Unless the context requires otherwise, 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-Direct®, K-Fuel Plants, K-Fuel facilities, K-Direct facilities, K-Direct plants, GreenCert™, C-lock™ and C-Lock refer to our patented processes and technologies.

Forward-Looking Information May Prove Inaccurate

Some of the information presented in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that include terms such as "may," "will," "intend," "anticipate," "estimate," "expect," "continue," "believe," "plan," or the like, as well as all statements that are not historical facts. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from current expectations. Although we believe our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from expectations.

For additional factors that could affect the validity of our forward-looking statements, you should read the risk factors set forth in Part I, Item 1A of our of this quarterly report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2007 and the Consolidated Financial Statements contained therein. The forward-looking statements included in this quarterly report are subject to additional risks and uncertainties not disclosed in this quarterly report, some of which are not known or capable of being known by us. The information contained in this quarterly report is subject to change without notice. Readers should review future reports that we file with the Securities and Exchange Commission. In light of these and other risks, uncertainties and assumptions, actual events or results may be very different from those expressed or implied in the forward-looking statements in this quarterly report or may not occur. We have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

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 patented 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.

Our C-Lock subsidiary is enhancing its patented C-Lock technology which is a science-based approach for massive data collection, correlation and mathematical models to measure and quantify carbon credits and greenhouse gases. The technology uses a web-based solution to measure, document and audit greenhouse gases, for environmental performance, including carbon offsets. A software technology, GreenCert™, provides automated processes for quantifying changes in environmental impact and specifically, greenhouse gas emission reductions

In July 2007, we completed a convertible debt offering that provided us with approximately $72 million, net of amounts held in escrow and offering costs. During the quarter ended September 30, 2008, we entered into multiple individually negotiated agreements with certain existing Noteholders to exchange $66.4 million in aggregate principal amount of our 8.00% convertible secured notes due 2012, for an aggregate of 47.9 million shares of our common stock and $3.5 million in cash which was paid on October 1, 2008. We issued all shares except for 9.3 million, by October 2008, which represents $12.5 million of principal value of the notes.. Further, we received the requisite consents to amend the Indenture and in compliance with the terms and provisions of the indenture, we, each of the guarantors and the trustee, executed a Supplemental Indenture. The Supplemental Indenture amends the indenture to eliminate substantially all of the restrictive covenants, to release the security interests in the collateral securing the notes and to make certain other conforming changes to the Indenture which included the release of $18.0 million of cash that was held in escrow.

K-Fuel

On March 19, 2008, we suspended operations at our Fort Union plant and mine site. This enabled 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 K-Fuel process. Bechtel Power Corporation Bechtel completed the enhanced standard design based upon the results of our testing completed at the Fort Union plant. Additionally, suspending production at this site further enabled us to reduce our cash expenditures. To date, we have de-commissioned the Fort Union boiler, processing towers and other equipment at the site. We are safeguarding the assets and maintaining the plant in a non-operational mode. While we would be able 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, we would be required to re-commission the equipment, which could take several months. As time passes and we further de-commission the Fort Union plant, the time and costs to convert it to an operational status will increase. We continue to evaluate redeploying some of the equipment to a future K-Fuel facility site.

We are evaluating several projects both domestically and internationally for potential K-Fuel facilities, focusing on terminal facilities, or K-Direct plants, which would be wholly owned or owned through joint ventures. We are evaluating sites in the United States and are currently negotiating agreements to locate a K-Fuel plant at a terminal site in the Mid-West. We believe that a terminal facility offers many benefits, including the following:

· A strategic location with access to rail, barge and trucking transportation options to many potential customers.

· Ability to handle multiple types of coal, from multiple locations as a feedstock to the K-Fuel process.

· Ability to blend K-Fuel refined coal with other coals to meet customer specifications, which we believe provides greater flexibility to potential customers by allowing them to target specifications like heat value or post-combustion characteristics like ash content or mercury, sulfur dioxide, chlorine, nitrogen oxide or other emission criteria.

· Opportunity to leverage any available, existing coal handling, coal blending or other equipment that may already be located on or near the plant site.

On January 8, 2008, following successful test results for product performance and stability, we, our subsidiary 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 and we anticipate finalizing the scope of a joint Phase III study in the coming months, which will include detailed engineering, financial and marketing studies with a view of the funding and commencement of construction of a commercial facility.

