in the fourth quarter of 2008 that, although not impaired under FAS 144, two additional wells at our Thermo
No. 1 project would not likely be used in the production of electricity and were expensed accordingly.

The impairment of the Truckee
well was primarily due to the current world-wide economic conditions that have led to tightening credit markets. As a result, the future undiscounted cash flows from the Truckee well have become uncertain because of the re-prioritization of our
projects based upon the changing economic conditions. In light of the fact that we have re-prioritized other projects ahead of the Truckee project and the fact that it is uncertain whether we will seek to secure additional drilling and project
financing for the Truckee project in the near term, we recognized an impairment of the Truckee well and expensed $3.0 million of capitalized costs during the fourth quarter of 2008. Management believes that this well could still be used as
either a production or re-injection well in the future should the appropriate financing be obtained.

Also, in accordance with our policy,
we identified two completed wells at the Thermo No. 1 project that are unlikely to be used for the production of electricity at the Thermo No. 1 geothermal power plant. Although one well initially exhibited production level heat, it
was damaged. After marginally restoring the well, we determined that the costs associated with the well should be expensed. Although, the other well also initially demonstrated marginal production capabilities, it was determined that the well
may not be used for the production of electricity in the near term. Accordingly, we expensed the total costs associate with both of these wells at December 31, 2008, which totaled $10.6 million.

Our power project leases are considered contract-based intangible assets as defined in FAS 141, Business Combinations and the costs to
acquire the power project leases are capitalized accordingly. Impairment of the power project leases is evaluated in accordance with FAS 142, Goodwill and Other Intangible Assets which consists of a comparison of the fair value with
its carrying amount at the balance sheet date. We evaluated our intangible assets for impairment at December 31, 2008 in accordance with FAS 142 and determined that none of our intangible assets had been impaired. In determining whether
our long-lived assets have been impaired, we must make judgments relating to the fair value of those assets. If these judgments prove to be incorrect, it could have a material effect on our results of operations and financial position.

Asset Retirement Obligations

We have incurred
certain liabilities related to the retirement of assets in connection with drilling wells and constructing our first geothermal power plant in Utah. These liabilities include our obligations to plug wells upon termination of our operating
activities, dismantle geothermal power plants upon cessation of operations and perform certain remedial measures related to the land on which such operations were conducted. When a new



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liability for an asset retirement obligation is recorded, we capitalize the costs of such liability by increasing the carrying amount of the related power
project lease. Such liability is accreted to its future value each period, and the capitalized cost is amortized over the useful life of the related geothermal power plant or 35 years. As of December 31, 2008, the present value of our asset
retirement obligations totals $2.1 million. At retirement, we will either settle the obligation for its recorded amount or incur a gain or a loss with respect thereto, as applicable. Revisions in estimated asset retirement obligations may result
from changes in estimated inflation rates, discount rates, retirement costs and the estimated timing of settling asset retirement obligations.

Valuation Allowance Against Deferred Income Taxes

Deferred income tax assets and liabilities are recorded when there is a
difference between the financial reporting and tax treatment of financial transactions. We recorded a valuation allowance to offset the entire net deferred tax asset as of December 31, 2008, 2007 and 2006, respectively. The valuation allowance
was recorded due to the losses incurred and the uncertainties regarding the future taxable income and recoverability of such deferred tax assets. We continually evaluate the estimated recoverability of deferred tax assets.

Equity Based Compensation

Effective January 1,
2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). Under the revised standard, companies may no longer account for share-based compensation transactions, such as stock
options, restricted stock, and certain other potential payments using the intrinsic value method as defined in APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Instead, companies are required to account for
such equity transactions using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest due
to the fact that service or performance conditions are not satisfied. However, compensation expense already recognized is not adjusted if market conditions are not met, such as when stock options expire out-of-the-money, or when options
expire unexercised.

Stock options and warrants granted to non-employees for services are accounted for in accordance with SFAS
No. 123R and Emerging Issues Task Force, (EITF 96-18) Accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods, or services. These standards require expense
recognition based on the fair value of the options and warrants granted. We calculate the fair value of options and warrants granted by using the Black-Scholes option pricing model as of either the grant date or performance completion date, as
applicable. We base our Black-Scholes assumptions used to calculate the fair value of equity instruments on certain historical and estimated future events. In the event that such estimates are incorrect, then the equity based expenses will change
and as a result may affect our consolidated financial condition and results of operations.

We have issued shares of common stock to
certain employees and directors as payment for services and have entered into agreements to issue stock over a specified vesting period. We have also issued shares of common stock to non-employees as payment for services and have entered into
agreements to issue stock either when a performance condition has been completed or based upon a specified vesting period. Stock issued for services, to both employees and non-employees, is valued based on the fair value on either the grant date or
the performance completion date as required by SFAS No. 123R and EITF 96-18 and is recognized over the requisite service period. In determining the fair value of stock issued for services, we must make judgments relating to pre-requisite
service periods, estimated option lives, risk free rates, stock volatility, forfeiture rate and likelihood of completing an applicable performance conditions. If these judgments prove to be incorrect, it could have a material effect on our results
of operations.



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Business Consolidations

In August 2008, we entered into various financing arrangements in which we sold Class A membership in Thermo No. 1 BE-01, LLC (the Thermo Subsidiary) to Merrill Lynch (the Class A
member) for $24.5 million representing 78.7% of the agreed-upon value of the Thermo Subsidiary which was $31.1 million. We, through our wholly owned subsidiary maintained the Class B membership representing 21.3% of the agreed-upon value.

Under the financing arrangements, the tax benefit and profit/loss allocations is 1% to the Class B member and 99% to the Class A
Member until the Class A Member achieves a 15% internal rate of return (IRR) on the project which is expected to be in the 10th year of operations at the Thermo project. Upon achieving a 15% IRR, the equity ownership will flip to
95% to us through the Class B Member and 5% to the Class A Member, which is expected to begin in the 11th year of operations.

According to financing agreements between the Company and the Class A Member, we also contributed as equity to Thermo No. 1 the fair value of six leases to serve as collateral securing the Class A Members financing.
These leases had a fair value of approximately $29,500 and consisted of 640 acres used for the current well field and 10,000 additional acres of surrounding leased property. We also contributed as equity to Thermo No. 1 completed well field
costs of approximately $26.8 million.

We evaluated the Class A and Class B member voting rights, the minority holders
substantive participative and protective rights, and conditions outlined in FIN 46(R), Consolidation of Variable Interest Entities (revised December 2003)and interpretation of ARB No. 51 and determined that the Thermo
Subsidiary should not be classified as a variable interest entity and that the subsidiary should continue to be consolidated for financial statement purposes. In determining whether our subsidiaries should be classified as variable interest
entities, we must make judgments about the minority holders substantive participative and protective rights and the other conditions outlined in FIN 46(R). If these judgments prove to be incorrect, and the Thermo Subsidiary must later be
deconsolidated, it could have a material effect on our results of operations and financial position.

Fair Value Measurement

FASB Statement No. 159, The Fair Value Option of Financial Assets and Financial Liabilities (SFAS No. 159) was effective
January 1, 2008. Under this standard, we are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair value recorded in earnings. We elected not to measure any eligible items
using the fair value option in accordance with SFAS No. 159. We did not elect the fair value option for any financial instruments; therefore, SFAS No. 159 did not have any impact on our consolidated financial condition or results of
operations.

We adopted SFAS No. 157, Fair Value Measurements (SFAS 157) effective January 1, 2008.
Consistent with SFAS 157, we implemented guidelines relating to the disclosure of our methodology for periodic measurement of our assets and liabilities recorded at fair market value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:



| |  |  | 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
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Level 1 assets primarily include our cash and cash equivalents (including our money market accounts), accounts receivable, notes receivable, interest receivable, accounts payable and accrued liabilities due to the immediate or
short-term maturities of these financial instruments. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Our Level 2 assets include our restricted cash certificate
of deposit. Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities (and validated through back testing to trade data or confirmation that the pricing services significant inputs
are observable) or determined through use of valuation methodologies using observable market inputs such as market interest rates. We do not currently have Level 3 assets.

The carrying value and estimated fair value of our debt instruments at December 31, 2008 were as follows:



|                                         |  |                     |            |                |   |            |   
|---------------------------------------- |  | ------------------- | ---------- | -------------- | - | ---------- | --
|                                         |  | December 31, 2008   |           
|                                         |  | Estimated FairValue |            | Carrying Value |  
|Note payable                             |  | $                   | 881,411    |                | $ | 945,833    |   
|Long-term 9.50% senior secured note*     |  |                     | 24,670,000 |                |   | 31,000,000 | **
|Long-term 8.00% convertible senior notes |  |                     | 31,845,000 |                |   | 56,106,767 |   
|                                         |  |                     |            |                |   |            |   
|Total liabilities                        |  | $                   | 57,396,411 |                | $ | 88,052,600 |   
|                                         |  |                     |            |                |   |            |   

*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% stated rate.

**Represents face value of debt without
consideration of the original issue discount of $5,155,156 as of December 31, 2008.

We did not have any debt instruments at
December 31, 2007.

The estimated fair value of our short-term note payable approximates the fair value of 263,108 shares of our
common stock as of January 27, 2009, based on a closing market price of $3.35 per share, or an aggregate of $881,411, to settle the note payable, which has a carrying value of approximately $945,833.

The estimated value of our long-term 7.00% senior secured note was determined with the assistance of a third-party valuation consultant using a
discounted cash flow analysis utilizing the projected cash outflows and a discount rate, which was derived from market and non-market inputs. Our estimate of the value of our long-term 7.00% 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.

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.

Deferred Finance Costs

Deferred finance costs are recorded at cost and include costs relating to undertaking debt financing activities. Upon successful completion of the related
financing, these costs associated with equity financings will be recorded as a reduction of additional paid in capital or, the costs associated with debt financings are amortized as interest expense over the life to maturity of the debt. If related
financing is not successfully completed, these costs will be charged to the statement of operations.



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Results of Operations

The following table sets forth our results of operations for the years ended December 31, 2008, 2007 and 2006:



|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                 |  | 2008 |             |   | 2007 |   |             | 2006 | 
|Revenue                                          |  | $    | 172,303     |   |      | $ | 320,072     |      |  | $ | 122,732     |  
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Operating expense                                |  |      |             |   |      |   |             |      |  |   |             |  
|Cost of sales                                    |  |      | 74,112      |   |      |   | 627,207     |      |  |   | 438,278     |  
|General and administrative                       |  |      | 9,819,455   |   |      |   | 10,133,000  |      |  |   | 15,050,080  |  
|Power project development                        |  |      | 10,351,060  |   |      |   | 2,637,315   |      |  |   |            |  
|Unsuccessful and impaired wells                  |  |      | 13,624,352  |   |      |   |            |      |  |   |            |  
|Research and development                         |  |      | 4,762,733   |   |      |   | 3,390,688   |      |  |   | 3,893,540   |  
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Total operating expenses                         |  |      | 38,631,712  |   |      |   | 16,788,210  |      |  |   | 19,381,898  |  
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Loss from Operations                             |  |      | (38,459,409 | ) |      |   | (16,468,138 | )    |  |   | (19,259,166 | )
|Interest income                                  |  |      | 410,907     |   |      |   | 752,599     |      |  |   | 874,831     |  
|Interest expense                                 |  |      | (3,198,280  | ) |      |   | (2,307      | )    |  |   |            |  
|Other                                            |  |      | (716,636    | ) |      |   | (31,159     | )    |  |   | (104,601    | )
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Loss before income taxes and minority interest   |  |      | (41,963,418 | ) |      |   | (15,749,005 | )    |  |   | (18,488,936 | )
|Income tax benefit                               |  |      |            |   |      |   |            |      |  |   |            |  
|Minority interest:                               |  |      |             |   |      |   |             |      |  |   |             |  
|From sale of minority interest in subsidiary     |  |      | (5,313,433  | ) |      |   |            |      |  |   |            |  
|From operations of subsidiary                    |  |      | 1,791,817   |   |      |   |            |      |  |   |            |  
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net loss                                         |  |      | (45,485,034 | ) |      |   | (15,749,005 | )    |  |   | (18,488,936 | )
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Loss per common share-basic and diluted          |  | $    | (0.79       | ) |      | $ | (0.29       | )    |  | $ | (0.36       | )
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Weighted average common shares-basic and diluted |  |      | 57,653,000  |   |      |   | 54,197,000  |      |  |   | 50,745,000  |  
|                                                 |  |      |             |   |      |   |             |      |  |   |             |  

Comparison of Years Ended December 31, 2008 and 2007

Revenue

During the year ended December 31, 2008,
we recognized revenue totaling $0.2 million. Revenue decreased $0.1 million from the year ended December 31, 2007 as a result of completing our research and development subcontract with ARINC in the first quarter of 2008. We accounted for this
subcontract on a percentage of completion basis.

Operating expenses

Cost of sales. We reported cost of sales for the years ended December 31, 2008 and 2007 totaling $0.1 million and $0.6 million, respectively. The decrease in cost of sales for 2008 compared to the prior
year is primarily related to a $342,000 loss during the first quarter of 2007 resulting from costs greater than originally anticipated to complete the ARINC subcontract objectives that did not occur in 2008.

General and Administrative.General and administrative expenses decreased to approximately $9.8 million for the year ended December 31, 2008
from approximately $10.1 million for the year ended December 31, 2007. This decrease was primarily due to a reduction in equity-based non-cash employee compensation expense, which declined to $2.2 million for the twelve months ended
December 31, 2008, compared to $2.7 million for the same period of 2007. Equity-based non-cash compensation expense was higher during the year ended December 31, 2007 due to the vesting of a larger number of executive stock and option
grants. Equity-based non-cash service provider compensation for the year ended December 31, 2008 decreased by approximately $0.8 million from the same period in 2007. While no shares issued to service providers were expensed as general and
administrative



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during 2008, 200,000 shares of common stock were issued to a provider of financial advisory services during the year ended December 31, 2007 totaling
$1.0 million. We also granted to a service provider 95,000 options to purchase shares of our common stock during 2008 totaling $0.2 million. This decrease is partially offset by increased professional services associated with financing structuring,
which increased approximately $0.6 million during the year ended December 31, 2008 over the same period in 2007. Employment related costs increased approximately $0.5 million during the year ended December 31, 2008 compared to the same
period of 2007, reflecting higher average salaries and employment levels required to support the ramp up in activity of the Power Systems segment. Office expenses totaled $0.7 million for the year ended December 31, 2008, which represents an
increase of $0.1 million when compared to the same period in 2007. The increase is primarily due to increased service fees to administer the cash payments for the Thermo No. 1 project and additional office related expenses due to current year
corporate expansion.

Power Project Developments.Power project development expenses during the year ended December 31, 2008
totaled $10.4 million, compared to $2.6 million for the year ended December 31, 2007. Equity-based non-cash employee and contractor compensation for the year ended December 31, 2008 increased $0.5 million over the year ended
December 31, 2007 as a result of stock option grants to new employees. Employment related costs for power project development employees increased during the year ended December 31, 2008 by $1.3 million over the same period of 2007 as we
increased our work force levels to execute our business plan. During the twelve months ended December 31, 2008, professional services relating to geological engineering consulting and legal fees associated with designing debt and tax equity
financing structures contemplated by financing commitments under our commitment letter with Merrill Lynch increased $4.6 million over the same period of 2007. Property related expenses such as delay rentals, completed transmission line capacity
studies and insurance increased during the year ended December 31, 2008 over the same prior year period by approximately $0.6 million due to incurring delay rentals on the anniversary date of each of our geothermal leases that we acquired. In
addition, since we began construction of our Thermo No. 1 geothermal power plant in 2008, we incurred costs related to performing transmission line capacity studies and certain insurances that were not incurred in the previous year. During the
year ended December 31, 2008, other expenses also increased by $0.6 million as compared to the same period in 2007 due primarily to writing off a promissory note that we deemed to be uncollectible and expensing certain lease acquisition costs
relating to properties in California, Utah and Washington that we are no longer pursuing.

Unsuccessful and Impaired Wells.Unsuccessful and impaired wells increased $13.6 million during the year ended December 31, 2008 over the prior year ended In December 2007. The increase is primarily due to expensing two wells at the Thermo No. 1 project and
determining that the well at the Truckee was impaired and should also be expensed. During the fourth quarter of 2008, we completed the testing of our UTCP power generating units and began generating and transmitting nominal quantities of
test electricity. As a result of evaluating the combined production capacity of the geothermal power plant and the combined electricity producing capacity of the production wells, in accordance with our policy, we identified two
completed production-sized wells that are unlikely to be used for the production of electricity at the Thermo No. 1 geothermal power plant. Although one well initially exhibited production level heat, it was damaged while attempting to
seal off a production zone. After redrilling and marginally restoring the well, with the assistance of independent consultants, we determined that since it was unlikely to be used in the production of electricity, the capitalized costs of the well
should be expensed. In addition, the second production sized well also initially demonstrated marginal production capabilities; however, we also determined that the well would not likely be used for the production of
electricity. Accordingly, we expensed the wells at December 31, 2008 totaling $10.6 million.

The circumstances that led to the
impairment of the Truckee well are primarily due the current world-wide economic conditions that have led to tightening credit markets. Because of the tightening credit markets, we determined that our access to capital may be constrained in the
future. Accordingly, we prioritized our cash uses, concentrating our efforts on our largest known resources. As a result, the future undiscounted cash flows from the Truckee well have become uncertain because of the re-prioritization of our projects
based upon the changing



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economic conditions. Therefore, we considered our ability to raise sufficient financing necessary to continue drilling at the Truckee project and
determined it was uncertain if we would be able to finance continued drilling at the Truckee project in the near term in addition to our other projects of higher priority. Because of this uncertainty, we expensed $3.0 million in the Power
Systems business segment in the fourth quarter of 2008 accordingly. Management believes that this well could still be used in the production of electricity as either a production or re-injection well in the future, should the appropriate
financing be obtained.

Research and Development. Research and Development expense increased from $3.4 million in the year ended
December 31, 2007 to $4.8 million for the year ended December 31, 2008. Equity based non-cash employee compensation for the year ended December 31, 2008 decreased by approximately $0.1 million from the prior year primarily due to the
termination of employment of an employee during 2008. Cash based employee compensation during the twelve months ended December 31, 2008 decreased by approximately $0.4 million compared to the year ended December 31, 2007, reflecting a
reduction in the number of employees performing research and development activities. Professional services increased by approximately $1.2 million during the year ended December 31, 2008 over the same period of 2007. This increase was due to
the timing of consulting work performed by our PHEV consultants and the hiring of a former key employee as a consultant. The portion of engineering expenses that could be attributed to cost of sales increased approximately $0.5 million during the
twelve months ended December 31, 2008 over the comparable 2007 period due primarily to the increased materials consumed in testing our PHEV prototype.

Interest and Other Income. Interest income for the year ended December 31, 2008 decreased to $0.4 million from $0.8 million for the same period in 2007. The decrease was due primarily to lower average
monthly cash balances and decreased interest rates due to the overall economic conditions during the twelve months ended December 31, 2008 compared to the 2007 period. Interest expense for the year ended December 31, 2008 increased $3.2
million from the same period in 2007. The increase was due to accrued interest expense relating to the issuance of the Convertible Notes and the non-recourse Thermo Note. Other expense also increased $0.8 million during the year ended
December 31, 2008 over the same period in 2007 due to a provision requiring payments until the registration statement becomes effective for the $20.0 million Fletcher private equity placement.

Minority Interest. Minority interest for the year ended December 31, 2008 includes the portion of the net loss that is allocated to a third
party that owns a minority interest in our Thermo Subsidiary totaling $1.8 million. There was no minority interest in 2007. We also incurred a loss on the sale of minority interest in our Thermo Subsidiary for the year ended December 31, 2008
totaling $5.3 million.

Comparison of Years Ended December 31, 2007 and 2006

Revenue

During the year ended December 31, 2007, we recognized revenue totaling $0.3 million.
Revenue increased over 2006 as a result of progress toward completion of our research and development subcontract with ARINC. Our work on the ARINC subcontract began in October 2006. We account for this subcontract on a percentage of completion
basis.

Revenue for the year ended December 31, 2006 included $0.1 million of revenue recognized on our research and development
subcontract with Advanced Energy, which was completed in 2006. This subcontract allowed for reimbursement of a percentage of our incurred costs, and was accounted for on a percentage of completion basis.

Operating expenses

Cost of sales. We reported
cost of sales for the years ended December 31, 2007 and 2006 totaling $0.6 million and $0.4 million, respectively. The increase in cost of sales for 2007 compared to the prior year is



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primarily related to a $342,000 loss during the first quarter of 2007 resulting from costs greater than originally anticipated to complete the ARINC
subcontract objectives.

General and administrative.General and administrative expenses decreased from approximately $15.1 million
for the year ended December 31, 2006 to approximately $10.1 million for the year ended December 31, 2007. This decrease is due primarily to a reduction in equity-based non-cash employee compensation expense, which declined to $2.7 million
in 2007 compared to $7.7 million in 2006. Equity-based non-cash compensation expense was higher in 2006 due to the vesting of a larger number of executive stock and option grants. Equity-based non-cash service provider compensation for 2007
decreased by approximately $0.4 million from 2006 due to the issuance of fewer shares to service providers. 300,000 shares of common stock were issued to a provider of financial services in 2006 while 200,000 shares of common stock were issued to a
provider of financial advisory services in connection with our private equity placement in 2007. Other employment related costs increased by approximately $0.2 million during 2007 compared to 2006, reflecting higher average salaries and employment
levels. Professional service expenses remained relatively constant during the year ended December 31, 2007 compared to the prior year. Office expenses increased by approximately $0.1 million during 2007 as compared to 2006 due to the general
increase in employment levels.

Power project developments.Power project development expenses during the year ended
December 31, 2007 totaled $2.6 million. Equity-based non-cash employee and contractor compensation totaled $0.4 million. Employment related costs for power project development employees totaled $0.9 million and professional services relating to
geological consulting totaled $1.3 million.

Research and development. Research and Development expense decreased from $3.9 million
in the year ended December 31, 2006 to $3.4 million for the year ended December 31, 2007. Equity based non-cash employee compensation decreased by approximately $0.8 million from the year ended December 31, 2006 to the current year
period. The decrease resulted from the timing of issuing share grants to research and development employees. Cash based employee compensation decreased by approximately $0.1 million from the year ended December 31, 2006 to the current year
period reflecting a slight reduction in the number of employees performing research and development activities. The portion of engineering expenses that could be attributed to cost of sales increased during the year ended December 31, 2007 over
the comparable 2006 period by approximately $0.1 million primarily due to the increased materials consumed in testing.

Interest and
other income. Interest income for the year ended December 31, 2007 decreased slightly from the prior year period from $0.9 million to approximately $0.8 million. The decrease is primarily due to higher average monthly cash balances in the
prior year.

Liquidity and Capital Resources



|                                              |  |      |           |      |   |           |  |   |          
|--------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|Cash and Cash Equivalents                     |  | 2008 |           | 2007 |   | 2006     
|Cash                                          |  | $    | 59,492    |      | $ | 516,938   |  | $ | 157,746  
|Certificate of deposit (unrestricted portion) |  |      |          |      |   | 325,000   |  |   |         
|Money market account                          |  |      | 1,475,328 |      |   | 5,070,272 |  |   | 3,193,822
|                                              |  |      |           |      |   |           |  |   |          
|Total                                         |  | $    | 1,534,820 |      | $ | 5,912,210 |  | $ | 3,351,568

Recent Financing Activities

Since inception, we have funded our operations primarily through the sale of equity instruments, borrowings and project financing arrangements. Most recently, on November 14, 2008, we sold 2,000,000 shares of our
common stock at a fixed price of $5.00 per share in a private equity transaction or $10.0 million. We also sold 2,360,417 shares of our common stock on December 12, 2008 for $4.23654 per share, which represents a price per share equal to $10.0
million divided by 110% of the average of the daily volume-weighted average price on the NYSE Arca exchange for the common stock for the ten business days ending on and including December 11,



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2008. The gross proceeds from the closing of the November 14, 2008 and December 12, 2008 private placement transactions were $20,000,000, before
deducting fees and commissions. We paid commissions of $1,232,000 to a placement agent in connection with the closing of the private placement transactions. In connection with this private placement, we issued warrants to purchase up to a maximum of
7,458,532 of our shares of common stock. Under our agreements with the purchaser, we are required to file a registration statement with the SEC to register the resale of the shares of common stock acquired by the purchaser. Although we timely filed
that registration statement, we will not be in a position to have that registration statement declared effective by the SEC until the SEC staff has completed its review of our filings. See Item 1B Unresolved Staff Comments. Our
agreements with the purchaser require us to make a cash payment of $200,000 to the purchaser each month until the registration statement is declared effective up to a maximum of $2,000,000. As of December 31, 2008, we had accrued for a total of
$800,000 to the purchaser pursuant to these provisions.

During the third quarter of 2008, we raised net proceeds of approximately $24.2
million from the sale of shares of our common stock pursuant to an ATM Equity Offering Sales Agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated. Also during the third quarter of 2008, we obtained
project financing for the Thermo No. 1 project. The project financing arrangements for the Thermo No. 1 project included approximately $31.2 million of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed
annual interest rate of 7.00%. Our Thermo Subsidiary received proceeds from the debt financing of approximately $26.1 million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the
effect of the original issue discount, the effective fixed interest rate on the $26.1 million of debt financing proceeds is 9.50%. From the proceeds of the debt financing, we received approximately $14.1 million from the Thermo Subsidiary as
repayment for construction costs at the Thermo No. 1 project that were incurred by us prior to closing the project financing. In addition, pursuant to the project financing agreements, the Thermo Subsidiary received a capital contribution from
the holder of Class A member interests of the Thermo Subsidiary totaling $24.5 million. The financing arrangements for the Thermo No. 1 project are described in more detail below.

In March 2008, we raised gross proceeds of $50.0 million, before deducting fees and commissions from the issuance of the Convertible Notes. We placed
approximately $7.9 million of the proceeds in an escrow account to secure payment of the first four interest payments payable on the Convertible Notes. We also used approximately $15.0 million of the proceeds to enter into a forward stock purchase
transaction, pursuant to which we will repurchase shares of our common stock, and approximately $5.9 million of net proceeds to fund a call spread option transaction. On April 1, 2008, the initial purchaser of the Convertible Notes exercised
its overallotment option and we sold an additional $5.0 million aggregate principal amount of Convertible Notes. We placed approximately $0.8 million of the proceeds from the overallotment exercise in an escrow account to secure payment of the first
two years of interest payable on the additional Convertible Notes issued pursuant to the overallotment exercise.

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

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



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Liquidity and Certain Commitments

At December 31, 2008, we had approximately $1.5 million in cash and cash equivalents. Our operating activities used approximately $22.9 million, $6.7 million, and approximately $7.9 million of cash during the
years ended December 31, 2008, 2007 and 2006, respectively.

At December 31, 2008, we had approximately $64.5 million in accounts
payable and accrued expenses. Approximately $29.4 million of this amount was owed to UTCP for power generating units received for projects other than the Thermo No. 1 project. Under the terms of our agreement with UTCP, these amounts are not
due and payable until we have received project financing for these projects and until specific tests have been successfully completed. Approximately $7.5 million was owed to UTCP for the remaining balance on power generating units at our Thermo
No. 1 project. These amounts are to be paid from the $20.9 million in restricted cash upon successful completion of certain tests to be performed on the units. The remaining balance of the accounts payable and accrued expenses is for amounts
owed for well field development, other equipment and construction costs for the Thermo No. 1 project and for general and administrative costs.

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

Our independent registered public accounting firms report on our financial statements expresses 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 the Company 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 2009.

We are not currently
generating significant revenues, and our cash and cash equivalents will continue to be depleted by our ongoing development efforts. Until we are in a position to generate significant revenues, we will need to continue to raise additional funds to
continue operating as a going concern. We may seek this additional funding through the issuance of debt, preferred stock, equity or a combination of these instruments. We may also seek to obtain financing through 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 to funding for general corporate purposes, well field development and certain other general development expenses, we will need to finance
each of the geothermal power projects we intend to develop. As more fully described below, we have entered into a Commitment Letter (the Commitment Letter) with Merrill Lynch. The Commitment Letter sets forth certain general terms
relating to the structure and financing of up to 155 MW of geothermal power plants we intend to develop. As more fully described below, we have obtained financing for the Thermo No. 1 project pursuant to the Commitment letter, and we are
seeking to fund additional projects in accordance with the Commitment Letter. The timing of the funding for additional projects will depend on the progress of our development at the potential sites, and our ability to satisfy any applicable
conditions under the terms of the Commitment Letter and the related financing commitments.

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



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

As part of our
geothermal power project development efforts, we have made a variety of financial commitments. Currently, our most significant financial commitments relate to our obligations under our purchase agreements with UTCP and other vendors. These purchase
agreements allow us to order and purchase generating units, transformers, pumps, cooling towers, transmission lines, power substations, fire safety equipment and other major electronic components for use in our geothermal power plants. We also have
obligations to pay delay rentals and other expenses associated with the geothermal resources on properties in which we have acquired an interest. As of December 31, 2008, we were obligated to pay the vendors and the lessors of our geothermal
leases approximately $69.6 million in 2009; $4.9 million in 2010; $5.0 million in 2011; $5.1 million in 2012; and $5.2 million in 2013.

Our obligations to UTCP relate primarily to purchase agreements for the purchase of generating units. We entered into three such agreements with UTCP in 2007. In April 2008, we executed a fourth purchase agreement with UTCP relating to the
purchase of additional power generating units. Concurrent with the execution of the April 2008 agreement we paid a down payment of $5.0 million. On August 31, 2008, we executed a fifth purchase agreement with UTCP relating to the purchase of
additional generating units. Concurrent with the execution of the fifth purchase agreement, we paid a down payment of $2.3 million. On December 23, 2008, the first purchase agreement with UTCP was terminated and the other four purchase
agreements with UTCP were amended into three separate purchase agreements to properly reflect the actual distribution of the generating units to the Thermo No. 1 project site and establish greater flexibility for distribution of the generating
units to future projects.

On December 23, 2008, the first purchase agreement with UTCP was terminated and the other three purchase
agreements with UTCP were amended (the Amended Agreements). The Amended Agreements reflect the actual distribution of the generating units to the Thermo No. 1 project site and establish greater flexibility for distribution of the
generating units to future projects. Under the Amended Agreements, the deposits already paid under the previous purchase agreements were allocated to the new purchase agreements consistent with the actual and intended future distributions of the
generating units. As of December 31, 2008, we were obligated to pay UTCP approximately $56.3 million to complete the agreements. However, under the Amended Agreements, no additional payments for equipment will be required beyond the initial
deposits until the project financing is obtained for each respective project. Once financing is obtained for a project, we are obligated to pay a certain portion of the amounts owed and, once certain tests have been successfully completed for the
project, we are obligated to pay the remaining balance.

Pursuant to the terms of the Amended Agreements, if we fail to accept or pay for
any of the UTCP power generating units we agreed to purchase, we may be required to forfeit all down payments relating to those power generating units and we may be required to pay certain liquidated damages per unit. Accordingly, if we failed to
accept or pay for the power generating units we agreed to purchase, excluding those power generating units already installed at the Thermo No. 1 geothermal power plant, the liquidated damages and forfeited down payments would total $10.9
million.

In addition, UTCP has agreed to allow our Thermo Subsidiary to retain a certain portion of the purchase price of the generating
units pending the successful completion of the Thermo No. 1 project. If the Thermo No. 1



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project is not successfully completed as a result of a problem with the generating units, our Thermo Subsidiary will keep all or a portion of the retained
portion of the purchase price as a liquidated damages payment.

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

Accordingly, we have reached an agreement with UTCP. Under the agreement, no additional payments for equipment will be required beyond the initial deposits until the closing of project financing is obtained for each
respective project for a certain portion of the amounts owed and until certain tests have been successfully completed on the remaining balance.

In connection with the purchase of a BLM lease for the Lightning Dock project in New Mexico, we also executed a promissory note in February 2008 whereby we agreed to pay to the seller $900,000 in principal plus $50,000 in interest charges
on or before January 5, 2009. This obligation was ultimately funded in February 2009 through the issuance of our common stock to settle the outstanding debt. We also have obligations to pay delay rentals and other expenses associated with the
geothermal resources on properties in which we have acquired an interest. Generally, these obligations will not be financed as part of a financing commitment for a specific power project, and we will need to finance the payment of these obligations
from other sources.

Our Commitment Letter with Merrill Lynch

On January 16, 2007, we, together with our wholly-owned subsidiary, Truckee Geothermal No. 1 SV-01, LLC, entered into the Commitment Letter with Merrill Lynch. The Commitment Letter sets forth general terms
relating to the structuring and financing of up to 155 MW of geothermal power plants we intend to develop. We have obtained financing commitments from Merrill Lynch to provide non-recourse financing for our Thermo No. 1 project in Utah, our
Lighting Dock project in New Mexico, and our Truckee project in Nevada. During the third quarter of 2008, we finalized the project financing arrangements for the Thermo No. 1 project as described below.

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

The Thermo Financing

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

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



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



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



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



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



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



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



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



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



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

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



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The Lightning Dock Commitment

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

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

The Lightning Dock Commitment is subject to market conditions, due diligence, receipt of all necessary internal approvals by both us and Merrill Lynch,
Merrill Lynchs satisfaction with the structure of the tax equity financing, the negotiation and execution of definitive documentation and the satisfaction of certain other conditions. The Lightning Dock Commitment expired on December 1,
2008. However, we intend to work with Merrill Lynch towards formally extending the expiration date of this commitment in the future and finalizing arrangements for Lightning Dock in 2009 when final permits are approved.

The Truckee Commitment

The Truckee
Commitment expired by its terms on June 30, 2008. Since the Truckee Commitment was negotiated, we have initiated the development of several other projects, and a number of these projects are expected to be developed more rapidly than the
Truckee project. Therefore, in the fourth quarter of 2008, we determined to postpone our discussions with Merrill Lynch regarding an extension of the Truckee commitment. We intend to continue our development efforts at the Truckee project and seek a
new financing commitment from Merrill Lynch once those development efforts progress to the point when financing is needed for construction of a plant and related development activities.

Potential Additional Financing Commitments

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



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

Structuring Fees and Other Consideration

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

As additional consideration, we granted Merrill Lynch warrants to purchase our common stock. The warrants will vest and become exercisable in increments
over the term of the Commitment Letter based on the actual funding provided. The exercise price of the warrants is subject to adjustment upon any dilutive issuance by us. In accordance with the anti-dilution protection included in the warrants, the
issuance of the Convertible Notes during the first quarter of 2008, the issuance of common stock during the third quarter of 2008 and the issuance of common stock in connection with our private equity placement during the fourth quarter of 2008
resulted in a reduction of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of $13.24 to $16.90. On August 31, 2008, warrants to purchase 1,350,000 shares of our common stock vested in connection with the
closing of the project financing arrangements for the Thermo No. 1 project.

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

Consolidated Statements of Cash Flows

Operating Activities. Cash consumed by operating activities for the year ended December 31, 2008 consisted primarily of a net loss of approximately $45.5 million, adjusted for approximately $3.8 million of
stock-based compensation and stock issued for services and $13.6 million related to managements determination



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to impair and expense two wells at the Thermo No. 1 project that were not likely to be used in the production of electricity and impair and expense one
well at the Truckee project as a result of the current economic conditions and tightening credit markets that caused us to reprioritize our cash uses and concentrate our efforts on our largest known resources instead of Truckee. Accounts payable and
accrued liabilities increased from $4.2 million at December 31, 2007, to $64.5 million at December 31, 2008, primarily due to accrued expenses for well field development, geothermal power plant construction, transmission line construction,
and the purchase of power systems equipment for the Thermo No. 1 project. The portion of accrued liabilities relating to well field development, construction-in-progress and power systems equipment, totaling $60.0 million, has been reclassified
as a non-cash item to decrease the change in accrued liabilities. Deferred revenues increased by approximately $0.2 million, reflecting a down payment received for our anticipated PHEV. Minority interest in operations of our subsidiary totaled $1.8
million at December 31, 2008, representing the allocated loss since the time a minority interest in the Thermo Subsidiary was acquired by a third party in connection with the equity financing arrangements for the Thermo No. 1 project. Our
loss on the sale of minority interest in our Thermo Subsidiary for the year ended December 31, 2008 totaled $5.3 million. We prepaid commissions arising from entering into the City of Anaheim power purchase agreement totaling $0.4 million at
December 31, 2008 and we have also made deposits to manufacture prototypes of our Transportation & Industrial segment designs totaling $0.4 million.

Cash consumed by operating activities for the year ended December 31, 2007 consisted primarily of a net loss of approximately $15.7 million, adjusted for approximately $4.9 million of stock-based compensation and
stock issued for services. Interest receivable at December 31, 2007 decreased by approximately $0.4 million compared to December 31, 2006 as a result of the repayment of a note receivable in March 2007. Accounts payable and accrued
liabilities increased $3.7 million to $4.3 million at December 31, 2007 due primarily to accrued fees for professional services relating to well field development and design and the Commitment Letter. Other current assets increased by
approximately $0.3 million reflecting an increase in prepaid insurance during 2007.

