10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period form                      to                      

Commission file number: 001-14176

EVERGREEN ENERGY INC.

(Exact Name of Registrant as specified in its Charter)

Delaware	84-1079971
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
55 Madison Street, Suite 500 Denver, Colorado	80206
(Address of Principal Executive Offices)	(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 x  No o

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 x

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 x  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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  o

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

The aggregate market value of the common stock held by non-affiliates of the registrant was $1,094,602,633 computed by reference to the closing price of the common stock on June 30, 2006, 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 February 23, 2007
Common Stock, $.001 par value	83,600,061 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Proxy Statement for the 2007 Annual Meeting	Part III

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
	PART II
Item 5.	Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	39
Item 9A.	Controls and Procedures	39
Item 9B.	Other Information	44
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	44
Item 11.	Executive Compensation	44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	44
Item 13.	Certain Relationships and Related Transactions, and Director Independence	44
Item 14.	Principal Accountant Fees and Services	44
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	45
SIGNATURES		49

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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:

·general economic and industry conditions;

·our history of losses, deficits and negative operating cash flows;

·our substantial capital requirements and dependence on the sale of our equity securities to provide capital to fund our operations;

·our limited operating history;

·technical and operational problems at K-Fuel facilities;

·uncertain market for our K-Fuel refined coal;

·industry competition;

·environmental and government regulation;

·protection and defense of our intellectual property rights;

·reliance on, and the ability to attract, key personnel;

·inability to implement our acquisition strategy; and

·other factors including those discussed under “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

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 refined coal and K-Fuel® 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 are leveraging a vertically integrated, coal-based platform to deliver combined energy, environmental and economic solutions, producing clean, efficient and affordable energy. We intend to meet the specific needs of industrial, international and public utility market customers. We provide 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 subbituminous coal and lignite, into a more energy efficient, lower-emission fuel. The pre-combustion refinement of raw coal into K-Fuel refined coal reduces mercury content up to 70 percent and upon combustion, sulfur dioxide and nitrous oxides by significant amounts. Studies show that the increased efficiency of K-Fuel refined coal will reduce carbon dioxide emissions by beneficial amounts.

Throughout the United States and internationally, there are abundant reserves of high moisture, low-Btu coals with heat values of less than 9,000 Btus per pound. However, many coal-fired power generating facilities, including industrial and institutional facilities, burn coal that is 11,000 Btus or greater. The current K-Fuel process applies heat and pressure to Powder River Basin coal 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%, resulting in its increased efficiency for use in power generating facilities, including industrial and institutional facilities. Further, the K-Fuel process removes a significant amount of impurities from the low-Btu coal allowing for the power generating industry to economically comply with increasingly stringent air emission standards and environmental regulations. We have and will continue to test other low Btu coals and lignites in our lab and study the results in order to increase the potential number of plant sites. Our research has shown coal sources other than coal from the Powder River Basin have produced similar results when subjected to the K-Fuel process.

As supplies of affordable eastern coals are tightening, emissions standards are strengthening, and public support for clean energy is building, we will continue becoming fully integrated, allowing us to engage in all different aspects of production, from mining our own coal, to manufacturing, transporting, marketing and retailing our end product. To date, we have executed our business strategy by owning coal reserves and a refining plant, maintaining our own marketing and distribution team and entering into distribution agreements with coal transporters.

On September 26, 2006, in keeping with our strategy to use technology to create cleaner coal for generating power, we began doing business as Evergreen Energy Inc. The name change received formal stockholder approval on November 9, 2006. The name of Evergreen Energy Inc. captures our key attributes, namely our commitment to delivering clean energy and our strategy to vertically integrate our operations.

We have completed the initial construction and entered the start-up phase for our Fort Union plant and mine site in Wyoming’s Powder River Basin, which is our first plant implementing the K-Fuel process. We are in the process of modifying and improving the design and efficiency of the equipment used in the K-Fuel process. In September 2006, we hired Bechtel Power Corporation to assist with the completion and

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optimization of our Fort Union plant and to assist with the future designs of K-Direct and K-Fuel plants. We have shipped K-Fuel refined coal to utilities and other industrial customers during 2006. Initial test burns of the K-Fuel refined coal provided us with positive results regarding the characteristics and quality of the K-Fuel refined coal.

On December 27, 2006, we received the test burn results of blending K-Fuel refined coal with high-sulfur Ohio coal. The test burns were conducted with the city of Painesville, Ohio Department of Utilities. The results indicated compliance with a new federal clean air standard for industrial coal-fired boilers, effective in 2007. Emissions included 0.07 pounds of particulate matter per million Btus generated, 0.09 pounds of hydrogen chloride per million Btus generated and nine pounds of mercury per trillion Btus generated.

On February 7, 2007, we received the results of test burns conducted at the University of Notre Dame. These test burns were conducted and monitored by an independent third party. We blended 50 percent and 75 percent of K-Fuel refined coal with high-sulfur, low-fusion eastern Ohio bituminous coal. Test burns using 100 percent of our K-Fuel refined coal were also conducted. Blended results indicated improvements in emissions that could help coal-fired boilers comply with the new Federal Industrial Boiler Maximum Achievable Control Technology rule for emissions while maintaining load capacities through higher Btu values. Using only K-Fuel refined coal resulted in reduced chloride emission by 75 percent, sulfur dioxide emissions by 90 percent and reduced the mercury content by 75 percent when compared to the high-sulfur, low-fusion eastern Ohio bituminous coal.

Segments

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, 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.

With the acquisition of Buckeye, we have expanded our segments and our segment presentation. We have identified three segments: our Plant and Licensing segment, Mining segment and Operating segment. Our results of operations are evaluated and allocations of capital resources are based upon the vertical integration and operation of these segments. The Plant and Licensing segment represents revenue and costs related to the use and application of our proprietary, patented K-Fuel process and our mine site in Gillette, Wyoming. The Mining segment represents our operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility, the blending facility and mines. The Operating segment is comprised of all other operations.

We incorporate the acquisition of Buckeye into our overall strategy and therefore, we do not operate or evaluate it as other stand-alone coal mining operations might. A significant value of Buckeye is its marketing team and strategic location, rail road loading facility, port dock loading facility on the Ohio River, blending facility and mines and coal reserves. This Form 10-K is presented in a view consistent with our vertical integration strategy and, unless otherwise specifically addressed, represents our overall business strategy and goals.

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Business Strategy

The principal elements of our long-term strategy are to construct K-Direct facilities, K-Fuel facilities and license our K-Fuel technology to third parties. In the next year, we plan to primarily focus on construction of K-Direct facilities and the following:

·Expand Production through the Construction of K-Direct Facilities   K-Direct facilities are K-Fuel processing plants located at coal-fired power generating plants. K-Direct plants co-located with new or existing power generating plants offer the added advantages of using secondary steam to refine raw low-Btu coal feedstocks. With a K-Direct plant at a generating site, coal users can shop the world market for abundant low-Btu coal, process it on site and feed it directly into their boilers. We have signed a letter of intent with TXU Generation Development Company LLC, for detailed engineering, design integration and tests of the K-Direct facilities. Should the results from the engineering, design and testing be successful, we could enter into one or more definitive agreements for the construction of K-Direct facilities at new or existing TXU power plants. In addition to this letter of intent, we have signed an agreement with another major utility to advance the integration of another K-Direct coal refinery.

K-Direct plants offer public utilities a unique opportunity to boost efficiency and meet emissions standards. The advantages of a K-Direct facility compared to a K-Fuel facility are: (i) less capital outlay; (ii) less construction time to complete; (iii) shorter permitting time; and (iv) accelerated product delivery as K-Fuel refined coal is transported from our processor directly into the coal-fired boilers at the power generating plants.

·Expand Production through the Construction of K-Fuel Facilities.   In the long-term, we intend to construct K-Fuel facilities at coal mine sites to process abundant reserves of subbituminous coal and lignite into K-Fuel refined coal. In the future we will pursue construction at sites, both within the Powder River Basin and throughout other coal-producing regions of the United States, focusing on sites that have readily available access to rail and barge transportation.

·Continue to Pursue Vertical Integration through Acquisitions and Joint Ventures.   We believe we are well-positioned to pursue selected acquisitions and attract industry joint venture partners to continue our vertical integration strategy. In the second quarter of 2006, we purchased Buckeye Industrial Mining Co., which provided us with established markets, infrastructure, blending facilities, rail and barge transportation access and coal supply. We expect to pursue additional acquisitions of companies with businesses complementary to our business model and strategy. Additional acquisitions will help us ensure quality refined coal for our customers and help us extract maximum rents from the coal value chain.

·Enter into Licensing Agreements.   We are developing K-Fuel production plants domestically and internationally through the licensing of our K-Fuel technology to third parties. We believe that there are a number of opportunities to license our technology to operators in other regions that have access to transportation infrastructure and high moisture, low-Btu coal supplies.

Coal is the largest source of power for America’s electricity generation. At about one-third the cost of natural gas, many utilities and industrial users are dependent upon coal. While the United States enjoys cheap and plentiful reserves of low-grade coal, the reserves of high-grade coals are dwindling, and environmental issues are a concern. It’s clear that we need to make those low-grade coals better.

The total annual coal consumption in the United States is approximately 1 billion tons per year. Our goal is to produce 50 million tons of K-Fuel refined coal per year in the next five years. Our Fort Union plant in Gillette, Wyoming, is shipping K-Fuel refined coal to utility and industrial customers. To further support our growth strategy, we are negotiating K-Direct co-location options with utilities that have coal-

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fired power plants, we are permitting and developing additional K-Fuel processing plants and we are working towards international licensing agreements.

