United
StatesSecurities and Exchange CommissionWashington, D.C. 20549

FORM
10-Q

(Mark One)

[ X ]     QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For
the quarterly period ended March 31, 2007

or

[   ]     TRANSITION
REPORT PURSUANT TO 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the
transition period from ________ to ________

Commission
File Number: 000-50216

ADA-ES,
INC.(Exact name of registrant as specified in its charter)

|                                | 
|------------------------------- | 
|                                | 
|Colorado                        | 
|(State or other jurisdiction of | 
|incorporation or organization)  | 
|                                | 

8100
SouthPark Way, B, Littleton, Colorado 80120            (Address of principal executive offices)    
(Zip Code)

(303)
734-1727(Registrants telephone number, including area code)

Not
Applicable(Former name, former address and former fiscal year, if changed since last report)

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

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

Large
accelerated filer  [   ]    Accelerated filer[ X ]    
  Non-accelerated filer [   ]

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

APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by
check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of  the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.  Yes  [   ]No [   ]

APPLICABLE
ONLY TO CORPORATE ISSUERS:

Indicate  the
number of shares outstanding of each of the issuers classes of common  stock, as of
the latest practicable date.

|Class                      | Outstanding at April 30, 2007
|-------------------------- | -----------------------------
|                           |                              
|Common Stock, no par value |                              
|                           |                              



---

PART
I  FINANCIAL INFORMATION

Item 1.
Condensed Financial Statements.

ADA-ES,
Inc. and Subsidiaries

Condensed
Consolidated Balance Sheets

(Amounts
in thousands, except share data)

|                                                                     | March 31,2007 | December 31,2006    |  
|-------------------------------------------------------------------- | ------------- | ------------------- | -
|
|ASSETS                                                               |               |                     |  
|                                                                     |               |                     |  
|CURRENT ASSETS:                                                      |               |                     |  
|Cash and cash equivalents                                            |               | $          15,187   |  
|Trade receivables, net of allowance for doubtful                     |               |                     |  
|accounts of $35 and $4, respectively                                 |               | 4,127               |  
|Investments in securities                                            |               | 1,930               |  
|Prepaid expenses and other                                           |               | 334                 |  
|                                                                     |               |                     |  
|Total current assets                                                 |               | 21,578              |  
|                                                                     |               |                     |  
|                                                                     |               |                     |  
|PROPERTY AND EQUIPMENT, at cost                                      |               | 2,076               |  
|Less accumulated depreciation and amortization                       |               | (1,110              | )
|                                                                     |               |                     |  
|Net property and equipment                                           |               | 966                 |  
|                                                                     |               |                     |  
|                                                                     |               |                     |  
|GOODWILL, net of $1,556 in amortization                              |               | 2,024               |  
|INTANGIBLE ASSETS, net of $64 and $57, respectively, in amortization |               | 242                 |  
|INVESTMENTS IN SECURITIES                                            |               | 5,626               |  
|DEVELOPMENT PROJECTS AND OTHER ASSETS                                |               | 1,772               |  
|                                                                     |               |                     |  
|TOTAL ASSETS                                                         |               | $           32,208  |  
|                                                                     |               |                     |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |               |                     |  
|                                                                     |               |                     |  
|CURRENT LIABILITIES:                                                 |               |                     |  
|Accounts payable                                                     |               | $             2,787 |  
|Accrued payroll and related liabilities                              |               | 519                 |  
|Accrued expenses                                                     |               | 133                 |  
|Deferred revenue                                                     |               | 826                 |  
|                                                                     |               |                     |  
|Total current liabilities                                            |               | 4,265               |  
|                                                                     |               |                     |  
|LONG-TERM LIABILITIES:                                               |               |                     |  
|Deferred warranty and other                                          |               | 213                 |  
|                                                                     |               |                     |  
|Total liabilities                                                    |               | 4,478               |  
|                                                                     |               |                     |  
|                                                                     |               |                     |  
|MINORITY INTEREST                                                    |               | 24                  |  
|COMMITMENTS AND CONTINGENCIES                                        |               |                     |  
|STOCKHOLDERS EQUITY:                                                |               |                     |  
|Preferred stock; 50,000,000 shares authorized, none outstanding      |               |                    |  
|Common stock; no par value, 50,000,000 shares authorized,            |               |                     |  
|5,635,137 shares issued and outstanding                              |               | 27,676              |  
|Accumulated other comprehensive income                               |               | 171                 |  
|Accumulated deficit                                                  |               | (141                | )
|                                                                     |               |                     |  
|Total stockholders equity                                           |               | 27,706              |  
|                                                                     |               |                     |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                           |               | $           32,208  |  
|                                                                     |               |                     |  

See
accompanying notes.

1



---

ADA-ES,
Inc. and SubsidiariesCondensed Consolidated Statements of Operations and Comprehensive Income(Amounts in thousands, except per share data)
(Unaudited)

