United States
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For  the
fiscal year ended December 31, 2006

Commission
file number 000-50216

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

|Colorado                 | 84-1457385
|------------------------ | ----------
|(State of incorporation) |           
|                         |           
|                         |           

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

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

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

|                           | 
|-------------------------- | 
|Title of class             | 
|Common Stock, no par value | 
|                           | 

Securities
registered under Section 12(g) of the Exchange Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. [   ] Yes [ X ] No

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [   ] Yes [ X ] No

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

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

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.) [   ] Yes [ X ]
No

The
aggregate market value of the voting stock held by non-affiliates as of June 30,
2006 was $96,503,000

As of
March 15, 2007, there were outstanding 5,635,137 shares of the Common Stock,
no par value.

DOCUMENTS
INCORPORATED BY REFERENCE:

In
Part III of this Annual Report on Form 10-K, portions of the registrants
definitive proxy statement for the 2007 Annual Meeting of Shareholders currently
scheduled to be held on June 19, 2007, are incorporated by reference.



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PART
I

Item 1.
Business

Abbreviations
We Use in this Report

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

|o |  | ACI
= activated carbon injection
|- |  | --------------------------------

|o |  | ADA-249M
= our patented slag viscosity modifying compound
|- |  | ---------------------------------------------------------

|o |  | CAMR
= Clean Air Mercury Rule
|- |  | -----------------------------

|o |  | CEMS
=  continuous emission monitoring system
|- |  | ---------------------------------------------

|o |  | DOE
= the United States Department of Energy
|- |  | --------------------------------------------

|o |  | EPA
=  United Stated Environmental Protection Agency
|- |  | ----------------------------------------------------

|o |  | EPRI
= the Electric Power Research Institute
|- |  | --------------------------------------------

|o |  | ESP
= electrostatic precipitator
|- |  | --------------------------------

|o |  | FGC=flue gas conditioning
|- |  | -------------------------

|o |  | MEC
=mercury emission control
|- |  | -----------------------------

|o |  | PAC
=  powdered activated carbon
|- |  | --------------------------------

|o |  | PRB
= Powder River Basin
|- |  | ------------------------

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

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

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

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

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

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

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

Our Business
in Detail

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Under
the terms of the agreement with Thermo:

|o |  | Thermo
is responsible for design of hardware, firmware software and overall  product development
as well as manufacture of commercial versions of the CEMS;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | we
are responsible for field validation and performance feedback and, during 2006,  2005 and
2004 paid Thermo $781,000, $271,000,and $168,000, respectively, for  technical services
and hardware;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | activities
under the Cooperative Agreement were completed in May 2005, although  we continue to test
and provide feedback on the CEMS, Thermo is now  manufacturing, marketing and selling
mercury CEMS and we have the ability to  purchase from Thermo all of our requirements for
mercury CEMS;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | under
a separate distribution arrangement, we may sell the Thermo CEMS only in  conjunction
with our mercury control technology and will receive a 25% discount  from Thermos
published price list; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | either
party may terminate the distribution arrangement upon 120 days written  notice to the
other party.
|- |  | ---------------------------------------------------------------------------------------------------------

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

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

7



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

|o |  | Audit
Committee Charter
|- |  | -----------------------

|o |  | Compensation
Committee Charter
|- |  | ------------------------------

|o |  | Nominating
and Governance Committee Charter
|- |  | -------------------------------------------

|o |  | Code
of Conduct
|- |  | ---------------

Forward-Looking
Statements Found in this Report

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

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

Item 1A.
Risk Factors.

RISKS
RELATING TO OUR BUSINESS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RISKS
RELATING TO OUR COMMON STOCK

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

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

14



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

Item 1B.
Unresolved Staff Comments.

None.

Item
2. Properties.

Office LeasesWe
lease approximately 12,000 square feet of combined office and warehouse space in
Littleton, Colorado, a suburb of Denver. The term of the lease runs through 2009  and the
lease agreement has an option to extend the term. We lease 440 square  feet of office
space in Columbia and Maryland, on a month to month basis.  While our total current
leased space is sufficient for  our immediate needs, we expect to require
additional space as our personnel  levels increase to support growth. In the near-term,
we believe that sufficient  space is available at reasonable rates in areas where we do
business. We do not  own any real property, but lease all of our office facilities.
Future annual  lease costs are expected to amount to approximately $170,000 through 2009.

Item
3. Legal Proceedings.

There
are no reportable pending legal proceedings involving the Company or our
subsidiaries.

Item
4. Submission of Matters to a Vote of Security Holders.

No
matters were submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2006.

PART
II

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

Market
for  Common Equity and Related Stockholder Matters

(a) Market Information.Registrants
common stock commenced trading on the NASDAQ Capital (formerly SmallCap) Market
on October 14, 2004 under the symbol ADES. Prior to such time, trading occurred
on the OTCBB market commencing on October 22, 2003. During 2006, 2005 and 2004
closing price ranges were as follows:

|            | 2006 | 2005     | 2004 |          |     |         
|----------- | ---- | -------- | ---- | -------- | --- | --------
|
|1st Quarter |      | $     24 | .14  | $     21 | .68 | $     31
|2nd Quarter |      | $     22 | .28  | $     17 | .15 | $     25
|3rd Quarter |      | $     15 | .44  | $     13 | .00 | $     24
|4th Quarter |      | $     16 | .60  | $     13 | .95 | $     20
|            |      |          |      |          |     |         
|            |      |          |      |          |     |         

15



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The
price ranges shown in the above table are based on NASDAQ quoted sales prices
for all of 2006 and 2005, and the fourth quarter of 2004, and OTCBB bid prices
for the first three quarters of 2004. The sale prices may reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.

(b)Holders.The
number of record holders of our common stock as of December 31, 2006 was  approximately
1,650; the approximate number of beneficial shareholders is  estimated at 8,000.

(c)Dividends.We
have not paid dividends since inception and we have no plans for paying
dividends in the foreseeable future.

(d)
Securities authorized for issuance under equity compensation plans.The
disclosure required by this Item is included under Item 11 of this Report.

RECENT SALES
OF UNREGISTERED SECURITIES

None

Purchases of
Equity Securities by the Company and Affiliated Purchasers

Neither
we nor any affiliated purchaser, as defined in SEC Rule
10b-18(a)(3), purchased any of our equity securities during the years ended
December 31, 2006 and 2005.

Item
6. Selected Financial Data.

FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA

|                                               | Years Ended December 31, |             |  |             | 
|---------------------------------------------- | ------------------------ | ----------- |  | ----------- | 
|
|Income Statement Data:                         |                          |             |  |             | 
|Net Sales                                      |                          | $ 15,488    |  | $ 11,028    | 
|Income (loss) from continuing operations       |                          | $      377  |  | $      663  | 
|Income  (loss) from continuing operations, per |                          |             |  |             | 
|common share, basic and diluted                |                          | $       .07 |  | $       .13 | 
|Dividends declared per common share            |                          | $       -0- |  | $       -0- | 
|                                               |                          |             |  |             | 

|Balance Sheet Data (at year end): | As at December 31, |             |  |             | 
|--------------------------------- | ------------------ | ----------- |  | ----------- | 
|
|Total Assets                      |                    | $ 31,754    |  | $ 28,716    | 
|Long-term Debt                    |                    | $       -0- |  | $       -0- | 
|Stockholders Equity              |                    | $ 27,641    |  | $ 25,856    | 
|                                  |                    |             |  |             | 

See
the audited financial statements attached hereto under Item 8 for additional
information.

QUARTERLY
FINANCIAL DATA  UNAUDITED

|                            |  | 2006     |  |          |  | 2005     |   |         
|--------------------------- |  | -------- |  | -------- |  | -------- | - | --------
|
|Net revenues                |  | $3,649   |  | $3,306   |  | $ 4,448  |   | $4,085  
|                            |  |          |  |          |  |          |   |         
|                            |  |          |  |          |  |          |   |         
|                            |  |          |  |          |  |          |   |         
|Gross margin                |  | $1,378   |  | $1,144   |  | $ 1,290  |   | $2,094  
|Net income (loss)           |  | $   238  |  | $     44 |  | $  (128  | ) | $   223 
|                            |  |          |  |          |  |          |   |         
|Common Stock Data           |  |          |  |          |  |          |   |         
|Basic and Diluted:          |  |          |  |          |  |          |   |         
|Net income (loss) per share |  | $    .04 |  | $    .01 |  | $   (.02 | ) | $    .04
|Average common shares       |  |          |  |          |  |          |   |         
|outstanding:                |  |          |  |          |  |          |   |         
|Basic                       |  | 5,616    |  | 5,624    |  | 5,627    |   | 5,631   
|Diluted                     |  | 5,834    |  | 5,875    |  | 5,627    |   | 5,708   
|                            |  |          |  |          |  |          |   |         

16



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Item
7.   Managements Discussion and Analysis of Financial Condition and Results
of Operation.

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. 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 the overall profitability of the
Company.

In
2006, we signed contracts for ten 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 commenced work on five additional
systems, with the expectation that six more systems will be ordered by customers
exercising options for these systems under the contracts. In addition, one
system was installed in partnership with a third party for whom we provided
design services through a DOE contract. Revenue from ACI system contracts
totaled $5.2 million for the year ended December 31, 2006 and $3.3 million is
remaining to be recognized on those contracts.

In
2006, we also signed two development and testing contracts with DOE with
revenues totaling approximately $7.5 million, including industry cost share
amounts, the services for which are expected to be performed over the period
from contract signing through the fall of 2008. We were also awarded a $100,000
research grant from DOE in 2006 to develop an improved activated carbon
manufacturing process, which activities are expected to be concluded by the end
of the first quarter of 2007, at which time we expect to submit an application
to DOE for additional funding to continue the work. Assuming no changes in
government funding, we expect to recognize over the next several years the
remaining revenue on the in-progress totaling $13.2 million as of December 31,
2006. We recognized $7.0 million related to DOE and industry co-funded contracts
in 2006. We expect to recognize revenue from these contracts of approximately
$7.0 million in total for 2007. If further funding were not approved, the
Company would decrease or cease activities on those contracts and would expect
to maintain a positive cash flow but at a reduced level. We expect DOE programs
to represent a decreasing percentage of revenues over the next few years as we
focus more on market growth for ACI systems for mercury control.

On
November 3, 2006, we closed the sale of a 50% interest in a joint venture with
NexGen Refined Coal, LLC, an affiliate of NexGen Resources Corporation, to
market our refined coal technology as further described in Part I, Item 1 above.
We received a $100,000 non-refundable down payment from NexGen upon signing a
Joint Venture Proposal on June 26, 2006. At closing, NexGen paid us $900,000 for
its 50% interest. This payment is non-refundable. ADA has the obligation to fund
its share of operating costs for the venture, and we expect our portion of these
costs to average approximately $25,000 a month in 2007. Included in our
operating loss for 2006 are net costs totaling approximately $486,000 related to
our Refined Coal effort, which from a cash flow standpoint were offset by the
non-refundable payments from NexGen, but no gain or revenue was recorded as a
result of those payments. If the JV succeeds in obtaining approval for the
anticipated tax credits, NexGen has the right to maintain its 50% interest by
paying us an additional $4 million, in 8 quarterly payments of $500,000 each,
beginning the later of the 4th quarter of 2007 or when qualification
for the tax credit is obtained.

17



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As
part of our strategy to address the growing MEC market, we are not only pursuing
internal, organic growth, but we have also been and expect to be engaged in
merger and acquisition (M&A) activities, particularly with respect to the
vertical integration of our business to establish an invested role in the
production and supply of activated carbon and in the manufacture of ACI systems.
The major revenue sources from the growing MEC market are expected to include
engineering services, equipment sales and activated carbon supply. Our M&A
activities have been and will likely be focused on candidates engaged in those
businesses. The costs we incur in our M&A activities may be significant.
Such 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 an
acquisition and then subject to future impairment evaluations. During the
quarter ended September 30, 2006 we determined that deferred charges amounting
to approximately $411,000 related to our M&A activities incurred earlier in
the year were no longer of future value and were therefore expensed. Such
charges are included in Interest and other expense for the year ended December
31, 2006 in the accompanying consolidated financial statements.