We plan to achieve our goals through a combination of organic growth, acquisitions and partnerships.

Competitive Strengths

As a result of the following strengths, we believe we are well positioned to execute our business strategy:

·Technical Expertise.   Our employees have a wide range of technical expertise and experience including expertise in refining coal, coal thermal upgrading, thermal processing, coal gasification, coal liquidification, chemical engineering, civil engineering, mechanical engineering and power engineering. We have exclusive licensing agreements with Sasol-Lurgi Technology Company and Lurgi (Pty) Limited who have brought over 70 years of experience in designing and building coal processing plants for the implementation of the K-Fuel process. In addition we have agreements with professional engineering firms for engineering services in the areas of architecture, civil/structural, mechanical, electrical, and controls, including subsystems engineering and design for our K-Direct and K-Fuel standard commercial plants.

·Proprietary Process.   The K-Fuel refined coal process uses heat and pressure to refine coal. The process also reduces mercury, and lowers emissions, upon combustion, of sulfur dioxide, nitrogen oxide and carbon dioxide, which helps coal consumers meet emissions standards. Our processes are patent-protected with global worldwide exclusivity on key equipment technology.

·High BTU, Low Emission K-Fuel Refined Coal.   We convert low-BTU sub-bituminous coals and lignites into K-Fuel refined coal, a high Btu, low emission coal that is a replacement for rapidly dwindling eastern coals. Current Federal and in some cases even tougher state emissions regulations will soon begin requiring significant reductions in sulfur dioxide, nitrous oxides and mercury levels. Some states are enacting carbon dioxide limits as well. Coal-fired power plants and industrial customers that use our K-Fuel refined coal can cost-effectively boost efficiency and may reduce these emissions without adding new, expensive, post-combustion cleanup equipment. Coal-fired power plants and industrial users with post-combustion controls may see improved pollution control performance. Power generating facilities burning our K-Fuel refined coal realize lower emissions and experience significant savings as a result of reducing the need to purchase carbon dioxide, sulfur dioxide, nitrogen oxide and mercury credits. In addition, coal-fired industrial boilers are required to meet stringent emissions standards beginning in September 2007 and are currently developing compliance strategies.

·Established Marketing and Sales Team.   The Buckeye acquisition has added value through access to its established markets, infrastructure and coal reserves. Over the years Buckeye has shipped product to over 70 coal customers, including utilities and industrial users. Buckeye’s marketing team brings considerable logistical expertise and longstanding relationships in the coal-fired industry, that enhance our ability to get our K-Fuel refined coal to a wide variety of customers.

·Favorable Price Differentials.   We have uniquely positioned ourselves in the energy market to capture a portion of the price differential between high- and low-Btu coals.

·Key Industry Relationships.   As we expand our production, we benefit from agreements such as our logistics and marketing agreement with DTE Coal Services Inc., and our technical services agreement with Bechtel Power Corporation. The Bechtel agreement provides engineering services in the areas of architecture, civil/structural, mechanical, electrical and controls, including subsystems engineering and design for future K-Direct and K-Fuel commercial plants. Bechtel is a global engineering, construction and project company with more than a century of experience on

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complex projects in challenging locations. Effective February 15, 2007, this agreement was amended and restated to include engineering, procurement and construction contracts for building several K-Direct Plants that are currently being evaluated by us.

·Vertically Integrated.   We are positioned to capture maximum value in the refined coal value chain, from mining to refining, transportation, marketing and distribution. Our vertical integration strategy helps us capture the considerable spread between low-grade western coal and high-grade eastern coal.

Business History and Patents

Over the past 20 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 K-Fuel, we intend to continue to file for new patent applications.

During the years ended December 31, 2006, 2005 and 2004, our research and development costs were approximately $1.4 million, $1.6 million and $696,000, respectively. The following historical events have contributed to the development and improvement of our technology:

·During 2006, we identified certain inefficiencies in the design and operation of our Fort Union plant. We, with the assistance of Bechtel, are currently optimizing this plant and incorporating the changes into the design of future K-Direct and K-Fuel facilities. Additionally, during the shipment of K-Fuel refined coal to First Energy in August of 2006, we identified certain dusting issues relating to the off load and transfer of K-Fuel refined coal. We have adjusted our process to address this issue and believe that it is resolved.

·Between 2000 and 2005, we completed evaluations of our K-Fuel refined coal and process and commissioned numerous independent combustion studies to test and improve our K-Fuel refined coal. Through these efforts we believe we have enhanced the K-Fuel process and resolved previously identified technical and operational issues.

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 55 Madison Street, Suite 500, Denver, Colorado 80206, and our telephone number is (303) 293-2992.

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 approximately $2.2 million. We incurred approximately $1.0 million in acquisition costs and reimbursed Buckeye’s former parent approximately $900,000 for costs 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. The acquisition of Buckeye continues our strategy to transition from an energy technology company into an energy production company. We believe the acquisition will add value through access to Buckeye’s established markets, infrastructure and coal reserves. The expected benefits of the acquisition include the addition of an experienced coal marketing and mining team and cash flow. Their operations have been included in our consolidated financial statements, for the nine months ended December 31, 2006, as of the effective purchase date of April 3, 2006.

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On May 21, 2004, we acquired all of the outstanding stock of Landrica Development Company from Wyodak Development Corporation for cash of $523,000 and the assumption of an asset retirement obligation of $2.7 million. The results of Landrica have been included in the consolidated financial statements from the date of acquisition. Landrica owns a coal mine and related assets that include land, buildings, coal handling equipment, a railroad loop and other pieces of equipment and property.

Competition

Our K-Fuel refined coal is a coal characterized by low-moisture, high-Btu content and low sulfur dioxide, nitrogen oxides and mercury emissions. As such, 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 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.

Customers

As of December 31, 2006, three customers from our mining segment accounted for 26%, 14% and 11% of total accounts receivables, respectively, while one customer in our mining segment, accounted for 12% of total revenues. We believe the loss of any one of these customers would not have a material adverse effect on our financial position.

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 and mercury into the environment. Regulation of these emissions can affect the market for our K-Fuel refined coal by imposing limits and caps on these emissions. The most significant national legislation and regulations affecting our market include the Clean Air Act, the Clean Air Interstate Rule and the Clean Air Mercury Rule, which are described further below. In addition, the K-Fuel market will be affected by additional national policies including the EPA’s Nitrogen Oxide State Implementation Plan Call, which requires 22 eastern states and the District of Columbia to reduce summertime ozone formation by controlling nitrogen oxide emissions; the EPA’s National Ambient Air Quality Standards for ozone and fine particulate matter, which requires that approximately 700 counties across the United States achieve attainment of ozone and particulate matter standards; 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, starting in 2009 in 7 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. Other states or regions may take similar actions in the coming years. Additionally, states are implementing emission reduction policies more stringent than national policy, such as, the approximately 10 states are requiring more stringent mercury reduction than the EPA’s Clean Air Mercury Rule.

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

·The Clean Air Act and Acid Rain Program.   The Clean Air Act of 1970, as amended, is currently the primary mechanism for regulating emissions of sulfur dioxide and nitrogen oxide from coal-fired power generating facilities. A key component of the act regulates sulfur dioxide and nitrogen oxide emissions. Specifically, title IV set a goal of reducing sulfur dioxide emissions by 10 million tons below 1980 levels and imposed a two-phased tightening of restrictions on fossil fuel-fired power plants. Phase I began in 1995 and focused primarily on coal-burning electric utility plants in the east and midwest. In 2000, Phase II began and this phase tightened the annual emissions’ limits on larger higher emitting plants and set restrictions on smaller, cleaner plants fired by coal, oil, and gas. The Acid Rain Program calls for a 2 million ton reduction in nitrogen oxide emission and focuses on one set of sources that emit nitrogen oxide: coal-fired electric utility boilers. Beginning in January 2000, nitrogen oxide emissions are to be reduced 900,000 tons per year beyond the 1.2 million per year reduction set by the EPA in 1995.

·Clean Air Interstate Rule.   The Clean Air Interstate Rule was finalized by the EPA in March 2005. Once fully implemented, this rule will reduce sulfur dioxide emissions in 28 states and District of Columbia by more than 70% and nitrogen oxide emissions by more than 60% from the 2003 levels. Through the use of a cap-and-trade approach, the rule promises to achieve substantial reduction of sulfur dioxide and nitrogen oxide emissions. The rule will be fully implemented by 2015.

·Clean Air Mercury Rule.   The Clean Air Mercury Rule will impose mandatory mercury emissions reduction on electric utility coal-fired power plants for the first time. The EPA finalized the rule in May 2005. The mercury rule is based on the EPA’s finding that approximately 75 tons of mercury is found in coal delivered to power plants each year and about 2¤3rds of this mercury is emitted to the air. As currently formulated, the rule allows coal-fired power plants to cap emissions in two phases, in 2010 and 2018, and trade mercury allowances. However, many states are implementing more stringent state standards, resulting in various timelines and caps across the country.