Cash consumed by operating activities for the year
ended December 31, 2006 consisted primarily of a net loss of approximately $18.5 million, adjusted for approximately $10.6 million of stock-based compensation and stock issued for services. Withholding taxes of approximately $1.0 million
related to a net share issuance were paid in the second quarter of 2006 in connection a net share grant to a former employee. Expenditures of approximately $0.8 million in 2006 were related to our unsuccessful acquisition, and were consequently
reflected as an investing activity rather than an operating activity. Other current assets increased by approximately $0.5 million in 2006, reflecting an increase in prepaid insurance and interest receivable. Accounts payable and accrued liabilities
increased $0.2 million in 2006 due to the timing of payments for certain professional services contracts.

Investing Activities. We
purchased investments in money market funds 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. In addition, we finalized the project financing arrangements for the Thermo No. 1 project and entered
into the Thermo Financing Agreements that provide debt financing and tax equity capital for the Thermo No. 1 project totaling $50.6 million. Pursuant to the Thermo Financing Agreements, the funds received can only be used for the purposes
permitted by the Thermo Financing Agreements. Any funds not specifically allocated are restricted and can be used only by our Thermo Subsidiary for certain operating expenses. An independent administrative agent has been appointed to administer all
of the Thermo Subsidiarys cash deposits and disbursements. The independent administrative agent has deposited the cash into a money market fund, which earns interest at a variable rate. At December 31, 2008, the interest rate applicable
to this money market fund was 1.53% per annum.

We maintain a portion of our available unrestricted cash in deposit accounts in one
bank in Utah. At times, cash balances in these accounts may exceed federally insured limits. From time to time, we invest a portion of our unrestricted cash in an AIM Funds money market account, which is not affiliated with the bank where we



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maintain our deposit accounts. The money market account earns interest based on a variable rate. At December 31, 2008, our balance in the money market
account was $1.5 million and the interest rate applicable to the money market account was 1.33% per annum. The average interest rate applicable to the money market account during the quarter ended December 31, 2008 was 1.92% per
annum. Cash from our checking account is swept nightly into an interest bearing account. At December 31, 2008, we had a balance of $0.1 million in this sweep account and the interest rate applicable to the sweep account was 1.11% per
annum. We invest our restricted cash balances in a money market fund managed by JP Morgan Fund. At December 31, 2008, we had a balance of $20.9 million invested in this money market fund and the interest rate applicable to the fund was
1.53% per annum. Due to the nature of the investments included in the money market accounts, we consider it reasonable to expect that the fair market values of these investments will not be significantly impacted by a change in interest rates,
and that they can be liquidated for cash on short notice.

Investing activities consumed approximately $106.2 million in the year ended
December 31, 2008, reflecting a net increase in deposits of $0.6 million for the purchase of electric generating units for use in the geothermal power plants we intend to develop in the future. During 2008, we also purchased $32.9 million of
equipment for geothermal well field development projects, primarily in Utah, and we incurred construction costs on our first geothermal power plant totaling $38.8 million. We deposited approximately $2.8 million primarily with drilling vendors,
transmission line contractors, and utilities to conduct transmission line capacity and routing studies on our behalf. We paid $1.8 million for land and $1.0 million for water rights in the Thermo No. 1 project area primarily for transmission
line easements and for water use operations. We also paid $0.8 million in connection with the acquisition of leases and the exercise of certain options relating to interests in geothermal properties in Oregon, Nevada and Utah. In connection with the
issuance of the Convertible Notes, we invested a portion of the proceeds totaling $8.7 million into four discounted U.S. Treasury Strips that mature separately on each of the first four semi-annual interest payment dates of the Convertible Notes.
The U.S. Treasury Strips were placed into an escrow account to secure the first four interest payments on the Convertible Notes. On October 1, 2008, we received proceeds from the maturity of the securities totaling $2.3 million which was used
to pay the first semi-annual interest payment on the Convertible Notes. These expenditures were partially offset by cash provided by investing activities, including the net change in the notes receivable totaling $0.2 million. In connection with the
Thermo Financing Agreements, the funds received through the financing were deposited into restricted money market fund accounts for the purposes of paying for the well field costs to complete the drilling and certain equipment costs to complete the
construction of the geothermal power plant resulted in a change in restricted cash totaling $20.9 million.

Investing activities consumed
approximately $9.9 million in the year ended December 31, 2007, reflecting deposits of $3.6 million towards the purchase of electric turbines for use in the geothermal power plants we intend to develop. We have also made deposits of $0.6
million to fulfill certain bonding requirements in connection with certain testing equipment and prototypes used by our Transportation & Industrial segment. During 2007, we also purchased $4.8 million of equipment for geothermal well field
development projects in Nevada and Utah. We also paid $5.4 million in connection with the acquisition of leases and the exercise of certain options relating to interests in unproved geothermal properties, including $4.1 million for the purchase of a
lease giving us the rights to develop geothermal power plants on certain BLM property in New Mexico. During 2007, we also purchased certain power project development equipment for $0.6 million. Additionally, we paid approximately $0.3 million on
equipment and fees relating to filings for patents and trademarks. These expenditures were partially offset by cash provided by investing activities, including the collection in full of a note receivable in the amount of $5.0 million and a change in
the status from restricted to unrestricted of $0.3 million of our certificate of deposit.

Investing activities consumed approximately $6.5
million in the year ended December 31, 2006, reflecting loans extended under a promissory note receivable from a former merger candidate of approximately $5.5 million, offset by the sale of short-term investments of approximately $0.5 million.
Expenditures of approximately $0.8 million in the year ended December 31, 2006 were related to our unsuccessful acquisition, and were consequently reflected as an investing activity rather than an operating activity. Additionally, we spent



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approximately $0.7 million on equipment and fees relating to filings for patents, trademarks, and the acquisition of a heat transfer technology license.

Financing Activities. Financing activities provided approximately $124.7 million, $0.3 million and $21.9 million of cash in the
year ended December 31, 2008, 2007 and 2006, respectively. We completed the issuance of the Convertible Notes and the related overallotment option totaling $55.0 million on April 1, 2008. In connection with the sale of the Convertible
Notes, we incurred financing fees of $2.2 million, which was paid to Merrill Lynch. We also entered into a call spread option transaction and a forward stock purchase transaction totaling $5.9 million and $15.0 million, respectively. We used the
remaining net proceeds from the offering for general corporate purposes and to continue well field and other development activities for our geothermal power projects. In connection with the purchase of a BLM lease in New Mexico, we entered into a
promissory note payable and received cash for $0.9 million in February 2008. On June 17, 2008, we entered into an ATM (at-the-market) Equity Offering Sales Agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which we were able to offer and sell through Merrill Lynch, as our sales agent, from time to time, shares of our common stock with an aggregate sales price of up to $25,000,000. During the third quarter of 2008, we
raised net proceeds totaling $24.2 million from our participation in the ATM equity program. In addition, pursuant to the Thermo Financing Agreements, we received a capital contribution for minority interest in our Thermo Subsidiary totaling $24.5
million. Under the same Thermo Financing Agreements, we also entered into an 18 year permanent non-recourse senior secured note bearing annual interest at 7.00% and received net proceeds totaling $26.1 million. Most recently, on November 14,
2008, we sold 2,000,000 shares of our common stock at a fixed price of $5.00 per share in a private equity transaction or $10.0 million. We also sold 2,360,417 shares of our common stock on December 12, 2008 for $4.23654 per share, which is a
price per share equal to $10.0 million divided by 110% of the average of the daily volume-weighted average price on the NYSE Arca exchange for the common stock for the ten business days ending on and including December 11, 2008. The gross
proceeds from the closing of the November 14, 2008 and December 12, 2008 private placement transactions were $20,000,000, before deducting fees and commissions. We paid commissions of $1,232,000 to a placement agent in connection with the
closing of the private placement transactions. During the year ended December 31, 2008, we also received approximately $0.7 million from the exercise of other outstanding stock options and warrants.

We completed the private placement of 2,693,552 shares of our common stock on March 30, 2007. We received net proceeds of $11.9 million from this
private placement transaction. As part of the private placement transaction, we issued warrants to purchase an aggregate of 1,037,012 shares of common stock at an exercise price of $6.05 per share to the purchasers of our common stock and the
placement agent. During August 2007, all of these warrants were exercised and we received approximately $6.3 million of proceeds for the purchase of the 1,037,012 shares. During 2007, we also received approximately $0.9 million from the exercise of
other outstanding stock options and warrants. Financing activities in 2006 provided approximately $0.3 million from the exercises of common stock options and warrants.

As of December 31, 2008, we had stockholders equity of approximately $6.3 million and approximately $1.5 million in cash and cash equivalents. Our cash balance, together with cash anticipated to be provided
by customer sales will not be sufficient to satisfy our anticipated cash requirements for normal operations and capital expenditures for the year ending December 31, 2009. To strengthen our financial position, we intend to seek additional
funding to be used for general corporate purposes, as well as up front geothermal development activities, including advancing well field development activities and project permitting. We intend to seek funding for our capital needs through the
issuance of debt, preferred stock, equity or a combination of these instruments. We may also seek to obtain financing through government grants, loan guarantees and private activity bonds, joint ventures, the sale of one or more of our projects or
interests therein, entry into prepaid 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 expect that we will be
able to secure sufficient financing to satisfy our anticipated cash requirements for normal operations and capital expenditures through at least December 31, 2009. As more fully described below, we intend to seek separate financing



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commitments with respect to each geothermal power project we intend to develop in order to fund construction and other development costs. Although we
anticipate that financing will be available to us, we cannot be certain that we can obtain financing on terms acceptable to us or at all. If we are not able to raise additional capital, we will not have sufficient cash to fund our operations.

Dividends related to convertible preferred stock.There have been no dividends related to convertible stock during the years ending
December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, we had no shares of preferred stock outstanding.

Off-Balance Sheet
Arrangements

As of December 31, 2008, we had the following off-balance sheet arrangements as defined by item 303(a)(4)(II) of SEC
Regulation S-K.

In connection with the Thermo Financing Agreements, we entered into an Amended and Restated Purchase Contract with UTCP
relating to the purchase of generating units for the Thermo No. 1 project. Under the terms of the Amended and Restated Purchase Contract, UTCP has agreed to allow us to retain a certain portion of the purchase price of the generating units
pending the successful completion of the Thermo No. 1 project. If the Thermo No. 1 project is not successfully completed as a result of a problem with the generating units, then we will keep the retained portion of the purchase price as a
liquidated damages payment. If the Thermo No. 1 project is not successfully completed as a result of any other reason, we will reimburse UTCP for any liquidated damages paid by UTCP. To secure payment of our obligations to reimburse UTCP under
the Amended and Restated Purchase Contract, we provided a security interest to UTCP in five patents relating to our Transportation & Industrial segment. We are unable to estimate the maximum potential obligation we may have for future
reimbursement payments under the Amended and Restated Purchase Contract at this time. We believe that the likelihood that we will be obligated to reimburse UTCP for liquidated damages under the Amended and Restated Purchase Contract is
remote and, accordingly, no liability was recorded for the year ended December 31, 2008.

Contractual Obligations and Commitments

We lease our corporate office located at 5152 North Edgewood Drive, Suite 200, Provo, Utah. On January 1, 2009, we entered into a new
lease agreement that expanded the corporate office space from 11,400 square feet to 19,300 square feet. Monthly rent also increased from approximately $19,900 per month to approximately $34,400 per month. The new lease expires on December 31,
2011.

We also lease our Symetron testing facility in Utah County, Utah. The testing facility has approximately 12,000 square feet
with monthly rent of approximately $6,400. The testing facility lease expires on June 1, 2009. We are currently evaluating whether to extend this lease. The corporate offices and facilities are well maintained and in good condition.

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 with monthly rent computed on a per unit basis of approximately $8,400 per month. The agreement continues on a month to month basis until all equipment is removed from the property.

We have entered into operating leases for our corporate headquarters, testing facility and outdoor storage of that we have received for the Lightning
Dock project in New Mexico. The lease of corporate headquarters office space expires on December 31, 2011 and testing facility lease expires on June 1, 2009. The outdoor storage lease is on month to month basis as long as the equipment
remains at the storage site. We also have ongoing employment commitments.



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Total rent expense for all of our office space, testing facilities and outdoor storage site leases for
the year ended December 31, 2008 was approximately $316,200. Total rent expense for all of our office space, testing facilities and outdoor storage site leases for the years ended December 31, 2007 and 2006 was approximately $265,000, and
$226,000, respectively.

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

The table below summarizes our operating lease obligations pursuant to our non-cancelable leases, our long-term debt and our executed purchase
obligations as of December 31, 2008:



|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           
|--------------------------------------- |  | ---------------------- | ----------- | --------------- | - | ----------- |  | ----------- | ---------- | ---------------- | - | ---------- |  | - | ----------
|                                        |  | Payments due by period
|                                        |  | Total                  |             | Less than1 year |   | 1 to 3years |  | 3 to 5years |            | More than5 years
|Operating Lease Obligations             |  | $                      | 1,301,114   |                 | $ | 446,753     |  | $           | 854,361    |                  | $ |           |  | $ |          
|Long Term Debt (principal and interest) |  |                        | 131,613,643 |                 |   | 8,212,824   |  |             | 14,695,511 |                  |   | 67,721,757 |  |   | 40,983,551
|Purchase Obligations                    |  |                        | 91,424,513  |                 |   | 69,591,374  |  |             | 9,929,777  |                  |   | 10,304,358 |  |   | 1,599,004 
|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           
|Total                                   |  | $                      | 224,339,270 |                 | $ | 78,250,951  |  | $           | 25,479,649 |                  | $ | 78,026,115 |  | $ | 42,582,555
|                                        |  |                        |             |                 |   |             |  |             |            |                  |   |            |  |   |           

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, our testing facility and outdoor storage of our Lightning Dock project equipment
that we have received.

In 2007, we executed three purchase agreements with UTCP relating to the purchase of generating units for the
geothermal power plants we intend to develop. Under the provisions of these agreements, we have paid approximately $3.8 million.

Our
obligations to UTCP relate primarily to purchase agreements for the purchase of generating units. We entered into three such agreements with UTCP in 2007. In April 2008, we executed a fourth purchase agreement with UTCP relating to the purchase of
additional power generating units. Concurrent with the execution of the April 2008 agreement we paid a down payment of $5.0 million. On August 31, 2008, we executed a fifth purchase agreement with UTCP relating to the purchase of additional
generating units. Concurrent with the execution of the fifth purchase agreement, we paid a down payment of $2.3 million. On December 23, 2008, the first purchase agreement with UTCP was terminated and the other four purchase agreements with
UTCP were amended into three separate purchase agreements to properly reflect the actual distribution of the generating units to the Thermo No. 1 project site and establish greater flexibility for distribution of the generating units to future
projects.

On December 23, 2008, the first purchase agreement with UTCP was terminated and the other three purchase agreements with
UTCP were amended (the Amended Agreements). The Amended Agreements reflect the actual distribution of the generating units to the Thermo No. 1 project site and establish greater flexibility for distribution of the generating units
to future projects. Under the Amended Agreements, the deposits already paid under the previous purchase agreements were allocated to the new purchase agreements consistent with the actual and intended future distributions of the generating units. As
of December 31, 2008, we were obligated to pay UTCP approximately $56.3 million to complete the agreements. However, under the Amended Agreements, no additional payments for equipment will be required beyond the initial deposits until the
project financing is obtained for each respective project. Once financing is obtained for a project, we are obligated to pay a certain portion of the amounts owed and, once certain tests have been successfully completed for the project, we are
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Pursuant to the terms of the Amended Agreements, if we fail to accept or pay for any of the UTCP power
generating units we agreed to purchase, we may be required to forfeit all down payments relating to those power generating units and we may be required to pay certain liquidated damages per unit. Accordingly, if we failed to accept or pay for the
power generating units we agreed to purchase, excluding those power generating units already installed at the Thermo No. 1 geothermal power plant, the liquidated damages and forfeited down payments would total $10.9 million.

On August 31, 2008, we finalized the project financing arrangements which provided project financing and tax equity capital for the Thermo
No. 1 project. Pursuant to the project financing arrangements, the Thermo Subsidiary received proceeds of approximately $29.8 million pursuant to the initial funding and the Thermo Subsidiary received approximately $20.8 million of additional
proceeds on October 20, 2008. These proceeds have been restricted for use of which a portion will be used to complete the outstanding purchase obligation relating to the generating units installed at the Thermo No. 1 power plant totaling
up to approximately $7.5 million.

We intend to finance the other two Amended Agreements with UTCP by similar means as the first agreement,
through project financing and tax equity capital or through prepaid power purchase agreements, government grants, loan guarantees and private activity bonds, or through other means. We expect that we will be able to secure sufficient financing to
satisfy our obligation under the Amended Agreement. Although we anticipate that financing will be available to us, we cannot be certain that we can obtain financing on terms acceptable to us or at all. If we are not able to raise additional capital,
we will not have sufficient cash to fund the purchase of these additional generating units.

The purchase obligations set forth in the
table above include a series of purchase and service agreements whereby certain vendors have agreed to provide certain equipment and services to us. As of December 31, 2008, we were obligated to pay the vendors approximately $69.6 million in
2009; $4.9 million in 2010; $5.0 million in 2011; $5.1 million in 2012; and $5.2 million in 2013, as reflected in the table above. Since our geothermal lease agreements are not considered to be operating leases under the Statement of Financial
Accounting Standard No. 13 (FAS 13), Accounting for Leases, the purchase obligations include delay rental payments that we have agreed to make in order to maintain our granted rights to the leased properties.

Recently issued accounting pronouncements

SFAS 162

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

SFAS 161

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



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SFAS 160

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

SFAS 141(R)

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

EITF 07-1

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

EITF 07-5

In June 2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an
entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also
clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We are currently
evaluating the impact of EITF 07-05 on our consolidated financial position and results of operations.

FSP EITF 03-6-1

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting



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and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method. FSP EITF 03-6-1
is effective January 1, 2009 and requires prior period EPS amounts presented to be adjusted retrospectively. Our grants of restricted stock and restricted stock units contain non-forfeitable rights to dividend equivalents and are considered
participating securities as defined in FSP EITF 03-6-1 and will be included in computing EPS using the two-class method beginning with the first quarter of 2009. We believe that the adoption of FSP EITF 03-6-1 will not have a material impact on the
calculation of our basic or diluted EPS.



|ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------

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

As of December 31, 2008, we had approximately $1.5 million in cash and cash equivalents, including $21.0 million in restricted cash,
that were invested primarily in low risk money market accounts and certificates of deposit until needed for operating and other activities. Current money market rates range from approximately 1.33% to 1.53%. The money market interest rates have
declined from 2.35% over the last three months. If interest rates continue to decline by another 1%, the amount of interest earned on our money market balance would be approximately $15,000 lower over a twelve month period. A review of our money
market accounts indicated that no impairment occurred during the year ended December 31, 2008 and no write-down in fair value is considered necessary.

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

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

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



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|ITEM 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

Our
audited Consolidated Financial Statements, including the notes thereto, appear beginning on page F-1 of this report.



|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

None.



|ITEM 9A. | 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 Annual Report on Form 10-K. 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 December 31, 2008, our
disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in 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 Annual Report
on Form 10-K. In January 2008, we enhanced our financial reporting capabilities by converting our accounting system to an accounting software package that enables us to more efficiently account for multiple entities. During the conversion period, we
implemented certain measures to ensure that the system of internal control remained effective such as daily reconciliations of data input and the roll-forward of prior period gain/loss balances. During the third quarter of 2008, pursuant to the
terms of certain financing agreements we entered into with Merrill Lynch, Pierce, Fenner & Smith Incorporated, for the tax equity financing of the Thermo Subsidiary, an independent administrative agent has been appointed to administer the
cash management process for all cash deposits and disbursements for the Thermo Subsidiary. We remain responsible for approving purchases, invoices for payment and reconciling the bank accounts. We believe that implementation of this control helps
ensure that the system of internal controls remains effective for the daily operations of the Thermo Subsidiary. Including the changes mentioned above that did not materially affect our internal control over financial reporting, there was no change
in our internal control over financial reporting during the year ended December 31, 2008 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Managements reports on internal controls over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) under the Securities and Exchange Act of 1934. Internal control over



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financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; 2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of
internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making its assessment, management used the criteria set forth in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on
managements assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2008 based on the COSO criteria.

Our independent registered public accounting firm, Hein & Associates LLP, independently assessed the effectiveness of the Companys
internal controls over financial reporting. Hein & Associates LLP has issued an attestation report concurring with managements assessment, which is included herein.



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Report of independent registered public accounting firm

To the Board of Directors and Stockholders

Raser Technologies, Inc.

Provo, Utah

We have audited Raser
Technologies, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Raser Technologies, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Raser Technologies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Raser Technologies, Inc. and Subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders equity and cash
flows for each of the three years in the period ended December 31, 2008 and for the period after re-entry into the development stage (October 1, 2006) through December 31, 2008 of Raser Technologies, Inc. and Subsidiary and our report
dated March 16, 2009 expressed a qualified opinion thereon.

/s/    HEIN& ASSOCIATES LLP

Denver, Colorado

March 16, 2009



|ITEM 9B. | Other Information.
|-------- | ------------------

None.



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PART III



|ITEM 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

The information required by this item is included in our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Exchange Act in connection with our 2009 annual meeting of
stockholders and is incorporated herein by reference. In addition, we refer you to Part I of this report.



|ITEM 11. | Executive Compensation.
|-------- | -----------------------

The information required
by this item is included in the proxy statement referred to above and is incorporated herein by reference.



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

The information required by this item is included in the proxy statement referred to above and is incorporated herein by reference.



|ITEM 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

The information required by this item is included in the proxy statement referred to above and is incorporated herein by reference.



|ITEM 14. | Principal Accounting Fees and Services.
|-------- | ---------------------------------------

The
information required by this item is included in the proxy statement referred to above and is incorporated herein by reference.



|ITEM 15. | Exhibits, Financial Statement Schedules.
|-------- | ----------------------------------------



|              |  |                                                                                                                                                                                                                                                                                     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                             
|2.1           |  | Agreement and Plan of Reorganization dated October 2, 2003 among Wasatch Web Advisors, Inc., the Company and the stockholders of the Company (incorporated by reference to Exhibit 2 to our
current report on Form 8-K filed October 14, 2003 (File No. 000-30657))                 
|              | 
|2.2           |  | Agreement and Plan of Merger between Raser Technologies, Inc., a Utah corporation, and Raser Technologies, Inc., a Delaware corporation, dated April 17, 2007 (incorporated by reference to
Exhibit 2.1 to our current report on Form 8-K filed April 23, 2007 (File No. 001-32661))
|              | 
|3.1           |  | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed June 18, 2007 (File No. 001-32661))                                                                                                                   
|              | 
|3.2           |  | Bylaws of the Company (incorporated by reference to Exhibit 3.2 to our current report on Form 8-K filed June 18, 2007 (File No. 001-32661))                                                                                                                                         
|              | 
|4.1           |  | Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to our annual report on Form 10-K filed March 11, 2008 (File No. 001-32661))                                                                                                              
|              | 
|4.2           |  | Registration Rights Agreement, dated as of July 22, 2004, among the Company and the Purchasers (as defined therein) (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K
filed July 28, 2004 (File No. 000-30657))                                          



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|              |  |                                                                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                
|4.3           |  | Form of Warrant to Purchase Shares of the Companys Common Stock (incorporated by reference to Exhibit 10.7 to our current report on Form 8-K filed July 28, 2004 (File No.
000-30657))                                                                                                                                
|              | 
|4.4           |  | Form of Registration Rights Agreement dated as of March 30, 2007 (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K filed April 5, 2007 (File No.
001-32661))                                                                                                                                 
|              | 
|4.5           |  | Common Stock Purchase Warrant, dated January 16, 2008 (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K filed January 23, 2008 (File No. 001-32661))                                                                                                                                         
|              | 
|4.6           |  | Registration Rights Agreement, dated as of January 16, 2008, between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 to our
current report on Form 8-K filed January 23, 2008 (File No. 001-32661))                                                       
|              | 
|4.7           |  | Indenture, dated as of March 26, 2008, between Raser Technologies, Inc. and The Bank of New York (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K filed March 27, 2008
(File No. 001-32661))                                                                                                
|              | 
|4.8           |  | Registration Rights Agreement, dated March 26, 2008, between Raser Technologies, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 to our
current report on Form 8-K filed March 27, 2008 (File No. 001-32661))                                                    
|              | 
|4.9           |  | Agreement, dated November 13, 2008, between Raser Technologies, Inc. and Fletcher International, Ltd. (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K filed November
14, 2008 (File No. 001-32661))                                                                                        
|              | 
|4.10          |  | Warrant, dated November 13, 2008, granted by Raser Technologies, Inc. to Fletcher International, Ltd. (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K filed November
14, 2008 (File No. 001-32661))                                                                                        
|              | 
|4.11          |  | Unsecured Line of Credit Agreement and Promissory Note, dated January 27, 2009, among Raser Technologies, Inc., Radion Energy, LLC, Ocean Fund, LLC, Primary Colors, LLC, and R. Thomas Bailey
(incorporated by reference to Exhibit 4.1 to our current report on Form 8-K filed February 2, 2009 (File No. 001-32661))
|              | 
|4.12          |  | Form of Warrant issued pursuant to the Unsecured Line of Credit Agreement and Promissory Note (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K filed February 2, 2009
(File No. 001-32661))                                                                                                 
|              | 
|10.1          |  | Amended and Restated 2004 Long-Term Incentive Plan (incorporated by reference to Appendix B to our information statement on Schedule 14C filed May 14, 2004 (File No. 000-30657))                                                                                                                                      
|              | 
|10.2          |  | Form of Stock Option Agreement for the Amended and Restated 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 to our quarterly report on Form 10-QSB filed August 13, 2004
(File No. 000-30657))                                                                                                
|              | 
|10.3          |  | Restricted Stock Grant Agreement dated as of February 23, 2004 between the Company and John C. Ritter (incorporated by reference to Exhibit 10.5 to our quarterly report on Form 10-QSB
filed November 9, 2004 (File No. 000-30657))                                                                                   
|              | 
|10.4          |  | Restricted Stock Grant Agreement dated as of February 25, 2004 between the Company and Timothy D. Fehr (incorporated by reference to Exhibit 10.6 to our quarterly report on Form 10-QSB filed
November 9, 2004 (File No. 000-30657))                                                                                  
|              | 
|10.5          |  | At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement effective as of August 1, 2004 between the Company and William Dwyer (incorporated by
reference to Exhibit 10.7 to our quarterly report on Form 10-QSB filed November 9, 2004 (File No. 000-30657))       



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.6          |  | Form of Award Agreement for Outside Directors under the Amended and Restated 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.20 to our current report on Form 8-K/A filed
July 20, 2006 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|10.7          |  | Employment Agreement dated January 31, 2005 between the Company and Brent M. Cook (incorporated by reference to Exhibit 10.8 to our current report on Form 8-K filed February 4, 2005 (File No.
000-30657))                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.8          |  | Amended Restricted Stock Grant Agreement dated as of April 29, 2005 between the Company and John C. Ritter (incorporated by reference to Exhibit 10.10 to our current report on Form 8-K filed May
5, 2005 (File No. 000-30657))                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.9          |  | Lease Agreement by and between the Company and EsNET Properties L.C., dated as of March 11, 2005 (incorporated by reference to Exhibit 10.11 to our current report on Form 8-K filed
May 24, 2005 (File No. 000-30657))                                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.10         |  | Second Amended Restricted Stock Grant Agreement dated as of July 12, 2005 between the Company and John C. Ritter (incorporated by reference to Exhibit 10.12 to our quarterly report on
Form 10-QSB filed November 14, 2005 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.11         |  | Third Amended Restricted Stock Grant Agreement dated as of July 29, 2005 between the Company and John C. Ritter (incorporated by reference to Exhibit 10.13 to our quarterly report on
Form 10-QSB filed November 14, 2005 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.12         |  | First Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated as of July 29, 2005 between the Company and William Dwyer
(incorporated by reference to Exhibit 10.14 to our quarterly report on Form 10-QSB filed November 14, 2005 (File No. 001-32661))                                                                                                                                                                                                                                                                                            
|              | 
|10.13         |  | Amended Restricted Stock Grant Agreement dated July 22, 2005 between the Company and Timothy D. Fehr (incorporated by reference to Exhibit 10.15 to our quarterly report on Form 10-QSB filed
November 14, 2005 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.14         |  | Fifth Amended Restricted Stock Grant Agreement dated as of January 15, 2006 between the Company and John C. Ritter (incorporated by reference to Exhibit 10.16 to our quarterly report on
Form 10-Q filed May 15, 2006 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.15         |  | Second Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated as of January 31, 2006 between the Company and William Dwyer
(incorporated by reference to Exhibit 10.17 to our quarterly report on Form 10-Q filed May 15, 2006 (File No. 001-32661))                                                                                                                                                                                                                                                                                               
|              | 
|10.16         |  | Second Amended Restricted Stock Grant Agreement dated February 1, 2006 between the Company and Timothy Fehr (incorporated by reference to Exhibit 10.18 to our quarterly report on Form 10-Q filed
May 15, 2006 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.17         |  | Employment Agreement dated as of June 27, 2006 between the Company and Patrick J. Schwartz (incorporated by reference to Exhibit 10.16 to our current report on Form 8-K filed June 30, 2006 (File
No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.18        |  | Termination Agreement and Mutual General Release dated as of September 2, 2006 by and among the Company, Power Acquisition Corp., Amp Resources, LLC, Amp Capital Partners, LLC, Highland Capital
Partners VI Limited Partnership, Highland Subfund VI-Amp Limited Partnership, Highland Entrepreneurs Fund VI Limited Partnership, Sorenson Capital Partners, L.P. and John H. Stevens, individually and as representative of the Amp
Resources, LLC Equityholders (as defined therein) (incorporated by reference to Exhibit 10.21 to our quarterly report on Form 10-Q filed November 9, 2006 (File No. 001-32661))



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.19        |  | Promissory Note, dated September 2, 2006, between Amp Resources, LLC and the Company (incorporated by reference to Exhibit 10.22 to our quarterly report on Form 10-Q filed November 9, 2006 (File
No. 001-32661))                                                                                                                                                                                                                              
|              | 
|10.20        |  | Amended and Restated License and Sublicense Agreement dated as of November 2, 2006 by and between RaserPower Systems, LLC and Recurrent Engineering, L.L.C. (incorporated by reference to
Exhibit 10.23 to our quarterly report on Form 10-Q filed November 9, 2006 (File No. 001-32661))                                                                                                                                                      
|              | 
|10.21        |  | First Amendment to Intercreditor and Subordination Agreement dated as of September 2, 2006 by and among Highland Capital Partners VI Limited Partnership, Highland Subfund VI-Amp Limited
Partnership, Highland Entrepreneurs Fund VI Limited Partnership, SCP/AR, LLC, AMP Capital Partners, LLC and the Company (incorporated by reference to Exhibit 10.24 to our quarterly report on Form 10-Q filed November 9, 2006 (File No.
001-32661))
|              | 
|10.22        |  | Guaranty dated September 2, 2006 by and between the Company and Recurrent Engineering LLC (incorporated by reference to Exhibit 10.25 to our quarterly report on Form 10-Q filed November 9, 2006
(File No. 001-32661))                                                                                                                                                                                                                         
|              | 
|10.23         |  | Third Amended At Will Employment, Confidential Information, Invention Assignment, Noncompetition and Arbitration Agreement dated as of July 31, 2006 between the Company and William Dwyer
(incorporated by reference to Exhibit 10.28 to our quarterly report on Form 10-Q filed November 9, 2006 (File No. 001-32661))                                                                                                                        
|              | 
|10.24        |  | Geothermal Lease Agreement dated December 22, 2006 among Raser-Power Systems, LLC, and Truckee River Ranch, LLC (incorporated by reference to Exhibit 10.33 to our annual report on Form 10-K
filed on March 20, 2007 (File No. 001-32661))                                                                                                                                                                                                     
|              | 
|10.25         |  | Settlement Agreement, Severance Agreement and Release dated January 2, 2007 between the Company and William Dwyer (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K
filed January 5, 2007 (File No. 001-32661))                                                                                                                                                                                                      
|              | 
|10.26         |  | Employment Agreement dated as of January 8, 2007 by and between Raser Technologies Operating Company, Inc. and Martin F. Petersen (incorporated by reference to Exhibit 10.1 to our current report
on Form 8-K filed January 11, 2007 (File No. 001-32661))                                                                                                                                                                                     
|              | 
|10.27         |  | Third Amended Restricted Stock Grant Agreement dated as of January 16, 2007 between the Company and Timothy Fehr (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K
filed January 19, 2007 (File No. 001-32661))                                                                                                                                                                                                      
|              | 
|10.28         |  | Securities Purchase Agreement dated as March 30, 2007 among the Company and the Purchasers (as defined in the Agreement) (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed April 5, 2007 (File No. 001-32661))                                                                                                                                                                                                 
|              | 
|10.29        |  | Geothermal Lease Agreement dated January 17, 2007 by and between Raser Power Systems, LLC, Richard Guelich and Charles McGee (incorporated by reference to Exhibit 10.33 to our registration
statement on Form S-3 filed May 9, 2007 (File No. 333-142779))                                                                                                                                                                                     
|              | 
|10.30        |  | Advisory Agreement dated as of March 22, 2007 by and between the Company and Objective Equity LLC (incorporated by reference to Exhibit 10.35 to our registration statement on Form S-3 filed
May 9, 2007 (File No. 333-142779))                                                                                                                                                                                                                
|              | 
|10.31        |  | Sourcing and Development Agreement dated as of April 6, 2007 by and between the Company and UTC Power Corporation (incorporated by reference to Exhibit 10.37 to our registration statement on
Form S-3 filed May 9, 2007 (File No. 333-142779))                                                                                                                                                                                                
|              | 
|10.32        |  | Service Agreement dated as of April 6, 2007 by and between UTC Power Corporation and Truckee Geothermal No. 1 SV-01, LLC (incorporated by reference to Exhibit 10.38 to our registration statement
on Form S-3 filed May 9, 2007 (File No. 333-142779))                                                                                                                                                                                         



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.33        |  | Purchase Contract dated as of April 6, 2007 by and between UTC Power Corporation and Truckee Geothermal No. 1 SV-01, LLC (incorporated by reference to Exhibit 10.39 to our registration statement
on Form S-3 filed May 9, 2007 (File No. 333-142779))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | 
|10.34         |  | Offer to Lease and Lease for Geothermal Resources, effective September 1, 2007, between Raser Power Systems, LLC and the BLM (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed September 7, 2007) (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.35         |  | Fourth Amended Restricted Stock Grant Agreement dated September 4, 2007 between the Company and Timothy Fehr (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed
September 7, 2007 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | 
|10.36        |  | Letter Agreement dated September 27, 2007, between Raser Technologies, Inc., and GeoLectric Power Company NM, LLC ( incorporated by reference to Exhibit 10.12 to our quarterly report on Form
10-Q filed November 9, 2007 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.37        |  | Lightning Dock Geothermal, Inc. Asset Purchase Agreement, dated as of December 3, 2007, by and among Lightning Dock Geothermal HI-01, LLC, a Delaware limited liability company, Lightning Dock
Geothermal, Inc., a New Mexico corporation, GeoLectric Power Company NM, LLC, a New Mexico limited liability company, and Edward C. Fisch, a resident of the State of California, Edward C. Fisch, Trustee of the Edward C. Fisch Defined Benefit Plan, a
trust established pursuant to ERISA, and Jack S. Wood, Trustee of the Wood Family Trust, a trust established pursuant to the laws of the State of California (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on
December 10, 2007 (File No. 001-32661))
|              | 
|10.38         |  | Commitment Letter, dated January 16, 2008, among the Company, Truckee Geothermal No. 1 SV-01, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to
Exhibit 10.1 to our current report on Form 8-K filed January 23, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.39        |  | Surface Access and Use Agreement dated December 14, 2007, between Raser Power Systems, LLC and Truckee River Ranch, LLC (incorporated by reference to Exhibit 10.39 to our annual report on
Form 10-K filed March 11, 2008 (file No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.40         |  | Renewable Power Purchase and Sale Agreement, dated March 10, 2008, between City of Anaheim and Thermo No. 1 BE-01, LLC (incorporated by reference to Exhibit 10.1 to our current report on Form
8-K filed March 19, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.41         |  | Renewable Power Purchase and Sale Agreement, dated March 10, 2008, between City of Anaheim and Harmony Geothermal No. 1 IR-01, LLC (incorporated by reference to Exhibit 10.2 to our current
report on Form 8-K filed March 19, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.42         |  | Purchase Agreement, dated March 19, 2008, by and between Raser Technologies, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference
to Exhibit 10.1 to our current report on Form 8-K filed March 25, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|10.43         |  | Call Spread Option Transaction, dated March 19, 2008, between Merrill Lynch Financial Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Raser Technologies, Inc.
(incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed March 25, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.44         |  | Confirmation of Forward Stock Purchase Transaction, dated March 19, 2008, between Merrill Lynch Financial Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Raser
Technologies, Inc. (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed March 25, 2008 (File No. 001-32661))                                                                                                                                                                                                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                             
|10.45         |  | Pledge and Escrow Agreement, dated as of March 26, 2008, among Raser Technologies, Inc., The Bank of New York, as escrow agent, and The Bank of New York, as trustee (incorporated by reference to
Exhibit 10.1 to our current report on Form 8-K filed March 27, 2008 (File No. 001-32661))                                                        
|              | 
|10.46        |  | Purchase Contract, dated April 3, 2008, between UTC Power Corporation and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed April 9,
2008 (File No. 001-32661))                                                                                                                           
|              | 
|10.47         |  | Employment Agreement dated April 4, 2008 by and between Raser Technologies, Inc. and Brent M. Cook (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed May 19, 2008
(File No. 001-32661))                                                                                                                            
|              | 
|10.48        |  | Commitment Letter, dated May 16, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Thermo No. 1 BE-01, LLC (incorporated by reference to Exhibit
10.1 to our current report on Form 8-K filed May 21, 2008 (File No. 001-32661))                                                                        
|              | 
|10.49        |  | Renewable Power Purchase and Sale Agreement, dated June 11, 2008, between the Salt River Project Agricultural Improvement and Power District and Lightning Dock Geothermal HI-01, LLC
(incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 13, 2008 (File No. 001-32661))                                        
|              | 
|10.50         |  | Commitment Letter, dated July 18, 2008, among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Raser Technologies, Inc., and Lightning Dock Geothermal HI-01, LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed July 21, 2008 (File No. 001-32661))                                                         
|              | 
|10.51         |  | Account and Security Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.1 to our
current report on Form 8-K filed September 5, 2008)                                                                                                  
|              | 
|10.52         |  | Engineering, Procurement and Construction Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Technologies, Inc. (incorporated by reference to Exhibit 10.2
to our current report on Form 8-K filed September 5, 2008)                                                                                         
|              | 
|10.53         |  | Equity Capital Contribution Agreement, dated as of August 31, 2008, by and among Intermountain Renewable Power, LLC and Thermo No. 1 BE-01, LLC, on the one hand, and Merrill Lynch L.P. Holdings
Inc., on the other hand (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed September 5, 2008)                     
|              | 
|10.54         |  | Operation and Maintenance Agreement, dated as of August 31, 2008, by and between Thermo No. 1 BE-01, LLC and Raser Power Systems, LLC (incorporated by reference to Exhibit 10.4 to our current
report on Form 8-K filed September 5, 2008)                                                                                                         
|              | 
|10.55         |  | Credit Agreement, dated as of August 31, 2008, among Thermo No. 1 BE-01, LLC, the Lenders (as defined in the Credit Agreement), and Deutsche Bank Trust Company Americas (incorporated by
reference to Exhibit 10.5 to our current report on Form 8-K filed September 5, 2008)                                                                      
|              | 
|10.56         |  | Amended and Restated Limited Liability Company Agreement of Thermo No. 1 BE-01, LLC, a Delaware limited liability company, dated as of August 31, 2008, by and between Intermountain Renewable
Power, LLC and Merrill Lynch L.P. Holdings Inc. (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K filed September 5, 2008)
|              | 
|10.57         |  | Closing Date and Funding Acknowledgment, dated August 31, 2008, by and among Thermo No. 1 BE-01, LLC, Merrill Lynch Credit Products, LLC, and Deutsche Bank Trust Company Americas (incorporated
by reference to Exhibit 10.7 to our current report on Form 8-K filed September 5, 2008)                                                            



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|              |  |                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                
|21.1*         |  | Significant Subsidiaries of Raser Technologies, Inc.                                                   
|              | 
|23.1*         |  | Consent of Hein & Associates LLP, Independent Registered Public Accounting Firm                        
|              | 
|23.2*         |  | Consent of GeothermEx, 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



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

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



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



|                     |  |                                                    
|-------------------- |  | ---------------------------------------------------
|                     |  | RASER TECHNOLOGIES, INC.                           
|                     | 
|Date: March 17, 2009 |  | /s/    BRENT M.
COOK                               
|                     |  | Brent M. Cook, Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brent M. Cook and Martin F. Petersen,
and each or any one of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capabilities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.

