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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý                                                                    | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2007                         
|o                                                                    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                    to

Commission file number: 001-14176

EVERGREEN ENERGY INC.(Exact Name of Registrant as specified in its Charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                |  | 84-1079971(IRS Employer
Identification No.)
|------------------------------------------------------------------------------------- |  | -------------------------------------------
|1225 17th Street, Suite 1300
Denver, Colorado(Address of Principal Executive Offices) |  | 80202(Zip Code)                            

Registrant's Telephone Number, including area code:(303) 293-2992

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

|Title of Each Class           |  | Name of Exchange on Which Registered
|----------------------------- |  | ------------------------------------
|Common Stock, $.001 par value |  | NYSE Arca                           

Securities
registered pursuant to Section 12(g) of the 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 o    No ý

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

Indicate by check mark whether 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 ý    No o

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. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the common stock held by non-affiliates of the registrant was $300,753,320 computed by reference to the closing price of
the common stock on June 30, 2007, the last trading day of the registrant's most recently completed second fiscal quarter.

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

|Class                         |  | Outstanding at March 18, 2007
|----------------------------- |  | -----------------------------
|Common Stock, $.001 par value |  | 84,347,410 shares            

DOCUMENTS INCORPORATED BY REFERENCE

|Document                                               |  | Parts Into Which Incorporated
|------------------------------------------------------ |  | -----------------------------
|Definitive Proxy Statement for the 2008 Annual Meeting |  | Part III                     



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TABLE OF CONTENTS



|           |  |                                                                                                |  | Page No.
|---------- |  | ---------------------------------------------------------------------------------------------- |  | --------
|           |  | PART I                                                                                         |  |         
|Item 1.    |  | Business                                                                                       |  | 4       
|Item 1A.   |  | Risk Factors                                                                                   |  | 12      
|Item 1B.   |  | Unresolved Staff Comments                                                                      |  | 25      
|Item 2.    |  | Properties                                                                                     |  | 25      
|Item 3.    |  | Legal Proceedings                                                                              |  | 26      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                            |  | 26      
|           |  | PART II                                                                                        |  |         
|Item 5.    |  | Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 27      
|Item 6.    |  | Selected Financial Data                                                                        |  | 30      
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 31      
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 50      
|Item 8.    |  | Financial Statements and Supplementary Data                                                    |  | 50      
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures          |  | 51      
|Item 9A.   |  | Controls and Procedures                                                                        |  | 51      
|Item 9B.   |  | Other Information                                                                              |  | 56      
|           |  | PART III                                                                                       |  |         
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                         |  | 57      
|Item 11.   |  | Executive Compensation                                                                         |  | 57      
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 57      
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                      |  | 57      
|Item 14.   |  | Principal Accountant Fees and Services                                                         |  | 57      
|           |  | PART IV                                                                                        |  |         
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                     |  | 58      
|SIGNATURES |  | 62                                                                                            

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are not statements of historical fact and may involve a number of
risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may
also relate to our future prospects, developments and business strategies.

We
have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "will," "plan," "predict," "project" and similar terms and phrases, including references
to assumptions, in this Annual Report on Form 10-K to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning
future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our
control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause
actual results to differ materially from our forward-looking statements:



You
should keep in mind that any forward-looking statement made by us in this Annual Report on Form 10-K or elsewhere speaks only as of the date on which we make it.
New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the
forward-looking statements in this Annual Report on Form 10-K after the date of this filing, except as may be required by law. In light of these risks and uncertainties, you should
keep in mind that any forward-looking statement made in this Annual Report on Form 10-K or elsewhere might not occur.

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PART I

ITEM 1.    BUSINESS

Overview

In this Annual Report on Form 10-K, we use the terms "Evergreen Energy," "we," "our," and "us" to refer to Evergreen Energy Inc. and its
subsidiaries. All references to K-Fuel, K-Fuel®, K-Fuel process, K-Fuel refined coal, K-Fuel refineries,
K-Directsm, K-Fuel Plants, K-Direct plants, K-Fuel facilities and K-Direct facilities refer to our patented process and
technology explained in detail throughout this Annual Report on Form 10-K. All references to years, unless otherwise noted, refer to our fiscal year, which ends on
December 31st.

We
were founded in 1984 as a clean coal company focused on developing our K-Fuel process. Our goal is to leverage a vertically integrated, coal-based platform to
deliver clean, efficient and affordable energy. We intend to meet the specific needs of public utility, industrial and international market customers by providing economical solutions to environmental
emission standards compared to other emission standard alternatives. Our proprietary K-Fuel process uses heat and pressure to physically and chemically transform high moisture,
low-Btu coals, such as sub-bituminous coal and lignite, into a more energy efficient, lower-emission fuel.

Coal
is the cheapest and most abundant source of fuel for generating America's electricity. Many utilities and industrial users are dependent upon coal. While the United States enjoys
economical and plentiful reserves of high moisture, low-Btu coals with heat values of less than 9,000 Btus per pound, the reserves of high-grade coals are declining, and
environmental issues are a concern. Moreover, many coal-fired power generating facilities, including industrial and institutional facilities, generally burn coal that is 11,000 Btus or
greater. Our goal is to make those low-grade coals more economical and environmentally compliant in order to meet the demand for energy in an optimal fashion.

The
current K-Fuel process applies heat and pressure to low-rank coals, such as those found in the northern Powder River Basin with a high water content, to
reduce moisture from approximately 30% in the low-Btu coal to 8% to 14% in our K-Fuel refined coal. As a result, the heat value is boosted by 30% to 40%. The increase is
variable depending on the type of coal we process. We believe the process results in increased efficiency of the fuel needs in power generating facilities, industrial and institutional facilities.
Further, the K-Fuel process removes a significant amount of impurities from the low-Btu coal which we believe will allow for the power generating industry to economically
comply with increasingly stringent air emission standards and environmental regulations. The pre-combustion refinement of raw coal into K-Fuel refined coal reduces up to 70% of
the mercury content, and upon combustion, sulfur dioxide and nitrous oxides are reduced. Our analysis also shows that burning K-Fuel refined coal with its increased efficiency will reduce
carbon dioxide emissions.

We,
along with our engineering consultant, Bechtel Power Corporation, have completed the modifications and improvements of the design and efficiency of the equipment used in the
K-Fuel process. Bechtel and Evergreen's operations team at Fort Union completed successful testing of new operational systems that will support construction of future K-Fuel
refineries, including enhanced standard processing tower design. This work signals that we and Bechtel have resolved the most substantive technical challenges to scaling and fully commercializing our
production process. In February 2007, we expanded our contractual relationship with Bechtel to assist with future designs of additional K-Fuel plants we may build or license, including any
K-Fuel facilities located at coal-fired power generating plants, which we refer to as K-Direct facilities. On September 19, 2007, we amended and restated our
umbrella agreement with Bechtel Power Corporation. Through this new program management agreement, we committed to provide Bechtel with $1 billion in construction contracts through 2013. This
restated agreement increases the scope of engineering, procurement and construction services which may be performed by Bechtel. We intend to use Bechtel's services to

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oversee
both technical development and implementation of all new facilities and existing plants, including both K-Fuel and K-Direct plants.

The
Fort Union plant in Wyoming's Powder River Basin, which was our first plant to implement the current K-Fuel process and has accomplished virtually all of the goals and
objectives we
set forth for this site, except for continuous production. Most notably, as a result of operations at the Fort Union plant, we have:



For
the reasons discussed below, we have chosen to suspend operations at our Fort Union plant and mine site. This will enable us to focus on future K-Fuel or
K-Direct facilities by redirecting constrained resources, both capital and human, to focus on the commercialization of our process. Bechtel has completed the enhanced standard processing
tower design based upon results of the testing completed by us at the Fort Union plant. Additionally, suspending production at this site will further enable us to reduce our cash expenditures. If the
need arises, we are positioned to resume operations at the Fort Union plant to demonstrate the technology or to provide K-Fuel refined coal for test burns at utilities or other industrial
sites. Alternatively, we are evaluating and anticipate redeploying some of the equipment to a future K-Fuel facility site. We recorded an asset impairment charge of $109.5 million
related to the Fort Union plant and mine site as of December 31, 2007.

Further,
on January 8, 2008, following successful test results for product performance and stability, our subsidiary, Evergreen Energy Asia Pacific Corp., and Sumitomo Corporation
have agreed with a major Indonesian mining group to proceed with development of engineering specifications, economic evaluation, marketability analysis and further coal tests for a 1.5 million
ton per year K-Fuel plant on the Indonesian island of Kalimantan, with the intent to expand the plant capacity in future years. We believe that some of the key benefits of this terminal
facility are as follows:



This
project contemplates a K-Fuel terminal facility with a design capacity of approximately 1.5 million tons per year, which is approximately twice the size of our
Fort Union plant and the minimum optimal size for a K-Fuel plant, based upon our and Bechtel's redesigned plant. Bechtel has committed to assisting us in the development of this project in
addition to the engineering, procurement and construction services to which it has previously committed.

Effective
February 2007, we entered into an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of carbon emissions and
formed a

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subsidiary,
C-Lock Technology, Inc. The agreement provides us with an exclusive worldwide sub-license to a technology to standardize the measurement of carbon emissions
in all business sectors. The measurement system and procedures are transparent, repeatable and verifiable. Through C-Lock Technology, Inc., we intend to market the proprietary
measurement system and procedures to quantify, certify, and verify carbon dioxide emissions. We expect the market in global carbon credit trading to evolve and grow.

Segments

During the quarter ended September 30, 2007, we re-evaluated our segments and have expanded our segment presentation to four segments to better
reflect how our results of operations are now evaluated and allocations of capital resources are determined. The Plant segment primarily represents revenue and costs related to our Fort Union plant
and our mine site in Gillette, Wyoming.
The Mining segment primarily represents our mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility and the blending facility. The
C-lock segment reflects the operations related to our worldwide sub-license of a technology to standardize the measurement of carbon emissions in energy and agricultural
related activities. The Technology segment is comprised of all other operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our
headquarters and related operations, activities of Evergreen Energy Asia Pacific and KFx Technology, LLC, which holds the licenses to our technology. Our Technology segment allocates support
costs to our other segments, they are generally allocated on a percentage basis based either on number of employees or on total operating expenses plus capital expenditures. We will continue to
evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.

Business Strategy

The total annual coal consumption in the United States is approximately 1 billion tons per year. The principal elements of our long-term
strategy are to build, own and operate K-Fuel and K-Direct facilities and to license our K-Fuel technology to third parties, if appropriate, through a combination
of organic growth, acquisitions and joint ventures. In the near-term, we plan to primarily focus on the following:





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Competitive Strengths

We believe we are uniquely positioned in the energy market as a result of the following strengths:



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Business History

Over the past 24 years, we have obtained multiple patents for different versions of the K-Fuel technology using a variety of methods to apply
heat and pressure to process high moisture coal feedstocks. We have patents or patent applications for the K-Fuel technology issued or pending in the United States and various foreign
countries. As we continue to develop and make enhancements to the K-Fuel process, we intend to expand our patent coverage.

During
the last five years we have been focused on the design, construction and operation of our Fort Union plant, which is the first plant utilizing the current version of our
technology. As previously stated, the Fort Union plant has realized virtually all of the goals and objectives except for continuous production, which we had set forth and we have chosen to suspend
operations at this site. Also, during the last five years we have completed numerous evaluations to further test and improve our K-Fuel refined coal and process. During the years ended
December 31, 2007, 2006 and 2005, our research and development costs were approximately $876,000, $1.4 million and $1.6 million, respectively.

Additionally,
on April 3, 2006, we completed the acquisition of Buckeye Industrial Mining Co. for a total purchase price of $39.1 million, including cash paid, stock
issued, liabilities assumed and costs incurred in the acquisition. Buckeye's primary business is to mine, process, blend and sell high quality coal to electric utilities, industrial and institutional
end users. Buckeye also operates one of the largest ash disposal facilities in the state of Ohio, disposing of up to one million tons of dry and conditioned ash per year. We believe the acquisition
has added value through access to Buckeye's established markets, infrastructure and coal reserves. In addition to sustained operation cash flow, this acquisition includes an experienced coal marketing
and mining team.

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We
were founded in 1984 as a clean coal company focused on developing our K-Fuel process. We incorporated under the laws of the state of Delaware in 1988. Our principal
executive offices are located at 1225 17th Street, Suite 1300, Denver, Colorado 80202, and our telephone number is (303) 293-2992.

Competition

Our K-Fuel refined coal is a coal with characteristics of low-moisture, high-Btu content and low sulfur dioxide, nitrogen
oxides and mercury emissions. As such, and upon achieving continuous production at a future K-Fuel or K-Direct facility, the known direct competitors for K-Fuel refined coal include other
coal upgrading processes, other high Btu coal, low sulfur coal and advanced pollution control technologies. The indirect competition to K-Fuel refined coal includes electrical generation
from natural gas, nuclear fuel, oil, wind, bio-fuels, and other renewable energy sources. Over the past two years, pricing trends for a number of these alternatives have enhanced the
competitive position of K-Fuel.

Potential
customers could choose to install pollution equipment instead of using our K-Fuel refined coal and/or choose to inject additives to reduce emissions. These
alternatives include equipment such as low-nitrogen oxide burners, over-fire air systems, selective catalytic reduction systems, sulfur scrubbers, fabric filters, electrostatic
precipitators, mercury control technology, or other equipment and adding limestone or other chemicals to combustion and waste stream. In contrast to our K-Fuel refined coal, most of these
technologies require a significant investment of capital by the customer and impose a parasitic load on the plant, thereby reducing the salable electricity produced from the affected unit.

We
believe we have in our C-Lock technology a first-of-its-kind web-based platform that accurately measures greenhouse gases
emissions and certifies these environmental improvements as carbon credits there are other companies that have developed other systems that measure greenhouse gases and certify carbon credits. Our
potential customer base could choose to use these other measuring systems instead of ours.

Intellectual Property

Our success depends in part on our ability to protect our intellectual property and to avoid infringement of the intellectual property of third parties. The
patents which cover earlier versions of our technology are near their expiration dates. Patents which cover newer versions of our technology will not expire until 2018 through 2024. Our most recently
issued patent covers most of the aspects of our K-Fuel process as it is currently conducted. Additional claims have been filed at the U.S. Patent and Trademark Office and the
application is pending. As we make modifications and improvements to our proprietary process, we continue to evaluate our patent protection. As a result, we anticipate filing for additional patents in
the future.

Customers

As of December 31, 2007, three customers from our mining segment accounted for 27%, 18%, 13% and 13% of total accounts receivables, respectively, while two
customer in our mining segment, accounted for 32% and 13% of total revenues. We believe the loss of any one of these customers would not have a material adverse effect on our financial position.

Buckeye
has presold, for delivery in 2008, approximately 500,000 tons of coal pursuant to long-term contracts, which expire through 2012, at prices tied to various published
indices. We expect these prices to range from $35 to $59 per ton in 2008, based on varying characteristics of the coal, including Btus, ash content, and so forth. Buckeye had presold 400,000 tons for
delivery in 2007 at prices ranging from $34 to $55 per ton. Pursuant to existing contracts, Buckeye has presold approximately 800,000 tons of coal for delivery through 2012 at pricing which are tied
to various

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indices.
In addition, Buckeye has committed to deliver, in 2008, approximately 200,000 tons of coal pursuant to customer purchase orders at prices tied to various indices, with expected pricing
ranging from $39 to $74 per ton. The total 2008 commitments of 700,000 represents less than half of Buckeye's expected 2008 production.

Environmental Regulation Affecting our Market

We believe that existing and proposed legislation and regulations could impact fossil fuel-fired, and specifically coal-fired, power
generating facilities. According to the U.S. Environmental Protection Agency, or EPA, power generation emits substantial levels of sulfur dioxide, nitrogen oxides, mercury and carbon dioxide into the
environment. Regulation of these emissions can affect the market for our K-Fuel refined coal by imposing limits and caps on fossil fuel emissions. Regulation of carbon dioxide can also
affect our subsidiary, C-Lock Technology. The most significant, existing national legislation and regulations affecting our K-Fuel market include the Clean Air Act, the Clean
Air Interstate Rule and the Clean Air Mercury Rule, which are described further below. While carbon dioxide emissions are not regulated at the national level at this time, a U.S. Senate committee
passed emissions reducing legislation in December 2007 that should continue moving forward in the 2008 legislative session. It is highly unlikely that national legislation will be passed in 2008
though future legislative sessions and presidential administrations seem more likely to do so within the next several years.

In
addition, the K-Fuel market will be affected by additional national policies including the EPA's Nitrogen Oxide State Implementation Plan Call, the EPA's National Ambient
Air Quality Standards for ozone and fine particulate matter, and the Regional Haze Rules, which requires emission controls for industrial facilities emitting air pollutants that reduce visibility by
causing or contributing to regional haze.

State
and regional policies will also impact our market. The Regional Greenhouse Gas Initiative requires reduction in carbon dioxide emissions from electric generating units, beginning
in January 2009 in 10 northeastern states. The state of California has adopted a stringent greenhouse gas policy that will affect coal-fired electricity generated in and imported into the
state. And the Western Climate Initiative, a coalition of 7 western states, is working on a regional, economy-wide greenhouse gas reduction program. Additionally, states are implementing
emission reduction policies more stringent than national policy, such as, requiring more stringent mercury reduction than the EPA's Clean Air Mercury Rule and Renewable Portfolio Standards requiring
robust renewable electricity generation.

The
following briefly describes the most significant existing national laws and regulations affecting the market for our K-Fuel refined coal.



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Environmental Regulation Affecting the Construction and Operation of our Plants and Mining of Coal

As a general matter, we are subject to a number of state and federal regulations that (i) seek to limit the amounts of certain emissions into the
environment, (ii) articulate the disposal of certain potentially hazardous materials, and (iii) impose certain employee safety requirements upon us. As we expand our operations we may
become subject to more regulation. For example, if we build additional plants we may install coal-fired boilers, which are subject to more permitting requirements and more environmental
regulation than gas-fired boilers. Through our mining activities we are subject to additional regulations including the Coal Mine Health and Safety Act of 1969, the Federal Mine Safety and
Health Act of 1977, the Black Lung Benefits Revenue Act of 1977 and other regulations that seek to protect the health and safety of employees.

In
the United States, K-Fuel refined coal is not expected to be subject to unusual levels of local, state or federal regulation with respect to its transportation and
distribution. However, any future production plants will require numerous permits, approvals and certificates from appropriate federal, state and local governmental agencies before construction of
each facility can begin and will be required to comply with applicable environmental laws and regulations (including obtaining operating permits) once facilities begin production. The most significant
types of permits that are typically required for commercial production facilities include an operating and construction permit under the Clean Air Act, a wastewater discharge permit under the Clean
Water Act, and a treatment, storage and disposal permit under the Resource Conservation and Recovery Act. Some federal programs have delegated regulatory authority to the states and, as a result,
facilities may be required to secure state permits. Finally, the construction of new facilities may require review under the National Environmental Policy Act, or a state equivalent, which requires
analysis of environmental impacts and, potentially, the implementation of measures to avoid or minimize these environmental impacts.

Any
international K-Direct or K-Fuel plants will also be subject to various permitting and operational regulations specific to each country. International
initiatives, such as the Kyoto Protocol, are expected to create increasing pressures on the electric power generation industry on a world-wide basis to reduce emissions of various
pollutants, which management expects will create additional demand for our products and services.

In
2004, Congress passed tax credits for refined coal within the American Jobs Creation Act. To qualify for the tax credit, the refined coal must realize a reduction of at least 20% in
nitrogen oxide emissions and at least 20% in either sulfur dioxide or mercury emissions and have an increase in market value over the comparable coal of at least 50%. Based upon our testing to date,
we believe that K-Fuel refined coal meets these requirements and that our future K-Fuel plants will be eligible for the credit if they are operational by January 1,
2009. However, due to the fact that there are no K-Fuel or K-Direct facilities under construction, it is unlikely that any will be operational by January 1, 2009 and be
in a position to take advantage of these credits, unless extended by Congress. Generally, the refined

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coal
credit, escalated annually, will be earned for each ton produced over a ten-year period from the date the plant is placed in service.

Employees

At March 20, 2008, we had 207 full-time employees.

Access to Information

Our web site address is www.evgenergy.com. We make available, free of charge, on the Investor Info section of our web site our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable
after these reports are electronically filed with or furnished to the Securities and Exchange Commission. We also make available through our web site other reports electronically filed with the SEC
under the Securities Exchange Act of 1934, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. Additionally, we make available press
releases, presentation material including slides and other investor information. We do not intend for information contained in our web site to be part of this Annual Report on
Form 10-K.

ITEM 1A.    RISK FACTORS

In addition to risk and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry
and our company could materially impact our future performance and results. We have provided below a list of these risk factors that should be reviewed when considering our business and securities.
These are not all the risks we face, and other factors currently considered immaterial or unknown to us may impact our future operations.

Business Risks

We have a history of losses, deficits, and negative operating cash flows and will likely continue to incur losses in the future. Such
losses may impair our ability to pursue our business plan.

We
expect to incur operating losses and continued negative cash flows from operations for the foreseeable future. We have made, and will continue to make, substantial capital and other
expenditures before we will have sufficient operating income and cash flow to recover our investments. We are not able to accurately estimate when, if ever, our cash flows from operating activities
will increase sufficiently to cover these investments. Further, we may not achieve or maintain profitability or generate cash from operations in future periods. Our working capital (the amount by
which our current assets exceed our current liabilities), accumulated deficit, net loss and cash (used in) provided by operating activities are as follows:

December 31,2007

2006

2005(in thousands)Working capital

$
45,580

$
79,156

$
19,910Accumulated deficit


(408,073
)

(203,397
)

(151,870
)Net loss


(204,676
)

(51,527
)

(23,313
)Cash used in operating activities

$
(51,581
)
$
(30,435
)
$
(12,071
)


We have substantial capital requirements and, as a result, we have been and continue to be dependent on financing activities or sales of our equity securities to
fund our operating costs.

As
a result of negative cash flows from operations, we have been and continue to be dependent on financing activities and sales of our equity securities to fund the operating and
substantial capital costs associated with our business. Our need for additional capital may further increase as we continue to

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pursue
our vertical integration strategy. Our success is dependent on our ability to utilize existing resources and to generate sufficient cash flows to meet our obligations on a timely basis, to
obtain financing or refinancing as may be required, to attain profitability, or a combination thereof. Depending on our future operations and the conditions of the capital markets, we may not be able
to continue to raise additional capital on terms acceptable to us or at all. A lack of adequate financing may adversely affect our ability to pay our existing indebtedness, pursue our business
strategy, respond to changing business and economic conditions and competitive pressures, absorb negative operating results and fund our continuing operations, capital expenditures or increased
working capital requirements.

We have a limited operating history as an energy solutions company, and our business and prospects should be considered in light of the risks and difficulties
typically encountered by a company with a limited operating history.

You
should consider our business and prospects in light of the risks and difficulties typically encountered by a company with a limited operating history. The specific risks include
whether we will be able to:



We
may not be successful in addressing these and other risks. As a result, our financial condition, results of operations and cash flows may be adversely affected.

We rely on key personnel and if we are unable to retain or attract qualified personnel, we may not be able to execute our business plan.

Our
success is currently dependent on the performance of a small group of senior managers, key technical personnel and independent contractors that have a wide range of technical
experience and expertise in coal refining, coal thermal upgrading, thermal processing, coal gasification and coal liquification. In addition, our business strategy will require us to attract and
retain a substantially greater number of qualified personnel and/or hire additional contractors. The inability to retain key managerial and technical personnel or attract and retain additional highly
qualified managerial or technical personnel in the future could harm our business or financial condition.

Our acquisition activities may not be successful.

As
part of our vertical integration business strategy, we may make acquisitions of businesses and properties. However, suitable acquisition candidates may not be available on terms and
conditions we

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find
acceptable. Further, acquisitions pose substantial risks to our financial condition, results of operations and cash flows. In pursuing acquisitions, we compete with other companies, many of which
have greater financial and other resources to acquire attractive companies and properties. Even if future acquisitions are completed, the following are some of the risks associated with acquisitions:



Competition from other companies in the clean coal and alternative fuel technology industries, including competition resulting from deregulation in the United
States power industry, could adversely affect our competitive position.

Competition
in the clean coal, alternative fuel and emission-reducing equipment industries could impact our ability to generate revenue from our K-Fuel process. Many of these
companies in the clean coal, alternative fuel technology and emission-reducing equipment industries have financial resources greater than ours. Providers of alternative or competing technologies in
these industries may be subject to less regulation, or alternatively, may enjoy subsidies that provide them with increased financial strength, or make their products or services more attractive to
energy consumers. Due to any of these competitive advantages, our existing and future competitors may be able to offer products more competitively priced and more widely available than ours. These
companies also may have the resources to create new technologies and products that could make our process and products obsolete. Our future revenues may depend on our ability to address competition in
these industries. In addition, deregulation in the United States power generating industry may result in increased competition from other producers of energy-efficient coal products, other clean fuel
sources, and other products, services and technologies designed to provide environmental and operating cost benefits similar to those which we believe are available from our K-Fuel refined
coal. In turn, this could result in lower margins for our product.

Overseas development of our business is subject to international risks, which could adversely affect our ability to license, construct or operate profitable
overseas plants.

We
believe a portion of the growth opportunity for our business lies outside the United States. Doing business in foreign countries may expose us to many risks that are not present
domestically. We lack significant experience dealing with such risks, including political, military, privatization, technology piracy, currency exchange and repatriation risks, and higher credit risks
associated with customers. In addition, it may be more difficult for us to enforce legal obligations in foreign countries, and we may be at a disadvantage in any legal proceeding within the local
jurisdiction. Local laws may also limit our ability to hold a majority interest in the projects that we develop.

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K-Fuel Process Risks

We faced technical and operational issues with improving capacity utilization at our Fort Union plant prior to suspending operations at
the plant. These technical and operational problems may adversely impact our ability to operate or develop future K-Fuel or K-Direct facilities, resulting in delays in
achieving full scale commercial production of our K-Fuel refined coal.

Research
and development is an iterative process and our K-Fuel process has been evolving for approximately 25 years with the most recent material modification being
the integration of the Sasol-Lurgi proprietary coal processing equipment with our patented technology, which started in 2003.

Our
Fort Union plant is a third generation facility developed for this purpose. The first facility was a research and development plant that currently serves as our research laboratory.
The second facility was a commercial demonstration plant that we constructed with a joint venture partner and commenced operations in 1998. In June 1999, our joint venture partner suspended production
at the plant due to its strategic restructuring. Thereafter, we sold our interest in the plant to our joint venture partner and in September 2002, the major equipment at the plant was purchased by a
third party and removed from the site. As part of the continued development of the K-Fuel process, we analyzed the operations of this plant and some of the problems that we encountered
with respect to operations and product quality and made modifications to the K-Fuel process that we believe addressed these issues. We built upon this knowledge base in designing and
constructing the Fort Union plant.

We
faced technical and operational problems in attempting to achieve commercial production of K-Fuel at our Fort Union plant and have decided to suspend further operations at
the plant. Problems we have encountered include cost overruns, delays, technical issues, availability of workers and contractors and weather. We may encounter similar problems at any future facilities
we are able to build. Additionally, any future facilities may encounter the following additional problems:



Our
ability to effectively operate and develop K-Fuel and K-Direct facilities may be harmed to the extent these and other technical or operational problems
materialize. Should we be unable to effectively operate and develop K-Fuel or K-Direct facilities, our ability to generate revenues and profits from our existing operations as
well as the potential for future facilities and future licensing opportunities may be negatively impacted. In particular, because we were unable to consistently operate our Fort Union plant for
sustained periods of time to produce commercial quantities of K-Fuel refined coal, it will likely be more difficult for us to enter into arrangements with customers for their regular
purchase of K-Fuel refined coal at future facilities or for us to finance the construction of additional K-Fuel plants or a K-Direct plant.

We do not know if K-Fuel refined coal is commercially viable.

While our Fort Union plant previously produced limited amounts of K-Fuel refined coal, we do not know whether K-Fuel refined coal can be
produced and sold on a commercial basis in a cost effective manner after taking into account the cost of the feedstock, our production costs and the cost of transportation. As our Fort Union plant was
not able to achieve full scale commercial production, we have not yet developed an efficient cost structure. We are currently using the knowledge base developed at our Fort Union plant to understand
our pricing and costs, as well as the qualities of the product when used in K-Fuel test burns, and intend to leverage this knowledge base when constructing any additional
K-Fuel plants or any K-Direct plants. We experienced technical problems with respect to

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the
K-Fuel refined coal produced at our Fort Union plant, including coal dusting. If we fail to adequately address these technical problems to the extent they occur at future
K-Fuel or K-Direct facilities, or any other unforeseen problems that may occur in the future, it could make K-Fuel refined coal more expensive to transport and
store, and therefore more expensive to burn. Failure to address both known and unforeseen technical challenges of K-Fuel refined coal, obtain feedstock in sufficient quantity and at
acceptable prices and to arrange for transportation services at reasonable prices, may materially and adversely affect our business, results of operations and financial condition.

Construction of future K-Fuel or K-Direct facilities will require substantial lead time and significant additional financing.

We do not have any definitive contracts to construct additional K-Fuel facilities or K-Direct facilities. To the extent that we identify
appropriate sites for future K-Fuel plants or agree with utilities or other businesses to construct K-Direct facilities, we will then be required to begin a lengthy permitting
and construction process. We estimate that it could take at least six months or longer to obtain necessary permits and approvals and that, depending on local circumstances, the required time could be
much longer. Thereafter, construction of a facility with a capacity of approximately 1.5 million tons of K-Fuel refined coal per year, which is approximately twice the size of our
Fort Union plant, would take an estimated further period of 18 to 24 months. Thus, we would not expect to obtain any revenues from any such facilities before at least 2010.