|                                                       | For the Quarter EndedMarch 31, |               
|------------------------------------------------------ | ------------------------------ | --------------
|
|REVENUE:                                               |                                |               
|Mercury emission control                               |                                | $     3,629   
|Flue gas conditioning and other                        |                                | 275           
|                                                       |                                |               
|Total net revenues                                     |                                | 3,904         
|                                                       |                                |               
|COST OF REVENUES:                                      |                                |               
|Mercury emission control                               |                                | 2,180         
|Flue gas conditioning and other                        |                                | 135           
|                                                       |                                |               
|Total cost of revenues                                 |                                | 2,315         
|                                                       |                                |               
|                                                       |                                |               
|GROSS MARGIN                                           |                                | 1,589         
|                                                       |                                |               
|OTHER COSTS AND EXPENSES:                              |                                |               
|General and administrative                             |                                | 1,461         
|Research and development                               |                                | 356           
|Depreciation and amortization                          |                                | 84            
|                                                       |                                |               
|Total expenses                                         |                                | 1,901         
|                                                       |                                |               
|                                                       |                                |               
|OPERATING INCOME (LOSS)                                |                                | (312          
|                                                       |                                |               
|OTHER INCOME (EXPENSE):                                |                                |               
|Minority interest in loss of consolidated subsidiary   |                                | 13            
|Interest and other income                              |                                | 266           
|                                                       |                                |               
|Total other income (expense)                           |                                | 279           
|                                                       |                                |               
|                                                       |                                |               
|INCOME (LOSS) BEFORE INCOME TAX PROVISION              |                                | (33           
|                                                       |                                |               
|DEFERRED INCOME TAX BENEFIT (PROVISION)                |                                | 10            
|                                                       |                                |               
|                                                       |                                |               
|NET INCOME (LOSS)                                      |                                | (23           
|                                                       |                                |               
|UNREALIZED GAINS AND (LOSSES) ON CERTAIN INVESTMENTS   |                                |               
|IN DEBT AND EQUITY SECURITIES, net of tax              |                                | 4             
|                                                       |                                |               
|COMPREHENSIVE INCOME (LOSS)                            |                                | $          (19
|                                                       |                                |               
|                                                       |                                |               
|NET INCOME (LOSS) PER COMMON SHARE  BASIC AND DILUTED |                                | $       (0.00 
|                                                       |                                |               
|                                                       |                                |               
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING             |                                | 5,635         
|                                                       |                                |               
|WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING     |                                | 5,635         
|                                                       |                                |               
|                                                       |                                |               
|                                                       |                                |               

See
accompanying notes.

2



---

ADA-ES,
Inc. and SubsidiariesCondensed
Consolidated Statements of Changes in Stockholders EquityFor
the Quarter Ended March 31, 2007 and 2006(Amounts
in thousands)(Unaudited)

|                                         | COMMON STOCK | ACCUMULATEDOTHER         COMPREHENSIVE | ACCUMULATED |                | 
|---------------------------------------- | ------------ | -------------------------------------- | ----------- | -------------- | 
|
|BALANCES, January 1, 2006                |              | 5,610                                  |             | $      26,318  | 
|Stock and stock options issued to        |              |                                        |             |                | 
|consultant and directors for services    |              | 7                                      |             | 147            | 
|Stock-based compensation                 |              |                                       |             | 80             | 
|Issuance of stock on exercise of options |              | 3                                      |             | 32             | 
|Unrealized holding gains on investments  |              |                                       |             |               | 
|Investment reclassification adjustments  |              |                                        |             |                | 
|to income                                |              |                                       |             |               | 
|Income tax effect                        |              |                                       |             |               | 
|Net income                               |              |                                       |             |               | 
|                                         |              |                                        |             |                | 
|BALANCES, March 31, 2006                 |              | 5,620                                  |             | $       26,577 | 
|                                         |              |                                        |             |                | 
|                                         |              |                                        |             |                | 
|BALANCES, January 1, 2007                |              | 5,635                                  |             | $       27,592 | 
|Stock-based compensation                 |              |                                       |             | 84             | 
|Unrealized holding gains on investments  |              |                                       |             |               | 
|Investment reclassification adjustments  |              |                                        |             |                | 
|to income                                |              |                                       |             |               | 
|Income tax effect                        |              |                                       |             |               | 
|Net loss                                 |              |                                       |             |               | 
|                                         |              |                                        |             |                | 
|BALANCES, March 31, 2007                 |              | 5,635                                  |             | $       27,676 | 
|                                         |              |                                        |             |                | 
|                                         |              |                                        |             |                | 

See
accompanying notes.

3



---

ADA-ES,
Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows(Amounts
in thousands)(Unaudited)

|                                                             | For the Quarter EndedMarch 31, |          
|------------------------------------------------------------ | ------------------------------ | ---------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |                                |          
|Net income (loss)                                            |                                | $     (23
|Adjustments to reconcile net income (loss) to net cash       |                                |          
|provided by (used in) operating activities:                  |                                |          
|Depreciation and amortization                                |                                | 84       
|(Gain) loss on asset dispositions and securities             |                                | (10      
|Deferred tax expense (benefit)                               |                                | (10      
|Expenses paid with stock and stock options                   |                                | 84       
|Minority interest in loss of subsidiary                      |                                | (13      
|                                                             |                                |          
|Changes in operating assets and liabilities:                 |                                |          
|Trade receivables, net                                       |                                | (605     
|Prepaid expenses and other                                   |                                | 28       
|Accounts payable                                             |                                | 435      
|Accrued expenses                                             |                                | (120     
|Deferred revenue and other                                   |                                | 94       
|                                                             |                                |          
|Net cash provided by (used in) operating activities          |                                | (56      
|                                                             |                                |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |                                |          
|Capital expenditures for equipment, patents                  |                                |          
|and development projects                                     |                                | (1,095   
|Investment in securities                                     |                                | (1,923   
|Proceeds from sale of securities and certificates of deposit |                                | 2,132    
|                                                             |                                |          
|Net cash provided by (used in) investing activities          |                                | (886     
|                                                             |                                |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |                                |          
|Payments on debt and notes payable                           |                                |         
|Exercise of stock options                                    |                                |         
|                                                             |                                |          
|Net cash provided by financing activities                    |                                |         
|                                                             |                                |          
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             |                                | (942     
|CASH AND CASH EQUIVALENTS, beginning of period               |                                | 16,129   
|                                                             |                                |          
|CASH AND CASH EQUIVALENTS, end of period                     |                                | $ 15,187 
|                                                             |                                |          
|SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:              |                                |          
|Cash payments for interest                                   |                                |         
|                                                             |                                |          
|                                                             |                                |          

See
accompanying notes.