Pursuant to the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                     |  |                                                                                         
|-------------------- |  | ----------------------------------------------------------------------------------------
|Date: March 17, 2009 |  | /s/    BRENT M.
COOK                                                                    
|                     |  | Brent M. Cook, Chief Executive Officer and Director (principal executive officer)       
|                     | 
|Date: March 17, 2009 |  | /s/    KRAIG T.
HIGGINSON                                                               
|                     |  | Kraig T. Higginson, Executive Chairman of the Board                                     
|                     | 
|Date: March 17, 2009 |  | /s/    MARTIN F.
PETERSEN                                                               
|                     |  | Martin F. Petersen, Chief Financial Officer (principal financial and accounting officer)
|                     | 
|Date: March 17, 2009 |  | /s/    REYNOLD
ROEDER                                                                   
|                     |  | Reynold Roeder, Director                                                                
|                     | 
|Date: March 17, 2009 |  | /s/    BARRY
MARKOWITZ                                                                  
|                     |  | Barry Markowitz, Director                                                               
|                     | 
|Date: March 17, 2009 |  | /s/    ALAN
PERRITON                                                                    
|                     |  | Alan Perriton, Director                                                                 
|                     | 
|Date: March 17, 2009 |  | /s/    JAMES A.
HERICKHOFF                                                              
|                     |  | James A. Herickhoff, Director                                                           
|                     | 
|Date: March 17, 2009 |  | /s/    SCOTT E.
DOUGHMAN                                                                
|                     |  | Scott E. Doughman, Director                                                             



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RASER TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                                                                                           |  |     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                           |  | Page
|Report of Independent Registered Public Accounting Firm                                                                                                                                                    |  | F-2 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                                                                                                               |  | F-3 
|Consolidated Statements of Operations for the years ended December 
31, 2008, 2007 and 2006 and for the period after re-entry into development stage (October 1, 2006 through December 31, 2008)           |  | F-4 
|Consolidated Statements of Stockholders Equity for the years ended December 
31, 2008, 2007 and 2006 and for the period after re-entry into development stage (October 1, 2006 through December 31, 2007) |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 
31, 2008, 2007 and 2006 and for the period after re-entry into development stage (October 1, 2006 through December 31, 2008)           |  | F-8 
|Notes to Consolidated Financial Statements                                                                                                                                                                 |  | F-9 
|Independent Registered Public Accounting Firms Report on Financial Statement Schedule                                                                                                                     |  | F-66
|Schedule I                                                                                                                                                                                                 |  | F-67



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Raser Technologies, Inc.

Provo, Utah

We have audited the accompanying
consolidated balance sheets of Raser Technologies, Inc. and subsidiaries (the Company) (a development stage enterprise) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December 31, 2008 and for the period after re-entry into development stage (October 1, 2006 through December 31, 2008). These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Raser Technologies, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their consolidated operations and their consolidated cash flows for each of the three years in the period ended December 31, 2008, and for the
period after re-entry into development stage (October 1, 2006 through December 31, 2008) in conformity with United States generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has
suffered losses, has used significant cash for operating activities since inception, has significant purchase commitments in 2009 and has a lack of sufficient working capital. This raises substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Raser
Technologies, Inc. and subsidiaries internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 16, 2009 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

/s/    HEIN & ASSOCIATES LLP

Denver, Colorado

March 16, 2009



F-2



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##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Balance Sheets



|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                   |  | December 31,2008 |             |   | December 31,2007 |  
|Assets                                                                                                                             |  |                  |             |   |                  |   |             |  
|Current assets:                                                                                                                    |  |                  |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                          |  | $                | 1,534,820   |   |                  | $ | 5,912,210   |  
|Restricted cash                                                                                                                    |  |                  | 75,704      |   |                  |   | 75,000      |  
|Accounts receivable                                                                                                                |  |                  |            |   |                  |   | 12,200      |  
|Unbilled receivable                                                                                                                |  |                  |            |   |                  |   | 192,157     |  
|Notes receivable, net                                                                                                              |  |                  | 144,525     |   |                  |   | 506,273     |  
|Restricted short-term marketable securities (held to maturity)                                                                     |  |                  | 4,366,257   |   |                  |   |            |  
|Other current assets                                                                                                               |  |                  | 1,147,562   |   |                  |   | 725,648     |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total current assets                                                                                                               |  |                  | 7,268,868   |   |                  |   | 7,423,488   |  
|Restricted cash                                                                                                                    |  |                  | 20,900,135  |   |                  |   |            |  
|Restricted long-term marketable securities (held to maturity)                                                                      |  |                  | 2,155,090   |   |                  |   |            |  
|Land                                                                                                                               |  |                  | 1,811,063   |   |                  |   |            |  
|Power project leases and prepaid delay rentals                                                                                     |  |                  | 8,630,643   |   |                  |   | 6,153,688   |  
|Geothermal well field development-in-progress                                                                                      |  |                  | 31,388,628  |   |                  |   | 4,750,525   |  
|Power project construction-in-progress                                                                                             |  |                  | 74,072,394  |   |                  |   |            |  
|Power project equipment, net                                                                                                       |  |                  | 19,727,500  |   |                  |   | 603,814     |  
|Equipment, net                                                                                                                     |  |                  | 608,886     |   |                  |   | 680,188     |  
|Intangible assets, net                                                                                                             |  |                  | 1,587,310   |   |                  |   | 515,037     |  
|Deferred financing costs, net                                                                                                      |  |                  | 7,670,382   |   |                  |   |            |  
|Power project development deposits                                                                                                 |  |                  | 4,196,550   |   |                  |   | 3,562,500   |  
|Other assets                                                                                                                       |  |                  | 4,006,999   |   |                  |   | 95,213      |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total assets                                                                                                                       |  | $                | 184,024,448 |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                               |  |                  |             |   |                  |   |             |  
|Current liabilities:                                                                                                               |  |                  |             |   |                  |   |             |  
|Accounts payable and accrued expenses                                                                                              |  | $                | 64,471,336  |   |                  | $ | 4,246,783   |  
|Short-term portion of long-term notes                                                                                              |  |                  | 1,831,147   |   |                  |   |            |  
|Note payable                                                                                                                       |  |                  | 945,833     |   |                  |   |            |  
|Deferred revenue                                                                                                                   |  |                  | 200,000     |   |                  |   |            |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total current liabilities                                                                                                          |  |                  | 67,448,316  |   |                  |   | 4,246,783   |  
|Asset retirement obligation                                                                                                        |  |                  | 2,152,230   |   |                  |   | 86,193      |  
|Long-term 7.00% senior secured note (non-recourse), net of discount of $5,155,156                                                  |  |                  | 25,120,464  |   |                  |   |            |  
|Long-term 8.00% convertible senior notes                                                                                           |  |                  | 55,000,000  |   |                  |   |            |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total liabilities                                                                                                                  |  |                  | 149,721,010 |   |                  |   | 4,332,976   |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Minority interest                                                                                                                  |  |                  | 28,025,116  |   |                  |   |            |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Contingencies and commitments, (see Notes 1, 4, 5, 11, 14, 15, 16)                                                                 |  |                  |             |   |                  |   |             |  
|Stockholders equity:                                                                                                              |  |                  |             |   |                  |   |             |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued and outstanding                                     |  |                  |            |   |                  |   |            |  
|Common stock, $.01 par value, 250,000,000 shares authorized, 63,519,455 and 55,923,705 shares issued and outstanding,
respectively |  |                  | 635,195     |   |                  |   | 559,237     |  
|Additional paid in capital                                                                                                         |  |                  | 102,350,814 |   |                  |   | 70,114,893  |  
|Accumulated deficit                                                                                                                |  |                  | (30,972,177 | ) |                  |   | (30,972,177 | )
|Accumulated deficit after re-entry into development stage                                                                          |  |                  | (65,735,510 | ) |                  |   | (20,250,476 | )
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total stockholders equity                                                                                                         |  |                  | 6,278,322   |   |                  |   | 19,451,477  |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                         |  | $                | 184,024,448 |   |                  | $ | 23,784,453  |  
|                                                                                                                                   |  |                  |             |   |                  |   |             |  

See accompanying notes to consolidated financial statements.



F-3



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##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Statements of Operations



|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------ |  | ----------------------- | ----------- | - | ------------------------------------------------------------------------------------------ | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                 |  | Year Ended December 31, |             |   | For the periodafter
re-entryinto developmentstage (October 1,2006 throughDecember 31,2008) |  
|                                                 |  | 2008                    |             |   | 2007                                                                                       |   |             | 2006 |  |  
|Revenue                                          |  | $                       | 172,303     |   |                                                                                            | $ | 320,072     |      |  | $ | 122,732     |   |  | $ | 537,092     |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Operating expense                                |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Cost of sales                                    |  |                         | 74,112      |   |                                                                                            |   | 627,207     |      |  |   | 438,278     |   |  |   | 746,036     |  
|General and administrative                       |  |                         | 9,819,455   |   |                                                                                            |   | 10,133,000  |      |  |   | 15,050,080  |   |  |   | 23,622,254  |  
|Power project development                        |  |                         | 10,351,060  |   |                                                                                            |   | 2,637,315   |      |  |   |            |   |  |   | 12,988,375  |  
|Unsuccessful and impaired wells                  |  |                         | 13,624,352  |   |                                                                                            |   |            |      |  |   |            |   |  |   | 13,624,352  |  
|Research and development                         |  |                         | 4,762,733   |   |                                                                                            |   | 3,390,688   |      |  |   | 3,893,540   |   |  |   | 9,095,880   |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Total operating expenses                         |  |                         | 38,631,712  |   |                                                                                            |   | 16,788,210  |      |  |   | 19,381,898  |   |  |   | 60,076,897  |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Operating loss                                   |  |                         | (38,459,409 | ) |                                                                                            |   | (16,468,138 | )    |  |   | (19,259,166 | ) |  |   | (59,539,805 | )
|Interest income                                  |  |                         | 410,907     |   |                                                                                            |   | 752,599     |      |  |   | 874,831     |   |  |   | 1,368,075   |  
|Interest expense                                 |  |                         | (3,198,280  | ) |                                                                                            |   | (2,307      | )    |  |   |            |   |  |   | (3,198,280  | )
|Other                                            |  |                         | (716,636    | ) |                                                                                            |   | (31,159     | )    |  |   | (104,601    | ) |  |   | (843,884    | )
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Loss before income taxes and minority interest   |  |                         | (41,963,418 | ) |                                                                                            |   | (15,749,005 | )    |  |   | (18,488,936 | ) |  |   | (62,213,894 | )
|Income tax benefit (expense)                     |  |                         |            |   |                                                                                            |   |            |      |  |   |            |   |  |   |            |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Minority interest:                               |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|From sale of minority interest in subsidiary     |  |                         | (5,313,433  | ) |                                                                                            |   |            |      |  |   |            |   |  |   | (5,313,433  | )
|From operations of subsidiary                    |  |                         | 1,791,817   |   |                                                                                            |   |            |      |  |   |            |   |  |   | 1,791,817   |  
|Net loss                                         |  |                         | (45,485,034 | ) |                                                                                            |   | (15,749,005 | )    |  |   | (18,488,936 | ) |  |   | (65,735,510 | )
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Loss per common share-basic and diluted          |  | $                       | (0.79       | ) |                                                                                            | $ | (0.29       | )    |  | $ | (0.36       | ) |  |   |             |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  
|Weighted average common shares-basic and diluted |  |                         | 57,653,000  |   |                                                                                            |   | 54,197,000  |      |  |   | 50,745,000  |   |  |   |             |  
|                                                 |  |                         |             |   |                                                                                            |   |             |      |  |   |             |   |  |   |             |  

See accompanying notes to consolidated financial statements.



F-4



---

##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Statement of Stockholders Equity



|                                                                                                                              |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- | ------ | -------------------------- | ------ | ------------ | ------ |  | ------------------------ | ------ |  | ------------------ | ------- | - | ---------------------------------------------------- | - | ---------- | ----- |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                                                                              |        | Convertiblepreferred stock |        | Common stock |        |  | Additionalpaid-incapital |        |  | Accumulateddeficit |         |   | DeficitAccumulatedafter re-entryintodevelopmentstage |   |            | Total | 
|                                                                                                                              | Shares |                            | Amount |              | Shares |  |                          | Amount |  |                    |         |   |                                                     
|Balance at January 1, 2006                                                                                                    |        |                           |        | $            |       |  | 50,404,005               |        |  | $                  | 504,040 |   |                                                      | $ | 35,675,184 |       |  | $ | (16,984,712 | ) |  |   |            |   |  | $ | 19,194,512  |  
|Employee compensatory share grants and stock options                                                                          |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   | 6,819,481  |       |  |   |             |   |  |   |            |   |  |   | 6,819,481   |  
|Net common share settlement agreement                                                                                         |        |                            |        |              |        |  | (99,293                  | )      |  |                    | (993    | ) |                                                      |   | (993,923   | )     |  |   |             |   |  |   |            |   |  |   | (994,916    | )
|Common stock issued for:                                                                                                      |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Employee grant vesting                                                                                                        |        |                            |        |              |        |  | 460,166                  |        |  |                    | 4,602   |   |                                                      |   | (4,602     | )     |  |   |             |   |  |   |            |   |  |   |            |  
|Contractor services                                                                                                           |        |                            |        |              |        |  | 3,500                    |        |  |                    | 35      |   |                                                      |   | 67,791     |       |  |   |             |   |  |   |            |   |  |   | 67,826      |  
|Stock options and warrant exercises                                                                                           |        |                            |        |              |        |  | 58,000                   |        |  |                    | 580     |   |                                                      |   | 244,870    |       |  |   |             |   |  |   |            |   |  |   | 245,450     |  
|Employee compensatory share grants and stock options as a development stage enterprise (since October 1, 2006)                |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   | 2,359,434  |       |  |   |             |   |  |   |            |   |  |   | 2,359,434   |  
|Common stock issued as a development stage enterprise (since October 1, 2006) for:                                            |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Lease acquisition on December 22, 2006 at a fair market value of $4.61 per share                                              |        |                            |        |              |        |  | 25,000                   |        |  |                    | 250     |   |                                                      |   | 115,000    |       |  |   |             |   |  |   |            |   |  |   | 115,250     |  
|Stock options exercises on October 13 and 20, 2006 at prices of $6.00 and $6.75 per share, respectively                       |        |                            |        |              |        |  | 14,000                   |        |  |                    | 140     |   |                                                      |   | 50,960     |       |  |   |             |   |  |   |            |   |  |   | 51,100      |  
|Employee share grant vesting at prices ranging from $3.79 to $6.80 per share from October 1 to December 31, 2006              |        |                            |        |              |        |  | 223,917                  |        |  |                    | 2,239   |   |                                                      |   | (2,239     | )     |  |   |             |   |  |   |            |   |  |   |            |  
|Contractor services on November 2, 2006 at a fair market value of $4.47 per share for services completed on September 1,
2006 |        |                            |        |              |        |  | 300,000                  |        |  |                    | 3,000   |   |                                                      |   | 1,338,000  |       |  |   |             |   |  |   |            |   |  |   | 1,341,000   |  
|Net Loss                                                                                                                      |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   | (13,987,465 | ) |  | $ | (4,501,471 | ) |  |   | (18,488,936 | )
|                                                                                                                              |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2006                                                                                                  |        |                           |        | $            |       |  | 51,389,295               |        |  | $                  | 513,893 |   |                                                      | $ | 45,669,956 |       |  | $ | (30,972,177 | ) |  | $ | (4,501,471 | ) |  | $ | 10,710,201  |  
|                                                                                                                              |        |                            |        |              |        |  |                          |        |  |                    |         |   |                                                      |   |            |       |  |   |             |   |  |   |            |   |  |   |             |  



See accompanying notes to the
financial statements.



F-5



---

##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Statement of Stockholders
Equity(Continued)



|                                                                                                                                                |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------ | -------------------------- | ------ | ------------ | ------ | ------------------------ | ---------- |  | ------------------ | ------- |  | ---------------------------------------------------- | ---------- | - | ----- | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                |        | Convertiblepreferred stock |        | Common stock |        | Additionalpaid-incapital |            |  | Accumulateddeficit |         |  | DeficitAccumulatedafter re-entryintodevelopmentstage |            |   | Total |  
|                                                                                                                                                | Shares |                            | Amount |              | Shares |                          | Amount     |  |                    |         | 
|Employee compensatory share grants and stock options as a development stage enterprise (since October 1, 2006)                                  |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 3,647,312  |   |       |   |             |   |  |   |             |   |  |   | 3,647,312   |  
|Stock Options issued as a development stage enterprise (since October 1, 2006) for:                                                             |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  
|Unproved property acquisition on August 21, 2007 at an exercise price of $15.10 per share with the fair market value computed on the
grant date |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 423,987    |   |       |   |             |   |  |   |             |   |  |   | 423,987     |  
|Warrants issued as a development stage enterprise (since October 1, 2006) for:                                                                  |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  
|Investor relations services on October 25, 2007 at an exercise price of $12.06 with the fair market value computed on the grant
date            |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 118,889    |   |       |   |             |   |  |   |             |   |  |   | 118,889     |  
|Common stock issued as a development stage enterprise (since October 1, 2006) for:                                                              |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  
|Private Equity Placement financing on March 30, 2007 at a purchase price of $4.65 per share                                                     |        |                            |        |              |        |                          | 2,693,552  |  |                    | 26,936  |  |                                                      | 11,826,815 |   |       |   |             |   |  |   |             |   |  |   | 11,853,751  |  
|Private Equity Placement warrant exercises at prices ranging from $12.24 to $15.35 per share from August 10 to August 23,
2007                  |        |                            |        |              |        |                          | 1,037,012  |  |                    | 10,370  |  |                                                      | 6,263,552  |   |       |   |             |   |  |   |             |   |  |   | 6,273,922   |  
|Series B warrant exercises at prices ranging from $10.71 to $12.60 per share from July 26 to September 21, 2007                                 |        |                            |        |              |        |                          | 28,143     |  |                    | 281     |  |                                                      | 130,584    |   |       |   |             |   |  |   |             |   |  |   | 130,865     |  
|Series B warrant exercises at prices ranging from $12.62 to $13.15 per share from October 2 to December 19, 2007                                |        |                            |        |              |        |                          | 4,571      |  |                    | 46      |  |                                                      | 21,209     |   |       |   |             |   |  |   |             |   |  |   | 21,255      |  
|Lease acquisition on January 16, 2007 at a fair market value of $5.47 per share                                                                 |        |                            |        |              |        |                          | 5,000      |  |                    | 50      |  |                                                      | 27,300     |   |       |   |             |   |  |   |             |   |  |   | 27,350      |  
|Lease acquisition on March 2, 2007 at a fair market value of $4.98 per share                                                                    |        |                            |        |              |        |                          | 2,500      |  |                    | 25      |  |                                                      | 12,425     |   |       |   |             |   |  |   |             |   |  |   | 12,450      |  
|Stock options exercises on at prices ranging from $7.22 to $7.25 from January 8 to January 9, 2007                                              |        |                            |        |              |        |                          | 20,000     |  |                    | 200     |  |                                                      | 72,800     |   |       |   |             |   |  |   |             |   |  |   | 73,000      |  
|Stock options exercises on at prices ranging from $8.30 to $13.75 from July 10 to August 28, 2007                                               |        |                            |        |              |        |                          | 52,500     |  |                    | 525     |  |                                                      | 191,100    |   |       |   |             |   |  |   |             |   |  |   | 191,625     |  
|Stock options exercises on at prices ranging from $12.03 to $13.90 from October 24 to December 7, 2007                                          |        |                            |        |              |        |                          | 127,000    |  |                    | 1,270   |  |                                                      | 602,930    |   |       |   |             |   |  |   |             |   |  |   | 604,200     |  
|Employee share grant vesting at prices ranging from $4.89 to $6.38 per share from January 1 to March 31, 2007                                   |        |                            |        |              |        |                          | 34,417     |  |                    | 344     |  |                                                      | (344       | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $5.24 to $9.06 per share from April 1 to June 30, 2007                                      |        |                            |        |              |        |                          | 125,048    |  |                    | 1,250   |  |                                                      | (1,250     | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $7.20 to $15.35 per share from July 1 to September 30, 2007                                 |        |                            |        |              |        |                          | 149,000    |  |                    | 1,490   |  |                                                      | (1,490     | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $11.64 to $17.30 per share from October 1 to December 31, 2007                              |        |                            |        |              |        |                          | 40,667     |  |                    | 407     |  |                                                      | (407       | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Contractor services on April 24 and September 4, 2007 at a fair market value of $4.95 per share for services completed on
March 22, 2007        |        |                            |        |              |        |                          | 200,000    |  |                    | 2,000   |  |                                                      | 988,000    |   |       |   |             |   |  |   |             |   |  |   | 990,000     |  
|Contractor services on June 8, 2007 at a fair market value of $7.35 per share for services completed on June 8, 2007                            |        |                            |        |              |        |                          | 15,000     |  |                    | 150     |  |                                                      | 110,100    |   |       |   |             |   |  |   |             |   |  |   | 110,250     |  
|Contractor services as deferred compensation from 2006                                                                                          |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 11,425     |   |       |   |             |   |  |   |             |   |  |   | 11,425      |  
|Net Loss                                                                                                                                        |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   | (15,749,005 | ) |  |   | (15,749,005 | )
|                                                                                                                                                |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2007                                                                                                                    |        |                           |        | $            |       |                          | 55,923,705 |  | $                  | 559,237 |  | $                                                    | 70,114,893 |   |       | $ | (30,972,177 | ) |  | $ | (20,250,476 | ) |  | $ | 19,451,477  |  
|                                                                                                                                                |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |            |   |       |   |             |   |  |   |             |   |  |   |             |  



See accompanying notes to
Consolidated Financial Statements



F-6



---

##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Statement of Stockholders
Equity(Continued)



|                                                                                                                                                                                                                      |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | -------------------------- | ------ | ------------ | ------ | ------------------------ | ---------- |  | ------------------ | ------- |  | ---------------------------------------------------- | ----------- | - | ----- | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                                                                                      |        | Convertiblepreferred stock |        | Common stock |        | Additionalpaid-incapital |            |  | Accumulateddeficit |         |  | DeficitAccumulatedafter re-entryintodevelopmentstage |             |   | Total |  
|                                                                                                                                                                                                                      | Shares |                            | Amount |              | Shares |                          | Amount     |  |                    |         | 
|Employee compensatory share grants and stock options as a development stage enterprise (since October 1, 2006)                                                                                                        |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 3,580,898   |   |       |   |             |   |  |   |             |   |  |   | 3,580,898   |  
|Call spread premium purchased in connection with issuance of 8.00% Convertible Senior Notes as a development stage enterprise (since
October 1, 2006) on March 8, 2008                                                |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | (5,850,000  | ) |       |   |             |   |  |   |             |   |  |   | (5,850,000  | )
|Forward purchase transaction purchased in connection with issuance of 8.00% Convertible Senior Notes as a development stage enterprise (since
October 1, 2006) on March 8, 2008                                       |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | (15,000,000 | ) |       |   |             |   |  |   |             |   |  |   | (15,000,000 | )
|Stock Options issued as a development stage enterprise (since October 1, 2006) for:                                                                                                                                   |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  
|Professional consulting services on December 5, 2008 at an exercise price of $4.00 per share with the fair market value computed on the
grant date                                                                    |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 175,361     |   |       |   |             |   |  |   |             |   |  |   | 175,361     |  
|Warrants vested and issued as a development stage enterprise (since October 1, 2006) for:                                                                                                                             |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  
|Private Equity Placement financing fees on August 31, 2008 at an exercise price of $14.21 per share with the fair market value computed
on the grant date                                                             |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      | 3,999,334   |   |       |   |             |   |  |   |             |   |  |   | 3,999,334   |  
|Common stock issued as a development stage enterprise (since October 1, 2006) for:                                                                                                                                    |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  
|At-the-Market (ATM) Equity trades at prices ranging from $8.95 to $11.52 per share from July 1 to August 15, 2008                                                                                                     |        |                            |        |              |        |                          | 2,718,173  |  |                    | 27,182  |  |                                                      | 24,133,137  |   |       |   |             |   |  |   |             |   |  |   | 24,160,319  |  
|Private Equity Placement financing at prices ranging from $4.24 to $5.00 per share from November 14 to December 12,
2008                                                                                              |        |                            |        |              |        |                          | 4,360,417  |  |                    | 43,604  |  |                                                      | 18,674,859  |   |       |   |             |   |  |   |             |   |  |   | 18,718,463  |  
|Series B warrant exercise at a market price of $16.60 per share on January 18, 2008                                                                                                                                   |        |                            |        |              |        |                          | 2,000      |  |                    | 20      |  |                                                      | 9,280       |   |       |   |             |   |  |   |             |   |  |   | 9,300       |  
|Series B warrant exercise at a market price of $8.56 per share on April 8, 2008                                                                                                                                       |        |                            |        |              |        |                          | 1,990      |  |                    | 20      |  |                                                      | 9,234       |   |       |   |             |   |  |   |             |   |  |   | 9,254       |  
|Series B warrant exercises at market prices ranging from $9.95 to $11.70 per share from July 22 to August 8, 2008                                                                                                     |        |                            |        |              |        |                          | 2,000      |  |                    | 20      |  |                                                      | 9,280       |   |       |   |             |   |  |   |             |   |  |   | 9,300       |  
|Lease acquisition on January 16, 2008 at a fair value of $9.93 per share                                                                                                                                              |        |                            |        |              |        |                          | 1,000      |  |                    | 10      |  |                                                      | 9,920       |   |       |   |             |   |  |   |             |   |  |   | 9,930       |  
|Contractor services for the construction of our Thermo No. 1 geothermal power plant from January 4 to February 2, 2008 with a
fair market value computed on the grant date at prices ranging from $9.84 to $14.35     |        |                            |        |              |        |                          | 71,514     |  |                    | 715     |  |                                                      | 819,259     |   |       |   |             |   |  |   |             |   |  |   | 819,974     |  
|Contractor services for the construction of our Thermo No. 1 geothermal power plant on September 25, 2008 with a fair market value
computed on the grant date at a price of $4.51                                     |        |                            |        |              |        |                          | 100,000    |  |                    | 1,000   |  |                                                      | 418,000     |   |       |   |             |   |  |   |             |   |  |   | 419,000     |  
|Contractor services for to the construction of our Thermo No. 1 geothermal power plant from October 31 to December 16, 2008
with a fair market value computed on the grant date at prices ranging from $3.99 to $4.35 |        |                            |        |              |        |                          | 147,265    |  |                    | 1,473   |  |                                                      | 598,529     |   |       |   |             |   |  |   |             |   |  |   | 600,002     |  
|Stock options exercises on at prices ranging from $8.83 to $9.55 from February 11 to February 26, 2008                                                                                                                |        |                            |        |              |        |                          | 102,500    |  |                    | 1,025   |  |                                                      | 481,850     |   |       |   |             |   |  |   |             |   |  |   | 482,875     |  
|Stock options exercises on at a price of $8.06 on June 25, 2008                                                                                                                                                       |        |                            |        |              |        |                          | 625        |  |                    | 6       |  |                                                      | 3,863       |   |       |   |             |   |  |   |             |   |  |   | 3,869       |  
|Stock options exercises on at prices ranging from $10.02 to $11.71 from July 21 to August 11, 2008                                                                                                                    |        |                            |        |              |        |                          | 45,000     |  |                    | 450     |  |                                                      | 163,550     |   |       |   |             |   |  |   |             |   |  |   | 164,000     |  
|Employee share grant vesting at prices ranging from $8.71 to $14.12 per share from January 1 to March 31, 2008                                                                                                        |        |                            |        |              |        |                          | 3,166      |  |                    | 32      |  |                                                      | (32         | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $9.55 to $10.45 per share from April 1 to June 30, 2008                                                                                                           |        |                            |        |              |        |                          | 38,767     |  |                    | 387     |  |                                                      | (387        | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $7.36 to $10.40 per share from July 1 to September 30, 2008                                                                                                       |        |                            |        |              |        |                          | 667        |  |                    | 7       |  |                                                      | (7          | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Employee share grant vesting at prices ranging from $3.55 to $3.60 per share from October 1 to December 31, 2008                                                                                                      |        |                            |        |              |        |                          | 666        |  |                    | 7       |  |                                                      | (7          | ) |       |   |             |   |  |   |             |   |  |   |            |  
|Net Loss                                                                                                                                                                                                              |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   | (45,485,034 | ) |  |   | (45,485,034 | )
|                                                                                                                                                                                                                      |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2008                                                                                                                                                                                          |        |                           |        | $            |       |                          | 63,519,455 |  | $                  | 635,195 |  | $                                                    | 102,350,814 |   |       | $ | (30,972,177 | ) |  | $ | (65,735,510 | ) |  | $ | 6,278,322   |  
|                                                                                                                                                                                                                      |        |                            |        |              |        |                          |            |  |                    |         |  |                                                      |             |   |       |   |             |   |  |   |             |   |  |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Consolidated Statements of Cash Flows



|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------------ | - | -------------------------------------------------------------------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ------------ | -
|                                                                            |  | Year Ended December 31, |              |   | For the periodafter re-entryinto developmentstage (October 1,2006 throughDecember
31,) |  
|                                                                            |  | 2008                    |              |   | 2007                                                                                   |   |             | 2006 |  |   | 2008        |  
|Cash flows from operating activities:                                       |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Net loss                                                                    |  | $                       | (45,485,034  | ) |                                                                                        | $ | (15,749,005 | )    |  | $ | (18,488,936 | ) |  | $ | (65,735,510  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Depreciation, amortization and accretion expense                            |  |                         | 304,259      |   |                                                                                        |   | 272,375     |      |  |   | 202,234     |   |  |   | 632,071      |  
|Deferred financing costs amortization                                       |  |                         | 593,393      |   |                                                                                        |   |            |      |  |   |            |   |  |   | 593,393      |  
|Bad debt expense                                                            |  |                         | 162,200      |   |                                                                                        |   |            |      |  |   |            |   |  |   | 162,200      |  
|Write off of abandoned patent applications                                  |  |                         | 14,668       |   |                                                                                        |   | 111,460     |      |  |   | 47,965      |   |  |   | 145,445      |  
|Write off of power project lease acquisitions                               |  |                         | 331,720      |   |                                                                                        |   |            |      |  |   |            |   |  |   | 331,720      |  
|Unsuccessful and impaired wells                                             |  |                         | 13,624,352   |   |                                                                                        |   |            |      |  |   |            |   |  |   | 13,624,352   |  
|Impairment of capitalized acquisition costs                                 |  |                         |             |   |                                                                                        |   |            |      |  |   | 806,772     |   |  |   |             |  
|Gain on completion of contract                                              |  |                         | (75,357      | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (75,357      | )
|Loss (gain) on disposal of assets                                           |  |                         | 30,382       |   |                                                                                        |   | (100        | )    |  |   | 5,791       |   |  |   | 33,266       |  
|Loss on the sale of securities                                              |  |                         |             |   |                                                                                        |   |            |      |  |   | 8,512       |   |  |   |             |  
|Common stock, stock options and warrants issued for services                |  |                         | 3,756,259    |   |                                                                                        |   | 4,877,876   |      |  |   | 10,587,742  |   |  |   | 11,004,994   |  
|Loss on sale of minority interest in subsidiary                             |  |                         | 5,313,433    |   |                                                                                        |   |            |      |  |   |            |   |  |   | 5,313,433    |  
|Minority interest in operations of subsidiary                               |  |                         | (1,791,817   | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (1,791,817   | )
|Withholding tax for net share issuance                                      |  |                         |             |   |                                                                                        |   |            |      |  |   | (994,916    | ) |  |   |             |  
|Decrease increase in accounts receivable                                    |  |                         |             |   |                                                                                        |   | 72,700      |      |  |   | 49,935      |   |  |   | 3,550        |  
|Increase (decrease) in unbilled receivable                                  |  |                         | 192,157      |   |                                                                                        |   | (192,157    | )    |  |   |            |   |  |   |             |  
|Increase in other assets                                                    |  |                         | (804,823     | ) |                                                                                        |   | (138,032    | )    |  |   | (77,503     | ) |  |   | (919,484     | )
|Decrease (increase) in interest receivable                                  |  |                         | (46,091      | ) |                                                                                        |   | 398,250     |      |  |   | (388,247    | ) |  |   | 212,330      |  
|Increase in account payable and accrued liabilities                         |  |                         | 805,778      |   |                                                                                        |   | 3,575,970   |      |  |   | 325,754     |   |  |   | 4,481,686    |  
|(Decrease) increase in unearned/deferred revenues                           |  |                         | 200,000      |   |                                                                                        |   | (24,433     | )    |  |   | (647        | ) |  |   | 200,000      |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Net cash used in operating activities                                       |  |                         | (22,874,521  | ) |                                                                                        |   | (6,795,096  | )    |  |   | (7,915,544  | ) |  |   | (31,783,728  | )
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Cash flows from investing activities:                                       |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Purchase of restricted marketable equity securities                         |  |                         | (8,687,174   | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (8,687,174   | )
|Proceeds from the maturity of restricted marketable equity securities       |  |                         | 2,262,000    |   |                                                                                        |   |            |      |  |   |            |   |  |   | 2,262,000    |  
|Proceeds from the sale of short term investments                            |  |                         |             |   |                                                                                        |   |            |      |  |   | 525,000     |   |  |   |             |  
|Decrease (increase) in notes receivable                                     |  |                         | 207,500      |   |                                                                                        |   | 5,047,552   |      |  |   | (5,547,552  | ) |  |   | 5,255,052    |  
|Cost of attempted acquisition                                               |  |                         |             |   |                                                                                        |   |            |      |  |   | (806,772    | ) |  |   |             |  
|Increase in deposits                                                        |  |                         | (2,834,448   | ) |                                                                                        |   | (576,440    | )    |  |   | (50,800     | ) |  |   | (3,410,888   | )
|Decrease (increase) in restricted cash                                      |  |                         | (20,900,839  | ) |                                                                                        |   | 325,000     |      |  |   |            |   |  |   | (20,575,839  | )
|Increase in intangible assets                                               |  |                         | (1,112,730   | ) |                                                                                        |   | (92,783     | )    |  |   | (344,861    | ) |  |   | (1,256,552   | )
|Purchase of equipment                                                       |  |                         | (215,464     | ) |                                                                                        |   | (249,763    | )    |  |   | (271,998    | ) |  |   | (540,761     | )
|Acquisition of power project leases                                         |  |                         | (760,471     | ) |                                                                                        |   | (5,334,608  | )    |  |   |            |   |  |   | (6,095,079   | )
|Acquisition of land                                                         |  |                         | (1,811,063   | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (1,811,063   | )
|Well field development-in-progress costs                                    |  |                         | (32,907,343  | ) |                                                                                        |   | (4,750,525  | )    |  |   |            |   |  |   | (37,657,868  | )
|Construction-in-progress costs                                              |  |                         | (38,792,019  | ) |                                                                                        |   | (603,814    | )    |  |   |            |   |  |   | (39,395,833  | )
|Power project equipment deposits                                            |  |                         | (634,050     | ) |                                                                                        |   | (3,562,500  | )    |  |   |            |   |  |   | (4,196,550   | )
|Asset retirement obligation                                                 |  |                         | (26,453      | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (26,453      | )
|Proceeds from the sale of equipment                                         |  |                         | 18,403       |   |                                                                                        |   | 5,000       |      |  |   |            |   |  |   | 23,403       |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Net cash used in investing activities                                       |  |                         | (106,194,151 | ) |                                                                                        |   | (9,792,881  | )    |  |   | (6,496,983  | ) |  |   | (116,113,605 | )
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Cash flows from financing activities:                                       |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Proceeds from exercise of common stock warrants                             |  |                         | 27,854       |   |                                                                                        |   | 6,426,043   |      |  |   | 51,300      |   |  |   | 6,453,897    |  
|Proceeds from exercise of common stock options                              |  |                         | 650,744      |   |                                                                                        |   | 868,825     |      |  |   | 245,250     |   |  |   | 1,570,669    |  
|Proceeds from the issuance of 8.00% convertible senior notes                |  |                         | 55,000,000   |   |                                                                                        |   |            |      |  |   |            |   |  |   | 55,000,000   |  
|Proceeds from the issuance of 7.00% senior secured note (non-recourse)      |  |                         | 26,130,873   |   |                                                                                        |   |            |      |  |   |            |   |  |   | 26,130,873   |  
|Principal payments of 7.00% senior secured note (non-recourse)              |  |                         | (377,743     | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (377,743     | )
|Proceeds from ATM equity financing                                          |  |                         | 24,160,319   |   |                                                                                        |   |            |      |  |   |            |   |  |   | 24,160,319   |  
|Purchase of forward stock purchase transaction                              |  |                         | (15,000,000  | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (15,000,000  | )
|Purchase of call spread option transaction                                  |  |                         | (5,850,000   | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (5,850,000   | )
|Incurrence of deferred financing fees                                       |  |                         | (4,172,728   | ) |                                                                                        |   |            |      |  |   |            |   |  |   | (4,172,728   | )
|Proceeds from issuance of note payable                                      |  |                         | 900,000      |   |                                                                                        |   |            |      |  |   |            |   |  |   | 900,000      |  
|Proceeds from minority interest capital contribution                        |  |                         | 24,503,500   |   |                                                                                        |   |            |      |  |   |            |   |  |   | 24,503,500   |  
|Proceeds from the sale of common stock in private equity placement          |  |                         | 18,718,463   |   |                                                                                        |   | 11,853,751  |      |  |   |            |   |  |   | 30,572,214   |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Net cash provided by financing activities                                   |  |                         | 124,691,282  |   |                                                                                        |   | 19,148,619  |      |  |   | 296,550     |   |  |   | 143,891,001  |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Net increase (decrease) in cash and cash equivalents                        |  |                         | (4,377,390   | ) |                                                                                        |   | 2,560,642   |      |  |   | (14,115,977 | ) |  |   | (4,006,332   | )
|Cash and cash equivalents at beginning of period                            |  |                         | 5,912,210    |   |                                                                                        |   | 3,351,568   |      |  |   | 17,467,545  |   |  |   | 5,541,152    |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  
|Cash and cash equivalents at end of period                                  |  | $                       | 1,534,820    |   |                                                                                        | $ | 5,912,210   |      |  | $ | 3,351,568   |   |  | $ | 1,534,820    |  
|                                                                            |  |                         |              |   |                                                                                        |   |             |      |  |   |             |   |  |   |              |  

See accompanying notes to consolidated financial statements.



