##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
  Form 10-KSB
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File
    No. 000-31953
 CATALYTICA ENERGY SYSTEMS,
    INC.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

77-0410420(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification Number)   301 West Warner Road, Suite 132
 Tempe, Arizona 85284
 (Address of principal executive
    offices)
  (480) 556-5555
 (Registrants telephone number, including area code)
  Securities registered under Section 12(b) of the
    Exchange Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value

NASDAQ Global Market   Securities registered under Section 12(g) of the
    Exchange Act: None
 (Title of Class)
  þ o
  Regulation S-B Form 10-KSB Form 10-KSB. þ
  Rule 12b-2 o þ
        DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-KSB
  o þ




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##### 



CATALYTICA
    ENERGY SYSTEMS, INC.
  Annual
    Report on
    Form 10-KSB
 December 31,
    2006
  Table of
    Contents
  
  Page No.PART IItem 1.


Description of
    Business


6Item 2.


Description of
    Property


29Item 3.


Legal
    Proceedings


29Item 4.


Submission of
    Matters to a Vote of Security Holders


30PART IIItem 5.


Market for Common
    Equity, Related Stockholder Matters and Small Business Issuer
    Purchases of Equity Securities


30Item 6.


Managements
    Discussion and Analysis or Plan of Operation


32Item 7.


Consolidated
    Financial Statements


43Item 8.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


43Item 8A.


Controls and
    Procedures


43Item 8B.


Other
    Information


43PART IIIItem 9.


Directors,
    Executive Officers, Promoters, Control Persons and Corporate
    Governance; Compliance with Section 16(a) of the Exchange
    Act


44Item 10.


Executive
    Compensation


44Item 11.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


44Item 12.


Certain
    Relationships and Related Transactions


44Item 13.


Exhibits


44Item 14.


Principal
    Accountant Fees and Services


49EX-10.73EX-10.74EX-10.75EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  This report contains forward-looking statements within the
    meaning of Section 27A of the Securities Act of 1933, as
    amended, and Section 21E of the Securities Exchange Act of
    1934, as amended. Words such as anticipate,
    believe, estimate, expect,
    intend, plan and similar expressions
    identify such forward-looking statements.
  The forward-looking statements in this report include, but
    are not limited to:
  
    our market opportunities and the growth of the market for our
    product and service offerings
    the effect of regulatory drivers on our market conditions
    our ability to capitalize on any long-term commercial
    prospects and maintain financial viability
    the long-term commercial prospects for our Company
    the effect of any strategic initiatives that we may decide to
    take, including any merger, acquisition or other strategic
    arrangement
    our belief that coal will continue to be the primary fuel
    source for U.S. power production for the foreseeable
    future
    our belief that SCR systems are expected to remain the
    dominant technology choice for coal-fired power plants to meet
    increasingly stringent U.S. air quality regulations
    our belief that the amount of savings that can be generated
    through catalyst regeneration will become increasingly important
    to power generating companies
    our belief that in the context of
    SO2
    to
    SO3
    oxidation, catalyst regeneration will present a compelling
    alternative to the purchase of ultra-low conversion catalyst
    our belief that our first mover advantage in the regeneration
    marketplace, combined with our established reputation as a
    market leader and substantial regeneration experience, will help
    us maintain our leading market position as the first company in
    North America to offer a technically feasible and economically
    viable regeneration process for SCR catalyst
    our negotiations with current and potential new customers
    the nature of our asset and technology base
    our business strategies and plan of operations
    our competitive advantage in the marketplace
    the nature and level of competition for our product and
    service offerings
    the efficiency and efficacy of our product and service
    offerings
    the cost-effectiveness of our product and service
    offerings
    the availability and expense of resources and raw materials
    necessary for SCR Catalyst and Management Services
    the value of our intellectual property and effectiveness of
    our patent portfolio, including our belief that our patent
    portfolio can provide us with a significant advantage over our
    competitors
    our ability to protect our foundation technology and cleaning
    and regeneration processes
    the ability of our management to adapt to changing
    circumstances
    our relations with employees
    the uniqueness, potential and market for our SCR Catalyst and
    Management Services
    our ability to manage SCR-Tech 3




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
    the role of catalyst regeneration in the catalyst replacement
    market
    the adequacy of SCR-Techs facilities
    our plans for the retention of future earnings for use in the
    expansion and operation of our business and the lack of plans
    for paying cash dividends in the foreseeable future
    our forecast of revenues and results of operations, including
    our belief that 2007 revenues will be flat or below 2006 revenue
    levels, specifically, in the $6.0 to $7.0 million dollar
    range, and our projection that we will not see any meaningful
    growth in revenues until 2008 when the market for SCR Catalyst
    and Management Services is expected to more fully develop
    the nature and amount of concentration of customers for
    SCR-Tech
    the effectiveness of testing of regenerated and cleaned SCR
    catalyst modules by independent third parties and the effect of
    such testing on revenue recognition
    our investment in, and expenses for, research and
    development
    sources and amounts of our revenues and the timing of revenue
    recognition
    the level, amount and consistency of our revenues
    our ability to generate cash and the sufficiency of existing
    cash and cash equivalents
    our funding requirements and potential sources of funding
    our belief that we have emerged on stable financial footing
    and are in a good position to drive the business commercially
    predictions as to the amount and nature of anticipated losses
    and use of our cash and whether we will achieve profitability
    our anticipated use of cash, cash equivalents, and short-term
    investments in 2007, which is expected to range between
    $3.0 million and $4.0 million
    our anticipated SG&A and capital expenditures, including
    our belief that future capital expenditures are anticipated to
    be required primarily for the expansion of production capacity
    at SCR-Tech
    our belief that we expect to spend up to $1.5 million
    during the next
    12-15 months
    to invest in equipment and facilities to maintain and increase
    capacity to meet our anticipated needs in the near-term, and up
    to $5 million in 2008 or 2009 for a second production
    facility
    our liquidity and the effect or our actions on our
    liquidity
    the amount and impact of interest income and expense
    the level and amount of our expenses
    predictions as to when we may incur material income taxes
    the financial effect of the sale of our Gilbert, Arizona
    facility
    the financial effect of the sale of our Xonon Cool Combustion
    technology and gas turbine assets to Kawasaki Heavy Industries,
    Ltd.
    the financial effect of the sale of diesel fuel processing
    technology and assets to Eaton Corporation
    the timing of our adoption of recent accounting standards and
    the impact of such standards on our financial statements
    critical accounting policies and the effect of such policies
    on our financial statements 4




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5




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##### Table of Contents



PART I  Item 1.
    DESCRIPTION
    OF BUSINESS  Overview
                  ®
 6




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SCR
    Catalyst and Management Services
      Catalyst Cleaning, Rejuvenation and
    Regeneration
  SCR and Catalyst Management
    Industry
    Background and Market Drivers
    kilowatt-hours
 7




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energy-per-BTU
      3 3
      Regulatory
    Drivers
  3
 8