4



---

ADA-ES,
Inc. and Subsidiaries

Notes
to Condensed Consolidated Financial Statements (Unaudited)March 31, 2007

(1)   Basis of
Presentation

ADA-ES,  Inc.
(ADA), its wholly owned subsidiary, ADA Environmental Solutions, LLC (ADA  LLC), and our
50% joint venture interest in Clean  Coal Solutions, LLC (Clean Coal), collectively, are
referred to  as the Company. ADAs  only asset is its investment in its wholly
owned  subsidiary, ADA LLC. The Company is  principally engaged in providing
environmental technologies  and specialty  chemicals to the coal-burning utility
industry. The Company generates a  substantial part of its revenue from contracts
co-funded by the government and  industry.  The Companys sales occur principally
throughout the United  States.

The
accompanying unaudited interim condensed consolidated financial statements have  been
prepared in accordance with U.S. generally accepted accounting principles  for interim
financial statements and with the instructions to Form 10-Q and  Article 10 of Regulation
S-X and, therefore, do not include all of the  information and footnotes required by U.S.
generally accepted accounting  principles for complete financial statements. The
condensed consolidated  financial statements include the financial statements of ADA-ES,
its  subsidiaries and Clean Coal. We have eliminated all significant intercompany
balances and  transactions in consolidation.

In  the opinion
of management, the condensed consolidated financial statements  include all adjustments
(consisting of normal recurring adjustments) considered  necessary for a fair
presentation of the results of operations, financial  position and cash flows for the
interim periods presented.  Operating  results for the three months ended March 31,
2007 are not necessarily indicative  of the results that may be expected for the year
ending December 31, 2007.

These
statements should be read in conjunction with the consolidated financial  statements and
related notes to consolidated financial statements included in  our Annual Report on Form
10-K for the year ended December 31, 2006. The  accounting policies used in preparing
these condensed consolidated financial  statements are the same as those described in our
Form 10-K.

We  prepare our
condensed consolidated financial statements in conformity with U.S.  generally accepted
accounting principles. The preparation of these financial  statements requires us to make
estimates and assumptions that affect the  reported amounts of assets and liabilities and
disclosure of contingent assets  and liabilities at the date of the financial statements,
and the reported  amounts of sales and expenses during the reporting period. Actual
results could  differ from those estimates.

(2)   Net
Income (Loss) Per Share

Basic
income (loss) per share is computed based on the weighted average common shares
outstanding in the period. Diluted income per share is computed based on the
weighted average common shares outstanding in the period and the effect of
dilutive securities (stock options and awards) except where the inclusion is
anti-dilutive.

|                                          | Quarter EndedMarch 31, |               
|----------------------------------------- | ---------------------- | --------------
|
|
|NET INCOME (LOSS):                        |                        | $         (23 
|                                          |                        |               
|                                          |                        |               
|DETERMINATION OF SHARES:                  |                        |               
|Average common shares outstanding         |                        | 5,635         
|Incremental common shares issuable:       |                        |               
|Stock Options and awards                  |                        |              
|                                          |                        |               
|Diluted average common shares outstanding |                        | 5,635         
|                                          |                        |               
|                                          |                        |               
|Basic earnings per common share           |                        | $        (0.00
|                                          |                        |               
|Diluted earnings per common share         |                        | $        (0.00
|                                          |                        |               
|                                          |                        |               

No
outstanding stock  options to purchase shares of common stock for the
quarter  ended  March 31, 2006 were excluded from the calculation of diluted shares. All
outstanding stock options  outstanding, see Note 4, to purchase shares of common stock
for  the quarter ended March  31, 2007 were excluded from the calculation of diluted
shares as their effect is  anti-dilutive. The effect of dilutive securities on  the loss
shown for 2007 is  anti-dilutive.

5



---

(3)   Property
and Equipment

Property
and equipment consisted of the following at the dates indicated:

|                                               | Life inyears | As of March 31,2007 | As of December 31,2006
|---------------------------------------------- | ------------ | ------------------- | ----------------------
|
|Machinery and equipment                        |              | 3-10                |                       
|Leasehold improvements                         |              | 3 -7                |                       
|Furniture and fixtures                         |              | 3-7                 |                       
|                                               |              |                     |                       
|                                               |              |                     |                       
|Less accumulated depreciation and amortization |              |                     |                       
|                                               |              |                     |                       
|Total property and equipment, net              |              |                     |                       
|                                               |              |                     |                       
|                                               |              |                     |                       
|                                               |              |                     |                       

Depreciation
and amortization of property and equipment for the quarters ended March 31,
2007 and 2006 was $77,000 and $55,000, respectively.

(4)   Stock
Options

During
2003 the Company adopted the 2002 ADA-ES, Inc. Stock Option Plan and reserved
400,000 shares of Common Stock for issuance under the plan. In general, all
options granted under the plan expire ten years from the date of grant unless
otherwise specified by the Companys Board of Directors. The exercise price
of an option will be determined by the compensation committee of the board of
directors at the time the option is granted and will not be less than 100% of
the fair market value of a share of our Common Stock on the date the option is
granted. The compensation committee may provide in the option agreement that an
option may be exercised in whole immediately or is exercisable in increments
through a vesting schedule. During the first quarter of 2006, 19,900 options
were granted under this plan.

During
2004, the Company adopted the 2004 Executive Stock Option Plan. This plan
authorized the grant of up to 200,000 options to purchase shares of the
Companys Common Stock to executive officers of the Company, all of which
were granted in 2004. The option exercise price of $8.60 per share was the
market price on the date of the grant. The options are exercisable over a
10-year period based on a vesting schedule that may be accelerated based on
performance of the individual recipients as determined by the Board of
Directors. In February 2007, the Board of Directors authorized the vesting of
17,258 options under this plan with a fair value of $35,000. As of March 31,
2007 and 2006, 56,486 and 40,228 options were exercisable, respectively.