On October 3, 2008, Congress passed the energy tax credits contained in the financial rescue package, which included a one-year extension of the refined coal tax credit. Credit is provided to qualified refined coal facilities under
Section 45 of the tax code that are placed in service no later than December 31, 2009. In addition to extending the deadline to December of next year so that the credit does not lapse at the end of 2008, the legislation passed sets the credit at $5.877 per ton of qualified fuel. To qualify, the refined coal must achieve a 20-percent emissions reduction of nitrogen oxide and a 40 percent emissions reduction in either sulfur dioxide or mercury. The credits apply to actual production and are available for 10 years after the project is placed in service.

We continue to have discussions with several potential buyers for the sale of our boiler, which is classified as "Assets Held For Sale", and anticipate the consummation of this sale in the future. We anticipate that we will utilize these additional proceeds to fund corporate operations and potential future projects. In the future, if we determine that we are unable to sell this boiler, we will evaluate utilizing it in a future K-Fuel plant.

Buckeye

Our average sales price realization per ton has increased approximately 24% between the quarters ended September 30, 2008 and the same period ended September 30, 2007. We believe these strong pricing levels will be sustainable for at least though December 31, 2010. However, we have not captured all the benefits from the coal price increases during the last few months due to longer-termed coal contracts entered into in the past, which contain prices that are periodically adjusted based upon indexes. Many of these index-based adjustments will occur throughout 2009. We anticipate, based on current coal prices, that we will see significant increases in revenue and cash flows from these longer-termed contracts beginning in early 2009. As anticipated increases in production described below occur, we expect to capture the upside of these increases in pricing and will continue to benefit from higher prices during the remainder of 2008 and future periods.

Our production tons for the third quarter ended September 30, 2008 were less than anticipated due to power outages and other weather issues related to Hurricane Ike. In addition, we experienced unexpected adverse roof conditions resulting

from clay vein slip areas in a section of one of our underground mining veins. We have resolved the roof conditions by using longer bolts in each of the main entries, more bolts and narrowing the belt entry. We were also required to obtain the Mine Safety and Health Administrations approval of the revised roof control and ventilation plans, which took longer than anticipated. We believe that all issues are resolved and Buckeye is now producing at prior levels. We anticipate production levels of at least 750,000 tons sold in 2008 as compared to 727,000 tons in 2007. With additional capital expenditures and continuing enhancements to our underground mine, we anticipate more than 1 million tons can be sold in 2009, followed by a potential 20% to 25% increase in 2010. Based on these projections, we believe that the cash flows from Buckeye will be sufficient to fund all consolidated general and administrative and other operational costs for the foreseeable future. If Buckeye experiences unexpected declines in production for any reason, including but not limited to, heavy rains or flooding, slow-downs or suspension of operations for geologic or any other unanticipated reason, it could adversely impact our cash flow from operations.

C-Lock

Our C-Lock subsidiary is enhancing its patented C-Lock technology which is a science-based approach for massive data collection, correlation and mathematical models to measure and quantify carbon credits and greenhouse gases. The technology uses a web-based solution to measure, document and audit greenhouse gases, for environmental performance, including carbon offsets. A software technology, GreenCert™, provides automated processes for quantifying changes in environmental impact and specifically, greenhouse gas emission reductions and enables:

· Quantification

· Verification

· Analysis of uncertainty; and

· Audit and compliance reporting for greenhouse gas risks and remediation measures.

C-Lock, along with IBM laboratories and research centers, has in place the software framework with the above characteristics. This framework is generally applicable to all industries and is then customized for client and industry specifics. We have completed the initial development of The Agricultural Land Carbon Solution and The Utility-Power Generation Carbon Solution for coal fired power plants. We recently signed an agreement to develop and market our technology to members of the largest electric cooperative in the United States. We also have identified other potential customers and are actively marketing both products.

C-Lock continues to identify potential future strategic partners, in addition to IBM Corp. and Enterprise Information Management Corp, to assist in the development, testing and roll-out of its products. Potential partners include companies offering services such as: energy engineering consulting; power generation performance optimization; environmental consulting; offering products relating to sensor systems and devices; data collection devices, or other products that support energy or power plant operations.

We continue to have discussions with several potential buyers for the sale of our boiler, which is classified as "Assets Held For Sale", and anticipate the consummation of this sale in the future. We anticipate that we will utilize these additional proceeds to fund corporate operations and potential future projects. In the future, if we determine that we are unable to sell this boiler, we will evaluate utilizing it in a future K-Fuel plant.