As
of December 31, 2007, we estimate that we have spent approximately $100 million in constructing our Fort Union plant, which we have decided to suspend construction and
operations. We estimate that the cost of constructing additional facilities, such as a 1.5 million ton per year facility, could be greater depending on additional variables, including site
location, material handling equipment and design, seismic zones, labor issues, and weather and climate conditions. Such variables could potentially increase costs. We would be required to obtain
substantial amounts of financing to undertake any such project and there can be no assurance that such financing would be available to us. Inability to construct additional facilities to produce
K-Fuel, or to finance the construction thereof on acceptable terms, will adversely affect our financial condition.

Any negative results from the continuing evaluation of K-Fuel refined coal produced at future facility sites by us or third parties could have a
material adverse effect on the marketability of K-Fuel refined coal and future prospects.

Although we have currently suspended operations at our Fort Union plant, we and certain third parties are continuing to evaluate the attributes of
K-Fuel refined coal previously produced at our Fort Union plant and that is produced in our laboratories. There can be no assurance that these evaluations will result in positive findings
concerning the moisture content, heat value, emission-levels, burn qualities or other aspects of our K-Fuel refined coal. Furthermore, even if current evaluations indicate that our
K-Fuel refined coal performs to design specifications, there can be no assurance that later tests will confirm these current results or that our K-Fuel refined coal will be
readily accepted by the market. The process of introducing our K-Fuel refined coal into the market may be further delayed if these test results are negative or if potential customers
conduct their own tests of the K-Fuel refined coal to determine whether it meets their individual requirements and the results are not acceptable. Substantially all of our evaluations of
K-Fuel refined coal at our Fort Union plant used Powder River Basin low-grade coal as the feedstock and we conducted only limited tests of the K-Fuel process at
Fort Union using other feedstocks. However, we have conducted numerous tests of the K-Fuel process using other feedstocks in our laboratories. The ability to use feedstocks from other
locations in the United States or overseas will depend on the results of future tests on different types of coal. If these tests limit the range of viable low-grade coal feedstocks for use
in the K-Fuel process, site locations for future K-Fuel or K-Direct plants may be limited and the commercial appeal of the process may be less than anticipated. If
this continuing process of evaluation and market introduction results in negative

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findings
concerning the K-Fuel process, this could have a material adverse effect on the marketability of K-Fuel refined coal and on our financial condition, results of
operations and future prospects.

Due to the uncertain market for, and commercial acceptance of, our K-Fuel refined coal, we may not be able to realize significant revenues from the
sale of K-Fuel refined coal.

While we believe that a commercial market is developing both domestically and internationally for cleaner coal products such as K-Fuel refined coal,
we may face the following risks due to the developing market for our cleaner coal technology:



If
we are unable to develop markets for our K-Fuel refined coal, our ability to generate revenues and profits may be negatively impacted.

If we are unable to construct and commercialize K-Fuel production plants, our ability to generate profits from this process will be impaired.

Our future success depends on our ability to locate, develop and construct future commercial K-Fuel production plants and operate them at a profit.
Prior to suspending operations at our Fort Union plant, we were not able to achieve commercial production. A number of different variables, risks and uncertainties affect our successful construction
of future K-Fuel production plants and our ability to operate such plants at a profit including:



If
we are unable to successfully address these risks, our results from operations, financial condition and cash flows may be adversely affected.

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Regulation of the K-Fuel process and K-Fuel refined coal may adversely affect our financial condition and results of operations and cash
flows.

Our K-Fuel refined coal is currently subject to federal, state, local, and foreign laws and regulations. In addition, as products and commercial
applications are introduced into the market, governments may impose new regulations which may increase our costs and price of our product. If the cost of compliance with applicable laws and
regulations increases past that forecasted, our ability to profitably market and sell K-Fuel refined coal may be jeopardized.

Compliance with environmental laws and regulations may increase our costs and reduce our future sales.

Our operations are subject to stringent and complex federal, state and local environmental laws and regulations. Failure to comply with these laws and regulations
may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders
enjoining future operations. Certain environmental statutes impose strict, joint and several liabilities for costs required to clean up and restore sites where hazardous substances have been disposed
or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of
substances or other waste products into the environment.

Future changes in the law may adversely affect our ability to sell our products and services.

A significant factor in expanding the potential U.S. market for K-Fuel refined coal is the numerous federal, state and local environmental
regulations, which provide various air emission requirements for power generating facilities and industrial coal users. We believe that the use of clean-burning fuel technologies, like
K-Fuel refined coal, will help utility companies comply with the air emission regulations and limitations. We are unable to predict future regulatory changes and their impact on the demand
for our products. While more stringent laws and regulations, including mercury emission standards, limits on sulfur dioxide emissions and nitrogen oxide emissions, may increase demand for our
products, such regulations may result in reduced coal use and increased reliance on alternative fuel sources. Similarly, amendments to the numerous federal and state environmental regulations that
relax emission limitations would have a material adverse effect on our prospects.

Our inability to adequately protect and defend our proprietary process could harm our business, increase our costs and decrease sales of our products and
services.

Our success depends upon our proprietary process. We rely on a combination of patent, trademark and trade secret rights to establish and protect our proprietary
rights. We currently have a series of patents
and patent applications on our K-Fuel process. However, competitors may successfully challenge the validity or scope of one or more of our patents, or any future patents. These patents
alone may not provide us with any significant competitive advantage.

Further,
while our most recently issued patent protection covers what we believe are the unique aspects of our K-Fuel process as it is currently conducted, not all of the
claims we filed were allowed. An additional patent application has been filed to address the examiner's comments and we expect some of the revised claims to be allowed. While we continue our efforts
regarding these claims there can be no assurance that we will be able to obtain patent protection in the United States or abroad to protect these or any other aspects of our intellectual property, or
that, in the absence of any such patent protection, that the combination of additional methods that we currently employ to maintain the confidentiality of our processes will adequately safeguard our
proprietary processes and information. If our intellectual property is not adequately protected, this may have a material adverse impact on our financial condition, results of operations, cash flows
and future prospects.

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Third
parties could copy or otherwise obtain and use our technology without authorization or develop similar technology independently. The protection of our proprietary rights may be
inadequate and our competitors could independently develop similar technology, duplicate our solutions, or design around any patents or other intellectual property rights we hold.

Any
actions taken by us to enforce our patents or other property rights could result in significant expense as well as the diversion of management time and resources. In addition,
detecting infringement and misappropriation of patents or intellectual property can be difficult, and there can be no assurance that we would detect any infringement or misappropriation of our
proprietary rights. Even if we are able to detect infringement or misappropriation of our proprietary rights, litigation to enforce our rights could cause us to divert significant financial and human
resources from our business operations, and may not ultimately be successful. If we are required to divert significant resources and time to the enforcement of our proprietary rights, even if the
enforcement is successful, our business could be materially adversely affected.

Our success will depend on our ability to operate without infringing on or misappropriating the proprietary rights of others.

We may be sued for infringing or misappropriating the proprietary rights of others. Intellectual property litigation is costly, and, even if we prevail, the cost
of such litigation could adversely affect our business. In addition, litigation is time consuming and could divert management attention and resources away from our business. If we do not prevail in
any litigation, we could be required to stop the infringing activity and/or pay substantial damages. Under some circumstances, these damages could be
triple the actual damages the patent holder incurs. If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products,
we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost
sales or damages paid to the patent holder.

If
a third party holding rights under a patent successfully asserts an infringement claim with respect to any of our products or processes, we may be prevented from manufacturing or
marketing our infringing product in the country or countries covered by the patent we infringe, unless we can obtain a license from the patent holder. Any required license might not be available to us
on acceptable terms, or at all. Some licenses may be non-exclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to market future products, which could have a material adverse effect on our business.

Coal Mining Risks

A substantial or extended decline in coal prices could reduce our revenues and the value of our coal reserves.

The
results of operations in our Mining segment are substantially dependent upon the prices we receive for our coal. The prices we receive for coal depend upon factors beyond our
control, including:



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Declines
in the prices we receive for our coal could adversely affect our operating results and our ability to generate the cash flows we require to improve our productivity and invest
in our operations.

Our coal mining production and delivery is subject to conditions and events beyond our control, which could result in higher operating expenses and/or decreased
production and sales and adversely affect our operating results and cash flows.

Our coal mining operations are conducted in underground mines and at surface mines. The level of our production at these mines is subject to operating conditions
and events beyond our control that could disrupt operations, affect production and the cost of mining at particular mines for varying lengths of time and have a significant impact on our operating
results. Adverse operating conditions and events that we may experience are:



The
occurrence of any of these conditions or events in the future may affect deliveries of coal to customers, increase our cost of mining and delay or halt production at particular mines
or sales to our customers either permanently or for varying lengths of time, which could adversely affect our operating results.

Our current business will be adversely affected if we are unable to develop or acquire additional coal reserves that are economically recoverable.

In addition to our K-Fuel business, our ability to achieve operational profitability depends substantially on our ability to mine coal reserves
possessing quality characteristics desired by our customers in a cost-effective manner. We have not yet applied for the permits required, or developed the mines necessary, to mine all of
our reserves. Permits are becoming increasingly more difficult and expensive to obtain and the review process continues to lengthen. In addition, we may not be able to mine all of our reserves
profitably in the future.

Because
our reserves are depleted as we mine our coal, our future success and growth depend, in part, upon our ability to acquire additional coal reserves that are economically
recoverable. If we are unable to replace or increase our coal reserves on acceptable terms, our production and revenues will decline as our reserves are depleted. Exhaustion of reserves at particular
mines also may have an adverse effect
on our operating results that is disproportionate to the percentage of overall production represented by such mines.

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We face numerous uncertainties in estimating our recoverable coal reserves, and inaccuracies in our estimates could result in decreased profitability from lower
than expected revenues or higher than expected costs.

Forecasts of our future performance are based on, among other things, estimates of our recoverable coal reserves. We base our estimates of reserve information on
engineering, economic and geological data assembled and analyzed by our internal engineers and periodically reviewed by third-party consultants. There are numerous uncertainties inherent in estimating
the quantities and qualities of recoverable reserves and costs to mine, including many factors beyond our control. Estimates of economically recoverable coal reserves and net cash flows necessarily
depend upon a number of variable factors and assumptions, any one of which may, if incorrect, result in an estimate that varies considerably from actual results. These factors and assumptions include:



Any
inaccuracy in our estimates related to our reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.

Risks Relating to Our Debt, Our Common Stock and Other Risks

Our debt obligations may affect our business, operating results and financial condition.

We
have a significant amount of debt, especially given our limited cash flow from operations. In July 2007, we issued $95.0 million long-term debt due August 1,
2012. Debt service obligations from the notes could adversely affect us in a number of ways, including by:



In
addition, our ability to generate cash flow from operations sufficient to make scheduled payments on our debts as they become due will depend on our future performance, our ability to
successfully implement our business strategy and our ability to obtain other financing, which may be

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influenced
by economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

The notes contain restrictive covenants that limit our operational flexibility.

The notes contain covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest. These
covenants include restrictions on our ability to:



Our
failure to comply with these restrictions could lead to a default under the notes.

Our ability to pay principal and interest on outstanding indebtedness depends upon our receipt of dividends or other intercompany transfers from our subsidiaries,
and claims of creditors of our subsidiaries that do not guarantee our indebtedness will have priority over claims you may have as for our guaranteed indebtedness with respect to the assets and
earnings of those subsidiaries.

We are a holding company and substantially all of our properties and assets are owned by, and all our operations are conducted through, our subsidiaries. As a
result, we are dependent upon cash dividends and distributions or other transfers from our subsidiaries to meet our debt service obligations, including payment of the interest on and principal of our
indebtedness when due, and other obligations. The ability of our subsidiaries to pay dividends and make other payments to us may be restricted by, among other things, applicable corporate, tax and
other laws and regulations in the United States and abroad and agreements made by us and our subsidiaries, including under the terms of our existing and potentially future indebtedness. In addition,
claims of creditors, including trade creditors, of our subsidiaries will generally have priority with respect to the assets and earnings of such subsidiaries over the claims of our creditors, except
to the extent the claims of our creditors are guaranteed by these subsidiaries. In the event of our dissolution, bankruptcy, liquidation or reorganization, the holders of such indebtedness will not
receive any amounts from our non-guarantor subsidiaries with respect to such indebtedness until after the payment in full of the claims of the creditors of those subsidiaries.

We may not have the ability to repurchase the notes for cash upon the occurrence of a fundamental change as required by the indenture governing the notes.

Holders of the notes will have the right to require us to repurchase the notes for cash upon the occurrence of a fundamental change. We may not have sufficient
funds to repurchase the notes or have the ability to arrange necessary financing on acceptable terms. Our ability to repurchase the notes for cash may be limited by law or the terms of other
agreements relating to our indebtedness outstanding at the time. Our failure to repurchase the notes when required would result in an event of default with respect to the notes and could result in the
acceleration of the maturity of our then-existing indebtedness. This repurchase right may actually have the effect of making us a less attractive candidate for a fundamental change
transaction.

The value of the collateral may not be sufficient to repay the holders of the notes in an event of default.

The notes are secured by a first-priority security interest in the equity interest in our wholly owned subsidiary, Evergreen Operations, LLC. We have
granted a first-priority security interest for the benefit of the holders of the notes in our and our subsidiaries' existing and future bank, investment, brokerage or other accounts holding cash and
cash equivalents, subject to certain limitations. We deposited

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$18.0 million
of the proceeds from the note offering in an escrow account in which we granted a first-priority security interest for the benefit of the holders of the notes. Our intellectual
property rights relating to the K-Fuel refined coal process are held by our wholly owned subsidiary, KFx Technology, LLC, which is not a subsidiary of Evergreen Operations, and
consequently, none of these intellectual property rights are included in the collateral securing the notes or are the property of an obligor on the notes. The value of the equity interests of
Evergreen Operations, LLC at any time will depend on market and other economic conditions, including the availability of suitable buyers, and such collateral may be illiquid and may have no
readily ascertainable market value. The value of such collateral for the notes could be impaired in the future as a result of changing economic conditions, our failure to implement or a change in our
business strategy, competition and other future trends. In the event that a bankruptcy case is commenced by or against us, if the value of such collateral, together with the additional collateral in
the form of cash and cash equivalents, if provided, is less than the amount of principal and accrued and unpaid interest on the notes and all other senior secured obligations, interest may cease to
accrue on the notes from and after the date the bankruptcy petition is filed. We cannot assure holders of the notes that the proceeds from the sale or sales of all of such collateral would be
sufficient to satisfy the amounts due on the notes in the event of a default. If such proceeds were not sufficient to repay amounts due on the notes, then holders of the notes (to the extent not
repaid from the proceeds of the sale of the collateral) would only have an unsecured claim against our remaining assets.

Our stock price has been volatile historically and may continue to be volatile. The price of our common stock, and therefore the price of the notes, may fluctuate
significantly, which may make it difficult for holders to resell the notes or the shares of our common stock issuable upon conversion of the notes when desired or at attractive prices.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates and
recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and new reports relating to trends in our markets or
general economic conditions.

In
addition, the stock market in general, and prices for companies in our industry in particular, have experienced volatility that often has been unrelated to the operating performance
of such companies. These broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance. Because the notes are convertible into
shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of our notes. Holders who receive common stock upon conversion also will
be subject to the risk of volatility and depressed prices of our common stock. In addition, the existence of the notes may encourage short selling in our common stock by market participants because
the conversion of the
notes could depress the price of our common stock. Additionally, lack of positive performance in our stock price may adversely affect our ability to retain key employees.

Sales of a significant number of shares of our common stock in the public markets, or the perception of such sales, could depress the market price of the notes.

Sales of a substantial number of shares of our common stock or other equity-related securities in the public markets could depress the market price of the notes,
our common stock, or both, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other
equity-related securities would have on the market price of our common stock or the value of the notes. The price of our common stock could be affected by possible sales of our common stock by
investors who view the notes as a more attractive means of equity participation in our company and by hedging or arbitrage trading activity which we expect to

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occur
involving our common stock. This hedging or arbitrage could, in turn, affect the market price of the notes.

Conversion of the notes may dilute the ownership interest of existing stockholders, including holders who have previously converted their notes.

To the extent we deliver common stock upon conversion of the notes, the ownership interests of existing stockholders may be diluted. Any sales in the public
market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the anticipated conversion of the notes into shares of our
common stock could depress the price of our common stock.

We may not be able to refinance the notes if required or if we so desire.

We may need or desire to refinance all or a portion of the notes or any other future indebtedness that we incur on or before the maturity of the notes. There can
be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.

We may be unable to deduct for tax purposes the interest or original issue discount, if any, paid or accrued on the notes.

No deduction is allowed for U.S. federal income tax purposes for interest paid on a disqualified debt instrument. A disqualified debt instrument generally
includes any indebtedness of a corporation which is payable in equity of the issuer. Although we believe and intend to take the position that the notes are not disqualified debt instruments, the notes
may be treated as disqualified debt instruments, and we may be prohibited from deducting the interest due on the notes. Consequently, we may have less cash available with which to satisfy our
obligations.

Our stock price has been volatile, and your investment in our common stock could suffer a decline in value.

An investment in our common stock is risky, and stockholders could suffer significant losses and wide fluctuations in the market value of their investment. The
market price of our common stock has been extremely volatile over the last twelve months; our stock price has declined approximately 80%. During 2007, the sale prices of our common stock on the NYSE
Arca ranged from a low of $2.10 to a high of $10.60. We expect our common stock to continue to be subject to fluctuations. Broad market and industry factors may adversely affect the market price of
our common stock, regardless of our actual operating performance. Volatility in the market price of shares may prevent investors from being able to sell their shares of common stock at prices they
view as attractive. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could
result in substantial costs and divert our management's attention and resources.

A substantial number of shares we have issued in exempt transactions are, or are being made, available for sale on the open market, and the resale of these
securities might adversely affect our stock price.

We have on file with the SEC effective registration statements for a substantial number of shares for resale. The selling stockholders under our effective
registration statements will be permitted to sell their registered shares in the open market from time to time without advance notice to us or to the market and without limitations on volume.

The
sale of a substantial number of shares of our common stock under our registration statements, or the anticipation of such sales, could make it more difficult for us to sell equity or
equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

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Our certificate of incorporation and by-laws include anti-takeover provisions that may enable our management to resist an unwelcome
takeover attempt by a third party.

Our organizational documents and Delaware law contain provisions that might discourage, delay or prevent a change in control of our company or a change in our
management. Our board of directors may also choose to adopt further anti-takeover measures without stockholder approval. The existence and adoption of these provisions could adversely
affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future.

We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Accordingly, we do not
intend to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account
many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Due to our rapid growth, it was necessary to relocate our headquarters to a new larger location. We leased 32,727 square feet of office space in Denver, Colorado
for a ten year term and we moved into our new headquarters in April 2007. Our new headquarters will allow us to improve office efficiency per square foot and will also accommodate future employees. We
believe this new space will be sufficient for our near-term goals and growth projections.

In
May 2004, we purchased Landrica Development Company, or Landrica. Through Landrica, we own approximately 1,000 acres of land located in Campbell County, Wyoming (near Gillette,
Wyoming), on which our Fort Union plant is located. The land also includes various coal processing equipment, certain industrial buildings, waste injection wells, producing water wells, a
coal-mining pit and a railroad spur.



Buckeye Industrial Mining Co. has been mining bituminous coal from surface and underground mines in northeast Ohio since 1992. Buckeye currently operates
three open-pit mines and one underground mine and has more than 400 lease agreements over five counties: Stark, Carroll, Columbiana, Jefferson, and Tuscarawas. Access to all these
mine sites are via US, State, Township or County roads. A fraction or small portion of the aggregate coal properties are owned by Buckeye. Currently, 32 sites have been permitted,
2 sites have been permitted but not yet effective and 12 sites are in the permitting process. The permitted sites are either actively being mined, being reclaimed, or in the maintenance
stage. Prospect drilling and evaluation on new leases is ongoing. As of December 31, 2007, Buckeye has approximately 20 million tons of recoverable reserves.

In
order to determine if potential sites are economically feasible, it is necessary to conduct drilling on the properties. If it has been determined that the properties are economically
feasible, the permitting process is initiated which includes government permits. The permitting process takes several years before granted. Not until a property is permitted and bonded can any mining
begin.

All
rock formations encountered in Buckeye's mining operations are Pennsylvanian age. The individual coal seams mined by Buckeye. All strata encompass the Allegheny Group of the

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Pennsylvanian
age with the exception of one which is in the Conemaugh Group. Contained within these strata are marketable shales, clays, and limestones. These are mined and marketed when possible but
comprise a very small fraction of Buckeye's sales.

Buckeye's
wash plant was built in 1977 and repair and maintenance is performed as necessary. Various loaders and bulldozers are utilized at this facility to move coal. Surface mines
utilize small dozers for ground preparation, scrapers for road maintenance, drainage control and mining of coal. This equipment is constantly being upgraded to meet mining requirements.

Typically,
the properties that are mined are leased from the surface land owner, the coal owner or both. It is common for a single open-pit mine to contain multiple leases
and many leases are required for underground mines. These lease agreements require Buckeye to pay royalties, on a per ton basis, for coal mined. New leases are being obtained continually. Most often,
lease agreements contain provisions that automatically renew lease terms during mining. In addition, leases are renewed when necessary through amendments.

When
mining on a property is completed, it must be reclaimed to government permit specifications. A five year, post-reclamation maintenance period is required by government
regulation prior to final release of the performance security. Buckeye remains liable for any environmental issues until final release. A performance security instrument, typically a performance bond,
is required to insure reclamation.

ITEM 3.    LEGAL PROCEEDINGS

We are not engaged in any material legal proceedings to which we or any of our subsidiaries are a party.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

26

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PART II

ITEM 5.    MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market and Price Range of Common Stock

Our common stock has been listed on the NYSE Arca exchange under the market symbol "EEE" since September 29, 2006. Prior to that date, our common stock was
listed on the American Stock Exchange under the market symbol "KFX." The following table sets forth the range of high and low sales prices per share of common stock for the periods indicated.

Year

Period

High

Low2007

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

$$$$
5.15
6.04
7.83
10.60

$$$$
2.10
3.50
5.62
5.452006

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

$$$$
14.13
16.50
19.52
22.16

$$$$
7.65
10.95
11.62
16.502005

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

$$$$
17.50
18.48
14.90
18.00

$$$$
12.41
13.98
10.32
12.24


As
of February 29, 2008, we had approximately 203 holders of record of our common stock. This does not include holdings in street or nominee names. On February 29, 2008 the
closing price of our common stock was $2.22 per share.

27

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Comparative Performance Graph

The following Performance Graph and related information shall not deemed "soliciting material" or be "filed" with the Securities and
Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the
extent that the Company specifically incorporates it by reference.

The
Securities and Exchange Commission requires that we include in this Form 10-K a line-graph presentation comparing cumulative, five-year
stockholder returns (assuming reinvestment of dividends) for our common stock with a broad-based market index and either a nationally recognized industry standard or an index of peer companies
selected by us. The following graph assumes $100 invested on December 31, 2002 in our common stock, two Peer Groups of companies and the S&P 500. The stock price performance shown on the
following graph is not necessarily indicative of future price performance.

Comparison of 5 Year Cumulative Total Return  Assumes Initial Investment of $100  December 2007

CHART

In
2007, we changed our Peer Group to better reflect energy companies more our size and complexity. Our new Peer Group is comprised of the following companies:
ADA-ES Inc.; Fuel Tech; Headwaters, Inc.; James River Coal Corp.; Met-Pro Corp.; Rentech Inc.; Synthesis Energy System; and Westmoreland Coal Company. All
companies in the new Peer Group are listed on U.S. stock exchanges or the NASDAQ system. Our Peer Group in 2006 was comprised of the following companies: ADA-ES Inc.; Alliance
Resource Partners, LP; Arch Coal, Inc.; Consol Energy, Inc.; Foundation Coal Holdings, Inc.; Headwaters, Inc.; International Coal Corp.; James River Coal Corp.;
Massey Energy Company; Natural Resource Partners LP; Penn Virginia Resource Partners LP; Rentech Inc.; Suncor Energy, Inc.; U.S. Energy Systems, Inc.; and
Westmoreland Coal Company.

We
are excluded from the Peer Group for purposes of the comparative performance graph.

28

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Dividend Policy

We have never paid cash dividends and do not anticipate paying dividends in the foreseeable future. We expect that we will retain all available earnings generated
by our operations for the development and growth of our business. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including
our operating results, financial conditions, current and anticipated cash needs and plans for expansion. We do not repurchase common stock.

Recent Sales of Unregistered Securities

During the year ended December 31, 2007, we did not have any sale of securities in transactions that were not registered under the Securities Act of 1933,
as amended ('Securities Act") that have not been reported in a Form 8-K or Form 10-Q.

Issuer Purchasers of Equity Securities

We did not repurchase any of our shares of common stock during the quarter ended December 31, 2007.

29

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto in
Item 8 of this report and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report. The selected consolidated results of
operations and cash flow data for each of the three years in the period ended December 31, 2007 and the selected balance sheet data as of December 31, 2007 and 2006 are derived from, and
qualified by reference to, our audited Consolidated Financial Statements, in Item 8 of this report. On March 19, 2008, we identified an error related to the classification of certain
investments, principally auction rate securities, which were incorrectly classified as cash and cash equivalents rather than marketable securities. As a result, we determined that the consolidated
balance sheets as of December 31, 2006 and 2005 and the consolidated statements of cash flows for the years ended December 31, 2006 and 2005 should be restated. See Note 18 to our
consolidated financial statements. The selected consolidated results of operations and cash flow data related to 2004 and 2003 and selected consolidated balance sheet data related to 2004 and 2003,
have been derived from audited financial statements not included in this report and have been revised from prior filings for our discontinued operations unless otherwise noted.

|                              |                                                                                             | Year ended December 31, |  
|----------------------------- | ------------------------------------------------------------------------------------------- | ----------------------- | -
|
|
|Statement of operations data: |                                                                                             |                         |  
|                              | Operating revenues                                                                          |                         | $
|                              | Operating expenses                                                                          |                         |  
|                              | Operating loss                                                                              |                         |  
|                              | Loss from continuing operations                                                             |                         |  
|                              | Net gain (loss) from discontinued operations                                                |                         |  
|                              | Net loss                                                                                    |                         |  
|                              | Basic and diluted loss from continuing operations                                           |                         |  
|                              | Basic and diluted net loss per share                                                        |                         | $
|                              | Weighted average shares of common stock outstanding                                         |                         |  
|Balance sheet data:           |                                                                                             |                         |  
|                              | Cash, cash equivalents and marketable securities(1)                                         |                         | $
|                              | Property, plant and equipment, mineral rights net, including plant construction in progress |                         |  
|                              | Total assets                                                                                |                         |  
|                              | Long-term liabilities, including current portion(2)                                         |                         |  
|                              | Stockholders' equity                                                                        |                         |  
|                              | Working capital(3)                                                                          |                         | $
|Cash flow data:               |                                                                                             |                         |  
|                              | Cash (used in) provided by operating activities                                             |                         | $
|                              | Cash used in continuing investing activities(4)                                             |                         |  
|                              | Cash provided by continuing financing activities                                            |                         | $

---

30

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and are qualified by reference to,
our Consolidated Financial Statements and related notes thereto in Item 8 of this report and Selected Financial Data included in Item 6 of this report. On March 19, 2008, we
identified an error related to the classification of certain investments, principally auction rate securities, which were incorrectly classified as cash and cash equivalents rather than marketable
securities. The following management's discussion and analysis gives affect to the restatement discussed in Note 18 to our Consolidated Financial Statements. Certain statements set forth below
under this caption constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform of 1995. Refer to the "Cautionary Statement About Forward Looking Statements"
preceding Item 1 of this report. Also, for a discussion of certain risk factors applicable to our business and operations see "Risk Factors" in Item 1A of this report.

We
were founded in 1984 as a clean coal company focused on developing our K-Fuel process. Our goal is to leverage a vertically integrated, coal-based platform to
deliver clean, efficient and affordable energy. We intend to meet the specific needs of public utility, industrial and international market customers by providing economical solutions to environmental
emission standards compared to other emission standard alternatives. Our proprietary K-Fuel process uses heat and pressure to physically and chemically transform high moisture,
low-Btu coals, such as sub-bituminous coal and lignite, into a more energy efficient, lower-emission fuel.

We,
along with, our engineering consultants, Bechtel Power Corporation, have completed the modifications and improvements of the design and efficiency of the equipment used in the
K-Fuel process. Bechtel and Evergreen's operations team at Fort Union completed successful testing of new operational systems that will support construction of future K-Fuel or
K-Direct facilities, including a enhanced standard processing tower design. This work signals that we and Bechtel have resolved the most substantive technical challenges to scaling and
commercializing our production process. In February 2007, we expanded our contractual relationship with Bechtel to assist with future designs of additional K-Fuel facilities we may build
or license, including any K-Fuel plants located at coal-fired power generating plants, which we refer to as K-Direct plants. On September 19, 2007, we
amended and restated our umbrella agreement with Bechtel Power
Corporation. Through this new program management agreement, we committed to provide Bechtel with $1 billion in construction contracts through 2013. This restated agreement increases the scope
of engineering, procurement and construction services which may be performed by Bechtel. We intend to use Bechtel's services to oversee both technical development and implementation of all new
facilities and existing plants, including both K-Fuel and K-Direct plants.