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NOx
    SIP Call
  1
  Clean
    Air Interstate Rule (CAIR)
  2 2 cap-and-trade
  Clean
    Air Mercury Rule (CAMR)
          1
 9




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SO2
    to
    SO3
    Conversion
  2 3 3
  2 3 2 2 2 2 2 3
    Market
    Opportunity
  3
      24,000-hour
   10




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##### Table of Contents



3
    SCR-Techs
    Service Offerings
  Catalyst
    Cleaning, Rejuvenation and Regeneration
              1.
    Ultrasonic Deep Cleaning  We first use
    a patented ultrasonic process to remove physical and microscopic
    pluggage2.
    Soaking and Washing  During this step,
    chemicals remove poisons that have contributed to catalyst
    deactivation  Regeneration
  Heat Treatment
 11




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SCR
    and Catalyst Management
    2 3
      Experience
  3 3
  Quality
    Control
    on-site,
 12




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on-site
    and/or
        Customers
         13




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Research
    and Development Projects
    2 3
  2 3 3
  2 3 2 3
  2 2 2 2
  2 3
    Competitive
    Advantage
   14




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##### Table of Contents



2
  1.
    Cost
    Savings        2.
    Elimination/Reduction
    of Disposal Issues          and/or
   15




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3.
    Enhanced
    Activity              4.
    Reduced
    SO2
    Conversion  2 2 2 2
  Competition
     16




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U.S.-based
  mid-2007.
      on-site
  Production
    and Laboratory Facilities
        on-site
 17




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on-site
  Intellectual
    Property
          Restructuring
    Activities
     18




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back-up
  ® ®
            Human
    Resources
    Available
    Information
  Form 10-KSB, Form 10-QSB Form 8-K, www.catalyticaenergy.com
 19




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##### Table of Contents



RISK
    FACTORS
  The following risk factors could materially and adversely
    affect our future operating results, financial condition, the
    value of our business, and the price of our common stock and
    also could cause actual events to differ materially from those
    predicted in the forward-looking statements we make about our
    business. Investors are encouraged to carefully consider the
    risks described below before making decisions related to buying,
    holding or selling our common stock.
  We
    have incurred significant net losses since inception and we may
    never achieve sustained profitability.
      SCR-Tech
    has a limited operating history.
    The
    size of the market for SCR-Techs business is
    uncertain.
    SCR-Tech
    will be subject to vigorous competition with very large
    competitors that have substantially greater resources and
    operating histories.
  mid-2007.
   20




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If we
    are unable to protect our intellectual property, or our
    intellectual property protection efforts are unsuccessful,
    others may duplicate our technology.
      Third
    parties may claim that we are infringing their intellectual
    property, and we could suffer significant litigation or
    licensing expenses or be prevented from selling products and
    services if these claims are successful. We also may incur
    significant expenses in affirmatively protecting our
    intellectual property rights.
     21




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SCR-Techs
    business is subject to customer concentration.
    Risk
    of changes in government regulation.
    SCR-Techs
    business is subject to potential seasonality.
   22




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SCR-Tech
    does not own its regeneration facilities and it is subject to
    risks inherent in leasing the site of its
    operations.
    SCR-Tech
    could be subject to environmental risks as a result of the
    operation of its business and the location of its
    facilities.
    We
    likely will be required to make significant capital expenditures
    to expand SCR-Techs production facilities or for other
    purposes; we may require additional capital for such
    purposes.
  12-15 months.
   23




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Certain
    of SCR-Techs capital equipment is unique to our business
    and would be difficult and expensive to repair or
    replace.
    SCR-Tech
    may be subject to warranty claims from its
    customers.
    SCR-Tech
    is dependent on third parties to perform certain testing
    required to confirm the success of its
    regeneration.
    Significant
    price increases in key materials may reduce SCR-Techs
    gross margins and profitability of SCR-Techs regeneration
    of SCR Catalyst.
    Risks
    of purchasing used SCR catalyst.
   24




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If we
    are unable to attract or retain key personnel, our ability to
    manage our business could be harmed; we have a very limited
    number of personnel and we may have difficulty meeting the
    requirements of Section 404 of the Sarbanes-Oxley Act of
    2002.
    Many
    of the risks of our business have only limited insurance
    coverage and many of our business risks are
    uninsurable.
   25




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We
    have indemnified Kawasaki Heavy Industries and Eaton Corporation
    for certain matters in connection with the sale of our Gas
    Turbine Assets and our Diesel Technologies and we may be subject
    to other liabilities from our activities prior to these
    sales.
    Liabilities
    we acquired as a result of our spin-off may have a negative
    effect on our financial results.
    Any
    significant transaction we may undertake could disrupt our
    business and harm our financial condition.
    
    issues associated with integrating the acquired operations,
    technologies or products with our existing business and products;
    changes in control or management;
    dilution of existing stockholders;
    potential disruption of our ongoing business activities and
    distraction of our management;
    difficulties in retaining business relationships with suppliers
    and customers of the acquired companies;
    difficulties in coordinating and integrating overall business
    strategies, sales and marketing, and research and development
    efforts; 26




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
    difficulties associated with the maintenance of corporate
    cultures, controls, procedures and policies;
    risks associated with entering markets in which we lack prior
    experience;
    the potential loss of key employees; and
    the potential for write-offs of goodwill and other acquired
    intangibles.    We
    incur substantial costs as a result of being a public
    company.
    The
    market price of our common stock is highly volatile, has
    significantly declined and may decline further. Our common stock
    could be de-listed by NASDAQ.
    
    the nature, amounts and trends with respect to our net losses
    and cash consumption;
    the amount of our capital resources and our potential need to
    seek additional funding;
    announcements or cancellations of orders;
    conditions or trends in our industry;
    changes in the market valuations of other companies in our
    industry;
    the effectiveness and commercial viability of products offered
    by us or our competitors;
    announcements by us or our competitors of technological
    innovations, new products, significant acquisitions or mergers,
    strategic partnerships, divestitures, joint ventures or other
    strategic initiatives;
    changes in environmental regulations;
    additions or departures of key personnel;
    the effect of our Shareholders Rights Plan;
    our limited number of shareholders; and
    our limited trading volume.   27




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
    the status of development and rate of expansion of our SCR
    Catalyst and Management Services business;
    the volume of sales activity in our SCR Catalyst and Management
    Services business;
    the market acceptance of SCR catalyst regeneration;
    the cost of our raw materials and key components;
    warranty and service costs for products in the field;
    the introduction, timing and market acceptance of new products
    and services introduced by us or our competitors;
    the success of potential new competition;
    the development of our customer relationships;
    general economic conditions, which can affect our
    customers capital investments and the length of our sales
    cycle;
    the timing and nature of any acquisition or other significant
    transaction and any of the terms and conditions of any financing
    in connection with such a transaction; and
    government regulations.    Because
    a small number of stockholders own a significant percentage of
    our common stock, they may exert significant influence over
    major corporate decisions, and our other stockholders may not be
    able to do so.
      Provisions
    in our charter documents, our Shareholder Rights Plan and
    Delaware law may prevent or delay an acquisition of us, which
    could decrease the value of our securities.
   28