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) regulate 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. As we have begun to mine coal from our open pit in Wyoming and as a result of the Buckeye acquisition, 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

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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. Generally, the refined 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 January 31, 2007, we had 216 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 operating income will increase sufficiently to cover these investments. Further, we may not achieve or maintain profitability or generate cash from operations in

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future periods. Our working capital (the amount our current assets exceed our current liabilities), accumulated deficit, net loss and cash (used in) provided by operating activities are as follows:

	December 31,
	2006			2005			2004
	(in thousands)
Working capital	$	79,156		$	19,910		$	73,603
Accumulated deficit	(203,397		)	(151,870		)	(128,557		)
Net loss	(51,527		)	(23,313		)	(10,555		)
Cash (used in) provided by operating activities	$	(30,435	)	$	(12,071	)	$	2,042

We have substantial capital requirements and, as a result, we have been and continue to be dependent on 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 sales of our equity securities to fund the operating and substantial capital costs associated with our business. Our business strategy to become fully vertically integrated may further increase our needs for additional capital. 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 equity capital markets, we may not be able to continue to raise additional equity capital on terms acceptable to us or at all. A lack of adequate financing may adversely affect our ability to 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:

·enter into agreements for the purpose of building K-Direct and K-Fuel plants or licensing the technology;

·enter into or maintain strategic partnerships with vendors and other parties to maximize our K-Fuel process;

·raise additional capital;

·accurately assess potential markets and effectively respond to competitive developments;

·attract and retain customers for product sales;

·attract and retain credit-worthy customers;

·effectively manage expanding operations;

·successfully market our products;

·execute our business strategy; and

·attract and retain key personnel.

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We may not be successful in addressing these and other risks. As a result, our financial condition and results of operations 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 and key technical personnel that have a wide range of technical expertise and experience including 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. 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 find acceptable. Further, acquisitions pose substantial risks to our financial condition and results of operations. 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:

·the acquired businesses or properties may not produce revenues, earnings or cash flow at anticipated levels;

·we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner;

·acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures;

·we may finance future acquisitions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of our stockholders; and

·we may incur additional debt related to future acquisitions.

K-Fuel Process Risks

Technical and operational problems may adversely impact our ability to operate or develop K-Fuel facilities, resulting in delays in the production of our K-Fuel refined coal.

Problems we may encounter in current and future plants include:

·construction problems including cost overruns, delays, damage, technical issues, availability of raw material, availability of workers or contractors and weather;

·unforeseen problems in the commissioning, start-up or operation of our current or future plants; and

·K-Fuel refined coal produced may not meet our specifications or customer requirements.

Our ability to effectively operate and develop K-Direct and K-Fuel 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 facilities, our ability to generate revenues and profits may be negatively impacted.

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

We and certain third parties are continuing to evaluate K-Fuel refined coal produced at our Fort Union plant. There can be no assurance that this evaluation 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 should 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. If this continuing process of evaluation and market introduction results in negative 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:

·limited pricing information;

·changes in the price differential between low- and high-Btu coal;

·unknown costs and methods of transportation for bringing  K-Fuel market;

·alternative fuel supplies available at a lower price;

·the availability of emissions-reducing equipment and other technologies that may be more desirable than the K-Fuel refined coal;

·the market viability of K-Fuel refined coal; and

·sufficient market interest for us to continue in business.

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 operate commercial K-Fuel production plants profitably, our ability to generate revenue from this process will be impaired.

The commercial production of our K-Fuel refined coal is relatively new. Our future success depends on our ability to locate, develop and construct future commercial K-Fuel production plants at a profit. 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:

·the complex, lengthy and costly regulatory permit and approval process;

·local opposition to development of projects, which can increase cost and delay timelines;

·increases in construction costs such as contractors, workers and raw materials;

·transportation costs and availability of transportation;

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·the possible price fluctuations of low-Btu coal, which could impact K-Fuel refined coal’s profitability; and

·expenditures related to researching and investigating future K-Fuel production sites, which we may not be able to recover.

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

Competition from other companies in the clean coal and alternative fuel technology industries could adversely affect our market share.

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. Due to these competitive advantages, our competition may be able to offer products more competitively priced and more widely available than ours. These companies may also have the resources to create new technologies and products that could make our process and products obsolete. Evergreen Energy’s future revenues may depend on our ability to address competition in these industries.

Deregulation in the United States power generating industry may result in increased competition, which could result in lower margins for our product.

We expect that deregulation in the United States power generating industry will result in utilities and other power generating facilities placing a high emphasis on reducing costs in their operations. This situation may, in turn, 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.

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 will be subject to federal, local, and foreign laws and regulations. In addition, as products are introduced into the market commercially, governments may impose new regulations. Any regulation of our K-Fuel refined, whether at the federal, state, local or foreign level, including any regulations relating to the development or sale of our product, may increase our costs and the 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 revenues.

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.

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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 and state 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, helps 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 increase 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 the sales volume 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 current issued patent protection covers what we believe are certain unique aspects of our K-Fuel process as it is currently conducted, not all of the claims we filed were 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.

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

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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 some of our anticipated products, which could have a material adverse effect on our business.

Any 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.

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:

·the supply of and demand for domestic and foreign coal;

·the demand for electricity;

·the proximity to, capacity of, and cost of transportation facilities;

·air emission standards for coal-fired power plants;

·regulatory, administrative, and judicial decisions; and

·the effect of worldwide energy conservation measures.

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.

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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.

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:

·delays and difficulties in acquiring, maintaining or renewing necessary permits for mining or surface rights;

·changes or variations in geologic conditions, such as the seam thickness of the coal deposits and the amount of rock embedded in or overlying the coal deposit;

·mining and processing equipment failures and unexpected maintenance problems;

·limited availability of mining and processing equipment and parts from suppliers;

·interruptions due to transportation availability and delays;

·adverse weather and natural disasters, such as heavy rains and flooding;

·accidental mine water discharges;

·the unavailability of qualified labor; and

·unexpected mine safety accidents, including fires and explosions.

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

Our 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 as profitably as we do at our current operations.

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.

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

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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:

·future coal prices, operating costs, capital expenditures, severance and excise taxes, royalties and development and reclamation costs;

·future mining technology improvements;

·the effects of regulation by governmental agencies; and

·geologic and mining conditions, which may not be fully identified by available exploration data and may differ from our experiences in areas we currently mine. As a result, actual coal tonnage recovered from identified reserve areas or properties, and costs associated with our mining operations, may vary from estimates.

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 Common Stock and Other Risks

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 65%. During 2006, the sale prices of our common stock on The American Stock Exchange and the NYSE Arca ranged from a low close of $7.65 to a high close of $22.16. 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.

Provisions in our articles of incorporation, bylaws and Delaware law may make it more difficult to effect a change in control, which could adversely affect the price of our common stock.

Provisions of our articles of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to stockholders in an acquisition.

Our articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control. These provisions include:

·giving the board the exclusive right to fill all board vacancies;

·providing that special meetings of stockholders may be called by the chair of the board, by the board, or by the holders of shares entitled to cast not less than 10% of the votes at the Meeting;

·a classified board of directors; and

·permitting removal of directors only for cause and with a majority vote of the stockholders.

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These provisions also could discourage proxy contests and make it more difficult stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock.

We are also subject to provisions of the Delaware General Corporation Law that prohibit business combinations with persons owning 15% or more of the voting shares of a corporation’s outstanding stock for three years following the date that person became an interested stockholder, unless the combination is approved by the board of directors prior to the person owning 15% or more of the stock, after which the business combination would be subject to special stockholder approval requirements. This provision could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquirer from attempting to obtain control from us, which in turn could have a material adverse effect on the market price of our common stock.

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.

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

We previously entered into a lease through May 2010 for office space to accommodate our headquarters, which is located in Denver, Colorado. Due to our rapid growth, it is necessary to move our headquarters from the current location to a new larger location. We have leased 32,727 square feet of office space in Denver, Colorado for a ten year term and anticipate moving 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 April 2006, we purchased Buckeye Industrial Mining Co. Through the purchase we own the rights to approximately 25 million tons of surface and underground coal reserves, in four Ohio counties. In addition to the coal reserves, we own one of the largest ash monofills in Ohio, disposing of over one million tons of dry and conditioned ash per year.

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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. These assets occupy only a portion of the total acreage of the site. As a result, there is acreage available for expansion or use for other purposes, subject to certain restrictions.

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

A special meeting of the stockholders was held on November 9, 2006 for the principal purpose of approving our name change from KFx Inc. to Evergreen Energy Inc.

The following votes were cast by the stockholders with respect to the approval of our name change:

Proposal	Shares Voted For		Shares Voted Against		Shares Abstained
Name change from KFx Inc. to Evergreen Energy Inc.		67,300,786		26,601		62,686

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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		Low
2006	Fourth Quarter	$	14.13	$	7.65
	Third Quarter	$	16.50	$	10.95
	Second Quarter	$	19.52	$	11.62
	First Quarter	$	22.16	$	16.50
2005	Fourth Quarter	$	17.50	$	12.41
	Third Quarter	$	18.48	$	13.98
	Second Quarter	$	14.90	$	10.32
	First Quarter	$	18.00	$	12.24

As of February 23, 2007, we had approximately 254 holders of record of our common stock. This does not include holdings in street or nominee names. On February 23, 2007, the closing price of our common stock was $8.84 per share.

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Comparative Performance Graph

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, 2001 in our common stock, a Peer Group 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 2006

Our Peer Group is 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. All companies in the Peer Group are listed on U.S. stock exchanges or the NASDAQ system.

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

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.

Recent Sales of Unregistered Securities

None.