During  2004,
the Company adopted a plan (the 2004 Plan) for the issuance of  shares and
the grant of options to purchase shares of the Companys Common  Stock to the Companys
non-management directors. The 2004 Plan provided for  the award of stock of 603 shares
per individual non-management director or 4,221  shares in total, and the grant of
options to purchase 5,000 shares of common stock per individual non-management  director
or 35,000 in total, all of which were formally granted and issued in  2005 after approval
of the 2004 Plan by the stockholders. The option exercise  price of $13.80 per share for
the stock options granted on November 4, 2004 was  the market price on the date of the
grant. The options are exercisable over a  period of five years and will vest over a
three-year period, one-third each year  for continued service on the Board. If such
service is terminated, the  non-vested portion of the option will be forfeited. During
the first quarter of  2006, 10,000 of such options and during the second quarter of 2006
another 5,000  of such options were forfeited after the resignation of three directors.
As of  March 31, 2007 and 2006, 5,001 and 8,335 options were vested and exercisable,
respectively.

During  2005
the Company adopted the 2005 Directors Compensation Plan (the  2005 Plan),
which authorized the issuance of shares of Common Stock  and the grant of options to
purchase shares of the Companys Common Stock  to non-management directors. The 2005
Plan provides a portion of the annual  compensation to non-management directors of the
Company in the form of awards of  shares of Common Stock and vesting of options to
purchase Common Stock of the  Company for services performed for the Company. Under the
2005 Plan, the award  of stock is limited to not more than 1,000 shares per individual
per year, and  the grant of options is limited to 5,000 per individual in total. The
aggregate  number of shares of Common Stock reserved for issuance under the 2005 Plan
totals 90,000 shares (50,000 in the form of stock awards and 40,000 in the form  of
options). The exercise price for options granted under the 2005 Plan will be the market
price on the date of grant,  the shares of Common Stock underlying the option will vest
for exercise at a rate of no  more than 1,667 shares per annual period per individual,
and any unvested options that are outstanding at the date the individual is no longer is
a  Director will be forfeited. The 2005 Plan, if not terminated earlier by the  Board,
will terminate ten years after the date of its adoption. In January 2006  the Board of
Directors authorized the issuance of 1,000 shares of Common Stock  each, or a total of
7,000 shares and in August 2006 the Board granted 15,000  options, to the non-management
directors of the Company. As of March 31, 2007  none of the options were vested and
exercisable.

6



---

Following
is a table of options activity for the quarter ended March 31, 2007:

|                                     | Director & EmployeeOptions | Non-EmployeeOptions | WeightedAverageExercisePrice
|------------------------------------ | -------------------------- | ------------------- | ----------------------------
|OPTIONS OUTSTANDING, January 1, 2007 |                            | 344,969             |                             
|Granted                              |                            |                    |                             
|Exercised                            |                            |                    |                             
|Expired                              |                            |                    |                             
|                                     |                            |                     |                             
|OPTIONS OUTSTANDING, March 31, 2007  |                            | 344,969             |                             
|                                     |                            |                     |                             
|                                     |                            |                     |                             
|OPTIONS EXERCISABLE, March 31, 2007  |                            | 164,352             |                             
|                                     |                            |                     |                             
|                                     |                            |                     |                             

No
options were exercised during the quarter ended March 31, 2007. The aggregate
intrinsic value of options exercisable at March 31, 2007 was $489,000 based on a
market price of $13.75.

Stock
options outstanding at March 31, 2007 are summarized in the table below:

|                | Options Outstanding | Options Exercisable |  |            | 
|--------------- | ------------------- | ------------------- |  | ---------- | 
|
|$2.80           |                     | 11,665              |  | $     2.80 | 
|$8.60 - $10.00  |                     | 237,400             |  | $     8.89 | 
|$13.80 - $15.25 |                     | 132,604             |  | $   14.54  | 
|$18.61 - $20.20 |                     | 43,300              |  | $   19.34  | 
|                |                     |                     |  |            | 
|                |                     | 424,969             |  | $   11.55  | 
|                |                     |                     |  |            | 
|                |                     |                     |  |            | 

As of March
31, 2007, there was $413,000 of total unrecognized cost related to non-vested
share-based compensation arrangements granted under the Companys equity  incentive
plans. This cost is expected to be recognized over a two year period.  The total fair
value of shares underlying stock options which vested during the  quarters ended March 31,
2007 and 2006 was $94,000 and $102,000, respectively.

No  options
were granted in the first quarter of 2007. The average fair value of  each director and
employee option granted in 2006 was approximately $5.44 and was estimated  on the date of
grant using the Black-Scholes option-pricing model with the  following weighted average
assumptions:

|                                    | 
|----------------------------------- | 
|                                    | 
|Expected volatility                 | 
|Risk-free interest rate             | 
|Expected life of options (in years) | 
|Expected dividends                  | 
|                                    | 

7



---

(5)   Business
Segment Information

The following
information relates to the Companys two reportable segments: Mercury emission
control (MEC) and  Flue gas conditioning and other (FGC).  All  assets are located in the
U.S. and are  not evaluated by management on a segment basis.  All significant customers
are U.S. companies.

|                | Quarter Ended March 31, |                    
|--------------- | ----------------------- | -------------------
|
|
|REVENUE:        |                         |                    
|MEC             |                         | $            3,629 
|FGC             |                         | 275                
|                |                         |                    
|Total           |                         | $            3,904 
|                |                         |                    
|                |                         |                    
|SEGMENT PROFIT: |                         |                    
|MEC             |                         | $               996
|FGC             |                         | 3                  
|                |                         |                    
|Total           |                         | $               999
|                |                         |                    
|                |                         |                    

A
reconciliation of the reported total segment profit to net income (loss) for the  periods
shown above is as follows:

|                                                                             | Quarter Ended March 31, |                     
|---------------------------------------------------------------------------- | ----------------------- | --------------------
|
|
|Total segment profit                                                         |                         | $               999 
|Non-allocated general and administrative      expenses                       |                         | (1,227              
|Depreciation and amortization                                                |                         | (84                 
|Interest, other income (expense) and deferred income tax (provision) benefit |                         | 289                 
|                                                                             |                         |                     
|Net income (loss)                                                            |                         | $                (23
|                                                                             |                         |                     

| | Non-allocated
general and administrative expenses include costs that benefit the business as a whole and
are not directly related to one of our segments. Such costs include but are not limited to
accounting and human resources staff, information systems costs, facility costs, audit
fees and corporate governance expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(6)Recently
Issued Accounting Pronouncements