The
Fort Union plant which was our first plant to implement the current K-Fuel process, has accomplished virtually all of the goals and objectives we set forth for this site.
Most notably, as a result of operations at the Fort Union plant, we have:



31

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For
the reasons discussed below, we have chosen to suspend operations at our Fort Union plant and mine site. This will enable us to focus on future K-Fuel or
K-Direct plants by redirecting constrained resources, both capital and human, to focus on the commercialization of our process. Bechtel has completed the enhanced standard processing tower
design based upon the results of testing completed by us at the Fort Union plant. Additionally, suspending production at this site will further enable us to reduce our cash utilization. If the need
arises, we are positioned to resume operations at the Fort Union plant to demonstrate the technology or to provide K-Fuel product for test burns at utilities or other industrial sites. We
are also evaluating redeploying some of
the equipment to a future K-Fuel facility site. We recorded an asset impairment charge of $109.5 million related to the Fort Union plant and mine site as of December 31,
2007.

The
condensed consolidated financial statements include our accounts and the accounts of our wholly and majority-owned subsidiaries, including the nine months ended December 31,
2006 for Buckeye Industrial Mining Co. (acquisition date of April 3, 2006). We consolidate all of our majority-owned subsidiaries and reflect as minority interest the portion of these
entities that we do not own and reflected in other long-term liabilities. Intercompany transactions and balances have been eliminated.

During
the quarter ended September 30, 2007, we re-evaluated our segments and have expanded our segment presentation to four segments to better reflect how our results
of operations are now evaluated and allocations of capital resources are determined. The Plant segment primarily represents revenue and costs related to our Fort Union plant and our mine site in
Gillette, Wyoming. The Mining segment primarily represents our mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility and the blending facility.
The C-lock segment reflects the operations related to our worldwide sub-license of a technology to standardize the measurement of carbon emissions in energy and agricultural
related activities. The Technology segment is comprised of all other operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our
headquarters and related operations, activities of Evergreen Energy Asia Pacific and KFx Technology, LLC, which holds the licenses to our technology. Our operations are principally conducted in
the United States. We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.

Significant Trends

For the last several years, our operations have been focused on developing our technology and the construction of the Fort Union plant. As a result, we have
limited revenues from K-Fuel refined coal and, historically most of our costs are related to general and administrative expenses. With the addition of Buckeye, we have begun to generate
revenue and incurred more substantial mining costs. In the future, we plan to build, own and operate K-Fuel and K-Direct refineries domestically and internationally, both
wholly owned and through joint ventures. Through C-Lock Technology we plan to generate revenues from our first-of- its-kind web-based system
along with our patent-pending technology that accurately measures greenhouse gases and certifies these environmental improvements as carbon credits. As our operations expand, we expect our revenue and
cost structure will also increase. The following discussion and analysis is focused on the events and trends that we believe have or will in the future have the most significant impact on our
business.

Revenue Trends

In the future we expect to generate revenue from the following sources:



32

---





We
have granted certain rights and limited licenses for the use of certain K-Fuel technology, which may limit our revenue from production of K-Fuel refined coal
to the extent that the rights are exercised. See Note 5 and 13 to our Consolidated Financial Statements for further details.

Expense Trends



We have chosen to suspend operations at our Fort Union plant and mine site. This will enable us to focus on future K-Fuel or K-Direct
plants by redirecting constrained resources, both capital and human, to focus on the commercialization of our process. Bechtel has completed the enhanced standard processing tower design based upon
the results of testing completed by us at the Fort Union plant. Additionally, suspending production at this site will further enable us to reduce our cash expenditures. If the need arises, we are
positioned to resume operations at Fort Union plant to demonstrate the technology or to provide K-Fuel product for test burns at utilities or other industrial sites. We are also evaluating
redeploying some of the equipment to a future K-Fuel facility site. We will incur costs including labor, consulting and other costs to safely suspend operations at the plant.



As we build future K-Fuel and K-Direct facilities and these facilities begin continuous operation, we will incur additional operational
expenses, the most significant being:



See
further discussion of the royalty owed to the estate of Edward Koppelman in Note 6Deferred Royalty Costs in Item 8 of this report.



With the acquisition of Buckeye we have incurred mine operating expenses including all costs associated with the mining of saleable coal and costs relating to our
coal ash disposal facility. As the price of coal increases, we anticipate increasing our production at both our surface mines and underground mines. We expect that the revenue generated from increased
production will exceed the incremental mining costs.

33

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As we identify business development opportunities, build new plants, and generally expand our business including hiring additional personnel at our corporate,
future plants and C-Lock locations and outsourced professional services, we will incur additional expenses, the most significant of which are:



We
anticipate that accounting for non-cash, share-based compensation will add approximately $6.0 million to $9.0 million per year in the foreseeable future to
our expenses. In the event we should achieve certain performance goals, we would significantly accelerate recognition of these costs. Costs such as payroll and related burdens, professional support
fees and utilities are variable costs that increase with size and adding locations. As we build new plants and expand our vertical integration strategy, we expect these costs to increase in future
periods.

Results Of Operations

Comparison of Years Ended December 31, 2007 and 2006



Revenues for the year ended December 31, 2007 were $48.7 million compared to $36.7 million for the same period ended December 31,
2006. The increase in revenue primarily relates to our April 2006 acquisition of Buckeye. During the year ended December 31, 2006, we owned Buckeye for only nine months. During the year ended
December 31, 2007, we owned Buckeye for the entire twelve-month period.

Revenues
in our Mining segment for the year ended December 31, 2007 were $47.3 million and $35.9 million for the same period ended December 31, 2006
respectively, as follows:



34

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K-Fuel
refined coal revenue is comprised of sales of our K-Fuel product to third parties. Blended K-Fuel refined coal revenue represents the
proportionate revenue related to K-Fuel that has been blended with other raw or prepared coal from our Buckeye operations and sold to third parties. The remaining revenue related to the
raw or prepared coal is reflected in Mining revenues. K-Fuel refined coal and blended K-Fuel refined coal sales were $1.1 million and $420,000 for the years ended
December 31, 2007 and 2006, respectively and are included in our Plant segment. K-Fuel refined coal sales were less than expected primarily due to less production at our Fort Union
plant for both periods.



Our coal mining operating expenses include all costs associated with the mining of saleable coal and costs relating to our coal ash disposal facility at Buckeye,
which principally comprises our Mining segment.



Coal mining operating expenses include employee-related costs, outside contracted mining costs for our underground mines, internal and external coal
transportation costs, blasting, drilling, heavy equipment costs, purchased coal and other mining-related costs. Coal mining operating expenses were $38.3 million and $28.9 million for
the years ended December 31, 2007 and 2006, respectively. The increase can be attributed to the acquisition of Buckeye in April 2006, resulting in recording nine months of Buckeye's operation
for the year ended December 31, 2006 compared to recording twelve months of Buckeye's operations for the year ended December 31, 2007.



Ash disposal expenses include employee-related costs, consulting costs, costs of repairs and maintaining culverts and drainage ponds, transportation, and heavy
equipment costs and other costs associated with the ash disposal facility. Ash disposal expenses were $4.8 million and $3.4 million for the periods ended December 31, 2007 and
2006, respectively.



The following table summarizes our general and administrative costs for the years ended December 31, 2007 and 2006.

Year Ended December 31,2007

2006(in thousands)Employee non-cash, share-based compensation

$
19,015

$
9,803Employee-related costs


11,721


8,045Non-cash, Arch warrants





1,692Professional fees


4,152


4,113Office and travel costs


3,498


2,555Insurance and other


4,645


2,634Total general and administrative

$
43,031

$
28,842


Employee
non-cash, share-based compensation expenses were $19.0 million and $9.8 million for the years ended December 31, 2007 and 2006, respectively,
substantially all of which related to our Technology segment. The increase for the year ended December 31, 2007 compared to the same period ended in 2006 was primarily due to a
one-time $9.8 million charge as a result of the termination of one of our executive officers and the acceleration of his restricted stock grant pursuant to his employment

35

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agreement
and a one-time $661,000 charge related to the departure of another executive officer and the acceleration of vesting of his restricted stock grant.

During
2005, we entered into two agreements with Arch Coal, Inc. which allowed us to evaluate the potential of constructing and operating a plant at their Coal Creek mine site and
required us to issue warrants. In 2006, we extended these agreements to allow additional time for the evaluation of the project. In connection with the extension, the expiration date of the warrants
was also extended and, pursuant to SFAS 123R, we were required to recognize an additional $1.7 million of non-cash expense for the year ended December 31, 2006. Based
on discussions with Arch Coal, it was mutually agreed not to further extend these agreements. The first agreement expired on September 30, 2006 and the warrant agreement expired on
October 31, 2006. As market conditions and other circumstances change we may enter into new agreements with Arch Coal.

Employee-related
costs primarily include salaries and wages, temporary employees, bonuses, benefits, employer payroll taxes and education and training. The following table summarizes our
employee-related costs related to each of our segments for the years ended December 31, 2007 and 2006.

Year Ended December 31,2007

2006(in thousands)Technology

$
4,617

$
4,459Plant


3,975


2,113Mining


2,593


1,473C-Lock


536


Total Employee-related

$
11,721

$
8,045


The
increases for the year ended December 31, 2007 in comparison to the comparable period in 2006 were primarily due to a company-wide increase in health insurance
costs and adding personnel, including plant and engineering personnel. In addition, through the acquisition of Buckeye, we incurred twelve months of expense in 2007 compared to nine months of expense
in 2006. The small increase in the technology segment and the substantial increase in the plant segment were due to more corporate resources being used at our Fort Union plant during 2007 and the
associated allocation of those expenses.

Professional
fees include legal, audit and accounting, public relations, governmental relations and similar costs. The following table summarizes our professional fees related to each of
our segments for the years ended December 31, 2007 and 2006.

Year Ended December 31,2007

2006(in thousands)Technology

$
2,929

$
3,469Plant


478


433Mining


335


211C-Lock


410


Total Professional fees

$
4,152

$
4,113


36

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Office
and travel costs include airfare, lodging, meals, office rent, marketing, office supplies, phone, publications, subscriptions and utilities. The following table summarizes our
office and travel costs related to each of our segments for years ended December 31, 2007 and 2006.

Year Ended December 31,2007

2006(in thousands)Technology

$
2,061

$
1,767Plant


867


583Mining


234


205C-Lock


336


Total Office and travel

$
3,498

$
2,555


The
anticipation of hiring additional employees at our corporate office led to our office expansion and relocation in May 2007, and the related increases in rent, utilities and
relocation costs for the year
ended December 31, 2007 compared to the same period ended 2006. Our travel for the year ended December 31, 2007 increased due an increase in the number of trips to our Fort Union plant
as well as increased business development efforts. In addition, during the same period we incurred non-recurring charges relating to a loss on the sub-lease of our former
corporate office space and moving costs.

Insurance
and other costs primarily include costs related to our property and commercial liability, other insurance and all costs that cannot be categorized elsewhere and include, among
other costs, various business and franchise taxes, licensing fees, repair and maintenance, engineering and technical services and director expenses. The following table summarizes our insurance and
other costs related to each of our segments for the years ended December 31, 2007 and 2006.

Year Ended December 31,2007

2006(in thousands)Technology

$
2,776

$
2,052Plant


511


74Mining


765


508C-Lock


593


Total Insurance and other

$
4,645

$
2,634


The
increase for the year ended December 31, 2007 compared to the same period ended 2006 can be attributed to the following:



37

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Plant start-up costs include purchased raw materials, coal transportation, outsourced engineering and technical support, fluid processing,
by-products and water disposal, and employee-related costs, which are reflected in our Plant segment. Plant start-up costs remain higher than anticipated due to general
start-up issues with this first-of-a-kind plant and technical and operation improvements being implemented. Plant start-up costs were
$34.7 million and $26.3 million for the years ended December 31, 2007 and 2006, respectively. During the majority of the year ended December 31, 2006, we were in the
construction and commissioning phases and most of the costs incurred during these phases were capitalized. During the year ended December 31, 2007, we were in the start-up phase and
a higher percentage of costs associated with the operations of our Fort Union plant were expensed as incurred. In addition, non-capitalized costs increased as a result of engineering and
technical work performed to improve and reconfigure our Fort Union plant.



Depreciation, depletion and amortization are comprised of (1) depreciation on our Fort Union plant using the units-of-production
method, based on actual tons processed and depreciation on other fixed assets using the straight-line method; (2) depletion, based on actual tons mined at our mine sites in Ohio and
Wyoming; and (3) amortization related to our patents. Depreciation, depletion and amortization expenses were $8.4 million for the year ended December 31, 2007 compared to
$5.5 million during the same period ended 2006. The increases are primarily attributable to the acquisition of Buckeye and the related depreciation and depletion on our mine sites and property
and equipment for the year ended December 31, 2007.



Research and development costs include costs incurred to advance, test, or otherwise modify our proprietary technology or develop new technologies and primarily
include costs incurred to operate and maintain our laboratory facilities and professional engineering fees related to off-site testing of our K-Fuel refined coal. Research and
development costs were $876,000 and $1.4 million for the years ended 2007 and 2006, respectively. The decrease is primarily a result of our Fort Union plant entering the start-up
phase of operation, which resulted in costs that were previously classified as research and development now being classified as plant start-up costs.



Cost of license and consulting revenue includes costs to transfer our technology related to licensing and royalty agreements, including amortization of deferred
royalty costs, salaries and wages of certain personnel and professional fees. Cost of licensing and consulting revenue was $77,000 and $134,000 for the years ended December 31, 2007 and 2006,
respectively. The decreases in these costs were in direct correlation to the revenue recognized on the licensing agreement we entered into in 2004.



Asset impairment and bad debt charges were $122.7 million and $335,000 for the years ended December 31, 2007 and 2006, respectively. Impairment
charges for the year ended December 31, 2007 are as follows:



38

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Interest income was $4.3 million and $5.6 million for the years ended December 31, 2007 and 2006, respectively. The decrease for the year
ended December 31, 2007 is attributed to interest earned on our cash balance, which was significantly lower compared to the same period in 2006.



Interest expense for the year ended December 31, 2007 and December 31, 2006 was $3.4 million and $6,000, respectively. The interest expense
relates to our long-term debt due 2012, which we completed in July 2007. We pay interest semi-annually at a rate of 8.00% per annum, due on February 1 and
August 1 of each year, beginning on February 1, 2008. For additional information, see Note 9Long-term Debt included in Item 8 of this report.



During the year ended December 31, 2007, other expense was $1.3 million as compared to $1.1 million of other income for the same period ended
2006. Pursuant to FAS 133, we estimated the fair value of the embedded derivatives as of July 30, 2007 when the notes were issued, and record those values as either assets or
liabilities. In addition, we are required to evaluate the fair value of the embedded derivatives at the end of each subsequent reporting period. We recognized a decrease in the fair value of the
derivatives of $1.7 million. This fair value adjustment is a non-cash item and each quarter's estimation exercise is impacted, in part, by our stock price. For additional
information, see Note 9Long-term Debt included in Item 8 of this report.

On
November 26, 2003, we completed an equity exchange transaction with Rio Tinto Energy America Services Company ("RTEA"), formerly Kennecott Energy Company. As a part of the
exchange transaction, an intercompany working capital loan from Evergreen Energy to Pegasus Technologies Inc. with an outstanding balance of $9.4 million was exchanged for a contingent
earn-out agreement of up to $9.4 million in the aggregate, plus accrued interest (prime rate plus 500 basis points), payable out of a portion of future cash flows generated by
Pegasus. Due to the contingent nature of this potential stream of future cash flows, we did not recognize an asset or any associated income at the time of the exchange transaction. On May 16,
2006, RTEA entered into a transaction involving its investment in Pegasus. Pursuant to the terms of the agreement entered into between us and RTEA dated November 7, 2003, which triggered the
earn-out provision, we received a payment of $1.1 million during the year ended December 31, 2006 from Pegasus as a payment in full satisfaction of the $9.4 million
contingent obligation. This transaction had no effect on our note receivable from Pegasus with an outstanding balance of $87,000, net of an allowance of $1.2 million, which is included in our
condensed consolidated balance sheet. We have been and expect to continue to, receive payments on this note.

39

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Comparison of Years Ended December 31, 2006 and 2005



Revenues for the year ended December 31, 2006 were $36.7 million compared to $984,000 for the same period ended December 31, 2005. The
increase in revenue for the period ended December 31, 2006 is substantially related to our April 2006 acquisition of Buckeye. Our Mining segment accounted for $35.8 million in revenue
for the period ended December 31, 2006.

We
recognized revenue of $768,000 from the $7.5 million up-front licensing fee received in December 2004 from Cook Inlet Coal LLC in our Technology segment for
the year ended December 31, 2005. To date we have completed all of our contractual deliverables for the licensing fee and are waiting for Cook Inlet Coal to provide specific site information
before the next phase of revenue recognition can commence.



Our coal mining operating expenses include all costs associated with the mining of saleable coal and costs relating to our coal ash disposal facility at Buckeye,
which principally comprises our Mining segment. Coal mining operating expenses were $32.3 million and $0 for the periods ended December 31, 2006 and 2005, respectively. The increase in
coal mining operating expenses for the period ended December 31, 2006 is related to our April 2006 acquisition of Buckeye.



The following table summarizes our general and administrative costs for the years ended December 31, 2006 and 2005.

Year Ended December 31,2006

2005(in thousands)Employee non-cash, share-based compensation

$
9,803

$
2,239Employee-related costs


8,045


6,318Non-cash, Arch warrants


1,692


5,803Professional fees


4,113


3,418Office and travel costs


2,555


1,445Insurance and other


2,634


1,365Total general and administrative

$
28,842

$
20,588


Employee
non-cash, share-based compensation expenses were $9.8 million and $2.2 million for the years ended December 31, 2006 and 2005, respectively,
substantially all of which related to our Technology segment. The increase in non-cash, share-based compensation was in direct correlation with the adoption of SFAS 123(R) as of
January 1, 2006. See
Note 11Stock Options, Stock Grants and Employee Benefit Plans for further discussion in Item 8 of this report. Non-cash, share based compensation in 2006
primarily related to restricted stock and option grants to our executive officers.

During
2005, we entered into two agreements with Arch Coal, Inc. which allowed us to evaluate the potential of constructing and operating a plant at their Coal Creek mine site and
required us to issue warrants. In 2005, we incurred $5.8 million of non-cash expense related to the issuance of these warrants to Arch Coal, Inc. In 2006, we extended these
agreements to allow additional time for the evaluation of the project. In connection with the extension, the expiration date of the warrants was also extended and, pursuant to SFAS 123R, we
were required to recognize an additional $1.7 million of non-cash expense for the year ended December 31, 2006. Based on discussions with Arch Coal, it was

40

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mutually
agreed not to further extend these agreements. The first agreement expired on September 30, 2006 and the warrant agreement expired on October 31, 2006.

The
following table summarizes our employee-related costs related to each of our segments for the years ended December 31, 2006 and 2005.

Year Ended December 31,2006

2005(in thousands)Technology

$
4,459

$
5,716Plant


2,113


602Mining


1,473


C-Lock





Total Employee-related

$
8,045

$
6,318


Employee-related
costs were $7.6 million and $6.3 million for the years ended December 31, 2006 and 2005, respectively. The increases for the year ended
December 31, 2006 were primarily related to an increase in the number of employees, which increased salaries and related burdens. During 2006, we added personnel in many areas, including
engineering and business development. In addition, the number of employees increased as a result of the Buckeye acquisition.

The
following table summarizes our professional fees related to each of our segments for the years ended December 31, 2006 and 2005.

Year Ended December 31,2006

2005(in thousands)Technology

$
3,469

$
3,098Plant


433


320Mining


211


C-Lock





Total Professional fees

$
4,113

$
3,418


The
increases can be attributed to a general overall increase in legal and accounting fees when compared to the same period ended 2005.

The
following table summarizes our office and travel costs related to each of our segments for years ended December 31, 2006 and 2005.

Year Ended December 31,2006

2005(in thousands)Technology

$
1,767

$
1,011Plant


583


434Mining


205


C-Lock





Total Office and travel

$
2,555

$
1,445


The
majority of the increase is attributed to our increase in the number of employees at our corporate office and as a result of our acquisition of Buckeye. In addition, we increased our
travel

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related
to our expanded business development efforts, including travel to our Ohio subsidiary and travel to identify potential sites for future plants. We also saw an increase in travel to our Fort
Union plant site by non-plant related employees and management in 2006, as the plant entered the startup phase.

The
following table summarizes our insurance and other costs related to each of our segments for the years ended December 31, 2006 and 2005.

Year Ended December 31,2006

2005(in thousands)Technology

$
2,052

$
1,029Plant


74


336Mining


508


C-Lock





Total Insurance and other

$
2,634

$
1,365


The
increase can be attributed primarily to an overall increase in property and commercial liability premiums for our corporate and our Buckeye operations.



Plant start-up costs were $26.3 million and $1.5 million for the years ended December 31, 2006 and 2005, respectively. Plant
start-up costs were higher than anticipated due to general start up issues with this first-of-a-kind plant and
the acceleration of initial production runs. The commissioning of the facility at this accelerated pace resulted in a number of plant operating inefficiencies. We incurred higher feed stock costs as
we chose to purchase coal from a nearby mine and incurred trucking costs for the transportation of that purchased coal. Outsourced engineering and employee-related costs were incurred to assist with
the acceleration of the initial production. The water handling system was limited in its ability to process water from the production process. Disposal of this excess water required utilizing third
parties to transport water to approved disposal sites. This resulted in higher water disposal costs.



Depreciation, depletion and amortization are comprised of depreciation on our Fort Union plant using the units-of-production method, based
on actual tons processed and depreciation on other fixed assets using the straight-line method, depletion, based on actual tons mined at our mine sites in Ohio and Wyoming, and
amortization related to our patents. Depreciation, depletion and amortization expenses were $5.5 million for the year ended December 31, 2006 compared to $773,000 during the same period
ended 2005. The increases are primarily attributable to the acquisition of Buckeye in the second quarter of 2006.



Research and development costs were $1.4 million and $1.6 million for the years ended 2006 and 2005, respectively.



Cost of licensing and consulting revenue was $134,000 and $401,000 for the years ended December 31, 2006 and 2005, respectively. The decreases in these
costs were in direct correlation to the revenue recognized in 2005 on the licensing agreement we entered into in 2004.

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Asset impairment and bad debt charges were $335,000 and $1.3 million for the years ended December 31, 2006 and 2005, respectively. In 2006, we wrote
off $295,000 of certain site specific costs, which we were evaluating for a future K-Fuel facility.

Through
a series of transactions, Pegasus became indebted to us for $2.7 million. We have rights to collect payments under this note from Pegasus and to demand payment upon
certain events of default. During the year ended December 31, 2005, we determined that Pegasus might not have sufficient contracts to continue to meet this obligation. Therefore, we have
recorded an allowance for bad debt for the note receivable of $1.3 million. Despite this allowance, we retain all of our rights to collect payments under this note from Pegasus and to demand
payment upon certain events of default.



Interest income was $5.6 million and $1.9 million for the years ended December 31, 2006 and 2005, respectively. The increase is attributed to
interest earned on our cash balance, which was significantly higher compared to the same period in 2005, primarily as a result of our public stock offering in February of 2006.



Other income was $1.1 million for the year ended December 31, 2006.

In
2003, we completed an equity exchange transaction pursuant to which we transferred our interest in Pegasus Technologies, Inc. for full ownership of
K-Fuel LLC, now part of a wholly owned subsidiary named KFx Technology, LLC. As a part of this exchange transaction, we exchanged an intercompany working capital loan with
Pegasus with an outstanding balance of $9.4 million for a contingent earn-out agreement of up to $9.4 million in the aggregate, plus accrued interest (prime rate plus 500
basis points), payable out of a portion of future cash flows generated by Pegasus. Due to the contingent nature of this potential stream of future cash flows, we did not recognize an asset or any
associated income at the time of the exchange transaction. As a result of a
transfer of ownership interests, the earn-out provisions were triggered and we received a payment of $1.1 million from Pegasus as a payment in full satisfaction of the
$9.4 million obligation.

2008 Liquidity and Capital Resources Discussion

Our cash will primarily be used to fund corporate operations and for capital expenditures for future K-Fuel and/or K-Direct facilities and
corporate purposes. Our capital expenditures for 2008 are expected to be less than $10 million which includes Buckeye mining and development costs, and costs associated with K-Fuel
and K-Direct facilities. We expect that our capital expenditures budget for 2008 may increase as we proceed with the potential construction of future K-Fuel plants and obtain
additional funding for these projects. In July 2007, the fabricator of the boiler island completed certain fabrication and engineering work which provided an appropriate point to temporarily suspend
construction. We have classified this boiler as held for sale in the amount of $18.6 million. We agreed with the fabricator to suspend further construction on the boiler. Effective
January 31, 2008, we and the fabricator of the boiler island agreed to terminate the contract and as a result, all future financial obligations were also terminated. We have been in discussions
with several potential buyers for the sale of this boiler and anticipate the consummation of this sale in the future.

We
believe because of the decision to suspend operations and construction at our Fort Union plant and mine sites, along with the anticipated cash flows from our Buckeye operations, that
our current cash level is sufficient to support our corporate operations, including starting preliminary site investigation, design, permitting and similar long-lead-time
activities related to K-Fuel plants and/or

43

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K-Direct
plants located at coal-fired power generating and industrial facilities for at least the next twelve months. However, as we identify strategic opportunities to
accelerate projects of large-scale commercial K-Fuel facilities and/or K-Direct facilities, or other agreements such as joint ventures, we will need to obtain additional
funding. We plan to seek additional capital from time to time as needed principally through: (1) equity offerings or the exercise of outstanding options and warrants; (2) debt offerings;
and (3) partnering with third parties in the construction and operation for some of our large-scale commercial plants through the formation of joint ventures. While we believe we will obtain
additional capital through one or more of the alternatives described, we can provide no assurance that any of the alternatives will be available to us or be on terms acceptable to us.

On
July 30, 2007, we completed the sale of $95.0 million of long-term debt due 2012 that was resold in a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes are senior, secured obligations guaranteed by our wholly owned subsidiary, Evergreen Operations, LLC, and
its subsidiaries, and secured by a first-priority security interest in (1) all of our equity interests in Evergreen Operations, LLC, (2) an escrow account established in
connection with the offering, and (3) our and each of our subsidiaries' bank, investment,
brokerage or similar accounts holding cash and cash equivalents, subject to certain exceptions. We will pay interest semi-annually at a rate of 8.00% per annum, due on February 1
and August 1 of each year, beginning on February 1, 2008. The notes mature on August 1, 2012. We incurred costs of $6.0 million in connection with the sale of the notes.
Pursuant to the offering, we deposited $18.0 million of the net proceeds in the escrow account referred to above. We plan on using the remaining proceeds for Buckeye capital expenditures, for
general corporate purposes and future construction of K-Fuel or K-Direct facilities.

If
(1) the closing price of our common stock for at least 20 trading days in any 30 consecutive trading day period is at least the conversion price, or the reduced interest rate
threshold, and (2) if the shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes is effective and available for use for at least
30 days following the reduced interest rate threshold, unless registration is no longer required, then the initial interest rate will be permanently decreased to 5.00%. In addition, if
(1) the closing price of our common stock for at least 20 trading days in any 30 consecutive trading day period is at least 130% of the then applicable conversion price, or the collateral
release threshold, and (2) if the shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes is effective and available for use for at
least 30 days following the collateral release threshold, unless registration is no longer required, then the security will be released, including the $18.0 million held in escrow, and
the notes will become automatically subordinated. At such time as the security is released, we may redeem the notes at a redemption price payable in cash equal to 100% of the principal amount, plus
any accrued and unpaid interest and an additional "coupon make-whole payment." The "coupon make-whole" amount per $1,000 principal amount of notes will be equal to the present
value of all remaining scheduled payments of interest on each note to be redeemed through the maturity date. On October 29, 2007, we and the subsidiary guarantors filed a
post-effective amendment and prospectus supplement to our shelf registration statement with the Securities and Exchange Commission covering the resale of the notes, guarantees and the
shares of common stock issuable upon conversion of the notes. The registration statement, post-effective amendment and prospectus supplement were automatically effective upon filing with
the Securities and Exchange Commission.

In
February 2006, we sold approximately 8.1 million shares of common stock at a price to the public of $18.75 per share pursuant to a follow-on common stock offering,
resulting in net proceeds of approximately $144.6 million after deducting the underwriting discounts and commissions and estimated offering expenses. We used part of the proceeds from this
offering to fund the acquisition of Buckeye and the construction of our Fort Union plant. We plan on using the remaining funds for new K-Fuel and K-Direct facility construction
costs and general corporate purposes.

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Payment Obligations

The following table summarizes our future commitments as of December 31, 2007:

|                                    |                   | Payments due by period
|----------------------------------- | ----------------- | ----------------------
|
|
|Operating leases                    |                   | $                     
|Capital lease and other obligations |                   |                       
|Consulting and service commitments  |                   |                       
|Long-term debt                      |                   |                       
|                                    |                   |                       
|                                    | Total commitments |                       
|                                    |                   |                       

This
table does not include accounts payable, accrued expenses, or asset retirement obligations, which are reported in our December 31, 2007 Consolidated Balance Sheet. We
generally have not included any obligation in which either party has the right to terminate except as discussed below. Additionally, we have not included royalty payments, as we cannot presently
determine when such payments will be made as such payments are based upon our receipt of cash for licensing and royalties.