In
2006 we incurred $911,000 for project development costs, which costs have been
deferred and are classified on the balance sheet and included with 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.

In
February 2007, our Board of Directors committed the necessary resources to
continue the development of an activated carbon manufacturing facility.
Previously, we had announced that in order to stay ahead of an expected billion
dollar market, we had undertaken preliminary activities for a new
Greenfield plant including plant design, initial permitting,
securing key lignite reserves, and third-party market analysis. We have now
committed approximately $4 million from internal funds, expected to be expended
over the five months beginning in March, 2007, to move the project forward in a
manner that we expect will position us to meet a significant portion of the
shortage in activated carbon supply for this rapidly expanding market. Approved
and funded activities include plant design, securing options on various
desirable properties for the plant, and permitting, as well as specifying and
sourcing of key capital equipment, and negotiating with potential financial
partners.

Results of
Operations  2006 versus 2005Revenues  totaled $15,488,000 for 2006 versus
$11,028,000 in 2005, representing an  increase of 40%. Revenues in our MEC segment for
2006 increased by $4,823,000  (55%), and FGC and other activities decreased by ($363,000)
(16%). We have been  hiring personnel in response to the growth we have realized in the
past and  expect to achieve in 2007, and adequate resources of skilled labor have been
and  are expected to be available to meet anticipated needs.

Revenues
in 2006 from the MEC segment were comprised of government and industry-supported
contracts (51%), sales and installation of activated carbon injection (ACI)
systems (38%) and consulting services (11%), compared to 54%, 21% and 25%,
respectively, in 2005. For the year, our DOE and industry demonstration contract
revenues totaled $7.0 million representing an increase of 46% from 2005
revenues. The remaining unearned amount of the contracts was $13.2 million as of
December 31, 2006, of which $7.0 million is expected to be recognized by the
Company in 2007 (including cash contributions by other industry partners). ACI
systems contributed approximately $5.2 million to MEC revenues recognized for
the year, increasing 178% from the 2005 contribution to revenue of $1.9 million.
We had contracts in progress at year-end for supply of ACI systems totaling
approximately $3.3 million which we expect to complete and realize in 2007.
While the dollar amount of revenues from both the government and
industry-supported contracts and the ACI systems sales increased from 2005 to
2006, the most significant growth occurred in the sales and installations of ACI
systems, which increased $3.3 million and is the result of an increasing number
of system sales as noted above. We expect growth in 2007 in the MEC segment to
result primarily from an increasing number of ACI systems sales in response to
mercury emission control legislation and from existing government and
industry-supported contracts. Activities in two of our DOE contracts were behind
the original planned schedule in 2006 due to the unavailability of one of the
host sites and test results that did not meet project goals.  Discussions
with DOE have resulted in reallocating a portion of the remaining contract
amounts to our other activities. 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 these DOE contracts, and funding is always subject to
unknown and uncontrollable contingencies. Revenues from consulting services
included in the MEC segment decreased approximately $690,000, from 2005 to 2006,
as a greater amount of work was performed in our DOE contracts in 2006 than
under commercial contracts.

18



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FGC
and other revenues decreased due to fewer shipments of chemical and revenues
related to continuing customers. 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. Included in this
segments revenues for 2006 are approximately $60,000 of chemical sales
that accrue to the benefit of Clean Coal Solutions in 2007 and future periods.
Under the existing arrangements we will continue to sell such chemicals to the
JV at a minor discount and so the impact to our future revenues is not expected
to be material.

Cost
of revenues increased by $2,841,000 or 42% in 2006 from 2005 primarily as a
result of increased revenues for the same periods. Gross margins were 38% for
the year as compared to 39% in 2005. The decrease is a result of decreased
margins in both the MEC and FGC and other segments as discussed below.

Cost
of revenues for the MEC segment increased by $2,704,000 in 2006 or 47%, as
compared to the same periods in 2005 primarily as a result of the increased
revenue generating activities noted above. Gross margins for this segment were
38% for the year as compared to 35% for 2005. 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 lower margins on
ACI system sales as that market is developing. The changes in MEC segment
profits from 2005 to 2006 are a result of the same factors.

Cost
of revenues for the FGC and other segment increased by $137,000 or 13% in 2006,
as compared to 2005 as a result of increased costs for development projects
included in this segment. Gross margins for this segment were 39% for 2006 as
compared to 55% in 2005. The decrease in gross margins from 2005 to 2006 is a
result of increased FGC sales of a product we license from ARKAY Technologies,
which carry a lower margin than historical FGC sales, lower margins typically
recognized on the demonstration projects we carried out in 2006, and the
increased costs in development projects noted above. 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 12% of total revenues in 2006, compared to 20% in 2005. The changes in
the FGC segment profits from 2005 to 2006 are a result of the same factors.

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 $1,668,000 or 67% to $4,170,000 in
2006. The dollar increase in 2006 resulted primarily from compensation expenses
related to the implementation of Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment($331,000 for 2006); legal and
increased director fees and expenses incurred to maintain compliance with public
company regulations (approximately $160,000 for the year); accounting and
consulting fees related to SOX 404 compliance ($270,000) and facilities,
benefits and other overhead expenses resulting from increases in number of
employees (approximately $313,000 for year). Included in our general and
administrative expense for 2006 is $65,000 related to directors and officers
insurance for the period from June 2006 through the end of the year.

Research
and development expenses increased by $487,000 or 50% in 2006 as compared to
2005. 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 2006, $481,000 was
directly related to DOE contracts.

MEC
segment profits increased by $1.3 million or 73% to $3.0 million as compared to
2005. 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 $728,000 or 72% to $282,000 as compared to 2005. The
decrease was primarily the result of increasing project development costs
incurred during the year, lower margin chemical sales and decreasing segment
revenues.

19



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Included
in interest and other expenses, we recognized $411,000 of deferred costs related
to our M&A activities as noted above. The Company had net interest and other
income of $909,000 in 2006, as compared to $357,000 for 2005. Interest and other
income increased in 2006 due to an increase in invested balances and increasing
interest rates.

The
deferred income tax provision for 2006 represents an effective tax rate of
approximately 22%, which is less than the rate of 34% we recognized for 2005.
The decrease is primarily the result of larger impact of R&D tax credits for
2006 as compared to 2005.

Unrealized
gains, net of tax, on investments in debt and equity securities amounted to
$134,000 for 2006 as compared to a loss of ($1,000) for 2005. The gains recorded
in 2006 are the result of increases in the market value of our equity
investments. The loss incurred in 2005 was primarily the result of increasing
interest rates, which correspondingly tend to result in a decrease in the market
value of our investments in longer-term fixed-rate debt securities.

Results of
Operations  2005 versus 2004Revenues  totaled $11,028,000 for 2005 versus
$8,417,000 for 2004, or an increase of 31%.  Revenues in the MEC segment for 2005
increased by $2,844,000 (48%), which was  offset by decreases of $233,000 (9%) in FGC and
other activities.

Revenues
from the MEC segment were comprised of 54% government and industry-supported
contracts, 21% sales and installation of activated carbon injection (ACI)
systems and 25% consulting services, as compared to 70%, 14% and 16%,
respectively in 2004. Increases in the dollar amount of sales in all of these
products contributed to the increase in MEC revenue in 2005. 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 the 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 these DOE contracts, and
funding is always subject to unknown and uncontrollable contingencies. FGC and
other revenues decreased due to an FGC customer discontinuing further purchases.
Revenues from consulting services included in the MEC segment increased
approximately $1.2 million from 2004 to 2005, due to an increased number of
commercial contracts for evaluation of mercury emissions were conducted in 2005.

Cost
of revenues increased by $1,721,000 in 2005, as compared to 2004 as a result of
the increased revenue generating activities. Gross margins for MEC activities
decreased from 36% in 2004 to 35% in 2005 and gross margins for FGC and other
increased from 51% in 2004 to 55% in 2005. Overall gross margins were fairly
stable at 39% in 2005 as compared to 40% in 2004.

Research
and development expenses increased in 2005 by $162,000 to $977,000 from 2004,
which reflects almost a 20% increase over 2004. 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.

MEC
segment profits increased by $742,000 or 74% to $1.7 million as compared to
2004. The increase was primarily a result of increased MEC segment revenues as
described above. FGC and other segment profits increased by only $12,000 or
about 1% to $1,010,000 as compared to 2004. The increase was primarily the
result of slightly improved margins on chemical sales even though segment
revenues decreased.

General
and administrative expenses increased by $456,000 to $2,502,000 in 2005, which
reflects an increase of 22% over 2004. The increase in 2005 resulted primarily
from legal and director fees incurred to attain compliance with public company
regulations that we became subject to during the year; consultant fees incurred
to launch services related to mercury measurement and demonstrations; and
increases in staff, benefits, recruiting and related costs as we prepared for
the anticipated growth in the mercury control market.

The
Company had net interest and other income of $348,000 in 2005, as compared to
interest expense in 2004 of $15,000. Interest and other income increased in 2005
due to invested cash balances that were invested for only part of the year in
2004. In addition, interest expense decreased in 2005 as a result of the payoff
of all long-term debt in 2004.

20



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The
deferred tax provision for 2005 increased from an effective rate of 16% in 2004
to a rate of 34% in 2005. In 2004, since our net income was less than in 2005,
the research and development credit for which we qualify and is a permanent
difference, had a more significant impact in reducing our effective rate.

Liquidity
and Capital ResourcesWe had  a positive working capital of $18.5 million at December
31, 2006, compared to  working capital of $17.0 million at December 31, 2005. The
increase resulted  from an increase in cash and accounts receivable, offset by a decrease
in  short-term investments due to liquidation of certificates of deposit and  increases
in current 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 $5.3 million and  $5.7 million at December 31, 2006 and 2005,
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 will likely
continue to  provide on sales of ACI systems. We expect to use a portion of such
investments  and cash on hand to fund growth of the Company, which are expected to
include  development projects for activated carbon production and may include expansion
of product offerings and strategic acquisitions. We believe that existing and  expected
future working capital, which we expect to come from positive cash  flow, will be
sufficient to meet the anticipated operating needs of the Company  for the next twelve
months. However, we cannot be certain that positive cash  flow that we have achieved
historically will continue, and it is possible that  we could be required to expend some
of our current working capital to fund  operations, although we consider this unlikely.
In addition, we will likely need  to raise additional capital to fund strategic
development and/or acquisitions.

Our
principal source of liquidity is our existing working capital and positive
operating cash flow. The continuation of positive cash flow is somewhat
dependent upon the continuation of chemical sales and operations of the three
flue gas conditioning (FGC) units currently in-place. Each of these units
provided an average monthly cash flow of approximately $21,000 in 2006. One of
these customers is performing a process upgrade that was expected to be
completed in 2006 that we expect will reduce or eliminate the requirement for
FGC. During 2006, we performed a successful demonstration project at one plant
that has resulted in continued chemical sales, although at a lower level and
with a lower gross margin than existing customers. 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), changes in regulations, 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.

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 for which the
Board has committed approximately $4 million from internal funds, expected to be
expended over the next five months to move the project forward in a manner that
we believe will position us to meet a significant portion of the shortage in
activated carbon supply that we expect for this rapidly expanding market.

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 2006 and 2005, we recognized $114,000 and $98,000,
respectively, of matching expense. In the past, the Company has also made
discretionary contributions to the Plan and employees. Based on results for
2005, the amount paid to the plan totaled $108,000 and was paid in the form of
cash to the accounts of all eligible employees in February 2006. Based on
results for 2006, the Company has paid and/or accrued a total of approximately
$123,000 for such payments.

We
recorded net deferred tax liabilities of ($133,000) and net deferred tax assets
of $340,000 as of December 31, 2006 and 2005, respectively.

