Item 1. Business

Abbreviations We Use in this Report

     “ADA-ES,” “the Company,” “we,” “us,” or “our” refer to ADA-ES, Inc., a Colorado corporation, and its consolidated subsidiaries. Other abbreviations we use in this Report include:

Business Purpose and Strategy
ADA-ES, Inc. was incorporated in Colorado in 1997, and develops and implements proprietary environmental technology and provides specialty chemicals that enable coal-fueled power plants to enhance existing air pollution control equipment, maximize capacity and improve operating efficiencies. We are positioned to capitalize on the emerging market for mercury emission controls (MEC) through the supply of powdered activated carbon, injection systems, mercury measurement instrumentation, and related services. We have established key business relationships with Arch Coal, Inc., NexGen Resources Corporation (“NexGen”) and Thermo Electron Corporation (“Thermo”). ADA-ES became a “stand-alone” public company through a “spin-off” from its parent company, Earth Sciences, Inc. in September 2003. We have one wholly-owned subsidiary called ADA Environmental Solutions LLC, in which all of our business is performed.

Our approach to technology development, implementation and commercialization involves taking technology to full-scale as quickly as we can, and testing and improving the technology under actual power plant operating conditions. The most significant benefit of this method is that we begin working early and closely with power companies to optimize the technology to meet their specific needs. For example, while some mercury control technologies are being developed in the isolation of a laboratory without feedback from users, we work on full-scale mercury control systems that are installed on plants operated by several of the largest power companies in North America. We assist electric utility companies to remain competitive while meeting environmental regulations.

Our major activities include sales of equipment, field testing and services related to the emerging market for mercury emission control (“ MEC ”) for coal-fired boilers used in electric generation, development and marketing of our refined coal technology in a joint venture with NexGen called Clean Coal Solutions, LLC, the sale of flue gas conditioning equipment and chemicals, and other chemicals and technologies for such boilers ( “FGC” ).

Overview of the Last Five Years
During our last five fiscal years, we (a) substantially increased our MEC business through government and industry funded field demonstration contract work, including work under existing and new contracts and a growing number of commercial activities; (b) in 2006 entered into a joint venture with NexGen to develop and market our refined coal technology; (c) continued our position in the FGC business through continued chemical sales and service; and (d) provided other chemicals and technologies for coal-fired boilers.

In August 2004 and October 2005, we sold shares of our common stock to a limited number of private investors. We were granted a listing on what is now called the NASDAQ Capital Market (formerly the NASDAQ Small Cap) shortly after completion of the private share offering in 2004.

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Thus far in 2007, we (a) commenced work on five additional activated carbon injection (“ACI”) systems to be delivered later in 2007 and in 2008, and continued work on eight (8) other ACI systems to be delivered at various times in 2007 and 2008, (b) continued work on government- and industry-supported contracts for field testing, installation and evaluation of mercury control systems at several sites, (c) continued to supply FGC chemicals to several plants and began preparations to demonstrate FGC technology at an additional plant, and (d) through a joint venture with NexGen, commenced development and marketing of our refined coal technology. We describe these activities and those in the preceding paragraphs in greater detail below.

Financial Information for Industry Segments
We have two reportable segments: MEC and FGC and other. Financial information concerning these reportable segments can be found in the Financial Statements filed as a part of this Report, in Footnotes 1 – Segment Information, and 11 – Business Segment Information, and that information is incorporated by reference here.

Our Business in Detail

Market for Our Products and Services
The primary drivers for many of our services are new environmental regulations and the deregulation of the utility industry. Environmental regulations, such as the 1990 Clean Air Act Amendments, the 2005 Clean Air Mercury Rule (“CAMR”), various state regulations and permitting requirements for new power plants are requiring utilities to reduce emission of pollutants, such as sulfur dioxide, nitrogen oxides, and mercury. Mercury regulations at the national and state levels are expected to require large mercury emission reductions at the nation’s 1,100-plus coal-fired units, which emit approximately 48 tons of mercury per year. Based on a 2005 National Coal Council report, coal powers more than 50% of all electricity produced in the United States, and the United States reserves are estimated to be capable of serving demand for the next 250 years. Early DOE studies indicate that the estimated cost to control these emissions will be $2-$5 billion annually. We are positioning ourselves to be a key supplier of equipment and services to the market that first began in 2005, and is developing rapidly as a result of this regulatory environment. The markets that will be affected by new regulations are the same ones in which we currently operate. In addition, the systems and products required for mercury controls fit well with our existing products and capabilities.

Following widespread disappointment and legal challenges to CAMR, in November 2005 the State and Territorial Air Pollution Program Administrators and the Association of Local Air Pollution Control Officials (STAPPA/ALAPCO), the two national associations of air pollution control agencies throughout the United States, have developed a model rule entitled, “Mercury from Power Plants: A Model Rule for States and Localities” in response to concern that CAMR was inconsistent with the requirements of the Clean Air Act, and would not result in adequate reductions in emissions of mercury from coal-fired power plants to protect public health. The STAPPA/ALAPCO model rule provides state and local governments with the tools needed to obtain reductions in mercury emissions necessary to meet the requirements of the Clean Air Act. Specifically, the model describes two options for state and local governments that wish to develop utility mercury rules that are more protective of public health and the environment than EPA’s regulation, and contains model rule language for both. The phased timing proposed in the model rule allows power generators to consider mercury specific control technologies, or alternatively, control technologies that reduce mercury as an added benefit when reducing other air pollution emissions. The model rule provides compliance options using two phases, the use of annual rolling averages, and averaging of emissions across sources at a facility; and may well provide the flexibility to prevent any threat to a source’s ability to continue to generate power. As compared with either maximum achievable control technology (MACT) regulation, or CAMR, we believe the STAPPA/ALAPCO model rule better reflects the capabilities of mercury control technologies that are commercially available today and gives power generators options in selecting the most cost effective approach for each plant. As of mid-February 2007, there are 12 states with mercury control rules and 13 states considering regulations more stringent than CAMR.