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Item 2.
    DESCRIPTION
    OF PROPERTY  Current
    Facilities
        Facilities
    Terminated in 2006
      Item 3.
    LEGAL
    PROCEEDINGS   29




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Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  Item 5.
    MARKET
    FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
    BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  Common
    Stock
  mark-ups
  Quarter EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Common stock price per share:High

$
1.86


$
1.66


$
1.35


$
2.07Low


0.97



1.30



0.97



1.06   Quarter EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Common stock price per share:High

$
2.81


$
2.35


$
2.02


$
1.29Low


2.00



1.79



1.40



0.97     Dividend
    Policy
    Shareholder
    Rights Plan
     30




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Stock
    Based Compensation Plans
    Stock
    option plan
      Employee
    stock purchase plan
   31




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Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Number of Securitiesto be Issued UponExercise ofOutstanding Options


Weighted-Average


Common Stockand Conversion of


Exercise Price of


Reserved for FutureRestricted Stock Units


Outstanding Options


Issuance(1)Plans approved by stockholders:1995 Stock Plan


2,263,938


$
4.02



4,122,1272000 Employee Stock Purchase Plan










1,060,353Total


2,263,938







5,182,480     (1)
    
    1995 Stock Plan amount includes options and restricted stock
    units granted but not yet vested or exercised and options
    authorized but not yet granted.  ITEM 6.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  This Managements Discussion and Analysis of Financial
    Condition and Results of Operations and other parts of this
    Annual Report on
    Form 10-KSB
    contain forward-looking statements that involve risks and
    uncertainties. Words such as anticipate,
    believe, estimate, expect,
    intend, plan and similar expressions
    identify such forward-looking statements, which are based on
    information available to us on the date hereof, and we assume no
    obligation to update any such forward-looking statements. Our
    actual results could differ materially from those anticipated in
    these forward-looking statements as a result of certain factors,
    including those set forth in Item 1. Description of
    Business  Risk Factors and elsewhere in this
    Form 10-KSB.
  Overview
         32




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back-up
  ® ®
              and/or
 33




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Results
    of Operations
    For the Year EndedDecember 31,2006


2005Revenues

$
7,383


$
1,726Costs and expenses:Cost of revenues


5,197



2,523Selling, general and administrative


6,438



6,107Total costs and expenses


11,635



8,630Operating loss


(4,252
)


(6,904
)Interest and other income


1,114



3,253Interest and other expense


(128
)


(683
)Loss from continuing operations


(3,266
)


(4,334
)Discontinued operations:Gain from disposal of discontinued
    operations


5,093



Loss from discontinued operations


(5,646
)


(9,132
)Total loss from discontinued
    operations


(553
)


(9,132
)Net loss

$
(3,819
)

$
(13,466
)   Comparison
    of the years ended December 31, 2006 and 2005:
  REVENUES
    period-to-period.
     34




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##### Table of Contents



COST OF
    REVENUES
        GROSS
    MARGIN
        SELLING,
    GENERAL AND ADMINISTRATIVE EXPENSES
     35




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INTEREST
    AND OTHER INCOME
        INTEREST
    AND OTHER EXPENSE
        INCOME
    TAXES
    LIQUIDITY
    AND CAPITAL RESOURCES
   36




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##### Table of Contents



Year Ended December 31,2006


2005Decrease in Cash and Cash
    Equivalents (Cash Flow)

$
(832
)

$
(25,411
)(Decrease) Increase in Investments


(1,873
)


11,151Cash Consumption

$
(2,705
)

$
(14,260
)     SCR-Techs 12-15 months
     37




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Other
    Capital Commitments
      Dividend
    Policy
    Off-Balance
    Sheet Arrangements
  Regulation S-B.
   38




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##### Table of Contents



Contractual
    Obligations
    Total


2007


2008


2009


2010


2011


ThereafterLong-Term Debt Obligations

$



$



$



$



$



$



$
Capital Lease Obligations


19



3



4



4



4



4



Operating Lease ObligationsBuilding


2,303



395



361



372



380



391



404Equipment


76



16



16



16



15



9



4Purchase Obligations


























Other Long-Term Liabilities Other


























Total Contractual Obligations

$
2,398


$
414


$
381


$
392


$
399


$
404


$
408   Other
    Commitments
          Critical
    Accounting Policies and Estimates
   39




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Revenue
    Recognition
        00-21, Accounting for Multiple Element Revenue
    Arrangements.
      period-to-period. period-to-period
  Stock
    Based Compensation
   40




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Accounting for
    Stock Issued to Employees, Accounting for Stock-based Compensation.
  Share-Based
    Payment,
  Goodwill
    and Other Intangible Assets
  Business Combinations, Goodwill and Other Intangible
    Assets. Accounting for Impairment or
    Disposal of Long-Lived Assets.
    Accounts
    Receivable Reserves
    Accrued
    Warranty Liability
   41




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Income
    Taxes
  Accounting
    for Income Taxes.
  Impact of
    Inflation and Foreign Currency Fluctuation
    Impact of
    Recently Issued Accounting Standards
  Accounting
    Changes and Error Corrections, Accounting Changes, Reporting Accounting
    Changes in Interim Financial Statements.
  Accounting for Uncertainty
    in Income Taxes  an interpretation of FASB Statement
    No. 109,
  Fair
    Value Measurements,
  Employers Accounting for Defined Benefit Pension
    and Other Postretirement Plans.
 42




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Considering the Effects of
    Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements.
  Item 7.
    CONSOLIDATED
    FINANCIAL STATEMENTS  Form 10-KSB.
  Item 8.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE   Item 8A.  CONTROLS
    AND PROCEDURES  Evaluation of disclosure controls and
    procedures.
  Changes in internal
    controls. Rules 13a-15 15d-15
  Item 8B.
    OTHER
    INFORMATION   43




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PART III    Item 9.
    DIRECTORS,
    EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
    GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
    ACT      Item 10.
    EXECUTIVE
    COMPENSATION    Item 11.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS      Item 12.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS    Item 13.
    EXHIBITS  ExhibitNumber

Notes

Description2
.1


(5)


Assignment and Assumption
    Agreement between Catalytica, Inc. and the Registrant, effective
    as of July 25, 1995.2
.1A


(28)


Membership Interests and Asset
    Purchase Agreement dated as of January 21, 2004 by and
    among EnBW Energy Solutions GmbH, with respect to
    Articles VII and X only, ENVICA GmbH, ENVICA Kat GmbH,
    E&EC Energy & Environmental Consultants GmbH,
    SCR-Tech GmbH, CESI-SCR, Inc. and, with respect to
    Section 11.18 and Articles VI and IX only, Catalytica
    Energy Systems, Inc., filed as Exhibit 2.1, dated as of
    January 21, 2004.2
.2