We
are obligated under non-cancelable operating leases with initial terms exceeding one year relating to office space. Rent expense for the years ended December 31,
2007, 2006 and 2005 was $784,000, $415,000 and $242,000, respectively. Additionally, included in operating leases is the rent obligation associated with our former headquarters totaling $942,000 a
portion of which we have sub-leased but are not released from the obligation. Furthermore, included in operating leases is a dock lease on the Ohio River, which we have the right to cancel
upon six months written notice. If this lease were cancelled as of December 31, 2007, we would be obligated to pay $250,000 rather than the entire obligation of $24.5 million reflected
in the above table.

Consulting
and service commitments include an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of carbon emissions.
The agreement provides us with an exclusive worldwide sub-license to a technology to standardize the measurement of carbon emissions in energy and agricultural related activities. The
agreement was amended and restated to expand the energy and agricultural activities to all applications of the technology and to eliminate other operating requirements. In order to maintain this
licensing arrangement, we are required to make minimum annual royalty payments of $500,000 to the developer of the proprietary technology, with each payment extending the arrangement for one year if
the parties are in material compliance with the contract. Additionally, consulting and service commitments includes our amended and restated our umbrella agreement with Bechtel. Through this new
program management agreement, we committed to provide Bechtel with $1 billion in construction contracts through 2013. Failure to meet this commitment by 2014 could cost us up to the
$10 million in termination fees, which is included in the above table.

Long-term
debt includes our principal amount due 2012 and the 8% interest payments.

Historical View



Cash used in operating activities was $51.6 million, $30.4 million and $12.1 million for the years ended December 31, 2007, 2006 and
2005, respectively. The majority of the cash used in operating activities for the year ended December 31, 2007 relates to cash utilized in our on-going operations, as adjusted for
non-cash items and changes in operating assets and liabilities. The most significant adjustment for the year ended December 31, 2007 was a $122.7 million impairment charges.
Other significant adjustments to net loss to arrive at cash used in operating activities for the years ended December 31, 2007 and 2006 were: non-cash compensation expense of
$19.6 million and $11.5 million

45

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in
2007 and 2006, respectively and depreciation, depletion and amortization of $8.4 million and $5.5 million, respectively, primarily from the acquisition of Buckeye. The most
significant adjustments to net loss for the year ended December 31, 2005 were non-cash expense related to the issuance of warrants and options to employees, directors and
consultants of $11.0 million and a $1.3 million non-cash charge to establish an allowance for a note receivable.



Cash used in investing activities was $50.2 million and $110.9 million for the years ended December 31, 2007 and 2006, respectively. The
majority of the uses of cash relate to the following:



Cash
used in investing activities was $73.9 million for the year ended December 31, 2005. The majority of the uses of cash related to the following;



Cash provided by financing activities for the year ended December 31, 2007 was $96.1 million compared to $169.1 million for the same period
ended 2006. The majority of the cash provided and used by financing activities relate to the following:



Cash
provided by financing activities for the year ended December 31, 2005 was $11.5 million. We received cash related to the exercise of options and warrants of
$11.7 million.

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Critical Accounting Policies and Estimates

We have identified the policies and estimates below as critical to our current and future business operations and the understanding of our results of operations.
For a detailed discussion on the application of these and other significant accounting policies, see the notes to our Consolidated Financial Statements in Item 8 of this Annual Report. These
policies and estimates are considered "critical" because they either had a material impact or they have the potential to have a material impact on our financial statements, and because they require
significant judgments, assumptions or estimates. The preparation of our financial statements in this Annual Report on Form 10-K requires us to make estimates and judgments that
affect both the results of operations as well as the carrying values of our assets and liabilities. Some of our accounting policies require us to make difficult and subjective judgments, often as a
result of the need to make estimates of matters that are inherently uncertain. We base estimates on historical experience and/or on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions, making it possible that a change in these estimates could occur in the near term. Set
forth below is a summary of our most critical accounting policies.

Revenue recognition.We recognize revenue when there is persuasive evidence of an arrangement,
generally when an agreement has been signed, all significant obligations have been satisfied, the fee is fixed or determinable, and collection is reasonably assured. Any up-front fees
received are deferred and recognized over the provision of specific deliverables as defined in the agreements. As our history related to customer relationships is limited, we may be required to change
the estimated period over which we recognize our revenue as more information becomes available. Arrangements that include multiple deliverables are evaluated to determine whether the elements are
separable based on objective evidence. If the elements are deemed separable, total consideration is allocated to each element and the revenue associated with each element is recognized as earned. If
the elements are not deemed separable, total consideration is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period. We believe that
the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are "critical accounting estimates" because: (1) they require
management to make assumptions about how long we will retain customers, for which we have limited history; (2) the assessment of whether bundled elements are separable can be subjective; and
(3) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material.

Accounts and notes receivable and allowances.Receivables are recorded at their estimated net
realizable value. The allowance for doubtful accounts is determined through an analysis of the past-due status of receivables and assessments of risk regarding collectability. If the
financial condition of the customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Capitalization of Costs.Generally, we expense plant start-up costs as incurred that do
not extend the life of the plant or increase production volumes. In addition, we expense mine exploration costs as incurred. Once it has been determined that it is economically feasible to extract
coal, we begin to capitalize these costs as premining costs. We have identified the commencement of permitting as the point to begin capitalizing premining costs. Judgment is exercised in determining
(i) if costs extend the life of the plant; (ii) if costs increase plant production volumes; and (iii) the feasibility of extracting coal. If these judgments are incorrect, we may
capitalize more costs than we otherwise should.

Mineral rights and mine development.A significant portion of our coal reserves are controlled
through leasing arrangements. Costs to obtain coal lands and leased mineral rights, including

47

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capitalized
premining costs, are capitalized and depleted to operations using the units-of-production method based on tons produced utilizing only proven and recoverable
reserves in the depletion base and are assumed to have no residual value. Premining costs include drilling, permitting, county and state filing fees and the initial overburden removal. We used
assumptions such as selling price of coal, costs to mine and a discount rate to value our mines at Buckeye. If the assumptions used to value the proven and recoverable reserves change in the future,
we may be required to record impairment charges for these assets.

Useful lives of our long-lived assets.Selecting the useful lives of
long-lived assets to be depreciated, depleted or amortized requires a significant amount of judgment. We placed our Fort Union plant into service in the third quarter of 2006. As this is
the first-of-its-kind plant, assumptions were made in order to estimate the total expected production for the life of the plant. These assumptions were primarily
based upon research and inquiry of our engineers.

Valuation of long-lived assets.The valuation of our long-lived and
intangible assets, including our Fort Union plant, mineral rights and patents, have significant impact on our results of operations and financial condition. We must assess the realizable value of
these assets for potential impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of these assets, we must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The estimates and assumptions related to our Fort Union plant are particularly
difficult to determine as it is a first-of-its-kind facility. In addition, we must make assumptions regarding the useful lives of these assets. If these estimates
or their related assumptions change in the future, we may be required to record impairment charges for these assets.

Asset retirement obligations.We are required to record the fair value of legally required removal
costs and retirement obligations as a liability and we also recorded an offsetting asset. Initially, our asset retirement obligations were recorded at their fair value using an expected cash flow
approach, in which multiple cash flow scenarios that reflected the range of possible outcomes and a credit-adjusted risk-free rate were applied. The liability is then accreted over time by
applying the interest method of allocation. In determining the initial liability, we must make assumptions regarding estimated future cash flows and other factors. In addition, the rate of accretion
is based upon our best estimate of the rate at which cost to complete the reclamation will increase. If these estimates and their related assumptions are incorrect or change in the future, we may be
required to increase our obligation.

Accounting for stock grants, options and warrants.We issue stock grants, options and warrants to
employees, board of directors and consultants in connection with our various business activities. In accounting for these awards we are required to make estimates of the fair value of the related
instruments, the periods benefited and forfeiture rates. These estimates may affect such financial statement categories as stockholders' equity and general and administrative expense. If these
estimates are incorrect, we may be required to incur additional expense in the future.

Accounting for derivative financial instruments.Derivatives may be embedded in financial instruments
(the "host instrument"). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument, the
terms of the embedded derivative are similar to those of a stand-alone derivative and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured
at fair value and any subsequent changes are recognized in the statement of operations. We are required to make estimates and assumptions including, but not limited to, estimating the future market
price of our common stock and probability of a change in control. If these assumptions and estimates are incorrect, we may be required to incur additional expense in the future. If our expected
volatility of our common stock decreased by 10%, the impact would have been an increase in other

48

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expenses
of $420,000. If our expected volatility of our common stock increased by 10%, the impact would have been an increase in other income of $330,000.

Accounting for acquisitions.The acquisition of businesses is an important element of our strategy.
We are required to record the net assets acquired at the estimated fair value at the date of acquisition. The determination of the fair value of the assets acquired and liabilities assumed requires us
to make significant estimates and assumptions that affect our financial statements. For example, the value and estimated life of assets may affect the amount of future period depletion and
depreciation expense for the assets as well as possible impairment charges that may be incurred.

Marketable securitiesWe classify our marketable securities as available for sale. As of
December 31, 2007 and 2006, we had available-for-sale investments in auction rate securities
("ARS") with a carrying value of $29.5 million and $41.8 million as of December 31, 2006. The types of ARS investments that we own are backed by student loans, the majority of
which are guaranteed under the Federal Family Education Loan Program ("FFELP"), and all had credit ratings of AAA or Aaa when purchased. The interest rates on these ARS are reset every 7 to
35 days by an auction process.

Historically,
these types of ARS investments have been highly liquid. As a result of the recent liquidity issues experienced in the global credit and capital markets, in February and
March 2008, auctions for a certain ARS investment held by us failed. The recent uncertainties in the credit markets have prevented us and other investors from liquidating the holdings of auction rate
securities in recent auctions for these securities because the amount of securities submitted for sale has exceeded the amount of purchase orders.

The
carrying value of our investments in ARS as of December 31, 2007 represents our best estimate of the fair value of these investments based on currently available information.
The estimated fair value calculated at December 31, 2007 was determined to be the carrying value as of December 31, 2007. The estimation process included consideration of such factors as
issuer and insurer credit rating, comparable market data, if available, credit enhancement structures, projected yields, discount rates and terminal periods. Due to the uncertainty in the credit
markets, it is reasonably possible the fair value of these investments may change in the near term. If the credit markets recover and successful auctions resume, we may be able to recover an amount
greater than the carrying value of the ARS as of December 31, 2007, which would result in a gain. However, if the issuers are unable to successfully close future auctions and their credit
ratings deteriorate, we may be required to adjust the carrying value of its investment in ARS through impairment charges.

Recent Accounting Pronouncements

On July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109," ("FIN 48") which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize, in our consolidated
financial statements, the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48
were effective as of January 1, 2007. We have evaluated our tax positions and determined that the adoption of this pronouncement did not have an impact on our financial position or results of
operations.

In
September 2006, the U.S. Securities and Exchange Commission, or SEC, released Staff Accounting Bulletin No. 108, or SAB No. 108, "Financial Statement Misstatements." SAB
No. 108 expresses the SEC staff's view regarding the process of quantifying financial statement misstatements. The Interpretations in SAB No. 108 was issued to address diversity in
practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB No. 108 is effective for annual
financial statements covering the first fiscal

49

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year
ending after November 15, 2006. The adoption of this pronouncement did not have a material impact on our financial position or results our operations.

In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157, "Fair Value Measurement". This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the Financial Accounting Standards Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly,
this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are in the process of evaluating the impacts, if any, of
adopting this pronouncement.

In
May 2005, the Financial Accounting Standards Board, as part of an effort to conform to international accounting standards, issued SFAS No. 154, "Accounting Changes and Error
Corrections," which was effective for us beginning on January 1, 2006. SFAS No. 154 requires that all voluntary changes in accounting principles be retrospectively applied to prior
financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154
requires that the new principle be applied to the earliest period practicable. Since adoption, SFAS No. 154 has not had a material effect on our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to risks inherent in operations, we are exposed to the following market risks in our business:

Some
of the products used in our mining activities, such as diesel fuel and explosives, are subject to commodity price risk. We expect to consume 1.7 million to 1.9 million
gallons of fuel per year. On a per gallon basis, based on this usage, a change in fuel prices of one cent per gallon would result in an increase in our operating costs of approximately $17,000 per
year. Alternatively, a one dollar per barrel
change in the price of crude oil would increase or decrease our annual fuel costs by approximately $680,000.

Ignoring
embedded derivatives, we own (or hold) no derivative instruments or floating rate debt and do not expect to derive a material amount of our revenues from such interest bearing
securities. Currently, we have no significant foreign operations. We were required to establish an irrevocable standby letter of credit in Euros, which will be adjusted to account for the change in
foreign currency rates. As these adjustments are made we will either increase or decrease our restricted cash balance. At this time we are still evaluating our exposure to these foreign currency rate
adjustments. However, to the extent that we establish significant foreign operations in the future, we may attempt to mitigate risks associated with foreign currency exchange rates contractually and
through the use of hedging activities and other means considered appropriate. We hold no equity market securities, which are subject to equity market risk relative to our own equity securities.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required pursuant to this item are included in Item 15 of this Annual Report on Form 10-K and begin on
page F-1. The supplementary financial information required by this item is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Background

As part of management's ongoing review of our accounting policies and internal control over financial reporting, on March 19, 2008, management identified a
material weakness in the operation of our internal controls over financial reporting as they existed at December 31, 2006 and 2005, related to accounting errors that resulted in a
misclassification of marketable securities held at December 31, 2006 and 2005 as cash and cash equivalents. This weakness led to the Board's decision on March 19, 2008 regarding the
restatement in this Annual Report on Form 10-K of our results for the year ended December 31, 2006 and 2005. A more detailed description of the restatements for these periods
is included in Note 18 of the notes to the consolidated financial statements set forth in Item 15 of this report.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives.

With
the participation of management, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. In performing this evaluation, management considered its controls over the accounting for and disclosure of its investments. Management
has determined that a material weakness in internal control over financial reporting related to the accounting for and disclosure of investments existed as of December 31, 2007, which resulted
in errors and the subsequent restatement of the 2005 and 2006 annual financial statements included in this Annual Report on Form 10-K. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in ensuring that material information required to be disclosed is included in the
reports that we file with the Securities and Exchange Commission.

Management's Annual Report on Internal Control over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting
for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing
reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or
disposition of company assets that could have a material

51

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effect
on our financial statements would be prevented or detected on a timely basis. Because of the inherent limitations of internal control over financial reporting, misstatements may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management,
with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on this assessment, management, with the participation of the Chief Executive Officer and Chief Financial Officer, has determined that we did not
maintain effective internal controls over financial reporting as of December 31, 2007. In connection with the preparation of its Annual Report on Form 10-K, the Company
identified certain accounting errors that led it to conclude that it's previously issued financial statements should be restated due to a misclassification of marketable securities held at
December 31, 2006 and 2005 as cash and cash equivalents. In connection with the restatement, management determined that there was a material weakness in the operation of our internal controls
over financial reporting, as more fully described below.

A
material weakness is a significant deficiency, or combination of significant 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. Management identified the following material weakness in their assessment: the Company's controls over the accounting for cash and cash
equivalents and short-term investments did not operate effectively to appropriately identify certain auction-rate securities and determine that such auction-rate
securities and certain other investments were presented in accordance with generally accepted accounting principles with the Company's balance sheet and statement of cash flows. This material weakness
resulted in the restatement of the Company's 2005 and 2006 consolidated balance sheets and statements of cash flows. The Company will also restate the quarterly periods for the periods ending
March 31, 2007, June 30,
2007 and September 30, 2007 when we file our quarterly reports on Form 10-Q. These errors did not result in any changes to the consolidated statements of operations, the
consolidated statements of stockholders' equity, total current assets, total assets, total liabilities and total stockholder's equity on the consolidated balance sheets for any of the previously
reported periods.

The
effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, our independent registered public accounting
firm.

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

In order to remediate the material weakness, management has researched the appropriate accounting classification for auction rate securities and has communicated
these findings to the Chief Financial Officer and other appropriate accounting and treasury personnel. In our consolidated financial statements as of December 31, 2007, the accounting for
auction rate securities is in conformity with GAAP and SEC guidance. We have implemented controls to analyze holdings at each reporting period to attempt to identify if any auction rate securities are
held and if so, that they are appropriately accounted for. In addition, we have also re-evaluated our investment strategy and have decided to liquidate all positions in auction rate
securities due to the uncertainty in that market. Subsequent to December 31, 2007, we have liquidated all of our holdings in auction rate securities except for $2 million.

Management
believes we have sufficient individuals that collectively possess a strong background, experience and expertise related to SEC reporting and finance functions. However, due to
the material weaknesses in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)

52

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under
the Exchange Act, and as described in this Item 9A, and the fact that the significant scope and timing of these remediation steps did not permit observation over an appropriate period of
time for us to adequately test their effectiveness, our disclosure controls and procedures were not effective as of December 31, 2007 to assure that the information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is appropriately recorded, processed, summarized and reported within the periods specified in the SEC's rules.

Notwithstanding
the existence of a material weakness in internal controls, we believe that the consolidated financial statements fairly present, in all material respects, our
consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31,
2007, 2006 and 2005 in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Other than as described above, there has been no change in our internal controls over financial reporting during the quarter ended December 31, 2007 that
has materially affected our internal controls over financial reporting.

53

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Evergreen Energy Inc.
Denver, Colorado

We
have audited Evergreen Energy Inc. and subsidiaries' (the "Company's") internal control over financial reporting as of December 31, 2007 based on the criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. 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,
included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, 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 by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) 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 (3) 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the 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 deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the identification and presentation in
accordance with accounting principles generally accepted in the United States of America, of marketable securities as cash and cash equivalents has been identified and included in management's
assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the accompanying consolidated financial statements the Company as
of and for the year ended

54

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December 31,
2007 of the Company and this report does not affect our report on such financial statements.

In
our opinion, because of the effect of the material weakness identified 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, 2007, based on the criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated financial statements of the Company
as of and for the year ended December 31, 2007 and our report dated March 21, 2008 expressed an unqualified
opinion on those financial statements and includes an explanatory paragraph relating to the change in method of accounting for stock based compensation discussed in Note 1 and an explanatory
paragraph relating to the restatement discussed in Note 18.

DELOITTE & TOUCHE LLP

Deloitte &
Touche LLP
Denver, Colorado
March 21, 2008

55

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ITEM 9B.    OTHER INFORMATION

On March 19, 2008, our Board of Directors decided to suspend operations at our Fort Union plant and mine site. As described elsewhere in this Annual
Report, we believe this will enable us to focus on future K-Fuel or K-Direct facilities by redirecting constrained resources, both capital and human, to focus on the
commercialization of our process. We incurred an asset impairment charge of $109.5 million related to the Fort Union plant and mine site as of December 31, 2007. Additionally, we
performed a fair value analysis on our boiler classified as assets held for sale and concluded that the carrying value was greater than the fair value analysis and recorded an impairment charge of
$7.8 million. None of these impairment charges, which are reflected in our financial statements included with this Annual Report, will result in future cash expenditures.

56

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The required information for this item is incorporated by reference to our Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, since such
Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.

Our
board of directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executives, officers and employees. Our Code of Business Conduct and Ethics can be
found on our web site, which is located atwww.evgenergy.com. We intend to make all required disclosures concerning any amendments to, or waivers from,
our Code of Business Conduct and Ethics on our web site. Any person may request a copy of the Code of Business Conduct and Ethics, at no cost, by writing to us at the following address: Evergreen
Energy Inc, 1225 17th Street, Suite 1300, Denver, Colorado, 80202, Attention: Investor Relations.

ITEM 11.    EXECUTIVE COMPENSATION

The required information for this item is incorporated by reference to our Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, since such
Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The required information for this item is incorporated by reference to our Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, since such
Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The required information for this item is incorporated by reference to our Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, since such
Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The required information for this item is incorporated by reference to our Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, since such
Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.

57

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

15(a)(1)The following documents are filed as part of this Annual Report on Form 10-K:

The
following consolidated financial statements of Evergreen Energy Inc. are filed as part of this report:



|Report of Independent Registered Public Accounting Firm    |  | F-1       
|---------------------------------------------------------- |  | ----------
|Consolidated Balance Sheets                                |  | F-2       
|Consolidated Statements of Operations                      |  | F-3       
|Consolidated Statements of Changes in Stockholders' Equity |  | F-4       
|Consolidated Statements of Cash Flows                      |  | F-5       
|Notes to Consolidated Financial Statements                 |  | F-6 - F-48

15(a)(2) Financial Statement Schedules.Consolidated Financial Statements of Evergreen Operations, LLC and Subsidiaries for the years ended
December 31, 2007, 2006 & 2005.

15(a)(3)    Exhibits.

|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 2.1 to our Form 10-KSB for the year ended December 31, 1993).                                                                                                                                                                                                                                                                    
|3.2            |  | Certificate of Amendment to Certificate of Incorporation of the Company (incorporated by reference to Exhibit 2.2 to our Form 10-KSB for the year ended December 31, 1993).                                                                                                                                                                                                                                                 
|3.3            |  | Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to our Form 10-KSB, as amended, for the year ended December 31, 1995).                                                                                                                                                                                                                                                          
|3.4            |  | Certificate of Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to our Form 10-K for the year ended December 31, 2006).                                                                                                                                                                                                                                          
|3.5            |  | Certificate of Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to our Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                                           
|3.6            |  | Certificate of Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.6 to our Form 10-K for the year ended December 31, 2006).                                                                                                                                                                                                                                          
|3.7            |  | Third Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to our Form 8-K filed February 27, 2007).                                                                                                                                                                                                                                                                                        
|4.1            |  | Indenture, dated July 30, 2007, by and between Evergreen Energy Inc., Evergreen Operations, LLC, KFx Plant, LLC, KFx Operations, LLC, Landrica Development Company, Buckeye Industrial
Mining Co. and U.S. Bank National Association, including the form of 8.00% Convertible Secured Note due 2012 (included as Exhibit A to the Indenture) (incorporated by reference to Exhibit 4.1 to our Form 8-K filed July 30,
2007).
|4.2            |  | Registration Rights Agreement dated as of July 30, 2007, by and among Evergreen Energy Inc., Evergreen Operations, LLC, KFx Plant, LLC, KFx Operations, LLC, Landrica Development Company, Buckeye
Industrial Mining Co. and the initial purchasers listed therein (incorporated by reference to Exhibit 4.2 to our Form 8-K filed July 30, 2007).                                                                          

58

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|4.3   |  | Security Agreement, dated as of July 30, 2007, by and among Evergreen Energy Inc., Evergreen Operations, LLC, KFx Plant, LLC, KFx Operations, LLC, Landrica Development Company, Buckeye Industrial
Mining Co. and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.3 to our Form 10-Q for the quarter ended September 30, 2007).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  |  | Amendments to Agreements Between Theodore Venners, S.A. Wilson, Koppelman Fuel Development Company, and the Koppelman Group dated December 29, 1992 (incorporated by reference to Exhibit 6.1 to our
Form 10-KSB for the year ended December 31, 1993).**                                                                                                                               
|10.2  |  | Royalty Agreement dated December 29, 1992 between the Company and the Koppelman Group (incorporated by reference to Exhibit 6.7 to our Form 10-KSB for the year ended December 31, 1993).                                                                                                                                                                                               
|10.3  |  | Stock Option Plan dated December 16, 1993 (incorporated by reference to Exhibit 6.19 to our Form 10-KSB for the year ended December 31, 1993).**                                                                                                                                                                                                                                        
|10.4  |  | Gross Royalty Share Agreement dated August 17, 1995 between the Company and Fort Union, Ltd. (incorporated by reference to Exhibit 10.51 to our Registration Statement on Form SB-2 (File
No. 33-97418)).                                                                                                                                                                               
|10.5  |  | Letter of Agreement dated August 15, 1995 between the Company and Edward Koppelman (incorporated by reference to Exhibit 10.53 to our Registration Statement on Form SB-2 (File No. 33-97418)
).                                                                                                                                                                                        
|10.6  |  | Royalty Amendment Agreement dated June 3, 1996 between the Company, Edward Koppelman and Theodore Venners (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarter ended June 30,
1996).**                                                                                                                                                                           
|10.7  |  | Non-qualified Stock Option Agreement dated October 1, 1998 between the Company and Seth L. Patterson (incorporated by reference to Exhibit 10.43 to our Form 10-K for the year ended December 31,
1998).                                                                                                                                                                                
|10.8  |  | Stock Purchase Agreement dated March 26, 1997 between the Company and Theodore Venners (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarter ended March 31, 1999).**                                                                                                                                                                                             
|10.9  |  | 1999 Stock Incentive Plan (incorporated by reference from Annex A-1 of the Company's Proxy Statement filed May 4, 1999).**                                                                                                                                                                                                                                                              
|10.10 |  | 1996 Stock Option and Incentive Plan of KFx Inc. (incorporated by reference to Exhibit 10.1 to our Form 10-K for the year ended December 31, 2000).**                                                                                                                                                                                                                                   
|10.11 |  | Addendum to Blanket Contract, No. 142072, dated May 1, 2001, ProjectCinergy NOx Compliance Plan, Addendum dated July 24, 2001 (incorporated by reference to Exhibit 10.3 to our Form 10-Q for
the quarter ended September 30, 2001).                                                                                                                                                   
|10.12 |  | Common Stock and Warrant Purchase Agreement dated as of March 28, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed April 2, 2002).                                                                                                                                                                                                                                 
|10.13 |  | Common Stock and Warrant Purchase Agreement between KFx Inc. and the Investors dated April 30, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed May 7, 2002).                                                                                                                                                                                                      
|10.14 |  | Common Stock and Warrant Purchase Agreement between KFx Inc. and the Investors dated July 1, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed July 3, 2002).                                                                                                                                                                                                       
|10.15 |  | Common Stock and Warrant Purchase Agreement between KFx Inc. and the Investors dated July 19, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed July 24, 2002)                                                                                                                                                                                                      

59

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|10.16 |  | Common Stock and Warrant Purchase Agreement between KFx Inc. and the Investors dated August 21, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed August 28, 2002).                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Waiver of Penalty Warrants dated September 25, 2002 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed September 27, 2002).                                                               
|10.18 |  | KFx Inc. 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K filed December 17, 2004).**                                                                              
|10.19 |  | Waiver Agreement dated December 17, 2004 between KFx Inc. and Theodore Venners (incorporated by reference to Exhibit 10.60 to our Form 10-K for the year ended December 31, 2004).**                    
|10.20 |  | Employment Agreement between KFx Inc. and William G. Laughlin (incorporated by reference to Exhibit 10.61 to our Form 8-K filed March 15, 2005).**                                                      
|10.21 |  | Employment Agreement between KFx Inc. and Robert I. Hanfling (incorporated by reference to Exhibit 10.62 to our Form 10-Q for the quarter ended March 31, 2005).**                                      
|10.22 |  | K-Fuel Projects Participation and Development Agreement Dated May 5, 2005 (incorporated by reference to Exhibit 10.63 to our Form 10-Q for the quarter ended March 31, 2005).                           
|10.23 |  | First Amendment to Fourth Amended and Restated Investors' Rights Agreement (incorporated by reference to Exhibit 10.64 to our Form 10-Q for the quarter ended March 31, 2005).                          
|10.24 |  | Employment Agreement between KFx Inc. and Mark S. Sexton (incorporated by reference to Exhibit 10.65 to our Form 8-K filed October 25, 2005).**                                                         
|10.25 |  | Employment Agreement between KFx Inc. and Kevin R. Collins (incorporated by reference to Exhibit 10.66 to our Form 8-K filed October 25, 2005).**                                                       
|10.26 |  | KFx Inc. 2005 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.67 to our Form S-8 filed November 4, 2005).**                                                                       
|10.27 |  | Option Agreement dated September 28, 2005 between Buckskin Mining Company and KFx Plant III, LLC (incorporated by reference to Exhibit 10.68 to our Form 10-Q for the quarter ended
September 30, 2005).
|10.28 |  | Employment Agreement between KFx Inc. and Theodore Venners (incorporated by reference to Exhibit 10.69 to our Form 8-K filed December 22, 2005).**                                                      
|10.29 |  | Business Development and Intellectual Property Rights Agreement, dated January 2, 2003 (incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 31, 2006).                              
|10.30 |  | Addendum to Business Development and Intellectual Property Rights Agreement, dated January 8, 2004 (incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 31, 2006).                  
|10.31 |  | First Amendment to the Business Development and Intellectual Property Rights Agreement, dated May 21, 2004 (incorporated by reference to Exhibit 99.3 to our Form 8-K filed January 31,
2006).          
|10.32 |  | Professional Services Agreement, dated July 16, 2003 (incorporated by reference to Exhibit 99.4 to our Form 8-K filed January 31, 2006).                                                                
|10.33 |  | Master Agreement between KFx Plant II, LLC and Arch Coal, Inc. dated October 5, 2005 (incorporated by reference to Exhibit 10.74 to our Form 10-K for the year ended December 31,
2005).                