21



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Cash
flow from operations totaled $1,821,000 for 2006 compared to $1,209,000 for
2005. Cash flow from operations in 2006 increased from 2005 primarily as a
result of net income of $377,000 and adjustments for non-cash expenses which
included, expenses paid with stock and stock options, depreciation and
amortization, and deferred tax expense. The 2006 operating cash flow was reduced
by increases in our accounts receivable ($508,000), and additional prepaid
expenses and other assets totaling ($82,000) as a result of increases in prepaid
insurance, which changes correspond with our growth in business. The 2006
operating cash flow increased as a result of an increase in accounts payable and
accrued expenses totaling $720,000 and an increase in deferred revenue and
accrued warranty costs totaling $395,000, which changes also correspond to our
overall growth in business and in particular with increasing ACI system sales.

Net
cash used by investing activities was ($817,000) for 2006 compared to cash used
in investing activities of ($2,128,000) in 2005. In 2006, certificates of
deposit totaling $800,000 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, and amounts invested in our
project development costs, particularly for development of a long-term activated
carbon supply.

Cash
provided by financing activities was $1,099,000 and $12,837,000 in 2006 and
2005, respectively. The decrease from 2005 was due to the exercise of fewer
stock options in 2006 and registration costs incurred in 2006 but related to
stock sold in 2005. Included in cash provided in 2006 is the $1 million in
proceeds from the sale of an interest in Clean Coal Solutions, LLC discussed
above. In 2005 we sold stock and recorded net proceeds of $12.5 million as
further described below. We may likely require additional debt or equity
financing to support future anticipated growth, including potential acquisitions
and/or for the development of the Greenfield activated carbon manufacturing
facility discussed above.

In
August 2004 we entered into several Subscription and Investment Agreements and
privately sold one million shares of our common stock to a limited number of
institutional investors at a price of $8.00 per share. The net proceeds to us
from the sales totaled $7,620,000. Pritchard Capital Partners LLP acted as the
placement agent for the sales and received a fee of approximately 5% of the
gross offering proceeds. Approximately $551,000 of the proceeds were utilized to
pay off long-term debt. Approximately $7 million of the proceeds have been
invested in highly-rated corporate and government bonds and low-risk growth
equities. We registered the shares for resale by the purchasers under the
Securities Act of 1933 in October, 2004.

In
October 2005, we entered into several Subscription and Investment Agreements and
privately sold 789,089 shares of our common stock to a limited number of
institutional accredited investors at a price of $17.00 per share. We received
net proceeds of approximately $12.5 million from the sale of the shares.
Pritchard Capital Partners LLP and Adams Harkness, Inc. acted as the placement
agents for the sales and received a fee of approximately 6% of the gross
proceeds of the offering, as well as reimbursement for certain offering
expenses. The shares also carry certain piggy-back and other
registration rights. A majority of the proceeds from the offering have been
invested in collateralized interest-bearing term deposits. We registered the
shares for resale by the purchasers under the Securities Act of 1933 in August,
2006.

We had
the following contractual commitments as of December 31, 2006:

|                            | Payments Due by Period |                 |  |                 | 
|--------------------------- | ---------------------- | --------------- |  | --------------- | 
|
|Operating lease obligations |                        | $       383,000 |  | $       130,000 | 
|Purchase obligations        |                        | 1,308,000       |  | 1,308,000       | 
|                            |                        |                 |  |                 | 
|                            |                        |                 |  |                 | 
|Total                       |                        | $    1,691,000  |  | $    1,438,000  | 
|                            |                        |                 |  |                 | 
|                            |                        |                 |  |                 | 
|                            |                        |                 |  |                 | 

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. The Company recognizes revenue on government contracts
based on the  time and expenses incurred to date.

22



---

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 FASB Interpretation No. 48 (FIN
48),  Accounting for Uncertainty in Income Taxes  an Interpretation of
FASB  Standard No. 109. FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position  taken or
expected to be taken in a tax return, and also provides guidance on  de-recognition,
classification, interest and penalties, accounting in interim  periods, disclosure and
transition. FIN 48 is effective for fiscal years  beginning after December 15, 2006. The
Company is in the process of evaluating  the financial impact of adopting FIN 48.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,to
define fair value, establish a framework for measuring fair value under
generally accepted accounting principles, and expand disclosures about fair
value measurements. Having a single definition of fair value, together with a
framework for measuring fair value, is designed to result in increased
consistency and comparability in fair value measurements. This FASB is effective
for reporting periods beginning after November 15, 2007. The Company is
evaluating its impact and does not expect that adoption of this FASB will have a
material impact on its financial statements.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 permits the measurement of
certain financial instruments at fair value. Entities may choose to measure
eligible items at fair value at specified election dates, reporting unrealized
gains and losses on such items at each subsequent reporting period. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has
not evaluated the potential impact of the fair value option.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk. Commodity Price RiskIn
the  normal course of its business, the Company is exposed to market risk or price
fluctuations related to the goods and services it procures related to its  revenue
producing activities. Components of ACI systems and consulting services,  which are
significant to such revenue producing activities, have market prices  that fluctuate
regularly, but not widely. In most cases we can pass on to our  customers such price
fluctuations. Based on the estimated 2006 procurement of  ACI components and consulting
services, a hypothetical 10% increase (or  decrease) in the price of ACI components and
consulting services, if such  fluctuations could not be passed on to our customer, would
result in a pretax  loss or gain of $370,000, respectively.

Interest
Rate RiskApproximately  $16.1 million of the cash and cash equivalents are invested
in interest bearing  accounts. A hypothetical change of 10% in the Companys
effective interest  rate from the year-end 2006 rate would increase or decrease interest
income by  $81,000.

23



---

Item  8.
Financial Statements and Supplementary Data.Our  Financial Statements can be found at
pages F-1 through F-18 of this report.

Index to
Financial StatementsReport of Independent Registered Public Accounting FirmFinancial Statements:

| | ADA-ES,
Inc. and Subsidiaries  Consolidated Balance Sheets, December 31, 2006 and 2005
Consolidated Statements of Income, For the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders Equity,
For the Years Ended December  31, 2006, 2005 and 2004  Consolidated Statements of Cash
Flows, For the Years  Ended December 31, 2006, 2005 and 2004 Notes to Consolidated
Financial  Statements
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 9.
Changes In and Disagreements With Accountants on  Accounting and Financial  Disclosure.

None.

Item 9A.
Controls and Procedures.

Evaluation
of Disclosure Controls and Procedures

We conducted an
evaluation under the supervision and with the participation of  our management, including
our Chief Executive Officer and Chief Financial  Officer, of the effectiveness of the
design and operation of our disclosure  controls and procedures. The term disclosure
controls and  procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended (Exchange Act),  means
controls and other procedures of a company that are designed to ensure  that information
required to be disclosed by the company in the reports it files  or submits under the
Exchange Act is recorded, processed, summarized and  reported, within the time periods
specified in the Securities and Exchange  Commissions rules and forms. Disclosure
controls and procedures also  include, without limitation, controls and procedures
designed to ensure that  information required to be disclosed by a company in the reports
that it files  or submits under the Exchange Act is accumulated and communicated to the
companys management, including its principal executive and principal  financial
officers, or persons performing similar functions, as appropriate, to  allow timely
decisions regarding required disclosure. Based on this evaluation,  our Chief Executive
Officer and Chief Financial Officer concluded as of December  31, 2006 that our
disclosure controls and procedures were not effective at the  reasonable assurance level
due to the material weaknesses discussed immediately  below.

Managements
Report on Internal Control Over Financial Reporting

Our management
is responsible for establishing and maintaining adequate internal  control over financial
reporting. Internal control over financial reporting (as  defined in Exchange Act Rules 13a-15(f)
and 15(d)-15(f)) and includes those  policies and procedures that: (a) pertain to
the maintenance of records  that, in reasonable detail, accurately and fairly reflect the
transactions and  dispositions of the assets of the company; (b) provide reasonable
assurance  that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a  material
effect on the financial statements.

Our  management
assessed our internal control over financial reporting as of  December 31,  2006.
Management based its assessment on criteria set forth in  the framework in Internal
Control-Integrated Frameworkissued by the  Committee of Sponsoring Organizations of
the Treadway Commission.

A  material
weakness is a control deficiency, or combination of control  deficiencies, that  result
in more than a remote likelihood that a material  misstatement of annual or  interim
financial statements will not be prevented or  detected. Managements  assessment
concluded that the Company did not  maintain effective internal control over  financial
reporting as of  December 31, 2006 as a result of the following identified  material
weaknesses:

24



---

|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.
|-- |  | -------------------------------------------------------------------------------------------------------------------

Managements
assessment of the effectiveness of our internal control over financial reporting  as of
December 31, 2006, has been audited by Hein & Associates LLP, our  independent
registered public accounting firm, as stated in their report which  appears herein.

Remediation
of Material WeaknessThe  following provides details
of the remedial actions taken  and planned as of the  date of this report, to address the
material weaknesses identified  above:

|1. |  | During
the second half of 2006, and through December 31, 2006, the Director of  Financial
Planning and Internal Control position was vacant. We have hired an  experienced
individual who is expected to provide additional review over our  presentation and
disclosure in financial statements and to provide further  technical accounting expertise
in applying generally accepted accounting  principles;
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | We
are evaluating the scope of our engagement with an outside accounting firm to  assist in
preparing our financial statements and providing technical expertise  in the proper
application of generally accepted accounting principles to various  transactions and
other financial statement matters.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | We
intend to enhance the training of our staff to ensure proper application of  generally
accepted accounting principles to various transactions and other  financial statement
matters.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | We
have systemized the collection and recordkeeping of invoices
|-- |  | ---------------------------------------------------------------

|5. |  | We
have  established monthly revenue and expense review meetings with business process
owners
|-- |  | ---------------------------------------------------------------------------------------------

|6. |  | We
have revised our chart of accounts to ensure proper balance sheet  classifications of
accounts receivable and deferred revenue.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------

We  anticipate
the actions described above and resulting improvements in controls  will strengthen our
internal control over financial reporting and will, over  time, address the related
material weaknesses that we identified as of December  31, 2006.  However, because
many of the controls in our system of internal  controls rely extensively on manual
review and approval, the successful  operation of these controls for, at least, several
quarters may be required  prior to management being able to conclude that the material
weakness has been  remediated.



Changes in
Internal Control Over Financial ReportingExcept
as otherwise discussed herein, there have been no changes in our internal  control over
financial reporting during the most recently completed fiscal  quarter that have
materially affected, or is reasonably likely to materially  affect, our internal control
over financial reporting.

25



---

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of DirectorsADA-ES, Inc. and SubsidiariesLittleton, Colorado

We
have audited managements assessment, included in the accompanying
Managements Report on Internal Control over Financial Reporting, that
ADA-ES, Inc. and Subsidiaries (Company) internal control over
financial reporting was not effective as of December 31, 2006, because of
the effect of material weaknesses described therein, based on criteria
established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.

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

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

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

A
material weakness is a significant control deficiency, or combination of
significant control deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. The following material weaknesses have been
identified and included in managements assessment as of December 31,
2006:

|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.
|-- |  | -------------------------------------------------------------------------------------------------------------------

26



---

These
material weaknesses were considered in determining the nature, timing and extent
of audit tests applied in our audit of the 2006 financial statements, and this
report does not affect our report dated March 26, 2007 on those financial
statements.

In our
opinion, managements assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2006
is fairly stated, in all material respects, based on the COSO framework. Also,
in our opinion, because of the effect of the material weaknesses described above
on the achievement of the objectives of the control criteria, the Company has
not maintained effective internal control over financial reporting as of
December 31, 2006, based on the COSO framework.

We do
not express an opinion or any other form of assurance on managements
statements referring to new controls being implemented after December 31,
2006.

We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of ADA-ES, Inc. and Subsidiaries and our report dated March 26, 2007
expressed an unqualified opinion.

/s/ HEIN & ASSOCIATES
LLP

Denver,
ColoradoMarch 26, 2007

Item 9B.
Other Information.