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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, 2006 and the selected balance sheet data as of December 31, 2006 and 2005 are derived from, and qualified by reference to, our audited Consolidated Financial Statements, in Item 8 of this report. The selected consolidated results of operations and cash flow data related to 2003 and 2002 and selected consolidated balance sheet data related to 2004, 2003 and 2002, 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,
	2006			2005			2004			2003			2002
	(in thousands, except per share amounts)
Statement of operations data:
Operating revenues	$	36,710		$	984		$	28		$	72		$	6
Operating expenses	94,918			26,144			11,375			9,590			6,491
Operating loss	(58,208		)	(25,160		)	(11,347		)	(9,518		)	(6,485		)
Loss from continuing operations	(51,527		)	(23,313		)	(10,555		)	(10,245		)	(18,385		)
Net gain (loss) from discontinued operations	—			—			—			1,962			(5,066		)
Net loss	(51,527		)	(23,313		)	(10,555		)	(8,283		)	(39,987		)
Basic and diluted loss from continuing operations	(0.66		)	(0.35		)	(0.18		)	(0.22		)	(0.52		)
Basic and diluted net loss per share	$	(0.66	)	$	(0.35	)	$	(0.18	)	$	(0.18	)	$	(1.14	)
Weighted average shares of common stock outstanding	77,783			66,399			57,928			46,569			35,088
Balance sheet data:
Cash, cash equivalents and marketable securities	$	84,276		$	28,793		$	79,381		$	23,701		$	2,758
Property, plant and equipment, mineral rights net, including plant construction in progress	151,727			76,291			23,521			6,649			126
Total assets(1)	252,319			114,172			112,304			35,005			15,782
Deferred rent and other long-term liabilities, including current portion(2)	646			535			213			170			415
Stockholders’ equity	224,984			93,641			94,260			31,098			1,735
Working capital (deficit)	$	79,156		$	19,910		$	73,603		$	21,204		$	(756	)
Cash flow data:
Cash (used in) provided by continuing operating activities	$	(30,435	)	$	(12,071	)	$	2,042		$	(8,220	)	$	(3,993	)
Cash used in continuing investing activities	(92,940		)	(49,984		)	(16,285		)	(5,669		)	(5,500		)
Cash provided by continuing financing activities	$	169,100		$	11,467		$	69,923		$	32,061		$	15,077

(1)Total assets for 2002 include assets held for disposal related to our discontinued operations of approximately $10.2 million.

(2)The current portion of long-term debt as of December 31, 2006, 2005, and 2004, was $0, $160,000 and $180,000, respectively.

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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. Certain reclassifications have been made to prior year amounts to conform to current year presentation. 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 “Cautions 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.

Overview

We are leveraging a vertically integrated, coal-based platform to deliver combined energy, environmental and economic solutions, producing clean, efficient and affordable energy. We intend to meet the specific needs of industrial, international and public utility market customers. We provide 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 subbituminous coal and lignite, into a more energy efficient, lower-emission fuel. The pre-combustion refinement of raw coal into K-Fuel refined coal reduces mercury content up to 70 percent and upon combustion, sulfur dioxide and nitrous oxides by significant amounts. Studies show that the increased efficiency of K-Fuel refined coal will reduce carbon dioxide emissions by beneficial amounts.

The following discussion is focused on the recent events that we believe have the most significant impact on our business.

·On February 7, 2007, we received the results of test burns conducted at the University of Notre Dame. These test burns were conducted and monitored by an independent third party. We blended 50 percent and 75 percent of K-Fuel refined coal with high-sulfur, low-fusion eastern Ohio bituminous coal. Test burns using 100 percent of our K-Fuel refined coal were also conducted. Blended results indicated improvements in emissions that could help coal-fired boilers comply with the new Federal Industrial Boiler Maximum Achievable Control Technology rule for emissions while maintaining load capacities through higher Btu values. Using only K-Fuel refined coal resulted in reduced chloride emission by 75 percent sulfur dioxide emissions by 90 percent and reduced the mercury content by 75 percent when compared to the high-sulfur, low-fusion eastern Ohio bituminous coal.

·On December, 27 2006, we received the test burn results of blending K-Fuel refined coal with high-sulfur Ohio coal. The test burns were conducted with the city of Painesville, Ohio Department of Utilities. The results indicated compliance with a new federal clean air standard for industrial coal-fired boiler that goes into effect in 2007. Emissions included 0.07 pounds of particulate matter per million Btu’s generated, 0.09 pounds of hydrogen chloride per million Btu’s generated and nine pounds of mercury per trillion Btus generated.

·On December 27, 2006, we signed agreements with two major utilities to advance the integration of several K-Direct coal refineries in both existing and new coal power plants.

·We completed the initial construction and are in the start-up phase for our Fort Union K-Fuel plant and mine site project in Wyoming’s Powder River Basin, which is our first plant implementing the K-Fuel process.

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·On September 29, 2006, we listed our common stock on the NYSE Arca platform under the new ticker symbol “EEE.”

·On September 26, 2006, in keeping with our strategy to use technology to create cleaner coal for generating power, we began doing business as Evergreen Energy Inc.

·On September 21, 2006, we signed an agreement with Bechtel Power Corporation for plant engineering, standardization and design optimization for our K-Fuel refined coal plants. The agreement provides for engineering services in the areas of architecture, civil/structural, mechanical, electrical, and controls, including subsystems engineering and design for our future K-Fuel and K-Direct commercial plants. Effective February 15, 2007, this agreement was amended and restated to include engineering, procurement and construction contracts for building several K-Direct Plants that are currently being evaluated by us.

·On August 4, 2006, we shipped our first unit train of K-Fuel refined coal.

·On June 28, 2006, we purchased a 700,000 pound per hour Circulating Fluidized Bed coal-fired boiler island. We have unexercised options to purchase two more coal-fired boiler islands. The fixed price for this first coal-fired boiler island is $76 million. As we are primarily focused on the construction of K-Direct facilities in the near term, we are evaluating alternatives for this boiler, including potentially selling it to a third party.

·On June 14, 2006, we entered into a long term Marketing, Distribution and Transportation Logistics Services Agreement with DTE Coal Services, Inc.

·On April 3, 2006, we completed the acquisition of Buckeye Industrial Mining Co., which continues our strategy to transition from an energy technology company into an energy production company.

·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.

Our consolidated financial statements include all of our wholly owned subsidiaries, including the nine months ended December 31, 2006, for Buckeye Industrial Mining Co. (acquisition date of April 3, 2006).

With the acquisition of Buckeye, we have expanded our segments and our segment presentation. We have identified three segments: our Plant and Licensing segment, Mining segment and Operating segment. Our results of operations are evaluated and allocations of capital resources are based upon the vertical integration and operation of these segments. The Plant and Licensing segment represents revenue and costs related to the use and application of our proprietary, patented K-Fuel process and our mine site in Gillette, Wyoming. The Mining segment represents our mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility, the blending facility and mines. The Operating segment is comprised of all other operations.

We incorporate the acquisition of Buckeye into our overall strategy and therefore, we do not operate or evaluate it as other stand-alone coal mining operations might. The value of Buckeye to us is its marketing team and strategic location, rail road loading facility, port dock loading facility on the Ohio River, blending facility and mines and coal reserves.

Our analysis presented below is organized in a way that provides the information required, while highlighting the information that we believe will be instructive for understanding the results of our operations and relevant trends. Discussions of our results related to our segments are presented in the context of our overall results and, unless otherwise indicated, relate to our Operating segment. We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.

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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 construct, own and operate K-Direct and K-Fuel production facilities domestically, both wholly owned and through joint ventures, as well as to license the K-Fuel technology to third parties, primarily internationally. 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:

·revenues from production facilities including K-Direct and K-Fuel plants;

·coal sales from blending our K-Fuel refined coal with other mined coal;

·coal sales from our Buckeye operations;

·licensing of our technology, including license fees for constructing a plant and royalty fees for operating a plant; and

·consulting services to parties who license our technology.

The value and pricing of our K-Fuel refined coal is evolving. Over time, as the market for our product develops, we will adjust the price at which we sell our refined coal. We may be able to charge a premium for K-Fuel refined coal in certain industries and different geographic regions of the United States. Conversely, we may be required to sell K-Fuel refined coal to customers at substantially discounted rates so customers can test combustion, emissions and coal handling through their own systems. Additionally, we may process raw coal provided by potential customers through our Fort Union plant to assess the removal of mercury and reductions in the emission of carbon dioxide, sulfur dioxide, nitrogen oxides and various product handling aspects at little or no cost to the potential customers.

In addition, to the extent that we execute on our vertical integration strategy and acquire companies that conform to our business strategy, we anticipate revenues from those sources as well.

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.

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Expense Trends

Plant costs

We have completed the initial construction and entered the plant start-up phase of our Fort Union plant in Gillette, Wyoming. Plant start-up costs were higher than anticipated and production was less 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. To eliminate these inefficiencies and optimize the facility, we are continuously modifying, testing, reconfiguring and improving the plant. We believe that the start-up costs incurred are not indicative of future continuous operations and that start-up costs will trend downward in future periods. As our Fort Union plant begins continuous operation and future potential K-Direct and K-Fuel plants are constructed, we will incur additional expenses, the most significant on a per ton basis are:

·raw material costs;

·coal transportation costs;

·outsourced engineering and technical support;

·fluid processing costs;

·by-product and water disposal costs;

·royalty costs, relating to fees we owe to parties who own certain rights that support our patents and proprietary technology, primarily the Koppelman estate.

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

Coal mining operating expenses

With the acquisition of Buckeye we expect to incur mine operating expenses including all costs associated with the mining of saleable coal and costs relating to our coal ash disposal facility. Additionally, as our Fort Union plant obtains continuous production, we expect to blend our K-Fuel refined coal with prepared and raw coal at Buckeye’s facility and incur the associated shipping and blending costs.

General and administrative expenses

As we continue to pursue vertical integration through acquisitions and joint ventures and generally expand our business including hiring additional personnel at our corporate and plant locations and outsourced professional services, we will incur additional expenses, the most significant of which are:

·non-cash, share-based compensation;

·payroll and related burdens;

·rent and utilities; and

·professional support fees.