In addition to environmental regulations, the coal burning electric power generation industry is also impacted by the ongoing deregulation of the utility business. Historically, public utilities have been able to pass capital and operating costs on to customers through rate adjustments. However with deregulation, utility companies face competitive challenges requiring them to better control capital spending and operating costs. These changes increase the need for cost-effective retrofit technologies that can be used to enhance existing plant equipment to meet the more stringent emission limits while burning less expensive coals. We have entered this market with (1) mercury control technology that has been demonstrated to effectively reduce mercury emission over a broad range of plant configurations and coal types, (2) our proprietary chemical conditioner that offers both technical and

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economic advantages over the hazardous chemicals that have been and continue to be in use, and (3) products, such as Cyclean, that provide utilities flexibility in choosing the grade of fuel they can burn. The Company has established itself as a leader in the mercury control market, received ten new orders for commercial mercury control systems in 2006, and has commenced work on an additional five new systems through February, 2007. Our programs have been demonstrated to be effective, even in difficult application, and have also been shown to be cost effective, in many cases reducing the costs associated with mercury control to less than 20% of initial cost estimates.

Government and Industry-Supported Contracts
The United States Department of Energy (DOE) issues solicitations from time to time for various development and demonstration projects. DOE solicitations range in subject matter, and we submit bids for those solicitations that fit our mission and strategic plan. The bids involve a proposed statement of work, and contracts are negotiated with successful bidders to perform the specified work. The contracts with the DOE are known as Cooperative Agreements and are considered financial assistance awards. We are currently participants in six such agreements and will participate with another company as a subcontractor. Generally, the agreements cover the development and/or demonstration of air pollution control technologies for coal-fired power generating plants. The work may involve designing and fabricating equipment, installing the equipment at power plants, testing the equipment, preparing economic studies, and preparing various reports. The deliverables required by the agreements include various technical and financial reports that we submit on a prescribed schedule. The agreements require us to perform the negotiated scope of work, which includes testing/demonstrating various air pollution control technologies. The agreements with the DOE provide that any inventions we create as a result of the work become our property. We also expect to act as a subcontractor on a DOE contract to develop and demonstrate a novel process to capture carbon dioxide from coal-fired power plants. The project is expected to start in the next few months and last for three years.

The agreements with DOE generally require industry cost share, which is considered a key component to the viability of the project and which may take the form of cash contributions and/or in-kind contributions of material and services. The industry cost share percentages on the mercury projects in which we are involved range from 25% to 50%. Typically, the utility host site for the demonstration project provides a considerable amount of the cost share with other interested industry partners also providing funding, either individually or through EPRI (the Electric Power Research Institute). To the extent that the required cost share is not provided by industry partners or EPRI, ADA-ES provides the balance by reducing the revenues it would otherwise recognize on the work performed. We expect the power industry’s interest in these and future projects to continue to grow.

We currently participate in DOE and industry contracts totaling $32.3 million, of which $15.5 million represents contracts directly with DOE. We recognized revenues in 2006, 2005 and 2004 from these DOE/industry-funded contracts totaling $7.0 million, $4.3 million and $4.2 million, respectively, which comprised 45%, 39% and 49% of our total revenues for those respective periods. Of these amounts, $3.7 million, $2.3 million and $2.4 million in 2006, 2005 and 2004, respectively, were revenues directly from DOE. We retain the rights to commercialize any products we develop under the activities of these contracts. These contracts are subject to audit and potential adjustment as to amounts already received. The Company has not been affected materially by adjustments mandated by government audits; however, government audits for the years 2002 through 2006 have not yet been finalized. These contracts are also subject to annual appropriation of funds by Congress, and although continued funding is considered probable, we cannot be certain that the government will continue to approve funding for these contracts in future budgets or at similar levels. Assuming no changes in funding, future revenues from current contracts in progress total $13.2 million, of which we expect to recognize approximately $7.0 million in 2007.

Commercial Mercury Emissions Control
During 2006, we signed contracts for ten activated carbon injection (ACI) systems for mercury emission control, and thus far in 2007 we have commenced work on five additional ACI systems under “notices to proceed,” with the expectation that final contracts will be signed within the next month. We expect to receive additional orders for up to six more systems, based on options for those systems which we believe the customers will exercise as part of those contracts. The contracts contain delivery milestones, which we expect to meet. Certain of the agreements provide for liquidated damages if we are unable to meet certain delivery obligations, except for delivery failures that are out of our control. Since the market for commercial systems commenced in 2005 we have met all of the delivery milestones under our contracts. If a customer elects early termination of an agreement not due to any fault of ours, we will be entitled to reimbursement for all costs incurred in performing the agreements through the date of termination, including costs incurred in terminating our performance and costs incurred to any subcontractors. We are recognizing revenue on these agreements on the percentage of completion method. The value of the uncompleted portion of outstanding contracts at December 31, 2006, totaled $3.3 million, all of which is expected to be recognized in 2007.

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In December we terminated our Market Development Agreement (“MDA”) with Norit Americas, Inc. (“Norit”). Under the MDA, we had been working exclusively with Norit to develop the North American market for powdered activated carbon injection systems and sorbents for purposes of reducing mercury emissions from coal-fired boilers. During 2006 we also terminated our exclusive marketing arrangement for ACI systems with ALSTOM Environmental Control Systems (“Alstom”). The joint activities conducted separately with Norit and Alstom were not meeting the expectations of the parties.

In March 2007, we executed a Memorandum of Understanding (“MOU”) with Calgon Carbon Corporation (“Calgon Carbon”). Under the MOU we will collaborate on an exclusive basis with Calgon Carbon to jointly develop products and services for the control of mercury emissions from coal-fired power plants. We believe this relationship will assist us in meeting the near term needs of our customers.

We believe that the terminations of the MDA with Norit and the marketing arrangement with Alstom will not have a material adverse effect on our business or results of operations. (See “Key Business Relationships,” below.)