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RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Basis of Presentation

Nature of Business

We are an environmental energy
technology company focused on geothermal power development and technology licensing. We operate two business segments: Power Systems and our Transportation & Industrial business. Our Power Systems segment develops clean, renewable
geothermal electric power plants and bottom-cycling operations. 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 Well to Wheels strategy in an effort to produce a positive impact on the environment and economically
beneficial results for our stockholders. By executing our Well to Wheels strategy, we aim to become both a producer of clean, geothermal electric power as well as, a provider of electric and hybrid-electric vehicle technologies and
products.

Power Systems Segment

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.

We have initiated the development of eight
geothermal projects in our Power Systems segment to date. We completed the major construction of the cooling towers and transmission lines and installed the power generating units at our first 10 megawatt (MW) geothermal power plant,
located in Beaver County, Utah, in October 2008. We refer to this project as the Thermo No. 1 project or the Thermo No. 1 geothermal power plant. We placed the plant in service in the first quarter of 2009 and we expect the Thermo
No. 1 geothermal power plant to become operational at or near full capacity in the first part of 2009. For a discussion of the revenues, profit/loss and total assets of the Power Systems segment for the years ended December 31, 2008, 2007
and 2006, please see Note 19, Business Segments below.

We are in the process of obtaining permits for the development of seven other
geothermal power projects we have initiated. These projects are located in Utah, Nevada, New Mexico and Oregon.

Our ability to complete
the development of our geothermal power projects is dependent on our ability to obtain adequate financing to fund those projects. We intend to evaluate a variety of alternatives to finance the development of our projects. These alternatives could
include project financing and tax equity financing arrangements under our existing commitment letter (the Commitment Letter) with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), government funding
from grants, loan guarantees or private activity bonds, joint ventures, the sale of one or more of our projects or interests therein, 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 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.

We recently retained Calyon Securities (USA) Inc. (Calyon) to explore potential strategic relationships that could provide
additional options for funding, implementing and accelerating our development efforts. The



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##### Table of Contents

potential for significant additional power production from the geothermal resource that we identified and evaluated as part of our Thermo No. 1 project
has generated a number of inquiries from potential financial partners wishing to explore a purchase, joint venture or other transaction in connection with the further development of this large resource. We engaged Calyon to help us evaluate the
proposals and negotiate any potential funding, development, or asset sale structures that we believe would enhance our ability to complete our objectives. We continue to work with Calyon to advance this process.

The current economic conditions in the United States and around the world make it more difficult to secure the financing and complete the other various
steps necessary to develop our projects. Nevertheless, we intend to continue to focus on the rapid deployment of our geothermal power projects.

We believe that some of our projects will allow for expansions of the power plants through bottom-cycling operations. When the temperature of the geothermal fluids produced from the well field is sufficiently high, the
geothermal fluids which are discharged from the plant can potentially carry enough heat to generate additional electricity. In a bottom-cycling operation, the discharged geothermal fluids are passed through additional generating units to generate
electricity without the risk and expense of drilling new wells.

We also believe the technologies used in our geothermal power projects can
also be used to generate electricity from waste heat associated with certain industrial operations. We intend to explore opportunities to expand our Power Systems segment to include the development of facilities that utilize waste heat to generate
electricity. We believe there are a number of companies that could benefit from these waste heat recovery facilities, including cement plants, conventional power plants, steel mills, and others, which would serve to reduce their overall long-term
energy costs.

Transportation & Industrial Segment

Our Transportation & Industrial segment focuses on commercializing our electric motor, generator and drive technologies, such as our series plug-in hybrid vehicle (PHEV) with range extender
technologies, into applications. In 2008, we began work to integrate a Symetron traction motor, generator and controller drive in a SUV demonstration vehicle expected to achieve 100 mpg equivalent to demonstrate the benefits of our plug-in
electric drive system in SUV and light truck applications. Our plug-in electric drive system is designed to allow light trucks and SUVs to achieve the equivalent of over 100 mpg in typical local daily driving with near zero emissions, by using
electricity instead of petroleum as the primary fuel. Pacific Gas & Electric of California agreed in February 2008 to initially purchase two test vehicles. The SUV demonstration vehicle is being built in cooperation with a leading global
OEM. During 2007 and early 2008, we entered into several other agreements and collaborative arrangements with large manufacturers to explore additional potential applications of our motor and drive technologies, including a collaborative arrangement
with Hyundai Heavy Industries (HHI) of Korea and a license agreement with Wilson Automotive of Canada.

We intend to continue
to explore opportunities to commercialize our motor and drive technologies. However, the recent economic downturn has had a dramatic and adverse effect on the automotive industry and other large industrial manufacturers that would otherwise 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. In light of the current economic conditions, we have reduced
our resources committed to new developmental efforts. We intend to evaluate the prospects for our technologies 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. For a discussion of the revenues, profit/loss and total assets of the Transportation & Industrial segment for the years ended December 31, 2008, 2007 and 2006, please see Note 19, Business Segments in our audited
consolidated financial statements.



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##### Table of Contents

Development Stage Enterprise

We currently operate as a development stage enterprise as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. In
2005, we transitioned from a development stage to an operating stage enterprise for accounting purposes. In the fourth quarter of 2006, our management reassessed our operations and determined that we should report as a development stage enterprise
effective October 1, 2006. The decision was primarily based upon the fact that anticipated licensing revenue from the Transportation & Industrial segment did not materialize as expected, our determination that our efforts to license
our technologies would take longer than originally anticipated, and a shift in our primary business focus to geothermal power systems development, requiring us to raise additional capital and perform many development stage activities that do not
immediately generate revenues. Accordingly, the consolidated statements of operations and cash flows include cumulative balances from the re-entry into the development stage date of October 1, 2006 to December 31, 2008.

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

We expect to obtain project financing for each geothermal
power project that we develop. During the third quarter of 2008, we obtained project financing for our geothermal project near Beaver, Utah, which we refer to as the Thermo No. 1 project. The project financing arrangements for the Thermo
No. 1 project included approximately $31.2 million of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed annual interest rate of 7.00%. Our subsidiary, Thermo No. 1 BE-01, LLC (Thermo
Subsidiary), received proceeds from the debt financing of approximately $26.1 million for construction of the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the effect of the original issue
discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. From the proceeds of the debt financing, we received approximately $14.1 million from our Thermo Subsidiary as repayment for construction costs at the
Thermo No. 1 project that were incurred by us prior to closing the project financing. In addition, pursuant to the project financing agreements, our Thermo Subsidiary received a capital contribution of $3.7 million from the minority member (the
Class A member) of the Thermo Subsidiary. In October 2008, our Thermo Subsidiary received the balance of the amount due under the financing agreement in the form of an additional $20.8 million capital contribution from the Class A
member. See Note 12, Long-Term Senior Secured



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Note (non-recourse) and Convertible Senior Notes for further discussion of the financing arrangements for the Thermo No. 1 project.

On November 13, 2008, we entered into an agreement (the Fletcher Agreement) with Fletcher International, Ltd. (selling security
holder). Pursuant to the terms of the Fletcher Agreement, on November 14, 2008, the selling security holder purchased 2,000,000 shares of our common stock at a fixed price of $5.00 per share and, on December 12, 2008, purchased
2,360,417 shares of our common stock for $4.23654 per share, which is a price per share equal to $10,000,000 divided by 110% of the average of the daily volume-weighted average price on the NYSE Arca exchange for the common stock for the ten
business days ending on and including December 11, 2008. The gross proceeds from the closing of the November 14, 2008 and December 12, 2008 private placement transactions were $20,000,000, before deducting fees and commissions. We
paid commissions of $1,232,000 to a placement agent in connection with the closing of the private placement transactions.

Basis of Presentation

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As discussed above, we re-entered the development stage in October 2006. As reflected in the accompanying consolidated financial statements, as of December 31, 2008, we
had cash and cash equivalents on hand of $1.5 million and accounts payable and accrued liabilities of $64.5 million. Cash used in operations totaled approximately $22.9 million for the year ended December 31, 2008 and the accumulated deficit
and deficit accumulated after re-entry into development stage totaled $96.7 million. We have incurred substantial losses since inception and we are not operating at cash breakeven.

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

Although we raised substantial proceeds during the year ended December 31, 2008, as described above, we have used
or committed a substantial portion of these proceeds to fund our operations and development efforts. Further, we are not currently generating significant revenues, and our cash and cash equivalents will continue to be depleted by our ongoing
development efforts. Until we are in a position to generate significant revenues, we will need to continue to raise additional funds to continue operating as a going concern. We may seek this additional funding through the issuance of debt,
preferred stock, equity or a combination of these instruments. We may also acquire financing through 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 prepaid 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. The accompanying consolidated
financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

New Accounting Pronouncements

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



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

In October 2008, the FASB FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3), which clarified the application of
SFAS No. 157 in an inactive market and demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The adoption of FSP 157-3 did not have an impact on the Companys determination of fair value for financial assets. See Note18, Fair Value Measurements below for additional discussion of our fair
value measurements.

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

Concentration of Credit Risk

We maintain a portion of our available unrestricted cash in deposit accounts in one bank in Utah. At times, cash balances in these accounts may exceed
federally insured limits. From time to time, we invest a portion of our unrestricted cash in an AIM Funds money market account, which is not affiliated with the bank where we maintain our deposit accounts. The money market account earns interest
based on a variable rate. At December 31, 2008, our balance in the money market account was $1.5 million and the interest rate applicable to the money market account was 1.33% per annum. The average interest rate applicable to the money
market account during the quarter ended and year ended December 31, 2008 was 1.92% and 2.59% per annum, respectively.

Cash from
our checking account is swept nightly into an interest bearing account. At December 31, 2008, we had a balance of $0.1 million in this sweep account and the interest rate applicable to the sweep account was 1.11% per annum.

We invest our restricted cash balances in a money market fund managed by JP Morgan Fund. At December 31, 2008, we had a balance of $20.9 million
invested in this money market fund and the interest rate applicable to the fund was 1.53% per annum.

Project financing proceeds
received by our subsidiaries are subject to the terms and conditions of those arrangements. On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into various definitive agreements
(the Thermo Financing Agreements) that provide debt financing and tax equity capital for the Thermo No. 1 project totaling $50.6 million. Pursuant to the Thermo Financing Agreements, the funds received can only be used for the
purposes permitted by the Thermo Financing Agreements. Any funds not specifically allocated are restricted and can be used only by our Thermo Subsidiary for certain operating expenses. An independent administrative agent has been appointed to
administer all of the Thermo Subsidiarys cash deposits and disbursements. The independent administrative agent has deposited the cash into a money market fund, which earns interest at a variable rate. At December 31, 2008, the interest
rate applicable to this money market fund was 1.53% per annum.

We reviewed the underlying investments included in the money market
accounts described above and concluded that the money market accounts are properly classified as cash equivalents for financial statement purposes. Due to the nature of the investments included in these money market accounts, we consider it

reasonable to expect that the fair market values of these investments will not be significantly impacted by a



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change in interest rates, and that they can be liquidated for cash on short notice. We have not experienced losses in our money market accounts, and we
believe that we are not exposed to any significant credit risks relating to our money market accounts.

Concurrent with the issuance of our
Convertible Notes, we entered into a Pledge and Escrow Agreement that required us to utilize approximately $8.7 million of the gross proceeds to purchase a portfolio of U.S. Treasury Strips that were placed in escrow to secure the payment of the
first four interest payments on the Convertible Notes. In October 2008, approximately $2.2 million of the U.S. Treasury Strips matured. The proceeds from these U.S. Treasury Strips were used to pay the holders of the Convertible Notes their first
semi-annual interest payment. Accordingly, the remaining portfolio of U.S. Treasury Strips that were placed in escrow approximates $6.5 million. The effective interest rates applicable to these U.S. Treasury Strips range from 1.36% to 1.72 %
per annum. Since these U.S. Treasury Strips are backed by the United States government, we believe that we are not exposed to any significant credit risk relating to these government securities.

We do not believe we are exposed to any significant credit risk associated with our outstanding promissory note receivable totaling $0.1 million. During
the year ended December 31, 2008, we generated revenue primarily from one government contractor which was completed in 2008.

Note 2. Summary of
Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include our accounts and the accounts of our consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the prior years consolidated financial statements to conform to the current year presentation.

In August 2008, we entered into various financing arrangements in which we sold Class A membership in Thermo No. 1 BE-01, LLC (the Thermo Subsidiary) to Merrill Lynch (the Class A member) for $24.5 million
representing 78.7% of the agreed-upon value of the Thermo Subsidiary which was $31.1 million. We, through our wholly owned subsidiary maintained the Class B membership representing 21.3% of the agreed-upon value.

Under the financing arrangements, the tax benefit and profit/loss allocations is 1% to the Class B member and 99% to the Class A Member until the
Class A Member achieves a 15% internal rate of return (IRR) on the project. Upon achieving a 15% IRR, the equity ownership automatically flips so that 95% of the tax benefits and profit/loss allocations flow to us through the Class
B Member and 5% to the Class A Member.

According to financing agreements between the Company and the Class A Member, we also
contributed as equity to Thermo No. 1 the fair value of six leases (640 acres of current well field and 10,000 additional acres of surrounding leased property) to serve as security collateral for the Class A Members financing of
approximately $29,500. We also contributed as equity to Thermo No. 1 completed well field costs of approximately $26.8 million.

We
evaluated the Class A and Class B member voting rights, the minority holder's substantive participative and protective rights, and conditions outlined in FIN 46(R), Consolidation of Variable Interest Entities (revised December
2003)and interpretation of ARB No. 51 and determined that the financing arrangement should not be classified as a variable interest entity and that the subsidiary should continue to be consolidated for financial statement purposes.
In determining whether our subsidiaries should be classified as variable interest entities, we must make judgments about the minority holders substantive participative and protective rights and the other conditions outlined in FIN 46(R). 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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Use of Estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Fair Value of Financial
Instruments

The carrying amounts reported in the accompanying consolidated financial statements for cash and cash equivalents, accounts
receivable, notes receivable, interest receivable, accounts payable and accrued liabilities approximate fair values because of the immediate or short-term maturities of these financial instruments. See Note 18, Fair Value Measurements for additional
discussion below.

The carrying value and estimated fair value of our debt instruments at December 31, 2008 were as follows:



|                                         |  |                      |            |                |   |           
|---------------------------------------- |  | -------------------- | ---------- | -------------- | - | ----------
|                                         |  | December 31, 2008   
|                                         |  | Estimated Fair Value |            | Carrying Value
|Note payable                             |  | $                    | 881,411    |                | $ | 945,833   
|Long-term 9.5% senior secured note*      |  |                      | 24,670,000 |                |   | 31,000,000
|Long-term 8.00% convertible senior notes |  |                      | 31,845,000 |                |   | 56,106,767
|                                         |  |                      |            |                |   |           
|Total liabilities                        |  | $                    | 57,396,411 |                | $ | 88,052,600
|                                         |  |                      |            |                |   |           

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.

*Represents face value of debt without
consideration of the original issue discount of $5,155,156 as of December 31, 2008.

We did not have any debt instruments at
December 31, 2007.

The estimated fair value of our short-term note payable approximates the fair value of 263,108 shares of our
common stock issued on January 27, 2009 at a closing market price of $3.35 per share or $881,411 to settle the note payable totaling $950,000.

The estimated value of our long-term 7.00% senior secured note was determined using a discounted cash flow analysis utilizing the projected cash outflows and a discount rate, which was derived from market and non-market inputs.

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.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less are classified as cash equivalents.

Restricted Cash

Restricted cash at December 31,
2008 consisted of a $75,000 certificate of deposit held with a bank to secure a credit card purchasing arrangement utilized to facilitate employee travel and certain ordinary purchases for our business operations. The certificate of deposit earned
2.2% interest per annum until it matured on March 1, 2009. On March 1, 2009, we rolled over the amount from the previous certificate of deposit into new certificate of deposit that earns 1.0% interest per annum maturing on
September 1, 2009.

On August 31, 2008, we and our subsidiary Thermo No. 1 BE-01, LLC (the Thermo Subsidiary)
entered into a debt financing and tax equity capital arrangement with Merrill Lynch for the construction of our Thermo



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No. 1 geothermal power plant. Under the arrangement, Merrill Lynch provided debt financing totaling $26.1 million, net of an original issue discount of
$5.0 million and $24.5 million of tax equity capital. In addition, we contributed approximately $29.0 million, primarily of well field drilling costs that we had incurred to that date and agreed to make additional capital contributions as necessary
to cover the costs to complete the well field. Pursuant to the arrangement, both parties agreed that the cash held at the Thermo Subsidiary would be restricted for use to complete the construction, service the debt and provide for continued
operations of the Thermo No. 1 geothermal power plant. The Thermo Subsidiary cash is located in separate cash accounts which are administered by Deutsche Bank. Accordingly, since the Thermo Subsidiary cash is restricted for use, we record the
cash accounts as restricted cash. As of December 31, 2008 the Thermo Subsidiary maintained a restricted cash balance of $20.9 million. This balance is to be used to pay accounts payable relating to the construction of the plant and well field
development and to fund the distribution account and other reserve accounts.

Investments

We classify investment securities as either available-for-sale or held-to-maturity. Available-for-sale securities and are recorded at fair market value,
based on quoted market prices, and unrealized gains and losses are recorded as a component of comprehensive income (loss). Realized gains and losses, which are calculated based on the specific-identification method, are recorded in operations as
incurred. We did not have short-term investments classified as available-for-sale during the years ended December 31, 2008 and 2007, respectively. Accordingly, there was no unrealized gain or loss relating to available-for-sale short-term
investments recorded for the year ended December 31, 2008 or 2007, respectively.

Held-to-maturity securities include U.S. Government
Strips that have coupon dates and coupon amounts that correspond with the amount of interest payable for first four semi-annual interest payments to the holders of our Convertible Notes. The held-to-maturity securities are carried and amortized at
cost.

Available-for-sale and held-to-maturity securities are assessed for impairment periodically. To determine if the impairment is
other-than-temporary, we consider the duration and severity of the loss position, the strength of the underlying collateral, the term to maturity, and credit rating. For investments that are deemed other-than-temporarily impaired, losses are
recorded and payments received on these investments are recorded using the cost recovery method. Since our investments are backed by the United States government, we believe that no impairment occurred during 2008.

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a periodic basis. Management estimates an allowance for doubtful accounts by
identifying aged delinquent accounts determined by contractual terms and by using historical experience. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded when
received as a credit to the allowance.

Accounting for Geothermal Energy Activities

There are three primary phases involved in the development and construction of our geothermal power projects. During the first phase, the site is
identified and evaluated. During the second phase, the power plant, transmission lines and pipelines are constructed and the production and reinjection wells are drilled. The third and final phase is the production phase, during which the power
plant is operated over its useful life.

Site Identification and Evaluation

The first step in the site identification and evaluation phase is the identification of potential project sites. As part of the identification process, we
incur a variety of costs, which may include costs for topographical studies, geological and geophysical studies, rights to access and study properties, technical materials and maps. Regardless of whether we pursue a project at a particular site, all
of the costs associated with the identification of a potential site are considered exploratory in nature and are expensed as incurred.



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The next step in the site identification and evaluation phase is land acquisition, pursuant to which we
acquire land, lease land, or otherwise obtain the appropriate property interests to develop a potential project. Lease acquisition costs, including lease bonuses, legal costs, permit costs, and the fair value of other forms of compensation to
acquire leases are capitalized as power project leases when incurred. The power project leases are capitalized but not amortized until the related power plant is placed in service. At that time, the related power project leases are capitalized as
geothermal property plant and equipment and amortized over the estimated useful life of the geothermal power plant. From time to time, we may also purchase land outright to develop. Any land we purchase outright would not be amortized and would be
stated in our financial statements at historical cost. We have not purchased outright any property to develop at this time.

Once we have
acquired an interest in a geothermal property, we also incur costs to carry and maintain the undeveloped property until we are in a position to determine whether or not to pursue a project on the property. These costs can include delay rentals,
certain taxes on the properties, legal costs for title defense, and the maintenance of land and lease records. All of these costs are expensed when incurred.

After, or occasionally prior to, the time we acquire an interest in a property, we conduct additional internal and external studies to determine whether to initiate the development of a project at the site. As part of
this process, we may drill slim holes or conduct other activities to help identify the general location and characteristics of the potential geothermal resource. All of these costs, including slim holes, are considered exploratory in nature and are
expensed as incurred.

Well Drilling and Plant Construction

We only decide to pursue a project at a site if we determine, with a high degree of confidence, that (i) the site contains an adequate renewable geothermal resource to support a plant that will continually
produce electricity without any substantial degradation of the heat resource; and (ii) we can effectively transmit and sell the power generating at a facility. Once we have made this determination for a site, the project begins the second
development phase, consisting of construction of the power plant, transmission lines and production and reinjection wells and pipelines.

Before drilling and construction can begin, we must obtain appropriate permits. Permitting costs are capitalized as part of the project costs. We capitalize permitting costs and record them as either well field development-in-progress or
construction-in-progress.

After obtaining appropriate permits, we begin to develop the well field for the project by drilling large
diameter production holes. In general, these holes are 20 to 22 inches in diameter at the surface and telescope down to between 13 5/8 inches to 9 5/8 inches, depending upon the depth of the well and other conditions. Each hole we drill will result
in either a production well, a reinjection well, or an unsuccessful well. Production wells and reinjection wells will ultimately be used in the geothermal power plant. Therefore, drilling costs for production wells and reinjection wells are
capitalized. Drilling costs associated with unsuccessful wells are expensed in the period in which we determine they cannot be used in the production of electricity. Capitalized costs associated with well field development-in-progress are
reclassified as geothermal property, plant and equipment once the plant is placed in service and amortized over the useful life of the plant, estimated to be 35 years.

Construction of the geothermal power plant, the related transmission lines, and the required substation normally occur concurrent with or subsequent to the drilling of the production and re-injection wells. The costs
associated with construction of the power plant and related transmission lines are accumulated and capitalized over the construction period. We begin to depreciate the construction related costs over the estimated useful life of the plant once the
power plant is placed in service. The estimated useful life of our power plants is estimated to be 35 years. Our financial results could differ if we had made different judgments relating to the capitalization of drilling costs or if management's
judgments prove to be incorrect.



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As part of the financing for a project, we incur costs to obtain a report from an independent engineer
verifying the production capacity of the well field. The costs associated with the engineers report are expensed as consulting costs when incurred and other financing-related costs, such as legal costs, broker fees, and accounting fees are
capitalized when incurred.

Production Phase

The final phase of a project is the energy production phase. The energy production phase begins when the plant is completed. Operating costs incurred during the energy production phase are expensed as incurred. Prepaid commissions, if any,
pursuant to power purchase agreements relating to the project are amortized over the life of agreements. As of December 31, 2008, no geothermal power plant has been placed in service.

Capitalization of Costs

Our determination to move
forward with the process to construct the power plant, transmission lines, production wells and pipelines for a geothermal power project is based on managements determination, with a high degree of confidence, that a given site contains
adequate renewable geothermal resources to support a plant that will continually produce electricity without any substantial degradation of the heat resource. This determination involves significant management judgment and is based on the
information available at the time, which may be limited. Once this determination has been made, we begin to capitalize certain construction-related costs. Although managements determination to proceed with construction activities and
capitalize construction-related costs is based on a high degree of confidence that a sufficient geothermal resource exists, the limited information available and the uncertainties associated with potential geothermal resources could later prove our
managements judgments to be incorrect. If managements judgments with respect to a project prove to be incorrect, we may have to write-off significant costs associated with that project that were previously capitalized, which could have a
material adverse affect on our results of operations.

Property, plant and equipment

Property, plant and equipment are stated at cost. Geothermal power plants and related transmission equipment, production and re-injection wells, and power
project leases for properties on which the applicable geothermal power plant and related wells are located are capitalized at costs and depreciated or amortized over the estimated useful life of the geothermal power plant when it is placed in
service. Equipment is recorded at cost and is depreciated over the estimated useful life of the related asset. Depreciation and amortization is computed using the straight-line method for financial reporting purposes. The estimated useful lives are
as follows:



|                                                                                                            |  |          
|----------------------------------------------------------------------------------------------------------- |  | ---------
|Office software                                                                                             |  | 3-5 years
|Office equipment                                                                                            |  | 3-7 years
|Engineering software                                                                                        |  | 5-7 years
|Engineering equipment                                                                                       |  | 3-7 years
|Demonstration vehicles                                                                                      |  | 5-7 years
|Marketing equipment                                                                                         |  | 3-7 years
|Geothermal power plants, transmission equipment, production and re-injection wells and power project leases |  | 35 years 

As of December 31, 2008, no geothermal power plants have been placed in service.

Depreciation expense for the years ended December 31, 2008, 2007 and 2006 totaled $277,300, $245,800 and $182,600, respectively.

Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Leasehold improvements are depreciated over the remaining life of the lease. Upon retirement or disposition of



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equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the consolidated
statements of operations.

Intangible Assets

Costs of internally developing, maintaining or restoring patents and trademarks that are specifically identifiable and have determinate lives are capitalized. The costs of patents are amortized on a straight-line basis over the estimated
useful life or 20 years from the date of the first filing. The costs of trademarks are capitalized but not amortized because their useful lives are indefinite.

We assess recoverability of our patents by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows using a discount rate which reflects our average cost of funds.

Costs incurred to acquire the global heat transfer technology license have been capitalized and amortized on a straight-line basis over the estimated useful life of the related patents underlying and accompanying the license, or 11.5 years.

We periodically review intangible assets for impairment. Abandoned or permanently impaired intangible assets are written off and expensed
in the period when the impairment occurs.

Our power project leases are considered contract-based intangible assets as defined in FAS 141,
Business Combinations and the costs to acquire the power project leases are capitalized accordingly. Impairment of the power project leases is evaluated in accordance with FAS 142, Goodwill and Other Intangible Assets which
consists of a comparison of the fair value with its carrying amount at the balance sheet date. In accordance with FAS 142, we evaluated our intangible assets as of December 31, 2008, for impairment and determined that none of our intangible
assets were impaired.

Deferred Finance Costs

Deferred finance costs are recorded at cost and include costs relating to undertaking debt financing activities. Upon successful completion of the related financing, these costs associated with equity financings will be recorded as a
reduction of additional paid in capital or, the costs associated with debt financings are amortized as interest expense over the life to maturity of the debt. If related financing is not successfully completed, these costs will be charged to the
statement of operations.

Impairment of Long-Lived Assets

We 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.

The carrying value of other long-lived assets such as the well field drilling costs, geothermal power plant, transmission line construction costs,
equipment and intangible assets is considered impaired in accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets when the anticipated cumulative undiscounted cash flows of the related asset or group of
assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset using a discount rate which reflects our average cost of funds. In
connection with performing the FAS 144 analysis, we exercised significant judgments including the assumption that our geothermal power plant will produce electricity over 35 years and a power purchase agreement will be renewed after its expiration.

In accordance with FAS 144, we evaluated our long-lived assets for impairment as of December 31, 2008 and determined that none of our
long-lived assets have been impaired, except for one well at our Truckee project.



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Accordingly, we expensed the well at December 31, 2008 totaling $3.0 million. For further discussion of the impairment of our well costs, refer to Note
5, Geothermal Well Field Development-in-Progress.We also determined in the fourth quarter of 2008 that, although not impaired under FAS 144, two additional wells at our Thermo No. 1 project would not likely be used in the
production of electricity and were expensed accordingly.

Asset Retirement Obligations

We have incurred certain liabilities in our Power Systems business segment related to the retirement of assets in connection with drilling wells and
constructing our Thermo No. 1 geothermal power plant in Utah. These liabilities include our obligations to plug wells upon termination of our operating activities, dismantle geothermal power plants upon cessation of operations and perform
certain remedial measures related to the land on which such operations were conducted. When a new liability for an asset retirement obligation is recorded, we capitalize the costs of such liability by increasing the carrying amount of the related
power project lease. Such liability is accreted to its future value each period, and the capitalized cost is amortized over the useful life of the related geothermal power plant or 35 years. At retirement, we will either settle the obligation for
its recorded amount or incur a gain or a loss with respect thereto, as applicable. Revisions in estimated asset retirement obligations may result from changes in estimated inflation rates, discount rates, retirement costs and the estimated timing of
settling asset retirement obligations.

Income Taxes

We recognize deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or income tax returns. Deferred income tax
assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred
income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. We classify penalties and interest as income taxes as allowed by FIN 48, Accounting for Uncertainty in Income Taxes.

Revenue Recognition

Revenue is
recognized when earned in accordance with applicable accounting standards and guidance, including Staff Accounting Bulletin or SAB, No. 104, Revenue Recognition, as amended. Although we have earned limited revenue since inception, we
expect to earn revenue in the future.

Revenues generated through our Power Systems segment are primarily through the sale of electricity
in accordance with power purchase agreements entered into with investor owned utilities and municipalities. Revenues related to the sale of electricity from our geothermal power plants are recorded based upon output delivered provided at rates
specified under relevant contract terms. We began generating and transmitting nominal quantities of test electricity at our Thermo No. 1 geothermal power plant in December 2008, however we recognized no revenue from the production
of this test electricity.

Pursuant to the Thermo financing agreements with Merrill Lynch, we have agreed to serve as the engineering,
procurement and construction contractor (EPC contractor) for our Thermo Subsidiary and have guaranteed the completion of the construction of the Thermo No. 1 project. Accordingly, as EPC contractor, we received intercompany revenues
from our Thermo Subsidiary for the completion of certain construction related milestones. In addition, we have also agreed to serve as the Operations and Management manager (O&M manager) for the Thermo No. 1 geothermal power
plant. Accordingly, as O&M manager for our Thermo Subsidiary, we expect to receive quarterly fees for our services performed. We also expect to receive fees from our Thermo Subsidiary relating to achieving substantial completion of the Thermo
No. 1 power plant and for providing general administrative services. However, since the Thermo Subsidiary is a consolidated entity, these intercompany fees will be eliminated in consolidation.



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Revenue is generated through our Transportation & Industrial segment from (1) the sale of
prototypes of our motors or PHEV demonstration vehicles to private companies for testing and simulation and (2) from fees and royalties generated by the sales of products and solutions of our licensed manufacturing partners. Revenue from
subcontracted engineering services is recognized under the percentage of completion method. Costs incurred to achieve the performance criteria are deferred and recognized concurrent with the recognition of revenue unless they are determined to be
unrecoverable. For contracts in which the fee is estimated to equal 100% of the cost to complete the contract, we recognize revenue as the cost is incurred to complete the project using zero as our estimate of profit under the
percentage-of-completion method. If estimated costs exceed projected revenues for a reporting period, we recognize a loss on the contract. Under the percentage of completion method, changes in the estimated time and cost to complete the contract may
affect the time period over which the unrecognized revenues and related costs are recognized.

The revenue from the sale of prototypes is
recognized when the prototype is delivered to the customer. We accepted an initial deposit of $200,000 for production of two extended range PHEVs. The initial deposit is recorded as unearned revenue until the vehicles are delivered. If we are unable
to deliver the vehicles, the deposit will be returned.

Equity Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment
(SFAS 123R). Under the revised standard, companies may no longer account for share-based compensation transactions, such as stock options, restricted stock, and certain other potential payments using the intrinsic value method as
defined in APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies are required to account for such equity transactions using an approach in which the fair value of an award is estimated at the date of grant
and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest due to the fact that service or performance conditions are not satisfied. However, compensation expense already
recognized is not adjusted if market conditions are not met, such as when stock options expire out-of-the-money, or when options expire unexercised.

For performance-based equity compensation, management assesses the likelihood that the event will successfully occur and computes the fair value of the instrument at each quarterly balance sheet date. When the
performance is assessed as probable, expense is recognized on a pro rata basis over the estimated service period. When the performance is assessed as less than probable, no expense is recognized.

We issue shares of common stock, options to purchase shares of common stock, and warrants containing underlying shares of our common stock as payment for
services or purchase of assets to certain service providers, contractors and other non-employees. In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, stock, options or warrants issued for services is valued based on the fair value of the stock on the earlier of the date of a performance commitment agreement or the date when performance is completed. Expense is
recognized over the requisite service period of the stock award.

Stock issued for the purchase of assets is also valued based on the fair
value of the stock on the date the stock is issued or required to be issued per the purchase agreement, or the fair value of the assets acquired, whichever is more readily determinable. The assets are recorded based on the more readily determinable
fair value of the stock issued or the assets acquired.

See Note 15. Common Stock for more information regarding our stock compensation
plans.