In  June 2006,
the FASB issued FIN 48, Accounting for Uncertainty in Income  Taxes  An
Interpretation of FASB Statement No. 109, which was  effective for our year
beginning January 1, 2007. This interpretation was  issued to clarify the accounting for
uncertainty in income taxes recognized in  the financial statements by prescribing a
recognition threshold and measurement  attribute for the financial statement recognition
and measurement of a tax  position taken or expected to be taken in a tax return. FIN 48
requires the  recognition of penalties and interest on any unrecognized tax benefits. Our
policy is to reflect penalties and interest as part of income tax expense as  they become
applicable. We  adopted the provisions of FIN 48 on January 1, 2007. No  unrecognized tax
benefits were  recorded as of the date of adoption.The  Company files income tax returns
in the U.S.  federal and various state  jurisdictions. We are no longer subject to U.S.
federal and  state and local examinations by tax authorities for years before 2004.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement
(SFAS No. 157), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS 157
focuses on creating consistency and comparability in fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We are evaluating its
impact and does not expect that adoption of SFAS 157 will have a material
impact on our financial statements.

In  February
2007, the FASB issued SFAS No. 159 (SFAS 159) The Fair Value  Option for Financial
Assets and Financial Liabilities.  SFAS 159  permits entities to choose to
measure many financial instruments and certain  other items at fair value.  The
provisions of SFAS 159 will be effective  for us beginning January 1, 2008.  We are
is in the process  of determining the effect, if any, the adoption of SFAS 159 will have
on our  financial statements.

8



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

This  Quarterly
Report on Form 10-Q contains forward-looking statements within the  meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of  the Securities Act of
1933, regarding future events and our anticipated future  results, which are based on
current expectations, estimates, forecasts, and  projections about the industries in
which we operate and the beliefs and  assumptions of our management. Actual results may
vary materially from such  expectations. The following discussion and analysis of our
financial condition  and results of operations should be read in conjunction with the
audited  consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2006. Words or  phrases such
as will, hope, expect, anticipate,  intend, plan or
similar  expressions are generally identify the forward-looking statements in this
Report, and such forward-looking statements include, but are not limited to,  statements
or expectations regarding (a) the impact of national and state  mercury control
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 Solutions, LLC, 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) the 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.

The
forward-looking statements contained in this Report 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 Quarterly 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 Quarterly Report on Form 10-Q 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. The  principal
risks and uncertainties that may affect our actual performance and results of  operations
include the following: changes  in existing and planned environmental laws,  changes in
government funding, loss  of key relationships, technical problems with  activated carbon
injection (ACI)  systems sold, failure to meet guarantees on ACI  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 risks and  uncertainties may cause our actual  results to
differ materially from those  described in any of the forward-looking  statements.

OverviewWe
provide environmental technologies and specialty chemicals to the coal-burning
electric utility industry. Revenues are generated through (1) time and materials
and fixed-price contracts for the emerging mercury emission control (MEC)
market, several of which are co-funded by government (Department of Energy
 DOE) and industry and (2) the sale of specialty chemicals and services
for flue gas conditioning (FGC) and other applications.

Mercury  has
been identified as a toxic substance and, pursuant to a court order, the EPA  issued
regulations for its control in March 2005. We believe that the long-term growth of the
MEC market for the electric utility industry will most likely depend on how  industry
chooses to respond to federal and state regulations, which are in  various stages of
enactment and challenge in the courts. As many as 1,100  existing coal-fired boilers may
be affected by such regulations, if and when  they are fully implemented. We have
recently seen a significant increase in new  plant projects. DOEs latest report
issued in 2006 includes 153 potential  new projects totaling 93GW of capacity. Permitting
of new coal-fired plants  generally requires them to meet more stringent requirements
that likely include  MEC. For the near-term, our revenues from this market will be
dependent on (i)  DOE- and industry-funded contracts mentioned above, (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. State
regulations and increasing numbers of consent decrees are  becoming the largest market
driver for this part of our business. Although we  expect this market to show steady
growth over the next several years, we believe  the most significant revenue growth will
occur when final federal regulations  impact a significant portion of previously
uncontrolled, existing boilers.

The
market for our FGC chemicals and services is relatively flat and is expected to
continue to decline in the near-term. Margins on these products are typically
higher than what we recognize for our present MEC sales and represent an
important but decreasing contribution to our overall profitability.

9



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In
2006, we signed contracts for ten Activated Carbon Injection (ACI) systems to be
delivered in 2006 and 2007, bringing the total number of ACI systems installed
or in process as of December 31, 2006 to twelve. Thus far in 2007, we have
signed contracts or orders to proceed for seven ACI systems to be delivered in
2007 and 2008, bringing our total number of ACI systems installed or currently
in process to 19. In addition, one system was installed in partnership with a
third party for which we provided design services through a DOE contract. We are
entitled to commissions on future sorbent sales to the utility industry in North
America purchased from a vendor with whom we have a relationship. Remaining
revenue from the ACI system contracts totaled $3.3 million as of January 1,
2007, of which approximately $1.6 million was recognized in the first quarter of
2007. Remaining revenues from ACI contracts totaled approximately $7.7 million
as of March 31, 2007 and is expected to be recognized in 2007 and 2008.

Results of
Operations  1st Quarter 2007 versus 1st Quarter 2006Revenues
totaled $3,904,000 for 2007 versus $3,649,000 in 2006, representing an increase  of 7%.
Revenues in our MEC segment for 2007 increased by $509,000 (16%), and  FGC and other
activities decreased by ($254,000) (48%). We have been hiring  personnel in response to
the growth we have realized in the past and expect to  achieve in 2007, and have more
than doubled the number of engineers in our commercial equipment group, who are  integral
to our MEC operations.  Adequate resources of skilled labor have been and are  expected
to be available to meet anticipated needs.

