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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                        to                     .

Commission File No. 000-31953

CATALYTICA ENERGY SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

430 Ferguson Drive

Mountain View, CA 94043

(Address of principal executive offices)

(650) 960-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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.  x

As of March 27, 2003, there were outstanding 17,617,635 shares of the Registrant’s common stock, par value $0.001, which is the only class of common stock of the Registrant registered under Section 12(g) of the Securities Act of 1933.

As of June 30, 2002, the aggregate market value of the shares of common stock held by non-affiliates of the Registrant (based on the last sale price for the common stock on The Nasdaq Stock Market) was $34,006,000.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2002.

Table of Contents

CATALYTICA ENERGY SYSTEMS, INC.

Annual Report on Form 10-K

Table of Contents

December 31, 2002

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions identify such forward-looking statements.

The forward-looking statements in this report include, but are not limited to, statements regarding our market opportunities and the growth of the market for our solutions, the applicability of our solutions to different turbine applications, statements regarding the successful development and market potential of diesel and fuel cell products, the efficiency of our solutions, the limits on current generation capacity due to environmental concerns, the cost of ultra-low emissions technology and its effects, the uniqueness of Xonon, our ability to design Xonon for different turbine models, our ability to broaden the range of uses of turbines, the timing of our testing activities and commercialization of our products, sources of our revenues, our ability to create an industry standard, our competitive advantage in the marketplace, the value of our intellectual property and effectiveness of our patent portfolio, availability and expense of resources and raw materials necessary for production and manufacturing, the level of research and development by OEMs, our commitments to joint ventures, our relations with employees, our ability to generate cash and the sufficiency of existing cash and cash equivalents, our use of earnings, our investment in research and development, our commitment to funded research programs, the impact of interest income and expense, critical accounting policies and our business strategies and plan of operations. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those discussed in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risks that Could Affect Our Financial Condition and Results of Operations.”

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no responsibility to update any of these forward-looking statements or to conform these statements to actual results.

“Xonon” is a registered trademark and “Cool Combustion,” “Catalytica Energy Systems” and the stylized Catalytica logo are trademarks of Catalytica Energy Systems, Inc.

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PART I

Item 1. BUSINESS

Overview

We design, develop and manufacture advanced catalytic products for the energy and transportation industries with a focus on cost-effective solutions for improved performance and reduced emissions from combustion sources. Our proprietary technologies include the application of catalysts to combustion systems and next-generation fuel processing applications to mitigate the environmental impact of power generation and transportation systems. We are marketing our first commercial product, Xonon Cool Combustion^™, a breakthrough pollution prevention technology that enables natural gas-fired turbines to achieve ultra-low emissions power production. Xonon^® prevents the formation of nitrogen oxides (“NOx”), a primary contributor to air pollution, through a proprietary catalytic combustion process. We are also conducting technology development efforts related to fuel processing for fuel cells and are actively pursuing adaptation of our core Xonon technology to both mobile and stationary diesel applications.

Our Xonon Cool Combustion product is the only commercially available pollution prevention technology proven to achieve ultra-low emissions (less than 5 parts per million, or ppm) during combustion. Our Xonon system is integrated within a gas turbine, replacing the conventional flame-based combustion system with a catalytic process that combusts fuel at temperatures below the threshold at which NOx forms. This revolutionary approach to reducing emissions is a significant departure from traditional methods of achieving ultra-low NOx levels, which involve cleaning up the pollution downstream through costly, add-on exhaust cleanup systems. Through pollution prevention instead of cleanup, we believe our Xonon system offers a more efficient and cost-effective means for gas turbine operators to meet increasingly stringent Federal and State-imposed NOx regulations. A Xonon-equipped 1.4 megawatt (“MW”) Kawasaki gas turbine has been operating since November 2002 at Sonoma Developmental Center in Eldridge, California as part of a co-generation application that is providing supplemental heat and power for a 120-building campus. This installation marks the world’s first commercial operation of a catalytic combustion system in a gas turbine and a major milestone in gas turbine innovation.