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 incur more substantial mining costs. In the future, we plan to build, own and operate K-Fuel and K-Direct plants domestically and internationally, both wholly owned and through joint ventures. Through C-Lock we expect to generate further revenues from the measurement of greenhouse gases and certification of environmental improvements as carbon credits. Our plant costs have significantly decreased due to our decision to idle our Fort Union plant in the first quarter of 2008. See our Annual Report on Form 10-K for the year ended December 31, 2007 for further discussion related to our anticipated revenue and expense trends. 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.

RESULTS OF OPERATIONS

Our segments include the Mining segment, the C-lock segment, the Plant segment and the Technology segment. 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 measurement of greenhouse gases and certification of these environmental improvements as carbon credits. The Plant segment primarily represents revenue and costs related to our Fort Union plant and our mine site in Gillette, Wyoming. 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 K-Fuel 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.

Revenue

Revenues for the third quarter of 2008 and 2007 were $14.0 million and $12.9 million, respectively.

Revenues in our Mining segment for the third quarter of 2008 and 2007 were $14.0 million and $12.6 million respectively, as follows:

· Coal revenue includes mined raw and prepared coal sales within our Buckeye operations. Coal revenues were $12.0 million and $10.6 million for the third quarter of 2008 and 2007, respectively. Coal sales for the third quarter ended 2008 were 176,795 tons at $67.88 sales realization per ton sold compared to 194,247 tons at $54.56 sales realization per ton sold, for the third quarter 2007. The increase in the sales realization per ton in the third quarter 2008 was due to higher coal sales prices when compared to the same quarter ended 2007. We anticipate these prices to increase in the near term. As previously discussed, production was less than expected during the three months ended September 30, 2008 due to unanticipated impacts from Hurricane Ike and adverse roofing conditions in the underground mine. We believe that all issues are resolved and Buckeye is now producing at prior levels.

· Brokered coal sales, net, are derived from revenues less the costs associated with the purchase of coal from other coal producers, which we ship directly to customers. Brokered coal sales, net, were $248,000 for the third quarter of 2008 compared to $65,000 for the third quarter of 2007.

· Ash disposal revenue includes revenue generated from the disposal of coal combustion byproducts at our ash pit in Ohio. Ash disposal revenues were $1.8 million for the third quarter of 2008 and for the third quarter of 2007, respectively.

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 $34,000 for the third quarter 2008, and $259,000 for the third quarter 2007 and are included in our Plant segment. We anticipate little to no revenue for the remainder of 2008, due to our decision to idle our Fort Union plant in March 2008.

Revenues in our Mining segment for the nine months ended September 30, 2008 and 2007 were $41.7 million and $35.4 million, respectively, as follows:

· Coal revenues were $35.4 million and $30.4 million for the nine months ended September 30, 2008 and 2007, respectively. Coal sales for the nine months ended September 30, 2008 were 547,917 tons at $64.61 sales realization per ton sold compared to 588,695 tons at $51.64 sales realization per ton sold, for the nine months ended September 30, 2007.

· Brokered coal sales, net were $315,000 for the nine months ended September 30, 2008 compared to $418,000 for the same period ended 2007.

· Ash disposal revenues were $6.0 million for the nine months ended September 30, 2008 compared to $5.0 million for the same period ended 2007. The increase for the nine months ended September 30, 2008 was due to increased disposal volume for one of our large customers.

K-Fuel refined coal and blended K-Fuel refined coal sales were $463,000 for the nine months ended September 30, 2008 compared to $523,000 for the same period ended 2007.

Coal Mining Operating Costs

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

Coal mining operating expenses

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 $9.9 million and $10.0 million for the third quarters ended 2008 and 2007, respectively. Coal mining operating costs for the nine months ended September 30, 2008 and 2007 were $31.1 million and $28.7 million, respectively. Although costs are relatively flat our production tons have decreased for the three and nine months ended September 30, 2008 compared to the same periods ended 2007. The increase in cost per ton for the three months and nine months ended September 30, 2008, results primarily from a rise in the price of fuel used to mine and transport coal.

Ash disposal

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 $1.6 million and $1.3 million for the quarters ended September 30, 2008 and 2007, respectively. Ash disposal expenses for the nine months ended September 30, 2008 and 2007 were $4.2 million and $3.6 million, respectively. The increase in the third quarter 2008 and the nine months ended September 30, 2008 is in direct correlation with the increase in revenue when compared to the same periods ended 2007.