Revenues  in
2007 from the MEC segment were comprised of government and industry-supported  contracts
(42%), sales and installation of ACI systems and minor amount of  commissions on
activated carbon (AC) sales (49%) and consulting services (9%),  compared to 44%, 33% and
9%, respectively, in 2006. For the quarter, our DOE and  industry demonstration contract
revenues totaled $1.5 million representing a  decrease of 5% from 2006 revenues. The
remaining unearned amount of the  contracts was $11.7 million as of March 31, 2007, of
which $7.4 million is  expected to be recognized in 2007 (including cash  contributions
by other industry partners). ACI systems and commissions earned on the  sale of
activitated carbon (AC) contributed  approximately $1.8 million to MEC revenues
recognized for the quarter,  increasing 48% from the 2006 contribution to revenue of $1.2
million. We had  contracts in progress at quarter-end for supply of ACI systems with
remaining  revenue of approximately $7.7 million which we expect to complete and realize
in  2007 and 2008. The most significant growth occurred in the sales and  installations
of ACI systems and AC commissions, which increased $573,000 in the  quarter and is the
result of an increasing number of system sales as noted  above. Revenues from AC
commissions represent approximately  $159,000 of that amount. We expect growth in 2007
in the MEC segment to result primarily from an  increasing number of ACI systems and AC
commissions sales in response to mercury  emission control legislation and from existing
government and industry-supported  contracts. Our contracts with the government are
subject to audit by the federal  government, which could result in adjustment(s) to
previously recognized  revenue. We believe, however, that we have complied with all
requirements of the  contracts and future adjustments, if any, will not be material. In
addition, the  federal government must appropriate funds on an annual basis to support
DOE contracts, and funding is always subject to unknown and uncontrollable
contingencies. Revenues from consulting services included in the MEC segment  increased
approximately $13,000, from 2006 to 2007.

FGC
and other revenues decreased by $254,000 or 48% due to fewer shipments of
chemical to continuing customers. Included in 2006 revenues
was a test program that was not repeated in 2007. We expect FGC and other
revenues in 2007 to be significantly lower than 2006, as we believe that planned
customer purchases for 2007 will be less than such purchases made in 2006.

Cost  of
revenues increased by $44,000 or 2% in 2007 from 2006 primarily as a result  of increased
revenues for the same periods. Gross margins were 41% for the first quarter  as compared
to 38% in 2006. The increase is a result of increased margins in the  MEC segment as
discussed below.

Cost
of revenues for the MEC segment increased by $161,000 in 2007 or 8%, as compared
to 2006 primarily as a result of the increased revenue generating activities
noted above. Gross margins for this segment were 40% for the first quarter as compared to
35% for 2006. The improvement in gross margins from the prior year resulted from
higher margins on DOE contracts as our cost share percentage on those contracts
has decreased, offset by somewhat lower margins on ACI system sales as that
market is developing. The changes in MEC segment profits from 2006 to 2007 are a
result of the same factors.

Cost  of
revenues for the FGC and other segment decreased by $117,000 or 46% in 2007,  as compared
to 2006. We performed a demonstration in the 1st and  2nd quarters
of 2006 was not repeated in 2007 that contributed to  higher costs for those periods.
Gross margins for this segment were 51% for 2007  as compared to 52% in 2006. The
decrease in gross margins from 2006 to 2007 is a  result of increased FGC sales of a
product we license from ARKAY Technologies,  which carry a lower margin than historical
FGC sales and the increased costs in  development projects . FGC revenues represent
primarily chemical sales, which  carry a higher margin than the typical fixed price and
time and materials sales  in MEC revenues. FGC and other revenues comprised 7% of total
revenues in 2007,  compared to 14% in 2006. The changes in the FGC segment profits from
2006 to  2007 are a result of the same factors.

10



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We
expect the amount of fixed price and time and materials work in the MEC segment
for the near term to represent an increasing source of revenue. Overall gross
margins for 2007 are therefore expected to decline somewhat from the levels
achieved in 2006, as a result of an increasing proportion of fixed price and
time and materials work, our assumption of an increasing share of costs in the
field demonstration projects in which we have elected to participate and pricing
pressure caused by increased competition.

General  and
administrative expenses increased by $609,000 or 72% to $1,461,000 in 2007.  The dollar
increase in 2007 resulted primarily from increased audit and Sarbanes-Oxley (SOx)
compliance costs  ($240,000); increased legal, consulting and outside labor costs
($138,000), increased  administrative wage costs ($115,000); and increased  insurance
costs ($34,000). We expect  our audit and SOx costs to decrease  substantially in future
periods.

Research
and development expenses increased by $52,000 or 17% in 2007 as compared to
2006. We incur R&D expenses not only on direct activities we conduct but
also by sharing a portion of the costs in the government and industry programs
in which we participate. Future consolidated research and development expenses,
except for those anticipated to be funded by the DOE contracts and others that
may be awarded, are expected to continue to grow at a rate of about 10% annually
for the next several years. Of the amount incurred in 2007, $125,000 was
directly related to DOE contracts.

MEC
segment profits increased by $268,000 or 37% to $996,000 as compared to 2006.
The increase was primarily a result of increased MEC segment revenues and
improved margins on our DOE contracts as described above. FGC and other segment
profits decreased by $162,000 or 98% to $3,000 as compared to 2006. The decrease
was primarily the result of increasing project development costs incurred during
the period, lower margin chemical sales and decreasing segment revenues.

Included  in
other income and expense is the minority interest in the loss of $13,000 of  Clean Coal
Solutions, LLC our joint venture with an affiliate of NexGen Resources Corporation that
is  pursuing refined coal opportunities. During the first quarter of 2007 we incurred
approximately  $158,000 related to these efforts and the support of our internal costs.

We had net
interest and other  income  of $266,000 in 2007, as compared to $194,000 for 2006.
Interest and other  income  increased in 2007 due to an increase in invested balances and
increasing  interest rates.