Since 1999, we have been conducting a field demonstration of our Xonon Cool Combustion system at Silicon Valley Power, a municipally-owned utility site, located in Santa Clara, California. The turbine, which functions as part of the local power grid, has served alternately as a demonstration of Xonon’s performance and reliability during unattended full-load operation and as a development and test engine in support of commercial program initiatives for customers. Since initiating the field demonstration, the Xonon-equipped turbine has run for more than 15,000 hours with NOx emissions consistently below 2.5 ppm. The system has satisfied federal Environmental Protection Agency, or EPA, guidelines for an emissions control technology that is “achieved in practice” and has demonstrated emissions levels that satisfy the California and South Coast Air Quality Management District, or SCAQMD, guidelines for gas turbines. We believe that Xonon is the only gas turbine combustion system demonstrated to meet these guidelines without requiring a downstream exhaust cleanup system. Furthermore, we have successfully completed evaluations by the EPA, through its Environmental Technology Verification program, and by the California Air Resources Board, or CARB, through its technology precertification program, both of which confirmed the ultra-low emissions performance of our technology while operating on a gas turbine.

We have been working actively with gas turbine original equipment manufacturers, or OEMs, to adapt our technology as part of their stationary gas turbine product lines. We currently have collaborative commercialization agreements in place with General Electric Power Systems, or GE, and Kawasaki Gas Turbines—Americas, a division of Kawasaki Motors Corp., U.S.A., or Kawasaki. We also have development work underway with Solar Turbines, or Solar, to incorporate the Xonon system into its gas turbine line. Our development of the Xonon technology has been supported by government agencies and research institutions, including the Federal Department of Energy, or DOE, the EPA, the California Energy Commission Public Interest Energy Research program, CARB, and others.

Catalytica Energy Systems, Inc. (formerly Catalytica Combustion Systems, Inc.) was incorporated in Delaware as a subsidiary of Catalytica, Inc. in 1995. In December 2000, Catalytica Advanced Technologies, Inc., another subsidiary of Catalytica Inc., was merged into us, and the combined entity was spun out from Catalytica, Inc. as a separate, stand-alone public company.

Continued Environmental Awareness

An ongoing barrier to adding new power generation capacity is the continued public focus on environmental issues. In the United States, the Clean Air Act creates the National Ambient Air Quality Standards, or NAAQS, which are the basis for regulations that limit emissions of certain harmful pollutants such as NOx.

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Today, U.S. emissions regulations generally require new installations of gas turbines to meet NOx emissions levels of 2.5 to 25 ppm depending on the location and size of the installation. We believe that the general trend is toward the lower end of this range, with all areas of the U.S. today generally requiring single-digit NOx levels for new installations of gas turbines greater than 50 MW in size. In certain areas where air quality is currently unacceptable, smaller turbines (<50 MW) are also being required to achieve single-digit NOx levels. According to the EPA, it has been estimated that 60% of the U.S. population lives in areas whose air quality is in violation of NAAQS and where the most stringent emissions requirements are being enforced.

We believe the role that environmental protection requirements have played, and may continue to play, in the permitting of new power generation capacity highlights the need for a cost-effective, widely-applicable emissions technology, like Xonon, that permits turbines to meet the most stringent existing emissions guidelines. We believe that Xonon may not only reduce the operating costs associated with complying with environmental standards, but may create additional value by enabling rapid siting and permitting of projects that otherwise may not have been possible.

Gas Turbine Technology

A gas turbine operates by compressing incoming air, combining it with fuel, often natural gas but also other hydrocarbons, and combusting the mixture. The combustion process releases the fuel’s energy, forming hot gases that power the turbine. In conventional combustion systems, a flame is used to combust the fuel. The temperature required to sustain a stable flame is significantly higher than the temperature at which the gas turbine is designed to operate, so most of the incoming air is used to cool the combustion process to the level the turbine requires. The high temperature required for a stable flame causes the nitrogen and oxygen in the air to react, forming NOx, a major contributor to air pollution. Even the most advanced flame-based combustion systems today are limited to achieving NOx levels of approximately 9 ppm for certain newer commercial systems, which are limited in application, and approximately 25 ppm for less sophisticated systems.