60

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|10.34 |  | Stock Purchase and Warrants Agreement between KFx Inc. and Arch Coal, Inc. dated October 5, 2005 (incorporated by reference to Exhibit 10.75 to our Form 10-K for the year ended December 31,
2005).                                                                                                                                                  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.35 |  | Marketing, Distribution and Transportation Logistics Service Agreement with DTE Coal Services, Inc. dated June 6, 2006 (incorporated by reference to Exhibit 10.79 to our Form 10-Q for the quarter ended
June 30, 2006).                                                                                                                             
|10.36 |  | Amendment to Master Agreement Between KFx Plant II, LLC and Arch Coal, Inc. dated June 29, 2006 (incorporated by reference to Exhibit 10.80 to our Form 10-Q for the quarter ended June 30,
2006).                                                                                                                                                    
|10.37 |  | Net lease agreement between Company and Seventeenth Street Plaza Realty Holding Company dated November 17, 2006 (incorporated by reference to Exhibit 10.37 to our Form 10-K for the year ended
December 31, 2006).                                                                                                                                   
|10.38 |  | Purchase Agreement dated as of July 25, 2007, among Evergreen Energy Inc., Evergreen Operations, LLC, KFx Plant, LLC, KFx Operations, LLC, Landrica Development Company, Buckeye Industrial
Mining Co. and the initial purchasers named therein (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarter ended September 30, 2007).
|10.39 |  | Program Management Agreement, dated September 19, 2007.*                                                                                                                                                                                                                                                                                              
|12.1  |  | Statement of Computation of Ratio of Earnings to Fixed Charges.*                                                                                                                                                                                                                                                                                      
|21.1  |  | Subsidiaries.*                                                                                                                                                                                                                                                                                                                                        
|23.1  |  | Consent of Deloitte & Touche LLPEvergreen Energy Inc.*                                                                                                                                                                                                                                                                                               
|23.2  |  | Consent of Deloitte & Touche LLPEvergreen Operations, LLC.*                                                                                                                                                                                                                                                                                          
|24.1  |  | Powers of Attorney, incorporated by reference to Signature page attached hereto.                                                                                                                                                                                                                                                                      
|31.1  |  | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                     
|31.2  |  | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                     
|32.1  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                              
|32.2  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                              
|99.1  |  | Consolidated Financial Statements of Evergreen Operations, LLC and Subsidiaries for the years ended December 31, 2007, 2006 and 2005.*                                                                                                                                                                                                                

---

61

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | EVERGREEN ENERGY INC.
|-------------------- |  | ---------------------
|Date: March 21, 2008 |  | By:                  
|                     |  |                      

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Diana L. Kubik or Kevin R. Collins as his or her true
and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place, stead, in any and all capacities, to
sign any
and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, including all amendments thereto, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|                     |  |                                                                                                         
|-------------------- |  | --------------------------------------------------------------------------------------------------------
|                     |  |                                                                                                         
|Date: March 21, 2008 |  | /s/KEVIN R. COLLINSKevin R. Collins,President, Chief Executive Officer and
Director                     
|                     |  | (Principal Executive Officer)                                                                           
|Date: March 21, 2008 |  | /s/THEODORE VENNERSTheodore Venners,Chief Strategy Officer and Director                                 
|Date: March 21, 2008 |  | /s/DIANA L. KUBIKVice President and Chief Financial Officer (Principal Financial and Accounting Officer)

62

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|Date: March 21, 2008 |  | /s/STANFORD M. ADELSTEINStanford M. Adelstein,Director              
|-------------------- |  | --------------------------------------------------------------------
|Date: March 21, 2008 |  | /s/ROBERT J. CLARKRobert J. Clark,Chairman of the Board of Directors
|Date: March 21, 2008 |  | /s/MANUEL H. JOHNSONManuel H. Johnson,Director                      
|Date: March 21, 2008 |  | /s/ROBERT S. KAPLANRobert S. Kaplan,Director                        
|Date:                |  | John V. Lovoi,Director                                              
|Date: March 21, 2008 |  | /s/JACK C. PESTERJack C. Pester,Director                            
|Date: March 21, 2008 |  | /s/JAMES S. PIGNATELLIJames S. Pignatelli,Director                  
|Date: March 21, 2008 |  | /s/W. GRADY ROSIERW. Grady Rosier,Director                          
|Date: March 21, 2008 |  | /s/JAMES R. SCHLESINGERJames R. Schlesinger,Director                

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Evergreen Energy Inc.
Denver, Colorado

We
have audited the accompanying consolidated balance sheets of Evergreen Energy Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these 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 audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of Evergreen Energy Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.

As
discussed in Note 1, the Company changed its method of accounting for stock-based compensation in 2006.

As
discussed in Note 18, the Company has restated its consolidated balance sheet as of December 31, 2006 and the consolidated statements of cash flows for the years ended
December 31, 2006 and 2005.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 21, 2008 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.

Deloitte &
Touche LLP
Denver, Colorado
March 21, 2008

F-1

---





EVERGREEN ENERGY INC.

Consolidated Balance Sheets

|                                                                  |                                                                                                                         | December 31,               |        
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------
|
|
|
|Assets                                                            |                                                                                                                         |                            |        
|Current:                                                          |                                                                                                                         |                            |        
|                                                                  | Cash and cash equivalents                                                                                               |                            | $      
|                                                                  | Accounts receivable                                                                                                     |                            |        
|                                                                  | Marketable securities                                                                                                   |                            |        
|                                                                  | Inventory                                                                                                               |                            |        
|                                                                  | Prepaid and other assets                                                                                                |                            |        
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | Total current assets       |        
|Property, plant and equipment, net of accumulated depreciation    |                                                                                                                         |                            | 25,882 
|Construction in progress                                          |                                                                                                                         |                            | 11,965 
|Mineral rights and mine development, net of accumulated depletion |                                                                                                                         |                            | 19,363 
|Restricted cash and marketable securities                         |                                                                                                                         |                            | 28,418 
|Debt issue costs, net of amortization                             |                                                                                                                         |                            | 5,587  
|Other assets                                                      |                                                                                                                         |                            | 4,694  
|Assets held for sale                                              |                                                                                                                         |                            | 18,615 
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | $                          | 175,811
|                                                                  |                                                                                                                         |                            |        
|Liabilities and Stockholders' Equity                              |                                                                                                                         |                            |        
|Current liabilities:                                              |                                                                                                                         |                            |        
|                                                                  | Accounts payable                                                                                                        |                            | $      
|                                                                  | Accrued liabilities                                                                                                     |                            |        
|                                                                  | Other current liabilities                                                                                               |                            |        
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | Total current liabilities  |        
|Long-term debt                                                    |                                                                                                                         |                            | 97,971 
|Deferred revenue, less current portion                            |                                                                                                                         |                            | 6,732  
|Asset retirement obligations                                      |                                                                                                                         |                            | 6,171  
|Other liabilities, less current portion                           |                                                                                                                         |                            | 2,531  
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | Total liabilities          |        
|Commitments and contingencies                                     |                                                                                                                         |                            |        
|Stockholders' equity:                                             |                                                                                                                         |                            |        
|                                                                  | Preferred stock, $.001 par value, shares authorized 20,000; none outstanding                                            |                            |        
|                                                                  | Common stock, $.001 par value, shares authorized 280,000; 84,327 and 82,690 shares issued and outstanding, respectively |                            |        
|                                                                  | Additional paid-in capital                                                                                              |                            |        
|                                                                  | Accumulated deficit                                                                                                     |                            |        
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | Total stockholders' equity |        
|                                                                  |                                                                                                                         |                            |        
|                                                                  |                                                                                                                         | $                          | 175,811
|                                                                  |                                                                                                                         |                            |        

See
accompanying notes to the consolidated financial statements.

F-2

---



EVERGREEN ENERGY INC.        Consolidated Statements of Operations

|                                           |                                                     | Years Ended December 31, |         
|------------------------------------------ | --------------------------------------------------- | ------------------------ | --------
|
|
|Operating revenues:                        |                                                     |                          |         
|                                           | Mining                                              |                          | $       
|                                           | K-Fuel refined coal and blended K-Fuel refined coal |                          |         
|                                           | Licensing                                           |                          |         
|                                           | Consulting and other                                |                          |         
|                                           |                                                     |                          |         
|                                           |                                                     | Total operating revenue  |         
|Operating expenses:                        |                                                     |                          |         
|                                           | General and administrative                          |                          |         
|                                           | Coal mining operating costs                         |                          |         
|                                           | Plant start-up costs                                |                          |         
|                                           | Depreciation, depletion and amortization            |                          |         
|                                           | Research and development                            |                          |         
|                                           | Cost of licensing and consulting revenue            |                          |         
|                                           | Asset impairment and bad debt                       |                          |         
|                                           |                                                     |                          |         
|                                           |                                                     | Total operating expenses |         
|                                           |                                                     |                          |         
|Operating loss                             |                                                     |                          | (204,221
|Other income (expense):                    |                                                     |                          |         
|                                           | Interest income                                     |                          |         
|                                           | Interest expense                                    |                          |         
|                                           | Other income, net                                   |                          |         
|                                           |                                                     |                          |         
|                                           |                                                     | Total other income       |         
|                                           |                                                     |                          |         
|Net loss                                   |                                                     | $                        | (204,676
|                                           |                                                     |                          |         
|Basic and diluted net loss per share       |                                                     | $                        | (2.49   
|                                           |                                                     |                          |         
|Weighted-average common shares outstanding |                                                     |                          | 82,232  
|                                           |                                                     |                          |         

See
accompanying notes to the consolidated financial statements.

F-3

---





EVERGREEN ENERGY INC.

Consolidated Statements of Stockholders' Equity

For the Years ended December 31, 2007, 2006 and 2005

|                                                                                           |                                                                       | Common Stock |     |   |    |   |   |         |       
|------------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------ | --- | - | -- | - | - | ------- | ------
|
|
|
|Balance, January 1, 2005                                                                   |                                                                       | 64,837       |     |   | 65 |   |   | 222,752 |       
|Common stock issued on exercise of options and warrants                                    |                                                                       | 3,239        |     |   | 3  |   |   | 11,696  |       
|Common stock and warrants issued for services                                              |                                                                       | 39           |     |   |   |   |   | 8,756   |       
|Compensation expense for directors and employees                                           |                                                                       | 28           |     |   |   |   |   | 2,239   |       
|Net loss                                                                                   |                                                                       |             |     |   |   |   |   |        |       
|                                                                                           |                                                                       |              |     |   |    |   |   |         |       
|Balance, December 31, 2005                                                                 |                                                                       | 68,143       |     |   | 68 |   |   | 245,443 |       
|Common stock issued on exercise of options and warrants                                    |                                                                       | 4,258        |     |   | 4  |   |   | 24,615  |       
|Common stock issued in public offering, net of offering costs                              |                                                                       | 8,050        |     |   | 8  |   |   | 144,551 |       
|Restricted stock issued to escrow agent (related to certain executives)                    |                                                                       | 2,000        |     |   | 2  |   |   |        |       
|Common stock issued related to acquisition                                                 |                                                                       | 119          |     |   |   |   |   | 2,194   |       
|Warrant extension                                                                          |                                                                       |             |     |   |   |   |   | 1,692   |       
|Share-based compensation expense related to employees and consultants                      |                                                                       | 120          |     |   | 1  |   |   | 9,803   |       
|Net loss                                                                                   |                                                                       |             |     |   |   |   |   |        |       
|                                                                                           |                                                                       |              |     |   |    |   |   |         |       
|Balance, December 31, 2006                                                                 |                                                                       | 82,690       |     |   | 83 |   |   | 428,298 |       
|                                                                                           |                                                                       |              |     |   |    |   |   |         |       
|Common stock issued on exercise of options and warrants                                    |                                                                       | 1,490        |     |   | 1  |   |   | 4,852   |       
|                                                                                           | Share-based compensation expense related to employees and consultants |              | 147 |   |    |  |   |         | 19,624
|Payment of income tax liability in exchange for common stock and retirement of such shares |                                                                       |             |     |   |   |   |   | (1,641  | )     
|Sale of stock in subsidiary, net offering costs                                            |                                                                       |             |     |   |   |   |   | 3,555   |       
|Net loss                                                                                   |                                                                       |             |     |   |   |   |   |        |       
|                                                                                           |                                                                       |              |     |   |    |   |   |         |       
|Balance, December 31, 2007                                                                 |                                                                       | 84,327       |     | $ | 84 |   | $ | 454,688 |       
|                                                                                           |                                                                       |              |     |   |    |   |   |         |       

See
accompanying notes to the consolidated financial statements.

F-4

---



EVERGREEN ENERGY INC.        Consolidated Statements of Cash Flows

|                                                 |                                                                         | Years ended December 31,                                 |        
|------------------------------------------------ | ----------------------------------------------------------------------- | -------------------------------------------------------- | -------
|
|
|
|Operating activities:                            |                                                                         |                                                          |        
|                                                 | Net loss                                                                |                                                          | $      
|                                                 | Adjustments to reconcile net loss to cash used in operating activities: |                                                          |        
|                                                 |                                                                         | Share-based compensation expense to employees and others |        
|                                                 |                                                                         | Depreciation, depletion and amortization                 |        
|                                                 |                                                                         | Derivative fair value adjustment                         |        
|                                                 |                                                                         | Amortization of initial fair value of derivative         |        
|                                                 |                                                                         | Asset impairment and bad debt                            |        
|                                                 |                                                                         | Asset retirement obligation accretion                    |        
|                                                 |                                                                         | Amortization of debt issuance costs                      |        
|                                                 |                                                                         | Gain on sale of fixed assets                             |        
|                                                 |                                                                         | Other                                                    |        
|                                                 | Changes in operating assets and liabilities:                            |                                                          |        
|                                                 |                                                                         | Accounts receivable                                      |        
|                                                 |                                                                         | Accounts receivable from related party                   |        
|                                                 |                                                                         | Inventory                                                |        
|                                                 |                                                                         | Prepaid and other assets                                 |        
|                                                 |                                                                         | Deferred revenue and other liabilities                   |        
|                                                 |                                                                         | Accounts payable and accrued liabilities                 |        
|                                                 |                                                                         |                                                          |        
|Cash used in operating activities                |                                                                         |                                                          | (51,581
|                                                 |                                                                         |                                                          |        
|Investing activities:                            |                                                                         |                                                          |        
|                                                 | Purchases of construction in progress                                   |                                                          |        
|                                                 | Purchases of property, plant and equipment                              |                                                          |        
|                                                 | Proceeds from the sale of assets                                        |                                                          |        
|                                                 | Cash paid for acquisition, net of cash received                         |                                                          |        
|                                                 | Purchases of marketable securities                                      |                                                          |        
|                                                 | Proceeds from marketable securities                                     |                                                          |        
|                                                 | Purchases of mineral rights and mine development                        |                                                          |        
|                                                 | Restricted cash and marketable securities                               |                                                          |        
|                                                 | Other                                                                   |                                                          |        
|                                                 |                                                                         |                                                          |        
|Cash used in investing activities                |                                                                         |                                                          | (50,236
|                                                 |                                                                         |                                                          |        
|Financing Activities:                            |                                                                         |                                                          |        
|                                                 | Proceeds from issuance of convertible debt                              |                                                          |        
|                                                 | Proceeds from sale or exercise of options and warrants                  |                                                          |        
|                                                 | Proceeds from issuance of common stock, net of offering costs           |                                                          |        
|                                                 | Proceeds from sale of stock in subsidiary, net of offering costs        |                                                          |        
|                                                 | Payments of debt issuance costs                                         |                                                          |        
|                                                 | Payment of payroll taxes in exchange for common stock                   |                                                          |        
|                                                 | Payments on capital leases and note payable                             |                                                          |        
|                                                 |                                                                         |                                                          |        
|Cash provided by financing activities            |                                                                         |                                                          | 96,057 
|                                                 |                                                                         |                                                          |        
|Increase (decrease) in cash and cash equivalents |                                                                         |                                                          | (5,760 
|Cash and cash equivalents, beginning of year     |                                                                         |                                                          | 32,718 
|                                                 |                                                                         |                                                          |        
|Cash and cash equivalents, end of year           |                                                                         | $                                                        | 26,958 
|                                                 |                                                                         |                                                          |        

See
accompanying notes to the consolidated financial statements.

F-5

---





EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2007, 2006 and 2005

In this Annual Report on Form 10-K, we use the terms "Evergreen Energy," "we," "our," and "us" to refer to Evergreen Energy Inc. and its
subsidiaries. All references to K-Fuel, K-Fuel®, K-Fuel process, K-Fuel refined coal, K-Fuel refineries,
K-Directsm, K-Fuel Plants, K-Fuel facilities, K-Direct facilities and K-Directsm plants refer to our patented
process and technology explained in detail throughout this Annual Report on Form 10-K. All references to years, unless otherwise noted, refer to our fiscal year, which ends on
December 31st.

(1) Business and Summary of Significant Accounting Policies

We were founded in 1984 as a clean coal company focused on developing our K-Fuel process. Our goal is to leverage a vertically integrated,
coal-based platform to deliver clean, efficient and affordable energy. We intend to meet the specific needs of public utility, industrial and international market customers by providing
economical solutions to environmental emission standards compared to other emission standard alternatives. Our proprietary K-Fuel process uses heat and pressure to physically and
chemically transform high moisture, low-Btu coals, such as sub-bituminous coal and lignite, into a more energy efficient, lower-emission fuel.

We,
along with, our engineering consultants, Bechtel Power Corporation, have completed the modifications and improvements of the design and efficiency of the equipment used in the
K-Fuel process. Bechtel and Evergreen's operations team at Fort Union completed successful testing of new operational systems that will support construction of future K-Fuel
refineries, including a enhanced standard processing tower design. This work signals that we and Bechtel have resolved the most substantive technical challenges to scaling and fully commercializing
our production process. In February 2007, we expanded our contractual relationship with Bechtel to assist with future designs of additional K-Fuel facilities we may build or license,
including any K-Fuel facilities located at coal-fired power generating plants, which we refer to as K-Direct facilities. On September 19, 2007, we amended
and restated our Umbrella Agreement with Bechtel Power Corporation. Through this new Program Management Agreement, we committed to provide Bechtel with $1 billion in construction contracts
through 2013. This restated agreement increases the scope of engineering, procurement and construction services which may be performed by Bechtel. We intend to use Bechtel's services to oversee both
technical development and implementation of all new facilities and existing plants, including both K-Fuel and K-Direct plants.

The
Fort Union plant and mine site in Wyoming's Powder River basin, which was our first plant to implement the current K-Fuel process, has accomplished virtually all of the
goals and objectives we set forth for this site. Most notably, as a result of operations at the Fort Union plant, we have:



On
March 19, 2008, we have chosen to suspend operations at our Fort Union plant and mine site. This will enable us to focus on future K-Fuel or K-Direct
plants by redirecting constrained resources,

F-6

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

both
capital and human, to focus on the commercialization of our process. Bechtel has completed the enhanced standard processing tower design based upon the results of the testing completed by us at
the Fort Union plant. Additionally, suspending production at this site will further enable us to reduce our cash expenditures. If the need arises, we are positioned to resume operations at the Fort
Union plant to demonstrate the technology or to provide K-Fuel refined coal for test burns at utilities or other industrial sites. Alternatively, we are evaluating and anticipate
redeploying some of the equipment to a future K-Fuel facility site. We recorded an asset impairment charge of $109.5 million related to the Fort Union plant and mine site as of
December 31, 2007.



In April 2007, we formed Evergreen Energy Asia Pacific Corp. as a separate international operation to develop markets in the Asia Pacific region. Shortly after
forming Evergreen Energy Asia Pacific, the Sumitomo Corporation of Japan acquired a 4% interest in Evergreen Energy Asia Pacific for $4.0 million which is recorded in other long-term
liabilities. On January 8, 2008, following successful test results for product performance and stability, Evergreen Energy Asia Pacific Corp. and Sumitomo Corporation agreed with a major
Indonesian mining group to proceed with development of engineering specifications, economic evaluation, marketability analysis and further coal tests for a 1.5 million ton per year
K-Fuel plant on the Indonesian island of Kalimantan, with the intent to expand the plant capacity in future years.



Effective February 2007, we entered into an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement
of carbon emissions and formed a subsidiary, C-Lock Technology, Inc. The agreement provides us with an exclusive worldwide sub-license to a technology to standardize the
measurement of carbon emissions in energy and agricultural related activities. The measurement system and procedures are transparent, repeatable and verifiable. Through C-Lock
Technology, Inc., we intend to market the proprietary measurement system and procedures to quantify, certify, and verify carbon dioxide emissions.



On April 3, 2006, we completed the acquisition of Buckeye Industrial Mining Company for a total purchase price of $39.1 million, including cash
paid, stock issued, liabilities assumed and costs incurred in the acquisition. Buckeye's primary business is to mine, process, blend and sell high quality coal to electric utilities and to industrial
and institutional end users. Buckeye also operates one of the largest ash disposal facilities in the state of Ohio, disposing of up to one million tons of dry and conditioned ash per year. The
acquisition of Buckeye complements our strategy to transition from an energy technology company into an energy production company.

Consolidation.The consolidated financial statements include our accounts and the accounts of our
wholly and majority-owned subsidiaries. We consolidate all of our majority-owned subsidiaries and reflect as minority interest the portion of these entities that we do not own. All intercompany
transactions and balances have been eliminated.

F-7

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

Estimates.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America, or GAAP, requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We believe that the significant estimates, assumptions
and judgments when accounting for items and matters such as asset retirement obligations, mineral reserves, capitalized premining costs, capitalized plant costs, depletion, depreciation, amortization,
asset
valuations, asset life, technology, deferred revenue, acquisitions, stock option and restricted stock grants and warrants, allowance for bad debts for receivables, taxes, recoverability of assets,
impairments, customer retention, reserves, fair value of derivatives and other provisions are reasonable, based upon information available at the time they are made. Actual results could differ from
these estimates, making it possible that a change in these estimates could occur in the near term.

Fair value of financial instruments.The carrying amount of cash and cash equivalents, accounts
receivable, marketable securities, other current assets, accounts payable, accrued liabilities and other current liabilities in the consolidated financial statements approximate fair value because of
the short-term nature of the instruments. As of December 31, 2007 the fair value of our debt was $65 million.

Cash and cash equivalents.Cash and cash equivalents are highly liquid investments that consist
primarily of short-term money market instruments and overnight deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase. We
utilize and invest with financial institutions that are sound and of high credit quality. Our investments are in low-risk instruments and we limit our credit exposure in any one
institution or type of investment instrument based upon criteria including creditworthiness.

Marketable Securities.As of December 31, 2007 and 2006 all marketable securities were auction
rate securities. These auction rate securities consist of government backed student loans and government bonds. Auction rate securities are usually issued with stated intermediated to
long-term maturities or in perpetuity; however, auction rate securities interest rates are periodically re-set through auctions, typically every 7, 28 or 35 days. They
are priced and traded as short-term instruments. Accordingly, such investments are reported at fair market value, with the resultant unrealized gains and losses reported as a separate
component of the shareholders' equity. Since the fair value of the marketable securities equals the cost basis for such securities, there is no effect on comprehensive income for the periods reported.
If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to adjust the carrying value of its investment in auction rate securities
through impairment charges. As of March 20, 2008, all auction rate securities have been converted to short-term money markets except for $2 million.

Receivables and allowance for doubtful accounts.Accounts receivable and note receivable, which is
reflected in prepaids and other assets, are recorded at their estimated net realizable value. The allowance for doubtful accounts is determined through an analysis of the past-due status
of accounts receivable and assessments of risk regarding collectability. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances

F-8

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

may
be required. As of December 31, 2007 and 2006, we have an allowance for doubtful accounts of $1.3 million and $1.3 million, respectively, primarily relating to a note
receivable.

Inventory.Inventory, which includes washed or prepared coal, raw coal and inventory in transit as
well as consumable parts, materials and supplies, are stated at the lower of cost or market. Our practice is to value coal and purchased coal based on the average cost method by the applicable type of
coal. Inventory principally consisted of $1.1 million and $1.2 million of washed or prepared coal, raw coal and inventory in transit and $317,000 and $104,000 of spare parts and supplies
as of December 31, 2007 and 2006, respectively.

Property, plant and equipment.Property, plant and equipment consists of our wash facility,
buildings, furniture and fixtures, computers, vehicles, leasehold improvements, coal handling system, land and our Fort Union plant. Expenditures that extend the useful lives of the assets or increase
production capacity are capitalized. Repairs and maintenance that do not extend the useful lives of the assets are expensed as incurred. We begin depreciation on property, plant and equipment assets
once the assets are placed into service. Depreciation expense is computed using the straight-line method over the estimated useful lives of the property and equipment or the
units-of-production method using total processed tonnage for our Fort Union plant.

Construction in progress.All costs that are directly related to the engineering, design, purchase or
fabrication of plant equipment and are expected to be used in a commercial K-Direct or K-Fuel plant project are capitalized. All costs that are directly related to, or
allocable to, developing a specific K-Direct or K-Fuel plant site are capitalized and separately identified as belonging to that site. Costs incurred to develop coal mines or
to expand the capacity of operating mines are capitalized. Interest is capitalized during the construction phase for internal-use capital projects. Repair and maintenance costs incurred
that extend the useful life of mining machinery and equipment are capitalized. Costs incurred to maintain current production capacity at a mine and exploration expenditures are charged to operating
costs as incurred. Employee-related costs directly related to construction are also capitalized during the construction phase.

Mineral rights and mine development.A significant portion of our coal reserves are controlled
through leasing arrangements. Costs to obtain coal lands and leased mineral rights, including capitalized premining costs, are depleted using the units-of-production method
based on tons produced utilizing only proven and recoverable reserves in the depletion base and are assumed to have no residual value. Premining costs include drilling, permitting, county and state
filing fees and the initial overburden removal. Also, included in mineral rights are the costs to establish the related asset retirement obligations. The leases have primary terms ranging from 3 to
10 years and substantially all of the leases contain provisions that allow for automatic extension once mining commences and for as long as some mining activity continues.

Restricted cash and marketable securities.We have restricted cash totaling $23.4 million, and
marketable securities totaling $5.0 million, set aside as collateral pledged toward our asset retirement obligation, our long-term debt and to secure certain other obligations.
Until the asset retirement obligation is relieved, certain market conditions are met relating to our $95 million long-term debt or our other obligations are fulfilled, the cash and
marketable securities will remain restricted.

F-9

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

Patents.All costs incurred to the point when a patent application is to be filed are expensed as
incurred as research and development and are included in other assets. Patent application costs, generally legal costs, thereafter incurred are capitalized. The costs of defending and maintaining
patents are expensed as incurred. Patents are amortized over the expected useful lives of the patents, which is generally 17 to 20 years for domestic patents and 5 to 20 years for
foreign patents. Patent amortization expense, including amortization of existing patents, was $129,000, $178,000 and $210,000 in 2007, 2006, and 2005, respectively. We estimate amortization expense of
approximately $130,000 for each of the years ending December 31, 2008, 2009 and 2010.

Health care costs.We are self-insured, subject to a stop-loss policy, for
individuals and all participants as a group, for our employee's health care costs. The liability for outstanding medical costs has been estimated based on historical claims and is included in accrued
liabilities in our consolidated balance sheets.

Asset retirement obligations.We value all asset retirement costs, for which we have a legal
obligation, and record all such costs as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period or depleted using actual tons mined or actual tons
produced. The liability is accreted over time by applying an interest method of allocation to increase the liability. We have identified legal retirement obligations related to our project site near
Gillette, Wyoming and our surface and deep mines in Ohio.

Exploration costs.Mineral exploration costs are expensed as incurred. When it has been determined
that it is economically feasible to extract coal and the permitting process has been initiated, the costs incurred to further delineate and develop the mine are considered premining costs and are
included in construction in progress in our consolidated balance sheets. Once the overburden has been removed and production has commenced these capitalized costs are transferred to mineral rights on
our consolidated balance sheets.

Long-lived assets.We evaluate long-lived assets based on estimated future
undiscounted net cash flows or other fair value measures whenever significant events or changes in circumstances occur that indicate the carrying amount may not be recoverable. If that evaluation
indicates that an impairment has occurred, a charge is recognized to the extent the carrying amount exceeds the discounted cash flows or fair values of the asset, whichever is more readily
determinable. In addition, we capitalized certain costs related to investigating potential sites for future facilities. We evaluate the status of these potential sites and if any site has been
abandoned or we anticipate that it will be abandoned, we write-off all associated costs.

Revenue.We recognize revenue when there is persuasive evidence of an arrangement, generally when an
agreement has been signed, all significant obligations have been satisfied, the fee is fixed or determinable, and collection is reasonably assured. Any up-front fees received are deferred
and recognized over the provision of specific deliverables as defined in the agreements. As our history related to customer relationships is limited, we may be required to change the estimated period
over which we recognize our revenue as more information becomes available. Arrangements that include multiple deliverables are evaluated to determine whether the elements are separable based on
objective evidence. If the elements are deemed separable, total consideration is allocated to each element and

F-10

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

the
revenue associated with each element is recognized as earned. If the elements are not deemed separable, total consideration is deferred and recognized ratably over the longer of the contractual
period or the expected customer relationship period.

We
recognize revenue from coal sales at the time risk of loss passes to the customer, either at our shipping point or upon delivery, depending on contractual terms. When sales include
delivery to the customer, transportation costs are billed by us to our customers. We had $8.7 million of transportation costs included in cost of sales and $8.7 million of revenue
included in mining revenue for the year ended December 31, 2007. Ash disposal revenue is recognized when coal combustion bi-products are received at our ash disposal facility.

Brokered coal.We act as an agent in certain transactions involving the brokering of coal produced by
others. As we generally do not take title to the coal or bear the risk of loss, we have recognized the net amount of profit related to the transactions in our consolidated statements of operations in
mining revenue.

Research and development.Costs incurred to advance, test, or otherwise modify our proprietary
technology or develop new technologies are considered research and development costs until such time as the modification or new technology is ready for protection through patent and are expensed when
incurred. These costs are primarily comprised of costs associated with the operation of our laboratories, pilot plants and operations of certain of our subsidiaries, including salaries and wages,
supplies, repair and maintenance, general office expenses and professional fees. Once patents are applied for, certain of these costs are capitalized as a cost of obtaining the patents. Additionally,
as our Fort Union plant has been placed into service, certain of these costs are now considered plant start-up costs and are expensed as incurred.