(11)


Employee Matters Agreement between
    Catalytica, Inc. and the Registrant, effective as of
    December 15, 2000. 44




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ExhibitNumber

Notes

Description2
.2A


(28)


Amendment No. 1 to Membership
    Interests and Asset Purchase Agreement by and among EnBW Energy
    Solutions GmbH, ENVICA GmbH, ENVICA Kat GmbH, E&EC
    Energy & Environmental Consultants GmbH, SCR-Tech GmbH,
    SCR-Tech LLC, CESI-SCR, Inc., filed as Exhibit 2.2, dated
    as of February 20, 2004.2
.3


(11)


Form of Master Trademark Ownership
    and License Agreement between Catalytica, Inc. and the
    Registrant, effective as of December 15, 2000.2
.4


(11)


Tax Sharing Agreement between
    Catalytica, Inc., Synotex, Inc. and the Registrant, dated as of
    December 15, 2000.2
.5


(11)


Master Confidential Disclosure
    Agreement between Catalytica, Inc. and the Registrant, effective
    as of December 15, 2000.2
.6


(5)


Cross-License Agreement between
    Catalytica, Inc. and the Registrant, effective as of July 1995.2
.7


(5)


Cross-License Agreement between
    Catalytica Advanced Technologies, Inc. and Catalytica, Inc.,
    dated July 1995.2
.8


(5)


Tax Sharing Agreement between
    Catalytica, Inc., Catalytica Bayview, Inc., Catalytica Advanced
    Technologies, Inc. and the registrant, dated March 4, 1999.2
.8A


(11)


Indemnification Agreement between
    Catalytica, Inc. and the Registrant, filed as Exhibit 2.8,
    dated December 15, 2000.2
.9


(11)


Transition Services Agreement
    between Catalytica, Inc. and the Registrant, dated
    December 15, 2000.2
.10


(11)


Real Estate Matters Agreement
    between Catalytica, Inc. and the Registrant, dated
    December 15, 2000.2
.11


(11)


Master Separation Agreement
    between Catalytica, Inc. and the Registrant, dated
    December 15, 2000.3
.1


(11)


Amended and Restated Certificate
    of Incorporation of Catalytica Energy Systems, Inc., dated
    December 13, 2000.3
.1A


(18)


Certificate of Designation, the
    form of Rights Certificate and the Summary of Rights attached
    thereto as Exhibits A, B and C, respectively, filed as
    Exhibit 4.1, dated January 29, 2002.3
.2


(8)


Form of Amended and Restated
    Bylaws.4
.1


(11)


Stock Specimen of the Registrant.4
.1A


(18)


Preferred Stock Rights Agreement
    between the Registrant and Mellon Investor Services LLC,
    including the Certificate of Designation, the form of Rights
    Certificate and the Summary of Rights attached thereto as
    Exhibits A, B, and C, respectively, filed as
    Exhibit 4.1, dated January 29, 2002.4
.1B


(35)


Amended and Restated Preferred
    Stock Rights Agreement with Mellon Investor Services LLC, filed
    as Exhibit 4.1, dated November 22, 2004.4
.1C


(57)


Amendment No. 1 to Amended
    and Restated Preferred Stock Rights Agreement with Mellon
    Investor Services, LLC, filed as Exhibit 4.3, dated as of
    December 14, 200610
.4


(5)*


Promissory Notes from Peter B.
    Evans issued to Registrant, both dated July 20, 1999.10
.6


(3)


Limited Liability Company
    Operating Agreement of GENXON Power Systems, LLC, dated
    October 21, 1996.10
.7


(4)


Amendment No. 1 to the
    Operating Agreement of GENXON Power Systems, LLC, dated
    December 4, 1997.10
.11


(5)


Omnibus Agreement by and among
    Catalytica, Inc., Sundance Assets, L.P., Enron North America
    Corp. and the Registrant, dated August 29, 2000.10
.12


(5)+


Collaborative Commercialization
    and License Agreement among General Electric Co., GENXON Power
    System, LLC and the Registrant, dated as of November 19,
    1998.10
.17


(8)


Registration Rights Agreement
    between Morgan Stanley Capital Partners III and its affiliates
    and the Registrant, dated September 2000.10
.18


(7)*


2000 Employee Stock Purchase Plan
    of the Registrant. 45




---



##### Table of Contents



ExhibitNumber

Notes

Description10
.23


(12)


Share Transfer Agreement between
    the Registrant and JSB Asset, LLC, dated December 15, 2000.10
.26


(16)+


Technology Development and
    Transfer Agreement between Kawasaki Heavy Industries, Ltd. and
    Registrant, dated December 13, 2000.10
.27


(16)+


Xonon Module Supply Agreement by
    and among Kawasaki Heavy Industries, Ltd. and Registrant, dated
    December 13, 2000.10
.30


(19)+


Amendment No. 1 to the
    Collaborative Commercialization and License Agreement between
    Catalytica Combustion Systems, Inc. and GENXON Power Systems,
    LLC and General Electric Company, dated January 3, 2002.10
.32


(19)


GENXON Membership Transfer and
    Settlement Agreement between the Registrant, Woodward Governor
    Company, and GENXON Power Systems, LLC, dated December 19,
    2001.10
.33


(19)


Control Patent Assignment and
    Cross-License Agreement between the Registrant and Woodward
    Governor Company, dated December 19, 2001.10
.43


(26)


Third Amendment and Extension to
    Lease Agreement between Jack Dymond Associates and Catalytica
    Energy Systems, Inc., dated June 20, 2003.10
.46


(29)


Lease Agreement dated
    December 16, 2002 between Clariant Corporation and
    SCR-Tech, LLC, dated December 16, 2002, and First Amendment
    to Lease Agreement between Clariant Corporation and SCR-Tech,
    LLC., dated February 18, 2004.10
.47


(34)


Loan Modification Agreements
    between the Arizona State Compensation Fund and the Registrant,
    as amended, dated August 9, 2004.10
.48


(36)*


Form of Indemnification Agreement
    between the Registrant and executive officers and directors of
    the Registrant.10
.49


(36)*


Consulting Agreement between the
    Registrant and David Merrion, dated February 1, 200510
.50


(37)*


Retention Agreement by and between
    the Registrant and Ralph Dalla Betta, dated as of
    September 27, 200510
.51


(37)


Retention Agreement by and between
    the Registrant and Joe Barry, dated as of September 27, 200510
.52


(37)*


Severance Consulting and Release
    Agreement by and between the Registrant and Dominic Geraghty,
    dated as of September 27, 200510
.53


(38)*


Employment Agreement by and
    between the Registrant and Robert W. Zack, dated as of
    September 27, 200510
.54


(39)