The Xonon Solution

Our Xonon system combusts the fuel in a gas turbine using a different principle. Instead of heating the fuel-air mixture in a flame until it is hot enough to burn, Xonon passes this mixture over a chemical catalyst that allows the combustion reaction to take place at much lower temperatures. A portion of the fuel is combusted in the catalyst. The remaining fuel is combusted downstream of the catalyst in a homogeneous reaction, also at a temperature low enough to prevent formation of significant amounts of NOx. The resulting concentration of NOx in the gas turbine exhaust will be in the range of 1 to 5 ppm and below 3 ppm in most gas turbines built today. Importantly, our flameless catalytic combustion approach provides the same amount of output energy as flame-based combustion systems while achieving ultra-low NOx emissions without add-on exhaust cleanup systems.

Our Strategy

We are focused on bringing the benefits of Xonon Cool Combustion to the power generation market through our strategic relationships with leading gas turbine manufacturers. To gain market share and penetrate new markets, OEMs seek to differentiate their products with technological advances that benefit their customers. The ultra-low emissions capabilities and economic benefits offered by Xonon-equipped gas turbines could greatly enhance an OEM’s product line and offer significant competitive advantages.

For each turbine model that an OEM agrees to pursue, we design a catalytic Xonon module, the key component of the Xonon system, to be incorporated into the design of the turbine combustion system. We then manufacture the custom-designed Xonon modules and sell them to the OEM to incorporate as an integral part of its product. At present, our Xonon modules have a guaranteed life of 8,000 hours (equivalent to approximately one year of continuous operation), and are designed to be replaced during regularly scheduled maintenance over the 15- to 20-year life of the turbine. We expect to derive revenue from the sale of both new and replacement Xonon modules.

Development and Commercialization

Our initial product offerings target the small gas turbine sector, which includes turbines that generate between 1 and approximately 15 MW of power. Turbines in this sector serve industrial, commercial and institutional loads in power only and combined heat and power, or cogeneration, applications and can help meet power requirements during periods of peak demand at base-load power facilities. Small gas turbines are also used in the pipeline industry to transport oil and gas. Distributed generation applications, or turbines located at or near the point of use, can enhance power quality and reliability while avoiding the need to expand transmission and distribution capacity.

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We believe that the distributed generation concept has the potential to address a number of ongoing problems in the power industry, including limitations in the bulk power transmission grids, environmental and community opposition surrounding the construction of new power lines, concerns about the vulnerability of the power infrastructure, and the need for high quality, reliable power.

We believe there is a growing market opportunity in constrained transmission pockets in certain areas of the U.S., whereby installations of small and medium-sized distributed power units, such as Xonon-equipped gas turbines, can serve to alleviate bottlenecks. The Los Angeles basin and certain areas of New York are examples of regions that we believe could benefit from such a solution.

We are currently engaged with leading gas turbine manufacturers in adapting and marketing Xonon for the following gas turbines within the 1 to 15 MW size range:

Kawasaki M1A-13X (1.4 MW) – In December 2000, we entered into a collaborative commercialization agreement whereby Kawasaki could market and sell our Xonon Cool Combustion system as part of a generator package comprised of a 1.4 MW Kawasaki gas turbine. Kawasaki is currently accepting commercial orders for this generator package. We shipped our first commercial Xonon modules to Kawasaki in the third quarter of 2001 for a distributed generation project at a United States government healthcare facility in Massachusetts. These units were originally intended to be installed in late 2001, but the project was subsequently cancelled for reasons unrelated to either the Xonon technology or the economics of the project. The first commercial Xonon-equipped M1A-13X gas turbine entered operation at Sonoma Developmental Center in Eldridge, California in November 2002. This unit is operating as part of a co-generation system, which is providing supplemental heat and power for a 120-building campus. We and Kawasaki are working on additional projects for the Xonon-equipped M1A-13X which could enter service by late spring 2003.