The
deferred income tax benefit for 2007 represents our expected effective tax rate
of approximately 31% for 2007, which is less than the rate of 34% we recognized
for the first quarter of 2006. The decrease is primarily the result of larger
impact of R&D tax credits for 2007 as compared to the amount estimated for
the first quarter of 2006.

Unrealized
gains, net of tax, on investments in debt and equity securities amounted to
$4,000 for 2007 as compared to $17,000 for 2006. The gains recorded in 2007 and
2006 are the result of increases in the market value of our equity investments.

Liquidity
and Capital ResourcesWe had
a positive working capital of $17.3 million at March 31, 2007, compared to
working capital of $18.5 million at December 31, 2006. The decrease is a result
primarily from our continued investments in our development projects and capital
expenditures, and fluctuations in operating assets and liabilities in the normal
course of business. In addition to working capital, we had long-term investments
in securities, accounted for as available-for-sale investments, of
approximately $5.6 million and $5.3 million at March 31, 2007 and December 31,
2006, respectively. We intend to retain a portion of these investments to
demonstrate strength in our financial position to support performance guarantees
we have been and may continue to provide on sales of ACI systems. We may also
use a portion of such investments and cash on hand to fund growth of the
Company, which may include expansion of product offerings and strategic
acquisitions. We believe that existing and expected future working capital, will
be sufficient to meet our anticipated operating needs in 2007.

Our
principal source of liquidity is our existing working capital and operating cash
flow. Future positive cash flow is somewhat dependent upon the
continuation of chemical sales and operations of the flue gas conditioning (FGC)
units currently in-place in Illinois, Louisiana and Iowa. These units provided
an average monthly cash flow of approximately $13,000 each thus far in 2007.
While we have been awarded a contract to perform a demonstration project at
another plant beginning in the first half of 2007, we are not certain that this
demonstration will be successful or will result in future sales of FGC equipment
and chemicals. Unsatisfactory results for any of our FGC customers, which could
be caused by a single factor (or some combination of factors) such as changes in
coal, mechanical difficulties (whether in the FGC unit or otherwise), and/or
overall cost/benefit analysis, at any of those units, are likely to result in a
decrease or termination of the sale of chemicals for such units and a reduction
in the cash flow we have historically received, thereby reducing that portion of
our liquidity that has been provided by positive cash flow.

11



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Assuming
no changes in government funding, we expect to recognize over the next several
years the remaining revenue on the in-progress and new awards totaling $11.7
million as of March 31, 2007. We recognized $1.5 million related to DOE and
industry co-funded contracts in the first quarter of 2007. We expect to
recognize revenue from these contracts of approximately $7.4 million in total
for 2007, including the first quarter. If further funding were not approved,
we would decrease or cease activities on those contracts and would expect
to maintain a positive cash flow but at a reduced level.

We  have
planned capital expenditures to sustain and improve ongoing operations for  2007
estimated at $400,000, which includes planned expenditures for build-out of  space and
office equipment to accommodate new employees, replacement of obsolete  computers and
office equipment and field equipment. We expect to fund these  requirements out of
existing working capital and cash flow from operations. This  amount does not include
amounts we may choose to spend on specific development  projects to secure our position
in the activated carbon market. The  Board has committed approximately $4 million from
internal funds, which we expect to  expend through August 2007. We believe this will
allow us to move the project forward in a manner that  will position us to meet a
significant portion of the shortage in  activated carbon supply for this rapidly
expanding market.

During
the 1st quarter of 2007 we incurred an additional $841,000 for such
project development costs, which costs have been deferred and are classified on
the balance sheet and included with Development Projects and Other Assets. Such
development costs are generally deferred and either (a) expensed when it has
been determined they are no longer of future value, or (b) capitalized as part
of long-term assets and then subject to future impairment evaluations.

Under  our
defined contribution and 401(k) pension plan, we match up to 5% of salary  amounts
deferred by employees in the Plan and contribute certain amounts based  on the profits of
the Company, which amounts are determined annually by our  Board of Directors. During the
quarter ended March 31, 2007 and 2006, we  recognized $34,000 and $25,000, respectively,
of matching expense; this expense  is expected to amount to approximately $170,000 in
2007. In the past, we have also made discretionary contributions to the Plan and
employees.  Based on results for 2006, the amount paid to the plan totaled $123,000 and
was  paid in the form of cash to the accounts of all eligible employees in February  and
March 2007. During the first quarters of 2007 and 2006, we accrued
approximately $45,000 and $32,000, respectively, for such payments based on  results for
the respective quarters.

We
recorded net deferred tax liabilities of $126,000 and $133,000 as of March 31,
2007, and December 31, 2006, respectively.

Cash  flow used
by operations totaled ($56,000) for the first quarter of 2007 compared  to cash flow
provided of $358,000 for the same period in 2006. The 2007 cash  flow used was due to
increases in our accounts receivable ($605,000) as a result of increased ACI system
sales, decrease  in accrued payroll and related liabilities ($120,000) and adjustments
for non  cash expenses which included benefit for income tax ($10,000) and the net loss
of ($23,000). The 2007 operating cash flow used was offset by the increase in  accounts
payable of $435,000, and an increase in deferred revenue and accrued  warranty costs
totaling $94,000, which correspond to our overall growth in  business and in particular
with increasing ACI system sales.

Net
cash used by investing activities was ($886,000) for first quarter of 2007
compared to cash provided in investing activities of $451,000 in 2006. In 2007,
certificates of deposit totaling $400,000 were liquidated and held as cash
equivalents, whereby proceeds from sales of securities exceeded investments in
securities. Such excess was offset somewhat by changes to our investment
portfolio to maintain a targeted balance and maximize earnings, as well as
re-investment of gains that occurred during the period. The net increase in cash
from investment activity was offset by a use of cash for purchases of property
and equipment for the build-out of additional space in our current headquarters
location to accommodate new employees and field equipment ($254,000), and
amounts invested in our project development costs ($841,000), particularly for
development of a long-term activated carbon supply.