Clean Coal Solutions
On November 3, 2006, we established a joint venture (“JV”) with NexGen Refined Coal, LLC, an affiliate of NexGen Resources Corporation (“NexGen”), to market our patented refined coal technology (“Refined Coal Technology”), which reduces emissions of nitrogen oxides and mercury from certain, treated coals (“Refined Coal”). The JV will be carried out through a Colorado limited liability company called Clean Coal Solutions, LLC (“Clean Coal”). The JV’s primary opportunity is based on tax credits available under Section 45 of the Internal Revenue Code (“Section 45 Tax Credits”), as it was amended by the American Jobs Creation Act of 2004 (the “2004 Act”) for qualifying Refined Coal. Under the 2004 Act, a tax credit with a current value of approximately $5.60 per ton of Refined Coal can be earned for a period of ten years ending in or before 2019. Our Refined Coal Technology incorporates our patented chemical, which we developed for slagging boilers (see discussion of AD-249M below), and our expertise with sorbent-based mercury control technology. NexGen’s affiliates have extensive experience and expertise with Section 29 tax credits (which apply to the development of syn-fuels), and we anticipate that NexGen’s experience and expertise in this area will serve as a template for monetization of Section 45 Tax Credits in the Refined Coal area. We believe that our Refined Coal Technology is applicable to a target market of approximately 60 million tons of Refined Coal per year, which would amount to a market potential to Clean Coal of approximately $150 million a year.

We formed Clean Coal on October 31, 2006, and shortly thereafter sold a 50% interest in Clean Coal to NexGen’s affiliate for which we were paid $900,000. This $900,000 payment was in addition to a $100,000 non-refundable down payment NexGen paid us upon signing a Joint Venture Proposal on June 26, 2006. The detailed report of a successful demonstration of the Refined Coal Technology, which was a prerequisite to execution of final documentation, was also completed in the third quarter of 2006. The $900,000 payment received on November 3, 2006 is non-refundable. The total payment of $1 million, net of an estimated tax and the minority interest in the JV amounting to $381,000, has been included in our shareholders’ equity. Included in our operating loss for 2006 are net costs totaling $486,000 related to our Refined Coal effort, which from a cash flow standpoint were offset by the non-refundable payments from NexGen, but no gain or revenue was recorded as a result of those payments.

The JV will initially operate a business supplying chemicals, additives, equipment and technical services to cyclone fired boiler users (a “Chemicals Business”), but the JV’s primary purpose is to seek and obtain approval from the United States Internal Revenue Service to qualify ADA Refined Coal for Section 45 Tax Credits (a “Section 45 Business”). If the JV succeeds in obtaining that approval and becomes a Section 45 Business, NexGen has the right to maintain its 50% interest by paying us an additional $4 million, in 8 quarterly payments of $500,000 each, beginning in the fourth quarter of 2007. NexGen is not obligated to make those payments, but it if does not do so, it will forfeit a part of its interest in Clean Coal in direct proportion to the amount of the $4 million that it elects not to pay. Once it fails to make any one payment, it cannot come back and reclaim its interest by making later payments.

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Simultaneously with the execution of the Purchase and Sale Agreement, the parties entered into an Amended and Restated Operating Agreement governing the operation of Clean Coal, which requires NexGen and ADA-ES to each pay 50% of the costs of operating the JV, and specifies certain duties that ADA-ES and NexGen are obligated to perform as members of Clean Coal to further the business purposes of the JV. Our share of these costs amounted to less than $10,000 in 2006. We estimate that our share of those costs will average approximately $25,000 per month for the next several months. We also entered into a License Agreement with Clean Coal pursuant to which we licensed certain patents and know-how (the “Licensed Property”) to Clean Coal on a fully paid-up, royalty-free, non-transferable and exclusive basis, to allow it to exploit our Refined Coal Technology for the cyclone-fired boiler market. Pursuant to the License Agreement, we are required to provide technical assistance without charge to the JV relating to the development, marketing and deployment of the Licensed Property and, with certain limitations, to prosecute, maintain and defend the patents that are a part of the Licensed Property, take appropriate steps to protect the know-how and trade secrets comprising a part of the Licensed Property, and indemnify and hold Clean Coal harmless in the event the Licensed Property infringes the intellectual property of any third party.

Finally, we entered into a Chemicals, Equipment and Technical Services Supply Agreement with Clean Coal pursuant to which we will supply the JV with certain chemicals, additives, equipment and technical services to facilitate the purposes of the JV. Clean Coal will pay us standard charges for the chemicals, additives, and technical services we supply to the JV. If we choose to supply equipment to the JV we have agreed to do so at our cost.

Current activities of the JV include marketing calls and visits to numerous potential customers, planning for two product demonstrations expected to be conducted in 2007 and work to obtain clarification of the Section 45 Tax Credits details.

FGC
We have developed technologies for conditioning flue gas streams from coal-fired combustion sources that allow existing air pollution control devices to operate more efficiently. Through various suppliers and contractors, we are able to manufacture engineered units for each individual application. The units mix, pump and monitor the feed of proprietary chemical blends. The chemical blends are applied to the flue gas streams by a pressurized system of specially designed lances and nozzles. Such treatment of the flue gas stream allows for more effective collection of fly ash particles that would otherwise escape into the atmosphere. Our technology also has application in the cement and petroleum refining industries where particulate emissions are being or need to be controlled. We are not currently pursuing the non-utility markets aggressively since the profit margin potential for these customers is considered to be less as a result of lower chemical usage by these industries.

We currently have three operating FGC units installed at coal-fired utilities in Illinois, Iowa and Louisiana. Revenues from sales of equipment and chemicals to FGC customers in 2006, 2005 and 2004 and other FGC contract work totaled $1.7 million, $1.9 million and $2.1 million, respectively. One FGC customer has informed us that they intend to minimize their chemical purchases commencing in 2007, with the expectation that they will cease chemical usage altogether once they complete anticipated equipment changes. As such, revenues related to FGC are expected to decrease to approximately $1.1 million in 2007. We expect to perform a demonstration during 2007 that may result in future purchases of chemicals. We cannot be certain that the demonstration will be successful or that future revenues will result from that demonstration.

ADA-249M
Since 2000, we have produced and sold a specialty chemical, called ADA-249M, which is designed to save utility companies with cyclone furnaces significant costs each year through reduced fuel costs, enhanced operational flexibility and improved marketability of combustion by-products. We expect that Clean Coal will pursue future applications for ADA-249M that are a part of our Refined Coal Technology as applied to cyclone coal-fired boilers.