As part of our joint marketing and sales strategy, we and Kawasaki continue to pursue initiatives to expand the penetration of Xonon-equipped gas turbines in the market. In February 2002, Kawasaki successfully petitioned the California Public Utilities Commission to expand qualification for self-generation financial incentives to include generating technologies up to 1.5 MW. As a result, California power projects considering installation of the Xonon-equipped M1A-13X may now qualify for a subsidy of up to 30 percent of project costs. Additionally, Kawasaki entered into a distribution agreement with Cummins Power Generation in December 2002, whereby Cummins will market, sell and service Kawasaki generator sets and power systems. This agreement creates an additional distribution channel for Xonon-equipped Kawasaki products.

GE10 (10 MW) – In May 2000, Alliance Power Inc. entered into a preliminary agreement with GE for the purchase of up to six 10 MW GE10 gas turbines equipped with the Xonon Cool Combustion system. Since that time, we and GE have pursued adaptation of Xonon for the GE10 under a collaborative commercialization agreement. System engineering and testing activities are underway in support of commercializing the Xonon-equipped GE10. We expect that successful completion of pre-launch test activities currently underway will lead to a full-scale engine test in the summer of 2003, a key milestone in our joint commercialization plan. Within the past two years, Alliance Power has completed three GE10 projects in Southern California. Each of these projects included four GE10 gas turbines, which were originally slated to include our Xonon technology. Because application engineering was not completed in time, conventional exhaust gas cleanup systems were used as the emissions control alternative. Alliance Power has informed us that they believe there are several additional opportunities similar to these for Xonon-based distributed generation projects using the GE10, in California and elsewhere.

Taurus 70 (7 MW) – In October 2001, we entered into an agreement with Solar for the development and adaptation of the Xonon Cool Combustion system to Solar’s Taurus 70 gas turbine. The scope of our work in this joint development effort, which commenced in the first quarter of 2002, includes the design of supplementary combustor components in addition to the Xonon module for the catalytic combustion system. In support of the ongoing program objectives, we delivered the first Xonon test module to Solar in December 2002 in preparation for initial testing in 2003.

Multi-combustor development (<15 MW) – In September 2001, the California Energy Commission, or CEC, granted us an award to help fund application of the Xonon Cool Combustion system to a small, multi-combustor gas turbine. The development effort for this program commenced in the first quarter of 2002. We have since completed the technology development phase and are assessing ongoing plans for the program.

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We also believe that Xonon combustion systems can be applied to larger gas turbine sizes. Larger gas turbines are used by public utilities and wholesale generating companies in base-load power generating facilities, as well as for meeting power requirements during periods of peak demand and in energy intensive industrial facilities for power generation and cogeneration. OEMs who manufacture gas turbines greater than 15 MW include Alstom Power, GE, Mitsubishi Heavy Industries, Pratt & Whitney Canada and Siemens Westinghouse.

We have performed initial development work and testing of Xonon for large gas turbines. Preliminary tests conducted with GE and another large gas turbine manufacturer have confirmed Xonon’s ability to reduce NOx to ultra-low levels in the high temperature and high pressure operating conditions of a large, industrial-type gas turbine.

As a result of the weak economic environment and challenging market conditions in the gas turbine industry, particularly for large gas turbines, our current focus is to complete commercial deployment of Xonon on small gas turbines. Consequently, we do not expect Xonon modules for large gas turbines to comprise a significant portion of our revenue in the near-term.

We spent $11,277,000, $14,622,000 and $14,229,000 on research and development and received revenue funding of research programs totaling $5,487,000, $5,523,000 and $4,795,000 during the years ended December 31, 2000, 2001 and 2002, respectively.