Settlement Agreement and Mutual
    Release among the Registrant, EnBW Energy Solutions GmbH, ENVICA
    Kat GmbH, E&EC Energy & Environmental Consultants
    GmbH, SCR-Tech GmbH, SCR-Tech LLC, CESI-SCR, Inc., ENVICA GmbH,
    CESI-Tech Technologies, Inc., Hans-Ulrich Hartenstein, and
    Brigitte Hartenstein10
.55


(40)


Form of Option Acceleration
    Agreement10
.56


(43)*


Employment Letter and Change of
    Control Agreement between the Registrant and William McMahon10
.57


(41)


Termination Agreement between the
    Registrant and General Electric Company10
.58


(44)


Purchase and Sale Agreement dated
    April 18, 2006 between the Registrant and Wilshire Property
    Company, LLC10
.59


(45)


First Amendment to Purchase and
    Sale Agreement dated May 18, 2006 between the Registrant
    and Wilshire Property Company, LLC10
.60


(46)


Second Amendment to Purchase and
    Sale Agreement dated July 14, 2006 between the Registrant,
    Wilshire Property Company, LLC and 1388 North Tech Boulevard
    Partners LP10
.61


(46)


Lease between the Registrant and
    1388 North Tech Boulevard Partners LP, effective July 20,
    200610
.62


(47)


Asset Purchase Agreement dated
    June 30, 2006 between the Registrant, Kawasaki Heavy
    Industries, Ltd. And Kawasaki Gas
    Turbines-Americas10
.63


(48)


Form of Stock Option Agreement 46




---



##### Table of Contents



ExhibitNumber

Notes

Description10
.64


(49)


License Agreement dated
    September 29, 2006 between the Registrant and Kawasaki
    Heavy Industries, Ltd.10
.65


(50)


Asset Purchase Agreement dated
    October 25, 2006 between the Registrant and Eaton
    Corporation10
.66


(51)


Lease between the Registrant and
    Warner Courtyards, LLC, effective August 29, 200610
.67


(52)


First Amendment to Asset Purchase
    Agreement dated October 25, 2006 between the Registrant and
    Eaton Corporation10
.68


(53)*


First Amendment to Retention
    Agreement by and between the Registrant and Ralph Dalla Betta
    and Joe Barry, dated as of September 27, 200510
.69


(54)*


Second Amendment to Employment
    Agreement by and between the Registrant and Robert W. Zack,
    dated as of September 27, 200510
.70


(55)


Letter Agreement dated
    December 12, 2006 between the Registrant and AWM Investment
    Co., Inc10
.71


(56)*


Employment Agreement by and
    between the Registrant and William J. McMahon, dated as of
    January 1, 200710
.72


(58)*


Catalytica Energy Systems, Inc.
    1995 Stock Plan as amended and restated August 31, 200510
.73


** *


Consulting Agreement between the
    Registrant and Richard Abdoo, effective as of January 1,
    200710
.74


**


Second Amendment to Lease
    Agreement between Clariant Corporation and SCR-Tech, LLC.,
    effective as of December 29, 200610
.75


** *


Third Amendment to Employment
    Agreement by and between the Registrant and Robert W. Zack,
    effective as of March 23, 200714
.1


(42)


Code of Ethics21
.1


**


Subsidiaries of Registrant23
.1


**


Consent of Independent Registered
    Public Accounting Firm24
.1


**


Power of Attorney (see Signature
    page)31
.1


**


Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    / 15d-14(a)
    of the Securities Exchange Act of 1934, as amended31
.2


**


Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    / 15d-14(a)
    of the Securities Exchange Act of 1934, as amended32
.1


**


Certification of Chief Executive
    Officer pursuant to 18 U.S.C. 1350.32
.2


**


Certification of Chief Financial
    Officer pursuant to 18 U.S.C. 1350.     +
    
    Confidential treatment has been granted for portions of these
    agreements.*
    
    Represents management contracts or compensatory plans for
    executive officers and directors.**
    
    Filed herewith.(1)
    
    Incorporated by reference to exhibits filed with Catalytica,
    Inc.s Registration Statement on
    Form S-1
    (Registration Statement
    No. 33-55696).(2)
    
    Incorporated by reference to exhibits filed with Catalytica,
    Inc.s
    Form 10-K
    (File
    No. 0-20966)
    for the year ended December 31, 1994.(3)
    
    Incorporated by reference to exhibits filed with Catalytica,
    Inc.s
    Form 10-K
    (File
    No. 0-20966)
    for the year ended December 31, 1996.(4)
    
    Incorporated by reference to exhibits filed with Catalytica,
    Inc.s
    Form 10-K
    (File
    No. 0-20966)
    for the year ended December 31, 1997.(5)
    
    Incorporated by reference to exhibits filed with our
    Registration Statement on Form
    S-1 (File
    No. 333-44772),
    filed on August 29, 2000.(7)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 2 to
    Form S-1
    (File
    No. 333-44772),
    filed on October 16, 2000. 47




---



##### Table of Contents



(8)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 3 to
    Form S-1
    (File
    No. 333-44772),
    filed on November 1, 2000.(11)
    
    Incorporated by reference to exhibits filed with our
    Post-Effective Amendment No. 1 to
    Form S-1
    (File
    No. 333-44772),
    filed on January 12, 2001.(12)
    
    Incorporated by reference to exhibits filed with our
    Form 10-K
    for the year ended December 31, 2000, filed on
    March 15, 2001.(14)
    
    Incorporated by reference to exhibits filed with our
    Registration Statement on Form
    S-1 (File
    No. 333-64682),
    filed on July 6, 2001.(16)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 2 to
    Form S-1
    (File
    No. 333-64682),
    filed on August 6, 2001.(18)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 1 to Form
    8-A12G/A,
    filed on February 6, 2002.(19)
    
    Incorporated by reference to exhibits filed with our
    Form 10-K
    for the year ended December 31, 2001, filed on
    April 01, 2002.(26)
    
    Incorporated by reference to exhibits filed with our
    Form 10-Q
    for the quarter ended June 30, 2003, filed on
    August 5, 2003.(28)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on March 4, 2004.(29)
    
    Incorporated by reference to exhibits filed with our
    Form 10-K
    for the year ended December 31, 2003, filed on
    March 30, 2004.(34)
    
    Incorporated by reference to exhibits filed with our
    Form 10-Q
    for the quarter ended September 30, 2004, filed on
    November 12, 2004.(35)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 1 to Form
    8-A12G/A,
    filed on November 22, 2004.(36)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on February 4, 2005.(37)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on September 28, 2005(38)
    
    Incorporated by reference to exhibit filed with our amended
    Form 8-K,
    filed on September 28, 2005(39)
    
    Incorporated by reference to the exhibit filed with our
    Form 8-K,
    filed on December 22, 2005(40)
    
    Incorporated by reference to the exhibit filed with our
    Form 8-K,
    filed on November 21, 2005(41)
    
    Incorporated by reference to the exhibit filed with our
    Form 8-K,
    filed on March 15, 2006(42)
    