ADA-249M is a patented product designed to modify slag viscosity. ADA-249M is a blend of iron oxides, mineralizers, and flow enhancers that is added to the PRB coal prior to combustion in order to create the proper slag layer for combustion within the cyclone barrel. In application at the utility, ADA-249M is conveyed mechanically from a supply delivered via dump truck to a hopper. From there ADA-249M is fed by screw and belt conveyors to the coal feeders. The addition of ADA-249M to the coal results in more coal burning in the cyclone, less carbon in the fly ash, better precipitator performance, reliable slag tapping, and more bottom ash to sell. We design and sell the delivery system and the continuing supply of chemical. During 2006 we ended the joint venture we had established with Arch Coal Inc. to jointly market the ADA-249M product.

Sales related to ADA-249M are recorded in the FGC and Other segment and were $60,000, $327,000 and $355,000 in 2006, 2005 and 2004, respectively.

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Key Business Relationships
Over the past several years we had developed key relationships with companies in our industry that are much larger than us (e.g. ALSTOM Environmental Control Systems (“Alstom”), Norit, Thermo Fisher Scientific Inc. (“Thermo”), and Arch Coal), and entered into agreements that defined those relationships. All of those agreements could be terminated by the passage of time, through notification from the other party or our failure to obtain a certain share of the market defined in the agreements. During 2006, at our election, we terminated the agreements with Alstom, Norit and Arch Coal. Although we had expected these relationships to bolster the position we believe we hold in the industry, we found that such agreements were in fact serving to limit our flexibility and commitment to the large market that appears to be emerging from regulations to limit mercury emissions from coal burning power plants. We do not believe the loss of these relationships will impede our ability to secure business from the emerging mercury control market. (See the discussion above under the captions “ADA-249M” and “Commercial Mercury Emissions Control.”)

Cooperative Agreement with Thermo Fisher Scientific Inc.
In April of 2004 we entered into a cooperative agreement with Thermo to develop a continuous emission monitoring system (“CEMS”) for the measurement of mercury in flue gas. Under this agreement, Thermo, the leading supplier of stack gas monitors to the U.S. power generation market, designed and manufactured the mercury CEMS. We conducted extensive field validation prior to the product’s commercialization in late 2005, and we continue to test and provide feedback regarding the CEMS. The Federal legislation for reducing power plant mercury emissions, which is being litigated by several states and environmental groups, has generated the need for enhanced flue gas mercury removal technology and the associated requirement to validate its performance via continuous emission monitoring. This challenging monitoring application requires extensive field studies under a broad range of flue gas matrices and operating conditions. The arrangement with Thermo provides a unique opportunity to accelerate the evaluation of sorbent injection based mercury removal systems and concurrently demonstrate the suitability of Thermo’s mercury CEMS.

Under the terms of the agreement with Thermo:

Other Consulting Services
We also offer consulting services to assist utilities in planning and implementing strategies to meet new government emission standards requiring reductions in sulfur dioxide, nitrogen oxide, particulates and mercury. We are also developing and testing new chemical blends expected to aid coal-burning utilities in the variety of problems that may be encountered in switching to lower cost coals. We received funding for a portion of the development and testing activities from an industry partner that has a strategic interest in the technology. Total revenues from other consulting services approximated $1.5 million, $3.0 million and $600,000 in 2006, 2005 and 2004, respectively, most of which related to the mercury emission control segment.

Competition
The commercial mercury control market for existing coal-fired electric utilities is emerging as a result of the enactment of state and federal regulations that for the first time in U.S. history are requiring those utilities to control mercury emissions. We estimate that there are approximately 1,100 individual units (several may be located on one site) in excess of 25 megawatts of generating capacity that could be impacted by these regulations. Regulations currently exist that require new coal-fired plants to control mercury emissions. There are as many as 50 new coal-fired power plants in the United States under various stages of development, all of which have requirements for mercury emission control. Through 2006, our mercury control technology has been demonstrated on a full scale at over 30 plants, generally yielding over 90% mercury control on most applications. In addition, our approach to mercury control is quite cost effective, in many cases reducing costs associated with mercury control to less than 20% of initial cost estimates. Our experience in installing full scale demonstration plants, together with our practice of

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providing users with performance guarantees, as well as the cost effectiveness of our methodology, are our principal methods of competing in this market. We have responded to several hundred bid requests for activated carbon injection systems, over one hundred of which we believe are likely to proceed to orders between now and 2010. The capital equipment expected to be required by each unit ranges from approximately $750,000 to $1 million, and the sorbent requirements per unit are estimated to range from approximately $1 to $2 million per year. We are aware of other companies, including Babcock Power, Wheelabrator and Sorbent Technologies, that have responded to requests for commercial bids for mercury control systems. With the new work commenced in 2007 we believe we have greater than 50% of the existing market. As this market matures, we expect competition will increase, primarily in the sorbent supply arena (activated carbon or other). See the discussion above under the caption “Market for Our Products and Services.”

Our primary competition in the FGC arena is conventional FGC technology using either sulfur trioxide or a combination of sulfur trioxide and ammonia. This technology has been available commercially since the 1970‘s and is offered by Chemithon Engineers Ltd., Wahlco, Inc. and Benetech, in a variety of forms. Conditioning of fly ash by injecting small amounts of sulfur trioxide into the flue gas is a well-proven technique for improving performance of the electrostatic precipitator (ESP). Sulfur trioxide conditioning loses its effectiveness in applications with temperatures over 350 degrees F. The capital costs of conventional FGC technology are in excess of $1 million. Injection of water mist into the flue gas stream is also a known technique for improving performance of the ESP in certain applications and is offered by EnviroCare, Inc. The capital cost of a water injection system is typically $200,000-300,000. A typical ADA-ES system costs between $300,000-600,000. We have also introduced a product shown to be effective in the 300-750 degree range that is suitable for intermittent application and can augment a sulfur trioxide system and help to avoid use of ammonia. The competitive advantages of our FGC technology include an effective temperature range of 300 to 900 degrees F; a simple injection system; a non-toxic conditioner that will not become a secondary pollutant; and chemicals that are safer and easier to handle on site. The different products in the industry which aid ESP performance primarily compete on the basis of performance and price. We usually arrange for a full-scale demonstration of our products to potential customers prior to selling our systems and chemicals for use on a continual basis.