We anticipate that accounting for non-cash, share-based compensation will add approximately $11 million to $13 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 the location. As we expand our vertical integration strategy we expect these costs increase in future periods.

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RESULTS OF OPERATIONS

Revenue

Revenues for the year ended December 31, 2006 were $36.7 million compared to $984,000 for the same period ended December 31, 2005. Substantially all the increase was due to our acquisition of Buckeye, which resulted in $35.8 million of revenue in our Mining segment for the nine months ended December 31, 2006 (acquisition date of April 3, 2006). The fluctuations are as follows;

·Coal revenue includes mined raw and prepared coal sales within our Buckeye operations. Buckeye coal sales, including transportation costs charged to customers, were $30.4 million or $56.32 sales realization per ton sold for the nine months ended December 31, 2006 (acquisition date of April 3, 2006).

·Brokered coal sales net, include the revenues reduced by costs associated with the purchase of coal from other coal producers, which we ship directly to customers. We recognized $695,000 of net revenue for the nine months ended December 31, 2006 (acquisition date of April 3, 2006) in our Mining segment.

·Ash disposal revenue includes revenue generated from the disposal of coal combustion bi-products at our ash pit in Ohio. Ash disposal revenues were $4.7 million for the nine months ended December 31, 2006 (acquisition date of April 3, 2006), in our Mining segment.

·During the year ended December 31, 2006, we recognized $420,000 of revenue related to shipments of K-Fuel refined coal in our Plant and Licensing segment. K-Fuel refined coal sales were less than expected primarily due to less production at our Fort Union Plant. In addition, we sold a portion of our K-Fuel refined coal at discounted rates.

·In 2000, we entered into a licensing and royalty agreement related to a previous version of our proprietary technology with a third party. During 2005, the equipment relating to the licensing agreement was placed into service. As a result of the equipment being placed into service, we received a cash royalty payment for 2005, in the first quarter 2006. We recognized $150,000 of royalty revenue for 2005 in the first quarter of 2006 in our Plant and Licensing segment. During the second quarter of 2006, we received an annual cash royalty payment for 2006 in the amount of $150,000. We anticipate that we will only recognize future revenue as circumstances dictate, including the receipt of cash payments. This licensing agreement expires in 2007.

·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 Plant and Licensing 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.

Revenues for the years ended December 31, 2005 and 2004 were $984,000 and $28,000. For the year ended December 31, 2005, we recognized $768,000 on the $7.5 million up-front licensing fee received in December 2004 in our Plant and Licensing segment as discussed above. Revenues for the period ended December 31, 2004 were insignificant to our operations.

Coal Mining Operating Expenses

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 represents our mining segment.

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Coal mining operating expenses

Coal mining operating expenses include employee-related costs, outside contracted mining for our underground mines, internal and external coal transportation costs, blasting, drilling, heavy equipment costs, blending costs, coal purchases from others used to blend with our coal and other mining related costs. Coal mining operating expenses were $28.9 million for the nine months ended December 31, 2006 (acquisition date of April 3, 2006). The increase in mining costs is attributed to the acquisition of Buckeye in the second quarter of 2006.

SFAS No. 141 requires under purchase price accounting that finished goods inventory be valued at estimated selling prices less a reasonable profit allowance for the selling effort and that raw materials be valued at current replacement costs. We determined that the book value for Buckeye’s raw material inventory as of April 1, 2006 was equal to current replacement cost. For finished goods, we increased the inventory to fair value from a book value of $1.7 million to a fair value of $2 million, for a total increase of $364,000. As a direct result of this purchase price adjustment, the sales of Buckeye’s inventory resulted in a 3% reduction in operating income in our mining operation for the nine months ended December 31, 2006 (acquisition date of April 3, 2006).

Ash disposal

Ash disposal expenses include employee-related costs, consulting, repairs and maintaining culverts and drainage ponds, transportation, heavy equipment costs and other costs associated with the ash disposal facility. Ash disposal expenses were $3.4 million for the nine months ended December 31, 2006 (acquisition date of April 3, 2006).

General and Administrative

The following table summarizes our general and administrative costs for the years ended December 31, 2006, 2005 and 2004.

	Year Ended December 31,
	2006		2005		2004
	(in thousands)
Employee non-cash, share-based compensation	$	9,803	$	2,239	$	157
Employee-related costs	8,045		6,319		2,090
Non-cash, Arch warrants	1,692		5,803		—
Professional fees	4,113		3,418		5,315
Travel and office costs	2,260		1,468		708
Insurance and other	2,929		1,341		517
Total general and administrative	$	28,842	$	20,588	$	8,787

Employee non-cash, share-based compensation expenses were $9.8 million and $2.2 for the year ended December 31, 2006 and 2005, respectively. The expenses for 2006 relate to (i) stock options outstanding, (ii) restricted stock grants, and (iii) the discount and the fair value calculation for the “look back” provision for employee stock purchases under our Employee Stock Purchase Plan. 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 9—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 Chief Executive Officer, Chief Operating Officer and our Chief Technology Officer.

Employee-related costs primarily include salaries and wages, bonuses, benefits, employer payroll taxes and education and training. Employee-related costs were $8.0 million and $6.3 million for the years ended

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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.

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.

Professional fees include legal, audit and accounting, public relations, governmental relations and similar costs. Professional fees were $4.1 million and $3.4 million for the period ended December 31, 2006 and 2005, respectively. The increases can be attributed to a general overall increase in legal and accounting fees when compared to the same period ended 2005.

Travel and office costs include airfare, lodging, meals, office rent, office supplies, phone and utilities. Travel and office expenses were $2.3 million as compared to $1.5 for the year ended December 31, 2006 and 2005, respectively. 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. The increase in the number of employees at our corporate office led to our office expansion in June 2005 and the related increases in rent and utilities. In addition, we increased our travel 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.

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, repair and maintenance, director fees and director expenses. Insurance and other costs for the year ended December 31, 2006 were $2.9 million compared to $1.3 million for the same period ended 2005. The increase can be attributed primarily to an overall increase in property and commercial liability premiums for our Fort Union plant, and our Buckeye operations.

Employee non-cash, share-based compensation expenses were $2.2 million and $157,000 for the years ended December 31, 2005 and 2004, respectively. Non-cash, share based compensation in 2005 primarily related to restricted stock and option grants to our current Chief Executive Officer, Chief Operating Officer and our Chief Technology Officer.

Employee-related costs were $6.3 million and $2.1 million for the years ended December 31, 2005 and 2004, respectively. The increase was primarily related to an increase in the number of employees and related burdens as we hired more employees at our corporate and plant office.

Pursuant to agreements we entered into with Arch Coal, previously described, we issued 2.5 million warrants in 2005 to Arch 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.

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Professional fees were $3.4 million, and $5.3 million for the years ended December 31, 2005 and 2004, respectively. We experienced fluctuations in professional fees due to the following:

·In 2005, we recognized $3.0 million of non-cash expense related to the issuance of stock to a consultant in exchange for services performed.

·In 2004 there was a $2.2 million non-cash charge for consulting fees relating to assistance with regulatory issues.

Travel and office costs were $1.5 million and $708,000 for the years ended December 31, 2005 and 2004, respectively. The increase in 2005 was due to additional non-plant related employees and management traveling to our Fort Union plant site and increased international travel related to visits to Lurgi South Africa’s facilities and other business development opportunities. Additionally, we experienced increases in all aspects of office expense due to the expansion of our business and the increase in the number of employees.

Insurance and other expenses were $1.3 million and $517,000 for the years ended December 31, 2005 and 2004, respectively. Increases were attributed to an overall increase in general and commercial liability premiums for our Fort Union plant.

Plant start-up costs

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 and Licensing segment.

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

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.

Depreciation, depletion and amortization expenses were $773,000 for the year ended December 31, 2005 compared to $420,000 during the same period ended 2004.

Research and Development

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 $1.4 million and $1.6 million for the years ended 2006

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and 2005, 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.

Research and development costs were $1.6 million and $696,000 for the years ended 2005 and 2004, respectively. The majority of the increase can be attributed to an increase in the number of employees and related overhead at our laboratory facilities and increases in new technology development and feasibility studies for future large-scale plant sites. The increased activity at our laboratory facilities was indicative of internal coal testing of our K-Fuel refined coal.

Cost of License and Consulting Revenue

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 $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.

Cost of licensing and consulting revenue was $401,000 and $5,000 for the years ended December 31, 2005 and 2004, respectively. The increases in these costs were in direct correlation to the revenue recognized in 2005 on the licensing agreement we entered into in 2004.

Bad Debt and Asset Impairment Charges

Bad debt and asset impairment 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.

Bad debt and asset impairment charges were $1.3 million for each of the years ended December 31, 2005 and 2004.

In 2004, we incurred $1.3 million plant development impairment primarily related to certain site-specific and plant size-specific costs incurred associated with evaluating three other locations for our Fort Union plant.

Other Income Expense

Interest income, net

Interest income, net 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.

Interest income, net was $1.9 million and $569,000 for the years ended December 31, 2005 and 2004, respectively. The increase is attributed to interest earned on our cash balance, which was significantly higher compared to the same period in 2005.

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Other income (expense), net

Other income (expense), net 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.

Deferred Tax Benefit

We have not reflected a deferred tax benefit, primarily from net operating loss carryforwards, since based on the weight of available evidence, both positive and negative, management has determined that it is more likely than not that our deferred tax assets may not be realized. The primary evidence was our history of net operating losses. As we begin to earn revenue and realize net income, we will continue to evaluate our valuation allowance and at such time as there is sufficient evidence that we will utilize at least some portion of our deferred tax assets, we will reverse a related portion of our valuation allowance.

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.