    Incorporated by reference to exhibits filed with our
    Form 10-K
    for the year ended December 31, 2004, filed on
    March 30, 2005(43)
    
    Incorporated by reference to exhibits filed with our
    Form 10-K
    for the year ended December 31, 2005, filed on
    March 30, 2006(44)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on April 24, 2006(45)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on May 23, 2006(46)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on July 24, 2006(47)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on July 5, 2006(48)
    
    Incorporated by reference to exhibits filed with our
    Form 10-QSB
    for the quarter ended June 30, 2006, filed on
    August 11, 2006(49)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on October 4, 2006(50)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on October 31, 2006(51)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on September 1, 2006(52)
    
    Incorporated by reference to exhibit filed with our amended
    Form 8-K/A,
    filed on November 14, 2006(53)
    
    Incorporated by reference to exhibit filed with our amended
    Form 8-K/A,
    filed on November 17, 2006(54)
    
    Incorporated by reference to exhibit filed with our amended
    Form 8-K/A,
    filed on November 17, 2006 48




---



##### Table of Contents



(55)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on December 15, 2006(56)
    
    Incorporated by reference to exhibits filed with our
    Form 8-K,
    filed on January 10, 2007(57)
    
    Incorporated by reference to exhibits filed with our Amendment
    No. 2 to Form
    8-A12G/A,
    filed on December 14, 2006(58)
    
    Incorporated by reference to exhibits filed with our
    Form 10-Q
    for the quarter ended September 30, 2005, filed on
    November 10, 2005  Item 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   49




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             
    50




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
 for the
    years ended December 31, 2006 and 2005
  For the Year EndedDecember 31,2006


2005(In thousands, except per share amounts)Revenues

$
7,383


$
1,726Costs and expenses:Cost of revenues


5,197



2,523Selling, general and administrative


6,438



6,107Total costs and expenses


11,635



8,630Operating loss


(4,252
)


(6,904
)Interest and other income


1,114



3,253Interest and other expense


(128
)


(683
)Loss from continuing operations


(3,266
)


(4,334
)Discontinued operations:Gain from disposal of discontinued
    operations, net of taxes


5,093



Loss from discontinued operations,
    net of taxes


(5,646
)


(9,132
)Total loss from discontinued
    operations


(553
)


(9,132
)Net loss

$
(3,819
)

$
(13,466
)Loss per common share:Loss from continuing operationsBasic and diluted

$
(0.18
)

$
(0.24
)Loss from discontinued operationsBasic and diluted

$
(0.03
)

$
(0.51
)Net lossBasic and diluted

$
(0.21
)

$
(0.75
)Weighted average sharesBasic and diluted


18,195



18,048    51




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  CONSOLIDATED
    BALANCE SHEET
 at
    December 31, 2006
  December 31, 2006(In thousands,except pershare amounts)ASSETSCurrent assets:Cash and cash equivalents

$
658Short-term investments


17,969Trade accounts receivable, less
    allowance of $0


926Revenues in excess of billings


861Inventory


304Prepaid expenses and other assets


301Total current assets


21,019Property and equipment:Equipment


1,748Leasehold improvements


250Less accumulated depreciation and
    amortization


(1,022
)Total property and equipment


976Goodwill


4,257Other intangible assets, net of
    accumulated amortization


1,238Other assets


81Total assets

$
27,571LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
230Deferred revenue


112Accrued payroll and benefits


636Accrued liabilities and other


901Total current liabilities


1,879Other long-term liabilities


15Total liabilities


1,894Stockholders equity:Series A convertible
    preferred stock, $0.001 par value; authorized 
    5,000 shares, none issued


Common stock, $0.001 par
    value; authorized  70,000 shares; issued and
    outstanding  18,249 at December 31, 2006


18Additional paid-in capital


167,981Retained deficit


(142,302
)Accumulated other comprehensive
    loss


(20
)Total stockholders equity


25,677Total liabilities and
    stockholders equity

$
27,571    52




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 for the
    period from January 1, 2005 through December 31, 2006
    (In thousands)
  Convertible

















AccumulatedPreferred Stock








Additional








OtherSeries A


Common Stock


Paid-In


Deferred


Retained


Comprehensive


StockholdersShares


Amount


Shares


Amount


Capital


Compensation


Deficit


Loss


EquityBalance at January 1,
    2005





$




17,890


$
18


$
167,358


$
(20
)

$
(125,017
)

$



$
42,339Exercise of stock options and
    issuance of restricted shares










169







73















73Purchase of shares through employee
    stock purchase plan










82







153















153Issuance of restricted stock units


















75



(75
)










Forfeiture of restricted stock units


















(7
)


7











Re-measurement of deferred
    compensation


















(8
)


8











Amortization of deferred
    compensation






















10











10Unrealized loss on
    available-
    for-sale
    securities






























(64
)


(64
)Net loss


























(13,466
)






(13,466
)Balance at December 31,
    2005










18,141



18



167,644



(70
)


(138,483
)


(64
)


29,045Adoption of FAS No. 123R


















(70
)


70











Exercise of stock options and
    issuance of restricted shares










79







47















47Forfeiture of restricted stock units


















(6
)














(6
)Purchase of shares through employee
    stock purchase plan










29







25















25Stock compensation expense:Options/stock purchase plan


















322















322Restricted stock units


















19















19Unrealized loss on
    available-
    for-sale
    securities






























44



44Net loss


























(3,819
)






(3,819
)Balance at December 31,
    2006





$




18,249


$
18


$
167,981


$



$
(142,302
)

$
(20
)

$
25,677     53




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    for the years ended December 31, 2006 and 2005
  For the Year EndedDecember 31,2006


2005(In thousands)Cash flows from continuing
    operating activities:Net loss from continuing operations

$
(3,266
)

$
(4,334
)Adjustments to reconcile net loss
    from continuing operations to net cash used in operating
    activities:Depreciation of property and
    equipment


506



666Gain on settlement of acquisition
    liability






(2,105
)Amortization(accretion) of
    investments premium(discount)


(36
)


25Amortization of intangible assets


173



173Accretion of interest on long-term
    debt






421Stock based compensation


341



10Gain (loss) on sale of assets


(2
)


2Changes in operating assets and
    liabilities:Trade accounts receivable


(636
)


(944
)Inventory


135



(655
)Prepaid expenses and other assets


79



(93
)Accounts payable


(3
)


17Deferred revenue


(73
)


1,228Accrued payroll and benefits


248



99Accrued liabilities and other


(881
)


356Net cash used in continuing
    operating activities


(3,415
)


(5,134
)Cash flows from continuing
    investing activities:Purchases of investments


(17,516
)


(35,525
)Maturities of investments


19,471



24,284Sale of property and equipment


2



2Additions to property and equipment


(183
)


(93
)Net cash provided by (used
    in) continuing investing activities


1,774



(11,332
)Cash flows from continuing
    financing activities:Repayments of long-term debt






(1,512
)Payments on capital lease and other
    long-term obligations


(12
)