Competition

We expect Xonon-equipped gas turbines to compete with turbines outfitted with current emissions reduction technologies, including advanced flame-based combustion systems and exhaust cleanup systems. Advanced flame-based combustion systems are manufactured and provided by gas turbine OEMs as part of their turbine product line. These gas turbine OEMs also represent the potential customer base for our Xonon modules, and we expect to rely upon them to distribute Xonon-equipped turbines to end-users. While even the most effective of these systems have been unable to achieve today’s required ultra-low emissions levels without add-on exhaust cleanup systems, we expect that OEMs will continue to develop technologies that may compete with ours.

Third parties, including Cormatech, Engelhard, EmeraChem, Mitsubishi and Siemens, manufacture conventional exhaust cleanup systems. End-users generally purchase these systems directly from the manufacturers, through packagers, or from vendors of heat recovery steam generation equipment. Gas turbine OEMs generally do not function as intermediaries in these transactions and do not receive any economic value from the sale of exhaust cleanup systems.

The deployment of exhaust cleanup systems involves the combination of a gas turbine equipped with an advanced flame-based combustion system and the addition of downstream cleanup equipment, which is fitted onto the turbine to clean the exhaust. While cleanup systems have been proven to reduce NOx to ultra-low levels in most gas turbine applications, they add considerably to the square footage of the power generating facility, and can be costly to install and operate. For most downstream cleanup systems, other drawbacks may include a negative impact on turbine efficiency and the use of toxic substances, such as ammonia, to clean up the pollution after it has formed. These hazardous materials are often perceived by the public to create incremental health and safety risks in surrounding communities, resulting in local opposition to power projects and consequent increased cost.

Through pollution prevention instead of cleanup, we believe our Xonon Cool Combustion system presents a more practical and cost-effective approach to reducing NOx to ultra-low levels in the form of a compact system integrated within the gas turbine itself. The installation of a Xonon-equipped turbine offers power producers an environmentally friendly, one-step approach to reducing NOx that requires no additional labor or space. Xonon can be widely applied and requires no toxic chemicals. As a result, we believe Xonon could ease the challenges associated with siting, permitting, and operating new power sources, enabling broader deployment of gas turbines in densely populated areas.

Over time, the Xonon combustion system may also face competition from new entrants to the market for emissions reduction. New entrants may eventually develop competing technologies, catalytic or otherwise, that also achieve ultra-low emissions on a cost-effective basis. We are aware of other companies pursuing the development of ultra-low NOx technologies with gas turbine OEMs, including Precision Combustion, Inc., ALZETA Corporation and Cheng Power Systems.

We believe that our Xonon system has a competitive advantage over competing emissions control alternatives as a result of our unique pollution prevention approach, which has been proven to reduce NOx emissions to ultra-low levels. Relative to other ultra-low NOx technologies in development, we believe we have a significant first mover advantage

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in that we are offering a commercially available product, which has been proven in commercial installations. Further, we believe that our significant investment in the technology, combined with our established OEM relationships and substantial intellectual property base will continue to yield an advantage over new entrants to the market.

New Technology Development

Challenging market conditions in the gas turbine industry over the past two years have prompted us to intensify our focus on product diversification. As a result, in addition to expanding the commercial availability and adoption of our Xonon Cool Combustion system in gas turbine power applications, we are pursuing new product development efforts for emerging markets in other combustion-related applications that leverage our core Xonon catalyst technology.

In an ongoing effort to preserve air quality, initiatives to reduce emissions from transportation applications are gaining momentum on both the State and Federal level. We are focused on delivering innovative, cost-effective solutions to help meet these objectives.

Fuel Processing for Vehicular Fuel Cell Applications

In 2001, we were selected by the DOE for an $11,658,000 cost-shared contract to help fund the development of a compact fuel processor capable of operating on multiple fuels for use with fuel cells in transportation applications. The 48-month development effort commenced in October 2001 in association with the National Fuel Cell Research Center, whom we have engaged as a sub-contractor. The objective of this development program is to deliver a compact fuel-flexible fuel processor prototype to be used with Proton Exchange Membrane, or PEM, fuel cells in an automotive application. The availability of a cost-effective, compact system that can convert conventional fuels, such as gasoline, to hydrogen to power fuel cells remains one of the barriers to widespread commercialization of fuel cell use in automobiles.