With respect to our Refined Coal Technology and ADA-249M, there are no major barriers to use of our products in the market, however, utility companies are generally slow to embrace new technologies when they perceive any potential for disruption in the production of electricity. Potential competition for these products may be magnetite, iron ore and coal blends. Even though there is currently no significant competition, the market for this product has been slow to emerge but is expected to accelerate as recent consent decrees requiring mercury emission control in several states are beginning to impact the market.

Patents
We have received eight patents and have an additional five patent applications pending relating to different aspects of our technology. The Company’s existing patents have terms of 17 years measured from the application date, the earliest of which was in 1995. Although important to protect our continuing business, we do not consider any of such patents to be critical to the ongoing conduct of our business, with the exception of the patents and intellectual property rights licensed to Clean Coal Solutions as noted above.

Supply of Chemicals for Our Customers
We typically negotiate blending contracts that include secrecy agreements with chemical suppliers located near major customers. These arrangements minimize transportation costs while assuring continuous supply of ADA-ES proprietary chemical blends. We have operated under these arrangements since the spring of 1999. They are generally renewed on an annual basis. We are investigating several near-term and long-term alternatives to assure the supply of activated carbon to our customers.

Development of Proposed Activated Carbon Manufacturing Facility
We believe that the supply of activated carbon (“AC”) needed for the developing mercury emissions control market will be unable to meet the demand for the material as early as 2010. We commissioned a market study from a third pary to address the current worldwide production and expected future demand for activated carbon in both the conventional water treatment markets and the developing mercury control market. This study documented that the current U.S. market for activated carbon, which is primarily for water treatment, is approximatedly $200 million per year. With regulations in place today to reduce mercury emmisions, this could more than double by 2010, and in addition, if a more stringent federal regulation comes into effect, the demand could more than triple by that time. As a result, we have been investigating the possibility of either purchasing or developing a facility to manufacture activated carbon. We are currently advancing plans to develop such a facility “from scratch,” while pursuing the parallel possibility of entering into a collaborative project with an existing AC manufacturer to increase capacity. We have committed approximately $4 million for the preparatory phase of this project, including plant location, design and permitting, as well as determining and sourcing key capital equipment that would be required for such a facility. A large-scale production facility, which is expected to cost in excess of $200 million to develop, and which will have the capacity to produce approximately $100 million on activiated carbon per year, is being designed to maximize efficiency and produce the most cost-effective product for the MEC market. Such a project will require supplementary financing, and we are pursuing that during the preparatory phases as well. We anticipate that financing will involve a combination of equity and debt funding from financial and strategic partners.

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Raw Materials, Contract Installation and Working Capital Practices
We purchase equipment from a variety of vendors including Norit, for the engineered ACI systems, components and other equipment we manufacture and/or provide. Such equipment is available from numerous sources. We typically subcontract the major portion of the construction labor associated with installation of such equipment, again from a variety of vendors, usually those located near the work site. We purchase our proprietary FGC, Refined Coal and ADA-249M chemicals through negotiated blending contracts with chemical suppliers generally located near each major customer. The chemicals used are readily available, and there are several chemical suppliers that can provide us with our requirements. We do not maintain any significant amounts of inventory for any of our business segments, nor do we provide any extended payment terms to our customers. We typically provide equipment warranties and performance guarantees related to our ACI systems (see the discussion below under “Risk Factors” and Footnote 7 – Commitments and Contingencies in the Financial Statements filed as a part of this Report).

Seasonality of Activities
The sale of FGC chemicals depends on the operations of the utilities to which such chemicals are provided. Our FGC customers routinely schedule maintenance outages in the spring of each year. During the period of such outages, which may range from two weeks to over a month, no FGC chemicals are used and purchases from us are correspondingly reduced. The other aspects of our business are not seasonal in any material way.

Dependence on Major Customers
During 2006, we recognized 45% of our revenue from services provided directly or as a subcontractor under contracts to the U.S. government and industry as discussed above under “Government and Industry-Supported Contracts”, involving mercury control systems. (See also Notes 4 and 8 to the Consolidated Financial Statements included elsewhere in this Report). In 2006, we supplied ACI systems to six customers. We recognized 15% of our revenue in 2006 from The Babcock & Wilcox Company in Ohio and 11% from PSEG Fossil LLC in New Jersey. ADA-ES’ own sales staff markets our technology through trade shows, mailings and direct contact with potential customers.

Backlog Orders
As of December 31, 2006, we had contracts in progress for supply of ACI systems totaling approximately $3.3 million which we expect to complete and realize in 2007. As noted above with regard to our DOE and industry funded R&D contracts, assuming no changes in funding, future revenues from current contracts in progress total $13.2 million, of which we expect to recognize approximately $7.0 million in 2007. Contracts in progress for other consulting work totaled approximately $464,000 at year–end, all of which are expected to be completed in 2007. All of these amounts relate to our MEC segment as FGC orders are generally filled as submitted and do not typically give rise to backlog.

As of December 31, 2005, we had contracts in progress for supply of ACI systems totaling approximately $1 million which we completed and realized in 2006. With regard to our DOE and industry funded R&D contracts, contracts in progress totaled $19.4 million at year-end 2005 Contracts in progress for other consulting work total approximately $120,000 at year–end, all of which were completed in 2006. All of these amounts relate to our MEC segment.

Research and Development Activities
The Company is involved in several R&D contracts funded by DOE and industry groups, primarily directed toward the control of mercury emissions. The Company cost shares in many of those contracts. For 2006, 2005 and 2004 our direct cost share of R&D in our DOE related contracts approximated $481,000, $273,000 and $348,000, respectively. In addition, we spent approximately $983,000, $704,000 and $467,000 on our own behalf on research and development activities related to further development of our technologies during 2006, 2005 and 2004, respectively. Approximately 85% of the amounts expended on our own behalf relate to our MEC segment.