Accounting for Derivative Financial Instruments.Derivatives may be embedded in financial instruments
(the "host instrument"). Embedded derivatives are treated as separate derivatives when the economic characteristics and risks are not clearly and closely related to those of the host instrument, the
terms of the embedded derivative are similar to those of a stand-alone derivative and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured
at fair value and any subsequent changes are recognized in the statement of operations. We are required to make
significant estimates and assumptions when fair valuing these derivatives. See Note 9Long-term debt for further details.

Income taxes.We follow the liability method of accounting for income taxes under which deferred tax
assets and liabilities are recognized for future tax consequences. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement and
tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized, based upon an assessment of both negative and positive evidence, in future tax returns. We have provided a full valuation reserve related to
our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate future taxable income becomes apparent, we may be required to reduce this valuation allowance,
resulting in income tax benefits in our consolidated statement of operations. Tax rate changes are reflected in the period such changes are enacted.

F-11

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

Effective
January 1, 2007, we adopted Financial Accounting Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109," ("FIN 48"), which prescribes a comprehensive model for how we should recognize, measure, present and disclose in its financial statements
uncertain tax positions that we have taken or expects to take on a tax return. We have evaluated our tax positions and determined that the adoption of this pronouncement did not have an impact on our
financial position or results of operations.

Comprehensive income.Comprehensive income includes all changes in equity during a period from
non-owner sources. During each of the three years ended December 31, 2007, 2006 and 2005, we had no transactions that were required to be reported as adjustments to determine
comprehensive income.

Advertising costs.We recognize advertising expense when incurred.

Accounting for stock grants, options and warrants.On January 1, 2006, we adopted Statement of
Financial Accounting Standards 123R, "Share-Based Payments", or SFAS 123R. We issue stock grants, options and warrants to employees, directors and consultants in connection with our various
business activities. These are accounted for in accordance with the provisions of SFAS 123R and Emerging Issues Task Force Abstract No. 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services", or EITF 96-18, as well as other authoritative accounting
pronouncements. We are required to make estimates of the fair value of the related instruments and the period benefited.

Net loss per common share.Basic net loss per common share is based on the weighted-average number of
common shares actually outstanding during each respective period and reduced by shares that are subject to a contingency. During the fourth quarter of 2005, we granted 2 million shares of
restricted stock to three of our executive officers, which immediately vest upon the attainment of certain performance or market criteria, but no later than the seventh anniversary of the date of the
agreement. Such unvested shares were transferred to an escrow agent during the first quarter of 2006. As a result, such shares are reflected as outstanding in the consolidated financial statements.
However, as the vesting criteria have not yet been attained, the shares in escrow are excluded from the net loss per share calculations due to the contingent status of the shares. On April 19,
2007, we ceased our relationship with one of the executive officers who held contingent shares. Pursuant to the terms of his employment agreement, he was entitled to acceleration of vesting with
respect to 899,000 of the 1 million shares of unvested common stock he was awarded in connection with his employment agreement. These accelerated vested shares are reflected as outstanding and
are included in the net loss per share calculation as of December 31, 2007, but were excluded from the net loss per share calculation in 2006.

The
calculation of diluted net earnings per common share adds the weighted-average number of potential common shares outstanding to the weighted-average common shares outstanding, as
calculated for basic loss per share, except for instances in which there is a net loss. Our total incremental potential common shares outstanding as of December 31, 2007, 2006 and 2005 were
30.1 million, 16.1 million and 22.9 million, respectively, and are comprised of outstanding stock options, restricted stock grants, warrants to purchase our common stock and
potential conversion of our convertible debt into common stock. All potential common shares outstanding have been excluded from

F-12

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(1) Business and Summary of Significant Accounting Policies (Continued)

diluted
net loss per common share because the impact of such inclusion on a net loss would be anti-dilutive.

Recently adopted accounting pronouncements.On July 2006, FIN 48 was issued, which clarifies
the accounting for uncertainty in tax positions. This Interpretation requires that we recognize, in our consolidated financial statements, the impact of a tax position if that position is more likely
than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of January 1, 2007. We have evaluated our tax positions
and determined that the adoption of this pronouncement did not have an impact on our financial position or results of operations.

In
September 2006, the U.S. Securities and Exchange Commission, or SEC, released Staff Accounting Bulletin No. 108, or SAB No. 108, "Financial Statement Misstatements." SAB
No. 108 expresses the SEC staff's view regarding the process of quantifying financial statement misstatements. The Interpretations in SAB No. 108 was issued to address diversity in
practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB No. 108 is effective for annual
financial statements covering the first fiscal year ending after November 15, 2006. The adoption of this pronouncement did not have a material impact on our financial position or results our
operations.

Recently issued accounting pronouncements.On February 15, 2007, the Financial Accounting
Standards Board issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which gives companies the option to measure eligible financial assets, financial
liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for
at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a
firm commitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15,
2007. We have evaluated the adoption of this pronouncement and do not expect any material impacts on our financial statements.

In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157, "Fair Value Measurement". This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any
new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We have evaluated the adoption of this pronouncement and do not expect any material impacts on our
financial statements.

F-13

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(2) Acquisitions



On April 3, 2006, we completed the acquisition of Buckeye, for a total purchase price of $39.1 million, consisting of $35.0 million in cash
and our common stock valued at $2.2 million. We incurred $1.0 million in acquisition costs and reimbursed Buckeye's former parent $900,000 for cost incurred relating to capital projects.
Buckeye's primary business is to mine, process, blend and sell coal to electric utilities and to industrial and institutional end users. Buckeye also operates one of the largest ash disposal
facilities in the state of Ohio, disposing of up to one million tons of dry and conditioned ash per year. We believe the acquisition has added value through access to Buckeye's established markets,
infrastructure and coal reserves. The benefits from the acquisition include the addition of an experienced coal marketing and mining team and cash flow.

The
acquisition of Buckeye has been accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations, or SFAS 141,
with us being treated as the acquirer. Following is a summary of the fair values of the assets acquired and liabilities assumed as of the effective date of the acquisition (in thousands):

Cash

$
Accounts receivable


4,649Inventory


2,138Other current and long-term assets


743Property, plant and equipment


7,812Ash disposal facility


7,557Mineral rights and mine development


20,720Construction in progress


1,442Total assets acquired


45,061Less: Current liabilities assumed


4,182Asset retirement obligations


1,772Net purchase price

$
39,107


Pro
forma acquisition information represents our unaudited results of operations as if the acquisition had occurred at the beginning of each period.

December 31,2006

2005(in thousands)Revenue

$
49,766

$
50,751Net loss

$
(51,284
)
$
(18,342
)Basic and diluted net loss per share

$
(0.66
)
$
(0.28
)




MR&E LLC, a research and engineering firm focused on thermal process engineering, including the upgrading and processing of clean coal, was acquired due to
the expertise in thermal processing

F-14

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(2) Acquisitions (Continued)

engineering
of certain of its employees. We acquired all of the outstanding membership interests effective March 1, 2005 for cash of $656,000, including cash received of $83,000. Their
operations have been included in our financial statements as of the effective purchase date of March 1, 2005. Effective October 11, 2007, we sold all of the assets of MR&E for a sales
price of $800,000 in cash.

The
operating results, including revenue and net income for the year ended December 31, 2005 was insignificant. Therefore, pro-forma results as if the acquisition had
occurred at the beginning of the period are not presented.

(3) Property, Plant & Equipment, Construction in Progress and Mineral Rights and Mine Development

Property, plant and equipment consisted of the following:

December 31,Lives

2007

2006(in years)

(in thousands)Fort Union plant and equipment



$
2,021

$
84,093Machinery and equipment

3-15


13,523


12,189K-Fuel demonstration facility




10,924


10,924Ash and wash facility

5-10


8,937


8,526Other

3-30


10,588


6,792Total




45,993


122,524Less accumulated depreciation




(20,111
)

(16,092
)Property, plant and equipment, net of accumulated depreciation



$
25,882

$
106,432


On
March 19, 2008, we decided to suspend operations at our Fort Union plant and mine site. We recorded an asset impairment charge of $93.5 million related to the Fort Union
plant and mine site as of December 31, 2007.

During
the year ended December 31, 2007, we transferred $13.7 million from construction in progress to property plant and equipment, transferred $846,000 from construction
in progress to mineral rights and increased property plant and equipment in the amount of $2.6 million for leasehold improvements related to our new office space. During the third quarter 2006,
we placed our Fort Union plant into service and as a result moved $84.1 million of costs from construction in progress to property, plant and equipment.

Depreciation
and depletion expense was $8.3 million, $5.3 million, and $563,000 in 2007, 2006 and 2005, respectively. We are depreciating Fort Union plant assets on a
units-of-production method, based on actual tonnage processed through the plant. Our K-Fuel demonstration facility is fully depreciated.

Property,
plant and equipment includes $1.9 million and $919,000 of accounts payable and accrued liabilities as of December 31, 2007 and 2006, respectively.

F-15

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(3) Property, Plant & Equipment, Construction in Progress and Mineral Rights and Mine Development (Continued)

Construction
in progress consisted of the following:

December 31,2007

2006(in thousands)Fort Union plant and operating equipment

$


$
4,478Future plant sites and equipment


2,713


13,981Mine and site improvements


737


2,597Mining equipment refurbishment


4,523


2,307Other


3,992


145Total construction in progress

$
11,965

$
23,508


On
March 19, 2008, we decided to suspend operations at our Fort Union plant and mine site. We recorded an asset impairment charge of $14.0 million for the year ended
December 31, 2007.

In
addition, in 2007 we impaired $3.6 million of capitalized costs related to projects that we abandoned and/or replaced with more cost effective projects and $2.1 million
of capital costs related to a previously announced future potential project with a major utility. In 2006, we impaired assets of $295,000 relating to certain sites specific costs, which we were
evaluating for a future K-Fuel facility.

Total
construction in progress includes $882,000 and $2.6 million of accrued costs as of December 31, 2007 and 2006, respectively. In 2007, we transferred
$18.6 million from construction in progress to assets held for sale see Note 7Assets Held For Sale for further details.

Mineral
rights are comprised of leases and mine development costs from the acquisition of Buckeye and our mine site in Wyoming. Costs are capitalized during the premining phase and are
depleted using the units-of-production method based on actual tons mined. As discussed above we impaired $1.7 million of mineral rights related to our Fort Union plant
near Gillette, Wyoming.



Our asset retirement obligations relate to our surface and deep mines in Ohio, our Gillette, Wyoming mine site, and the improvements we have made at the site on
which our Fort Union plant

F-16

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(3) Property, Plant & Equipment, Construction in Progress and Mineral Rights and Mine Development (Continued)

are
located. The following table reconciles the change in the asset retirement obligation during the year ended December 31, 2007:

Changes in
Asset
Retirement
Obligations(in thousands)Balance at January 1, 2007

$
5,626Liability incurred


270Liability settled


(12
)Accretion


287Balance at December 31, 2007

$
6,171


We
allocate asset retirement costs to the underlying assets based on the fair value using an expected cash flow approach, in which multiple cash flow scenarios are used to reflect a
range of possible outcomes and a credit-adjusted risk-free rate. The liabilities are then accreted over time by applying an interest method of allocation. As the assets are placed into
service we are depreciating or depleting the related assets on a units-of-production method based on actual tonnage processed and actual tonnage mined.

(4) Restricted Cash and Marketable Securities

The following table represents the components of our restricted cash and marketable securities:

December 31,
2007

December 31,
2006(in thousands)Long-term debt escrow

$
18,000

$
Collateral:Environmental remediation obligations


8,907


3,782Other


1,511


128Total restricted cash

$
28,418

$
3,910


Pursuant
to our $95 million long-term debt offering, we deposited $18.0 million of the net proceeds in an escrow account. See further discussion at
Note 9Long-term Debt. Included in environmental remediation obligations was $5.0 million held in auction rate securities. As of February 29, 2008, we have
converted these auction rate securities into money market investments.

(5) Note Receivable

Through a series of transactions, Pegasus Technologies Inc. became indebted to us. This note receivable bears interest at 7% and principal payments are due
pursuant to an assignment of certain cash payments received by Pegasus. We have rights to collect payments under this note from Pegasus and to demand payment upon certain events of default. During the
year ended December 31, 2005, we

F-17

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(5) Note Receivable (Continued)

determined
that Pegasus might not have sufficient contracts to continue to meet this obligation. Therefore, we recorded an allowance for bad debt for the note receivable of $1.3 million.
Despite this allowance, we retain all of our rights to collect payments under this note from Pegasus and to demand payment upon certain events of default. As of December 31, 2007 and 2006 the
net balance of this note receivable was $87,000. As of December 31, 2007, Pegasus continues to make their minimum interest payments.

In
2003, we completed an equity exchange transaction pursuant to which we transferred our interest in Pegasus for full ownership of K-Fuel LLC, now part of a wholly
owned subsidiary named KFx Technology, LLC. As a part of the exchange transaction, an intercompany working capital loan from us to Pegasus with an outstanding balance of $9.4 million was
exchanged for a contingent earn-out agreement of up to $9.4 million in the aggregate, plus accrued interest (prime rate plus 500 basis points), payable out of a portion of future
cash flows generated by Pegasus. Due to the contingent nature of this potential stream of future cash flows, we did not recognize an asset or any associated income at the time of the exchange
transaction. As a result of a transfer of ownership interests in 2006, the earn-out provisions were triggered and we received a payment of $1.1 million from Pegasus as a payment in
full satisfaction of the $9.4 million obligation, which is reflected in other income for the year ended December 31, 2006.

(6) Other Assets

Included within other assets are deferred royalty costs, totaling $1.4 million as of December 31, 2007 and 2006, which are comprised of deferred
costs related to the issuance of licenses for K-Fuel facilities and a one-time payment made to Mr. Edward Koppelman, the inventor of the K-Fuel process.

The
deferred royalty costs associated with the issuances of licenses for K-Fuel represent the licensing fees paid to the Koppelman estate, described below. Such costs are
amortized over the same period as the deferred revenue related to the underlying contracts.

In
1996, we entered into a royalty amendment agreement with Mr. Koppelman, or subsequent to his death, the Koppelman estate, that reduced the cap for payments by $500,000 to
$75.2 million and set the royalty percentage at 25% of our worldwide licensing and royalty revenue, as defined in the agreement. Mr. Koppelman provided us an indemnification against
potential claims made by certain parties if we licensed the technology. We paid Mr. Koppelman a total of $500,000 pursuant to the agreement as a prepayment. The $500,000 has no specified
expiration date and recognition is solely dependent upon the issuance of licenses. We are amortizing the $500,000 payment as license revenue is generated. In addition, Mr. Theodore Venners, our
CSO, is entitled to 50% of net royalties paid to the Koppelman estate. As of December 31, 2007, there is $73.0 million remaining under the cap. Also, see discussion in
Note 13Commitments and contingenciesRoyalties and Other Rights.

(7) Assets Held for Sale

In June 2006, we entered into an agreement to purchase a 700,000 pound per hour Circulating Fluidized Bed boiler island, with the option to purchase two more. We
entered into this agreement with the intent of using this boiler, and possibly the other two boilers, at one of our future K-Fuel plants in the Powder River Basin. As our current
K-Fuel plant designs require different specifications for a

F-18

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(7) Assets Held for Sale (Continued)

boiler,
we are in the process of selling our interest in the first boiler island. Effective January 31, 2008, we and the fabricator of the boiler island agreed to terminate the contract and as
a result, all future financial obligations were also terminated. In March 2007, we decided to sell this boiler and classified the costs associated with the boiler as assets held for sale

Pursuant
to the guidance of Statements of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS 144,
we are required to evaluate the carrying value of the boiler if we are unable to sell the boiler after a twelve month period. As of the filing date of this annual report on
Form 10-K, we do not have a firm purchase commitment for the sale of this boiler. We performed a fair value analysis using the following: 1) the probabilities of the sale of
the boiler at the current recorded value; and 2) the probabilities of selling the boiler at less than its carrying value. As a result, of the analysis of the probabilities we calculated an
estimated fair value of the boiler and recorded an impairment charge of $7.8 million in our Technology segment. We have been in discussions with several potential buyers for the sale of this
boiler and anticipate the consummation of this sale in the future.

(8) Accrued liabilities

Accrued liabilities consist of:

December 31,2007

2006(in thousands)Employee-related

$
2,669

$
2,402Accrued interest on long-term debt


3,209


Services or goods received, not invoiced


1,541


2,240Taxes, other than income taxes


631


1,086Other


647


844Total accrued liabilities

$
8,697

$
6,572


Employee-related
includes paid time off, payroll and bonuses. Services or goods received not invoiced primarily consists of goods and services at our Fort Union plant. Taxes, other than
income taxes represent various accrued taxes including property, use and franchise taxes.

(9) Long-term Debt



On July 30, 2007, we completed the sale of $95.0 million long-term debt due 2012 that were resold in a private offering to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes are senior, secured obligations guaranteed by our wholly owned subsidiary, Evergreen
Operations, LLC, and its subsidiaries, and secured by a first-priority security interest in (1) all of our equity interest in Evergreen Operations, LLC, (2) an escrow
account established in connection with the offering, and (3) our and each of its subsidiaries' bank, investment, brokerage or similar accounts holding cash and cash equivalents, Evergreen
Operations, LLC subject to certain exceptions. Our intellectual property rights relating to the K-Fuel refined coal process are held

F-19

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(9) Long-term Debt (Continued)

by
a wholly owned subsidiary, which is not a subsidiary of Evergreen Operations, LLC and consequently, none of these intellectual property rights are included in the collateral securing the
notes. Additionally, our subsidiaries C-Lock Technology, Inc. and Evergreen Energy Asia Pacific Corp. are also excluded from the collateral securing the notes. The notes contain
covenants, that among other things, limit our ability and the ability of our subsidiary guarantors to incur additional debt or issue certain preferred shares; pay dividends on or make distributions in
respect to our capital stock; create liens on certain assets to secure debt; and sell certain assets. We will pay interest semi-annually at a rate of 8.00% per annum, due on
February 1 and August 1 of each year, beginning on February 1, 2008. The notes mature on August 1, 2012. We plan on using the remaining proceeds to fund operations,
construct future K-Fuel and/or K-Direct plants and capital expenditures at our Buckeye location and for general corporate purposes.

Holders
may convert their notes into a number of shares of common stock or cash or a combination thereof, at our option, at the applicable conversion rate on any day up to and including
the business
day prior to the maturity date. The initial conversion rate for the notes is 190.4762 shares of our common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately
$5.25 per share, subject to adjustment upon the occurrence of certain events. If we undergo certain fundamental changes, as defined in the agreements, the holders of the notes may require us to
repurchase the notes in cash at 100% of the principal amount plus any accrued and unpaid interest. Additionally, upon a fundamental change, the holders, if they elect to convert, will receive a
conversion rate adjustment that will require us to increase the number of shares based on our stock price and the passage of time.

If
(1) the closing price of our common stock for at least 20 trading days in any 30 consecutive trading day period is at least the conversion price, or the reduced interest rate
threshold, and (2) if the shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes is effective and available for use for at least
30 days following the reduced interest rate threshold, unless registration is no longer required, then the initial interest rate will be permanently decreased to 5.00%. In addition, if
(1) the closing price of our common stock for at least 20 trading days in any 30 consecutive trading day period is at least 130% of the then applicable conversion price, or the collateral
release threshold, and (2) if the shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes is effective and available for use for at
least 30 days following the collateral release threshold, unless registration is no longer required, then the security will be released, including the $18.0 million held in escrow, and
the notes will become automatically subordinated. At such time as the security is released, we may redeem the notes at a redemption price payable in cash equal to 100% of the principal amount, plus
any accrued and unpaid interest and an additional "coupon make whole payment." The "coupon make-whole" amount per $1,000 principal amount of notes will be equal to the present value of all
remaining scheduled payments of interest on each note to be redeemed through the maturity date.

We
incurred $6.0 million of debt issuance costs relating to our convertible debt offering, which included $200,000 of accrued cost as of December 31, 2007. We are
amortizing the debt issuance costs using the effective interest rate method over the life of our debt.

F-20

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(9) Long-term Debt (Continued)



Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging Activities," or FAS 133, and EITF No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and potentially Settled in, a Company's Own Stock,"provides guidance for distinguishing
between permanent equity, temporary equity, and assets and liabilities. Derivatives may be embedded in financial instruments, in our case our $95 million long-term debt (or the host
instrument). Embedded derivatives are treated as separate derivatives when their economic
characteristics and risks are not clearly and closely related to those of the host instrument and must be accounted for separately from the host instrument. The embedded derivative is measured at fair
value with subsequent changes in the fair value being recognized in the statements of operations.

We
have evaluated our $95 million long-term debt and have concluded that our conversion adjustment upon the occurrence of a fundamental change is an embedded
derivative that needs to be bifurcated for valuation purposes. Additionally, we have concluded that the potential decrease in our interest rate based on our common stock price is also is an embedded
derivative that needs to be bifurcated. Both of these derivatives were determined to not be clearly and closely related to the host instrument. We used a fair value modeling technique to value these
derivatives and recorded $3.2 million of long-term assets and a corresponding increase in long-term debt in our condensed consolidated balance sheets at the date of
issue of our 8.00% Convertible Secured Notes. Furthermore, we are required to fair value these derivatives at each reporting period and, as a result, we recorded $1.8 million of other expense
during the year ended December 31, 2007 by decreasing the net derivative assets contained within other long-term assets to $1.4 million in our consolidated balance sheet at
December 31, 2007.

(10) Stockholders' Equity

On February 8, 2006, we sold 7 million shares of common stock at a price to the public of $18.75 per share pursuant to a follow-on
common stock offering. On February 27, 2006, the underwriters exercised in full their over allotment option, purchasing an additional 1.1 million shares of common stock. Including the
over-allotment, the offering totaled approximately 8.1 million shares of common stock at a price of $18.75, resulting in net proceeds of $144.6 million after deducting the
underwriting discounts and commissions and estimated offering expenses. We used the proceeds from this offering to fund the acquisition of Buckeye, the improvements at our Fort Union plant and general
corporate purposes.

On
April 3, 2006, we completed the acquisition of Buckeye, for a total purchase price of $39.1 million, consisting of $35.0 million in cash and our common stock
valued at approximately $2.2 million. We incurred $1.0 million in acquisition costs and reimbursed Buckeye's former parent $900,000 for cost incurred relating to capital projects.

During
the fourth quarter of 2005, we sold 191,000 shares of our common stock to Arch Coal Inc. for proceeds of $3 million, which were used for general corporate purposes.
The shares were sold in connection with the execution of two agreements with Arch, which (1) allowed us to evaluate the potential of constructing and operating a plant at their Coal Creek mine
site located in the Powder

F-21

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(10) Stockholders' Equity (Continued)

River
Basin and (2) required us to issue warrants. We issued 2.5 million warrants to Arch to purchase our common stock. See further discussion of the warrants in
Note 12Warrants.

During
2002, we entered into a series of transactions with three investor groups whereby we issued a total of 6.8 million shares of our common stock and 14.4 million
warrants. The investors have certain rights pursuant to an investor rights agreement, including the right for one group to select two persons to serve on our Board of Directors. As of
December 31, 2007, these two positions were not filled. This provision remains in force until the investors hold less than 400,000 shares of our common stock. During 2005, we renegotiated the
investor rights agreement executed in connection with the issuance of the shares in 2002 to provide us greater flexibility in constructing and operating plants. Subsequent to the renegotiation, we and
the investors have the following rights:



Except
for the right to select persons to serve on our Board of Directors, all other rights expire 20 years after the 25 million tons annual capacity threshold is reached
or earlier, if the investors exercise their rights to 50 million tons of annual capacity.

(11) Stock Options, Stock Grants and Employee Benefit Plans

We have five qualified stock plans, under which 12.5 million shares were reserved and 3.8 million shares are available for grant as of
December 31, 2007. Pursuant to these plans we granted stock options, restricted stock and stock appreciation rights to directors, employees and outside consultants. In the past, we have also
issued stock related to various compensation and fee agreements with certain employees that were not issued from our five plans. These grants were made pursuant to certain stock exchange rules. All
but one of the five qualified plans has been registered with the Securities and Exchange Commission. The non-plan awards are generally registered with other registration statements that we
periodically file. The five qualified stock plans and the non-plan awards are collectively referred to as "the plans."

These
plans are administered by the Compensation Committee of our Board of Directors, or the Committee, which has the authority to determine the specific terms of awards under these
plans, including exercise price and vesting term, subject to certain restrictions of the Internal Revenue Code

F-22

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

regarding
incentive stock options. The Committee can accelerate the vesting of an outstanding award at its sole discretion. Certain of the plans contain provisions requiring the acceleration of
vesting of all outstanding awards in the event of a change in control, as defined in those plans. In addition, certain employee grants per the individual grant agreements contain provisions that
accelerate the vesting of unvested outstanding awards upon a change in control. Stock options granted under the plans generally expire not more than ten years from the date of grant.

Stock-Based Compensation

Effective January 1, 2006, we began measuring and recognizing compensation expense for all stock grants, options and warrants granted to employees, members
of our board of directors and consultants in accordance with SFAS 123R, EITF 96-18 as well as other authorative pronouncements. SFAS 123R requires the measurement and
recognition of compensation expense for all share-based payment awards to non-employee directors and employees including stock options, restricted stock grants and stock purchases related
to our employee stock purchase plan, based on estimated fair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123R; we apply
the provisions of SAB 107 in the application of SFAS 123R.

Under
the guidance of SFAS 123R we are required to estimate the fair value of share-based payment awards on the grant date. We use the Black-Scholes option pricing model to
calculate the fair value of stock options. Restricted stock is valued based upon the closing price of our common stock on the date of grant. The fair value is recognized as expense and additional
paid-in capital over the requisite service period, which is usually the vesting period, if applicable, in our consolidated financial statements. Prior to the adoption of SFAS 123R,
we accounted for share-based payment awards in accordance with Accounting Principals Board 25 "Accounting for Stock Issued to Employees", or APB 25, which generally provided that no
compensation expense was recorded in connection with the granting of employee and non-employee directors stock options if the options were granted at prices at least equal to the fair
value of the common stock at date of grant. Stock options granted to employees and non-employee directors were measured using the Black-Scholes option pricing model and were reflected in
our pro-forma disclosures pursuant to SFAS 123 "Accounting for Stock-Based Compensation," or SFAS 123. We adopted SFAS 123R, using the modified prospective transition
method, which requires the application of the accounting standard as of January 1, 2006. In accordance with the modified prospective transition method, our consolidated financial statements for
prior periods, including the year ended December 31, 2005, have not been restated to reflect the impact of SFAS 123R. In prior periods, our pro-forma disclosure under
SFAS 123 did not include an estimate of forfeitures and, instead, accounted for forfeitures as they occurred.

F-23

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

Had compensation expense for our stock options granted to employees and directors been recognized based on the fair value over the vesting period for the awards
consistent with the method of SFAS 123, our pro forma net loss and net loss per share would have been reported as follows (in thousands, except for per share amounts):

Year ended December 31, 2005Net loss, as reported

$
(23,313
)Less: Share-based employee compensation expense included in reported net loss


1,230Total share-based employee compensation expense determined under a fair value based method


(7,338
)Pro forma net loss


(29,421
)Basic and diluted net loss per share, as reported

$
(0.35
)Pro forma basic and diluted net loss per share

$
(0.44
)


Pursuant
to SFAS 123R, share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that are ultimately
expected to vest, assuming estimated forfeitures at the time of grant. Historically, the majority of option grants outstanding were to executives, consultants and to our CSO. We have estimated the
forfeiture rate on each of these grantee groups based upon historical data.

In
the fourth quarter of 2005, we started granting restricted shares to non-executive employees. We have based the forfeiture rate for this grantee group on the historical
data of the executive stratification, as we do not have sufficient historical data for non-executive employees.

Lastly,
during the fourth quarter of 2005, we granted restricted stock awards to certain of our executive officers, as further describe below, which contain accelerated vesting
provisions. Our estimate of forfeitures for these grants is that they all will vest and, as a result, we have not reduced our expense by estimated forfeitures.

The
following table summarizes the assumptions used to value stock options grant in 2007, 2006 and 2005:

Year Ended December 31,2007

2006

2005Weighted-average:Risk free interest rate

4.50
%
4.78
%
3.89
%Expected option life (years)

3.0

3.0

6.7Expected volatility

63
%
57
%
67
%Expected dividends

None

None

None


We
use the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of a number of assumptions, including the volatility of our stock price, a
weighted average risk-free interest rate, and the weighted average expected life of the options. Generally, our

F-24

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

option
grants to non-employee board members vest immediately and expire on the third anniversary of the date of grant. As we do not pay dividends, the dividend rate variable in the Black-
Scholes model is zero.

The
volatility assumption is based on the historical weekly price data of our stock over a period equivalent to the expected life of the options. We evaluated whether there were factors
during the period which were unusual and which would distort the volatility figure used to estimate future volatility and concluded that there were no such factors.

The
risk-free interest rate assumption is based upon the note principal U.S. Treasury Strips rates determined at the date of grant. The expected life of the stock options
represents the life of the option up to the expiration date. This is based upon an analysis of the historical exercise pattern of our employees and directors.

Total
non-cash compensation expense was $19.6 million and $9.8 million for the years ended December 31, 2007 and 2006, respectively, which is primarily
reflected in general and administrative expenses.