Date of Next
Annual Meeting of  Shareholders  and  Information  Concerning  Shareholder  Proposals for
Presentation at the Next Annual Meeting of Shareholders

Our
next Annual Meeting of Shareholders will be held on June 19, 2007, which is
approximately one month later than we originally expected to hold the meeting.
If a shareholder has not submitted a proposal to be considered at the meeting by
December 11, 2006, the date stated in last years proxy statement for
submitting such proposals, and the shareholder fails to notify the Company of
such proposal on or before April 2, 2007, then the proxies appointed by the
Companys management will be allowed to use their discretionary voting
authority when the proposal is raised at the Annual Meeting, without any
discussion of the matter in the proxy statement. The proponent of any such
proposal must own shares of Common Stock equal to the lesser of (a) 1% or more
of the outstanding shares as of December 31, 2006, or (b) shares having a market
value of at least $2,000, and must have continuously owned such shares for one
year and intend to continue to hold such shares through the date of the Annual
Meeting in order to present a shareholder proposal to the Company.

PART
III

Item  10.
Directors, Executive Officers, and Corporate Governance.

Information
regarding our directors is incorporated by reference from the information
contained under the caption Election of Directors in our Proxy
Statement for the 2007 Annual Meeting of Stockholders (2007 Proxy
Statement) to be filed pursuant to Regulation 14A promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934
within 120 days after the end of our fiscal year ended December 31, 2006.
Information regarding our audit committee, including our audit committee
financial expert, is incorporated by reference from the information contained
under the caption Audit Committee in our 2007 Proxy Statement and
information regarding executive officers is incorporated by reference from the
information contained under the caption Executive Officers in our
2007 Proxy Statement. Information regarding Section 16 reporting compliance is
incorporated by reference from information contained under the caption
Executive Compensation  Section 16(a) Beneficial Ownership Reporting
Compliance in our 2007 Proxy Statement.

27



---

Code of
EthicsWe  adopted a Code of Conduct that applies to our officers, directors and
employees,  including the principal executive officer, principal financial officer,
principal accounting officer or controller or other persons performing similar
functions, and includes a code of ethics as defined in Item 406(b) of Regulation  S-K. A
copy of our Code of Conduct is available on our website at www.adaes.com.  We intend to
disclose any amendments to certain provisions of our Code of  Conduct, or waivers of such
provisions granted to executive officers and  directors, on our website.

Item
11. Executive Compensation.

The
information required by this item is incorporated by reference from the
information contained under the captions Compensation Committee,
Executive Compensation, Director Compensation and
Stock Incentive Plans in our 2007 Proxy Statement.

Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.

The
information required by this item is incorporated by reference from the
information contained under the caption Security Ownership of Principal
Stockholders and Management and Related Stockholder Matters and
Equity Compensation Plan Information in our 2007 Proxy Statement.

Item
13. Certain Relationships and Related Transactions and Director Independence.

The
information required by this item is incorporated by reference from the
information contained under the caption Certain Relationships and Related
Transactions and Director Independence in our 2007 Proxy Statement.

Item
14. Principal Accountant Fees and Services.

The
information required by this item is incorporated by reference from the
information contained under the caption Relationship with Independent
Certified Public Accountants in our 2007 Proxy Statement.

PART
IV

Item
15. Exhibits and Financial Statement Schedules.

(a)  
The following documents are filed as part of this Annual Report on Form 10-K:

|(1) |  | Financial
Statements  see Part II, Item 8, which is incorporated herein by this reference;
|--- |  | -------------------------------------------------------------------------------------------

|(2) |  | Financial
Statement Schedules  None required or applicable; and
|--- |  | ----------------------------------------------------------------

|(3) |  | Exhibits
 as described in the following index.
|--- |  | -----------------------------------------------

Index to
Exhibits.

No.     Description

|3.1 |  | Amended
and Restated Articles of Incorporation of ADA-ES (1)
|--- |  | ------------------------------------------------------------

|3.2 |  | Amended
and Restated Bylaws of ADA-ES (2)
|--- |  | -----------------------------------------

|4.1 |  | Form
of Specimen Common Stock Certificate (3)
|--- |  | ---------------------------------------------

|4.2 |  | Registration
Rights Agreement dated October 21, 2005 (4)
|--- |  | --------------------------------------------------------

|4.3 |  | Registration
Rights Agreement between ADA-ES, Inc. and Arch Coal, Inc. dated March 19, 2003 (16)
|--- |  | ------------------------------------------------------------------------------------------------

|4.4 |  | Standstill
and Registration Rights Agreements dated August 3-6, 2004 (6)
|--- |  | ------------------------------------------------------------------------

|10.1 |  | Distribution
Agreement dated as of March 17, 2003 between Earth Sciences, Inc. and ADA-ES, Inc. (7)
|---- |  | ---------------------------------------------------------------------------------------------------

|10.2 |  | 2003
ADA-ES, Inc. Stock Option Plan** (5)
|---- |  | -----------------------------------------

|10.6 |  | Securities
Subscription and Investment Agreement between ADA-ES, Inc. and Arch Coal, Inc.  dated
July 7, 2003 (7)
|---- |  | -----------------------------------------------------------------------------------------------------------------

|10.7 |  | U.S.
Department of Energy Cooperative Agreement No. DE-FC26-00NT41004 "Field Test Program
to Develop Comprehensive Design,  Operating, and Cost Data for Mercury Control
Systems" (7)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---

|10.8 |  | U.S.
Department of Energy Cooperative Agreement No. DE-FC26-00NT40755 "Advanced Flue  Gas
Conditioning as a Retrofit Upgrade to Enhance PM collection from Coal-Fired Electric
Utility  Boilers" (7)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Tax
Sharing Agreement between ADA-ES, Inc. and Earth Sciences, Inc. dated March 17, 2003 (5)
|----- |  | --------------------------------------------------------------------------------------------

|10.11 |  | U.S.
Department of Energy Cooperative Agreement No. DE-FC26-02NT41591 "Long-Term
Operation of a COHPAC System for Removing Mercury from Coal-Fired Flue Gas" (7)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Amendment
No. 1 to Distribution Agreement by and between ADA-ES, Inc. and Earth Sciences, Inc.
dated  August 15, 2003 (8)
|----- |  | -------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 2003
Stock Compensation Plan #1** (9)
|----- |  | -------------------------------------

|10.14 |  | 2003
Stock Compensation Plan #2** (10)
|----- |  | --------------------------------------

|10.15 |  | U.S.
Department of Energy Cooperative Agreement No. DE-FC26-03NT41986 "Evaluation of
Sorbent Injection for Mercury Control"  (11)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Purchase
Order #4500589101 signed 3/18/04 from We Energies (12)
|----- |  | ---------------------------------------------------------------

|10.17 |  | Clean
Coal Power  Initiative Repayment Agreement between the U.S. Department of Energy and
ADA-ES, Inc.  dated April 6, 2004  (12)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | TOXECON
Sorbent Sales Repayment Agreement by and between Norit America Inc. and ADA-ES, Inc.
dated February 18, 2004 (12)
|----- |  | -------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Development
and Field Validation Agreement between Thermo Environmental Instruments Inc. and ADA-ES,
Inc. dated April 16,  2004 (12)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Distribution
Agreement between Thermo Environmental Instruments Inc. and ADA-ES, Inc. dated April 16,
2004 (12)
|----- |  | ---------------------------------------------------------------------------------------------------------------

|10.21 |  | ADA-ES,
Inc. 2004 Executive Stock Option Plan** (13)
|----- |  | ----------------------------------------------------

|10.22 |  | U.S.
Department of Energy Cooperative Agreement No. DE-FC26-05NT42307 Low-Cost Options
for Moderate Levels of Mercury  Control (14)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Employment
Agreement dated May 1, 1997 between C. Jean Bustard and ADA Environmental Solutions, LLC
(assigned to ADA-ES,  Inc.) ** (14)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Employment
Agreement dated May 1, 1997 between Michael D. Durham and ADA Environmental Solutions,
LLC (assigned to ADA-ES,  Inc.) ** (14)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Employment
Agreement dated January 2, 2000 between Mark H. McKinnies and ADA Environmental
Solutions, LLC (assigned to  ADA-ES, Inc.) ** (14)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Employment
Agreement dated January 1, 2000 between Richard J. Schlager and ADA Environmental
Solutions, LLC (assigned to  ADA-ES, Inc.) ** (14)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | 2004
Stock Compensation Plan #2 and model stock option agreements** (13)
|----- |  | ------------------------------------------------------------------------

|10.28 |  | 2004
Directors Stock Compensation Plan #1** (15)
|----- |  | ------------------------------------------------

|10.29* |  | 2005
Directors Compensation Plan**(16)
|------ |  | ---------------------------------------

|10.30 |  | License
Agreement dated as of November 3, 2006 by and between ADA-ES, Inc. and ADA-NexCoal, LLC.
(17)
|----- |  | -----------------------------------------------------------------------------------------------------

|10.31 |  | Chemicals,
Equipment, and Technical Engineering Services Supply Agreement dated as of November 3,
2006  by and between  ADA-ES, Inc. and ADA-NexCoal, LLC. (18)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | Purchase
and Sale Agreement dated as of November 3, 2006 by and among ADA-ES, Inc., NexGen Refined
Coal, LLC and  ADA-NexCoal, LLC. (19)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|10.33 |  | Amended
and Restated Operating Agreement of ADA-NexCoal, LLC dated as of November 3, 2006 by and
among ADA-ES, Inc., NexGen  Refined Coal, LLC and ADA-NexCoal, LLC. (20)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34* |  | Employment
Agreement dated March 1, 2003 between Sharon M. Sjostrom and ADA  Environmental
Solutions, LLC (assigned to ADA-ES, Inc.)**
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------

|10.35* |  | Executive
Compensation Plan**
|------ |  | -----------------------------

|10.36* |  | Memorandum
of Understanding dated March 20th, 2007, between Calgon  Carbon Corporation
and ADA-ES, Inc.
|------ |  | -------------------------------------------------------------------------------------------------------

|10.37* |  | 2006
Profit Sharing Plan**
|------ |  | --------------------------

|21.1* |  | Subsidiaries
of ADA-ES, Inc.
|----- |  | ----------------------------

|23.1* |  | Consent
of Hein & Associates LLP
|----- |  | --------------------------------

|31.1* |  | Certification
of Chief Executive Officer of ADA-ES, Inc. Pursuant to 17 CFR 240.13a-14(a) or 17 CFR
240.15d-14(a)
|----- |  | -----------------------------------------------------------------------------------------------------------------

|31.2* |  | Certification
of Chief Financial Officer of ADA-ES, Inc. Pursuant to 17 CFR 240.13a-14(a) or 17 CFR
240.15d-14(a)
|----- |  | -----------------------------------------------------------------------------------------------------------------

|32.1* |  | Certification
of Chief Executive Officer of ADA-ES, Inc. Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

29



---

|32.2* |  | Certification
of Chief Financial Officer of ADA-ES, Inc. Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

*
  filed herewith.