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Employees
As of December 31, 2006 we employed a total of 42 full-time personnel. Included in this number are 36 people employed at our offices in Littleton, Colorado, 2 in Alabama, 1 in Pennsylvania, 2 in Maryland and 1 in Texas. In addition, other personnel were employed on a contract basis for specific project tasks during the year.

Copies of Reports
The periodic and current reports of the Company filed with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934, and amendments thereto, are available free of charge, as soon as reasonably practicable after the same are filed with or furnished to the SEC, at the Company’s website at www.adaes.com.

Copies of Corporate Governance Documents
The following Company corporate governance documents are available free of charge at the Company’s website at www.adaes.com and such information is available in print to any shareholder who requests it by contacting the Secretary of the Company at 8100 SouthPark Way Unit B, Littleton, CO 80120.

Forward-Looking Statements Found in this Report

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 that involve risks and uncertainties. In particular such forward-looking statements are found in this Part 1 and under the heading “Management’s Discussion and Analysis or Plan of Operation.” Words or phrases such as “anticipates,” “believes,” “hopes,” “expects,” “intends,” “plans” or similar expressions are used in this Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding (a) impact of national and state mercury regulations on the nation’s 1,100-plus coal-fired units; (b) capability of U.S. coal reserves to serve demand for the next 250 years, (c) future estimated costs to control mercury emissions, (d) the rapid development of the mercury emission control market, (e) expected growth in the power industry’s interest in DOE projects, (f) amounts and timing of and changes in future revenues, research and development expenses, costs of operating Clean Coal, annual lease costs and other expenditures and gross margins, (g) our ability to meet contract delivery milestones, (h) the size of the applicable target market and market potential for Refined Coal, (i) timing of completion of projects and future demonstrations, (j) procession of outstanding bid requests to orders between now and 2010, (k) the range of costs for capital equipment expected to be required by each coal-fired unit and range of sorbent requirements per unit; (l) market for our Refined Coal Technology and ADA-249M, (m) inability of the supply of activated carbon to meet market demand as early as 2010, (n) potential costs for development of a Greenfield activated carbon facility, (o) appropriation of funds by Congress for DOE projects, (p) immateriality of any future adjustments due to DOE audits, and (r) our ability to meet a significant portion of the expected shortage in activated carbon supply. Our expectations are based on certain assumptions, including without limitation, that (a) we will become a key supplier of equipment and services to the coal-fired power generation industry as it seeks to implement reduction of mercury in flue gases, (b) contracts we have with the DOE, which generate a significant part of our revenue, will continue to be funded at expected levels and that we will be chosen to participate in additional contracts of a similar nature, (c) current environmental laws and regulations requiring reduction of mercury from coal-fired boiler flue gases will be upheld and/or strengthened in pending court proceedings and/or by pending state legislation, and such laws and regulations will not be materially weakened or repealed by courts or legislation in the future, (d) we will be able to meet any performance guarantees we make with respect to levels of mercury reduction from systems that we install, (e) we will be able to obtain adequate resources and personnel to meet anticipated growth, (f) we will be able to retain our key business relationships with companies with which we have established such relationships, (g) orders we anticipate receiving will in fact be received, (h) the power industry will continue to participate in mercury abatement test projects, (i) we will continue to be able to meet our obligations under contracts as required by those contracts, (j) governmental audits of our performance under DOE contracts will not result in material adjustments to amounts we have previously received under those contracts, (k) we will be able to

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formulate new chemicals and blends that will be useful to, and accepted by, the coal-fired boiler power generation business, (l) we will be able to effectively compete against others who may choose to participate in our areas of business, (m) adequate supplies of coal will be available to power generators, (n) we will be able to meet any technical requirements of projects we undertake, (o) we will be able to obtain adequate supplies of the materials and supplies needed in our business, including activated carbon, (p) our efforts to market activated carbon sorbents with industry partners will be successful, (q) our FGC segment will remain attractive to the power generation industry, (r) our stock price will not be negatively affected by our retaining earnings for future expansion rather than paying dividends to shareholders and (s) we will have access to adequate capital to meet our needs. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the anticipated results we discuss in this Report. Although forward-looking statements provide additional information about us, investors should keep in mind that forward-looking statements are only predictions, at a point in time, and are inherently less reliable than historical information. We do not guarantee future results, levels of activity, performance or achievements and we do not assume responsibility for the accuracy and completeness of these statements. You are cautioned not to place undue reliance on the forward-looking statements made in this Annual Report, and to consult any later filings we may make with the Securities and Exchange Commission for additional risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements contained in this Annual Report on Form 10-K are made and based on information as of the date of this report. We assume no obligation to update any of these statements based on information after the date of this report. In evaluating these statements, you should specifically consider the risks outlined under “Risk Factors” in Item 1A, including the following: changes in existing and planned environmental laws, changes in government funding, loss of key relationships, technical problems with activated carbon injection systems sold, non-compliance with guarantees on activated carbon injection systems, decrease in demand for coal, lack of management expertise, inability to obtain funding and other risks relating to the development of a Greenfield activated carbon facility, seasonality of our business, inadequate supply of activated carbon, inadequate supply of coal, lack of or mismanagement of resources to support future growth, loss of key personnel, changes in taxation rules or financial accounting standards, dilution resulting from future sales of common stock or other securities, and lack of dividend payments to shareholders. These risk factors may cause our actual results to differ materially from any forward-looking statement.

Item 1A. Risk Factors.

RISKS RELATING TO OUR BUSINESS

IF EXISTING AND PLANNED ENVIRONMENTAL LAWS ARE RESCINDED OR SUBSTANTIALLY CHANGED, OUR BUSINESS WOULD BE ADVERSELY AFFECTED
A significant market driver for our existing products and services, and those planned in the future, are the environmental laws that limit emissions from power plants. In the event that such laws were rescinded or substantially changed, our business would be adversely affected by declining demand for such products and services. Demand for the Company’s FGC and ADA 249M products is primarily two-fold. Customers purchase these products to mitigate operating problems and/or to help comply with environmental regulations such as the Clean Air Act Amendments of 1990. Although the Company’s existing customers and those expected in the near-term are believed to desire the Company’s products for mitigation of operating problems, we expect that any softening of existing air pollution control requirements would slow expected growth for these products. Demand for the Company’s MEC technology and Refined Coal Technology is being driven almost exclusively by legislation requiring mercury emission control. Mercury has been identified as a toxic substance and pursuant to a court order the EPA issued the CAMR for its control in March 2005. CAMR is being contested by as many as fourteen different states and four environmental groups for its failure to meet court-mandated standards. In response to the uncertainty surrounding CAMR, several states have entered into consent decrees, have passed, or are expected to pass, legislation requiring such control, including Arizona, Colorado, Connecticut, Illinois, Maine, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New York, North Carolina, Wisconsin and Pennsylvania.