Liquidity and Capital Resources

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-Direct and K-Fuel facility construction costs and general corporate purposes.

Our cash will primarily be used to fund operations and for capital expenditures. The capital expenditure budget for 2007 is approximately $25 million to $30 million which will be used for Fort Union completion costs, Buckeye mining and development costs and costs associated with initial K-Direct facilities. After completion of the next phase and upon initiation of definitive agreements, future capital costs will be adjusted to reflect the construction of two new K-Direct facilities.

We believe our cash level is sufficient to support our operations, including the Fort Union plant, start preliminary site investigation, design, permitting and similar long-lead-time activities related to K-Direct plants located on site at coal-fired power generating and industrial facilities and other large-scale K-Fuel plants for at least the next twelve months. However, as we identify strategic opportunities to accelerate construction of K-Direct and large-scale commercial plants, 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 through: (1) equity offerings or the exercise of outstanding options and warrants; (2) debt offerings; (3) partnering with third parties in the construction and operation for some of our large-scale commercial plants through the formation of joint ventures, and (4) fees from additional licensing of our K-Fuel technology. While we believe we will obtain additional capital through one or more of the alternatives

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described, we can provide no assurance that any of the alternatives will be available to us or be on terms acceptable to us.

Payment Obligations

The following table summarizes our future commitments as of December 31, 2006:

	Payments due by period
	2007		2008		2009		2010		2011		Thereafter			Total
	(in thousands)
Operating leases	$	1,183	$	1,421	$	1,437	$	1,301	$	1,105		$	26,060	$	32,507
Capital lease and other obligations	100		16		16		8		—			—		140
Purchase commitment obligations	25,268		26,637		9,459		—		—			—		61,364
Consulting and service commitments	4,020		3,045		240		240		—			—		7,545
Total commitments	$	30,571	$	31,119	$	11,152	$	1,549	$	1,105		$	26,060	$	101,556

This table does not include accounts payable, accrued expenses nor asset retirement obligations, which are reported in our December 31, 2006 Consolidated Balance Sheets. 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. Rent expense in the years ended December 31, 2006, 2005 and 2004 was $415,000, $242,000 and $226,000, respectively. Included in operating leases is a 50 year port dock lease on the Ohio River, we have the right to cancel this lease upon six months written notice, if we cancelled this lease as of December 31, 2006, we would be obligated to pay only $250,000 of the $25.0 million included in the table.

Purchase commitments include our 700,000 pound per hour Circulating Fluidized Bed coal-fired boiler island that is being constructed. We have the right to cancel this at any time with a 17.5% penalty, if we cancelled this as of December 31, 2006, we would be obligated to pay only $10.7 million of the $61.1 million included in the table.

Consulting and service commitments include agreements with consultants to advise us on proposed legislation and regulations and advocate our interests before the U.S. Congress and regulatory agencies, these agreements are for 18 months. Also included in consulting and service agreements is an agreement for technical and engineering service in which we have the right to cancel upon six months written notice, if we cancelled this agreement as of December 31, 2006, we would be obligated to pay only $1.8 million of the $6.3 million include in the table. Effective February 15, 2007, we amended and restated a service agreement with Bechtel, as a result of this amendment, if we were to cancel early we would be required to pay up to a $5 million termination fee.

Historical View

Cash (Used in) Provided by Operating Activities

Cash used in operating activities was $30.4 million and $12.1 million for the years ended December 31, 2006 and 2005, respectively. The majority of the cash used in operating activities for the year ended December 31, 2006, 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 to net loss to arrive at cash used in operating activities for the year ended December 31, 2006, were non-cash expense related to the

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adoption of SFAS 123R and the issuance of stock and warrants for services resulting in a $11.5 million charge and depreciation, depletion and amortization of $5.5 million, 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 and an allowance for a note receivable.

Cash used in operating activities was $12.1 million and cash provided by operating activities was $2.0 million for the years ended December 31, 2005 and 2004, respectively. For the year ended December 31, 2004, we had cash provided by operations primarily due to a cash receipt of $7.5 million related to the license agreement we entered into in December 2004. We received the up-front cash payment but are required to defer and amortize the underlying revenue in our financial statements. The most significant adjustments to net loss to arrive at cash used in operating activities were:

·Non-cash expense related to the issuance of warrants and options to employees, directors and consultants of $11.0 million and $3.8 million for the years ended December 31, 2005 and 2004, respectively.

·In 2005, we recorded a $1.3 million non-cash charge to establish an allowance for a note receivable.

·In 2004, we recorded asset impairments of $1.3 million.

Cash Used in Investing Activities

Cash used in investing activities was $92.9 million and $50.0 million for the years ended December 31, 2006 and 2005, respectively. The majority of the uses of cash relate to the following:

·We paid $36.9 million to consummate the Buckeye acquisition in 2006.

·We purchased $17.7 million of marketable securities and received $8.0 million in proceeds from the maturity of marketable securities in 2006.

·We spent $41.5 million primarily on our Fort Union plant and future plant sites in 2006.

·We spent $47.1 million primarily on our Fort Union plant in 2005.

·We had capital expenditures related to other purchases of property and equipment of $5.1 million, and $851,000 for the years ended December 31, 2006 and 2005, respectively, and $1.0 million for purchases of mineral rights and mine development for the year ended December 31, 2006.

·We were required to restrict cash to serve as collateral of $1.8 million in 2005, to collateralize other contractual obligations and our asset retirement obligation; $1.3 million of restricted cash was released in 2006.

Cash used in investing activities were $50.0 million and $16.3 million for the years ended December 31, 2005 and 2004, respectively. The majority of the uses of cash related to the following;

·We spent $47.1 million and $12.6 million on our Fort Union plant for the years ended December 31, 2005 and 2004, respectively.

·We had capital expenditures related to other purchases of property and equipment of $851,000 and $44,000 for 2005 and 2004, respectively.

·We were required to restricted cash to serve as collateral of $1.8 million and $3.4 million in 2005 and 2004, respectively, to collateralize other contractual obligations and our asset retirement obligation.

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Cash Provided by Financing Activities

Cash provided by financing activities for the year ended December 31, 2006 was $169.1 million compared to $11.5 million for the same period ended 2005, an increase of $157.6 million. The increase is attributable to the $144.6 million of cash received from our public offering in February 2006 and an increase of $12.9 million of cash proceeds from the exercise of warrants and options.

Cash provided by financing activities for the year ended December 31, 2005 was $11.5 million compared to $69.9 million compared to the same period ended 2004. The majority of our financing activities related to the exercise of options and warrants and the issuance of common stock in private placements. We received cash related to the exercise of options and warrants of $11.7 million and $22.6 million for the years ended December 31, 2005 and 2004, respectively. In addition, in 2004, we generated cash from the issuance of common stock from private placements of $47.4 million.

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.

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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. As of December 31, 2006, we had a $1.3 million recorded allowance for doubtful accounts relating primarily to a note receivable.

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 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 and out-source engineers. As there is no history on which to base the economic life of the equipment and as we used a number of assumptions and estimates in determining the production of the plant, we may periodically need to re-evaluate the economic life of and production our Fort Union plant and may be required to take additional depreciation expense.

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.

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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 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.

Recent Accounting Pronouncements

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 September 2006, the U.S. Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Financial Statement Misstatements.” SAB No. 108 expresses the staff’s view regarding the process of quantifying financial statement misstatements. The interpretations in SAB No. 108 are being 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 statement did not have a material impact on our financial position or results our operations.

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize, in our 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 are effective as of January 1, 2007. 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.

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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:

We are exposed to market risk due to changes in natural gas prices. Natural gas is used in our K-Fuel process at our Fort Union plant. There has been a generally increasing trend in natural gas prices during the last few years due to various supply factors, including the increasing overall demand for natural gas from industrial users, which is affected, in part, by the general conditions of the United States economy, and other factors. Seasonal fluctuations exist each year resulting from various supply and demand factors, such as the severity of winters affecting consumer consumption for heating and the severity of, summers affecting industrial demand for electrical generation, among other factors. A hypothetical increase of $1.00 per MMBTU of natural gas prior to the installation of a reboiler and other plant modifications could increase the cost per ton by approximately $2.00 per ton of K-Fuel or approximately $1.5 million annually, assuming the plant is operating at near full design utilization.

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 1.6 million to 1.8 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 $18,000 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 $720,000.

We are indirectly exposed to fluctuations in fuel commodity prices. To the extent that fuel prices rise or fall, there may be greater or lesser demand for our K-Fuel refined coal. 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.”

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

None.

ITEM 9A.CONTROLS AND PROCEDURES

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

39

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 at the conclusion of the period ended December 31, 2006. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were 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 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 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, 2006. 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, believes that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Deloitte & Touche LLP, our independent registered public accounting firm, has issued an attestation report on management’s assessment of our internal control over financial reporting. That attestation report is set forth below in this Item 9A.

Changes in Internal Control over Financial Reporting

During the third quarter of 2006, we began to implement a new enterprise-wide software system. During the year ended December 31, 2006, we commenced using the general ledger, accounts payable and procurement applications of the software to record, allocate and report financial transactions. This new system resulted in certain material changes to our internal controls over financial reporting. Pre-implementation testing and post-implementation reviews were conducted by management to ensure that internal controls surrounding the system implementation process, the applications, and the closing process were properly designed to prevent material financial statement errors. We have tested and evaluated the effectiveness of the key controls over financial reporting related to the general ledger, accounts payable

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and procurement and determined that they are operating effectively. We plan on implementing additional modules of the enterprise-wide software through the first quarter of 2007. As we implement other modules, our internal control structure will be modified as appropriate.