Stock Option Grants

Stock options granted under the plans to employees generally vest over five years from the grant date until fully vested. Stock options granted to directors
usually vest 100% on date of grant and expire three years from the date of grant. All stock options granted during each of the three years ended December 31, 2007 were at exercise prices that
were equal to or greater than the fair market value of our common stock on the date of grant. The following table summarizes our stock option activity, including both plan and non-plan
options, for the three-year period ended December 31, 2007:

|                                                                 |                       | Years Ended December 31,
|---------------------------------------------------------------- | --------------------- | ------------------------
|
|
|
|Outstanding, beginning of period                                 |                       | 4,044                   
|                                                                 | Granted               |                         
|                                                                 | Exercised             |                         
|                                                                 | Expired and forfeited |                         
|                                                                 |                       |                         
|Outstanding, end of period                                       |                       | 2,726                   
|                                                                 |                       |                         
|Options exercisable and expected to vest as of December 31, 2007 |                       | 2,618                   
|                                                                 |                       |                         
|Options exercisable, end of period                               |                       | 2,154                   
|                                                                 |                       |                         

F-25

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

Plan
and non-plan stock options outstanding and exercisable as of December 31, 2007 are summarized below:

|                  |  | Stock Options Outstanding |  | Stock Options Exercisable
|----------------- |  | ------------------------- |  | -------------------------
|
|
|$  2.75 - $  3.00 |  | 292                       |  | 2.2                      
|$  3.01 - $  6.00 |  | 722                       |  | 1.6                      
|$  6.01 - $  9.00 |  | 281                       |  | 3.2                      
|$  9.01 - $12.00  |  | 280                       |  | 3.6                      
|$12.01 - $15.00   |  | 841                       |  | 4.1                      
|$15.01 - $18.71   |  | 310                       |  | 4.1                      
|                  |  |                           |  |                          
|                  |  | 2,726                     |  |                          
|                  |  |                           |  |                          

The
following table summarizes the fair value of our stock option activity, including both plan and non-plan options, for non-vested option shares during the year
ended December 31, 2007:

Total

Weighted-Average Grant Date Fair Value(shares in thousands)Non-vested, beginning of period

1,929

$
13.53Granted

82


7.36Vested

(630
)

11.68Expired and forfeited

(809
)

14.27Non-vested, end of period

572

$
13.83


The
total intrinsic value of options exercised is the difference between the exercise price of the option and the closing price of our common stock on the exercise date. The total
intrinsic value of options exercised was $4.6 million and $21.8 million for the years ended December 31, 2006 and 2005, respectively. We had no options exercised during the year
ended December 31, 2007.

The
aggregate intrinsic value of stock options is the difference between our closing stock price on December 31, 2007 and the exercise price multiplied by the number of options.
All of our outstanding options, exercisable options and exercisable and expected to vest options had exercise prices greater than the closing price of our common stock at December 31, 2007. As
a result, these options had no aggregate intrinsic value at December 31, 2007.

We
have granted 82,000, 50,000 and 2.2 million of stock option shares to our employees, directors and consultants for the years ended December 31, 2007, 2006 and 2005,
respectively. The

F-26

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

weighted-average
grant date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 were $7.36, $5.14 and $9.18, respectively.

The
total fair value of stock options vested during the years ended December 31, 2007, 2006 and 2005 were $4.8 million, $5.4 million and $3.4 million,
respectively

As
of December 31, 2007, total unrecognized compensation expense related to non-vested stock options was $3.5 million. This expense is expected to be recognized
over a weighted-average period of 1.9 years.

Restricted Stock Grants

In the fourth quarter of 2005, the compensation committee of the board of directors began to grant restricted stock, rather than stock options, to employees and
officers. Restricted stock grants issued to employees under the plans generally vest over three years from grant date until fully vested. Restricted stock grants to certain executive officers, contain
accelerated vesting criteria and are more fully described below. In the fourth quarter of 2006, we began to grant restricted stock awards to employees that contain time and performance vesting
criteria. These grants usually vest over a three to five year period with 20%-33% vesting each year, if the agreed upon performance criteria have been achieved.

The
following table summarizes our restricted stock grant activity for the years ended December 31, 2007, 2006 and 2005:

Years Ended December 31,2007

2006

2005(in thousands)Outstanding, beginning of period

2,364

2,100

Granted

988

296

2,240Vested

(744
)
(20
)
(140
)Expired and forfeited

(596
)
(12
)
Outstanding, end of the period

2,012

2,364

2,100Outstanding and expected to vest as of December 31, 2007

1,962


The
aggregate intrinsic value of restricted stock outstanding and restricted stock outstanding and expected to vest at December 31, 2007 was $4.5 million and
$4.4 million, respectively.

The
weighted-average remaining vesting term of restricted stock outstanding at December 31, 2007 was 3.5 years.

We
have granted 988,000, 296,000 and 2.2 million shares of restricted stock to our employees, directors and consultants for the years ended December 31, 2007, 2006 and
2005, respectively. The weighted-average grant date fair value of restricted stock granted during the years ended December 31, 2007, 2006 and 2005 were $4.46, $15.43 and $15.28, respectively.

F-27

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

The
fair value of restricted stock is calculated by multiplying the number of restricted shares by the closing price of our common stock on December 31, of each year. The total
fair value of restricted stock vested during the years ended December 31, 2007, 2006 and 2005 were $3.5 million, $358,000 and $2.4 million, respectively.

As
of December 31, 2007, total unrecognized compensation expense related to outstanding restricted stock grants was $15.5 million. This expense is expected to be recognized
over a weighted-average period of 3.5 years.

During
the fourth quarter of 2005, we granted 2.0 million shares of restricted stock to certain of our executive officers. Full vesting of the stock will occur upon attainment of
any of the following:



Further,
partial vesting, as defined in the agreement, may occur if certain lesser targets are achieved. Unless sooner vested pursuant to the incentive targets described above, the
restricted stock shares will fully vest on the seventh anniversary of the date of the agreement so long as the individual is continually employed. Related to these awards, we recognized
$12.6 million, $4.4 million and $679,000 of non-cash expense during the years ended December 31, 2007, 2006 and 2005, respectively. Pursuant to the employment
agreements, we were required to transfer the 2 million shares to an escrow agent; such transfer occurred in February 2006.

On
April 19, 2007, we ceased our relationship with one of the executive officers referred to above. Pursuant to the terms of his employment agreement, he was entitled to
acceleration of vesting with respect to 899,000 of the 1,000,000 shares of unvested common stock he was awarded in connection with his employment, and, as a result, we incurred a one-time
$9.8 million non-cash charge for the year ended December 31, 2007. The 899,000 shares vested on July 18, 2007. The executive officer exercised a right pursuant to his
employment agreement to have shares, which would have otherwise vested, withheld in satisfaction of his income tax liability from this vesting. As a result, we made a one-time cash payment
of approximately $1.6 million to the appropriate taxing authorities related to his taxable income on this transaction. The withholding of these shares for taxes effectively represents a
retirement of these shares and has been reflected as an adjustment to our additional paid-in capital during the year ended December 31, 2007.

Employee Stock Purchase Plan

During the third quarter of 2005, the Committee and shareholders approved the establishment of an Employee Stock Purchase Plan. We have reserved 100,000 shares of
our common stock that are eligible for issuance to employees. Until June 30, 2006, employees were able contribute to the plan, subject to certain maximum contributions, and be eligible for a
discount November 1, 2005 or June 30,

F-28

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(11) Stock Options, Stock Grants and Employee Benefit Plans (Continued)

2006,
the first purchase date pursuant to the plan. After June 30, 2006, our employees are eligible for monthly purchases at the month end market price less a discount that we pay for our
employees.

(12) Warrants

Associated with various financing and other transactions and professional service agreements, we have issued transferable warrants to purchase common stock, which
generally immediately vest. The following table summarizes the outstanding warrant activity for years ended December 31, 2007, 2006, and 2005:

Year Ended December 31,2007

2006

2005Number of Potentially Exercisable Shares

Number of Potentially Exercisable Shares

Number of Potentially Exercisable SharesOutstanding, beginning of period


9,606


15,856


14,564Granted








2,547Exercised


(1,757
)

(3,703
)

(1,255
)Expired and cancelled


(553
)

(2,547
)

Outstanding, end of period


7,296


9,606


15,856Expiration


2008-2010


2007-2010


2006-2010Exercise price per share

$
2.75

$
2.75 - $8.52

$
2.64 - $20.69


We
issued 2.5 million warrants in 2005 to Arch Coal to purchase our common stock at prices ranging from $15.69 to $20.69. We recognized $5.8 million of general and
administrative expense during the year ended December 31, 2005 related to the warrants. The expense was estimated using a Black-Scholes option-pricing model using an expected life of
10 months, a dividend yield of zero, expected volatility of 56% and a risk free interest rate of 4.1%.

In
the second quarter of 2006, we extended these agreements with Arch Coal, to allow additional time for the evaluation of the project, including the underlying agreements. In connection
with the extension, the expiration date of the warrants was also extended and, pursuant to SFAS 123R, we were required to recognize an additional $1.7 million of non-cash
expense for the year ended December 31, 2006. The expense was estimated using a Black-Scholes option pricing model using an expected life of four months, a dividend yield of zero, expected
volatility of 55% and a risk free interest rate of 5.22%.

F-29

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(13) Commitments and Contingencies

Payment Obligations

The following table summarizes our future commitments as of December 31, 2007:

|                                    |                   | Payments due by period
|----------------------------------- | ----------------- | ----------------------
|
|
|Operating leases                    |                   | $                     
|Capital lease and other obligations |                   |                       
|Consulting and service commitments  |                   |                       
|Long-term debt                      |                   |                       
|                                    |                   |                       
|                                    | Total commitments |                       
|                                    |                   |                       

This
table does not include accounts payable, accrued liabilities, or asset retirement obligations, which are reported in our December 31, 2007 Consolidated Balance Sheet. We
generally have not included any obligation in which either party has the right to terminate except as discussed below. Additionally, we have not included royalty payments, as we cannot presently
determine when such payments will be made as such payments are based upon our receipt of cash for licensing and royalties.

We
are obligated under non-cancelable operating leases with initial terms exceeding one year relating to office space. Rent expense for the years ended December 31,
2007, 2006 and 2005 was $784,000, $415,000 and $242,000, respectively. Additionally, included in operating leases is the rent obligation associated with our former headquarters totaling $942,000, a
portion of which we have sub-leased but are not released from the obligation. Furthermore, included in operating leases is a 48-year port dock lease on the Ohio River, which we
have the right to cancel upon six months written notice. If this lease were cancelled as of December 31, 2007, we would be obligated to pay $250,000 rather than the entire obligation of
$24.5 million.

Consulting
and service commitments include an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of carbon emissions.
The
agreement provides us with an exclusive worldwide sub-license to a technology to standardize the measurement of carbon emissions in energy and agricultural related activities. The
agreement was amended and restated to expand the energy and agricultural activities to all applications of the technology and eliminates other operating requirements. In order to maintain this
licensing arrangement, we are required to make minimum annual royalty payments of $500,000 to the developer of the proprietary technology, with each payment extending the arrangement for one year if
the parties are in material compliance with the contract. Additionally, consulting and service commitments includes our amended and restated our Umbrella Agreement with Bechtel. Through this new
Program Management Agreement, we committed to provide Bechtel with $1 billion in construction contracts through 2013. Failure to meet this commitment by 2014 could cost us up to the
$10 million in termination fees which is included in the above table.

Long-term
debt includes our principal amount due 2012 and the 8% interest payments.

F-30

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(13) Commitments and Contingencies (Continued)

Litigation

We are not engaged in any material legal proceedings to which we or any of our subsidiaries are a party.

Royalties and Other Rights

We owe royalty payments to parties related to certain rights that support our patents and our proprietary technology, primarily related to Mr. Edward
Koppelman the inventor of the K-Fuel process. As described in further detail in Note 6Deferred Royalty Costs.

We
have granted certain rights and limited licenses for the use of certain K-Fuel technology. The following is a summary of the significant parties and the rights:



(14) Segments

During the quarter ended September 30, 2007, we re-evaluated our segments and have expanded our segment presentation to better reflect how our
results of operations are now evaluated and allocations of capital resources are determined. The Plant segment primarily represents revenue and costs related to our Fort Union plant and our mine site
in Gillette, Wyoming. The Mining segment primarily represents the mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal and wash facilities. The
C-lock segment reflects the operations related to our technology to standardize the measurement of carbon emissions in energy and agricultural related activities. The Technology segment is
comprised of all other operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our headquarters and related operations, activities of
Evergreen Energy Asia Pacific and KFx Technology, LLC, which holds the licenses to our technology. Our Technology segment allocates support costs to our other segments and are generally
allocated on a percentage basis based either on number of employees or on total operating expenses plus capital expenditures. Our operations are principally conducted in the United States. Data
through segment operating loss is what is provided to our Chief Operating Decision

F-31

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(14) Segments (Continued)

Maker.
We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting.

|                             |                                                     | For the Year Ended December 31, 2007 |        
|---------------------------- | --------------------------------------------------- | ------------------------------------ | -------
|
|
|Operating revenues:          |                                                     |                                      |        
|                             | Mining                                              |                                      | $      
|                             | K-Fuel refined coal and blended K-Fuel refined coal |                                      |        
|                             | Licensing                                           |                                      |        
|                             | Consulting and other                                |                                      |        
|                             |                                                     |                                      |        
|                             |                                                     | Total operating revenue              |        
|Operating expenses:          |                                                     |                                      |        
|                             | General and administrative                          |                                      |        
|                             | Coal mining operating costs                         |                                      |        
|                             | Plant start-up costs                                |                                      |        
|                             | Cost of licensing and consulting revenue            |                                      |        
|                             |                                                     |                                      |        
|                             |                                                     | Total segment operating expense      |        
|                             |                                                     |                                      |        
|Segment operating loss       |                                                     | $                                    | (39,748
|                             |                                                     |                                      |        
|Total assets                 |                                                     | $                                    | 2,822  
|                             |                                                     |                                      |        
|Reconciliation to net loss:  |                                                     |                                      |        
|Total Segment operating loss |                                                     |                                      |        
|                             | Depreciation, depletion and amortization            |                                      |        
|                             | Research and development                            |                                      |        
|                             | Asset impairments and bad debt                      |                                      |        
|                             | Other income (expense)                              |                                      |        
|                             |                                                     |                                      |        
|Net loss                     |                                                     |                                      |        
|                             |                                                     |                                      |        

F-32

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(14) Segments (Continued)

|
|

|                                |                                                     | For the Year Ended December 31, 2006 |        
|------------------------------- | --------------------------------------------------- | ------------------------------------ | -------
|
|
|Operating revenues:             |                                                     |                                      |        
|                                | Mining                                              |                                      | $      
|                                | K-Fuel refined coal and blended K-Fuel refined coal |                                      |        
|                                | Licensing                                           |                                      |        
|                                | Consulting and other                                |                                      |        
|                                |                                                     |                                      |        
|                                |                                                     | Total operating revenue              |        
|Operating expenses:             |                                                     |                                      |        
|                                | General and administrative                          |                                      |        
|                                | Coal mining operating costs                         |                                      |        
|                                | Plant start-up costs                                |                                      |        
|                                | Cost of licensing and consulting revenue            |                                      |        
|                                |                                                     |                                      |        
|                                |                                                     | Total segment operating expense      |        
|                                |                                                     |                                      |        
|Segment operating (loss) income |                                                     | $                                    | (28,834
|                                |                                                     |                                      |        
|Total assets                    |                                                     | $                                    | 96,835 
|                                |                                                     |                                      |        
|Reconciliation to net loss:     |                                                     |                                      |        
|Total Segment operating loss    |                                                     |                                      |        
|                                | Depreciation, depletion and amortization            |                                      |        
|                                | Research and development                            |                                      |        
|                                | Asset impairments and bad debt                      |                                      |        
|                                | Other income (expense)                              |                                      |        
|                                |                                                     |                                      |        
|Net loss                        |                                                     |                                      |        
|                                |                                                     |                                      |        

F-33

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(14) Segments (Continued)

|
|

|                             |                                          | For the Year Ended December 31, 2005 |       
|---------------------------- | ---------------------------------------- | ------------------------------------ | ------
|
|
|Operating revenues:          |                                          |                                      |       
|                             | Licensing                                |                                      | $     
|                             | Consulting and other                     |                                      |       
|                             |                                          |                                      |       
|                             |                                          | Total operating revenue              |       
|Operating expenses:          |                                          |                                      |       
|                             | General and administrative               |                                      |       
|                             | Coal mining operating costs              |                                      |       
|                             | Plant start-up costs                     |                                      |       
|                             | Cost of licensing and consulting revenue |                                      |       
|                             |                                          |                                      |       
|                             |                                          | Total segment operating expense      |       
|                             |                                          |                                      |       
|Segment operating loss       |                                          | $                                    | (3,135
|                             |                                          |                                      |       
|Reconciliation to net loss:  |                                          |                                      |       
|Total Segment operating loss |                                          |                                      |       
|                             | Depreciation, depletion and amortization |                                      |       
|                             | Research and development                 |                                      |       
|                             | Asset impairments and bad debt           |                                      |       
|                             | Other income (expense)                   |                                      |       
|                             |                                          |                                      |       
|Net loss                     |                                          |                                      |       
|                             |                                          |                                      |       

F-34

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(15) Income Taxes

Our operations are principally domestic, with income taxable at the federal statutory rate of 34% plus applicable state rates. Deferred tax assets (liabilities)
were comprised of the following:

2007

2006(in thousands)Gross deferred tax assets:Net operating loss carryforwards

$
103,024

$
61,781Depreciation and amortization


26,368


(1,143
)Accrued liabilities


831


2,166Stock options and warrants


4,686


4,417Deferred revenue


2,511


2,535Reserve on note receivable


469


469Prepaid expenses


(531
)

Other


164


164Gross deferred tax assets


137,522


70,389Deferred tax assets valuation allowance


(137,522
)

(70,389
)Net deferred tax assets

$


$



We
have recorded a valuation allowance for the full amount of our net deferred asset because, based upon an assessment of both negative and positive evidence, it is more likely than not
that we will not realize such benefits in future tax returns. As of December 31, 2007 our tax return net operating loss carryforwards are approximately $276.0 million expiring in various
amounts beginning in 2008; $1.7 million expired in 2007. We are evaluating various costs that we have incurred related to our Fort Union plant and mine site, including the impairment charge, to
determine if they qualify as research and development tax credits. Certain limitations apply to the annual amount of net operating losses that can be used to offset taxable income due to certain
ownership changes, as defined in Section 382 of the Internal Revenue Code. Our tax return net operating loss carryforwards are significant. The tax years in which losses arose may be subject to
audit by the Internal Revenue Service when such carryforwards are utilized to offset taxable income in future periods.

F-35

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(15) Income Taxes (Continued)

Our
total provision for income taxes in 2007, 2006 and 2005 were different from the amount expected by applying the statutory federal income tax rate to our net loss as reported in our
Consolidated Statement of Operations. The approximate differences are as follows:

2007

2006

2005(in thousands)Expected tax benefit on loss before income taxes (34%)

$
(69,590
)
$
(17,519
)
$
(7,926
)Expected state tax benefit, net


(6,754
)

(1,700
)

(769
)Stock options and warrant exercises


5,727


(910
)

(12,032
)Non-deductible items and other


3,484


(546
)

1,070Expiring net operating loss








1,655Increase in valuation allowance


67,133


20,675


18,002$


$


$



(16) Related Party Transactions



On December 7, 2006, we entered into a memorandum of understanding and real estate lease with Hills Products Group, Inc, or Hills Products. Hills Products
is owned by Mr. Stanford Adelstein who serves on our Board of Directors. We have leased certain real estate and facilities, including a train load-out facility, for the sole purpose
of trans-loading our K-Fuel refined coal from over-the-road truck into railcars. Prior to the execution of this agreement our independent Board members approved
this transaction. We believe the terms and contracted amounts would be similar if we had entered into this agreement with a third party. Per the agreement, we have committed to a monthly payment in
the amount of $1,500, plus an additional fee based on tonnage of K-Fuel refined coal loaded after agreed upon monthly tonnages are exceeded. During the year ended December 31, 2007,
we paid Hills Production Group, Inc $24,000.



We had consulting agreements with Venners & Company, Ltd. for governmental affairs services, primarily for advice on proposed legislation and
regulations and to advocate our interests before the U.S. Congress and regulatory agencies. Venners & Company, Ltd. is controlled by John P. Venners, the brother of Theodore Venners, our
CSO. We entered into agreements with Venners & Company for the providing of these services at a fixed monthly fee plus certain performance bonuses. In August 2007, we terminated one of the
agreements and pursuant to the other agreement we are obligated to make payments of $7,500 per month through May 2008 for previous legislative consulting work. During the years ended
December 31, 2007, 2006 and 2005, we paid Venners & Company $216,000, $306,000 and $346,000, respectively, in cash for consulting fees.

F-36

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(16) Related Party Transactions (Continued)



In February 2007, we entered into an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of
carbon emissions and formed a subsidiary, C-Lock Technology, Inc. The agreement provides us with an exclusive worldwide sub-license to a technology to standardize the
measurement of carbon emissions in energy and agricultural related activities. The agreement was amended and restated to
expand the energy and agricultural activities to all applications of the technology and eliminates other operating requirements. In order to maintain this licensing arrangement, we are required to
make minimum annual royalty payments of $500,000 to the developer of the proprietary technology, with each payment extending the arrangement for one year if the parties are in material compliance with
the contract. In August 2007, the developer of the proprietary technology became an employee of Evergreen Energy. We made the first annual payment of $500,000 in 2007. Additionally, upon signing of
the definitive agreement on June 7, 2007, we granted 97,000 shares of our restricted common stock to the developer of the proprietary technology, which fully vest on April 3, 2008. We
are required to recognize $600,000 of non-cash compensation expense ratably through April 3, 2008.

In
December 2004, we entered into a licensing agreement with Cook Inlet Coal, an affiliate of Kanturk Partners LLC, under which we agreed to license to Cook Inlet Coal our
proprietary coal processing technology for use at a coal processing plant to be operated by Cook Inlet Coal. Kanturk Partners owns approximately a 12% interest in Cook Inlet Coal. Mr. John
Venners, brother of our CSO, Mr. Theodore Venners, has an approximately 4.5% interest in Kanturk Partners.



In addition, we are obligated to make licensing and royalty payments to a party related to Theodore Venners, our CSO. See further discussion in
Note 6Deferred Royalty Costs and Note 13Commitments and Contingencies.



In December 2007, our subsidiary, C-Lock Technology, Inc., in conjunction with IBM and Enterprise Information Management, Inc. developed
a greenhouse gas meter called GreenCert. This meter was developed on IBM Websphere Portal-based software, which can calculate carbon reductions across multiple industries and devices. Two of our
employees serve on the board of directors of Enterprise Information Management. We believe the terms and contracted amounts would be similar if we had entered into this agreement with a third party.
We paid Enterprise Information Management Inc. $1.3 million during the year ended December 31, 2007.

(17) Financial Statements of Guarantors

The following information sets forth our consolidating statements of operations for the years ended December 31, 2007, 2006 and 2005; our consolidating
balance sheets as of December 31, 2007 and 2006, and our consolidating statements of cash flows for the years ended December 31, 2007, 2006 and 2005. Pursuant to SEC regulations, we have
presented in columnar format the financial information for Evergreen Energy Inc., the parent, Evergreen Operations, LLC, the guarantor, and all

F-37

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

non-guarantor
other subsidiaries on a combined basis. The consolidating statements of operations, cash flows, and balance sheets include the effects of elimination of intercompany
transactions and balances. Except for Evergreen Energy Asia Pacific, which is 96% owned by us, and C-Lock Technologies which is 82% owned by us, all of our other subsidiaries are 100%
owned. The accounting principles used to determine the amounts reported in this note are consistent with those used in our consolidated financial statements, except for the parent presents the
ownership in the subsidiaries under the equity method. Transactions effecting our consolidated stockholders' equity include net loss, exercise of options and warrants, vesting of restricted stock,
issuance of common stock in a public offering, warrant extension and debt issue costs. These transactions for all periods relate to our parent, Evergreen Energy Inc. with the exception of the
sale of stock in Evergreen Asia Pacific for $3.6 million, net of offering costs, which is included in the column labeled Other.

F-38

---





EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING BALANCE SHEETS  DECEMBER 31, 2007

|                                                                  |                           | Evergreen Energy Inc.     |          | Evergreen Operations, LLC |         | Other   |       | Eliminations |        | Evergreen Energy Consolidated
|----------------------------------------------------------------- | ------------------------- | ------------------------- | -------- | ------------------------- | ------- | ------- | ----- | ------------ | ------ | -----------------------------
|
|Assets                                                            |                           |                           |          |                           |         |         |       |              |        |                              
|Current:                                                          |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  | Cash and cash equivalents |                           | $        | 25,194                    |         | $       |      |              | $      | 1,764                        
|                                                                  | Accounts receivable, net  |                           |          |                          |         |         | 6,446 |              |        |                             
|                                                                  | Marketable securities     |                           |          | 22,500                    |         |         |      |              |        | 2,000                        
|                                                                  | Inventory                 |                           |          |                          |         |         | 1,443 |              |        |                             
|                                                                  | Prepaid and other assets  |                           |          | 928                       |         |         | 785   |              |        | 227                          
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | Total current assets      |          |                           | 48,622  |         |       | 8,674        |        |                              
|Property, plant and equipment, net of accumulated depreciation    |                           |                           | 4,880    |                           |         | 20,596  |       |              | 406    |                              
|Construction in progress                                          |                           |                           | 5,779    |                           |         | 5,260   |       |              | 926    |                              
|Mineral rights and mine development, net of accumulated depletion |                           |                           |         |                           |         | 19,363  |       |              |       |                              
|Restricted cash and marketable securities                         |                           |                           | 28,418   |                           |         |        |       |              |       |                              
|Debt issuance costs                                               |                           |                           | 5,587    |                           |         |        |       |              |       |                              
|Investment in subsidiaries                                        |                           |                           | (222,341 | )                         |         |        |       |              |       |                              
|Due from subsidiaries                                             |                           |                           | 263,379  |                           |         |        |       |              |        |                              
|Other assets                                                      |                           |                           | 2,731    |                           |         | 509     |       |              | 1,454  |                              
|Assets held for sale                                              |                           |                           | 18,615   |                           |         |        |       |              |       |                              
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | $                         | 155,670  |                           | $       | 54,402  |       | $            | 6,777  |                              
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|Liabilities and Stockholders' Equity                              |                           |                           |          |                           |         |         |       |              |        |                              
|Current liabilities:                                              |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  | Accounts payable          |                           | $        | 3,772                     |         | $       | 3,046 |              | $      |                             
|                                                                  | Accrued liabilities       |                           |          | 5,605                     |         |         | 2,962 |              |        | 130                          
|                                                                  | Other current liabilities |                           |          | 192                       |         |         |      |              |        |                             
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | Total current liabilities |          |                           | 9,569   |         |       | 6,008        |        |                              
|Long-term debt                                                    |                           |                           | 97,971   |                           |         |        |       |              |       |                              
|Deferred revenue, less current portion                            |                           |                           |         |                           |         |        |       |              | 6,732  |                              
|Due to parent                                                     |                           |                           |         |                           |         | 235,118 |       |              | 28,261 |                              
|Asset retirement obligations                                      |                           |                           |         |                           |         | 6,171   |       |              |       |                              
|Other liabilities, less current portion                           |                           |                           | 1,431    |                           |         | 1,100   |       |              |       |                              
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | Total liabilities         |          |                           | 108,971 |         |       | 248,397      |        |                              
|Commitments and contingencies                                     |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | Total equity (deficit)    |          |                           | 46,699  |         |       | (193,995     | )      |                              
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              
|                                                                  |                           | $                         | 155,670  |                           | $       | 54,402  |       | $            | 6,777  |                              
|                                                                  |                           |                           |          |                           |         |         |       |              |        |                              

F-39

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING BALANCE SHEETS  DECEMBER 31, 2006

|                                                                  |                           | Evergreen Energy Inc.     |         | Evergreen Operations, LLC |         | Other   |       | Eliminations |        | Evergreen Energy Consolidated
|----------------------------------------------------------------- | ------------------------- | ------------------------- | ------- | ------------------------- | ------- | ------- | ----- | ------------ | ------ | -----------------------------
|
|
|Assets                                                            |                           |                           |         |                           |         |         |       |              |        |                              
|Current                                                           |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  | Cash and cash equivalents |                           | $       | 32,581                    |         | $       |      |              | $      | 137                          
|                                                                  | Accounts receivable, net  |                           |         |                          |         |         | 6,011 |              |        |                             
|                                                                  | Marketable securities     |                           |         | 51,558                    |         |         |      |              |        |                             
|                                                                  | Inventory                 |                           |         |                          |         |         | 1,260 |              |        |                             
|                                                                  | Prepaid and other assets  |                           |         | 1,147                     |         |         | 1,149 |              |        | 55                           
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | Total current assets      |         |                           | 85,286  |         |       | 8,420        |        |                              
|Property, plant and equipment, net of accumulated depreciation    |                           |                           | 2,087   |                           |         | 104,273 |       |              | 72     |                              
|Construction in progress                                          |                           |                           | 13,733  |                           |         | 9,526   |       |              | 249    |                              
|Mineral rights and mine development, net of accumulated depletion |                           |                           |        |                           |         | 21,787  |       |              |       |                              
|Restricted cash                                                   |                           |                           | 3,910   |                           |         |        |       |              |       |                              
|Investment in subsidiaries                                        |                           |                           | (60,263 | )                         |         |        |       |              |       |                              
|Due from subsidiaries                                             |                           |                           | 187,408 |                           |         |        |       |              |       |                              
|Other assets                                                      |                           |                           | 1,349   |                           |         |        |       |              | 1,435  |                              
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | $                         | 233,510 |                           | $       | 144,006 |       | $            | 1,948  |                              
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|Liabilities and Stockholders' Equity                              |                           |                           |         |                           |         |         |       |              |        |                              
|Current liabilities:                                              |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  | Accounts payable          |                           | $       | 5,012                     |         | $       | 2,683 |              | $      |                             
|                                                                  | Accrued liabilities       |                           |         | 2,935                     |         |         | 3,578 |              |        | 59                           
|                                                                  | Other current liabilities |                           |         | 344                       |         |         | 112   |              |        | 19                           
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | Total current liabilities |         |                           | 8,291   |         |       | 6,373        |        |                              
|Deferred revenue, less current portion                            |                           |                           |        |                           |         |        |       |              | 6,732  |                              
|Due to parent                                                     |                           |                           |        |                           |         | 168,775 |       |              | 18,633 |                              
|Asset retirement obligations                                      |                           |                           |        |                           |         | 5,626   |       |              |       |                              
|Other liabilities, less current portion                           |                           |                           | 235     |                           |         |        |       |              |       |                              
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | Total liabilities         |         |                           | 8,526   |         |       | 180,774      |        |                              
|Commitments and contingencies                                     |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | Total equity (deficit)    |         |                           | 224,984 |         |       | (36,768      | )      |                              
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              
|                                                                  |                           | $                         | 233,510 |                           | $       | 144,006 |       | $            | 1,948  |                              
|                                                                  |                           |                           |         |                           |         |         |       |              |        |                              