Options and warrants granted to employees and contractors are valued by applying the fair value based method to stock-based
compensation in each period utilizing the Black-Scholes option pricing model, a generally



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accepted valuation model for determining the fair value of options. The maximum term of each option is ten years. With respect to stock options granted and
warrants issued during the years ended December 31, 2008, 2007 and 2006, the assumptions used in the Black-Scholes option-pricing model computations were as follows:



|                                  |  |                         |   |  |           |   |  |           |  
|--------------------------------- |  | ----------------------- | - |  | --------- | - |  | --------- | -
|                                  |  | Year ended December 31, |  
|                                  |  | 2008                    |   |  | 2007      |   |  | 2006      |  
|Risk-free interest rate           |  | 0.933.41               | % |  | 3.655.05 | % |  | 4.355.19 | %
|Expected dividend yield           |  | 0.0                     | % |  | 0.0       | % |  | 0.0       | %
|Volatility                        |  | 97105                  | % |  | 97101    | % |  | 109117   | %
|Expected exercise life (in years) |  | 2.0-6.0                 |   |  | 4.0-6.0   |   |  | 6.0       |  

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

Loss per Share of Common Stock

The computation of basic (loss) earnings per common share is based on the weighted average number of shares outstanding in accordance with SFAS 128, Earnings Per Share.

Stock warrants, stock options and unvested share awards are not included in the calculation of dilutive loss per common share because we have experienced
operating losses in all periods presented and, therefore, the effect would be anti-dilutive. Also see Note 17, Loss per Share of Common Stock for potentially dilutive shares.

Minority Interest in Consolidated Entities

The accompanying consolidated financial statements
include all assets, liabilities, revenues, and expenses in a subsidiary that we control, but own less than 100%. Accordingly, we recorded minority interests in the earnings and equity of that subsidiary. We record adjustments to minority interest
for allocable portions of income and loss to which the minority interest holders are entitled plus an allocable liquidated book value based upon contractual arrangements. For the year ended December 31, 2008, minority interest was $28.0
million. We also record the changes in minority interest capital accounts relative to the contractual arrangements as gains or losses on the sale of minority interest in our subsidiary. For the year ended December 31, 2008, we recorded a loss
on the sale of minority interests totaling $5.3 million.

Note 3. Restricted Short-Term and Long-Term Marketable Securities

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

On March 26, 2008, we used
approximately $7.9 million of the proceeds from the Convertible Notes to purchase four discounted U.S. Treasury Strips that have coupon dates and coupon amounts that correspond with the amount of interest payable at each semi-annual payment date of
the Convertible Notes. On April 1, 2008, we also purchased additional U.S. Treasury Strips totaling approximately $0.8 million to secure the first four interest payments on the additional $5.0 million of Convertible Notes. Under the Pledge and
Escrow Agreement, we are



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required to hold these securities to maturity. Accordingly, the discounts are amortized over the period of the coupon and recognized as interest income. At
December 31, 2008 the short-term and long-term marketable securities were classified as follows:



|                           |  |                 |           |      |   |             |  |              |  |   |          
|-------------------------- |  | --------------- | --------- | ---- | - | ----------- |  | ------------ |  | - | ---------
|Maturity                   |  | PrincipalAmount |           | Cost |   | Coupon Date |  | CouponAmount
|Short-term portion:        |  |                 |           |      |   |             |  |              |  |   |          
|03/31/09                   |  | $               | 2,000,000 |      | $ | 1,967,720   |  | 04/01/09     |  | $ | 2,000,000
|03/31/09                   |  |                 | 200,000   |      |   | 197,320     |  | 04/01/09     |  |   | 200,000  
|09/30/09                   |  |                 | 2,000,000 |      |   | 1,951,280   |  | 10/01/09     |  |   | 2,000,000
|09/30/09                   |  | $               | 200,000   |      |   | 195,860     |  | 10/01/09     |  | $ | 200,000  
|                           |  |                 |           |      |   |             |  |              |  |   |          
|                           |  |                 |           |      |   | 4,312,180   |  |              |  |   |          
|Discount amortization      |  |                 |           |      |   | 54,077      |  |              |  |   |          
|                           |  |                 |           |      |   |             |  |              |  |   |          
|Total at December 31, 2008 |  |                 |           |      | $ | 4,366,257   |  |              |  |   |          
|                           |  |                 |           |      |   |             |  |              |  |   |          



|                           |  |                 |           |      |   |             |  |              |  |   |          
|-------------------------- |  | --------------- | --------- | ---- | - | ----------- |  | ------------ |  | - | ---------
|Maturity                   |  | PrincipalAmount |           | Cost |   | Coupon Date |  | CouponAmount
|Long-term portion:         |  |                 |           |      |   |             |  |              |  |   |          
|03/15/10                   |  | $               | 2,000,000 |      | $ | 1,933,080   |  | 04/01/10     |  | $ | 2,000,000
|03/15/10                   |  |                 | 200,000   |      |   | 194,420     |  | 04/01/10     |  |   | 200,000  
|                           |  |                 |           |      |   |             |  |              |  |   |          
|                           |  |                 |           |      |   | 2,127,500   |  |              |  |   |          
|Discount amortization      |  |                 |           |      |   | 27,590      |  |              |  |   |          
|                           |  |                 |           |      |   |             |  |              |  |   |          
|Total at December 31, 2008 |  |                 |           |      | $ | 2,155,090   |  |              |  |   |          
|                           |  |                 |           |      |   |             |  |              |  |   |          

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

Note 4. Power Project Leases and Prepaid Delay Rentals

The first phase of our development and construction of our geothermal power projects is site identification and evaluation. The first step in the site
identification and evaluation phase is the identification of potential project sites. As part of the identification process, we incur a variety of costs, which may include costs for topographical studies, geological and geophysical studies, rights
to access and study properties, technical materials and maps. Regardless of whether we pursue a project at a particular site, all of the costs associated with the identification of a potential site are considered exploratory in nature and are
expensed as incurred.

The next step in the site identification and evaluation phase is land acquisition, pursuant to which we acquire
land, lease land, or otherwise obtain the appropriate property interests to develop a potential project. Lease acquisition costs, including lease bonuses, legal costs, permit costs, and the fair value of other forms of compensation to acquire leases
are capitalized as power project leases when incurred. The power project leases are capitalized but not amortized until the related power plant is placed in service. At that time, the related power project leases are capitalized as geothermal
property, plant and equipment and amortized over the estimated useful life of the geothermal power plant. From time to time, we also purchase land outright to develop. Any land we purchase outright is not amortized and is stated in our financial
statements at historical cost.

Our power project leases are considered contract-based intangible assets as defined in FAS 141,
Business Combinations and the costs to acquire the power project leases are capitalized accordingly. Impairment of the power project leases is evaluated in accordance with FAS 142, Goodwill and Other Intangible Assets which
consists of a comparison of the fair value with its carrying amount at the balance sheet date. In accordance with FAS 142, we evaluated our power project leases as of December 31, 2008 for impairment and determined that none of our intangible
assets were impaired.



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Once we have acquired an interest in a geothermal property, we also incur costs to carry and maintain the
undeveloped property until we are in a position to determine whether or not to pursue a project on the property. These costs can include delay rentals, certain taxes on the properties, legal costs for title defense, and the maintenance of land and
lease records. All of these costs are expensed when incurred.

As part of our site identification and evaluation process, as of
December 31, 2008, we have accumulated a large portfolio of geothermal interests in four western states in the United States that have the potential to provide sufficient geothermal energy to operate binary cycle geothermal power plants. In
addition to our geothermal interests in the United States, in September 2008, we and Indonesia Power were selected as low bidders on a geothermal project in Indonesia. As a result, both companies were awarded a concession by the Indonesian
government that includes approximately 100,000 acres of land that contains potential geothermal resources. We are in the process of finalizing a joint venture agreement with Indonesia Power to evaluate the geothermal resources and develop a
geothermal power project. We expect this joint venture agreement to be finalized during the first or second quarter of 2009.

The following
represent capitalized power project lease and acquisition costs by geographical area and by general project area which include leases surrounding the target project development site at December 31, 2008 (normally, the well field and power plant
are designed to be drilled and constructed on leased properties between 480 and 1,000 acres within the project site):



|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|-------------------------- |  | ------- | --- |  | ---------------------------------------------- | --------- | --- | ----------------------- | - | --------------------- |  | - | ---------
|State                      |  | Acreage |     |  | CapitalizedPower Project LeaseAcquisitionCosts |           |     | PrepaidDelayRentalCosts |   | TotalCapitalizedCosts
|Nevada                     |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|*Truckee area              |  | 16,600  |     |  | $                                              | 734,544   | (e) |                         | $ | 50,000                |  | $ | 784,544  
|Devils Canyon area        |  | 995     |     |  |                                                | 45,680    |     |                         |   |                      |  |   | 45,680   
|*Trail Canyon area         |  | 10,640  |     |  |                                                | 179,593   |     |                         |   |                      |  |   | 179,593  
|Other areas                |  | 5,325   |     |  |                                                | 437,912   |     |                         |   |                      |  |   | 437,912  
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Total Nevada               |  | 33,560  | (a) |  | $                                              | 1,397,729 |     |                         | $ | 50,000                |  | $ | 1,447,729
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|New Mexico                 |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Lightning Dock area        |  | 2,520   |     |  | $                                              | 4,751,863 | (e) |                         | $ |                      |  | $ | 4,751,863
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Total New Mexico           |  | 2,520   |     |  | $                                              | 4,751,863 |     |                         | $ |                      |  | $ | 4,751,863
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Utah                       |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|*Thermo area               |  | 25,644  |     |  | $                                              | 2,051,076 | (e) |                         | $ |                      |  | $ | 2,051,076
|Other areas                |  | 135,651 |     |  |                                                | 369,975   |     |                         |   |                      |  |   | 369,975  
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Total Utah                 |  | 161,295 | (b) |  | $                                              | 2,421,051 |     |                         | $ |                      |  | $ | 2,421,051
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Oregon                     |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Klamath Falls area         |  | 984     |     |  | $                                              | 10,000    |     |                         | $ |                      |  | $ | 10,000   
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Total Oregon               |  | 984     |     |  | $                                              | 10,000    |     |                         | $ |                      |  | $ | 10,000   
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          
|Total Power Project Leases |  | 198,359 |     |  | $                                              | 8,580,643 |     |                         | $ | 50,000                |  | $ | 8,630,643
|                           |  |         |     |  |                                                |           |     |                         |   |                       |  |   |          



|* | The Thermo area as used in this table includes the Thermo No. 1 project and parcels which are in the closes proximity to the Thermo No. 1 project. This acreage
does not include other parcels which we consider part of the greater Thermo area. Our holdings in the immediate vicinity of the Thermo No. 1 project and the greater Thermo area total approximately 51,000. The typical project will generally have
a parcel of 480-1,000 acres dedicated to it. These larger acreage numbers represent the total acreage of the leases on which these projects are currently being proposed. However, prior to finalizing project financing for each of these, we
anticipating segregating these leases so that only a small portion (480-1,000 acres as stated above) will be dedicated to the typical 10-11 MW project.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following represent capitalized power project lease and acquisition costs by geographical area and by
general project area which include leases surrounding the target project development site at December 31, 2007 (normally, the well field and power plant are designed to be drilled and constructed on leased properties between 640 and 1,000 acres
within the project site):



|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|--------------------------- |  | ------- | --- |  | ---------------------------------------------- | --------- | --- | ----------------------- | - | ------- | --------------------- |  | - | ---------
|State                       |  | Acreage |     |  | CapitalizedPower Project LeaseAcquisitionCosts |           |     | PrepaidDelayRentalCosts |   |         | TotalCapitalizedCosts
|California                  |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Other projects              |  | 640     | (c) |  | $                                              | 210,076   |     |                         | $ | 70,750  | (d)                   |  | $ | 280,826  
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total California            |  | 640     |     |  | $                                              | 210,076   |     |                         | $ | 70,750  |                       |  | $ | 280,826  
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Nevada                      |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Truckee project             |  | 16,600  |     |  | $                                              | 703,120   |     |                         | $ | 50,000  |                       |  | $ | 753,120  
|Devil's Canyon project      |  | 395     |     |  |                                                | 17,450    |     |                         |   |        |                       |  |   | 17,450   
|Trail Canyon project        |  | 10,080  |     |  |                                                | 164,593   |     |                         |   |        |                       |  |   | 164,593  
|Other projects              |  | 5,325   |     |  |                                                | 437,912   |     |                         |   |        |                       |  |   | 437,912  
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total Nevada                |  | 32,400  | (a) |  | $                                              | 1,323,075 |     |                         | $ | 50,000  |                       |  | $ | 1,373,075
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|New Mexico                  |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Lightning Dock project      |  | 2,500   |     |  | $                                              | 4,346,608 | (e) |                         | $ |        |                       |  | $ | 4,346,608
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total New Mexico            |  | 2,500   |     |  | $                                              | 4,346,608 |     |                         | $ |        |                       |  | $ | 4,346,608
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Utah                        |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Thermo No. 1 project        |  | 8,892   |     |  | $                                              | 27,697    |     |                         | $ |        |                       |  | $ | 27,697   
|Other projects              |  | 91,927  |     |  |                                                | 86,525    |     |                         |   |        |                       |  |   | 86,525   
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total Utah                  |  | 100,819 | (b) |  | $                                              | 114,222   |     |                         | $ |        |                       |  | $ | 114,222  
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Washington and Oregon       |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Other projects              |  | 77,914  |     |  | $                                              | 38,956    |     |                         | $ |        |                       |  | $ | 38,956   
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total Washington and Oregon |  | 77,914  |     |  | $                                              | 38,956    |     |                         | $ |        |                       |  | $ | 38,956   
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          
|Total Power Project Leases  |  | 214,273 |     |  | $                                              | 6,032,937 |     |                         | $ | 120,750 |                       |  | $ | 6,153,687
|                            |  |         |     |  |                                                |           |     |                         |   |         |                       |  |   |          



|(a) | In December 2006, we paid $25,000 in cash, as a lease bonus, to cover the first year rental obligation, and issue to the owner 25,000 restricted shares of Raser common stock that
had a fair value of $115,250 on the grant date to obtain the right to begin development and construction of geothermal power plants on three ranches in central Nevada consisting of approximately 11,600 acres. Under the same lease agreement, we also
obtained a grant of geothermal and surface rights, if any, held by a property owner with respect to three million additional acres of land currently used for ranching in central Nevada. During the fourth quarter of 2008, we began the necessary due
diligence to determine if the property owner does have any geothermal rights with respect to these three million acres of land. We expect to complete our due diligence in the first or second quarter of 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Includes a geothermal resource lease agreement with a party that holds an undivided 75% interest on 11,294 acres of land and geothermal resource lease agreement with another party
that holds an undivided 25% interest 5,454 acres of land in Utah.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(e) | Includes asset retirement obligations relating to plugging our ten wells we have drilled and decommissioning of the Thermo No. 1 geothermal power plant. See Note 11. Asset
Retirement Obligation for further discussion of our asset retirement obligations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Thermo Area Leases

After identifying the Thermo prospect area, we began acquiring geothermal rights. Beginning in April 2007, we entered into several lease agreements with
the State of Utah School and Institutional Trust Lands Administration (the State) for geothermal rights in the Thermo area totaling approximately 5,500 acres in the Thermo area of Beaver and Iron Counties, Utah. The initial term of the
geothermal leases is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rental payments on the States leases are $1.00 per acre and are due on each anniversary
date until production begins. If a geothermal power plant is constructed which utilizes geothermal resource covered by the leases, royalties are paid based on a percentage of electrical sales from the plant.

Additionally, in September, 2007, we entered into a lease agreement with a private landowner for geothermal rights on approximately 11,000 acres of land
located in the Thermo area. Through this lease, we acquired a 75% undivided interest in the geothermal rights on the properties. We are in the process of acquiring the remaining 25% undivided interest via a lease with another private entity, which
we expect to finalize in the first part of 2009. The initial term of the lease with 75% undivided interests is ten years. Cumulative annual delay rental payments on the lease with 75% undivided interests are $1.00 per acre and are due on each
respective anniversary date until production has begun. If a geothermal power plant is constructed which utilizes geothermal resource covered by the lease, royalties are paid based on a percentage of electrical sales from the plant. We expect the
lease on the remaining 25% undivided interest to have a five year initial term with other provisions similar to the lease with 75% undivided interests. We also capitalized the present value of our asset retirement obligation totaling $2.0 million
that we assumed to plug our wells and decommission our geothermal power plant at the end of its estimated useful life. This asset retirement obligation is included in the carrying cost of the leased properties and amortized when the geothermal power
plant is placed in service over its estimated useful life of 35 years.

During 2008, we entered into three separate geothermal leases with
private land owners in the Thermo area for $41,200 covering approximately 10,800 acres. The initial terms of the leases are between five and ten years, subject to certain extensions. Annual delay rentals for the three leases total $33,300 and are
due on each anniversary date until production begins. If a geothermal power plant is constructed which utilizes geothermal resource covered by the lease, royalties are owed to the landowner based on a percentage of electrical sales from the plant.
We continue to pursue the acquisition of geothermal leases on other State parcels and geothermal leases with other private landowners in the Thermo area.

Our general strategy in the Thermo area has been to lease as much property as possible that we consider to be part of the Thermo resource. We anticipate that each typical 10-11 MW project will have a smaller portion
of property dedicated to it; typically 4801,000 acres. We expect to segregate these smaller parcels out from the larger leased positions as we finalize the project financing for each individual project.

Lightning Dock Area Leases

In 2007, we entered into
an agreement to acquire GeoLectric, LLC. This agreement was later superseded by our agreement to purchase a BLM lease and other miscellaneous assets totaling $4,260,000 from a subsidiary of GeoLectric, LLC (the Purchase). The expenses
associated with the negotiation, document preparation, due diligence and other acquisition related activities were capitalized as part of the land acquisition. The Purchase was subject to the BLMs approval of the assignment of the BLM Lease
from the subsidiary of GeoLectric, LLC



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##### Table of Contents

to us. On December 13, 2007, the BLM approved the assignment of the BLM Lease to us, which fulfilled the condition required to complete the Purchase
pursuant to the terms of agreement. Under the assigned BLM Lease, we obtained rights to begin development of one or more geothermal power plants on the property located on approximately 2,500 acres in Hidalgo County, New Mexico. The initial lease
term of the assigned BLM Lease began in January 1979 and has been extended based upon certain conditions in the lease until January 2024. Annual delay rental payments of $5,000 are required on each anniversary date until geothermal power production
has begun. If a geothermal power plant is constructed which utilizes geothermal resource covered by the lease, royalties are owed to the BLM based on a percentage of electrical sales from the plant. We have capitalized certain legal fees directly
associated with completing the Purchase and obtaining the BLM lease. We also capitalized the present value of our asset retirement obligation totaling $85,600 that we assumed to plug certain wells associated with the BLM property. This asset
retirement obligation is included in the carrying cost of the leased properties and amortized when the geothermal power plant is placed in service over its estimated useful life of 35 years.

With respect to the same 2,500 acres in Hidalgo County, New Mexico, in January 2008, we also entered into a surface access and use lease agreement, or
surface lease agreement, with a private property owner in New Mexico (the New Mexico Property Owner) and paid $320,000 to obtain surface right-of-way access and drilling rights. The term of the surface lease agreement continues until our
geothermal rights respective to the BLM lease have expired. Pursuant to the surface lease agreement, we also obtained certain water rights at $0.50 per acre foot of water with a minimum annual fee of $1,000 during the term surface lease agreement,
which is due on each anniversary date of the surface lease agreement.

In August 2008, we paid $1,200 as a lease bonus and entered into a
ground lease agreement for 20 acres with the New Mexico Property Owner. The term of the ground lease agreement is indefinite, as long as the power plant, transmission and related facilities on the leased property are producing or capable of
producing electricity from geothermal resources. No annual payments are required for the ground lease agreement. Under the ground lease agreement, we obtained the right to construct and operate a geothermal power plant and transmission facilities on
the property.

Klamath Falls Area Leases

In January 2008, we paid $10,000 as a lease bonus and entered into a geothermal lease with private land owners for 984 acres approximately 13 miles south of Klamath Falls, Oregon. Under the lease agreement, we obtained the right to begin
development and construction of geothermal power plants. The initial lease term is 10 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rental payments of $1,000 are due
on each anniversary date until production begins.

Truckee Area Leases

In December 2006, we paid $25,000 in cash, as a lease bonus, to cover the first year rental obligation, and issue to the owner 25,000 restricted shares of our common stock that had a fair value of $115,250 on the
grant date to obtain the right to begin development and construction of geothermal power plants on three ranches in central Nevada consisting of approximately 11,600 acres. In August 2007, we also granted to the private property owner 35,000 options
at a strike price of $15.10 representing the closing market price on the date of the grant as consideration to cancel previously awarded contingently vesting stock. The fair value of the 35,000 options was recorded as power project leases totaling
$424,000. Annual delay rental payments total $34,800 on each anniversary date until production of electricity begins. If a geothermal power plant is constructed which utilizes geothermal resource covered by the lease, royalties are owed to the
landowner based on a percentage of electrical sales from the plant. The terms of the lease agreement are for 50 years subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Under the same lease
agreement, we also obtained a grant of geothermal and surface rights, if any, held by a property owner with respect to three million additional acres of land currently used for ranching in central Nevada. During the fourth quarter of 2008, we



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began the necessary due diligence to determine if the property owner does have any geothermal rights with respect to these three million acres of land. We
expect to complete our due diligence in the first or second quarter of 2009.

In June 2007, we paid $40,000 to the private land owner that
held the geothermal rights and entered into a geothermal lease agreement for the same 11,600 acres described above. Under the terms of this lease agreement, there are no delay rental payments. Of the 11,600 acres of leased property, approximately
1,000 acres have been designated for the Truckee project. In September 2007, we participated in a United States Bureau of Land Management (BLM) auction to obtain the geothermal development rights for certain parcels of land in the
Truckee project site. We successfully won the bid for one parcels of land and entered into a 10-year lease agreement with the BLM covering a total of approximately 5,000 acres. Our payment obligation under this lease was $55,000, which was paid in
the third quarter of 2007. Pursuant to the terms of the BLM leases, annual delay rental payments total $15,000. If a geothermal power plant is constructed which utilizes geothermal resource covered by the lease, royalties are owed to the BLM based
on a percentage of electrical sales from the plant.

Devil's Canyon Area Leases

In February 2007, we entered into a lease agreement with a private property owner covering approximately 155 acres in Devil's Canyon. Under the lease
agreement, we obtained the right to begin development and construction of geothermal power plants. The initial lease terms of the lease agreement is 10 years, subject to extension for as long as we are actively pursuing or generating resources from
the leased lands. Concurrently, we were assigned the rights of the private property owner's BLM lease covering 240 acres. Under the lease agreement, we obtained the right to begin development and construction of geothermal power plants. The
remaining lease terms of the BLM lease agreement is 4 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. In June 2008, we leased an additional 600 acres of private land from another
private landowner adjacent to our previously leased property. Under the lease agreement, we obtained the right to begin development and construction of geothermal power plants. The initial lease terms of the lease agreement is 50 years, subject to
extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rental payments of $20,000 are due on each anniversary date until production begins. If a geothermal power plant is constructed which
utilizes geothermal resource covered by the lease, royalties are owed to the landowner based on a percentage of electrical sales from the plant.

In December 2008, we purchased a cold water well containing water rights on property that we had leased for geothermal development. We expect to use this water in our operations of the Devil's Canyon plant.

Trail Canyon Area Leases

In January 2007, we paid
$5,000 and issued 5,000 restricted shares of our common stock to a private land owner and entered into a geothermal lease agreement on 635 acres of private land in the Trail Canyon project. The terms of the lease agreement are for 50 years, subject
to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rentals total $635 on each anniversary date of the lease until production of electricity begins. In addition, concurrent with entering
into this lease agreement, the private land owner assigned to us a BLM lease in the Trail Canyon project for the same 635 acres. The BLM lease contains the rights to develop and construct a geothermal power plant. The term of the BLM lease is 10
years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. Annual delay rentals for the BLM lease total $635 due on each anniversary date until production of electricity begins. If a geothermal
power plant is constructed which utilizes geothermal resources covered by the lease, royalties are owed to the BLM based on a percentage of electrical sales from the plant.

In September 2007, we participated in a United States Bureau of Land Management (BLM) auction to obtain the geothermal development rights for
certain parcels of land in the Trail Canyon project site. We successfully won the bid for one parcels of land and entered into a 10-year lease agreement with the BLM covering a total of approximately 1,900 acres. Our payment obligation under this
lease was $126,800, which was



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paid in the third quarter of 2007. Pursuant to the terms of the BLM leases, annual delay rental payments total $5,700. If a geothermal power plant is
constructed which utilizes geothermal resources covered by the lease, royalties are owed to the BLM based on a percentage of electrical sales from the plant.

In August and November 2007, we paid a total of $5,000 and entered into seven separate lease agreements with seven private land owners of the same private property near the Truckee project drilling site consisting of
4,444 acres to obtain the right to develop and construct a geothermal power plant. The terms of the lease agreements are for 50 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands.
Pursuant to the terms of this lease agreement, annual delay rentals total $4,444 on each anniversary date until production of a geothermal power plant begins. If a geothermal power plant is constructed which utilizes geothermal resources covered by
the leases, royalties are owed to the respective landowners based on a percentage of electrical sales from the plant.

In May 2008, we paid
$15,000 as a lease bonus and entered into a geothermal lease with private land owners for 560 acres in the Trail Canyon project. Under the lease agreement, we obtained the right to begin development and construction of geothermal power plants. The
initial lease term is 15 years, subject to extension for as long as we are actively pursuing or generating resources from the leased lands. The annual delay rental payments total $5,000 on each anniversary date until production of electricity
begins. If a geothermal power plant is constructed which utilizes geothermal resources covered by the leases, royalties are owed to the respective landowners based on a percentage of electrical sales from the plant.

Additional Power Project Leases

In addition to our
power project leases described above, we have also acquired certain additional leases for properties that we are currently evaluating for future projects.

In September 2007, we participated in a United States Bureau of Land Management (BLM) auction to obtain the geothermal development rights for certain parcels of land in the Big Smoke Valley of Nye County,
Nevada. We successfully won the bid for one parcels of land for the Truckee project, one parcel of land for the Trail Canyon project and two parcels of land for a project that is yet to be determined. The terms of the BLM lease are 10 years. The
acreage acquired that has not been assigned to a project totals approximately 8,400 acres. Our payment obligation under these leases was $437,900, which was paid in the third quarter of 2007. Pursuant to the terms of the BLM leases, annual delay
rental payments total $25,200. If a geothermal power plant is constructed which utilizes geothermal resources covered by the leases, royalties are owed to the BLM based on a percentage of electrical sales from the plant.

Since March 2007, we have entered into approximately 70 geothermal leases with the State throughout Utah totaling approximately 120,000 acres. These
leases are located in areas that we are currently evaluating for future projects. The terms of these geothermal leases are 10 years with an annual delay rental payment on each anniversary date of $1.00 per acre until production of electricity
begins. The lease acquisition costs for these State leases totaled approximately $130,000 as of December 31, 2008. If a geothermal power plant is constructed which utilizes geothermal resources covered by the leases, royalties are paid based on
a percentage of electrical sales from the plant.

In September 2008, in conjunction with a bid jointly submitted with Indonesia Power, we
were also granted a 100,000 acre geothermal concession in West Java, Indonesia. As we finalize our partnership agreement with Indonesia Power which is expected in the first or second quarter of 2009, we intend to enter into a long-term lease
agreement with the government of Indonesia to develop these geothermal resources.

In December 2008, we participated in a BLM auction to
obtain the geothermal development rights for certain parcels of land in Utah. We successfully won the bids for four parcels of land and entered into four separate 10-year renewable lease agreements with the BLM covering a total of approximately
60,300 acres. Our



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total payment obligation under these leases was $503,816, of which $199,190 was paid in the fourth quarter of 2008. However, our January 5, 2009 payment
for the remaining $304,626 was rejected and returned to us due to our clerical error. We believe that the payment was valid and we are in the process of filing an appeal to re-instate the leases. The costs associated with the leases won at the BLM
auction lease will remain capitalized until we receive the final determination of acceptance or rejection of our appeal by the BLM.

As
part of the overall consideration for the geothermal lease agreements, we issued 25,000, 5,000, 2,500, and 1,000 restricted shares of our common stock in connection with three Nevada leases, respectively. The fair values of these equity awards were
$115,250, $27,350, $12,450 and $9,930 on the respective grant dates, respectively. We have also granted options to purchase 35,000 shares of our common stock at a strike price of $15.10 per share to a property owner in Nevada. The Black-Scholes fair
value of the options on the grant date total $423,987. These costs have been capitalized as power project leases. Certain legal fees incurred in connection with acquiring the geothermal lease agreements were also capitalized as power project leases
totaling $55,700. We also agreed to pay $50,000 as an advance against future delay rentals and/or royalties beginning in the second year of one of the lease agreements in Nevada. Power project leases are not amortized until a geothermal power plant
constructed on the applicable leased property is placed in service. Prepaid delay rentals are not amortized.

Abandoned Leases and Lease Options

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

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

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

In November 2007, we entered into an option for the right to pursue the development of geothermal
resources on properties owned by International Paper, Inc. in the States of Oregon and Washington totaling 77,914 acres. The lease acquisition costs for these options leases totaled approximately $39,000 as of December 31, 2008. Based upon
managements further evaluation of the properties, we decided not to exercise these options and the binding option agreements were terminated. Accordingly, we expensed $39,000 of capitalized power project lease costs relating to this property.

Collateralized Leases

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



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

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

Note 5. Geothermal Well Field Development-in-Progress

Once we have obtained sufficient third-party evaluation and analysis supporting the conclusion, with a high degree of confidence, that our leased geothermal property contains adequate renewable geothermal resources to continually produce
electricity, we begin drilling production and reinjection wells for use at the geothermal power plant we intend to build. Depending on the depth of the well and conditions encountered, it typically takes approximately 25 to 90 days to drill a
production or reinjection well. Once drilled, the determination of whether the well can be used in the production of electricity can take another six months or more and is normally based upon several factors such as; (1) the results of testing
the heat and volume flow of the geothermal liquids, (2) the combined production capacity of the geothermal power plant, (3) the combined electricity producing capacity of the other production wells, and (4) the required total quantity
of reinjection wells for the project. The costs of the wells for which the determination of the viability for use as a production or reinjection well is pending are capitalized with those wells that have already been determined for use as production
or reinjection wells. The capitalized costs for pending wells and wells that have been determined to be used in the production of electricity are classified on the balance sheet as either well field development-in-progress or as geothermal property,
plant and equipment if the plant is already placed in service. When management determines that it is probable that a well will not be used to in the production of electricity by the respective geothermal power plant, the previously capitalized costs
of that well are expensed in the period in which the wells are determined to be unusable.

At our Thermo No. 1 project, as of
December 31, 2008, we had drilled four wells that had been identified as production wells, two wells had been identified as reinjection wells, one well will be utilized as a cold water well for the cooling towers, and two wells that we have
determined to be non-commercial wells at this time. These two non-commercial wells were expensed. One well was in progress which was later identified as a production well.

As of December 31, 2008, we had drilled one production-sized well at the Truckee in 2007 that we have been unable to determine its viability as
either a production or reinjection well.



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The following table is a roll forward of the capitalized well costs for pending wells the Thermo
No. 1 and Truckee projects for the year ending December 31, 2008:



|                                                                                          |  |                      |             |   |                 |   |            |  
|----------------------------------------------------------------------------------------- |  | -------------------- | ----------- | - | --------------- | - | ---------- | -
|                                                                                          |  | Thermo No. 1 Project |             |   | Truckee Project |  
|Balance at December 31, 2007                                                              |  | $                    | 1,720,691   |   |                 | $ | 2,953,580  |  
|2008 Activity:                                                                            |  |                      |             |   |                 |   |            |  
|Additions to capitalized well costs for pending wells                                     |  |                      | 39,642,671  |   |                 |   | 48,670     |  
|Wells charged to expense                                                                  |  |                      | (10,622,102 | ) |                 |   | (3,002,250 | )
|Reclassification of capitalized well costs from pending wells to wells used in production |  |                      | (28,842,583 | ) |                 |   |           |  
|                                                                                          |  |                      |             |   |                 |   |            |  
|Balance at December 31, 2008                                                              |  | $                    | 1,898,677   |   |                 | $ |           |  

The costs to drill production and reinjection wells include tangible and intangible drilling
costs. Tangible drilling costs include tangible materials that remain as part of the well after drilling is complete such as casing, pipes, wellheads, pumps, rings and drilling pads. Intangible drilling costs include tangible and intangible
materials that do not remain as part of the well after the drilling is complete such as, permit preparation, drilling rig rental, salaries and expenses incurred by drilling personnel, lubricants, drilling mud, cement and other materials used in the
drilling process, drill bits, freight to deliver the products, fishing costs, sample testing, rental equipment, survey costs, excavation cost, drainage cost, and other expenditures incurred analyzing the drilling process. Internal costs that are
directly identified with development of a specific well field are also capitalized when incurred.

Once the related geothermal power plant
is placed in service, the drilling costs are reclassified as Geothermal property, plant and equipment and depreciated over the estimated useful life of the related geothermal power plant or 35 years.

We have either obtained or are in the process of obtaining permits for the development of eight geothermal projects located in Utah, Nevada, New Mexico
and Oregon. During 2008, we continued developing well fields on certain properties in Nevada and Utah. We received appropriate permits and as of December 31, 2008, we have drilled one well at our Truckee project in Nevada and ten wells at our
Thermo No. 1 project in Utah. We also began the permitting process to develop well fields at the Devil's Canyon and Trail Canyon project sites in Nevada, the Thermo No. 2 and Thermo No. 3 project sites in Utah, the Lightning Dock
project site in New Mexico and the Klamath Falls project site in Oregon. In December 2008, we completed testing of the power generating units at our Thermo No. 1 project site in Utah and began generating and transmitting nominal quantities of
test electricity. The Thermo No. 1 geothermal power plant was placed in service in the first quarter of 2009. When the geothermal power plant is placed in service, the drilling costs become reclassified as Geothermal property,
plant and equipment.



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The following table sets forth our capitalized drilling and permitting costs for projects to develop
geothermal power plants that had not yet been placed in service by geographical area and by project as of December 31, 2008:



|                                       |  |                                         |            |                        |   |                       |  |   |            |  | 
|-------------------------------------- |  | --------------------------------------- | ---------- | ---------------------- | - | --------------------- |  | - | ---------- |  | 
|State                                  |  | Intangible Drillingand Permitting Costs |            | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada                                 |  |                                         |            |                        |   |                       |  |   |           
|Truckee project                        |  | $                                       |           |                        | $ |                      |  | $ |          
|Devil's Canyon project                 |  |                                         | 77,138     |                        |   |                      |  |   | 77,138    
|Trail Canyon project                   |  |                                         | 139,806    |                        |   |                      |  |   | 139,806   
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Total Nevada                           |  | $                                       | 216,944    |                        | $ |                      |  | $ | 216,944   
|New Mexico                             |  |                                         |            |                        |   |                       |  |   |           
|Lightning Dock project                 |  | $                                       | 283,484    |                        | $ |                      |  | $ | 283,484   
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Total New Mexico                       |  | $                                       | 283,484    |                        | $ |                      |  | $ | 283,484   
|Utah                                   |  |                                         |            |                        |   |                       |  |   |           
|Thermo No. 1 project                   |  | $                                       | 25,990,273 |                        | $ | 4,750,987             |  | $ | 30,741,260
|Thermo No. 2 and Thermo No. 3 projects |  |                                         | 5,322      |                        |   |                      |  |   | 5,322     
|Other projects                         |  |                                         | 66,059     |                        |   |                      |  |   | 66,059    
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Total Utah                             |  | $                                       | 26,061,654 |                        | $ | 4,750,987             |  | $ | 30,812,641
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Oregon                                 |  |                                         |            |                        |   |                       |  |   |           
|Klamath Falls project                  |  | $                                       | 75,559     |                        | $ |                      |  | $ | 75,559    
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Total Oregon                           |  | $                                       | 75,559     |                        | $ |                      |  | $ | 75,559    
|                                       |  |                                         |            |                        |   |                       |  |   |           
|Total                                  |  | $                                       | 26,637,641 |                        | $ | 4,750,987             |  | $ | 31,388,628
|                                       |  |                                         |            |                        |   |                       |  |   |           

The following table sets forth our capitalized drilling and permitting costs for projects to
develop geothermal power plants that had not yet been placed in service by geographical area and by project as of December 31, 2007:



|                       |  |                                         |           |                        |   |                       |  |   |          
|---------------------- |  | --------------------------------------- | --------- | ---------------------- | - | --------------------- |  | - | ---------
|State                  |  | Intangible Drillingand Permitting Costs |           | Tangible DrillingCosts |   | TotalCapitalizedCosts
|Nevada                 |  |                                         |           |                        |   |                       |  |   |          
|Truckee project        |  | $                                       | 2,569,406 |                        | $ | 384,174               |  | $ | 2,953,580
|Other projects         |  |                                         | 62,899    |                        |   |                      |  |   | 62,899   
|                       |  |                                         |           |                        |   |                       |  |   |          
|Total Nevada           |  | $                                       | 2,632,305 |                        | $ | 384,174               |  | $ | 3,016,479
|New Mexico             |  |                                         |           |                        |   |                       |  |   |          
|Lightning Dock project |  | $                                       | 12,168    |                        | $ |                      |  | $ | 12,168   
|                       |  |                                         |           |                        |   |                       |  |   |          
|Total New Mexico       |  | $                                       | 12,168    |                        | $ |                      |  | $ | 12,168   
|Utah                   |  |                                         |           |                        |   |                       |  |   |          
|Thermo No. 1 project   |  | $                                       | 1,472,233 |                        | $ | 248,458               |  | $ | 1,720,691
|Other projects         |  |                                         | 1,187     |                        |   |                      |  |   | 1,187    
|                       |  |                                         |           |                        |   |                       |  |   |          
|Total Utah             |  | $                                       | 1,473,420 |                        | $ | 248,458               |  | $ | 1,721,878
|                       |  |                                         |           |                        |   |                       |  |   |          
|Total                  |  | $                                       | 4,117,893 |                        | $ | 632,632               |  | $ | 4,750,525
|                       |  |                                         |           |                        |   |                       |  |   |          

Intangible costs are normally higher than tangible drilling cost because tangible costs are
limited to tangible materials such as pipe and well casings that become part of the well when the well is completed. Capitalized interest costs included in well field development in progress totaled $652,900 and zero for the year ended
December 31, 2008 and 2007, respectively.