Diesel NOx Reduction

We are also pursuing the application of our core Xonon technology for NOx reduction in diesel engines.

In 2001, we commenced development of a prototype diesel fuel processor designed to enable medium and heavy-duty diesel trucks to meet stringent EPA emissions requirements which will be phased in between 2007 and 2010. Our system is designed to significantly improve NOx storage and release, or NOx trap, technology. While current NOx trap technology has been proven to reduce NOx emissions in diesel engines, certain operating constraints persist, including significant performance limitations and a negative impact on fuel economy. We believe that the use of our technology will solve these issues by enabling enhanced regeneration of NOx traps for improved performance and fuel efficiency. The technical objective of this combined system is to reduce NOx by 90 to 95%. In December 2002, we completed the assembly of two prototype diesel fuel processors. An agreement is in place to conduct an on-engine demonstration of our technology with a major diesel engine manufacturer in 2003.

We are also exploring the technical potential for a retrofit application of our diesel technology. The retrofit market is driven by an emerging need to reduce NOx emissions from diesels in urban areas with poor air quality and could include mobile, stationary and off-road diesels. We plan to further test the feasibility of our technology for such an application in 2003.

Manufacturing

In October 2002, we brought on-line a new commercial manufacturing facility in Gilbert, Arizona to manufacture both prototype and production Xonon modules. We have sufficient capacity in this facility to build both development and production Xonon modules to satisfy our needs for the foreseeable future. We plan to retain all proprietary manufacturing within our facilities and to outsource the manufacturing of non-critical components to third party suppliers.

We expect the Xonon modules to be returned to us at the end of their useful life. We expect to reclaim, reuse or recycle most components of the module, particularly the precious metals palladium and platinum, in order to reduce our costs and protect ourselves against the volatility of precious metal prices.

In the fourth quarter of 1999, we earned ISO 9001 Registration from Underwriters Laboratories, Inc. for the design and manufacture of Xonon modules at our Mountain View, California facility. We also earned IS0 9001 Registration for our new Gilbert, Arizona manufacturing operations in the fourth quarter of 2002.

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Intellectual Property

We rely on a combination of patents, trade secrets, trademarks, copyrights and contracts to protect our proprietary technology, including the Xonon Cool Combustion system. Our intellectual property strategy is to identify key intellectual property developed by us in order to protect it in a timely and effective manner, and to use and assert such intellectual property to our competitive advantage in the catalytic combustion business. An objective of our intellectual property strategy is to enable us to be first to market with proprietary technology and to sustain a long-term technological lead in the market.

We use patents as the primary means of protecting our technological advances and innovations. We have adopted a proactive approach to identifying patentable inventions and securing patent protection through the timely filing and aggressive prosecution of patent applications. Our employees participate in a comprehensive invention disclosure program involving preparation of written invention memoranda and preservation of supporting laboratory records. Patent applications are filed in various jurisdictions internationally, which are carefully chosen based on the likely value and enforceability of intellectual property rights in those jurisdictions and to strategically reflect our anticipated major markets.

As of the date of this filing, we either owned (exclusively or jointly), held exclusive license rights from third parties for, or held license rights from affiliates for 25 U.S. patents and 12 pending applications and the international counterparts associated with them. These patents and pending applications cover technologies related to our proprietary Xonon Cool Combustion technology which encompasses system designs, catalyst compositions, new materials, manufacturing processes, operating techniques, methods of control, combustor components and combustor system designs. Additionally, three of these pending applications cover our NOx control strategies for application to diesel engines.

We actively monitor our patent position, technical developments and market activities of our competitors. We believe that our growing patent portfolio, especially when coupled with a strong enforcement program, can provide us with a significant advantage over our competitors. We plan to vigorously defend our intellectual property.

Portions of our know-how are also protected as trade secrets and supported through contractual agreements with our employees, suppliers, partners and customers. We aggressively protect our intellectual property rights in our collaboration agreements with a view to capturing maximum value from our products in our markets and ensuring a competitive advantage.