**
  Management contract or compensatory plan or arrangement.

|(1) |  | Incorporated
by reference to Exhibit 3.1 to the Form 10-QSB for the quarter  ended September 30, 2005
filed on November 10, 2005 (File No. 000-50216).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated
by reference to Exhibit 3.2 to the Form 8-K dated December 1, 2005  filed on December 5,
2005 (File No. 000-50216).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated
by reference to Exhibit 4.1 to the Form 8-K dated October 21, 2005  filed on October 26,
2005 (File No. 000-50216).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated
by reference to Exhibit 10.1 to the Form 8-K dated October 21, 2005  filed on October 26,
2005 (File No. 000-50216).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-KSB for  the year ended December
31, 2005 filed on March 30, 2006 (File No. 000-50216).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated
by reference to Exhibit A to Exhibit 10.1 to the Form S-3 filed on  October 18, 2004
(File No. 333-119795).
|--- |  | ------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-SB/A-3  filed on July 28, 2003
(File No. 000-50216).
|--- |  | --------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-SB/A-4  filed on August 24, 2003
(File No. 000-50216).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated
by reference to Exhibit 99.2 to the Form S-8 filed on November 14,  2003 (File No.
333-110479).
|--- |  | ------------------------------------------------------------------------------------------------------------

|(10) |  | Incorporated
by reference to Exhibit 99.1 to the Form S-8 filed on February 6,  2004 (File No.
333-112587).
|---- |  | -----------------------------------------------------------------------------------------------------------

|(11) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-KSB for  the year ended December
31, 2003 filed on March 30, 2004 (File No. 000-50216).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-QSB for  the quarter ended March
31, 2004 filed on May 13, 2004 (File No. 000-50216).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-KSB for  the year ended December
31, 2005 filed on March 30, 2006 (File No. 000-50216).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Incorporated
by reference to the same numbered Exhibit to the Form 10-KSB for  the year ended December
31, 2004 filed on March 30, 2005 (File No. 000-50216).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Incorporated
by reference to Exhibit 99.1 to the Form S-8 filed on April 16,  2004 (File No.
333-114546).
|---- |  | ---------------------------------------------------------------------------------------------------------

|(16) |  | Re-filing
to correct a typographical error in the original filing.
|---- |  | ------------------------------------------------------------------

|(17) |  | Incorporated
by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended September  30, 2006
filed on November 8, 2006 (File No. 000-50216).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Incorporated
by reference to Exhibit 10.2 to the Form 10-Q for the quarter ended  September 30, 2006
filed on November 8, 2006 (File No. 000-50216).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Incorporated
by reference to Exhibit 10.3 to the Form 10-Q for the quarter ended  September 30, 2006
filed on November 8, 2006 (File No. 000-50216).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Incorporated
by reference to Exhibit 10.4 to the Form 10-Q for the quarter ended  September 30, 2006
filed on November 8, 2006 (File No. 000-50216).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | See
(a)(3) above.
|--- |  | -----------------

|(c) |  | See
(a)(2)  above.
|--- |  | ------------------

30



---

SIGNATURES

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

|                                             | 
|-------------------------------------------- | 
|ADA-ES, Inc.                                 | 
|(Registrant)                                 | 
|                                             | 
|By /s/ Mark H. McKinnies                     | 
|Mark H. McKinnies, Senior Vice               | 
|President and Chief Financial Officer        | 
|(Principal Financial and Accounting Officer) | 
|                                             | 
|Date:  March 27 , 2007                       | 
|                                             | 
|                                             | 
|                                             | 

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

|                            | 
|--------------------------- | 
|/s/ John W. Eaves           | 
|John W. Eaves, Director     | 
|                            | 
|Date: March 27 , 2007       | 
|                            | 
|                            | 
|/s/ Jeffrey C. Smith        | 
|Jeffrey C. Smith, Director  | 
|                            | 
|Date: March 27, 2007        | 
|                            | 
|                            | 
|/s/ Mark H. McKinnies       | 
|Mark H. McKinnies, Director | 
|                            | 
|Date: March 27 , 2007       | 
|                            | 
|                            | 
|/s/ Robert N. Caruso        | 
|Robert N. Caruso, Director  | 
|                            | 
|Date: March 27, 2007        | 
|                            | 
|                            | 
|/s/ Derek C. Johnson        | 
|Derek C. Johnson, Director  | 
|                            | 
|Date: March 27, 2007        | 
|                            | 

31



---

INDEX
TO FINANCIAL STATEMENTS

|                                                                                              | PAGE
|--------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                                       |     
|                                                                                              |     
|Consolidated Balance Sheets  December 31, 2006 and 2005                                      |     
|                                                                                              |     
|Consolidated Statements of Income  For the Years Ended December 31, 2006, 2005, and 2004     |     
|                                                                                              |     
|Consolidated Statements of Changes in Stockholders Equity  For the Years Ended December 31, |     
|2006, 2005, and 2004                                                                          |     
|                                                                                              |     
|Consolidated Statements of Cash Flows  For the Years Ended December 31, 2006, 2005, and 2004 |     
|                                                                                              |     
|Notes to Consolidated Financial Statements                                                    |     
|                                                                                              |     

F-1



---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and StockholdersADA-ES, Inc and SubsidiariesLittleton, Colorado

We
have audited the consolidated balance sheets of ADA-ES, Inc and Subsidiaries as
of December 31, 2006 and 2005, and the related consolidated statements of
income, changes in stockholders equity and cash flows for each of the
three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ADA-ES, Inc and Subsidiaries
as of December 31, 2006 and 2005, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of ADA-ES, Inc and
Subsidiaries internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 26, 2007 expressed an unqualified opinion
on managements assessment of the effectiveness of ADA-ES, Inc and
Subsidiaries internal control over financial reporting and an adverse opinion on
the effectiveness of ADA-ES, Inc and Subsidiaries internal control over
financial reporting.

As
discussed in note 1 to the accompanying consolidated financial statements,
effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment.

/s/  HEIN & ASSOCIATES
LLP

DENVER,
COLORADOMarch 26, 2007

F-2



---

ADA-ES,
INC AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands)

| | ASSETS
| | ------

|                                                                        | DECEMBER 31 |            
|----------------------------------------------------------------------- | ----------- | -----------
|
|CURRENT ASSETS:                                                         |             |            
|Cash and cash equivalents                                               |             | $   16,129 
|Trade receivables, net of allowance for doubtful accounts of $4         |             | 3,522      
|Investments in securities                                               |             | 2,427      
|Prepaid expenses and other                                              |             | 361        
|                                                                        |             |            
|Total current assets                                                    |             | $   22,439 
|                                                                        |             |            
|                                                                        |             |            
|PROPERTY AND EQUIPMENT, at cost                                         |             | 1,830      
|Less accumulated depreciation and amortization                          |             | (1,033     
|                                                                        |             |            
|Net property and equipment                                              |             | 797        
|                                                                        |             |            
|                                                                        |             |            
|GOODWILL, net of $1,556 in amortization                                 |             | 2,024      
|INTANGIBLE ASSETS, net of $57 and $44 in amortization, respectively     |             | 241        
|INVESTMENTS IN SECURITIES                                               |             | 5,322      
|OTHER ASSETS                                                            |             | 931        
|                                                                        |             |            
|TOTAL ASSETS                                                            |             | $   31,754 
|                                                                        |             |            
|                                                                        |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                    |             |            
|                                                                        |             |            
|CURRENT LIABILITIES:                                                    |             |            
|Accounts payable                                                        |             | $     2,352
|Accrued payroll and related liabilities                                 |             | 618        
|Accrued expenses                                                        |             | 161        
|Deferred revenue and other                                              |             | 761        
|                                                                        |             |            
|Total current liabilities                                               |             | 3,892      
|                                                                        |             |            
|                                                                        |             |            
|LONG-TERM LIABILITIES:                                                  |             |            
|Accrued  warranty and other                                             |             | 184        
|                                                                        |             |            
|Total liabilities                                                       |             | 4,076      
|                                                                        |             |            
|MINORITY INTEREST (Note 5)                                              |             | 37         
|                                                                        |             |            
|COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)                           |             |            
|                                                                        |             |            
|STOCKHOLDERS EQUITY:                                                   |             |            
|Preferred stock; 50,000,000 shares authorized, none outstanding         |             |           
|Common stock; no par value, 50,000,000 shares authorized, 5,635,137 and |             |            
|5,610,267 shares issued and outstanding                                 |             | 27,592     
|Accumulated other comprehensive income                                  |             | 167        
|Accumulated deficit                                                     |             | (118       
|                                                                        |             |            
|Total stockholders equity                                              |             | 27,641     
|                                                                        |             |            
|                                                                        |             |            
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                              |             | $   31,754 
|                                                                        |             |            
|                                                                        |             |            

See
accompanying notes to these consolidated financial statements.

F-3



---

ADA-ES,
INC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Dollars in thousands, except per share data)

|                                                   | FOR THE YEARS ENDED DECEMBER 31, |                |  
|-------------------------------------------------- | -------------------------------- | -------------- | -
|
|REVENUE:                                           |                                  |                |  
|Mercury emission control                           |                                  | $    13,607    |  
|Flue gas conditioning and other                    |                                  | 1,881          |  
|                                                   |                                  |                |  
|Total net revenues                                 |                                  | 15,488         |  
|                                                   |                                  |                |  
|COST OF REVENUES:                                  |                                  |                |  
|Mercury emission control                           |                                  | 8,426          |  
|Flue gas conditioning and other                    |                                  | 1,156          |  
|                                                   |                                  |                |  
|Total cost of revenues                             |                                  | 9,582          |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|GROSS MARGIN                                       |                                  | 5,906          |  
|                                                   |                                  |                |  
|OTHER COSTS AND EXPENSES:                          |                                  |                |  
|General and administrative                         |                                  | 4,170          |  
|Research and development                           |                                  | 1,464          |  
|Depreciation and amortization                      |                                  | 284            |  
|                                                   |                                  |                |  
|Total expenses                                     |                                  | 5,918          |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|OPERATING (LOSS) INCOME                            |                                  | (12            | )
|                                                   |                                  |                |  
|OTHER INCOME (EXPENSE):                            |                                  |                |  
|Interest and other expense                         |                                  | (412           | )
|Interest and other income                          |                                  | 909            |  
|                                                   |                                  |                |  
|Total other income                                 |                                  | 497            |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|INCOME BEFORE INCOME TAX PROVISION                 |                                  | 485            |  
|                                                   |                                  |                |  
|DEFERRED INCOME TAX PROVISION                      |                                  | (108           | )
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|NET INCOME                                         |                                  | 377            |  
|                                                   |                                  |                |  
|UNREALIZED GAINS AND (LOSSES) ON INVESTMENTS IN    |                                  |                |  
|DEBT AND EQUITY SECURITIES, net of tax             |                                  | 134            |  
|                                                   |                                  |                |  
|COMPREHENSIVE INCOME                               |                                  | $          511 |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|NET INCOME PER COMMON SHARE BASIC AND DILUTED      |                                  | $         0.07 |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING         |                                  | 5,624          |  
|                                                   |                                  |                |  
|WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING |                                  | 5,729          |  
|                                                   |                                  |                |  
|                                                   |                                  |                |  

See
accompanying notes to these consolidated financial statements.

F-4



---

ADA-ES,
INC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYFOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004(Dollars in thousands)

|                                            | Common Stock | AccumulatedOther     Comprehensive | Accumulated |                |  
|------------------------------------------- | ------------ | ---------------------------------- | ----------- | -------------- | -
|
|BALANCES, January 1, 2004                   |              | 3,582,230                          |             | $        4,467 |  
|Stock issued to employees and directors for |              |                                    |             |                |  
|expenses                                    |              | 25,716                             |             | 181            |  
|Issuance of stock for cash, net             |              | 1,000,000                          |             | 7,620          |  
|Issuance of stock on exercise of options    |              | 173,265                            |             | 435            |  
|Issuance of stock on conversion of debt     |              | 14,500                             |             | 36             |  
|Tax benefit of stock transactions           |              |                                   |             | 395            |  
|Unrealized holding gains on investments     |              |                                   |             |               |  
|Income tax effect                           |              |                                   |             |               |  
|Net income                                  |              |                                   |             |               |  
|                                            |              |                                    |             |                |  
|BALANCES, December 31, 2004                 |              | 4,795,711                          |             | 13,134         |  
|                                            |              |                                    |             |                |  
|Stock and stock options issued to           |             
|consultant and directors for expenses       |              | 4,221                              |             | 75             |  
|Issuance of stock for cash, net             |              | 789,089                            |             | 12,538         |  
|Issuance of stock on exercise of options    |              | 40,976                             |             | 303            |  
|Tax benefit of stock transactions           |              |                                   |             | 268            |  
|Return of shares from escrow                |              | (19,730                            | )           |               |  
|Unrealized holding losses on investments    |              |                                   |             |               |  
|Investment reclassification adjustments to  |              |                                    |             |                |  
|income                                      |              |                                   |             |               |  
|Income tax effect                           |              |                                   |             |               |  
|Net income                                  |              |                                   |             |               |  
|                                            |              |                                    |             |                |  
|BALANCES, December 31, 2005                 |              | 5,610,267                          |             | 26,318         |  
|                                            |              |                                    |             |                |  
|Stock and stock options issued to           |             
|consultant and directors for expenses       |              | 7,000                              |             | 164            |  
|Stock based compensation                    |              |                                   |             | 331            |  
|Issuance of stock on exercise of options    |              | 17,870                             |             | 116            |  
|Tax benefit of stock transactions           |              |                                   |             | 56             |  
|Expense of stock issuance                   |              |                                   |             | (12            | )
|Sale of JV interest, net of $343 tax        |              |                                   |             | 656            |  
|Minority Interest                           |              |                                   |             | (37            | )
|Unrealized holding gains on investments     |              |                                   |             |               |  
|Income tax effect                           |              |                                   |             |               |  
|Net income                                  |              |                                   |             |               |  
|                                            |              |                                    |             |                |  
|BALANCES, December 31, 2006                 |              | 5,635,137                          |             | $      27,592  |  
|                                            |              |                                    |             |                |  
|                                            |              |                                    |             |                |  

See
accompanying notes to these consolidated financial statements.