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Thermo No. 1 Project Wells

As of December 31, 2008, we had drilled four wells had been identified as production wells, two wells had been identified as reinjection wells, one well will be utilized as a cold water well for the cooling
towers, and two wells that we have determined to be non-commercial wells at this time. These two non-commercial wells were expensed. One well was in progress which was later identified as a production well.

In December 2008, we completed the testing of our UTC Power Corporation (UTCP) power generating units and began generating and transmitting
nominal quantities of test electricity. As a result of evaluating the combined production capacity of the geothermal power plant and the combined electricity producing capacity of the production wells, in accordance with our policy, we
identified two completed production-sized wells at the Thermo No. 1 project that are unlikely to be used for the production of electricity at the Thermo No. 1 geothermal power plant. Although one well initially exhibited production
level heat, it was damaged and after redrilling and marginally restoring the well, with the assistance of independent consultants, we determined that it should be expensed. In addition, the other well also initially demonstrated marginal
production capabilities; however, we also determined that the well would not likely be used for the production of electricity. Accordingly, we expensed the wells at December 31, 2008 totaling $10.6 million.

Impairment of the Truckee Well

As of
December 31, 2008, we had drilled one production-sized well at the Truckee project. After performing an impairment analysis of our long-lived assets at December 31, 2008 in accordance with FAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we determined that the Truckee well was impaired. Accordingly, we expensed the well at December 31, 2008 totaling $3.0 million.

The circumstances that led to the impairment of the Truckee well are primarily due the current world-wide economic conditions that have led to tightening credit markets. Because of the tightening credit markets,
we determined that our access to capital may be constrained in the future. Accordingly, we prioritized our cash uses, concentrating our efforts on our largest known resources. As a result, the future undiscounted cash flows from the Truckee well
have become uncertain because of the re-prioritization of our projects based upon the changing economic conditions. Therefore, we considered our ability to secure sufficient financing necessary to continue drilling at the Truckee project and
determined it was uncertain if we would be able to finance continued drilling at the Truckee project in the near term in addition to our other projects of higher priority. Because of this uncertainty, we expensed $3.0 million in the Power
Systems business segment in the fourth quarter of 2008 accordingly. However, management believes that this well could still be used in the production of electricity as either a production or reinjection well in the future should the appropriate
financing be obtained.

Note 6. Power Project Construction-in-Progress

The construction of the geothermal power plant, the related transmission lines, and the required substation takes place concurrently with the drilling of the production and re-injection wells. An independent
engineering firm prepares the basic blue print design for each geothermal power plant project. The blueprints are customized for each plant prior to beginning construction. Depending on the contractual agreement with the entity financing the
project, we either hire a third-party general contractor and several subcontractors to complete the construction of the power plant, installation of the UTCP power generating units, cooling towers and other electrical equipment or we act as the EPC
contractor for the project. The construction of the power plant and related transmission lines are accumulated and capitalized over the construction period. Once the geothermal power plant is placed in service, the related construction costs will be
reclassified as Geothermal property, plant and equipment.

In 2007, we began purchasing UTPC power generating units for the
construction of our geothermal power plant at the Thermo No. 1 project. As of December 31, 2008, pursuant to purchase agreements with a manufacturer, we had taken delivery of 163 generating units for use in the geothermal power plants we
are developing. Fifty of these generating units have been installed at the Thermo No. 1 project. We had taken



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delivery of 48 power generating units that are being stored at the Lightning Dock project pending installation at that project. These UTCP power generating
units are capitalized as power project construction-in-progress. We had also taken delivery of 27 power generating units that are being stored on the Thermo No. 1 project site that have not yet been assigned to a specific project, and 38 power
generating units that are being stored at independent storage facilities in New York and Pennsylvania that have not yet been assigned to a specific project. These 65 power generating units that have not yet been assigned to a specific project are
recorded as Power project equipment on our consolidated balance sheets totaling $19.7 million. Once the UTCP power generating units are assigned to a project for the purpose of beginning construction at the project site, the applicable
costs of the UTCP power generating units will be reclassified from power project equipment to power project construction-in-progress.

Construction of the cooling towers, transmission lines and setting of the UTCP power generating units at the Thermo No. 1 geothermal power plant was completed in October of 2008. The Thermo No. 1 power plant began generating and
transmitting nominal quantities of test electricity in December 2008 and is expected to become operational at or near full capacity in the first part of 2009.

The Thermo No. 1 project construction in progress costs included costs to construct transmission lines and connecting substations. In order to connect a geothermal power plant to the existing power lines, we must
construct transmission lines from the plant to the local utility interconnection point. We also must construct a substation at or near the facility that will increase the voltage from the generation facility to match local utility transmission
voltages. We completed construction of approximately 6.5 miles of transmission lines for the Thermo No. 1 project in July 2008 and are in the process of completing the construction of the associated substation and other interconnection lines
with the plant. We capitalized approximately $3.8 million of costs associated with the construction of these transmission lines and substation. As of December 31, 2008, we have not begun the construction of transmission lines for any other
projects.

As of December 31, 2008, pursuant to certain vendor purchase commitments, we had taken delivery at our Lightning Dock
project site of equipment to construct our cooling towers, water pumps and pipes to transport geothermal water from the wellheads to the power generating units and other electronic equipment that will be used to operate the geothermal power plant at
the Lightning Dock project site. This equipment is capitalized as power project construction-in-progress at the Lightning Dock project below.

Power project construction-in-progress consisted of the following at December 31, 2008 (by project):



|                                            |  |                   |            |                   |   |  
|------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | -
|                                            |  | December 31, 2008 |            | December 31, 2007
|Thermo No. 1 project:                       |  |                   |            |                   |   |  
|Power plant construction-in-progress        |  | $                 | 49,722,241 |                   | $ | 
|Transmission lines construction-in-progress |  |                   | 3,831,789  |                   |   | 
|Accumulated depreciation                    |  |                   |           |                   |   | 
|                                            |  |                   |            |                   |   |  
|Total Thermo No. 1 project                  |  |                   | 53,554,030 |                   |   | 
|                                            |  |                   |            |                   |   |  
|Lightning Dock project:                     |  |                   |            |                   |   |  
|Power plant construction-in-progress        |  | $                 | 18,146,538 |                   | $ | 
|Transmission lines construction-in-progress |  |                   |           |                   |   | 
|Accumulated depreciation                    |  |                   |           |                   |   | 
|                                            |  |                   |            |                   |   |  
|Total Lightning Dock project                |  |                   | 18,146,538 |                   |   | 
|                                            |  |                   |            |                   |   |  
|Other projects:                             |  |                   |            |                   |   |  
|Power plant construction-in-progress        |  | $                 | 2,371,826  |                   | $ | 
|Transmission lines construction-in-progress |  |                   |           |                   |   | 
|Accumulated depreciation                    |  |                   |           |                   |   | 
|                                            |  |                   |            |                   |   |  
|Total other projects                        |  |                   | 2,371,826  |                   |   | 
|                                            |  |                   |            |                   |   |  
|Net power project construction-in-progress  |  | $                 | 74,072,394 |                   | $ | 
|                                            |  |                   |            |                   |   |  



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Capitalized interest included in construction in progress totaled $368,300 and zero for the years ending
December 31, 2008 and 2007, respectively. Amounts capitalized as power project construction-in-progress will not be depreciated until the applicable geothermal power plant is placed in service.

Note 7. Equipment, net

Equipment consisted of the
following at December 31:



|                         |  |      |           |   |      |   |           |  
|------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                         |  | 2008 |           |   | 2007 |  
|Office software          |  | $    | 62,022    |   |      | $ | 56,950    |  
|Office equipment         |  |      | 337,620   |   |      |   | 308,576   |  
|Engineering software     |  |      | 336,496   |   |      |   | 319,463   |  
|Engineering equipment    |  |      | 486,720   |   |      |   | 416,301   |  
|Demonstration vehicles   |  |      | 15,813    |   |      |   | 27,013    |  
|Marketing equipment      |  |      | 12,250    |   |      |   | 12,250    |  
|Geothermal Software      |  |      | 19,811    |   |      |   |          |  
|Geothermal equipment     |  |      | 24,585    |   |      |   |          |  
|Leasehold improvements   |  |      | 81,682    |   |      |   | 64,957    |  
|                         |  |      |           |   |      |   |           |  
|Total                    |  |      | 1,376,999 |   |      |   | 1,205,510 |  
|Accumulated depreciation |  |      | (768,113  | ) |      |   | (525,322  | )
|                         |  |      |           |   |      |   |           |  
|Net equipment            |  | $    | 608,886   |   |      | $ | 680,188   |  
|                         |  |      |           |   |      |   |           |  

Note 8. Intangible Assets, net

At December 31, 2008 and 2007, we had capitalized costs directly related to internally developing, maintaining or restoring patents and trademarks
totaling $531,377 and $437,303, respectively. The accumulated amortization related to patents at December 31, 2008 and 2007 totaled $46,865 and $33,006, respectively. Since trademarks are considered to have indefinite lives, the costs of
trademarks are not amortized.



|                               |  |              |         |   |      |   |         |  
|------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                               |  | December 31, |        
|                               |  | 2008         |         |   | 2007 |  
|Patents                        |  | $            | 350,036 |   |      | $ | 265,280 |  
|Trademarks                     |  |              | 181,342 |   |      |   | 172,023 |  
|                               |  |              |         |   |      |   |         |  
|Patents and Trademarks at Cost |  |              | 531,377 |   |      |   | 437,303 |  
|Accumulated Amortization       |  |              | (46,865 | ) |      |   | (33,006 | )
|                               |  |              |         |   |      |   |         |  
|Net Patents & Trademarks       |  | $            | 484,512 |   |      | $ | 404,297 |  
|                               |  |              |         |   |      |   |         |  

Amortization expense relating to patents totaled $14,900, $15,800, and $16,000 for the years ended
December 31, 2008, 2007, and 2006, respectively. Patent amortization expense for the succeeding five years is $18,250 per year or $91,250.

Abandoned or impaired patents and trademarks are written off in the period of abandonment or when the impairment occurred and a loss is recorded based upon the historical cost less accumulated amortization of the asset. For the years ended
December 31, 2008, 2007, and 2006, losses relating to abandonment of patents and trademarks total $11,554, $111,460, and $47,965, respectively.

Amortization expense relating to our global license (excluding Australia, New Zealand, South Africa, and Canada) for certain key heat transfer technologies including geothermal, waste heat recovery and bottom-cycling
applications at December 31, 2008, 2007 and 2006 totaled $10,892, $10,892 and $3,631, respectively. Amortization expense relating to the global heat transfer technology license for the succeeding five years is $10,892 per year, or $54,460.



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During 2008, we entered into various agreements to purchase the water rights from private owners of water
rights in Utah, Nevada and New Mexico in order to provide the necessary water to operate the geothermal power plants that we intend to develop. The following table sets forth the quantity and costs of our water rights as of December 31, 2008
and 2007, respectively:



|                                                                      |  |              |           |      |   |  
|--------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | -
|                                                                      |  | December 31,
|                                                                      |  | 2008         |           | 2007
|Thermo No. 1 (1,500 acre feet per year)                               |  | $            | 867,950   |      | $ | 
|Lightning Dock Project (options to purchase 1,200 acre feet per year) |  |              | 35,000    |      |   | 
|Other Projects (100 acre feet per year)                               |  |              | 100,000   |      |   | 
|                                                                      |  |              |           |      |   |  
|Total Water Rights                                                    |  | $            | 1,002,950 |      | $ | 
|                                                                      |  |              |           |      |   |  

Since water rights normally increase in value over time, no amortization is recorded.

Note 9. Deferred Acquisition and Financing Fees

Costs incurred that are directly related to the completion of a proposed acquisition are deferred on the balance sheet and capitalized as part of the purchase price if the transaction is completed. Such costs are expensed if the potential
acquisition is no longer considered probable by management. Consistent with this policy, on September 27, 2007, we entered into a binding letter agreement to purchase GeoLectric, LLC. Under the terms of the agreement, we paid $500,000 as a down
payment and agreed to subsequent payments based upon certain performance criteria totaling $4.2 million. In anticipation of the proposed acquisition, we incurred certain acquisition costs totaling $160,415 during the fourth quarter of 2007. In
December 2007, based upon mutual agreement of all parties, we terminated the binding letter agreement and entered into an asset purchase agreement with a wholly-owned subsidiary of GeoLectric, LLC to purchase a BLM lease covering 2,500 acres in New
Mexico and other assets for $4.1 million. According to the asset purchase agreement, the original down payment of $500,000 was converted into a note receivable effective September 27, 2007 and was properly reclassified. Since the acquisition
costs incurred during the fourth quarter of 2007 primarily related to acquisition of the BLM lease, we reclassified $160,415 of deferred acquisition costs as power project leases.

At December 31, 2008 and 2007 the deferred acquisition costs balance was $0, respectively.

Deferred financing fees consisted of the following at December 31, 2008:



|                                                                                                                |  |                   |           |   |                   |   |  
|--------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------- | - | -
|                                                                                                                |  | December 31, 2008 |           |   | December 31, 2007
|Deferred financing fees for placement of 8.00% convertible senior notes                                         |  | $                 | 2,572,728 |   |                   | $ | 
|Accumulated amortization                                                                                        |  |                   | (383,063  | ) |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Net deferred financing fees for 8.00% convertible senior notes                                                  |  |                   | 2,189,665 |   |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Deferred financing fees for fair value of Merrill Lynch warrants vested upon closing Thermo No. 1 financing     |  | $                 | 3,999,334 |   |                   | $ | 
|Accumulated amortization                                                                                        |  |                   | (89,526   | ) |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Net deferred financing fees for fair value of Merrill Lynch warrants vested upon closing Thermo No. 1 financing |  |                   | 3,909,808 |   |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Deferred financing fees for closing Thermo No. 1 financing                                                      |  | $                 | 1,600,000 |   |                   | $ | 
|Accumulated amortization                                                                                        |  |                   | (29,091   | ) |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Net deferred financing fees for the Thermo No. 1 financing.                                                     |  |                   | 1,570,909 |   |                   |   | 
|                                                                                                                |  |                   |           |   |                   |   |  
|Net deferred financing fees                                                                                     |  | $                 | 7,670,382 |   |                   | $ | 
|                                                                                                                |  |                   |           |   |                   |   |  



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Refer to Note 12, Long-Term Senior Secured Note (non-recourse) and Convertible Senior Notes for further
discussion of the 8.00% convertible senior notes deferred financing fees and discussion of the Thermo No. 1 project financing agreements. Also refer to Note 16, Warrants for further discussion of the fair value of the warrants that vested upon
entering into the Thermo No. 1 project financing arrangements.

Note 10. Note Payable

On February 15, 2008, we executed a promissory note, whereby we agreed to pay to Lightening Dock Geothermal, Inc. (Lender) $900,000 in
principal plus $50,000 in interest on or before January 5, 2009. The promissory note is secured by a mortgage agreement whereby, our BLM lease is assigned as security against an event of default by us. In the event that we cannot pay the
promissory note when due, an event of default would occur. Under the mortgage agreement, we would have 15 business days to cure such event of default or the Lender may exercise any or all of its rights, remedies and recourses including, but not
limited to, foreclosure and sale of the BLM lease. Accrued interest payable on this promissory note at December 31, 2008 totaled $45,833. On January 27, 2009, we settled the promissory note payable and issued to the Lender 263,108 shares
of our common stock at a closing market price of $3.35 per share at a fair market value of $881,412.

Note 11. Asset Retirement Obligation

The following table sets forth a reconciliation of beginning and ending aggregate carrying amount of asset retirement obligation for
the years presented below:



|                                     |  |              |           |   |      |   |       
|------------------------------------ |  | ------------ | --------- | - | ---- | - | ------
|                                     |  | December 31,
|                                     |  | 2008         |           |   | 2007
|Balance at beginning of year         |  | $            | 86,193    |   |      | $ |      
|Actual cost incurred to retire asset |  |              | (26,453   | ) |      |   |      
|Changes in price estimates           |  |              | (10,338   | ) |      |   |      
|Liabilities incurred                 |  |              | 2,101,675 |   |      |   | 86,193
|Accretion expense                    |  |              | 1,153     |   |      |   |      
|                                     |  |              |           |   |      |   |       
|Total asset retirement obligation    |  | $            | 2,152,230 |   |      | $ | 86,193
|                                     |  |              |           |   |      |   |       

Pursuant to the purchase of our BLM lease in New Mexico, we agreed to assume certain plug and
abandon obligations for certain wells on the leased land. Management determined that the present value of the total estimated costs to plug and abandon the wells was $86,193. In February 2008, we plugged and abandoned 11 of the well sites at a cost
of $26,453. No additional wells were required to be plugged and abandoned during the year ended December 31, 2008.

We completed the
construction of the cooling towers, transmission lines and setting of the UTCP power generating units at our Thermo No. 1 project in October 2008. The Thermo No. 1 power plant began generating and transmitting nominal quantities of
test electricity in December 2008 and is expected to become operational at or near full capacity in the first part of 2009. In connection with the construction of the Thermo No. 1 geothermal power plant, we have incurred a future
obligation to dismantle the geothermal power plant, plug and abandoned our ten 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.
Therefore, we have estimated the present value of the asset retirement liabilities for the Thermo No. 1 geothermal power plant and for each of the respective wells of approximately $2.0 million during 2008.

Asset retirement liabilities for other projects were estimated at $0.1 million at December 31, 2008.

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 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.



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Note 12. Long-Term Senior Secured Note (non-recourse) and Convertible Senior Notes

On August 31, 2008, we finalized the project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing
Agreements that provide debt financing and tax equity capital for the Thermo No. 1 project. According to the Thermo Financing Agreements, the project financing arrangements for the Thermo No. 1 project included approximately $31.1 million
of permanent non-recourse debt financing for the Thermo No. 1 project with a fixed annual interest rate of 7.00% over 18 years. Our Thermo Subsidiary received proceeds from the debt financing of approximately $26.1 million for construction of
the Thermo No. 1 project after an original issue discount of approximately $5.0 million. After the effect of the original issue discount, the effective interest rate on the $26.1 million of debt financing proceeds is 9.50%. Pursuant to the
Thermo Financing Agreements, the debt financing for the Thermo No. 1 project is held by our Thermo Subsidiary, which is responsible for debt service, all maintenance and operations expenses, and the payment of various fees and distributions to
us and Merrill Lynch. Accordingly, if our Thermo Subsidiary defaulted on the loan, there would be no recourse to us to pay the unpaid balance. As of December 31, 2008, we have made principal and interest payments toward the $31.1 million 7.00%
senior secured note totaling $377,743 and $682,388, respectively.

On March 26, 2008, we sold $50.0 million aggregate principal amount
of our 8.00% Convertible Notes due 2013 pursuant to the terms of the Purchase Agreement between the Initial Purchaser and us. We granted the Initial Purchaser of the Convertible Notes a 30-day overallotment option to purchase up to an additional
$5.0 million aggregate principal amount of the Convertible Notes. On April 1, 2008, we sold an additional $5.0 million aggregate principal amount of the Convertible Notes pursuant to the exercise of the Initial Purchasers overallotment
option. The Convertible Notes were offered through the Initial Purchaser only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. Six qualified institutional buyers purchased the Convertible
Notes. The net proceeds from the sale of the Convertible Notes, after deducting financing fees of $2.2 million, totaled $52.8 million. The Convertible Notes financing fees of $2.2 million has been capitalized as a deferred financing fee and
will be amortized as additional interest expense over the five-year term of the Convertible Notes (see Note 9. Deferred Acquisition and Financing Fees above). On October 1, 2008, we paid the first semi-annual interest payment to the current
holders of the Convertible Notes totaling $2.2 million.

The Convertible Notes bear interest at a rate of 8.00% per annum, which is
payable semi-annually. The Convertible Notes are convertible, at the holders option, at an initial conversion rate of 108.3658 shares of common stock per $1,000 principal amount of Convertible Notes, which represents a 20% conversion premium
based on the last reported sale price of $7.69 per share of our common stock on March 19, 2008. Conversion of all Convertible Notes will result in the issuance of up to a maximum of 5,960,121 shares of our common stock. As of December 31,
2008, none of the Convertible Notes had been converted. The Convertible Notes are unsecured and rank on parity with all of our other existing and future unsecured indebtedness.

The table set forth below represents outstanding payments for our long-term senior secured note (non-recourse) and convertible senior notes and related
scheduled payments as of December 31, 2008:



|                                                     |  |        |           |        |   |         |  |        |         |        |   |            |  |       |            |  |   |            |  |   |           
|---------------------------------------------------- |  | ------ | --------- | ------ | - | ------- |  | ------ | ------- | ------ | - | ---------- |  | ----- | ---------- |  | - | ---------- |  | - | ----------
|                                                     |  | Year 1 |           | Year 2 |   | Year 3  |  | Year 4 |         | Year 5 |   | Thereafter |  | Total
|Long-term 7.00% senior secured (non-recourse note),* |  | $      | 724,380   |        | $ | 830,523 |  | $      | 956,577 |        | $ | 1,039,290  |  | $     | 1,202,279  |  | $ | 25,990,300 |  | $ | 30,797,349
|Long-term 8.00% convertible senior notes             |  |        |          |        |   |        |  |        |        |        |   |           |  |       | 55,000,000 |  |   |           |  |   | 55,000,000
|Note payable                                         |  |        | 950,000   |        |   |        |  |        |        |        |   |           |  |       |           |  |   |           |  |   | 950,000   
|                                                     |  |        |           |        |   |         |  |        |         |        |   |            |  |       |            |  |   |            |  |   |           
|Total long-term debt obligations                     |  | $      | 1,674,380 |        | $ | 830,523 |  | $      | 956,577 |        | $ | 1,093,290  |  | $     | 56,202,279 |  | $ | 25,990,300 |  | $ | 86,747,349



|* | Scheduled payments represent payments on the face value of the note without to the recorded discount of $5,155,156.
|- | -------------------------------------------------------------------------------------------------------------------



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Concurrently, with the pricing of the Convertible Notes, we entered into a call spread option transaction
and a confirmation of a forward stock purchase transaction with an affiliate of the Initial Purchaser of the Convertible Notes. We used approximately $15.0 million of the net proceeds from the offering to repurchase shares of our common stock
pursuant to the forward stock purchase transaction and approximately $5.9 million of net proceeds to fund the call spread option transaction. We used the remaining net proceeds from the offering for general corporate purposes and to continue well
field and other development activities for the geothermal power plants we are developing. For further discussion of the call spread option and forward purchase transaction, refer to Note 15. Common Stock below.

Note 13. Minority Interest

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

The Thermo Financing
Agreements provide for the allocation of 99% of profits and losses to the Class A Investor until the Class A Investor earns a target internal rate of return of 15%. Upon reaching the target rate of return, the Class A Investors
allocation of profits and losses will automatically be reduced to 5.00%.

Because we maintained a 75% voting interest in our Thermo
Subsidiary, we will continue to consolidate 100% of the assets and liabilities of our Thermo Subsidiary. The Class A Investors interest in our Thermo Subsidiary is reflected as Minority Interest in our consolidated balance
sheet and statement of operations. For the year ended December 31, 2008, minority interest was $28.0 million. We also record the changes in minority interest capital accounts relative to the contractual arrangements as gains or losses on the
sale of minority interest in our subsidiary. For the year ended December 31, 2008, we recorded a loss on the sale of minority interest in our subsidiary totaling $5.3 million.

In conjunction with the issuance of Class A member interest, our share of our Thermo Subsidiarys net equity was reduced by $1.4 million. In
accordance with SEC Staff Accounting Bulletin Topic 5H, we initially elected to record the $1.4 million as a reduction in paid in capital rather than a loss on the sale of a subsidiary. However, after further evaluation, we changed the method of
accounting to recognize the loss on the sale of minority interest in our subsidiary in the income statement rather than as a reduction in additional paid in capital. We believe that this change in accounting method did not materially impact the
third quarter of 2008 condensed consolidated financial statements.

See further discussion of the change in accounting method at Note 24.
Quarterly Financial Data below.

Note 14. Contingencies and Commitments

We have entered into non-cancelable operating leases for our corporate offices and a testing facility. We have commitments under these leases that extend
through December 31, 2011.

Future minimum lease payments under non-cancelable operating leases under Statement of Financial
Accounting Standard No. 13 (FAS 13), Accounting for Leases, of December 31, 2008 were as follows:



|                         |  |                      |          
|------------------------ |  | -------------------- | ---------
|Year Ending December 31, |  | Minimum leasepayment
|2009                     |  | $                    | 446,753  
|2010                     |  |                      | 422,359  
|2011                     |  |                      | 432,002  
|2012                     |  |                      |         
|2013                     |  |                      |         
|Thereafter               |  |                      |         
|                         |  |                      |          
|Total minimum payments   |  | $                    | 1,301,114
|                         |  |                      |          



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Total rent expense for the years ended December 31, 2008, 2007 and 2006, was approximately $316,000,
$265,000 and $226,000, respectively.

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

During 2007 and 2008, we executed multiple purchase agreements with UTCP relating to the purchase of 250 power generating units for the geothermal power
plants we intend to develop. Under the provisions of these agreements, we had paid down payments totaling approximately $3.8 million in 2007 and $7.3 million in 2008. On August 31, 2008, we finalized the project financing arrangements to
provide for debt financing and tax equity capital for the Thermo No. 1 project. Concurrent with the closing of the debt financing, our Thermo Subsidiary paid approximately $6.2 million toward the UTCP power generating units received in
accordance with the first purchase agreement.

On December 23, 2008, the first purchase agreement with UTCP was terminated and the
other purchase agreements with UTCP were amended into three separate purchase agreements (the Amended Agreements) to properly reflect the actual distribution of the generating units to the Thermo No. 1 project site and establish
greater flexibility for distribution of the generating units to future projects. Under the Amended Agreements, the deposits and payments already made under the previous purchase agreements were allocated to the new purchase agreements consistent
with the actual and intended future distributions of the generating units. As of December 31, 2008, we were obligated to pay UTCP approximately $56.3 million to complete the agreements of which approximately $34.1 million is included in our
accounts payables and accrued liabilities.

We have also entered into certain purchase obligations including a series of purchase and
service agreements whereby certain vendors have agreed to provide certain equipment and services to us. As of December 31, 2008, we were obligated to pay the vendors including UTCP approximately $69.6 million in 2009; $4.9 million in 2010; $5.0
million in 2011; $5.1 million in 2012; and $5.2 million in 2013. Since our geothermal lease agreements are not considered to be operating leases under the Statement of Financial Accounting Standard No. 13 (FAS 13),
Accounting for Leases, these purchase obligations include delay rental payments that we have agreed to make in order to maintain our granted rights to the leased properties.

Contingent Options and Share Grants

During the third
quarter of 2006, we committed to grant 50,000 options to a key technical employee contingent upon attainment of certain performance objectives. During the third quarter of 2007, we granted the 50,000 options to the key technical employee upon the
announcement of a license agreement with an alternator re-manufacturer. The exercise price of $12.80 was established at the closing market price on the day after the announcement. Vesting of the options continues to be contingent upon the attainment
of certain performance objectives. These options were cancelled when the employee terminated employment in April 2008. Accordingly no equity compensation was recognized relating to the contingent options during the years ended December 31, 2008
and 2007, respectively.

On December 22, 2006, we entered into a 50-year geothermal lease agreement to obtain the right to begin
development and construction of geothermal power plants on properties in Nevada consisting of 11,600 acres. We also have rights to pursue similar projects on 3.0 million additional acres of land with respect to which the land owner may have
geothermal rights. During the fourth quarter of 2008, we began the necessary due diligence to determine if the property owner does have any geothermal rights with respect to these three million acres of land. We expect to complete our due diligence
in the first or second quarter of 2009. As part of the consideration of the 50-year geothermal lease agreement, we committed to grant 25,000 restricted shares of our common stock, contingent upon successfully placing a geothermal power plant in
operation upon the leased lands. In December 2007, by mutual consent of both parties, the geothermal lease agreement was amended to cancel the contingent share grant. No equity based compensation expense has been recognized relating to these
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On June 18, 2007, we entered into a 10-year geothermal lease agreement to obtain the exclusive right
to drill for, extract, produce, remove, utilize, sell and dispose of all forms of thermal energy on the same property we previously leased on December 22, 2006 in Nevada. This lease was necessary to more fully secure our interest in the
property. As part of the consideration for the 10-year geothermal lease agreement we committed to grant 25,000 restricted shares of our common stock, contingent upon successfully placing a geothermal power plant in operation upon the leased lands.
At the end of each quarter since the grant date, management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5,
Accounting for Contingencies. Accordingly, we did not recognize equity compensation during the years ended December 31, 2008 and 2007, respectively.

On October 22, 2007, the Compensation Committee granted options to purchase 10,000 shares of our common stock to a key power systems employee. Vesting of these options is contingent upon successfully placing one
geothermal power plant under his supervision in service. The option exercise price is $11.87 per share, which was the closing market price on the grant date. Failure to successfully place the geothermal power plants in service will result in the
forfeiture of the unvested contingent options. At December 31, 2007, management assessed the likelihood of completing the contingent requirements and concluded that it should be considered reasonably possible in accordance with the
definition in SFAS No. 5, Accounting for Contingencies that a geothermal power plant be placed in service under his supervision. Accordingly, we did not recognize equity compensation during the years ended December 31, 2008 and
2007, respectively.

On May 24, 2007, we entered into a geothermal project alliance agreement whereby a service provider agreed to
provide engineering advice to us relating to geothermal drilling and geothermal power plant construction. As part of the consideration for the agreement, we agreed to grant 5,000 shares of common stock upon issuance of a certificate of completion
with respect to each of the first three specific projects. During the second quarter of 2008, management assessed the likelihood of completing the contingent requirements and concluded that the completion of the first geothermal power plant was
considered probable in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly, we recognized equity compensation for the years ended December 31, 2008 and 2007 totaling $29,100 and
zero, respectively. For the other two specific projects, management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS
No. 5, Accounting for Contingencies. Accordingly, we did not recognize equity compensation for the other two specific projects during the years ended December 31, 2008 and 2007, respectively.

On May 31, 2007, we granted options to purchase 50,000 shares of our common stock to a key executive in our power systems segment. Vesting of these
options is contingent upon successfully placing each of our first three geothermal power plants in service. The options will vest with respect to one third of the shares each time one of the three geothermal power plants is successfully placed in
service. The option exercise price is $7.20 per share, which was the closing market price on the grant date. Failure to successfully place any of the first three geothermal power plants in service will result in the forfeiture of one third of the
unvested contingent options. During the second quarter of 2008, management assessed the likelihood of completing the contingent requirements and concluded that the completion of the first geothermal power plant was considered probable in
accordance with the definition in SFAS No. 5, Accounting for Contingencies. Accordingly, we recognized equity compensation for the year ended December 31, 2008 and 2007 totaling $80,844 and zero, respectively. For the other two
specific projects, management assessed the likelihood of completing the contingent requirements and concluded that it remained reasonably possible in accordance with the definition in SFAS No. 5, Accounting for
Contingencies. Accordingly, we did not recognize equity compensation for the other two specific projects during the year ended December 31, 2008 and 2007, respectively.

On January 14, 2008, the Compensation Committee granted options to purchase 100,000 shares of our common stock to a key power systems employee.
Vesting of these options is contingent upon successfully achieving certain sales levels. The option price is $16.50 per share, which was the closing market price on the grant date. Failure to successfully, attain the predetermined sales levels will
result in forfeiture of the unvested



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contingent options. At December 31, 2008, management assessed the likelihood of completing the contingent requirements in accordance with the definition
in SFAS No. 5, Accounting for Contingencies. Based on this assessment, management concluded that it is reasonably possible that a geothermal power plant will be placed in service under the employees supervision and
that the required sales level can be met. Accordingly, we did not recognize equity compensation during the year ended December 31, 2008.

On December 5, 2008, the Board of Directors granted options to purchase 50,000 shares of our common stock to a service provider. The option price is $4.00 per share which exceeded the closing market price on the day of the grant of
$3.55 per share. Vesting of these options is contingent upon the successful completion of a strategic transaction which nets to us cash proceeds in an amount greater than or equal to $50.0 million. At December 31, 2008, management assessed the
likelihood of completing the contingent requirements in accordance with the definition in SFAS No. 5, Accounting for Contingencies. Based on this assessment, management concluded that it is reasonably possible that a
geothermal power plant will be placed in service under the employees supervision and that the required sales level can be met. Accordingly, we did not recognize equity compensation during the year ended December 31, 2008.

Guarantees

On August 31 2008, we finalized the
project financing arrangements for the Thermo No. 1 project and entered into the Thermo Financing Agreements. The Thermo Financing Agreements included an equity capital contribution agreement (the ECCA) between our Thermo Subsidiary
and Merrill Lynch L.P. Holdings, Inc. (ML Holdings). Pursuant to the ECCA, our Thermo Subsidiary agreed to fund any drilling costs in excess of the original drilling account escrow of $5.7 million established to complete the well field
drilling of the Thermo No. 1 project (the Drilling Escrow Top Up). In conjunction with independent geothermal engineers, we have performed monthly reviews of our estimated cost to complete the well field for production. Through
March 8, 2009, we have contributed an additional $8.9 million to the drilling account escrow for completion of the well field.

The
Thermo Agreements include a guaranty agreement dated August 31, 2008 among our Thermo Subsidiary, the Class A investors of our Thermo Subsidiary, and us. Under the guaranty agreement, we guarantee the full payment of the Drilling Escrow
Top Up. Our liability under this agreement will continue until the guaranteed obligation is satisfied in full. We expect to complete our drilling at the Thermo No. 1 project during the first or second quarter of 2009; however, the maximum
potential future payments may be unlimited if our wells cannot produce enough electricity so that the Thermo No. 1 geothermal power plant can achieve full capacity.

The Thermo Financing Agreements, also include an engineering, procurement and construction agreement (the EPC Agreement) with our Thermo Subsidiary. Pursuant to the EPC Agreement, we agreed to oversee the
engineering, procurement and construction of the geothermal power plant for the Thermo No. 1 project. In addition, we guaranteed the completion of the geothermal power plant construction and the payment of all services performed by the
subcontractors. We expect to make the payments to the subcontractors, including cost overruns, if any, in the ordinary course of business. All intercompany transactions related to the EPC Agreement are eliminated in consolidation of the financial
statements. Our liability under this agreement will continue until the guaranteed obligation is satisfied in full. We expect to complete our construction phase at the Thermo No. 1 project during the first or second quarter of 2009.

In connection with the Thermo Financing Agreements, we also entered into an amended and restated purchase contract (the Amended and Restated
Purchase Contract) with UTCP relating to the purchase of generating units for the Thermo No. 1 project. Under the terms of the Amended and Restated Purchase Contract, UTCP has agreed to allow us to retain a certain portion of the purchase
price of the generating units pending the successful completion of the Thermo No. 1 project. If the Thermo No. 1 project is not successfully completed as a result of a problem with the generating units, then we will keep the retained
portion of the purchase price as a



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liquidated damages payment. If the Thermo No. 1 project is not successfully completed as a result of any other reason, we will reimburse UTCP for any
liquidated damages paid by UTCP. To secure payment of our obligations to reimburse UTCP under the Amended and Restated Purchase Contract, we provided a security interest to UTCP in five patents relating to our Transportation & Industrial
segment. We believe that the likelihood that we will be obligated to reimburse UTCP for liquidated damages under the Amended and Restated Purchase Contract is remote. Accordingly, we estimate the maximum potential obligation and the
related fair value of the obligation under the Amended and Restated Purchase Contract to be immaterial at this time. Therefore, no liability had been recorded at December 31, 2008.

We have previously entered into a license and sublicense agreement for heat transfer technologies through our wholly owned subsidiary, RaserPower
Systems, LLC. We also entered into a guaranty on behalf of the subsidiary to irrevocably and unconditionally guarantee full and prompt payment and performance of all the subsidiary obligations under the license and sublicense agreement. The guaranty
will remain in full force and effect until satisfaction in full of all the subsidiarys obligations under the agreement and is binding on any successors. The maximum potential amount of future payments under this guarantee cannot be estimated,
but payment obligations will be limited to the actual royalties payable arising from developed projects that utilize the heat-transfer license.

As of December 31, 2008, we did not have any letters of credit or repurchase obligations.