12



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Critical
Accounting Policies and EstimatesRevenue
Recognition  ADA follows the percentage of completion method of accounting
for all significant contracts excluding government contracts and chemical sales.
The percentage of completion method of reporting income takes into account the
estimated costs to complete and estimated gross margin for contracts in
progress. We recognize revenue on government contracts based on the
time and expenses incurred to date.

Significant
estimates are used in preparation of our financial statements and include (1)
our allowance for doubtful accounts, which is based on historical experience;
(2) our valuation and classification of investments as
available-for-sale securities, which is based on estimated fair
market value; and (3) our percentage of completion method of accounting for
significant long-term contracts, which is based on estimates of gross margins
and of the costs to complete such contracts. In addition, amounts invoiced for
government contracts are subject to change based on the results of future audits
by the federal government. We have not experienced significant adjustments in
the past, and we do not expect significant adjustments will be required in the
future. We also use our judgment to support the current fair value of goodwill
and other intangible assets of $2.3 million on the consolidated balance sheets.
Management believes the fair value of other recorded intangibles is not
impaired, although market demand for our products and services could change in
the future, which would require a write-down in recorded values. As with all
estimates, the amounts described above are subject to change as additional
information becomes available, although we are not aware of anything that would
cause us to believe that any material changes will be required in the near term.

Recently
Issued Accounting PoliciesIn  June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income  Taxes  An Interpretation of FASB Statement No. 109, which
was  effective for our year beginning January 1, 2007. This interpretation was  issued to
clarify the accounting for uncertainty in income taxes recognized in  the financial
statements by prescribing a recognition threshold and measurement  attribute for the
financial statement recognition and measurement of a tax  position taken or expected to
be taken in a tax return. FIN 48 requires the  recognition of penalties and interest on
any unrecognized tax benefits. Our  policy is to reflect penalties and interest as part
of income tax expense as  they become applicable. We  adopted the provisions of FIN 48 on
January 1, 2007. No  unrecognized tax benefits  were recorded as of the date of
adoption. We file income tax returns in  the U.S. federal and various
state  jurisdictions.  We are no longer subject to U.S.  federal and state and local
examinations by tax authorities for years before 2004.

In  September
2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157),
which defines fair value, establishes a framework for measuring  fair value and expands
disclosures about fair value measurements. SFAS 157  focuses on creating consistency and
comparability in fair value measurements.  SFAS 157 is effective for fiscal years
beginning after November 15, 2007,  and interim periods within those fiscal years. We are
evaluating its  impact and does not expect that adoption of SFAS 157 will have a
material  impact on our financial statements.

In  February
2007, the FASB issued SFAS No. 159 (SFAS 159) The Fair Value  Option for Financial
Assets and Financial Liabilities.  SFAS 159  permits entities to choose to
measure many financial instruments and certain  other items at fair value.  The
provisions of SFAS 159 will be effective  beginning January 1, 2008.  We
are in the process  of determining the effect, if any, the adoption of SFAS 159 will have
on our  financial statements.

Item
4. Controls and Procedures.

Evaluation
of Disclosure Controls and Procedures

Our
management evaluated, with the participation and under the supervision of our
Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934 is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure and that such information is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

13



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Changes in
Internal Control Over Financial ReportingThere
has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting, except as follows:

In our
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006, three material weaknesses were identified as summarized
below:

|1. |  | The
Company did not have a sufficient complement of personnel with appropriate  training and
experience in generally accepted accounting principles  (GAAP), or adequate
controls over the resolution of GAAP accounting  issues.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | The
Companys controls over the collection and recording of accounts payable  did not
operate effectively.
|-- |  | ----------------------------------------------------------------------------------------------------------

|3. |  | The
Company did not maintain adequate controls over the reconciliation of accounts
receivable and deferred revenue.
|-- |  | -------------------------------------------------------------------------------------------------------------------

Over
the past 4 months, we have taken steps to strengthen our ability to identify and
resolve GAAP accounting issues as they arise. Specifically, we have implemented
new controls and procedures to substantially mitigate the risks associated with
the material weaknesses identified above. Management has not completed all of
the testing of controls in these areas for fiscal 2007.

Our
CEO and CFO do not expect that our internal controls and procedures will prevent
all error and all fraud. Although our internal controls were designed to provide
reasonable assurance of achieving their objectives, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any system of controls is also
based partly on 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.

PART
II. OTHER INFORMATION

Item 5.   Other Information

Rollie
J. Peterson, a Director who served as Chairman of the Nominating and Governance
Committee and a Member of the Audit Committee died in a motoring accident in
Minnesota on May 6, 2007. He was 59 years old. The Board has not yet replaced
Mr. Peterson as Chairman of the Nominating and Governance Committees, but will
appoint his replacement at the next scheduled Board meeting on May 16, 2007. The
Board will reduce the size of the Board of Directors from nine to eight as a
result of Mr. Petersons death, and will therefore not be replacing Mr.
Peterson as a director at the present time. We will disregard any votes cast for
Mr. Peterson in the election of directors that will take place at the Annual
Shareholder Meeting to be held on June 19, 2007.

Item
6.    Exhibits

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|31.1* | 
|      | 
|      | 
|31.2* | 
|      | 
|      | 
|32.1* | 
|      | 
|      | 
|      | 
|32.2* | 
|      | 
|      | 
|      | 
|      | 

*
These certifications are furnished and shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

SIGNATURES

In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

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|-------------------- |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|Date:   May 10, 2007 |  | 
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|                     |  | 
|Date:   May 10, 2007 |  | 
|                     |  | 
|                     |  | 
|                     |  | 

14



---

EXHIBIT
INDEX

|      | 
|----- | 
|31.1* | 
|      | 
|      | 
|31.2* | 
|      | 
|      | 
|32.1* | 
|      | 
|      | 
|      | 
|32.2* | 
|      | 
|      | 
|      | 
|      | 

*
These certifications are furnished and shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

15