F-5



---

ADA-ES,
INC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)

|                                                                      | FOR THE YEARS ENDED DECEMBER 31, |              |  
|--------------------------------------------------------------------- | -------------------------------- | ------------ | -
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                  |                                  |              |  
|Net income                                                            |                                  | $      377   |  
|Adjustments to reconcile net income to net cash provided by           |                                  |              |  
|Operating activities:                                                 |                                  |              |  
|Depreciation and amortization                                         |                                  | 284          |  
|Loss on asset dispositions and securities                             |                                  | 32           |  
|Write off of inventory                                                |                                  |             |  
|Expenses paid with stock and stock options                            |                                  | 495          |  
|Deferred tax expense                                                  |                                  | 108          |  
|Changes in operating assets and liabilities:                          |                                  |              |  
|Trade receivables                                                     |                                  | (508         | )
|Prepaid expenses and other                                            |                                  | (82          | )
|Accounts payable                                                      |                                  | 646          |  
|Accrued expenses                                                      |                                  | 74           |  
|Deferred revenue and other                                            |                                  | 395          |  
|                                                                      |                                  |              |  
|Net cash provided by operating activities                             |                                  | 1,821        |  
|                                                                      |                                  |              |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                 |                                  |              |  
|Capital expenditures for equipment, patents and development           |                                  |              |  
|projects                                                              |                                  | (1,431       | )
|Investment in securities                                              |                                  | (7,054       | )
|Proceeds from asset dispositions                                      |                                  |             |  
|Proceeds from sale of securities and certificates of deposit          |                                  | 7,668        |  
|                                                                      |                                  |              |  
|Net cash used in investing activities                                 |                                  | (817         | )
|                                                                      |                                  |              |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                 |                                  |              |  
|Payments on debt and notes payable                                    |                                  | (5           | )
|Proceeds from sale of JV interest                                     |                                  | 1,000        |  
|Exercise of stock options                                             |                                  | 104          |  
|Sale of stock                                                         |                                  |             |  
|                                                                      |                                  |              |  
|Net cash provided by financing activities                             |                                  | 1,099        |  
|                                                                      |                                  |              |  
|INCREASE IN CASH AND CASH EQUIVALENTS                                 |                                  | 2,103        |  
|CASH AND CASH EQUIVALENTS, beginning of year                          |                                  | 14,026       |  
|                                                                      |                                  |              |  
|CASH AND CASH EQUIVALENTS, end of year                                |                                  | $ 16,129     |  
|                                                                      |                                  |              |  
|SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:                       |                                  |              |  
|Cash payments for interest                                            |                                  | $          1 |  
|                                                                      |                                  |              |  
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |                                  |              |  
|Transfer of inventory to property                                     |                                  | $           |  
|                                                                      |                                  |              |  
|Tax benefit of stock option exercises                                 |                                  | $        56  |  
|                                                                      |                                  |              |  
|Stock issued in conversion of debt                                    |                                  | $           |  
|                                                                      |                                  |              |  
|                                                                      |                                  |              |  
|                                                                      |                                  |              |  

See
accompanying notes to these consolidated financial statements.

F-6



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   
SUMMARY OF NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES:

| | Nature
of Operations The accompanying consolidated financial  statements  include
the accounts of ADA-ES, Inc. (ADA), its wholly owned  subsidiary, ADA Environment
Solutions, LLC (ADA LLC), and Clean Coal Solutions,  LLC (Clean Coal). ADAs
only asset is its investment in its  wholly owned subsidiary, ADA LLC. As of and for the
year ended December 31,  2006, Clean Coal had no significant assets, liabilities or
operations (see Note  5). All significant intercompany transactions have been eliminated.
Collectively, ADA and ADA-ES are referred to as the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
Equivalents The Company considers all highly liquid debt  instruments with
original maturities of three months or less to be cash  equivalents. The Company
maintains the majority of its cash in deposit accounts  collateralized by U.S. Treasury
Securities. The amount on deposit at December  31, 2006 and 2005 was held in one
commercial bank and was in excess of the  insurance limits of the Federal Deposit
Insurance Corporation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Receivables
and Credit Policies Trade receivables are uncollateralized
customer obligations due under normal trade terms requiring payment within 30  days from
the invoice date. Management reviews trade receivables periodically  and reduces the
carrying amount by a valuation allowance that reflects  managements best estimate
of the amount that may not be collectible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments Investments in securities include certificates of deposit,  common
stock and debt securities. All investments are classified as  available-for-sale
securities, and are recorded at fair value in investments in  securities, with the change
in fair value during the period excluded from  earnings and recorded net of tax as a
component of other comprehensive income.  Premiums and discounts on investments in debt
securities are amortized over the  contractual lives of those securities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventories  Inventories,
which are included in prepaid expenses and other, are stated  at the lower of cost or
market, determined by the first-in, first-out method and  consist of supplies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
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. The
Company recognizes revenue on government  contracts based on the time and expenses
incurred to date. As of December 31,  2006 and 2005, costs incurred in excess of billings
totaled $1,422,000 and  $142,000, respectively, and are included in accounts receivable,
net, in the  accompanying Balance Sheets. Billings in excess of recognized income totaled
$761,000 and $135,000 as of December 31, 2006 and 2005, respectively, and are  included
in deferred revenue and other in the accompanying Balance Sheets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ADA
chemical sales are recognized when products are shipped to customers. A reserve  is
established for any returns, based on historical trends. Chemical products  are shipped
FOB shipping point and title passes to the customer when the  chemicals are shipped. The
Companys sales agreements do not contain a  right of inspection or acceptance
provision and products are generally received  by customers within one day of shipment.
The Company has had no significant  history of non-acceptance, nor of replacing goods
damaged or lost in transit.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consulting
revenue is recognized as services are performed and collection is assured.
| | -------------------------------------------------------------------------------------

| | Property
and Equipment Property and equipment is stated at cost.  Depreciation on
assets is provided using the straight-line method based on  estimated useful lives
ranging from 3 to 10 years. Maintenance and repairs are  charged to operations as
incurred. When assets are retired, or otherwise  disposed of, the property accounts are
relieved of costs and accumulated  depreciation and any resulting gain or loss is
credited or charged to income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Intangible
Assets  Intangible assets principally consist of patents.  Patents
obtained by the Company directly are being amortized over a 17-year  life. Amortization
of intangible assets for the years ended December 31, 2006,  2005 and 2004 was $13,000
$11,000 and $10,000 respectively. Based on the balance  of intangible assets as of
December 31, 2006, the Company anticipates  amortization expense over the next 5 years to
be approximately $18,000 per year.  The weighted average amortization period is 14 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets consist of:
| | -----------------------------

|                               | At December 31, |      
|------------------------------ | --------------- | -----
|
|
|                               |                 |      
|Patents:                       |                 |      
|Cost                           |                 | $ 298
|Less: Accumulated Amortization |                 | (57  
|                               |                 |      
|Net                            |                 | $ 241
|                               |                 |      

| | Goodwill Goodwill
consists of the excess of the aggregate purchase price over  the fair value of net assets
of businesses acquired. Goodwill was amortized over  a 10-year period through December 31,
2001 and is attributable to the  Companys FGC reporting segment. As of January 1,
2002, goodwill is no  longer amortized, but subject to an impairment evaluation, which is
performed in  the fourth quarter of each year. As a result of this evaluation, which was
performed on the FGC reporting segment, the Company concluded that no impairment  of its
goodwill was required.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
of Revenues Costs of revenues include all labor, fringe  benefits,
subcontract labor, chemical costs, materials, equipment, supplies and  travel costs
directly related to the Companys production of revenue.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | General
and Administrative  General and administrative costs  include
personnel related fringe benefits, sales and administrative staff labor  costs, facility
costs and other general costs of conducting business.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warranty
Costs  Under certain contracts the Company may grant  performance
guarantees for a specified period and the achievement of a certain  plant operating
conditions. In the event the equipment fails to perform as  specified, the Company is
obligated to correct or replace the equipment.  Estimated warranty costs are recorded at
the time of sale based on current  industry factors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Income Per Share  Basic EPS is calculated by dividing the  income
available to common stockholders by the weighted average number of common  shares
outstanding for the period. Diluted EPS is calculated using the same  numerator as basic
EPS and further reflects the potential dilution that could  occur if outstanding stock
options were exercised. The effect of such dilutive  stock options added 104,000, 171,000
and 67,000 shares in 2006, 2005 and 2004,  respectively, to the weighted average number
of common shares outstanding used  in calculation of diluted EPS. A total of 43,300
outstanding stock options were  excluded from the 2006 calculation of diluted shares as
their inclusion would be  anti-dilutive.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
of Long-Lived Assets  In the event that facts and  circumstances
indicate that the carrying value of assets or intangible assets  may be impaired, an
evaluation of recoverability would be performed. Based on  the Companys evaluation
as of December 31, 2006 and 2005, no impairment of  value existed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
Value of Financial Instruments  The carrying amounts of  financial
instruments, including cash, cash equivalents, accounts receivable,  accounts payable and
accrued expenses approximate fair value due to the short  maturity of these instruments.
The fair values of investments are estimated  based on quoted market prices for those
investments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
Taxes The Company accounts for income taxes under the liability  method
whereby deferred tax assets and liabilities are determined based on tax  rates and laws
enacted as of the balance sheet date. A valuation allowance is  provided when deferred
tax assets are not expected to be realized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Research
and Development Costs Research and development costs are charged  to
operations in the period incurred.
| | -----------------------------------------------------------------------------------------------------------------

| | Stock-Based
Compensation  Effective January 1, 2006, the Company  adopted
Statement of Financial Accounting Standards No. 123R (SFAS No. 123R),  Share-Based
Payment, which requires the Company to record equity  compensation to employees at
fair value. Prior to January 1, 2006, the Company  elected to use APB 25, which required
expense to be recognized only to the  extent the exercise price of the stock-based
compensation was below the market  price on the date of grant. The modified prospective
approach was used in  adopting SFAS No. 123R; therefore, results prior to January 1, 2006
have not  been restated. For the year ended December 31, 2006, $331,000 was charged to
expense for equity compensation, which amounted to $299,000, after tax and  ($0.05) of
basic and diluted earnings per share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
compensation cost for the Companys stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those  plans
consistent with the method of SFAS No. 123R during 2005, then the  Companys net
income per share for the years ended December 31, 2005 and  would have been adjusted to
the pro forma amounts indicated below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Years Ended December 31, |                
|-------------------------------------------------- | ------------------------ | ---------------
|
|
|Net income:                                        |                          |                
|As reported                                        |                          | $           663
|Fair value of stock based compensation, net of tax |                          | (147           
|                                                   |                          |                
|Pro forma                                          |                          | $           516
|                                                   |                          |                
|                                                   |                          |                
|Net income per share  basic and diluted:          |                          |                
|As reported                                        |                          | $          0.13
|Fair value of stock based compensation             |                          | (0.03          
|                                                   |                          |                
|Pro forma  basic and diluted                      |                          | $          0.10
|                                                   |                          |                