The impact of various state and federal regulations on the future of our business, and the long-term growth of the MEC market for the electric utility industry will most likely depend on the final outcome of the CAMR court action and how industry chooses to respond to final CAMR and other state regulations, which are in various stages of enactment. As many as 1,100 existing coal-fired boilers may be affected by such regulations when they are fully implemented. Permitting of new coal-fired plants generally requires them to

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meet more stringent requirements that are likely to include controlling mercury emissions. For the near-term, our revenues from this market will depend on (i) DOE- and industry-funded contracts, (ii) mercury testing services and (iii) equipment sales and commissions on sorbents sold to new plants and existing plants affected by the implementation of enacted regulations. We do not expect significant revenue growth unless and until federal regulations and/or state regulations impact a significant portion of existing boilers. Delays in, or derailment of, the passage of state mercury control legislation, or undue delay in resolution of the CAMR court action, would likely impede our expected growth in the mercury control market.

IF THE DEPARTMENT OF ENERGY (DOE) DISCONTINUES FUNDING OF EXISTING AND PLANNED CLEAN COAL TECHNOLOGY PROGRAMS, OUR BUSINESS WOULD BE HARMED
In 2006, 2005 and 2004, 45%, 39% and 49%, respectively of our revenues were derived from or related to DOE programs. Our revenues from government contracts would be adversely impacted by any material decrease in funding for the projects in which we are involved. In addition, we look to DOE funding as a significant means to further develop our technology and intellectual property in the areas of mercury emissions control and flue gas conditioning additives covered by that funding. Any material decrease in funding for the projects in which we are involved would hamper the development of our technology and intellectual property as it does not appear that we could currently fund the same level of development work apart from the funding being provided by the DOE. President Bush’s currently proposed federal budget for fiscal year 2008 does not contain any funding for the types of DOE projects we have historically participated in. Although we believe Congress will appropriate funds consistent with past practice, we cannot be sure that this will occur, and failure to appropriate such funds would be likely to have a material adverse effect on our business.

INADEQUATE SUPPLIES OF ACTIVATED CARBON COULD ADVERSELY AFFECT OUR PROFITABILITY
We expect the demand for activated carbon to increase as power plants begin to use ACI systems to control mercury emissions. If the production of activated carbon, which is currently outside our control, does not increase to meet the increased demand, the inadequate supplies of activated carbon could harm our results of operations and business.

DEVELOPMENT OF A GREENFIELD ACTIVATED CARBON FACILITY TO SUPPLY THE EMERGING MERCURY EMISSION CONTROL MARKET COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We have committed significant resources to the development of a Greenfield activated carbon production facility that will require extensive development work including environmental and other permitting, and material funding requirements well beyond our present capabilities. Although we have employees and have and expect to hire consultants who have past experience in such matters, our management has no past experience in undertaking such a complex project. In addition to the several inherent development risks of such a project, maintaining an acceptable schedule and budget, as well as attainment of anticipated production levels and acceptable operating costs are all significant factors in the overall financial viability of the project. The inability to obtain additional financing or any significant deviation in such factors from our planning model would hamper the advancement of the project and would likely have a material adverse effect on our business and financial condition.

THE MARKET FOR OUR PLANNED REFINED COAL PRODUCT AND QUALIFICATION FOR THE SECTION 45 TAX CREDIT ARE UNSURE AND COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND PROFITABILITY
The ability of Clean Coal Solutions to sell its planned Refined Coal product and qualify for the expected Section 45 tax credits depends on several conditions, including meeting the requirements of a presently unclear law, selling the Refined Coal at the required mark-up, contracting with monetizers to facilitate the sale of the required facilities, and completing and making operational such facilities prior to the January 1, 2009 date presently required by in the law. The inability of Clean Coal Solutions to successfully resolve and/or complete any of these conditions would likely have an adverse effect on our future growth and profitability.

THE LOSS OF KEY RELATIONSHIPS WOULD ADVERSELY AFFECT OUR SALES AND FINANCIAL CONDITION
We have developed key industry relationships with companies much larger than ourselves (e.g. B&W and Thermo). Subject to the terms of the agreement with Thermo, the relationship may be terminated by the passage of time or through notification from the other party. We believe these relationships bolster our position in the market to limit mercury emissions from coal-fueled power plants. The loss of these relationships could impede our ability to secure business from that market.

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TECHNICAL OR OPERATIONAL PROBLEMS WITH LONG-TERM OPERATION OF ACTIVATED CARBON INJECTION SYSTEMS COULD RESULT IN DELAYS THAT ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our ACI systems have been demonstrated for several months at certain power plants and we are starting to install them on a permanent basis for the first time. We cannot assure you that there will be not be technical or operational problems with our ACI systems from long-term operations. Any such problems could result in delays in, or postponement or cancellation of, expected installations at power plants, and would likely have a material adverse effect on our business.

THE EFFECT OF ISSUING PERFORMANCE GUARANTEES FOR COMMERCIAL ACTIVATED CARBON INJECTION SYSTEMS IS UNKNOWN AND COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
The market for commercial ACI systems to control mercury emissions is emerging as state consent decrees and state and federal regulations are being formulated and finalized. Performance guarantees have been and will likely continue to be an integral part of successful sales of our ACI systems. Such guarantees typically require levels of mercury removal efficiency based on stated injection rates of a specified or approved activated carbon given other operating parameters, including the nature of the coal burned. Provisions of such guarantees generally require us to spend amounts up to the value of the sales contract to “make right” the performance of the ACI, if the guaranteed level of performance is not achieved. Any substantial payments under such guarantees would have an adverse effect on our financial condition and our ability to generate future sales.