Plant costs

Subsequent to the idling of the Fort Union plant, costs primarily consist of salaries and wages, security and repair and maintenance. Previously plant costs primarily included purchased raw materials, coal transportation, outsourced engineering and technical support, fluid processing, byproducts and water disposal, and employee-related costs, which are reflected in our Plant segment. Plant costs were $2.4 million and $7.9 million for the three months ended September 30, 2008 and 2007, respectively. Plant costs were $16.5 million and $25.2 million for the nine months ended September 30, 2008 and 2007, respectively. Plant costs decreased for the three and nine months ended September 30, 2008 primarily due to the idling of our Fort Union plant in late March 2008. While we anticipate further plant costs reductions, we will continue to incur various costs related to maintaining the site in a non-operating mode.

General and Administrative

The following table summarizes our general and administrative costs for the
three and nine months ended September 30, 2008 and 2007.

                                       Three Months Ended          Nine Months Ended
                                          September 30,              September 30,
                                        2008          2007         2008          2007
                                                       (in thousands)

Non-cash, share-based compensation   $    1,319      $ 2,895     $   4,683     $ 17,270
Employee-related costs                    3,274        3,156        10,097        8,264
Professional fees                         1,033        1,439         2,994        3,515
Office and travel costs                     879          765         2,886        2,652
Insurance and other                       2,036        1,183         4,572        3,492
Total general and administrative     $    8,541      $ 9,438     $  25,232     $ 35,193

Employee non-cash, share-based compensation expenses were $1.3 million and $2.9 million for the three months ended September 30, 2008 and 2007, respectively, substantially all of which related to our Technology segment. Non-cash share based compensation expenses were $4.7 million and $17.3 million for the nine months ended September 30, 2008 and

2007, respectively, substantially all of which relate to our Technology segment. The decrease related to the quarter ended September 30, 2008 as compared to the same period in 2007, was due to the termination of a former executive officer and a one-time charge of $661,000 related to the accelerated vesting of a portion of his restricted stock grant. The decrease for the nine months ended September 30, 2008 was due to the one-time $9.8 million charge as a result of the termination of the former executive officer and the acceleration vesting of a portion of his restricted stock.

Employee-related costs primarily include salaries and wages, bonuses, benefits, employer payroll taxes and education and training. The following table summarizes our employee-related costs in each of our segments for the three and nine months ended September 30, 2008 and 2007.

                           Three Months Ended          Nine Months Ended
                              September 30,              September 30,
                            2008          2007          2008         2007
                                           (in thousands)

Technology               $    1,547      $ 1,303     $    4,858     $ 3,248
Plant                           324        1,115          1,665       2,866
Mining                          635          603          1,900       1,960
C-Lock                          768          135          1,674         190
Total employee-related   $    3,274      $ 3,156     $   10,097     $ 8,264

Employee-related costs were $3.3 million and $3.2 million for the three months ended September 30, 2008 and 2007, respectively. Employee-related costs were $10.1 million and $8.3 million for the nine months ended September 30, 2008 and 2007, respectively. The increases for the nine months ended September 30, 2008 in comparison to the same period in 2007, were primarily due to adding personnel to our C-Lock segment, as well as adding engineering and other personnel in our Technology segment, recruiting fees, and an overall increase in health insurance costs. Offsetting these increases were decreases in employee-related costs in our Plant segment as a result of idling our Fort Union plant. We anticipate that due to the expansion of our engineering staff, we will see savings in our outsourced engineering costs.

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 three and nine months ended September 30, 2008 and 2007.

                            Three Months Ended          Nine Months Ended
                               September 30,              September 30,
                             2008          2007          2008         2007
                                            (in thousands)

Technology                $      644      $   828     $    1,916     $ 2,424
Plant                             85          166            342         356
Mining                           165           87            321         261
C-Lock                           139          358            415         474
Total professional fees   $    1,033      $ 1,439     $    2,994     $ 3,515

Professional fees were $1.0 and $1.4 million for the three months ended September 30, 2008 and 2007, respectively. Professional fees were $3.0 million and $3.5 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease for the three and nine months ended September 30, 2008 compared to the same periods ended September 30, 2007, was due to less outsourced engineering work as a result of increasing our corporate engineering staff in our Technology segment.

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 the three and nine months ended September 30, 2008 and 2007.

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