| | The
options granted in 2004 and 2005 had exercise prices equal to the market price  on the
date of the grants. Prior to the third quarter of 2005, the Company  showed expense
related to stock options in the period of grant. The presentation  above, including 2004
amounts, shows expense amortized over the estimated  service period, as required under
SFAS No. 123, Accounting for  Stock-Based Compensation. The average fair
value of each employee option  granted in 2005 and 2004 was approximately $2.18 and
$1.38, respectively, and  was estimated on the date of grant using the Black-Scholes
option-pricing model  with the following weighted average assumptions:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Years Ended December 31, |     
|----------------------------------- | ------------------------ | ----
|
|Expected volatility                 |                          | 41% 
|Risk-free interest rate             |                          | 2.6%
|Expected life of options (in years) |                          | 4.8 
|Expected dividends                  |                          | 0   

| | Use
of Estimates The preparation of the Companys consolidated  financial
statements in conformity with generally accepted accounting principles  requires the
Companys management to make estimates and assumptions that  affect the amounts
reported in these financial statements and accompanying  notes. Actual results could
differ from those estimates. The Company makes  significant assumptions concerning: 1)
the impairment of and the remaining  realizability of its intangibles; 2) estimates of
certain overhead and other  rates on research contracts with the U.S. Government, which
are subject to  future audits; 3) fair value of stock options; 4) warranty costs. At this
time,  the Company does not believe any future government audit will result in material
adjustment to previously recorded revenues; 3) the allowance for doubtful  accounts,
which is based on historical experience; 4) the valuation and  classification of
investments in available-for-sale securities, which is based  on estimated fair market
value; and 5) the 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Comprehensive
Income  Comprehensive income is defined to include all  changes in
equity except those resulting from investments by owners and  distributions to owners.
For the years ended December 31, 2006, 2005 and 2004,  comprehensive income includes net
unrealized gains (losses) on investments, net  of income tax expense, of $134,000,
($1,000) and $34,000, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Segment
Information  The Company follows established standards on  the way
that public companies report financial information about operating  segments in annual
financial statements and requires reporting of selected  information about operating
segments in interim financial statements issued to  the public. It also establishes
standards for disclosures regarding products and  services, geographic areas, and major
customers. These standards defines  operating segments as components of a company about
which discrete financial  information is available that is evaluated regularly by the
chief operating  decision maker in deciding how to allocate resources and in assessing
performance. The Company has two reportable segments: mercury emission controls  (MEC)
and flue gas conditioning and other (FGC).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently
Issued Accounting Pronouncements 
| | -------------------------------------------

| | In
June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),  Accounting
for Uncertainty in Income Taxes  an Interpretation  of FASB Standard No. 109.
FIN 48 prescribes a recognition threshold and  measurement attribute for financial
statement recognition and measurement of a  tax position taken or expected to be taken in
a tax return, and also provides  guidance on de-recognition, classification, interest and
penalties, accounting  in interim periods, disclosure and transition. FIN 48 is effective
for fiscal  years beginning after December 15, 2006. The Company is in the process of
evaluating the financial impact of adopting FIN 48.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,to  define
fair value, establish a framework for measuring fair value in generally  accepted
accounting principles (GAAP), and expand disclosures about fair value  measurements.
Having a single definition of fair value, together with a  framework for measuring fair
value, is designed to result in increased  consistency and comparability in fair value
measurements. This FASB is effective  for reporting periods beginning after November 15,
2007. The Company is  evaluating its impact and does not expect that adoption of this
FASB will have a  material impact on its financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial  Assets
and Financial Liabilities. SFAS 159 permits the measurement of  certain financial
instruments at fair value. Entities may choose to measure  eligible items at fair value
at specified election dates, reporting unrealized  gains and losses on such items at each
subsequent reporting period. SFAS 159 is  effective for fiscal years beginning after
November 15, 2007. The Company has  not evaluated the potential impact of the fair value
option.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   
PROPERTY AND EQUIPMENT:

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

|                                               |  | Years Ended December 31, | 
|---------------------------------------------- |  | ------------------------ | 
|
|
|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 years ended December 31,  2006,
2005 and 2004 was $271,000, $146,000 and $143,000, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

3.   
INVESTMENTS:

| | Investments
in available-for-sale securities are reported at their fair value in investments  in
securities and are summarized as follows at December 31, 2006 and 2005:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | GrossUnrealized Gain | GrossUnrealized Loss | Fair Value
|----------------------- | -------------------- | -------------------- | ----------
|
|2006                    |                      |                      |           
|Certificates of deposit |                      | $                   |           
|Common stock            |                      | $               305  |           
|Debt securities         |                      | 14                   |           
|                        |                      |                      |           
|Total                   |                      | $               319  |           
|                        |                      |                      |           
|Less short-term portion |                      |                      |           
|                        |                      |                      |           
|Long-term portion       |                      |                      |           
|                        |                      |                      |           
|2005                    |                      |                      |           
|Certificates of deposit |                      | $                   |           
|Common stock            |                      | 142                  |           
|Debt securities         |                      | 4                    |           
|                        |                      |                      |           
|Total                   |                      | $               146  |           
|                        |                      |                      |           
|Less short-term portion |                      |                      |           
|                        |                      |                      |           
|Long-term portion       |                      |                      |           
|                        |                      |                      |           
|                        |                      |                      |           
|                        |                      |                      |           

F-11



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Realized
gains and losses are determined on the basis of specific identification of the  security
sold. Realized gains and losses are included in Interest and Other  Income in the
accompanying Statements of Income. During 2006 and 2005,  information on securities sold
is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | 2006 | 2005             | 2004
|---------------------------------- | ---- | ---------------- | ----
|
|
|Carrying amount of securities sold |      | $        7,662   |     
|                                   |      |                  |     
|                                   |      |                  |     
|Sale proceeds                      |      | $        7,668   |     
|                                   |      |                  |     
|                                   |      |                  |     
|Gross realized losses              |      | $            (77 | )   
|                                   |      |                  |     
|                                   |      |                  |     
|Gross realized gains               |      | $             83 |     
|                                   |      |                  |     

| | Accumulated
other comprehensive income for 2006, 2005 and 2004 includes unrealized holding  gains,
net of tax, on securities of $167,000, $33,000 and $34,000, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Debt
securities will mature as follows:
| | ---------------------------------------

|Year(s)     | Amount
|----------- | ------
|
|
|2007        |       
|2008-2011   |       
|2012-2016   |       
|Beyond 2016 |       
|            |       
|Total       |       
|            |       
|            |       

4.     GOVERNMENT
AND INDUSTRY FUNDED CONTRACTS:

| | ADA
has performed activities under 7 contracts awarded by the Department of Energy  (the
DOE) that contributed a total of $6,957,000, $4,298,000 and  $4,163,000 to
revenues in 2006, 2005 and 2004, respectively. These amounts are  included in Mercury
emission control revenues. ADA typically invoices the DOE  and industry cost-share
partners monthly for labor and expenditures plus  estimated overhead factors, less cost
share amounts. The total approved DOE and  industry budgets amount to $32.3 million, of
which the Companys and  industry partners cost-share portion is $7.9 million.
The remaining  unearned amount of the contracts was $13.2 million as of December 31,
2006, of  which $7 million is expected to be recognized by the Company in 2007 (including
cash contributions by other industry partners). These contracts are subject to  audit and
future appropriation of funds by Congress. The Companys  historical experience has
not resulted in significant adverse adjustments to the  Company, however the government
audits for years ended 2006, 2005, 2004, 2003  and 2002 have not yet been finalized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.    JOINT
VENTURE AND TRANSACTIONS WITH NEXGEN:

| | In
November  2006, the Company sold a 50% interest in its refined coal technology to a joint
venture called Clean Coal Solutions, LLC, which was formed in October 2006  (Clean
Coal or the JV), to be operated with NexGen  Refined Coal, LLC (NexGen),
to market such technology. During 2006  the Company received non-refundable payments
totaling $1,000,000 from NexGen.  The proceeds of the sale, net of the estimated tax
effect, in the amount of  $619,000 were recorded to Stockholders Equity. In order
to maintain its  50% interest in the JV, ADA is required to fund its 50% share of
operating costs  for the JV. In 2006 ADAs share of such cost amounted to less than
$10,000.  At present, ADA is considered the primary beneficiary of this variable interest
entity and will consolidate the accounts of the JV. As of December 31, 2006, the  JV had
no significant assets, liabilities or operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | The
JV  will initially operate a business supplying chemicals, additives, equipment and
technical services to cyclone fired boiler users, but the JVs primary  purpose is
to seek and obtain approval from the United States Internal Revenue  Service to qualify
for Section 45 tax credits. If the JV succeeds in obtaining  that approval, NexGen has
the right to maintain its 50% interest by paying ADA  an additional $4 million, in 8
quarterly payments of $500,000 each, beginning  the later of the 4th quarter
of 2007 or when qualification for the  tax credit is obtained. NexGen can determine not
to make those payments, but it  if does so, it will forfeit a part of its interest in the
JV in direct  proportion to the amount of the $4 million that it elects not to pay. Once
NexGen fails to make any one payment, it cannot come back and reclaim its  interest by
making later payments. In no event is ADA required to refund any of  the payments made to
it by NexGen, even in the event of non-performance under  the agreements described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreements governing the operation of Clean Coal call for NexGen and ADA-ES to  each pay
50% of the costs of operating the JV to retain their respective 50%  interests, and
specify certain duties that ADA-ES and NexGen are obligated to  perform as members of
Clean Coal to further the business purposes of the JV. If  ADA determines not to make any
agreed upon contribution to the JV, its interest  will be diluted. ADA also entered into
a License Agreement with Clean Coal  pursuant to which it licensed certain patents and
know-how to Clean Coal, on an  exclusive basis, to allow it to exploit the refined coal
technology. Pursuant to  the License Agreement, ADA is required to provide technical
assistance without  charge to the JV relating to the development, marketing and
deployment of the  refined coal technology and, with certain limitations, to prosecute,
maintain  and defend the patents that are a part of that technology, take appropriate
steps to protect the know-how and trade secrets comprising a part of that  technology,
and indemnify and hold Clean Coal harmless in the event that  technology infringes the
intellectual property of any third party. ADA also  entered into a Supply Agreement with
Clean Coal pursuant to which it will supply  the JV with certain chemicals, additives,
equipment and technical services to  facilitate the purposes of the JV. Clean Coal will
pay ADA standard charges for  the chemicals, additives, and technical services it will
supply to the JV. ADA  will supply equipment to the JV at its cost.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.   
STOCKHOLDERS EQUITY:

| | Shares
and Stock Options Issued for Pension Expenses and Directors and Consultant
Compensation  In 2004 the Company issued shares of its  common stock
for the payments of approximately $146,000 of ADA pension related  expenses (see Note 7)
and $35,000 of non-management directors compensation, based upon the per share
value of unrestricted common stock of ADA  at the time of exchanges. In 2006 and 2005,
the Company issued shares of its  common stock for compensation of $141,000 and $58,000,
respectively, to  non-management directors based on the market price of the common stock,
and  recorded $22,000 and $17,000, respectively, of expense related to stock options
issued to a consultant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sale
of Stock, Convertible Debenture and Grant of Option to Arch  In  2003, the
Company sold 137,741 shares to Arch Coal for $1 million and sold a  convertible debenture
for $300,000, both pursuant to an investment agreement. Of  the shares sold, 37,741 were
originally placed in escrow of which 19,730 shares  were returned to the Company during
2005 since the market price of the  Companys shares exceeded a minimum of $9.08 for
a twenty-day continuous  period during the one-year period from the date of their
issuance. The Debenture  was repaid during 2004. As a part of the share purchase Arch was
also granted an  option to purchase 50,000 shares for $10.00 per share. The option
expires in  five years. As of December 31, 2006, all of the shares under the option are
available to be purchased.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sale
of Stock in 2004 and 2005  In August 2004 and October 2005,  the
Company entered into several Subscription and Investment Agreements. Under  the August
2004 agreements, the Company privately sold 1 million shares of its  common stock to a
limited number of institutional investors at a price of $8.00  per share. The net
proceeds to the Company from the sales totaled $7,620,000.  Under the October 2005
agreements, the Company privately sold 789,089 shares of  its common stock to a limited
number of institutional investors at a price of  $17.00 per share. Net proceeds to the
Company totaled $12,538,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Stock
Options During 2003 the Company adopted the 2003 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  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  ten 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 January 2006, the Board of Directors authorized the vesting of  38,428
options under this plan with a fair value of $77,000. In 2006 1,000 of  such options were
exercised. At December 31, 2006, 39,228 options were  exercisable. In February 2007, the
Board authorized vesting of 17,258 options  under this plan with a fair value of $35,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 of 5,000 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 2006, 15,000 of such
options were forfeited after the resignation of three directors. As of December  31,
2006, one-third of the remaining outstanding options, or a total of 5,000  options vested.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 will be the market price on the date of grant,  the shares
of 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 shares  of Stock that are
outstanding at the date the individual is no longer 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 the Board
authorized the grant of 15,000  options to the non-management directors of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | Following
is a table of options activity for the three years ended December 31, 2006:
| | -------------------------------------------------------------------------------------

|                                       | Employees andDirectorsOptions | Non-EmployeeOptions | WeightedAverageExercise Price
|-------------------------------------- | ----------------------------- | ------------------- | -----------------------------
|
|
|Options Outstanding, January 1, 2004   |                               | 187,310             |                              
|Options granted                        |                               | 275,995             |                              
|Options expired                        |                               | (7,800              | )                            
|Options exercised                      |                               | (157,765            | )                            
|                                       |                               |                     |                              
|Options Outstanding, December 31, 2004 |                               | 297,740             |                              
|                                       |                               |                     |                              
|Options granted                        |                               | 96,900              |                              
|Options expired                        |                               | (2,181              | )                            
|Options exercised                      |                               | (40,976             | )                            
|                                       |                               |                     |                              
|Options Outstanding, December 31, 2005 |                               | 351,483             |                              
|                                       |                               |                     |                              
|Options granted                        |                               | 34,900              |                              
|Options expired                        |                               | (23,544             | )                            
|Options exercised                      |                               | (17,870             | )                            
|                                       |                               |                     |                              
|Options Outstanding, December 31, 2006 |                               | 344,969             |                              
|                                       |                               |                     |                              

| | The
weighted average remaining contractual life for all options as of December 31,  2006 was
approximately 7.5 years. At December 31, 2006, 193,319 options with a  weighted average
exercise price of $11.35 were fully vested and exercisable. Of  the remaining 231,650
options, 69,633 options with a weighted average exercise  price of $15.27 vest in 2007,
21,425 options with a weighted average exercise  price of $13.24 vest in 2008, 16,600
options with a weighted average exercise  price of $11.17 vest in 2009, and the remaining
123,992 options with a weighted  average exercise price of $9.54 vest at the discretion
of the board of directors  based on specific performance objectives of executive officers
and a consultant,  with minimum annual vesting of 11,500 and maximum annual vesting of
46,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
average fair value of each employee and director option granted in 2006 was
approximately $5.52 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                  | 

| | Following
is information related to options outstanding/exercisable at December 31, 2006:
| | -----------------------------------------------------------------------------------------

|                | Options Outstanding | Options Exercisable |  |       | 
|--------------- | ------------------- | ------------------- |  | ----- | 
|
|$2.80           |                     | 11,665              |  | 2.80  | 
|$8.60 - $10.00  |                     | 237,400             |  | 8.89  | 
|$13.80 - $15.20 |                     | 132,604             |  | 14.54 | 
|$18.61 - $20.20 |                     | 43,300              |  | 19.34 | 
|                |                     |                     |  |       | 
|                |                     | 424,969             |  | 11.55 | 
|                |                     |                     |  |       | 

| | The
aggregate intrinsic value of options exercised in years ended December 31, 2006,  2005
and 2004, based on an average market price of $18.09, $19.03 and $12.51,  respectively,
was $207,000, $477,000 and $1,733,000, respectively. The aggregate  intrinsic value of
options exercisable at December 31, 2006 was $938,000 based  on a market price of $16.20.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | As
of  December 31, 2006, total compensation costs related to non-vested options, which  had
not yet been recognized was $414,000. The weighted average period over which  such
expense is expected to be recognized is 2.0 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.   
COMMITMENTS AND CONTINGENCIES:

| | Pension
Expense and Retirement Plan  The Company assumed a defined
contribution and 401(k) plan covering all eligible employees as of January 1,  2003. The
Company recognized contribution expense of $237,000, $206,000 and  $161,000 for 2006,
2005 and 2004, respectively, based on a percentage of the  eligible employees annual
compensation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Performance
Guarantee Activated Carbon Injection Systems Under  contracts to
supply activated carbon injection systems, the Company may grant  performance guarantees
to the owner of the power plants that guarantee the  performance of the associated
equipment for a specified period and the  achievement of a certain level of mercury
removal based upon the injection of a  specified quantity of activated carbon at a
specified rate given other plant  operating conditions. In the event the equipment fails
to perform as specified,  the Company is obligated to correct or replace the equipment.
In the event the  level of mercury removal is not achieved, the Company has a make
right obligation within the contract limits. As of December 31, 2006 and  2005,
$120,000 and $21,000, respectively has been accrued for such equipment  warranties and
performance guarantees. No charges against the accrued amount  were made in either year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Purchase
Obligations  The Company routinely issues purchase orders  for the
major components of the activated carbon injection systems it supplies  to customers. As
of December 31, 2006, the Company had purchase obligations  totaling $1,308,000 that it
expects to pay in 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Operating
Leases We lease office facilities under two noncancellable
operating lease agreements. Our facilities leases generally provide for periodic  rent
increases and renewal options. Annual minimum commitments under these  leases are shown
in the table below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Operating LeaseCommitments(In thousands)
|--------------------------------- | ----------------------------------------
|
|Years ending December 31,         |                                         
|2007                              |                                         
|2008                              |                                         
|2009                              |                                         
|                                  |                                         
|Total operating lease commitments |                                         
|                                  |                                         

| | Rent
expense totaled $187,000, $153,000, $158,000 in 2006, 2005 and 2004,  respectively.
| | ----------------------------------------------------------------------------------------

8.   
MAJOR CUSTOMERS:

| | Sales
to unaffiliated customers which represent 10% or more of the Companys  sales for
the years ended December 31, 2006, 2005 and 2004 were as follows  (as a percentage
of each entitys sales):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Customer                   | 2006 | 2005 | 2004
|-------------------------- | ---- | ---- | ----
|
|A (Governmental Contracts) |      | 24%  |     
|B                          |      | 15%  |     
|C                          |      | 11%  |     

| | At
December 31, 2006 and 2005, approximately 86% and 89% of the Companys  trade
receivables were from eight and five customers, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

F-16



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| | A
significant portion of ADAs revenue is derived from contracts with the DOE  and
chemical and equipment sales to coal-burning electric power plants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

9.   
INCOME TAXES:

| | The
following lists the Companys deferred tax assets and liabilities, which  are
included in Other Assets, Accrued Expenses and Long-term Liabilities,  respectively, in
the accompanying Balance Sheet:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | At December 31, |        
|------------------------------------------- | --------------- | -------
|
|
|Current assets (liabilities):               |                 |        
|Prepaid expenses                            |                 | $   (72
|Unrealized gains  securities held for sale |                 | (98    
|Deferred revenues, compensation and other   |                 | 87     
|                                            |                 |        
|                                            |                 | (83    
|                                            |                 |        
|Non-current assets (liabilities)            |                 |        
|Deferred compensation, warranty and other   |                 | 61     
|Property and intangible asset differences   |                 | (270   
|Net loss carryforward                       |                 |       
|Tax credits                                 |                 | 159    
|                                            |                 |        
|                                            |                 | (50    
|                                            |                 |        
|Net tax (liabilities) / assets              |                 | $ (133 
|                                            |                 |        
|                                            |                 |        

| | As
of  December 31, 2006 and 2005, the Company had approximately $-0- and $891,000 of  tax
loss carryforwards, respectively. Approximately $891,000 and $69,000 of tax  loss
carryforwards were used to reduce taxable income in 2006 and 2005,  respectively. The
Companys valuation allowance as of December 31, 2006 and  2005 was $-0-, as the
Company believes that it is more likely than not that its  deferred tax assets at those
dates would be realized in the future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2006, 2005 and 2004, the Companys current tax provision was  reduced
by $56,000, $268,000 and $395,000, respectively, attributable to the tax  effects of
stock option exercises recorded in stockholders equity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following is a reconciliation of the expected Federal tax rate to the actual  income tax
rate  expense (benefit) as of December 31, 2006, 2005 and 2004,  which was
approximately 22%, 34% and 16%, respectively:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | As of December 31, |     |  
|-------------------------------------------- | ------------------ | --- | -
|
|Expected income tax rate - expense (benefit) |                    | 34% |  
|Permanent differences                        |                    | 2%  |  
|Tax credits                                  |                    | (9% | )
|State income taxes                           |                    | 3%  |  
|Other                                        |                    | (8% | )
|                                             |                    |     |  
|Actual income tax rate                       |                    | 22% |  
|                                             |                    |     |  

F-17



---

ADA-ES,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.   
RELATED PARTY TRANSACTIONS:

| | As
discussed above in Note 6, the Company executed a Securities Subscription and  Investment
Agreement with Arch Coal, Inc in 2003. Pursuant to the investment  agreement, in
September 2003 Arch purchased a $300,000 convertible debenture  from the Company,
purchased 137,741 shares of the Companys Common stock  and was also granted an
option to purchase 50,000 shares. The debenture and  accrued interest thereon was repaid
in 2004. In addition, the Company cancelled  a co-marketing agreement of its ADA-249
product and performs certain testing and  research projects under agreements with Arch in
2006. Under such arrangements,  the Company has recorded revenue of $261,000, $230,000
and $25,000 in 2006, 2005  and 2004, respectively. A designee of Arch has been appointed
a seat on the  Companys Board of Directors and management of the Company has agreed
in  the future to nominate and to vote all proxies and other shares of stock in the
Company which they are entitled to vote in favor of that designee so long as  Arch holds
no less than 100,000 shares of the Companys common stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.   
BUSINESS SEGMENT INFORMATION:

| | The
following information relates to the Companys two reportable segments: MEC and 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | Years Ended December 31, |                          | 
|--------------- | ------------------------ | ------------------------ | 
|
|
|Revenue:        |                          |                          | 
|MEC             |                          | $                13,607  | 
|FGC             |                          | 1,881                    | 
|                |                          |                          | 
|Total           |                          | $                15,488  | 
|                |                          |                          | 
|                |                          |                          | 
|Segment profit: |                          |                          | 
|MEC             |                          | $                  3,000 | 
|FGC             |                          | 282                      | 
|                |                          |                          | 
|Total           |                          | $                  3,282 | 
|                |                          |                          | 

| | A
reconciliation of the reported total segment profit to net income for the  periods shown
above is as follows:
| | ---------------------------------------------------------------------------------------------------------------

|                                                  | Years Ended December 31, |             |  
|------------------------------------------------- | ------------------------ | ----------- | -
|
|
|Total segment profit                              |                          | $    3,282  |  
|Non-allocated general and administrative expenses |                          | (3,011      | )
|Depreciation and amortization                     |                          | (284        | )
|Interest, other income/expenses and tax           |                          |             |  
|(provision) benefit                               |                          | 390         |  
|                                                  |                          |             |  
|Net income                                        |                          | $       377 |  
|                                                  |                          |             |  

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18