(3
)Proceeds from exercise of stock
    options


47



73Proceeds from issuance of common
    stock to employees through stock plans


25



153Net cash provided by (used
    in) continuing financing activities


60



(1,289
)Net decrease in cash flows from
    continuing operations


(1,581
)


(17,755
)Net increase (decrease) in cash
    flows from discontinued operations


749



(7,656
)Cash and cash equivalents at
    beginning of period


1,490



26,901Cash and cash equivalents at end
    of period

$
658


$
1,490Cash flows from discontinued
    operations:Net cash used in operating
    activities

$
(5,735
)

$
(7,651
)Net cash provided by (used in)
    investing activities


9,392



(152
)Net cash (used in) provided by
    financing activities


(2,908
)


147Net increase (decrease) in
    cash flows from discontinued operations

$
749


$
(7,656
)Additional disclosure of cash
    flow information:Interest paid

$
120


$
199Deferred compensation for issuance
    and revaluation of stock options to non-employees

$



$
67    54




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2006
  Note 1.
    Description
    of Business  Formation and Operations of the
    Company.
    Description of Business.
            ®
 55




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Note 2.
    Significant
    Accounting Policies  Principles of Consolidation.
  Reclassifications.
  Use of Estimates.
  Cash Equivalents.
  Short-Term Investments. Accounting for Certain Investments in
    Debt and Equity Securities.
    Year Ended December 31, 2006AccumulatedOtherComprehensive


EstimatedAvailable-for-Sale Investments:

Cost


Gains


Losses


Fair ValueAuction rate securities
    (SAVRs)

$
3,350


$



$



$
3,350U.S. government agency notes


14,564



2



(22
)


14,544U.S. corporate bonds


75











75$
17,989


$
2


$
(22
)

$
17,969  56




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Investments in Equity Investments and Joint
    Ventures.
  Concentrations of Credit
    Risk.
  Accounts Receivable.
  Allowance for Doubtful Accounts and
    Notes.
  Year Ended

Beginning


Net Provision/


EndingDecember 31,

Balance


(Recoveries)


Balance2005

$
717


$
(192
)

$
5252006


525



(25
)


500     Fair Value of Financial Instruments.
  Inventory. first-in,
 57




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Property and Equipment.
  Impairment of Long-Lived Assets. Accounting for
    the Impairment or Disposal of Long-Lived Assets,
  Goodwill and Other Intangible
    Assets. Business
    Combinations, Goodwill and Other Intangible Assets.
    Using Cash Flow Information and Present Value in
    Accounting Measurements,
 58




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Gross





NetCarrying


Accumulated


CarryingAmount


Amortization


AmountGoodwillBalance at December 31, 2005

$
4,257


$



$
4,257Change










Balance at December 31, 2006

$
4,257


$



$
4,257Other Intangible
    AssetsBalance at December 31, 2005

$
1,727


$
(316
)

$
1,411Amortization expense






(173
)


(173
)Balance at December 31, 2006

$
1,727


$
(489
)

$
1,238     Deferred Revenue.
  Accrued Warranty Liability. ®
   59




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Balance as of December 31,
    2005

$
156Warranties issued and adjustment
    to provision


171Warranty claims


Balance as of December 31,
    2006

$
327     Revenue Cost Reserves.
    Balance as of December 31,
    2005

$
122Adjustment to provision


Revenue refunds issued


Balance as of December 31,
    2006

$
122   Comprehensive Loss.
  Year Ended December 31,2006


2005Net loss

$
(3,819
)

$
(13,466
)Other comprehensive loss:Change in unrealized loss(gain) on
    available-for-sale
    securities


44



(64
)Comprehensive loss

$
(3,775
)

$
(13,530
)   SCR Catalyst and Management Services
    Revenues. Revenue
    Recognition in Financial Statements,
   60




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      00-21, Accounting for Multiple Element Revenue
    Arrangements.
      period-to-period. period-to-period
  Stock Based Compensation. Accounting
    for Stock Issued to Employees, Accounting for Stock-based Compensation.
  Share-Based
    Payment,
 61




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Income Taxes. Accounting
    for Income Taxes.
  Net Loss per Share. Earnings Per Share.
  Impact of Recently Issued Accounting
    Standards. Accounting
    Changes and Error Corrections, Accounting Changes, Reporting Accounting
    Changes in Interim Financial Statements.
  Accounting for Uncertainty
    in Income Taxes  an interpretation of FASB Statement
    No. 109,
  Fair
    Value Measurements,
 62




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employers Accounting for Defined Benefit Pension
    and Other Postretirement Plans.
  Considering the Effects of
    Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements.
  Note 3.
    Purchase
    of SCR-Tech        Note 4.
    Exit and
    Reorganization Costs   63




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       DiscontinuedOperations


S,G & A


TotalAccrued at December 31,
    2004

$



$



$
Expensed


464



563



1,027Paid


(399
)


(517
)


(916
)Accrued at December 31,
    2005

$
65


$
46


$
111Expensed


1,564



393



1,957Paid


(1,629
)


(439
)


(2,068
)Accrued at December 31,
    2006

$



$



$
     Note 5.
    Transactions
    with Related Parties  NovoDynamics, Inc.
        Transactions with Officers and
    Directors.
 64




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Note 6.
    Income
    Taxes    Year Ended December 31,2006


2005Income tax benefit at
    U.S. statutory rate

$
1,298


$
4,578Valuation allowance for deferred
    tax assets


(1,298
)


(4,578
)Income tax benefit

$



$
     Year EndedDecember 31,2006Deferred tax assets:Net operating loss carryforwards

$
20,244Capitalized research and
    development


14,395Accruals and reserves not
    currently deductible


511Basis in investment


903Basis in intangible assets


41Stock compensation


137Total gross deferred tax assets


36,231Less valuation allowance


(36,082
)Net deferred tax assets


149Deferred tax liabilities:Basis in fixed assets


(149
)Deferred tax liabilities


(149
)Total Net Deferred Taxes

$
    65




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Note 7.  Capital
    Stock
    Employee stock purchase plan


1,060,3531995 Stock Plan


4,122,1275,182,480   Shareholder Rights Plan.
       66




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 8.
    Employee
    Benefit Plans  401(k)
    Savings & Retirement Plan
    Stock
    Based Compensation Plans
    Stock
    option plan
      Employee
    stock purchase plan
   67




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Shares


Shares


Options and RSUs


PlanName of Plan

Authorized


Available


Outstanding


Expiration1995 Stock Plan(1)


5,000,000



1,858,189



2,263,938


June 6, 20122000 Employee Stock Purchase Plan


1,500,000



460,353






Not applicable     (1)
    
    Includes stock options and restricted share units.  Stock
    based compensation
    Accounting for Stock Issued to
    Employees, Accounting for Stock-based
    Compensation.
      Net loss, as reported

$
(13,466
)Add: Stock-based compensation
    expense included in reported net income, net of related tax
    effects