The implemented and planned system changes were undertaken primarily to improve management reporting and were not undertaken in response to any actual or perceived significant deficiencies in our internal control over financial reporting. Other than the changes related to this new system, no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On April 3, 2006, we completed the acquisition of Buckeye Industrial Mining Co., which represents a material acquisition for us. Our consolidated financial statements as of December 31, 2006 include the Buckeye operations. In recording the Buckeye acquisition, we followed our normal accounting procedures and internal controls. Our management also reviewed the nine months of operations of Buckeye that are included in our financial statements for the year ended December 31, 2006. In addition, we solicited disclosure information from Buckeye employees using our Section 302 procedures regarding the current business environment in which Buckeye operates. We are continuing to integrate our internal controls into the Buckeye operations and it is contemplated that this effort will continue through the first quarter of 2007. In accordance with SEC guidance, we have not completed our evaluation of the internal controls of Buckeye and, as a result, our conclusion regarding the effectiveness of our internal control over financial reporting does not extend to the internal controls of Buckeye, whose financial statements constitute 18% of total assets and 98% of revenues.

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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 management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Evergreen Energy Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Buckeye Industrial Mining Company, which was acquired on April 3, 2006 and whose financial statements constitute 17 percent and 18 percent of net and total assets, respectively, 98 percent of revenues, and 3 percent of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at Buckeye Industrial Mining Company. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the

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criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued 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 Consolidated Financial Statements as of and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007 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.

DELOITTE & TOUCHE LLP
Denver, Colorado
February 28, 2007

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ITEM 9B.OTHER INFORMATION

None.

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The required information for this item is incorporated by reference to our Proxy Statement for the 2007 Annual Meeting of Stockholders, since such 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 at www.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, 55 Madison Street, Suite 500, Denver, Colorado, 80206, Attention: Investor Relations.

ITEM 11.EXECUTIVE COMPENSATION

The required information for this item is incorporated by reference to our Proxy Statement for the 2007 Annual Meeting of Stockholders, since such 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 Proxy Statement for the 2007 Annual Meeting of Stockholders, since such 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 Proxy Statement for the 2007 Annual Meeting of Stockholders, since such 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 Proxy Statement for the 2007 Annual Meeting of Stockholders, since such 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.

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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-31

15(a)(2)   Financial Statement Schedules.   Schedules are omitted because they are not required or because the information is provided elsewhere in the financial statements. The financial statements of unconsolidated subsidiaries are omitted because, considered in the aggregate, they would not constitute a significant subsidiary.

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.*
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.*
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).
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)).

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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)
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).

46

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).
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.*
21.1	Subsidiaries.*
23.1	Consent of Deloitte & Touche LLP.*
24.1	Powers of Attorney, incorporated by reference to Signature page attached hereto.

47

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.*

*Filed herewith.

**Management contracts and compensatory plans.

48

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 1, 2007	By:	/s/ MARK S. SEXTON
		Mark S. Sexton Chief Executive Officer

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Mark S. Sexton or Kevin R. Collins as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his 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 might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his 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 1, 2007	/s/ MARK S. SEXTON
	Mark S. Sexton, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
Date: March 1, 2007	/s/ THEODORE VENNERS
	Theodore Venners, Chief Technology Officer and Director
Date: March 1, 2007	/s/ DIANA L. KUBIK
	Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 1, 2007	/s/ STANFORD M. ADELSTEIN
	Stanford M. Adelstein, Director
Date; March 1, 2007	/s/ ROBERT J. CLARK
	Robert J. Clark, Director
Date: March 1, 2007	/s/ MANUEL H. JOHNSON
	Manuel H. Johnson, Director

49

Date: March 1, 2007	/s/ ROBERT S. KAPLAN
	Robert S. Kaplan, Director
Date: March 1, 2007	/s/ JOHN V. LOVOI
	John V. Lovoi, Director
Date: March 1, 2007	/s/ JACK C. PESTER
	Jack C. Pester, Director
Date: March 1, 2007	/s/ JAMES S. PIGNATELLI
	James S. Pignatelli, Director
Date: March 1, 2007	/s/ W. GRADY ROSIER
	W. Grady Rosier, Director
Date: March 1, 2007	/s/ JAMES R. SCHLESINGER
	James R. Schlesinger, Director

50

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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the financial statements, the Company changed its method of accounting for stock-based compensation in 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Deloitte & Touche LLP
Denver, Colorado
February 28, 2007

F-1

EVERGREEN ENERGY INC.
Consolidated Balance Sheets

	December 31,
	2006			2005
	(in thousands, except per share amount)
Assets
Current:
Cash and cash equivalents	$	74,518		$	28,793
Accounts receivable	6,011			—
Marketable securities	9,758			—
Inventory	1,260			64
Prepaid and other assets	2,351			900
Total current assets	93,898			29,757
Property, plant and equipment, net of accumulated depreciation	106,432			4,679
Construction in progress	23,508			71,612
Mineral rights and mine development, net of accumulated depletion	21,787			—
Restricted cash	3,910			5,198
Deferred royalty cost, less current portion	1,435			1,461
Patents, net of accumulated amortization	1,134			1,123
Other assets	215			342
	$	252,319		$	114,172
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,695		$	1,303
Accrued liabilities	6,572			8,365
Other current liabilities	475			179
Total current liabilities	14,742			9,847
Deferred revenue, less current portion	6,732			6,751
Asset retirement obligations	5,626			3,558
Other liabilities, less current portion	235			375
Total liabilities	27,335			20,531
Commitments and contingencies (note—11)
Stockholders’ equity:
Preferred stock, $.001 par value, shares authorized 20,000; none outstanding	—			—
Common stock, $.001 par value, shares authorized 280,000; 82,690 and 68,143 shares issued and outstanding, respectively	83			68
Additional paid-in capital	428,298			245,443
Accumulated deficit	(203,397		)	(151,870		)
Total stockholders’ equity	224,984			93,641
	$	252,319		$	114,172

See accompanying notes to the consolidated financial statements.

F-2

EVERGREEN ENERGY INC.
Consolidated Statements of Operations

	Years Ended December 31,
	2006				2005			2004
	(in thousands, except per share amounts)
Operating revenues:
Mining		$	35,937		$	—		$	—
K-Fuel refined coal		420			—			—
Licensing		319			787			20
Consulting and other		34			197			8
Total operating revenue		36,710			984			28
Operating expenses:
Coal mining operating costs		32,311			—			—
General and administrative		28,842			20,588			8,787
Plant start-up costs		26,332			1,522			154
Depreciation, depletion and amortization		5,526			773			420
Research and development		1,438			1,605			696
Cost of licensing and consulting revenue		134			401			5
Bad debt and asset impairment		335			1,255			1,313
Total operating expenses		94,918			26,144			11,375
Operating loss		(58,208		)	(25,160		)	(11,347		)
Other income (expense):
Other income (expense), net		1,080			(16		)	223
Interest income, net		5,601			1,863			569
Total other income		6,681			1,847			792
Net loss		$	(51,527	)	$	(23,313	)	$	(10,555	)
Basic and diluted net loss per share		$	(0.66	)	$	(0.35	)	$	(0.18	)
Weighted-average common shares outstanding		77,783			66,399			57,928

See accompanying notes to the consolidated financial statements.

F-3

EVERGREEN ENERGY INC.
Consolidated Statements of Stockholders’ Equity
For the Years ended December 31, 2006, 2005 and 2004

	Common Stock				Additional Paid-in		Accumulated
	Shares		Amounts		Capital		Deficit				Total
	(in thousands)
Balance January 1, 2004	52,952		$	53	$	149,047		$	(118,002	)	$	31,098
Common stock issued on exercise of options and warrants	7,649		8		22,566			—			22,574
Sale of common stock	4,245		4		47,351			—			47,355
Common stock and warrants issued for services	16		—		3,631			—			3,631
Compensation expense for directors, employees and other	(25	)	—		157			—			157
Net loss	—		—		—			(10,555		)	(10,555		)
Balance, December 31, 2004	64,837		65		222,752			(128,557		)	94,260
Common stock sold or issued on exercise of options and warrants	3,239		3		11,696			—			11,699
Common stock and warrants issued for services	39		—		8,756			—			8,756
Compensation expense for directors and employees	28		—		2,239			—			2,239
Net loss								(23,313		)	(23,313		)
Balance, December 31, 2005	68,143		68		245,443			(151,870		)	93,641
Common stock issued on exercise of options and warrants	4,258		4		24,615			—			24,619
Common stock issued in public offering, net of offering costs	8,050		8		144,551			—			144,559
Restricted stock issued to escrow agent (related to certain executives)	2,000		2		—			—			2
Common stock issued related to acquisition	119		—		2,194			—			2,194
Warrant extension	—		—		1,692			—			1,692
Share-based compensation expense related to employees and consultants	120		1		9,803			—			9,804
Net loss	—		—		—			(51,527		)	(51,527		)
Balance, December 31, 2006	82,690		$	83	$	428,298		$	(203,397	)	$	224,984

See accompanying notes to the consolidated financial statements.