ANY DECREASE IN THE USE OF COAL OR INCREASE IN THE USE OF ALTERNATIVE ENERGY SOURCES BY ELECTRIC UTILITY COMPANIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND BUSINESS
Our business depends substantially on providing air pollution and operating cost solutions to coal-fueled power plants. If the demand for coal declines as a result of increases in the use of alternative fuels or alternative energy sources, technological developments or general economic conditions, the Company’s financial condition and business could be materially adversely affected.

OUR FINANCIAL RESULTS MAY FLUCTUATE AS A RESULT OF SEASONALITY AND OTHER FACTORS, INCLUDING THE DEMAND FOR ENVIRONMENTAL TECHNOLOGY AND SPECIALTY CHEMICALS, WHICH MAKES IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE
The sale of FGC chemicals is dependent on the operations of the utilities to which such chemicals are provided. Our FGC customers routinely schedule maintenance outages in the spring of each year. During the period of such outages, which may range from two weeks to over a month, no FGC chemicals are used and purchases from us are correspondingly reduced.

INADEQUATE SUPPLIES OF COAL COULD ADVERSELY AFFECT OUR PROFITABILITY
Our profitability depends on working with coal-fueled power plants. If economically recoverable coal reserves are not available or if coal cannot be readily supplied to power plants because of transportation, labor or other issues, such unavailability could adversely affect our profitability and impede the growth of our business.

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WE ARE AN EMERGING COMPANY IN A NEW INDUSTRY, WHICH ENTAILS RISKS THAT COULD IMPAIR OUR BUSINESS
We intend to pursue a growth strategy for the foreseeable future by expanding our environmental technology/specialty chemicals business into the emerging MEC market. We anticipate that future operations will place a strain on management, information systems and other resources. We must attract and integrate new personnel, improve existing procedures and controls and implement new ones to support future growth. Any inability to meet our future hiring needs and to adapt our procedures and controls accordingly could have a material adverse effect on our results of operations, financial condition and business prospects. In addition, if we make strategic acquisitions, we must successfully integrate the acquired operations in a timely manner. We cannot assure you that we will be able to manage expected growth, and our inability to do so could materially adversely affect our results of operations and business.

WE DEPEND ON KEY PERSONNEL
We depend on the performance of our senior management team — including Jonathan Barr, C. Jean Bustard, Dr. Michael Durham, Mark McKinnies, Rich Miller, Richard Schlager and Sharon Sjostrom, and their direct reports and other key employees, particularly highly skilled engineers. Our success depends on our ability to attract, retain and motivate these individuals. We do not have any binding agreements with any of our employees that prevent them from leaving our company at any time without any restrictions on their competing against us after their employment terminates. We compete heavily for these types of personnel. In addition, although we maintain key person life insurance on certain of our executives, the loss of the services of any of our key employees or our failure to attract, retain and motivate key employees, could harm our business.

MATERIAL ADJUSTMENTS PURSUANT TO DOE AUDITS OF OUR PAST PERFORMANCE COULD HAVE A DETRIMENTAL IMPACT ON OUR BUSINESS
We have participated in eight contracts awarded by the U.S. Department of Energy (DOE) and industry that are subject to adjustment as a result of government audits. These contracts contributed a total of $7.0 million, $4.3 million and $4.2 million to revenues in 2006, 2005 and 2004, respectively, of which $3.7 million, $2.3 million and $2.4 million, respectively, were directly from DOE. Including two contracts negotiated in 2006, the total approved budgets for these contracts combined are $39.8 million, $10.0 million of which is the cost-share portion for us and our industry partners. The remaining unearned amount of the contracts was $13.2 million as of December 31, 2006, and we expect to recognize $7.0 million of that amount in 2007 (including cash contributions by other industry partners). Our historical experience with these audits has not resulted in significant adverse adjustments to amounts previously received, however the audits for the years 2002 through 2006 have not been finalized. If audits for open years were to require us to repay material amounts, our results of operations and business would likely suffer material adverse impacts.

CHANGES IN TAXATION RULES OR FINANCIAL ACCOUNTING STANDARDS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Changes in taxation rules and accounting pronouncements (and changes in interpretations of accounting pronouncements) have occurred and may occur in the future. A change in existing taxation rules or accounting standards could have an adverse effect on our reported results of operations.

RISKS RELATING TO OUR COMMON STOCK

A SIGNIFICANT PORTION OF OUR OUTSTANDING SHARES OF COMMON STOCK MAY BE SOLD IN THE PUBLIC MARKET, WHICH COULD LOWER THE MARKET PRICE OF OUR STOCK
As of December 31, 2006, we had 5,635,137 shares of common stock issued and outstanding. We sold 789,089 shares of common stock in a private placement offering in October, 2005, and those shares are no longer restricted from resale in the public market. Sales of substantial amounts of our common stock, or the perception that such sales will occur, may have a material adverse effect on our stock price.

THE ISSUANCE OF ADDITIONAL SECURITIES IN THE FUTURE COULD HARM THE BOOK VALUE OF THE OUTSTANDING SHARES OF COMMON STOCK
To the extent our future funding requirements dictate the issuance of convertible securities, preferred stock or debt instruments having liquidation, dividend and other preferences and priorities over those of our common stock, the shares of common stock may suffer a decline in book value. Subject to requirements of our NASDAQ Stock Market listing, our Board of Directors has the authority to offer and sell additional securities without the vote of or notice to existing shareholders. It is likely that additional securities may be issued to provide future financing or in connection with acquisitions. The issuance of additional securities could dilute the percentage interests and per share book value of existing shareholders, and have a detrimental impact on the market for our common stock.

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LACK OF EXPECTED DIVIDENDS MAY MAKE OUR STOCK LESS ATTRACTIVE AS AN INVESTMENT
We intend to retain all future earnings for the foreseeable future for use in the development of our business. We therefore do not anticipate paying any cash dividends on our common stock for the foreseeable future. Generally, stocks which pay regular dividends command higher market trading prices, and our stock price may therefore be lower as a result of our dividend policy.

Item 1B. Unresolved Staff Comments.

None.