Human Resources

As of December 31, 2002, we employed 85 persons. In February 2003, we eliminated 14 positions in an ongoing effort to reduce our administrative costs. None of our employees is represented by a labor union. We believe our relations with our employees are good.

Item 2. PROPERTIES

Our research and development facility, consisting of four leased buildings covering approximately 85,000 square feet, is located in Mountain View, California. Our lease expires on December 31, 2003, with a five-year option for renewal. We currently sublease approximately 28,000 square feet at this site. Management is exploring various alternatives regarding this space including extending the lease term on a portion of the 85,000 square feet currently occupied.

In the fourth quarter of 2001, we expanded our manufacturing operations and relocated certain administrative functions to a new facility in Gilbert, Arizona under a lease of approximately 43,000 square feet. In March 2002, we purchased this building. We currently sublease approximately 2,000 square feet of this building.

We lease from the City of Santa Clara, California a site which houses the field demonstration module of our Xonon Cool Combustion system. The lease of this space at Silicon Valley Power expires on February 28, 2004.

We lease an additional 5,300 square foot facility in Scottsdale, Arizona, which is entirely subleased. This lease expires in August 2003.

We believe that our existing facilities are adequate for our present needs.

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Although we may be subject to litigation from time to time in the ordinary course of our business, we are not currently a party to any material legal proceeding.

There were no matters submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year covered by this report.

PART II

Common Stock

Catalytica Energy Systems, Inc. common stock is listed on the Nasdaq National Market under the symbol “CESI.” The following table sets forth high and low trading prices per share for our common stock as quoted on the Nasdaq National Market during each quarter of 2001 and 2002. Such prices represent inter-dealer prices and do not include retail mark-ups or mark-downs or commissions and may not represent actual transactions.

As of March 26, 2003, there were 779 holders of record of our common stock, as shown on the records of our transfer agent. The number of record holders does not include shares held in “street name” through brokers.

Dividend Policy

We have never paid cash dividends on our common stock or any other securities. We anticipate that we will retain any future earnings for use in the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable future.

Shareholder Rights Plan

On January 29, 2002, our Board of Directors adopted a Shareholder Rights Plan. Under the plan, we distributed Preferred Stock Purchase Rights as a dividend at the rate of one Right for each share of our common stock held by stockholders of record on February 20, 2002 (the “Record Date”). The Board of Directors also authorized the issuance of Rights for each share of common stock issued after the Record Date, until the occurrence of certain specified events. The Shareholder Rights Plan was adopted to provide protection to stockholders in the event of an unsolicited attempt to acquire us. Each Right will entitle the registered holder to purchase from us one one-thousandth of a share of Series A Participating Preferred stock at an exercise price of $45, subject to adjustment. We have authorized 5,000,000 shares of Series A preferred stock for issuance pursuant to this plan.

The Rights are not exercisable until triggered by certain conditions including the acquisition of beneficial ownership of 15% of our common stock. However, Morgan Stanley Capital Partners III, L.P., and its affiliates may

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acquire up to 21.5% of our common stock without triggering the Rights. If the Rights are triggered then each holder of a Right which has not been exercised (other than Rights beneficially owned by the Acquiring Person) will have the right to receive, upon exercise, voting Common Shares having a value equal to two times the Purchase Price.

We are entitled to redeem the Rights, for $0.001 per Right, at the discretion of our Board of Directors, until certain specified times. We may also require the exchange of Rights, under certain additional circumstances. We also have the ability to amend the Rights, subject to certain limitations.

Securities Authorized for Issuance Under Equity Compensation Plans

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains selected consolidated financial data as of and for each of the five years ended December 31, 1998, 1999, 2000, 2001 and 2002 that were derived from our consolidated financial statements, which were audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data are qualified by reference to, and should be read in conjunction with, our financial statements and the notes to those consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. No cash dividends were declared in any of the years presented.