F-40

---





EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF OPERATIONS  DECEMBER 31, 2007

|                               |                                                     | Evergreen Energy Inc.    |          | Evergreen Operations, LLC |        | Other    |         | Eliminations |        | Evergreen Energy Consolidated |      
|------------------------------ | --------------------------------------------------- | ------------------------ | -------- | ------------------------- | ------ | -------- | ------- | ------------ | ------ | ----------------------------- | -----
|
|Operating revenues:            |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               | Mining                                              |                          | $        |                          |        | $        | 47,362  |              | $      |                              |      
|                               | K-Fuel refined coal and blended K-Fuel refined coal |                          |          |                          |        |          | 1,081   |              |        |                              |      
|                               | Licensing                                           |                          |          |                          |        |          |        |              |        | 169                           |      
|                               | Consulting and other                                |                          |          |                          |        |          | 45      |              |        |                              |      
|                               | Consulting and other to parent                      |                          |          |                          |        |          | 161     |              |        |                              |      
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               |                                                     | Total operating revenue  |          |                           |       |          |         | 48,649       |        |                               | 169  
|Operating expenses:            |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               | General and administrative                          |                          |          | 28,293                    |        |          | 10,546  |              |        | 4,192                         |      
|                               | Coal mining operating costs                         |                          |          | 716                       |        |          | 42,377  |              |        |                              |      
|                               | Plant start-up costs                                |                          |          |                          |        |          | 34,720  |              |        | 10                            |      
|                               | Depreciation, depletion and amortization            |                          |          | 1,139                     |        |          | 7,199   |              |        | 45                            |      
|                               | Research and development                            |                          |          |                          |        |          |        |              |        | 876                           |      
|                               | Cost of licensing and consulting revenue            |                          |          |                          |        |          | 24      |              |        | 53                            |      
|                               | Cost of consulting revenue to parent                |                          |          |                          |        |          | 161     |              |        |                              |      
|                               | Asset impairments                                   |                          |          | 11,508                    |        |          | 111,180 |              |        |                              |      
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               |                                                     | Total operating expenses |          |                           | 41,656 |          |         | 206,207      |        |                               | 5,176
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|Operating loss                 |                                                     |                          | (41,656  | )                         |        | (157,558 | )       |              | (5,007 | )                             |      
|Other income (expense):        |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               | Interest income                                     |                          |          | 4,230                     |        |          |        |              |        | 118                           |      
|                               | Interest expense                                    |                          |          | (3,429                    | )      |          | (4      | )            |        |                              |      
|                               | Other income, net                                   |                          |          | (1,729                    | )      |          | 335     |              |        | 24                            |      
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|                               |                                                     | Total other income       |          |                           | (928   | )        |         | 331          |        |                               | 142  
|Equity in loss of subsidiaries |                                                     |                          | (162,092 | )                         |        |         |         |              |       |                               |      
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      
|Net loss                       |                                                     | $                        | (204,676 | )                         | $      | (157,227 | )       | $            | (4,865 | )                             | $    
|                               |                                                     |                          |          |                           |        |          |         |              |        |                               |      

F-41

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF OPERATIONS  DECEMBER 31, 2006

|                               |                                                     | Evergreen Energy Inc.    |         | Evergreen Operations, LLC |        | Other   |        | Eliminations |        | Evergreen Energy Consolidated |      
|------------------------------ | --------------------------------------------------- | ------------------------ | ------- | ------------------------- | ------ | ------- | ------ | ------------ | ------ | ----------------------------- | -----
|
|Operating revenues:            |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               | Mining                                              |                          | $       |                          |        | $       | 35,937 |              | $      |                              |      
|                               | K-Fuel refined coal and blended K-Fuel refined coal |                          |         |                          |        |         | 420    |              |        |                              |      
|                               | Licensing                                           |                          |         |                           |        |         |       |              |        | 319                           |      
|                               | Consulting and other                                |                          |         |                          |        |         | 34     |              |        |                              |      
|                               | Consulting and other to parent                      |                          |         |                          |        |         | 663    |              |        |                              |      
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               |                                                     | Total operating revenue  |         |                           |       |         |        | 37,054       |        |                               | 319  
|Operating expenses:            |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               | General and administrative                          |                          |         | 20,916                    |        |         | 5,697  |              |        | 2,229                         |      
|                               | Coal mining operating costs                         |                          |         | 583                       |        |         | 31,728 |              |        |                              |      
|                               | Plant start-up costs                                |                          |         |                          |        |         | 26,189 |              |        | 143                           |      
|                               | Depreciation, depletion and amortization            |                          |         | 573                       |        |         | 4,915  |              |        | 38                            |      
|                               | Research and development                            |                          |         |                          |        |         |       |              |        | 1,438                         |      
|                               | Cost of consulting and licensing revenue            |                          |         |                          |        |         | 22     |              |        | 112                           |      
|                               | Cost of consulting revenue to parent                |                          |         |                          |        |         | 663    |              |        |                              |      
|                               | Asset impairments                                   |                          |         |                          |        |         | 40     |              |        | 295                           |      
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               |                                                     | Total operating expenses |         |                           | 22,072 |         |        | 69,254       |        |                               | 4,255
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|Operating loss                 |                                                     |                          | (22,072 | )                         |        | (32,200 | )      |              | (3,936 | )                             |      
|Other income (expense):        |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               | Interest income                                     |                          |         | 5,606                     |        |         | 1      |              |        |                              |      
|                               | Interest expense                                    |                          |         | (2                        | )      |         | (4     | )            |        |                              |      
|                               | Other income, net                                   |                          |         | 1,063                     |        |         | 16     |              |        | 1                             |      
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|                               |                                                     | Total other income       |         |                           | 6,667  |         |        | 13           |        |                               | 1    
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|Equity in loss of subsidiaries |                                                     |                          | (36,122 | )                         |        |        |        |              |       |                               |      
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      
|Net loss                       |                                                     | $                        | (51,527 | )                         | $      | (32,187 | )      | $            | (3,935 | )                             | $    
|                               |                                                     |                          |         |                           |        |         |        |              |        |                               |      

F-42

---





EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF OPERATIONS  DECEMBER 31, 2005

|                               |                                          | Evergreen Energy Inc.    |         | Evergreen Operations, LLC |        | Other  |       | Eliminations |        | Evergreen Energy Consolidated |      
|------------------------------ | ---------------------------------------- | ------------------------ | ------- | ------------------------- | ------ | ------ | ----- | ------------ | ------ | ----------------------------- | -----
|
|Operating revenues:            |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               | Licensing                                |                          | $       |                          |        | $      |      |              | $      | 787                           |      
|                               | Consulting and other                     |                          |         |                          |        |        | 132   |              |        | 65                            |      
|                               | Consulting and other to parent           |                          |         |                          |        |        | 649   |              |        |                              |      
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               |                                          | Total operating revenue  |         |                           |       |        |       | 781          |        |                               | 852  
|Operating expenses:            |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               | General and administrative               |                          |         | 18,924                    |        |        | 1,641 |              |        | 23                            |      
|                               | Plant start-up costs                     |                          |         |                          |        |        | 1,484 |              |        | 38                            |      
|                               | Depreciation, depletion and amortization |                          |         | 387                       |        |        | 361   |              |        | 25                            |      
|                               | Research and development                 |                          |         |                          |        |        |      |              |        | 1,605                         |      
|                               | Cost of consulting and licensing revenue |                          |         |                          |        |        | 142   |              |        | 259                           |      
|                               | Cost of consulting revenue to parent     |                          |         |                          |        |        | 649   |              |        |                              |      
|                               | Bad debt                                 |                          |         | 1,255                     |        |        |      |              |        |                              |      
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               |                                          | Total operating expenses |         |                           | 20,566 |        |       | 4,277        |        |                               | 1,950
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      
|Operating loss                 |                                          |                          | (20,566 | )                         |        | (3,496 | )     |              | (1,098 | )                             |      
|Other income (expense):        |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               | Interest income                          |                          |         | 1,865                     |        |        |      |              |        | 1                             |      
|                               | Interest expense                         |                          |         | (5                        | )      |        | 2     |              |        |                              |      
|                               | Other (expense) income, net              |                          |         | (13                       | )      |        |      |              |        | (3                            | )    
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      
|                               |                                          | Total other income       |         |                           | 1,847  |        |       | 2            |        |                               | (2   
|Equity in loss of subsidiaries |                                          |                          | (4,594  | )                         |        |       |       |              |       |                               |      
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      
|Net loss                       |                                          | $                        | (23,313 | )                         | $      | (3,494 | )     | $            | (1,100 | )                             | $    
|                               |                                          |                          |         |                           |        |        |       |              |        |                               |      

F-43

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF CASH FLOW  DECEMBER 31, 2007

|                                                 |                                                                                       | Evergreen Energy Inc.                                   |         | Evergreen Operations, LLC |         | Other   |          | Eliminations |        | Evergreen Energy Consolidated |     
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------------------- | ------- | ------- | -------- | ------------ | ------ | ----------------------------- | ----
|
|Operating activities:                            |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|                                                 | Net loss                                                                              |                                                         | $       | (204,676                  | )       | $       | (157,227 | )            | $      | (4,865                        | )   
|                                                 | Adjustments to reconcile net loss to cash (used in) provided by operating activities: |                                                         |         |                           |         |         |          |              |        |                               |     
|                                                 |                                                                                       | Share-based compensation expense to employees and other |         |                           | 18,547  |         |          | 1,077        |        |                               |    
|                                                 |                                                                                       | Depreciation, depletion and amortization                |         |                           | 1,139   |         |          | 7,199        |        |                               | 45  
|                                                 |                                                                                       | Derivative fair value adjustments                       |         |                           | 1,730   |         |          |             |        |                               |    
|                                                 |                                                                                       | Amortization of initial fair value of derivative        |         |                           | (229    | )       |          |             |        |                               |    
|                                                 |                                                                                       | Asset impairments                                       |         |                           | 11,508  |         |          | 111,180      |        |                               |    
|                                                 |                                                                                       | Asset retirement obligation accretion                   |         |                           |        |         |          | 287          |        |                               |    
|                                                 |                                                                                       | Net loss in subsidiaries                                |         |                           | 162,092 |         |          |             |        |                               |    
|                                                 |                                                                                       | Amortization of debt issuance costs                     |         |                           | 397     |         |          |             |        |                               |    
|                                                 |                                                                                       | Gain sale of fixed assets                               |         |                           | 9       |         |          | (277         | )      |                               |    
|                                                 |                                                                                       | Other                                                   |         |                           | (9      | )       |          | 10           |        |                               | 1   
|                                                 | Changes in operating assets and liabilities:                                          |                                                         |         |                           |         |         |          |              |        |                               |     
|                                                 |                                                                                       | Accounts receivable                                     |         |                           |        |         |          | (459         | )      |                               |    
|                                                 |                                                                                       | Inventory                                               |         |                           |        |         |          | (183         | )      |                               |    
|                                                 |                                                                                       | Prepaids and other assets                               |         |                           | 234     |         |          | 74           |        |                               | (189
|                                                 |                                                                                       | Deferred revenue and other obligations                  |         |                           | (260    | )       |          | (45          | )      |                               | (19 
|                                                 |                                                                                       | Accounts payable and accrued expenses                   |         |                           | 1,291   |         |          | 22           |        |                               | 15  
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Cash used in operating activities                |                                                                                       |                                                         | (8,227  | )                         |         | (38,342 | )        |              | (5,012 | )                             |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Investing activities:                            |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|                                                 | Purchases of construction in progress                                                 |                                                         |         | (22,180                   | )       |         | (26,560  | )            |        | (623                          | )   
|                                                 | Purchases of property, plant and equipment                                            |                                                         |         | (2,725                    | )       |         | (981     | )            |        | (390                          | )   
|                                                 | Proceeds from the sale of assets                                                      |                                                         |         | 18                        |         |         | 916      |              |        |                              |     
|                                                 | Purchase of marketable securities                                                     |                                                         |         | (74,613                   | )       |         |         |              |        | (2,000                        | )   
|                                                 | Proceeds from maturities of marketable securities                                     |                                                         |         | 101,672                   |         |         |         |              |        |                              |     
|                                                 | Restricted cash and marketable securities                                             |                                                         |         | (24,508                   | )       |         | (220     | )            |        |                              |     
|                                                 | Other                                                                                 |                                                         |         | (42                       | )       |         |         |              |        |                              |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Cash used in investing activities                |                                                                                       |                                                         | (20,378 | )                         |         | (26,845 | )        |              | (3,013 | )                             |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Financing Activities:                            |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|                                                 | Payments to parent/subsidiaries                                                       |                                                         |         | (124,075                  | )       |         | (52,884  | )            |        |                              |     
|                                                 | Proceeds from issuance of convertible debt                                            |                                                         |         | 95,000                    |         |         |         |              |        |                              |     
|                                                 | Advances /from parent/subsidiaries                                                    |                                                         |         | 52,884                    |         |         | 118,138  |              |        | 5,937                         |     
|                                                 | Proceeds from exercise of options and warrants                                        |                                                         |         | 4,853                     |         |         |         |              |        |                              |     
|                                                 | Proceeds from sale of stock in subsidiary, net of offering costs                      |                                                         |         |                          |         |         |         |              |        | 3,715                         |     
|                                                 | Payments of debt issuance costs                                                       |                                                         |         | (5,785                    | )       |         |         |              |        |                              |     
|                                                 | Payment of payroll tax liability in exchange for common stock                         |                                                         |         | (1,641                    | )       |         |         |              |        |                              |     
|                                                 | Payments on capital leases and note payable                                           |                                                         |         | (18                       | )       |         | (67      | )            |        |                              |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Cash provided by financing activities            |                                                                                       |                                                         | 21,218  |                           |         | 65,187  |          |              | 9,652  |                               |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Increase (decrease) in cash and cash equivalents |                                                                                       |                                                         | (7,387  | )                         |         |        |          |              | 1,627  |                               |     
|Cash and cash equivalents, beginning of year     |                                                                                       |                                                         | 32,581  |                           |         |        |          |              | 137    |                               |     
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     
|Cash and cash equivalents, end of year           |                                                                                       | $                                                       | 25,194  |                           | $       |        |          | $            | 1,764  |                               | $   
|                                                 |                                                                                       |                                                         |         |                           |         |         |          |              |        |                               |     

F-44

---





EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF CASH FLOW  DECEMBER 31, 2006

|                                                 |                                                                                       | Evergreen Energy Inc.                                   |         | Evergreen Operations, LLC |        | Other   |         | Eliminations |        | Evergreen Energy Consolidated |    
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------------------- | ------ | ------- | ------- | ------------ | ------ | ----------------------------- | ---
|
|
|Operating activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|                                                 | Net loss                                                                              |                                                         | $       | (51,527                   | )      | $       | (32,187 | )            | $      | (3,935                        | )  
|                                                 | Adjustments to reconcile net loss to cash (used in) provided by operating activities: |                                                         |         |                           |        |         |         |              |        |                               |    
|                                                 |                                                                                       | Share-based compensation expense to employees and other |         |                           | 10,916 |         |         | 582          |        |                               |   
|                                                 |                                                                                       | Depreciation, depletion and amortization                |         |                           | 573    |         |         | 4,915        |        |                               | 38 
|                                                 |                                                                                       | Equity in loss of subsidiaries                          |         |                           | 36,122 |         |         |             |        |                               |   
|                                                 |                                                                                       | Asset impairments                                       |         |                           |       |         |         | 37           |        |                               | 298
|                                                 |                                                                                       | Asset retirement obligation accretion                   |         |                           |       |         |         | 229          |        |                               |   
|                                                 |                                                                                       | Other                                                   |         |                           | (36    | )       |         | (28          | )      |                               |   
|                                                 | Changes in operating assets and liabilities:                                          |                                                         |         |                           |        |         |         |              |        |                               |    
|                                                 |                                                                                       | Accounts receivable                                     |         |                           |       |         |         | (1,402       | )      |                               |   
|                                                 |                                                                                       | Inventory                                               |         |                           |       |         |         | 941          |        |                               |   
|                                                 |                                                                                       | Prepaids and other assets                               |         |                           | (584   | )       |         | (205         | )      |                               | (19
|                                                 |                                                                                       | Deferred revenue and other obligations                  |         |                           | 252    |         |         | 45           |        |                               | (19
|                                                 |                                                                                       | Accounts payable and accrued expenses                   |         |                           | 5,116  |         |         | (508         | )      |                               | (49
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Cash (used in) provided by operating activities  |                                                                                       |                                                         | 832     |                           |        | (27,581 | )       |              | (3,686 | )                             |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Investing activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|                                                 | Purchases of construction in progress                                                 |                                                         |         | (13,150                   | )      |         | (27,772 | )            |        | (533                          | )  
|                                                 | Purchases of property, plant and equipment                                            |                                                         |         | (1,607                    | )      |         | (3,532  | )            |        | (33                           | )  
|                                                 | Cash paid for acquisition, net of cash received                                       |                                                         |         |                          |        |         | (36,913 | )            |        |                              |    
|                                                 | Purchase of marketable securities                                                     |                                                         |         | (113,309                  | )      |         |        |              |        |                              |    
|                                                 | Proceeds from maturities of marketable securities                                     |                                                         |         | 85,624                    |        |         |        |              |        |                              |    
|                                                 | Purchases of mineral rights and development                                           |                                                         |         |                          |        |         | (1,026  | )            |        |                              |    
|                                                 | Restricted cash                                                                       |                                                         |         | 1,287                     |        |         |        |              |        |                              |    
|                                                 | Other                                                                                 |                                                         |         | 28                        |        |         | 26      |              |        |                              |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Cash used in investing activities                |                                                                                       |                                                         | (41,127 | )                         |        | (69,217 | )       |              | (566   | )                             |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Financing Activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|                                                 | Payments to parent/subsidiaries                                                       |                                                         |         | (134,160                  | )      |         | (34,703 | )            |        |                              |    
|                                                 | Advances from parent/subsidiaries                                                     |                                                         |         | 34,703                    |        |         | 129,963 |              |        | 4,241                         |    
|                                                 | Proceeds from the exercise of options and warrants                                    |                                                         |         | 24,619                    |        |         |        |              |        |                              |    
|                                                 | Proceeds from issuance of common stock, net of offering costs                         |                                                         |         | 144,559                   |        |         |        |              |        |                              |    
|                                                 | Payments on capital leases and note payable                                           |                                                         |         | (64                       | )      |         | (14     | )            |        |                              |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Cash provided by financing activities            |                                                                                       |                                                         | 69,657  |                           |        | 95,246  |         |              | 4,241  |                               |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Increase (decrease) in cash and cash equivalents |                                                                                       |                                                         | 29,362  |                           |        | (1,552  | )       |              | (11    | )                             |    
|Cash and cash equivalents, beginning of year     |                                                                                       |                                                         | 3,219   |                           |        | 1,552   |         |              | 148    |                               |    
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    
|Cash and cash equivalents, end of year           |                                                                                       | $                                                       | 32,581  |                           | $      |        |         | $            | 137    |                               | $  
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |    

F-45

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(17) Financial Statements of Guarantors (Continued)

EVERGREEN ENERGY INC.  CONSOLIDATING STATEMENTS OF CASH FLOW  DECEMBER 31, 2005

|                                                 |                                                                                       | Evergreen Energy Inc.                                   |         | Evergreen Operations, LLC |        | Other   |         | Eliminations |        | Evergreen Energy Consolidated |     
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------------------- | ------ | ------- | ------- | ------------ | ------ | ----------------------------- | ----
|
|
|Operating activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|                                                 | Net loss                                                                              |                                                         | $       | (23,313                   | )      | $       | (3,495  | )            | $      | (1,099                        | )   
|                                                 | Adjustments to reconcile net loss to cash (used in) provided by operating activities: |                                                         |         |                           |        |         |         |              |        |                               |     
|                                                 |                                                                                       | Share-based compensation expense to employees and other |         |                           | 10,995 |         |         |             |        |                               |    
|                                                 |                                                                                       | Depreciation, depletion and amortization                |         |                           | 387    |         |         | 361          |        |                               | 25  
|                                                 |                                                                                       | Bad debt                                                |         |                           | 1,255  |         |         |             |        |                               |    
|                                                 |                                                                                       | Equity in loss of subsidiaries                          |         |                           | 4,594  |         |         |             |        |                               |    
|                                                 |                                                                                       | Asset retirement obligation accretion                   |         |                           |       |         |         | 103          |        |                               |    
|                                                 |                                                                                       | Other                                                   |         |                           | 2      |         |         |             |        |                               |    
|                                                 | Changes in operating assets and liabilities:                                          |                                                         |         |                           |        |         |         |              |        |                               |     
|                                                 |                                                                                       | Receivable from related party                           |         |                           | 750    |         |         |             |        |                               |    
|                                                 |                                                                                       | Inventory                                               |         |                           |       |         |         | (64          | )      |                               |    
|                                                 |                                                                                       | Prepaids and other assets                               |         |                           | (286   | )       |         | (31          | )      |                               | (11 
|                                                 |                                                                                       | Deferred revenue and other obligations                  |         |                           | (101   | )       |         |             |        |                               | (616
|                                                 |                                                                                       | Accounts payable and accrued expenses                   |         |                           | (5,223 | )       |         | 3,624        |        |                               | 72  
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Cash (used in) provided by operating activities  |                                                                                       |                                                         | (10,940 | )                         |        | 498     |         |              | (1,629 | )                             |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Investing activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|                                                 | Purchases of construction in progress                                                 |                                                         |         |                          |        |         | (47,084 | )            |        |                              |     
|                                                 | Purchases of property, plant and equipment                                            |                                                         |         | (234                      | )      |         | (565    | )            |        | (52                           | )   
|                                                 | Purchase of marketable securities                                                     |                                                         |         | (54,674                   | )      |         |        |              |        |                              |     
|                                                 | Proceeds from maturities of marketable securities                                     |                                                         |         | 30,800                    |        |         |        |              |        |                              |     
|                                                 | Cash paid for acquisition, net of cash received                                       |                                                         |         |                          |        |         | (573    | )            |        |                              |     
|                                                 | Restricted cash                                                                       |                                                         |         | (1,798                    | )      |         |        |              |        |                              |     
|                                                 | Other                                                                                 |                                                         |         | 283                       |        |         |         |              |        |                              |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Cash used in investing activities                |                                                                                       |                                                         | (25,623 | )                         |        | (48,222 | )       |              | (52    | )                             |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Financing Activities:                            |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|                                                 | Payments to parent/subsidiaries                                                       |                                                         |         | (50,566                   | )      |         |        |              |        |                              |     
|                                                 | Advances from parent/subsidiaries                                                     |                                                         |         |                          |        |         | 49,263  |              |        | 1,342                         |     
|                                                 | Proceeds from the exercise of options and warrants                                    |                                                         |         | 11,699                    |        |         |        |              |        |                              |     
|                                                 | Payments on capital leases                                                            |                                                         |         | (232                      | )      |         |        |              |        |                              |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Cash provided by financing activities            |                                                                                       |                                                         | (39,099 | )                         |        | 49,263  |         |              | 1,342  |                               |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Increase (decrease) in cash and cash equivalents |                                                                                       |                                                         | (75,662 | )                         |        | 1,539   |         |              | (339   | )                             |     
|Cash and cash equivalents, beginning of year     |                                                                                       |                                                         | 78,881  |                           |        | 13      |         |              | 487    |                               |     
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     
|Cash and cash equivalents, end of year           |                                                                                       | $                                                       | 3,219   |                           | $      | 1,552   |         | $            | 148    |                               | $   
|                                                 |                                                                                       |                                                         |         |                           |        |         |         |              |        |                               |     

F-46

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(18) Restatement of Consolidated Balance Sheet and Consolidated Statements of Cash Flows

We identified an error related to the classification of certain investments, primarily auction rate securities, as cash and cash equivalents rather than
marketable securities. As a result, of this error we determined that the consolidated balance sheet at December 31, 2006 and the consolidated statements of cash flows for the years ended
December 31, 2006 and 2005 should be restated. The restatement is necessary to properly classify auction rate securities as marketable securities, which we classify as
available-for-sale in accordance with SFAS 115. These errors did not result in any changes to the consolidated statements of operations, the consolidated statements of
stockholders' equity, total current assets, total assets, total liabilities and total stockholder's equity on the consolidated balance sheets for any of the previously reported periods, however, the
effect on the statements of cash flows and on the cash and marketable securities balances on the balance sheet were considered material.

Following
is a summary of the effects of the restatement on our consolidated financial statements:

|                                                 |  | As previously reported |         | Adjustments |   | As restated |  
|------------------------------------------------ |  | ---------------------- | ------- | ----------- | - | ----------- | -
|Balance SheetDecember 31, 2006                   |  |                        |         |             |   |             |  
|Cash and cash equivalents                        |  | $                      | 74,518  |             | $ | (41,800     | )
|Marketable securities                            |  |                        | 9,758   |             |   | 41,800      |  
|Statement of Cash FlowsDecember 31, 2006         |  |                        |         |             |   |             |  
|Purchases of marketable securities               |  | $                      | (17,733 | )           | $ | (95,576     | )
|Proceeds from marketable securities              |  |                        | 7,974   |             |   | 77,650      |  
|Cash used in investing activities                |  |                        | (92,940 | )           |   | (17,926     | )
|Increase (decrease) in cash and cash equivalents |  | $                      | 45,725  |             | $ | (17,926     | )
|Cash and cash equivalents, beginning of year     |  |                        | 28,793  |             |   | (23,874     | )
|Cash and cash equivalents, end of year           |  |                        | 74,518  |             |   | (41,800     | )
|Statement of Cash FlowsDecember 31, 2005         |  |                        |         |             |   |             |  
|Purchases of marketable securities               |  | $                      |        |             | $ | (54,674     | )
|Proceeds from marketable securities              |  |                        |        |             |   | 30,800      |  
|Cash used in investing activities                |  |                        | (49,984 | )           |   | (23,874     | )
|Increase (decrease) in cash and cash equivalents |  |                        | (50,588 | )           |   | (23,874     | )
|Cash and cash equivalents, end of year           |  |                        | 28,793  |             |   | (23,874     | )

F-47

---



EVERGREEN ENERGY INC.

Notes to Consolidated Financial Statements (Continued)

Years ended December 31, 2007, 2006 and 2005

(19) Selected Quarterly Financial Data (Unaudited)

The following table presents selected unaudited quarterly financial data for the years ended December 31, 2007 and 2006:

|                                            |  | First Quarter |         | Second Quarter |   | Third Quarter |   | Fourth Quarter |         | Total |  
|------------------------------------------- |  | ------------- | ------- | -------------- | - | ------------- | - | -------------- | ------- | ----- | -
|
|2007                                        |  |               |         |                |   |               |   |                |         |       |  
|Revenues                                    |  | $             | 11,088  |                | $ | 12,088        |   | $              | 12,893  |       | $
|Operating loss                              |  |               | (17,062 | )              |   | (28,329       | ) |                | (21,827 | )     |  
|Net loss                                    |  |               | (15,990 | )              |   | (27,649       | ) |                | (19,366 | )     |  
|Basic and diluted net loss per common share |  |               | (0.20   | )              |   | (0.34         | ) |                | (0.23   | )     |  
|2006                                        |  |               |         |                |   |               |   |                |         |       |  
|Revenues                                    |  |               | 185     |                |   | 11,499        |   |                | 12,097  |       |  
|Operating loss                              |  |               | (7,338  | )              |   | (12,195       | ) |                | (18,907 | )     |  
|Net loss                                    |  |               | (6,228  | )              |   | (9,539        | ) |                | (17,363 | )     |  
|Basic and diluted net loss per common share |  | $             | (0.09   | )              | $ | (0.12         | ) | $              | (0.22   | )     | $

Fourth Quarter 2007 Discussion

We incurred $118.9 million of impairment charges during the fourth quarter.

Fourth Quarter 2006 Discussions

We recognized non-cash compensation expense of $2.4 million related to non-cash compensation to employees.

F-48

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