1053361--3/30/2006--CATALYTICA_ENERGY_SYSTEMS

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{gas, price, oil}

{property, intellectual, protect}

{product, candidate, development}

{acquisition, growth, future}

{personnel, key, retain}

{cost, regulation, environmental}

{customer, product, revenue}

{competitive, industry, competition}

{cost, contract, operation}

{stock, price, operating}

{product, liability, claim}

{control, financial, internal}

{financial, litigation, operation}

{provision, law, control}

{condition, economic, financial}

{cost, operation, labor}

{regulation, change, law}

{operation, natural, condition}

{stock, price, share}

RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL RISKS RELATING TO OUR FINANCIAL CONDITION AND OPERATING RESULTS We have incurred significant continuing losses since inception, and we may never achieve profitability. We may need significant additional capital to operate our business or achieve profitability, and we may be unable to raise additional capital. Risk of changes in government regulation. Our acquisition of SCR-Tech and any significant transaction we may undertake could disrupt our business and harm our financial condition. The market price of our common stock is highly volatile, has significantly declined and may decline further. Our common stock could be de-listed by NASDAQ. We may have difficulty managing our current operations in light of recent management changes. We have historically focused on research and development activities and have limited experience in marketing, selling and servicing our products. If we are unable to attract or retain key personnel, our ability to adapt our technology to diesel engines or other products, to continue to develop and commercialize our technology, to effectively market our products and to manage our business could be harmed. Certain of our processing and manufacturing equipment is unique to our business and would be difficult and expensive to repair or replace. Significant price increases in key materials may reduce our gross margins and profitability of our NOx reduction products. We are subject to significant potential environmental and product liability exposure. Many of the risks of our business have only limited insurance coverage and many of our business risks are uninsurable. If we are unable to protect our intellectual property, or our intellectual property protection efforts are unsuccessful, others may duplicate our technology. Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products and services if these claims are successful. We incur substantial costs as a result of being a public company. Because a small number of stockholders own a significant percentage of our common stock, they may exert significant influence over major corporate decisions, and our other stockholders may not be able to do so. Provisions in our charter documents, our Shareholder Rights Plan and Delaware law may prevent or delay an acquisition of us, which could decrease the value of our securities. Liabilities we acquired as a result of our spin-off may have a negative effect on our financial results. ADDITIONAL RISKS RELATING TO SCR CATALYST AND MANAGEMENT SERVICES SCR-Tech has not been profitable and there can be no assurance SCR-Tech will become profitable. We are dependent on management at SCR-Tech for success in its business. We have limited experience with the operations of SCR-Tech. SCR-Tech has very limited operating experience in North America. SCR-Tech may not be able to profitably operate its business. The size of the market for SCR-Tech s business is uncertain. SCR-Tech may be subject to vigorous competition with very large competitors that have substantially greater resources and operating histories. SCR-Tech s business is subject to potential seasonality. SCR-Tech may be subject to warranty claims from its customers. SCR-Tech is dependent on third parties to perform certain testing required to confirm the success of its regeneration. SCR-Tech is still dependent on ENVICA. SCR-Tech is highly dependent upon the strength of its intellectual property to protect its business. SCR-Tech does not own its regeneration facilities and it is subject to risks inherent in leasing the site of its operations. SCR-Tech may require unexpected capital expenditures to expand its production facilities. SCR-Tech could be subject to environmental risks as a result of the operation of its business and the location of its facilities. Risks of Purchasing Used SCR Catalyst ADDITIONAL RISKS RELATING TO EMISSIONS CONTROL SOLUTIONS FOR DIESEL ENGINES We may never complete the research and development of commercially viable emissions control solutions for diesel engines. We may not have sufficient capital to complete development of a commercially viable emissions control solution for diesel engines. We will be heavily dependent on developing relationships with diesel industry companies, including large diesel OEMs or suppliers to OEMs, and their commitment to adopt and market our diesel emissions reduction technology for their or their customers diesel engines in order to enter the diesel OEM marketplace; any agreements with these diesel industry companies may limit our market opportunities. We may incur significant costs in developing our diesel technology with OEMs or suppliers to OEMs; if any OEM or OEM supplier does not complete development for any reason, we may not be able to recover costs incurred for the development with that OEM or OEM supplier. We will be dependent on third party development of NOx adsorbers for our diesel products. We will be dependent on third party suppliers for the supply of key components for our diesel products. We may be subject to significant competition from companies including those that may have substantially greater resources and market credibility. Alternate technologies may provide a more effective solution than our diesel NOx reduction technology. Failure to successfully demonstrate our technology in field tests could negatively impact demand for our products. We may not meet our product development and commercialization milestones, which could have a material adverse effect on our operations. Significant warranty and product liability risks could arise from our diesel emissions reduction solutions. We have no experience manufacturing our diesel products on a commercial basis. ADDITIONAL RISKS RELATING TO RESTRUCTURING ACTIVITIES AND RECENT DEVELOPMENTS We have ceased any further development or commercialization efforts associated with our Xonon Cool Combustion product for gas turbines and we are exploring strategic alternatives for such business. We may not realize any significant value from such alternatives. We are involved in a contract dispute with Kawasaki that could result in adverse financial consequences and a diversion of resources and management time and attention from business operations. We may never complete the research and development of a commercially viable fuel processor to be utilized with PEM fuel cell applications.

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1053361--3/30/2006--CATALYTICA_ENERGY_SYSTEMS_INC