Note 15. Common Stock

Private Equity Placements

On
March 30, 2007, we sold 2,693,552 shares of our common stock in a private placement to certain accredited investors, including one member of our board of directors, at a price of $4.65 per share. The gross proceeds from the private equity
placement totaled $12,525,001. Certain commissions and legal fees incurred in conjunction with the financing totaled $671,250, resulting in net proceeds totaling $11,853,751.

On November 14, 2008, we sold 2,000,000 shares of our common stock at a fixed price of $5.00 per share in a private equity transaction or $10.0
million. We also sold 2,360,417 shares of our common stock on December 12, 2008 for $4.23654 per share, which is a price per share equal to $10.0 million divided by 110% of the average of the daily volume-weighted average price on the NYSE Arca
exchange for the common stock for the ten business days ending on and including December 11, 2008. The gross proceeds from the closing of the November 14, 2008 and December 12, 2008 private placement transactions were $20,000,000,
before deducting fees and commissions. We paid commissions of $1,232,000 to a placement agent in connection with the closing of the private placement transactions. In connection with this private placement, we issued 7,458,532 warrants to purchase
our shares of common stock (see Note 16. Warrants below).

Stock-Based Compensation

In March 2004, our Board of Directors (the Board) adopted the Raser Technologies, Inc. Amended and Restated 2004 Long-Term Incentive Plan (the
Plan), and in May 2004, our board recommended and the stockholders approved the Plan. The Plan was adopted to facilitate (1) grants of a wider range of stock incentive awards, including restricted stock, stock appreciation rights,
performance shares and performance units, (2) an automatic annual increase to the number of shares of common stock reserved for issuance under the Plan beginning in 2005 equal to the lesser of 1,750,000 shares of common stock, 3% of the
outstanding shares of common stock on the first of each fiscal year, or an amount determined by the Board, and (3) optional automatic, nondiscretionary annual stock option grants for employees and non-employee directors. As of December 31,
2008, we were authorized to issue up to 7,943,173 shares of common stock pursuant to the Plan.

Three of our Board of Directors also
participate in an additional compensation plan for our outside directors. The standard equity package under the this plan consists of stock awards, each award having a nominal value of



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$95,000 as of the date of the Annual Meeting of Stockholders (with the actual share award rounded to the nearest round lot of 100 shares). Current outside
directors that had not previously participated in this plan, could elect to participate in the new plan by making an election within 30 days of the Annual Meeting of Stockholders. Any director who elects to adopt this plan retains all options vested
up to that point under previous compensation arrangements and forfeits all unvested options. During the year ended December 31, 2006, three of the eligible outside directors elected to adopt this plan. Accordingly, the three outside directors
forfeited a cumulative total of 156,667 unvested options and were granted a total of 10,600 shares each to be delivered on June 27, 2007, one year after the 2006 Annual Meeting of Stockholders. Each of the three directors were granted 12,700
shares on June 1, 2007, date of the Annual Meeting of Stockholders, to be delivered on June 1, 2008, one year after the 2007 Annual Meeting of Stockholders. Three directors were granted 9,500 shares on May 28, 2008, date of the Annual
Meeting of Stockholders, to be delivered on May 28, 2009, one year after the 2008 Annual Meeting of Stockholders. If the director resigns prior to the delivery date, the shares will be forfeited and not delivered.

Employee and Director Share Grants and Option Grants

We granted common stock to our employees and directors totaling 28,500 shares during the year ended December 31, 2008. We also granted options to purchase an aggregate of 557,950 shares of common stock during the year ended
December 31, 2008. During the years ended December 31, 2007 and 2006, we granted to our employees and directors 43,100 and 67,800 shares of common stock, respectively, and options to purchase an aggregate of 992,500 and 481,500 shares of
common stock, respectively. During the years ended December 31, 2008, 2007 and 2006, vested options expired out of the money and were not exercised totaling 78,050, 2,000 and 58,200, respectively. During the years ended
December 31, 2008, 2007 and 2006, employees forfeited 92,325, 10,500 and 108,800 of unvested options to purchase shares of common stock, respectively.

During the year ended December 31, 2008, no unvested share grants were forfeited. During the year ended December 31, 2007, a former employee forfeited 2,000 unvested stock grant shares. During the year ended
December 31, 2006, two former employees forfeited 316,668 unvested stock grant shares and were granted 220,833 additional shares of common stock in settlement of employment arrangements. Approximately $4.1 million of non-cash equity expense was
recognized in year ended December 31, 2006 related to these settlements.

During the year ended December 31, 2008, we issued
43,125 shares of common stock as a result of option exercises, and 5,990 shares of common stock as a result of warrant exercises. During the year ended December 31, 2007, we issued 199,500 shares of common stock as a result of option exercises,
and 1,069,726 shares of common stock as a result of warrant exercises. During the year ended December 31, 2006, we issued 66,000 shares of common stock as a result of option exercises, and 6,000 shares of common stock as a result of warrant
exercises.

In the third quarter of 2008, we modified the terms of our options to increase the period in which the holder of vested options
may exercise those options after termination of employment. We believe the impact of this change was not material.

Third Party Share Grants

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

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



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

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

On October 10, 2008, in settlement of an outstanding invoice totaling $450,000, we
granted 112,782 restricted shares of our common stock to a service provider for design and engineering services related to our geothermal power plant development efforts. The 112,782 shares represented the fair value of the amount to be applied
towards the outstanding invoice on the date of the grant. The fair value of these shares totaled $450,000.

On December 16, 2008, in
partial settlement of an outstanding invoice, we granted 34,483 restricted shares of our common stock to a service provider for the construction of our Thermo No. 1 geothermal power plant. The 34,483 shares represented the fair value of the
amount to be applied towards the outstanding invoice on the date of the grant. The fair value of these shares totaled $150,000.

During the
first quarter of 2007, we issued to three separate owners of geothermal properties in Nevada a total of 7,500 shares of our common stock pursuant to two separate 50-year geothermal lease agreements. The common stock had a fair value totaling $39,800
on the respective grant date. These costs have been capitalized and classified as unproved property and prepaid delay rentals.

During the
first quarter of 2007, we granted 200,000 shares of restricted common stock to a service provider to advise us on various matters. Pursuant to the terms of the agreement 150,000 shares were delivered in April 2007 and 50,000 shares were delivered in
September 2007. Accordingly, the stock was valued on the grant date and was recognized in the first quarter of 2007 as a non-cash general and administrative expense totaling $990,000.

During the second quarter of 2007, we granted 15,000 shares of registered common stock to a service provider to advise us on engineering matters relating
to geothermal drilling and power plant construction. The stock had a fair value on the grant date totaling $110,250 and was recognized as a non-cash power project development expense.

During the third quarter of 2006, we committed to grant an unspecified amount of shares to a service provider in connection with their performance of
financing services, merger and acquisition services and assistance in obtaining our geothermal heat transfer license. These services were completed on September 2, 2006. On November 2, 2006, we agreed to grant 300,000 shares of
unregistered common stock to this service provider. The stock was valued on the date when services were completed and the full value of the award was recognized totaling $1,341,000.

On December 22, 2006, we issued 25,000 restricted shares of our common stock as part of the overall consideration to acquire a 50-year Geothermal
Lease Agreement with the owner of three ranches in Nevada. The common stock had a fair value of $115,250 on the grant date. These costs have been capitalized and classified as unproved property and prepaid delay rentals.

Convertible Preferred Stock

We did not issue
convertible preferred stock during the years ended December 31, 2008 and 2007.



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Third Party Option and Warrant Grants

Stock options granted to non-employees for services are accounted for in accordance with Emerging Issues Task Force (EITF) 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services which requires expense recognition based on the fair value of the options. We calculate the fair
value of options and warrants that have been granted by using the Black-Scholes pricing model.

On December 5, 2008, we granted
options to purchase 95,000 shares of our common stock to a service provider for consulting services to assist us with entering into a corporate alliance to finance the construction of future geothermal power plants. The options have an exercise
price of $4.00 per share which exceeded the closing market price on the grant date of $3.55 per share. The options have a fair value of $175,351 which was recorded as power project development expense.

During the third quarter of 2007, we granted options to purchase 35,000 shares of our common stock to the owner of three ranches in Nevada as
consideration to secure certain surface rights to the land. The options have an exercise price of $15.10 per share which was established as the closing market price on the grant date. The options had a fair value of $423,987 that was recorded as
power project leases. We did not grant options to purchase shares of our common stock to service providers during 2006.

See discussion of
contingently vesting warrants and non-contingently vesting warrants issued during 2008 and 2007 and utilization of a binomial lattice model to calculate their fair value in Note 16, Warrants below.

The activity for stock options and warrants during the years ending December 31, 2008, 2007 and 2006, respectively is summarized as follows:



|                                  |  |                               |   |  |                                |       |                          |   |           
|--------------------------------- |  | ----------------------------- | - |  | ------------------------------ | ----- | ------------------------ | - | ----------
|                                  |  | Number of Optionsand Warrants |   |  | Weighted AverageExercise Price |       | Aggregate IntrinsicValue
|Outstanding at January 1, 2006:   |  | 1,921,947                     |   |  | $                              | 9.38  |                          |   |           
|Granted                           |  | 481,500                       |   |  |                                | 9.18  |                          |   |           
|Exercised                         |  | (72,000                       | ) |  |                                | 4.12  |                          |   |           
|Expired or forfeited              |  | (323,667                      | ) |  |                                | 18.63 |                          |   |           
|                                  |  |                               |   |  |                                |       |                          |   |           
|Outstanding at December 31, 2006: |  | 2,007,780                     |   |  | $                              | 7.95  |                          | $ | 2,188,606 
|                                  |  |                               |   |  |                                |       |                          |   |           
|Granted                           |  | 2,189,512                     |   |  |                                | 7.01  |                          |   |           
|Exercised                         |  | (1,269,226                    | ) |  |                                | 5.75  |                          |   |           
|Expired or forfeited              |  | (17,500                       | ) |  |                                | 13.18 |                          |   |           
|                                  |  |                               |   |  |                                |       |                          |   |           
|Outstanding at December 31, 2007: |  | 2,910,566                     |   |  | $                              | 8.14  |                          | $ | 20,494,977
|                                  |  |                               |   |  |                                |       |                          |   |           
|Granted                           |  | 11,961,482                    |   |  |                                | 8.66  |                          |   |           
|Exercised                         |  | (154,115                      | ) |  |                                | 4.40  |                          |   |           
|Expired or forfeited              |  | (165,375                      | ) |  |                                | 10.69 |                          |   |           
|                                  |  |                               |   |  |                                |       |                          |   |           
|Outstanding at December 31, 2008: |  | 14,552,558                    |   |  | $                              | 8.57  |                          | $ | 50,560    
|                                  |  |                               |   |  |                                |       |                          |   |           
|Exercisable at December 31, 2006: |  | 1,323,222                     |   |  | $                              | 5.93  |                          | $ | 2,161,924 
|                                  |  |                               |   |  |                                |       |                          |   |           
|Exercisable at December 31, 2007: |  | 1,499,641                     |   |  | $                              | 6.99  |                          | $ | 12,410,954
|                                  |  |                               |   |  |                                |       |                          |   |           
|Exercisable at December 31, 2008: |  | 10,578,354                    |   |  | $                              | 7.20  |                          | $ | 49,235    
|                                  |  |                               |   |  |                                |       |                          |   |           

The total intrinsic value of options and warrants exercised in the years ended December 31,
2008, 2007 and 2006 was approximately $297,394, $8,943,604 and $598,895 respectively. The cash received from exercises of options and warrants in the years ended December 31, 2008, 2007 and 2006 was approximately $678,597, $7,294,868 and
$296,600, respectively.



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The following tables summarize certain stock option and warrant information at December 31, 2008:

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



|                        |  |            |  |                                  |  |                                |       |                 |   |       
|----------------------- |  | ---------- |  | -------------------------------- |  | ------------------------------ | ----- | --------------- | - | ------
|Range of exercise price |  | Number     |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsic value
|$3.00  $5.75           |  | 1,399,693  |  | 6.36                             |  | $                              | 4.32  |                 | $ | 50,560
|$6.00  $11.00          |  | 8,603,032  |  | 9.66                             |  |                                | 6.31  |                 |   |      
|$11.01  $17.20         |  | 4,516,500  |  | 6.35                             |  |                                | 14.05 |                 |   |      
|$25.95                  |  | 33,333     |  | 6.30                             |  |                                | 25.95 |                 |   |      
|                        |  |            |  |                                  |  |                                |       |                 |   |       
|Total                   |  | 14,552,558 |  | 8.31                             |  | $                              | 8.57  |                 | $ | 50,560
|                        |  |            |  |                                  |  |                                |       |                 |   |       

Outstanding Options and Warrants Fully Vested and Exercisable



|                        |  |            |  |                                  |  |                                |       |                 |   |       
|----------------------- |  | ---------- |  | -------------------------------- |  | ------------------------------ | ----- | --------------- | - | ------
|Range of exercise price |  | Number     |  | Weighted averagecontractual life |  | Weighted averageexercise price |       | Intrinsic value
|$3.00  $5.75           |  | 944,614    |  | 5.62                             |  | $                              | 4.05  |                 | $ | 49,235
|$6.00  $11.00          |  | 7,881,907  |  | 9.76                             |  |                                | 6.11  |                 |   |      
|$11.01  $17.20         |  | 1,718,500  |  | 6.28                             |  |                                | 13.58 |                 |   |      
|$25.95                  |  | 33,333     |  | 6.30                             |  |                                | 25.95 |                 |   |      
|                        |  |            |  |                                  |  |                                |       |                 |   |       
|Total                   |  | 10,578,354 |  | 8.81                             |  | $                              | 7.20  |                 | $ | 49,235
|                        |  |            |  |                                  |  |                                |       |                 |   |       

The following table summarizes the non-vested stock options at December 31, 2008:

Non-Vested Option Grants



|                                 |  |                   |   |  |                                             |      
|-------------------------------- |  | ----------------- | - |  | ------------------------------------------- | -----
|                                 |  | Number of Options |   |  | Weighted averageper option fairmarket
value
|Non-vested at January 1, 2006:   |  | 786,350           |   |  | $                                           | 13.13
|Granted                          |  | 481,500           |   |  |                                             | 7.91 
|Vested                           |  | (317,825          | ) |  |                                             | 8.99 
|Forfeited                        |  | (265,467          | ) |  |                                             | 15.97
|                                 |  |                   |   |  |                                             |      
|Non-vested at December 31, 2006: |  | 684,558           |   |  | $                                           | 10.28
|                                 |  |                   |   |  |                                             |      
|Granted                          |  | 1,137,500         |   |  |                                             | 6.30 
|Vested                           |  | (410,633          | ) |  |                                             | 7.92 
|Forfeited                        |  | (15,500           | ) |  |                                             | 10.66
|                                 |  |                   |   |  |                                             |      
|Non-vested at December 31, 2007: |  | 1,395,925         |   |  | $                                           | 7.73 
|                                 |  |                   |   |  |                                             |      
|Granted                          |  | 802,950           |   |  |                                             | 6.74 
|Vested                           |  | (482,346          | ) |  |                                             | 6.57 
|Forfeited                        |  | (92,325           | ) |  |                                             | 11.96
|                                 |  |                   |   |  |                                             |      
|Non-vested at December 31, 2008: |  | 1,624,204         |   |  | $                                           | 7.34 
|                                 |  |                   |   |  |                                             |      



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The following table summarizes the non-vested stock awards at December 31, 2008:

Non-Vested Share Awards



|                                 |  |                  |   |  |                                            |      
|-------------------------------- |  | ---------------- | - |  | ------------------------------------------ | -----
|                                 |  | Number of Shares |   |  | Weighted averageper share fairmarket value
|Non-vested at January 1, 2006:   |  | 651,835          |   |  | $                                          | 4.43 
|Granted                          |  | 616,133          |   |  |                                            | 10.17
|Vested                           |  | (887,583         | ) |  |                                            | 8.23 
|Forfeited                        |  | (316,668         | ) |  |                                            | 3.87 
|                                 |  |                  |   |  |                                            |      
|Non-vested at December 31, 2006: |  | 63,717           |   |  | $                                          | 9.79 
|                                 |  |                  |   |  |                                            |      
|Granted                          |  | 265,600          |   |  |                                            | 5.62 
|Vested                           |  | (282,467         | ) |  |                                            | 6.02 
|Forfeited                        |  | (2,000           | ) |  |                                            | 17.19
|                                 |  |                  |   |  |                                            |      
|Non-vested at December 31, 2007: |  | 44,850           |   |  | $                                          | 8.54 
|                                 |  |                  |   |  |                                            |      
|Granted                          |  | 348,279          |   |  |                                            | 6.21 
|Vested                           |  | (363,045         | ) |  |                                            | 6.18 
|Forfeited                        |  |                 |   |  |                                            |     
|                                 |  |                  |   |  |                                            |      
|Non-vested at December 31, 2008: |  | 30,084           |   |  | $                                          | 10.07
|                                 |  |                  |   |  |                                            |      

Vested and undelivered shares relating to delayed share delivery schedules for two former
employees totaled 289,165 shares and had a weighted average fair market value of $4.73 per share at December 31, 2006. There are no vested and undelivered shares at December 31, 2008 or December 31, 2007.

As of December 31, 2008, there was $9,876,888 (pre-tax) and $138,405 (pre-tax) of unrecognized compensation expense related to non-vested stock
option and stock award grants, respectively. This expense is expected to be recognized over a weighted average period of 2.08 years. The following table summarizes the unrecognized compensation expense expected to be recognized in future periods at
December 31, 2008.



|       |  |                                          |           
|------ |  | ---------------------------------------- | ----------
|       |  | Stock-basedcompensationexpense (pre-tax)
|2009   |  | $                                        | 3,707,780 
|2010   |  |                                          | 3,258,683 
|2011   |  |                                          | 1,597,522 
|2012   |  |                                          | 1,140,861 
|2013   |  |                                          | 310,447   
|       |  |                                          |           
|Total: |  | $                                        | 10,015,293
|       |  |                                          |           

Call Spread Option Transaction

Concurrent with the issuance of the Convertible Notes, we entered into a call spread option transaction with an affiliate of Merrill Lynch. The call
spread option transaction was intended to reduce the potential dilution of our common stock upon conversion of the Convertible Notes. The Convertible Notes are convertible at any time prior to maturity at a conversion rate of 108.3658 shares per
$1,000 principal amount of Convertible Notes, which represents a conversion price of $9.23 per share, subject to adjustment. The call spread option transaction allows us to receive up to 934,118 shares of our common stock at $9.23 per share from the
call spread option transaction holder, equal to the amount of our common stock related to the excess conversion value that we



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would deliver to the holders of the Convertible Notes upon conversion. The number of shares that we would receive pursuant to the call spread option
transaction declines after the market price exceeds $11.15 per share to reflect the aggregate market value of $10.4 million of our common stock. The call spread option transaction will terminate upon the earlier of the maturity date of the related
Convertible Notes or the first day all of the related Convertible Notes are no longer outstanding due to conversion or otherwise.

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

Forward Stock Purchase Transaction

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

We accounted for the forward stock purchase transaction pursuant to guidance in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock, Accordingly, the $15.0 million cost of the forward stock purchase transaction was recorded as a reduction to additional paid in capital on the Consolidated Balance Sheets for the year ended December 31, 2008 and we will not
recognize subsequent changes in fair value.

Contingent Options and Share Grants

Refer to discussion of contingent options and share grants in Note 14, Commitment and Contingencies above.

Note 16. Warrants

Contingent Warrants

On January 16, 2008, we granted to Merrill Lynch warrants to purchase up to 3,700,000 shares of our common stock, subject to vesting requirements
associated with the financing of our geothermal power plants. The warrants will vest and become exercisable in increments over the term of the Commitment Letter based on the actual funding provided. In accordance with the anti-dilution provisions
included in the warrants, the issuance of the Convertible Notes and the issuance of common stock during the third quarter of 2008 and the issuance of common stock in connection with our private equity placement during the fourth quarter of 2008
resulted in a reduction of the original strike prices of the warrants from a range of $14.98 to $19.71 to a range of $13.24 to $16.90. The warrants expire on January 16, 2015 and would generate proceeds totaling $51.0 million if all of the
warrants vest and are exercised.

Warrants to purchase 1,350,000 shares of our common stock vested in connection with the closing of the
project financing arrangements for the Thermo No. 1 project. These warrants are immediately exercisable and have a current exercise price of $13.24. In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, the performance criteria related to the vesting of the warrants has been completed. Since the vesting of warrants was a result of closing the project financing,
we allocated the fair value between the net proceeds of the debt and the

amount of equity contribution in our Thermo Subsidiary. We used a binomial lattice
option-pricing model to



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calculate the fair value of the vested warrants. Accordingly, the fair value of the vested warrants allocated to the issuance of debt totaled $3,999,334 and
the fair value of the vested warrants allocated to the equity contribution in our Thermo Subsidiary totaled $3,749,728.

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

The number of unvested warrants that vest
in connection with a project funding will depend on the amount of funding provided. No more than 3,700,000 warrants may vest pursuant to the financing of the first 100 MW of power projects funded under the Merrill Lynch Commitment Letter. The
following table sets forth the general terms of the vesting schedule and the exercise price (as adjusted through December 31, 2008) applicable to each portion of warrants to vest in accordance with the schedule:



|                                                                                                                                                                                                                                                                                                                                                                    |  |               |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -----
|Vesting Schedule                                                                                                                                                                                                                                                                                                                                                    |  | ExercisePrice
|Concurrent with the closing of the funding with respect to the Thermo No. 1 project, warrants vested and became exercisable for the
purchase of 1,350,000 shares of common stock.                                                                                                                                                                                   |  | $             | 13.24
|Concurrent with the closing of each funding with respect to any portion of the next 10 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 150,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 13.24
|Concurrent with the closing of each funding with respect to any portion of the next 30 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 100,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter. |  | $             | 13.24
|Concurrent with the closing of each funding with respect to any portion of the next 50 MWs of geothermal power projects after taking into
account the projects previously funded, warrants vest and become exercisable for the purchase of 50,000 shares of common stock for each $10 million of financing provided or arranged pursuant to the Commitment Letter.  |  | $             | 16.90
|Concurrent with the closing of the funding with respect to the final MW (i.e., the one hundredth MW) of geothermal power projects after taking
into account the projects previously funded, warrants vest and become exercisable for the purchase of 200,000 shares of common stock.                                                                                |  | $             | 16.90

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

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



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Contingent Warrants Call Provision

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



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

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

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



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



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

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

Contingent Warrant Registration Rights Agreement

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

2008 Private Placement Warrants

As
part of the November 14, 2008, $20.0 million private placement, we issued 7,458,532 warrants to the security holder to purchase our shares of common stock. The warrants have a strike price per share of equal to the lesser of (i) six
dollars ($6.00) or (ii) a price equal to the average of the daily market prices of our common stock for the forty (40) business days ending on the third business day prior to the exercise of the Warrants, less $0.60, subject to certain
adjustments. The warrants have a term of ten years.

2007 Private Placement Warrants

As part of the March 30, 2007, private placement, each investor, including one member of our board of directors, received warrants to purchase
additional shares equal to approximately 35% of the shares of common stock purchased by such investor. Accordingly, warrants to purchase 942,739 shares were issued to investors, including one member of our board of directors, at a cash-only exercise
price of $6.05 per share. As described below, all of these warrants were exercised in 2007.

On March 22, 2007, we entered into a
twelve-month advisory agreement with a service provider to receive certain non-exclusive advisory services, including general corporate finance, advisory, merger and acquisition and business development services. The twelve-month period of the
advisory agreement commenced on October 31, 2006, and is renewable for twelve additional months unless terminated in writing by us. We issued 94,273 warrants to the service provider for the purchase of common stock as partial compensation for
assisting us with raising the capital for the March 30, 2007 private placement. These warrants had an exercise price of $6.05.



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The warrants issued to the service provider in conjunction with the private placement were accounted for as a cost of equity, which was netted against the
fair value of the warrants, resulting in offsetting entries to additional paid in capital. As described below, all of these warrants were exercised in 2007.

2007 Private Placement Warrants Call Provision

The March 30, 2007, private placement warrant agreement contained a
call provision. If the closing market price of our common stock exceeded $9.075 for 20 consecutive trading days, we could exercise the right to require all warrant holders to either exercise the warrants or forfeit the warrants not exercised. On
August 9, 2007, our common stock price closed above $9.075 for the twentieth consecutive trading day. Therefore, on August 9, 2007, we exercised the call provision to require the warrant holders to either exercise their warrants or allow
us to cancel their warrants. During August 2007, the warrant holders exercised all 1,037,012 outstanding warrants at the exercise price of $6.05 per share and received an equal number of shares of unrestricted common stock. Proceeds received from
these warrant exercises totaled $6.3 million.

Contractor Warrants

On October 25, 2007, we issued warrants to purchase 15,000 shares our shares of common stock to a service provider for advice, counsel and other investor relations services. The warrants carry an exercise price
of $12.06 which is equal to the five day average closing price of our common stock prior to the contract signature date. The contract signature date is also the grant date. The warrants vest on October 25, 2008, and expire on October 25,
2011.

EITF 96-18 requires that an expense be recognized over the requisite service period when the performance required to earn the
warrants is completed. Since no further actions were required after signing the contract, we computed the fair value of the warrants using the Black-Scholes pricing model and recorded an expense totaling $118,889 in the fourth quarter of 2007 when
the contract was signed. As of December 31, 2008, these warrants had not been exercised.

Series B Warrants

Holders of Series B Preferred Stock were granted cash-only exercise warrants equal to 25% of the common stock available to them upon conversion at an
exercise price of $8.55 per share. During the year ending December 31, 2008, and 2007, 5,990 and 32,714 warrants were exercised by holders of Series B Preferred Stock, providing $27,850 and $152,120 in cash to us. 25,243 warrants were
outstanding and unexercised at December 31, 2008.

Series B Warrant Price Reset Feature

In conjunction with issuing the Series B Convertible Preferred Stock, we issued 412,691 warrants that contained an exercise price reset feature based upon
certain conditions and events that would cause the warrant exercise price for outstanding warrant holders to be adjusted downward to fair value of the common stock on the date when the event occurred. In November 2006, we issued shares to a service
provider which triggered the warrant re-pricing feature in 63,947 outstanding and exercisable warrants. Accordingly, the outstanding warrants previously exercisable for $8.55 per warrant were reset to a new exercise price of $6.05 per warrant.

On March 30, 2007, we issued shares in connection with a private placement. This issuance also triggered the warrant re-pricing
feature applicable to the 63,947 then outstanding and exercisable warrants. Accordingly, the exercise price of the outstanding warrants previously exercisable for $6.05 per share was reset to a new exercise price of $4.65 per share.

On December 12, 2008, we issued shares in connection with a $20.0 million private placement. This issuance also triggered the warrant re-pricing
feature applicable to the 25,243 then outstanding and exercisable



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warrants. Accordingly, the exercise price of the outstanding warrants previously exercisable for $4.65 per share was reset to a new exercise price of $4.24
per share. Based upon the price reset feature in the Series B warrant agreement, further warrant pricing resets may occur given the occurrence of certain conditions and events.

The following table summarizes the warrants outstanding and exercisable at December 31, 2008:



|                      |  |                   |                 |                     |   |                     |  |                           |                  |  |   |                  
|--------------------- |  | ----------------- | --------------- | ------------------- | - | ------------------- |  | ------------------------- | ---------------- |  | - | -----------------
|                      |  | Series B Warrants |                 | Contractor Warrants |   | Contingent Warrants |  | PrivatePlacement Warrants
|Grant dates           |  |                   | September 2004  |                     |   | October 2007        |  |                           | January 2008     |  |   | November 2008    
|Exercise price        |  | $                 | 4.24            |                     | $ | 12.06               |  | $                         | 13.24 -16.90     |  | $ | Max of $6.00     
|Expiration date       |  |                   | October 5, 2009 |                     |   | October 5, 2011     |  |                           | January 15, 2015 |  |   | November 14, 2018
|Warrants outstanding  |  |                   | 25,243          |                     |   | 15,000              |  |                           | 3,700,000        |  |   | 7,458,532        
|Warrants exercisable  |  |                   | 25,243          |                     |   | 15,000              |  |                           | 1,350,000        |  |   | 7,458,532        
|Proceeds if exercised |  | $                 | 107,030         |                     | $ | 180,900             |  | $                         | 17,874,000       |  | $ | 44,751,192       

2008 Private Placement Registration Rights Agreement

In connection with our $20.0 million private placement on November 14, 2008 described above, the purchasers of the common stock and related warrants
also entered into a registration rights agreement that required us to register the resale of the common stock purchased in the private placement and pursuant to the exercise of related warrants. We were obligated to file a registration statement
with the United States Securities and Exchange Commission registering the sale of the shares of common stock and the shares of common stock underlying the Warrants no later than November 14, 2008, and to use our best efforts to cause the
registration statement to be declared effective by December 29, 2008, for the first 2.0 million shares of our common stock purchased and by January 30, 2009, for the remaining 2.3 million shares purchased and the related
7.5 million warrants. We are also obligated to use our best efforts to keep the registration statement continuously effective. Liquidated damages for failure to become effective or maintain effectiveness of the registration statement on Form
S-3 equals one percent of the $20.0 million received per month up to a maximum of $2.0 million in aggregate. As of March 13, 2009, our registration statement on Form S-3 has not been declared effective by the SEC due to unresolved comments from
their SEC comment Letters. Accordingly, we have assessed the likelihood that our registration statement on Form S-3 will be declared effective prior to incurring the maximum liquidated damages associated with this registration rights agreement.
According to our assessment, we should record a liability to accrue for the liquidated damages through March 31, 2009, or $800,000. Management believes that the comments from the SEC comment letter will be resolved and the registration
statement on Form S-3 declared effective prior to April 30, 2009, to avoid additional liquidated damages.

2007 Private Placement Registration
Rights Agreement

In conjunction with the March 30, 2007, private placement, the purchasers of the common stock and related
warrants also entered into a registration rights agreement that required us to register the resale of shares of common stock purchased in the private placement and pursuant to the exercise of related warrants. We filed a registration statement on
Form S-3 with the SEC. The registration statement became effective on June 7, 2007.

If we fail to maintain a continuously effective
registration statement with respect to the resale of the shares described above, we are obligated to pay the purchasers liquidated damages equal to 1.0% of the aggregate purchase price for each month up to a total of three months. The outstanding
balance is subject to interest payments of 18% per annum.

We are currently in compliance with the requirements of the registration
rights agreement and, as such, management believes that the likelihood that the registration statement for these shares will fail to remain continuously effective is remote as defined in SFAS No. 5 Accounting for
Contingencies. Accordingly, no accrued liability is deemed necessary by management.



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Series B Registration Rights Agreement

The Series B preferred stock securities purchase agreement and related agreements provide the purchasers of the Series B preferred stock and the related
Series B warrants with certain rights to register shares of common stock pursuant to a registration rights agreement. We are also obligated to cause the registration statement to remain continuously effective until all Series B preferred shares and
Series B warrants are exercised or expired. In September 2004, all of the outstanding Series B preferred shares and certain of the Series B warrants were converted into shares of common stock under the original registration statement filed on
September 20, 2005. We did not maintain a continuously effective registration for the common shares issuable upon exercise of Series B warrants as required by our agreements, resulting in liquidated damages and interest totaling $31,000 and
$96,000 for the years ended December 31, 2007 and 2006, respectively. We filed a registration statement on Form S-3 with the SEC. The registration statement became effective on June 8, 2007. In July 2007, we paid the amount owed in-full to
the purchasers.

We are currently in compliance with the requirements of the registration rights agreement and, as such, management
believes that the likelihood that these shares will fail to remain continuously effective is remote as defined in SFAS No. 5 Accounting for Contingencies. Accordingly, no additional accrued liability is deemed necessary.

Note 17. Net Loss Per Common Share

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

The following table sets forth the number of shares that would be outstanding
if outstanding securities convertible into common stock were converted into common stock, whether the convertible securities were in the money or out of the money based upon the closing market price on December 31, 2008:



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  |               |  | 11,198,775        
|Vested employee options   |  | 523,250        |  | 1,076,428         
|Unvested employee options |  | 8,750          |  | 1,615,355         
|Vested contractor options |  |               |  | 130,000           

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 December 31, 2007:



|                          |  |                |  |                   
|------------------------- |  | -------------- |  | ------------------
|                          |  | In the Money |  | Out of the Money
|Warrants granted          |  | 46,233         |  |                  
|Vested employee options   |  | 1,117,950      |  | 165,458           
|Unvested employee options |  | 1,185,550      |  | 210,375           
|Vested contractor options |  | 150,000        |  | 35,000            

Unvested and fully-vested and undelivered stock grants totaling 30,084 and 44,850 were outstanding
on December 31, 2008 and 2007, respectively. These warrants, options and share grants were not included in the calculation of diluted net loss per share because their effect was anti-dilutive. Our common stock underlying the



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call spread option transaction and forward stock purchase transaction would be recorded as treasury stock when delivered and; therefore, would be excluded
from the calculation of diluted net loss per share because their effect is anti-dilutive.

Note 18. Fair Value Measurement

We adopted SFAS No. 157, Fair Value Measurements, (SFAS 157) as of January 1, 2008, for financial instruments measured
at fair value on a recurring basis. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. SFAS 157 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We measure certain financial instruments at fair value on a recurring basis. Financial assets measured at fair value on a recurring basis are as follows at December 31, 2008:



|                          |  |         |            |         |   |         |  |       |   |  |   |           
|------------------------- |  | ------- | ---------- | ------- | - | ------- |  | ----- | - |  | - | ----------
|                          |  | Level 1 |            | Level 2 |   | Level 3 |  | Total
|Cash and cash equivalents |  | $       | 1,534,820  |         | $ | 0       |  | $     | 0 |  | $ | 1,534,820 
|Restricted cash           |  |         | 20,900,135 |         |   | 75,704  |  |       | 0 |  |   | 20,975,839
|                          |  |         |            |         |   |         |  |       |   |  |   |           
|Total assets              |  | $       | 22,434,955 |         | $ | 75,704  |  | $     | 0 |  | $ | 22,510,659

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.

Note 19. Business Segments

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

Prior to 2006, we operated in one business segment, Transportation & Industrial. Beginning in
2006, we began to pursue opportunities to develop technologies in the Power Systems market to supplement the development of technologies targeted for the Transportation & Industrial markets. Accordingly, the presentation



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below comprises financial information relating to the years ended December 31, 2008, 2007 and 2006, respectively.



|                                                 |  |                            |            |   |               |   |             |                    |  |   |            |   |  |   |             |  
|------------------------------------------------ |  | -------------------------- | ---------- | - | ------------- | - | ----------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|As of and for the Year Ended December 31, 2008   |  | Transportation &Industrial |            |   | Power Systems |   |             | Corporate andOther |  |   | Total      |  
|Revenues                                         |  | $                          | 142,303    |   |               | $ | 30,000      |                    |  | $ |           |   |  | $ | 172,303     |  
|Segment Operating Loss                           |  |                            | (4,724,107 | ) |               |   | (23,966,896 | )                  |  |   | (9,768,406 | ) |  |   | (38,459,409 | )
|Depreciation and Amortization                    |  |                            | 200,557    |   |               |   | 20,977      |                    |  |   | 82,725     |   |  |   | 304,259     |  
|Unsuccessful and Impaired Wells                  |  |                            |           |   |               |   | 13,624,352  |                    |  |   |           |   |  |   | 13,624,352  |  
|Interest Expense                                 |  |                            |           |   |               |   | 632,558     |                    |  |   | 2,565,692  |   |  |   | 3,198,280   |  
|Fixed Asset Purchases                            |  |                            | 106,994    |   |               |   | 29,282      |                    |  |   | 88,003     |   |  |   | 224,279     |  
|Geothermal Well Field Drilling Purchases         |  |                            |           |   |               |   | 40,262,455  |                    |  |   |           |   |  |   | 40,262,455  |  
|Power Project Construction-in-Progress Purchases |  |                            |           |   |               |   | 73,468,580  |                    |  |   |           |   |  |   | 73,468,580  |  
|Power Project Equipment Purchases                |  |                            |           |   |               |   | 19,727,500  |                    |  |   |           |   |  |   | 19,727,500  |  
|Total Assets                                     |  | $                          | 749,185    |   |               | $ | 168,405,311 |                    |  | $ | 14,869,952 |   |  | $ | 184,024,448 |  



|                                                 |  |                            |            |   |               |   |            |                    |  |   |            |   |  |   |             |  
|------------------------------------------------ |  | -------------------------- | ---------- | - | ------------- | - | ---------- | ------------------ |  | - | ---------- | - |  | - | ----------- | -
|As of and for the Year Ended December 31, 2007   |  | Transportation& Industrial |            |   | Power Systems |   |            | Corporate andOther |  |   | Total      |  
|Revenues                                         |  | $                          | 320,072    |   |               | $ |           |                    |  | $ |           |   |  | $ | 320,072     |  
|Segment Operating Loss                           |  |                            | (3,990,583 | ) |               |   | (2,673,583 | )                  |  |   | (9,806,279 | ) |  |   | (16,470,445 | )
|Depreciation and Amortization                    |  |                            | 181,299    |   |               |   | 11,542     |                    |  |   | 79,534     |   |  |   | 272,375     |  
|Unsuccessful and Impaired Wells                  |  |                            |           |   |               |   |           |                    |  |   |           |   |  |   |            |  
|Fixed Asset Purchases                            |  |                            | 117,305    |   |               |   | 15,114     |                    |  |   | 117,344    |   |  |   | 249,763     |  
|Geothermal Well Field Drilling Purchases         |  |                            |           |   |               |   | 4,750,000  |                    |  |   |           |   |  |   | 4,750,000   |  
|Power Project Construction-in-Progress Purchases |  |                            |           |   |               |   |           |                    |  |   |           |   |  |   |            |  
|Power Project Equipment Purchases                |  |                            |           |   |               |   | 603,814    |                    |  |   |           |   |  |   | 603,814     |  
|Total Assets                                     |  | $                          | 1,105,628  |   |               | $ | 16,076,942 |                    |  | $ | 6,601,883  |   |  | $ | 23,784,453  |  



|                                                 |  |                            |            |   |               |   |            |                    |  |   |             |   |  |   |             |  
|------------------------------------------------ |  | -------------------------- | ---------- | - | ------------- | - | ---------- | ------------------ |  | - | ----------- | - |  | - | ----------- | -
|As of and for the Year Ended December 31, 2006   |  | Transportation &Industrial |            |   | Power Systems |   |            | Corporate andOther |  |   | Total       |  
|Revenues                                         |  | $                          | 122,732    |   |               | $ |           |                    |  | $ |            |   |  | $ | 122,732     |  
|Segment Operating Loss                           |  |                            | (4,390,098 | ) |               |   | (2,356,405 | )                  |  |   | (12,512,663 | ) |  |   | (19,259,166 | )
|Depreciation and Amortization                    |  |                            | 133,047    |   |               |   | 3,631      |                    |  |   | 65,556      |   |  |   | 202,234     |  
|Fixed Asset Purchases                            |  |                            | 237,901    |   |               |   |           |                    |  |   | 34,097      |   |  |   | 271,998     |  
|Geothermal Well Field Drilling Purchases         |  |                            |           |   |               |   |           |                    |  |   |            |   |  |   |            |  
|Power Project Construction-in-Progress Purchases |  |                            |           |   |               |   |           |                    |  |   |            |   |  |   |            |  
|Power Project Equipment Purchases                |  |                            |           |   |               |   |           |                    |  |   |            |   |  |   |            |  
|Total Assets                                     |  | $                          | 956,224    |   |               | $ | 6,272,056  |                    |  | $ | 4,177,167   |   |  | $ | 11,405,447  |  

Included in total assets for the Power Systems segment are two separate notes receivable from two
separate potential merger candidates totaling $0, $506,273 and $5,952,074 at December 31, 2008, 2007 and December 31, 2006, respectively.