Deduct: Total stock-based
    compensation expense determined under fair value based method
    for all awards, net of related tax effects


(1,299
)Pro forma net loss

$
(14,765
)Basic and diluted earnings per
    share:As reported

$
(0.75
)Pro forma

$
(0.82
)  68




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Weighted


WeightedAverage


Average


AggregateNumber


Exercise


Contractual


IntrinsicOptions

of Shares


Price


Term (Years)


ValueOutstanding at December 31,
    2005


2,415,337


$
5.21Granted


755,200



1.17Exercised


(70,500
)


0.66Forfeited


(67,207
)


1.15Expired


(803,267
)


5.30Outstanding at December 31,
    2006


2,229,563


$
4.08



5.02


$
622,846Exercisable at December 31,
    2006


1,897,523


$
4.59



4.25


$
326,311     Weighted-AverageGrant-DateNon-Vested Shares

Shares


Fair ValueNon-vested shares at
    December 31, 2005


46,875


$
1.50Granted


Vested


(8,216
)

$
1.50Forfeited


(4,284
)

$
1.50Non-vested shares at
    December 31, 2006


34,375


$
1.50       69




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Years EndedDecember 31,

December 31,2006

2005Expected dividend yield

0.0%

0.0%Expected stock price volatility

66.8% - 68.3%

62.5% - 62.8%Risk-free interest rate

4.70% - 4.72%

3.71% - 3.74%Expected life of options (in years)

3.85 - 4.19

2.84 - 3.97   Note 9.  Major
    Customers and Geographic Revenues
    Year Ended December 31,2006


2005Customer A


3
%


29
%Customer B






11
%Customer C


3
%


43
%Customer D


7
%


Customer E


34
%


1
%Customer F


33
%


Customer G


11
%


Customer H


8
%


Other


2
%


16
%100
%


100
%     Note 10.
    Debt,
    Leases, Commitments and Contingencies  Debt agreements.
       70




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Operating leases.
              Year2007

$
4112008


3772009


3882010


3952011


400Thereafter


408$
2,379    71




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##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Commitments and Contingencies.
        Note 11.
    Segment
    Disclosures  Disclosures about Segments of
    an Enterprise and Related Information,
      
    Catalyst regeneration, rejuvenation, cleaning and management
    services for SCR systems used by coal-fired power generating
    facilities to reduce NOx emissions  our SCR Catalyst
    and Management Services segment (SCMS); and 72




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    Designing, developing and manufacturing advanced products based
    on our proprietary catalyst and fuel processing technologies,
    primarily focused on cost-effective solutions for reducing
    emissions from diesel engine applications  our
    Catalyst-Based Technology Solutions segment (CBTS).    Note 12.
    Sale of
    Gilbert Facility.    Note 13.
    Sale of
    Xonon Gas Turbine Technology.  ®
    Note 14.
    Sale of
    Diesel Fuel Processing Technology.     73




---



##### Table of Contents



CATALYTICA
    ENERGY SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Note 15.
    Selected
    Quarterly Financial Data (Unaudited) (In thousands, except per
    share amounts):  First Quarter


Second Quarter


Third Quarter


Fourth Quarter2006


2005


2006


2005


2006


2005


2006


2005Revenues

$
2,979


$
744


$
957


$
183


$
1,368


$
427


$
2,079


$
372Total expenses


3,357



2,202



2,370



1,810



2,727



2,676



3,181



1,942Income(loss) from continuing
    operations


(159
)


(1,376
)


(1,204
)


(1,463
)


(1,134
)


(2,138
)


(747
)


698Income(loss) from discontinued
    operations


(1,567
)


(2,161
)


(1,686
)


(2,028
)


1,814



(2,714
)


864



(2,284
)Net income(loss)

$
(1,726
)

$
(3,537
)

$
(2,890
)

$
(3,491
)

$
680


$
(4,852
)

$
117


$
(1,586
)Net income(loss) per share:Net income(loss) from continuing
    operations Basic and diluted

$
(0.01
)

$
(0.08
)

$
(0.07
)

$
(0.08
)

$
(0.06
)

$
(0.12
)

$
(0.04
)

$
0.04Net income(loss) from discontinued
    operations Basic and diluted

$
(0.09
)

$
(0.12
)

$
(0.09
)

$
(0.11
)

$
0.10


$
(0.15
)

$
0.05


$
(0.13
)Net income(loss)Basic and diluted

$
(0.10
)

$
(0.20
)

$
(0.16
)

$
(0.19
)

$
0.04


$
(0.27
)

$
0.01


$
(0.09
)Weighted average sharesBasic


18,158



17,931



18,171



17,996



18,218



18,126



18,234



18,140Diluted


18,158



17,931



18,171



17,996



18,218



18,126



18,234



18,234  74




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##### Table of Contents



SIGNATURES
       /s/  Robert
    W. Zack  Robert W. Zack
 President and Chief Executive Officer
    POWER OF
    ATTORNEY
  attorney-in-fact, Form 10-KSB, attorney-in-fact,
    Signature

Title

Date/s/  Robert
    W. ZackRobert
    W. Zack

President, Chief Executive Officer
    (Principal Executive Officer), Chief Financial Officer
    (Principal Accounting and Financial Officer) and Director

March 23, 2007/s/  Ricardo
    B. LevyRicardo
    B. Levy

Chairman of the Board

March 8, 2007/s/  Richard
    A. AbdooRichard
    A. Abdoo

Director

March 7, 2007/s/  William
    B. EllisWilliam
    B. Ellis

Director

March 15, 2007/s/  Howard
    I. HoffenHoward
    I. Hoffen

Director

March 15, 2007/s/  David
    F. MerrionDavid
    F. Merrion

Director

March 7, 2007/s/  Susan
    F. TierneySusan
    F. Tierney

Director

March 8, 2007  75




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##### Table of Contents



INDEX TO
    EXHIBITS
  10
.73** *

Consulting Agreement between the
    Registrant and Richard Abdoo, effective as of January 1,
    200710
.74**

Second Amendment to Lease
    Agreement between Clariant Corporation and SCR-Tech, LLC.,
    effective as of December 29, 200610
.75** *

Third Amendment to Employment
    Agreement by and between the Registrant and Robert W. Zack,
    effective as of March 23, 200721
.1**

Subsidiaries of Registrant.23
.1**

Consent of Independent Registered
    Public Accounting Firm.24
.1**

Power of Attorney (see Signature
    page).31
.1**

Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    / 15d-14(a)
    of the Securities Exchange Act of 1934, as amended.31
.2**

Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    / 15d-14(a)
    of the Securities Exchange Act of 1934, as amended.32
.1**

Certification of Chief Executive
    Officer pursuant to 18 U.S.C. 1350.32
.2**

Certification of Chief Financial
    Officer pursuant to 18 U.S.C. 1350.     *
    
    Represents management contracts of compensatory plans for
    executive officer and directors.**
    
    Filed herewith. 76