Note 20. Income Taxes

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a
company must measure the tax position to determine the amount to recognize in the financial



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statements. The application of income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, we are
required to make many subjective assumptions and judgments regarding the income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in the subjective assumptions and judgments
can materially affect amounts recognized in the balance sheets and statements of income.

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

We classify interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As
of December 31, 2008, we had no accrued interest or penalties related to uncertain tax positions. The tax year 2008 federal return remains open to examination and the tax years 2004-2008 remain open to examination by other taxing jurisdictions
to which we are subject. The Internal Revenue Service completed their examination of our 2005 federal tax return without significant adjustment to our financial statements.

At December 31, 2008, we had net operating loss carry-forwards available to offset future taxable income of approximately $108,270,000 which will
begin to expire in 2023. The utilization of the net operating loss carry-forwards is dependent upon the tax laws in effect at the time the net carry-forwards can be utilized. The Internal Revenue Code contains provisions that likely could reduce or
limit the availability and utilization of these net operating loss carry-forwards. For example, limitations are imposed on the utilization of net operating loss carry-forwards if certain ownership changes have taken place. We will perform an
analysis to determine whether any such limitations have occurred as the net operating losses are utilized. The amount of, and ultimate realization of, the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, our
future earnings, and other future events, the effects of which cannot be determined. We have established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their
realization. Accordingly, there is no benefit for income taxes in the accompanying consolidated statements of operations.

Deferred income
taxes are determined based on the estimated future effects of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in
place. The deferred income tax assets (liabilities) are comprised of the following at December 31, 2008 and December 31, 2007:



|                                          |  |              |             |   |      |   |             |  
|----------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                          |  | December 31, |            
|                                          |  | 2008         |             |   | 2007 |  
|Net operating loss carry-forwards         |  | $            | 40,060,000  |   |      | $ | 16,491,000  |  
|Research and development tax credit       |  |              | 1,062,000   |   |      |   | 733,000     |  
|Depreciation and amortization             |  |              | (47,000     | ) |      |   | (62,000     | )
|Partnership investments                   |  |              | (6,546,000  | ) |      |   |            |  
|Stock compensation                        |  |              | 1,595,000   |   |      |   | 770,000     |  
|Exploration and intangible drilling costs |  |              | 137,000     |   |      |   | (97,000     | )
|Unearned revenue                          |  |              | 75,000      |   |      |   |            |  
|Allowance for bad debts                   |  |              | 56,000      |   |      |   |            |  
|Accrued vacation                          |  |              | 7,000       |   |      |   | 5,000       |  
|Charitable contribution carry forward     |  |              | 2,000       |   |      |   | 2,000       |  
|Valuation allowance                       |  |              | (36,401,000 | ) |      |   | (17,842,000 | )
|                                          |  |              |             |   |      |   |             |  
|Net deferred income tax asset             |  | $            |            |   |      | $ |            |  
|                                          |  |              |             |   |      |   |             |  



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Reconciliations between the benefit for income taxes at the federal statutory income tax rate and our
benefit for income taxes for the years ended December 31, 2008 and December 31, 2007 is as follows:



|                                                            |  |              |             |   |      |   |            |  
|----------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ---------- | -
|                                                            |  | December 31, |            
|                                                            |  | 2008         |             |   | 2007 |  
|Federal income tax benefit at statutory rate                |  | $            | 16,074,000  |   |      | $ | 5,355,000  |  
|Book and tax differences for warrant and stock transactions |  |              | (435,000    | ) |      |   | (326,000   | )
|Research and development creditnet tax effect              |  |              | 194,000     |   |      |   | 148,000    |  
|State tax expense benefit                                   |  |              | 1,560,000   |   |      |   | 520,000    |  
|Other                                                       |  |              | (18,000     | ) |      |   | (32,000    | )
|Change in valuation allowance                               |  |              | (17,375,000 | ) |      |   | (5,665,000 | )
|                                                            |  |              |             |   |      |   |            |  
|Income tax benefit for fiscal year                          |  | $            |            |   |      | $ |           |  
|                                                            |  |              |             |   |      |   |            |  

Note 21. Supplemental Cash Flow Information

For the year ended December 31, 2008:



| |  |  | $2,944,000 was paid for interest and $400 was paid for income taxes.
| | - |  | --------------------------------------------------------------------



| |  |  | We recorded in accrued liabilities certain capitalized well field development expenditures that were not paid as of December 31, 2008. These accrued
capitalized costs included both tangible and intangible drilling costs and were omitted from the statement of cash flows as non-cash items totaling $7,389.063.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded in accrued liabilities and accounts payable certain capitalized power systems equipment and contractor fees that were not paid as of December 31,
2008. These accrued expenses included equipment such as pumps, cooling towers, generating units and related construction costs for a geothermal power plant under construction. These accrued capitalized costs were omitted from the statement of cash
flows as non-cash items totaling $32,885,311.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded as an increase to power project leases and to asset retirement obligation for the present value cost to decommission our power plant and plug the
related wells totaling $2,066,037.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



| |  |  | We recorded a $450,000 non-cash payment for 112,782 shares of our common stock issued to settle a portion of an outstanding invoice from a service provider for
design and engineering services relating
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | to construction of a geothermal power plant. The non-cash payment was equal to the fair market value of the shares on the date the shares were granted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded a $150,000 non-cash payment for 34,483 shares of our common stock issued to settle a portion of an outstanding invoice from a service provider for
construction services for 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 2007:



| |  |  | No cash was paid for interest and $300 was paid for income taxes.
| | - |  | -----------------------------------------------------------------



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



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



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



| |  |  | We recorded a $423,987 non-cash payment of options to purchase 35,000 shares of common stock at an exercise price of $15.10 per share issued to acquire the
geothermal surface rights on land in Nevada. The non-cash payment was equal to the fair market value of the shares on the date the issuance was approved by the Board of Directors.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded an $118,889 non-cash payment of warrants to purchase 15,000 shares of our common stock at an exercise price of $12.06 per share issued to a service
provider for investor relations services. The non-cash payment was equal to the fair market value of the shares on the date the service provider agreement was signed.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 2006:



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



| |  |  | We recorded a non-cash payment of 25,000 shares of our common stock to acquire the geothermal mineral rights on properties in Nevada. We recorded the fair market
value of the shares on the date the 50-year geothermal lease was signed totaling $115,250.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 2, 2006, we agreed to grant 300,000 shares of unregistered common stock to a service provider for assistance with acquiring the global heat
transfer technology license. The stock was valued on the date when services were completed and the full value of the non-cash equity award was recognized totaling $1,341,000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 22. Recent Accounting Pronouncements

SFAS 162

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



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SFAS 161

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

SFAS 160

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

SFAS 141(R)

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

EITF 07-1

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

EITF 07-5

In June 2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an
entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to



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its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of EITF 07-5 on our
consolidated financial position and results of operations.

FSP EITF 03-6-1

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

Note 23.
Subsequent Events

On January 27, 2009, we entered into an Unsecured Line of Credit Agreement and Promissory Note (the Line
of Credit), among Radion Energy, LLC (Radion), Ocean Fund, LLC (Ocean Fund), Primary Colors, LLC (Primary Colors) and R. Thomas Bailey, an individual (collectively, the Lenders). Pursuant to the
Line of Credit, we may borrow up to $15 million, subject to the final approval of each advance by the Lenders. Radion committed $7.2 million and is controlled by our Chairman of the Board of Directors, Kraig Higginson. Ocean Fund committed $5.3
million, Primary Colors committed $2.0 million, and Mr. Bailey committed $500,000.

We obtained the line of credit in order to provide
working capital for general corporate purposes. We expect that borrowings under the line of credit will be repaid primarily with proceeds from other financing arrangements we intend to secure in connection with the development of our geothermal
power projects. Under the Line of Credit, advances are subject to the final approval of the Lenders, and amounts borrowed under the line of credit accrue interest at the rate of 10% per annum. Unless the Lenders agree to a later date, the line
of credit will mature and amounts borrowed must be repaid by November 15, 2009 or earlier if certain financing arrangements for the development of our geothermal power projects are completed and placed in service.

Under the Line of Credit, each Lender receives warrants (the Warrant) to purchase our common stock for each advance of funds made under the
Line of Credit. The number of shares underlying each Warrant is equal to 50% of the total amounts funded by the applicable Lender divided by the closing price of our common stock on the date of the advance. The Warrants will have an exercise price
of $6.00 per share.

As of March 13, 2009, we had borrowed $5.9 million under the line of credit. Accordingly, the Lenders have
received approximately 799,000 warrants to purchase our common stock at a strike price of $6.00 per share as a result of the amount borrowed.

On January 12, 2009, we issued 574,713 shares of our common stock to settle a portion of an outstanding invoice from a subcontractor for construction services at our Thermo No. 1 geothermal power plant. The fair value of the
shares based upon the closing market price of $3.48 on the date issued totaled $2.0 million

On January 27, 2009, we issued 263,108
shares of our common stock as payment in full for our outstanding note payable of $950,000. The fair value of the shares based upon the closing market price of $3.35 on the date issued totaled $881,412. Since we had a net loss for the year ended
December 31, 2008, the issuance of the shares would have had an anti-dilutive effect on the December 31, 2008 loss per share calculation.



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On March 11, 2009, our Board of Directors authorized the issuance of 754,717 shares of our common
stock, 70,197 restricted shares of our common stock, and 122,603 warrants at a strike price of $5.35 to settle a portion of an outstanding accounts payable balance of $2.5 million. The fair value of the shares and warrants based upon the closing
market price on the date issued totaled $2.5 million.

Note 24. Quarterly Financial Data

Selected quarterly data (unaudited) for the years ending December 31, 2008 and 2007 are as follows:



|                                          |  |             |            |   |             |   |            |             |  |   |             |   |  |             |             |   |             |   |            |             |  |   |             |   |  |   |            |   |  |   |            |  
|----------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | ----------- | ----------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                          |  | 2008        |            |   | 2007        |  
|                                          |  | 1st Quarter |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |   |  | 1st Quarter |             |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|Revenue                                   |  | $           | 130,543    |   |             | $ | 5,880      |             |  | $ | 30,000      |   |  | $           | 5,880       |   |             | $ | 123,763    |             |  | $ | 28,562      |   |  | $ | 49,887     |   |  | $ | 117,860    |  
|Gross margin                              |  |             | 56,431     |   |             |   | 5,880      |             |  |   | 30,000      |   |  |             | 5,880       |   |             |   | (342,367   | )           |  |   | 900         |   |  |   |           |   |  |   | 34,332     |  
|Operating loss                            |  |             | (5,480,044 | ) |             |   | (6,514,945 | )           |  |   | (6,621,532  | ) |  |             | (19,842,888 | ) |             |   | (4,789,495 | )           |  |   | (3,431,461  | ) |  |   | (3,568,375 | ) |  |   | (4,681,115 | )
|Net loss applicable to common stockholder |  |             | (5,410,465 | ) |             |   | (7,441,173 | )           |  |   | (8,831,267  | ) |  |             | (23,802,129 | ) |             |   | (4,626,569 | )           |  |   | (3,224,017  | ) |  |   | (3,372,519 | ) |  |   | (4,525,901 | )
|Net loss per share:                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |             |   |             |   |            |             |  |   |             |   |  |   |            |   |  |   |            |  
|Basic                                     |  |             | (0.10      | ) |             |   | (0.13      | )           |  |   | (0.15       | ) |  |             | (0.39       | ) |             |   | (0.09      | )           |  |   | (0.06       | ) |  |   | (0.06      | ) |  |   | (0.08      | )
|Diluted                                   |  | $           | (0.10      | ) |             | $ | (0.13      | )           |  | $ | (0.15       | ) |  | $           | (0.39       | ) |             | $ | (0.09      | )           |  | $ | (0.06       | ) |  | $ | (0.06      | ) |  | $ | (0.08      | )

Significant year end adjustments include expensing the costs of two wells at the Thermo No. 1
project and expensing the cost of one well at the Truckee project totaling $13.6 million. The result of this adjustment is an increase in our loss per share in the fourth quarter calculation of $(0.22) per share.

In conjunction with the issuance of Class A member interest, our share of our Thermo Subsidiarys net equity was reduced by $1.4 million. In
accordance with SEC Staff Accounting Bulletin Topic 5H, we initially elected to record the $1.4 million as a reduction in paid in capital rather than as a reduction in minority interest. However, after further evaluation, we changed the method of
accounting to recognize the loss on the sale of minority interests in the income statement rather than as a reduction in additional paid in capital. We believe that this change in accounting method did not materially impact the third quarter of 2008
condensed consolidated financial statements.

The effect of the change in the accounting method on our condensed consolidated statement of
operations on the third quarter of 2008 is as follows:



|                                             |  |                                         |            |   |                                |   |            |            |  |   |            |  
|-------------------------------------------- |  | --------------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---------- |  | - | ---------- | -
|                                             |  | 3rd Quarter2008Prior to changein method |            |   | 3rd Quarter2008changein method |   |            | Difference | 
|Operating loss                               |  | $                                       | (6,621,532 | ) |                                | $ | (6,621,532 | )          |  | $ |           |  
|Other                                        |  |                                         | (983,665   | ) |                                |   | (983,665   | )          |  |   |           |  
|Minority interest:                           |  |                                         |            |   |                                |   |            |            |  |   |            |  
|From sale of minority interest in subsidiary |  |                                         |           |   |                                |   | (1,453,468 | )          |  |   | (1,453,468 | )
|From operations of subsidiary                |  |                                         | 227,398    |   |                                |   | 227,398    |            |  |   |           |  
|Net loss applicable to common stockholder    |  |                                         | (7,377,799 | ) |                                |   | (8,831,267 | )          |  |   | (1,453,468 | )
|Net loss per share:                          |  |                                         |            |   |                                |   |            |            |  |   |            |  
|Basic                                        |  |                                         | (0.13      | ) |                                |   | (0.15      | )          |  |   | (0.02      | )
|Diluted                                      |  | $                                       | (0.13      | ) |                                | $ | (0.15      | )          |  | $ | (0.02      | )



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The effect of the change in the accounting method on our condensed consolidated balance sheets on the
third quarter of 2008 is as follows:



|                                                          |  |                                         |             |   |                                |   |             |            |  |   |            |  
|--------------------------------------------------------- |  | --------------------------------------- | ----------- | - | ------------------------------ | - | ----------- | ---------- |  | - | ---------- | -
|                                                          |  | 3rd Quarter2008Prior to changein method |             |   | 3rd Quarter2008changein method |   |             | Difference | 
|Stockholders' equity                                      |  |                                         |             |   |                                |   |             |            |  |   |            |  
|Common stock                                              |  | $                                       | 590,111     |   |                                | $ | 590,111     |            |  | $ |           |  
|Additional paid-in-capital                                |  |                                         | 83,693,741  |   |                                |   | 85,147,209  |            |  |   | 1,453,468  |  
|Accumulated deficit                                       |  |                                         | (30,972,177 | ) |                                |   | (30,972,177 | )          |  |   |           |  
|Accumulated deficit after re-entry into development stage |  |                                         | (40,479,912 | ) |                                |   | (41,933,380 | )          |  |   | (1,453,468 | )
|                                                          |  |                                         |             |   |                                |   |             |            |  |   |            |  
|Total stockholders' equity                                |  | $                                       | 12,831,763  |   |                                | $ | 12,831,763  |            |  | $ |           |  

Note 25. Restricted Assets

On August 31, 2008, we and our subsidiary Thermo No. 1 BE-01, LLC (the Thermo Subsidiary) entered into a debt financing and tax equity capital arrangement with Merrill Lynch for the construction
of our Thermo No. 1 geothermal power plant. Under the arrangement, Merrill Lynch provided debt financing totaling $26.1 million, net of an original issue discount of $5.0 million, and $24.5 million of tax equity capital. In conjunction with the
Thermo Financing Agreements, the Class A Investor maintained certain protective rights to participate in certain major decisions such as, giving permission regarding the possession of property of the Thermo Subsidiary by any holder of
membership interests; the assignment, transfer or pledge of rights in specific property for other than the purpose or benefit of our Thermo Subsidiary; or commingling funds of the Thermo Subsidiary with the funds of any other person. Since the
assets of our Thermo Subsidiary are restricted for use, we separately disclosed the December 31, 2008 condensed consolidated financial statements of our Thermo Subsidiary and related elimination entries in Schedule I below. For presentation
purposes only, the construction cost of the Thermo No. 1 geothermal power plant that we incur as the EPC contractor have been included with at the Thermo Subsidiary level and eliminated in consolidation.



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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

REPORT ON FINANCIAL STATEMENT SCHEDULE

To the Raser
Technologies, Inc. and Subsidiary

Provo, Utah

We have
audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and internal control over financial reporting of Raser Technologies, Inc. and Subsidiary included
in this Form 10-K and have issued our report thereon dated March 16, 2009. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 15
herein (Schedule ICondensed Financial Information of Registrant) is the responsibility of the Companys management and is presented for the purpose of complying with the Securities and Exchange Commissions rules and is not part of
the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects with the financial
data required to be set forth therein in relation to the basic financial statements taken as a whole.

/s/ HEIN & ASSOCIATES LLP

Denver, Colorado

March 16, 2009



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##### Table of Contents

SCHEDULE I

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Balance Sheets



|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------ | - | ----------- | ------------ |  | - | ------------- | - |  | - | ----------- | -
|                                                                                                                                   |  | RaserWithoutThermo |             |   | Thermo |   |             | Eliminations |  |   | Consolidation |  
|Assets                                                                                                                             |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Current assets:                                                                                                                    |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Cash and cash equivalents                                                                                                          |  | $                  | 1,534,820   |   |        | $ |            |              |  | $ |              |   |  | $ | 1,534,820   |  
|Restricted cash                                                                                                                    |  |                    | 75,704      |   |        |   |            |              |  |   |              |   |  |   | 75,704      |  
|Notes receivable, net                                                                                                              |  |                    | 144,525     |   |        |   |            |              |  |   |              |   |  |   | 144,525     |  
|Restricted short-term marketable securities (held to maturity)                                                                     |  |                    | 4,366,257   |   |        |   |            |              |  |   |              |   |  |   | 4,366,257   |  
|Other current assets                                                                                                               |  |                    | 1,085,257   |   |        |   | 62,305      |              |  |   |              |   |  |   | 1,147,562   |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total current assets                                                                                                               |  |                    | 7,206,563   |   |        |   | 62,305      |              |  |   |              |   |  |   | 7,268,868   |  
|Restricted cash                                                                                                                    |  |                    |            |   |        |   | 20,900,135  |              |  |   |              |   |  |   | 20,900,135  |  
|Restricted long-term marketable securities (held to maturity)                                                                      |  |                    | 2,155,090   |   |        |   |            |              |  |   |              |   |  |   | 2,155,090   |  
|Land                                                                                                                               |  |                    |            |   |        |   | 1,811,063   |              |  |   |              |   |  |   | 1,811,063   |  
|Power project lease acquisitions and prepaid delay rentals                                                                         |  |                    | 6,626,786   |   |        |   | 2,003,857   |              |  |   |              |   |  |   | 8,630,643   |  
|Geothermal well field development-in-progress                                                                                      |  |                    | 647,368     |   |        |   | 30,741,260  |              |  |   |              |   |  |   | 31,388,628  |  
|Power project construction-in-progress                                                                                             |  |                    | 20,518,364  |   |        |   | 53,554,030  |              |  |   |              |   |  |   | 74,072,394  |  
|Equipment, net                                                                                                                     |  |                    | 602,302     |   |        |   | 6,584       |              |  |   |              |   |  |   | 608,886     |  
|Intangible assets, net                                                                                                             |  |                    | 719,360     |   |        |   | 867,950     |              |  |   |              |   |  |   | 1,587,310   |  
|Deferred financing costs, net                                                                                                      |  |                    | 6,099,473   |   |        |   | 1,570,909   |              |  |   |              |   |  |   | 7,670,382   |  
|Power project equipment, Net                                                                                                       |  |                    | 19,727,500  |   |        |   |            |              |  |   |              |   |  |   | 19,727,500  |  
|Power project development deposits                                                                                                 |  |                    | 4,071,675   |   |        |   | 124,875     |              |  |   |              |   |  |   | 4,196,550   |  
|Other assets                                                                                                                       |  |                    | 63,892,915  |   |        |   | 2,806,569   |              |  |   | (62,692,485   | ) |  |   | 4,006,999   |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total asset                                                                                                                        |  | $                  | 132,267,396 |   |        | $ | 114,449,537 |              |  | $ | (62,692,485   | ) |  |   | 184,024,448 |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Liabilities and Stockholders Equity                                                                                               |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Current liabilities:                                                                                                               |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Accounts payable and accrued expenses                                                                                              |  | $                  | 52,227,690  |   |        | $ | 12,243,646  |              |  | $ |              |   |  | $ | 64,471,336  |  
|Short-term portion of long-term notes                                                                                              |  |                    | 1,106,767   |   |        |   | 724,380     |              |  |   |              |   |  |   | 1,831,147   |  
|Note payable                                                                                                                       |  |                    | 945,833     |   |        |   |            |              |  |   |              |   |  |   | 945,833     |  
|Deferred revenue                                                                                                                   |  |                    | 200,000     |   |        |   |            |              |  |   |              |   |  |   | 200,000     |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total current liabilities                                                                                                          |  |                    | 54,480,290  |   |        |   | 12,968,026  |              |  |   |              |   |  |   | 67,448,316  |  
|Asset retirement obligation                                                                                                        |  |                    | 177,908     |   |        |   | 1,974,322   |              |  |   |              |   |  |   | 2,152,230   |  
|Long-term 7.00% senior secured note (non-recourse), net of discount of $5,155,156                                                  |  |                    |            |   |        |   | 25,120,464  |              |  |   |              |   |  |   | 25,120,464  |  
|Long-term 8.00% convertible senior notes                                                                                           |  |                    | 55,000,000  |   |        |   |            |              |  |   |              |   |  |   | 55,000,000  |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total liabilities                                                                                                                  |  |                    | 109,658,198 |   |        |   | 40,062,812  |              |  |   |              |   |  |   | 149,721,010 |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Minority interest                                                                                                                  |  |                    |            |   |        |   |            |              |  |   | 28,025,116    |   |  |   | 28,025,116  |  
|Contingencies and commitments                                                                                                      |  |                    |            |   |        |   |            |              |  |   |              |   |  |   |            |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Stockholders equity:                                                                                                              |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Class A Members Equity                                                                                                          |  |                    |            |   |        |   | 28,025,116  |              |  |   | (28,025,116   | ) |  |   |            |  
|Class B Members Equity                                                                                                          |  |                    |            |   |        |   | 57,379,052  |              |  |   | (57,379,052   | ) |  |   |            |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued and outstanding                                     |  |                    |            |   |        |   |            |              |  |   |              |   |  |   |            |  
|Common stock, $.01 par value, 250,000,000 shares authorized, 63,519,455 and 55,923,705 shares issued and outstanding,
respectively |  |                    | 635,195     |   |        |   |            |              |  |   |              |   |  |   | 635,195     |  
|Additional paid in capital                                                                                                         |  |                    | 102,350,814 |   |        |   |            |              |  |   |              |   |  |   | 102,350,814 |  
|Accumulated deficit                                                                                                                |  |                    | (80,376,811 | ) |        |   | (11,017,443 | )            |  |   | (5,313,433    | ) |  |   | (96,707,687 | )
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total stockholders equity                                                                                                         |  |                    | 22,609,198  |   |        |   | 74,386,725  |              |  |   | (90,717,601   | ) |  |   | 6,278,322   |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  
|Total liabilities and stockholders equity                                                                                         |  | $                  | 132,267,396 |   |        | $ | 114,449,537 |              |  | $ | (62,692,485   | ) |  | $ | 184,024,448 |  
|                                                                                                                                   |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |             |  



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##### Table of Contents

SCHEDULE I

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Statements of Operations



|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|---------------------------------------------- |  | ------------------ | ----------- | - | ------ | - | ----------- | ------------ |  | ------------- | - |  | - | ----------- | -
|                                               |  | RaserWithoutThermo |             |   | Thermo |   |             | Eliminations |  | Consolidation |  
|Revenue                                        |  | $                  | 172,303     |   |        | $ |            |              |  | $             |  |  | $ | 172,303     |  
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Operating expense                              |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Cost of sales                                  |  |                    | 74,112      |   |        |   |            |              |  |               |  |  |   | 74,112      |  
|General and administrative                     |  |                    | 9,767,955   |   |        |   | 51,500      |              |  |               |  |  |   | 9,819,455   |  
|Power project development                      |  |                    | 8,701,097   |   |        |   | 1,649,963   |              |  |               |  |  |   | 10,351,060  |  
|Unsuccessful and impaired wells                |  |                    | 3,002,250   |   |        |   | 10,622,102  |              |  |               |  |  |   | 13,624,352  |  
|Research and development                       |  |                    | 4,762,733   |   |        |   |            |              |  |               |  |  |   | 4,762,733   |  
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Total operating expenses                       |  |                    | 26,308,147  |   |        |   | 12,323,565  |              |  |               |  |  |   | 38,631,712  |  
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Operating loss                                 |  |                    | (26,135,844 | ) |        |   | (12,323,565 | )            |  |               |  |  |   | (38,459,409 | )
|Interest income                                |  |                    | 295,530     |   |        |   | 115,377     |              |  |               |  |  |   | 410,907     |  
|Interest expense                               |  |                    | (2,611,525  | ) |        |   | (586,755    | )            |  |               |  |  |   | (3,198,280  | )
|Other                                          |  |                    | (716,636    | ) |        |   |            |              |  |               |  |  |   | (716,636    | )
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Loss before income taxes and minority interest |  |                    | (29,168,475 | ) |        |   | (12,794,943 | )            |  |               |  |  |   | (41,963,418 | )
|Income tax benefit (expense)                   |  |                    |            |   |        |   |            |              |  |               |  |  |   |            |  
|Minority interest:                             |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|From sale of minority interest in subsidiary   |  |                    | (5,313,433  | ) |        |   |            |              |  |               |  |  |   | (5,313,433  | )
|From operations of subsidiary                  |  |                    | 1,791,817   |   |        |   |            |              |  |               |  |  |   | 1,791,817   |  
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  
|Net loss                                       |  | $                  | (32,690,091 | ) |        | $ | (12,794,943 | )            |  | $             |  |  | $ | (45,485,034 | )
|                                               |  |                    |             |   |        |   |             |              |  |               |   |  |   |             |  



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##### Table of Contents

SCHEDULE I

RASER TECHNOLOGIES, INC. AND SUBSIDIARIES

(a development stage enterprise)

Condensed Consolidated Statements of Cash Flows



|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|--------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------ | - | ----------- | ------------ |  | - | ------------- | - |  | - | ------------ | -
|                                                                            |  | RaserWithoutThermo |             |   | Thermo |   |             | Eliminations |  |   | Consolidation |  
|Cash flows from operating activities:                                       |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Net loss                                                                    |  | $                  | (32,690,092 | ) |        | $ | (12,794,942 | )            |  | $ |              |   |  | $ | (45,485,034  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |             |   |        |   |             |              |  |   |              |   |  |   |              |  
|Depreciation, amortization and accretion expense                            |  |                    | 302,389     |   |        |   | 1,870       |              |  |   |              |   |  |   | 304,259      |  
|Deferred financing costs amortization                                       |  |                    | 472,589     |   |        |   | 120,804     |              |  |   |              |   |  |   | 593,393      |  
|Bad debt expense                                                            |  |                    | 162,200     |   |        |   |            |              |  |   |              |   |  |   | 162,200      |  
|Write off of abandoned patent applications                                  |  |                    | 14,668      |   |        |   |            |              |  |   |              |   |  |   | 14,668       |  
|Write off of power project lease acquisitions                               |  |                    | 331,720     |   |        |   |            |              |  |   |              |   |  |   | 331,720      |  
|Unsuccessful and impaired wells                                             |  |                    | 3,002,250   |   |        |   | 10,622,102  |              |  |   |              |   |  |   | 13,624,352   |  
|Gain on completion of contract                                              |  |                    | (75,357     | ) |        |   |            |              |  |   |              |   |  |   | (75,357      | )
|Loss on disposal of assets                                                  |  |                    | 8,882       |   |        |   | 21,500      |              |  |   |              |   |  |   | 30,382       |  
|Common stock, stock options and warrants issued for services                |  |                    | 3,756,259   |   |        |   |            |              |  |   |              |   |  |   | 3,756,259    |  
|Loss on sale of minority interest in subsidiary                             |  |                    | 5,313,433   |   |        |   |            |              |  |   |              |   |  |   | 5,313,433    |  
|Minority interest in operations of subsidiary                               |  |                    | (1,791,817  | ) |        |   |            |              |  |   |              |   |  |   | (1,791,817   | )
|Increase in unbilled receivable                                             |  |                    | 192,157     |   |        |   |            |              |  |   |              |   |  |   | 192,157      |  
|Increase in other assets                                                    |  |                    | (301,945    | ) |        |   | (502,878    | )            |  |   |              |   |  |   | (804,823     | )
|Decrease increase in interest receivable                                    |  |                    | (46,091     | ) |        |   |            |              |  |   |              |   |  |   | (46,091      | )
|Increase (decrease) in account payable and accrued liabilities              |  |                    | 16,395,640  |   |        |   | (15,589,862 | )            |  |   |              |   |  |   | 805,778      |  
|Increase in unearned/deferred revenues                                      |  |                    | 200,000     |   |        |   |            |              |  |   |              |   |  |   | 200,000      |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Net cash used in operating activities                                       |  |                    | (4,753,115  | ) |        |   | (18,121,406 | )            |  |   |              |   |  |   | (22,874,521  | )
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Cash flows from investing activities:                                       |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Purchase of restricted marketable equity securities                         |  |                    | (8,687,174  | ) |        |   |            |              |  |   |              |   |  |   | (8,687,174   | )
|Proceeds from the maturity of restricted marketable equity securities       |  |                    | 2,262,000   |   |        |   |            |              |  |   |              |   |  |   | 2,262,000    |  
|Decrease in notes receivable                                                |  |                    | 207,500     |   |        |   |            |              |  |   |              |   |  |   | 207,500      |  
|Increase in deposits                                                        |  |                    | (468,453    | ) |        |   | (2,365,995  | )            |  |   |              |   |  |   | (2,834,448   | )
|Increase in restricted cash                                                 |  |                    | (704        | ) |        |   | (20,900,135 | )            |  |   |              |   |  |   | (20,900,839  | )
|Increase in intangible assets                                               |  |                    | (244,780    | ) |        |   | (867,950    | )            |  |   |              |   |  |   | (1,112,730   | )
|Purchase of equipment                                                       |  |                    | (207,010    | ) |        |   | (8,454      | )            |  |   |              |   |  |   | (215,464     | )
|Acquisition of power project leases                                         |  |                    | (730,936    | ) |        |   | (29,535     | )            |  |   |              |   |  |   | (760,471     | )
|Acquisition of land                                                         |  |                    |            |   |        |   | (1,811,063  | )            |  |   |              |   |  |   | (1,811,063   | )
|Asset retirement obligation                                                 |  |                    | (26,453     | ) |        |   |            |              |  |   |              |   |  |   | (26,453      | )
|Well field development-in-progress costs                                    |  |                    | (524,457    | ) |        |   | (32,382,886 | )            |  |   |              |   |  |   | (32,907,343  | )
|Construction-in-progress costs                                              |  |                    | (4,836,120  | ) |        |   | (33,955,899 | )            |  |   |              |   |  |   | (38,792,019  | )
|Power project equipment deposits                                            |  |                    | (634,050    | ) |        |   |            |              |  |   |              |   |  |   | (634,050     | )
|Investment in subsidiary                                                    |  |                    | (61,770,693 | ) |        |   |             |              |  |   | 61,770,693    |   |  |   |             |  
|Proceeds from the sale of equipment                                         |  |                    | 2,403       |   |        |   | 16,000      |              |  |   |              |   |  |   | 18,403       |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Net cash used in investing activities                                       |  |                    | (75,658,927 | ) |        |   | (92,305,917 | )            |  |   | 61,770,693    |   |  |   | (106,194,151 | )
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Cash flows from financing activities:                                       |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Proceeds from exercise of common stock warrants                             |  |                    | 27,854      |   |        |   |            |              |  |   |              |   |  |   | 27,854       |  
|Proceeds from exercise of common stock options                              |  |                    | 650,744     |   |        |   |            |              |  |   |              |   |  |   | 650,744      |  
|Proceeds from the issuance of 8.00% convertible senior notes                |  |                    | 55,000,000  |   |        |   |            |              |  |   |              |   |  |   | 55,000,000   |  
|Proceeds from the issuance of 7.00% senior secured note (non-recourse)      |  |                    |            |   |        |   | 26,130,873  |              |  |   |              |   |  |   | 26,130,873   |  
|Principal payments of 7.00% senior secured note (non-recourse)              |  |                    |            |   |        |   | (377,743    | )            |  |   |              |   |  |   | (377,743     | )
|Proceeds from ATM equity financing                                          |  |                    | 24,160,319  |   |        |   |            |              |  |   |              |   |  |   | 24,160,319   |  
|Purchase of forward stock purchase transaction                              |  |                    | (15,000,000 | ) |        |   |            |              |  |   |              |   |  |   | (15,000,000  | )
|Purchase of call spread option transaction                                  |  |                    | (5,850,000  | ) |        |   |            |              |  |   |              |   |  |   | (5,850,000   | )
|Incurrence of deferred financing fees                                       |  |                    | (2,572,728  | ) |        |   | (1,600,000  | )            |  |   |              |   |  |   | (4,172,728   | )
|Proceeds from issuance of note payable                                      |  |                    | 900,000     |   |        |   |            |              |  |   |              |   |  |   | 900,000      |  
|Proceeds from parent equity contributions                                   |  |                    |            |   |        |   | 61,770,693  |              |  |   | (61,770,693   | ) |  |   |             |  
|Proceeds from minority interest capital contribution                        |  |                    |            |   |        |   | 24,503,500  |              |  |   |              |   |  |   | 24,503,500   |  
|Proceeds from the sale of common stock in private equity placement          |  |                    | 18,718,463  |   |        |   |            |              |  |   |              |   |  |   | 18,718,463   |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Net cash provided by financing activities                                   |  |                    | 76,034,652  |   |        |   | 110,427,323 |              |  |   | (61,770,693   | ) |  |   | 124,691,282  |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Net increase (decrease) in cash and cash equivalents                        |  |                    | (4,377,390  | ) |        |   |            |              |  |   |              |   |  |   | (4,377,390   | )
|Cash and cash equivalents at beginning of period                            |  |                    | 5,912,210   |   |        |   |            |              |  |   |              |   |  |   | 5,912,210    |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  
|Cash and cash equivalents at end of period                                  |  | $                  | 1,534,820   |   |        | $ |            |              |  | $ |              |   |  | $ | 1,534,820    |  
|                                                                            |  |                    |             |   |        |   |             |              |  |   |               |   |  |   |              |  



F-69