F-4

EVERGREEN ENERGY INC.
Consolidated Statements of Cash Flows

	Years ended December 31,
	2006			2005			2004
	(in thousands)
Operating activities:
Net loss	$	(51,527	)	$	(23,313	)	$	(10,555	)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Share-based compensation expense to employees and others	11,498			10,995			3,788
Depreciation, depletion and amortization	5,526			773			420
Asset impairment and bad debt	335			1,255			1,313
Asset retirement obligation accretion	229			103			—
Other	(64		)	2			(35		)
Changes in operating assets and liabilities:
Accounts receivable	(1,402		)	—			—
Accounts receivable from related party	—			750			—
Inventory	941			(64		)	—
Prepaids and other assets	(808		)	(327		)	(1,732		)
Deferred revenue and other current obligations	278			(718		)	7,481
Accounts payable and accrued expenses	4,559			(1,527		)	1,362
Cash (used in) provided by operating activities	(30,435		)	(12,071		)	2,042
Investing activities:
Purchases of construction in progress	(41,455		)	(47,084		)	(12,570		)
Purchases of property, plant and equipment	(5,172		)	(851		)	(44		)
Cash paid for acquisition, net of cash received	(36,913		)	(573		)	(523		)
Purchases of marketable securities	(17,733		)	—			—
Proceeds from marketable securities	7,974			—			—
Purchases of mineral rights and mine development	(1,026		)	—			—
Restricted cash	1,287			(1,798		)	(3,400		)
Other	98			322			252
Cash used in investing activities	(92,940		)	(49,984		)	(16,285		)
Financing Activities:
Proceeds from sale or exercise of options and warrants	24,619			11,699			22,574
Proceeds from issuance of common stock, net of offering costs	144,559			—			—
Issuance of common stock and warrants from private placement, net of issuance cost	—			—			47,355
Payments on capital leases and note payable	(78		)	(232		)	(6		)
Cash provided by financing activities	169,100			11,467			69,923
Increase (decrease) in cash and cash equivalents	45,725			(50,588		)	55,680
Cash and cash equivalents, beginning of year	28,793			79,381			23,701
Cash and cash equivalents, end of year	$	74,518		$	28,793		$	79,381

See accompanying notes to the consolidated financial statements.

F-5

EVERGREEN ENERGY INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004

Unless the context requires otherwise, the terms “Evergreen,” “we,” “our,” and “us” refer to Evergreen Energy Inc. and its subsidiaries. All references to K-Fuel refer to our patented process and technology.

(1) Business and Summary of Significant Accounting Policies

We are leveraging a vertically integrated, coal-based platform to deliver combined energy, environmental and economic solutions, producing clean, efficient and affordable energy. We intend to meet the specific needs of industrial, international and public utility market customers. We provide 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 subbituminous coal and lignite, into a more energy efficient, lower-emission fuel. The pre-combustion refinement of raw coal into K-Fuel refined coal reduces mercury content up to 70 percent and upon combustion, sulfur dioxide and nitrous oxides by significant amounts. Studies show that the increased efficiency of K-Fuel refined coal will reduce carbon dioxide emissions by beneficial amounts.

On September 26, 2006, in keeping with our strategy to use technology to create cleaner coal for generating power, we began doing business as Evergreen Energy Inc. The name change received formal stockholder approval on November 9, 2006. The name of Evergreen Energy Inc. captures our key attributes, namely our commitment to delivering clean energy and our strategy to vertically integrate our operations.

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.

We have completed the initial construction and entered the start-up phase for our Fort Union plant and mine site in Wyoming’s Powder River Basin, or PRB, which is our first plant implementing the K-Fuel process. In the third quarter of 2006, we began shipping K-Fuel refined coal. Initial test burns of K-Fuel refined coal provided us with positive results regarding the characteristics and quality of the K-Fuel refined coal.

Consolidation.   The accompanying consolidated financial statements include the accounts of Evergreen Energy Inc. and our wholly owned subsidiaries. All significant intercompany account balances, transactions and profits (loss) have been eliminated.

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,

F-6

revenue, acquisitions, stock option and restricted stock grants and warrants, allowance for bad debts for receivables, taxes, recoverability of assets, impairments, customer retention, reserves 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.

Reclassifications.   Certain prior year balances have been reclassified to conform to the current year presentation.

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.

Cash and cash equivalents.   Cash and cash equivalents consist of 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.   Marketable securities consist of short-term commercial paper and Federal Government Agency reset bonds with original maturities greater than three months but less than twelve months. We have classified our marketable securities as held-to-maturity as we have the intent and ability to hold those securities to maturity. Such securities are recorded at cost, which approximates fair value.

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. As of December 31, 2006, three customers from our Mining segment accounted for 26%, 14% and 11% of total accounts receivable, respectively, while one customer from our Mining segment accounted for 12% of total revenues from operations. 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 may be required. As of December 31, 2006 and 2005, we have an allowance for doubtful accounts of $1.3 million, 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 based on the average cost method by the applicable type of coal. Inventory consisted of $1.2 million of washed or prepared coal and $104,000 of spare parts and supplies as of December 31, 2006 and $64,000 of spare parts and supplies as of December 31, 2005, all classified as finished goods.

Plant, property and equipment.   Plant, property and equipment consists of our Fort Union plant, wash plant facility, buildings, furniture and fixtures, computers, vehicles, leasehold improvements, coal handling system, water treatment equipment, injection wells and land. 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 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. Costs incurred to

F-7

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. Any cost that is not directly related to specific equipment or development of a specific site is expensed.

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 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. 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.   We have restricted cash set aside as collateral pledged toward our asset retirement obligation and to secure certain other obligations. Until the asset retirement obligation is relieved and our other obligations are fulfilled, the cash will remain restricted.

Patents.   All costs incurred to the point when a patent application is to be filed are expensed as incurred as research and development. 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.

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 sheet.

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 then 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.

Long-lived assets.   We evaluate long-lived assets based on estimated future undiscounted net cash flows 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

F-8

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 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 $5.9 million of transportation costs included in cost of sales and $5.9 million of revenue included in mining revenue for the year ended December 31, 2006. 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 were 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.

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. Tax rate changes are reflected in the period such changes are enacted.

Deferred income taxes.   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. We evaluate the deferred tax assets annually and assess the need for the valuation allowance.

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, 2006, 2005 and 2004, we had no transactions that were required to be reported as adjustments to determine comprehensive income.

Advertising costs.   We recognize advertising expense when incurred. Advertising expense was $116,000, $3,000 and $0 for the years ended December 31, 2006, 2005 and 2004, respectively.

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, board of 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” as well as other authoritative

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accounting pronouncements. We are required to make estimates of the fair value of the related instruments and the period benefited.

Stock-based compensation.   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”, 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 reflected in our proforma disclosures pursuant to Statement of Financial Accounting Standard 123 “Accounting for Stock-Based Compensation.” Stock options and other share-based payments granted to non-employees were accounted for in accordance with SFAS No. 123, 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.” Accordingly, stock options granted to non-employees were measured using the Black Scholes option pricing model and reflected in the consolidated financial statements under guidance of SFAS 123 over the expected service period.

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:

	Year ended December 31, 2005				Year ended December 31, 2004
	(in thousands, except per share amounts)
Net loss, as reported		$	(23,313	)		$	(10,555	)
Less: Share-based employee compensation expense included in reported net loss		1,230				229
Total share-based employee compensation expense determined under a fair value based method		(7,338		)		(2,781		)
Pro forma net loss		(29,421		)		(13,107		)
Basic and diluted net loss per share, as reported		$	(0.35	)		$	(0.18	)
Pro forma basic and diluted net loss per share		$	(0.44	)		$	(0.23	)

For pro forma calculations, the fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants:

	Year ended December 31, 2005			Year ended December 31, 2004
Weighted-average:
Risk free interest rate		3.89	%		4.08	%
Expected option life (years)		6.7			7.0
Expected volatility		67	%		70	%
Expected dividends		None			None

The pro forma amounts reflected above may not be representative of the effects on our reported net income or loss in future years because the number of future shares to be issued is not known and assumptions used to determine fair value vary significantly.

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 our Chief Executive Officer, or CEO, Chief Technology Officer, or CTO, and Chief Operating Officer, or COO, which immediately vest upon the attainment of certain performance or market criteria,

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but no later than the seventh anniversary of the date of the agreement. Such shares were transferred to an escrow agent during the first quarter of 2006. As a result of the transfer, such shares are reflected as outstanding in the Consolidated Financial Statements. However, as the vesting criteria have not yet been attained, they are excluded from the net loss per share calculations due to the contingent status of the shares.

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, 2006, 2005 and 2004 were 16.1 million, 22.9 million and 19.4 million, respectively, and are comprised of outstanding stock options, restricted stock grants and warrants to purchase our common stock. All potential common shares outstanding have been excluded from diluted net loss per common share because the impact of such inclusion on a net loss would be anti-dilutive.

Recently adopted accounting pronouncements.   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 are being 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.

In May 2005, the Financial Accounting Standards Board, or FASB, 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. The adoption of this pronouncement did not have a material impact on our financial position or results of operations.

Recently issued accounting pronouncements.   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 are in the process of evaluating the impacts, if any, of adopting this pronouncement.

In July 2006, the FASB 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 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 are effective as of January 1, 2007. We are in the process of evaluating the impacts, if any, of adopting this pronouncement.

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(2) Acquisitions

Buckeye Acquisition

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 will add value through access to Buckeye’s established markets, infrastructure and coal reserves. The expected benefits of the acquisition include the addition of an experienced coal marketing and mining team and cash flow. Their operations have been included in our consolidated financial statements for the nine months ended December 31, 2006, as of the effective purchase date of April 3, 2006.

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 estimated fair values of the assets acquired and liabilities assumed as of the effective date of the acquisition (in thousands):

Cash	$	—
Accounts receivable	4,649
Inventory	2,138
Other current and long-term assets	743
Property, plant and equipment	7,812
Ash disposal facility	7,557
Mineral rights and mine development	20,720
Construction in progress	1,442
Total assets acquired	45,061
Less: Current liabilities assumed	4,182
Asset retirement obligations	1,772
Net purchase price	$	39,107

Pro forma acquisition information represents our unaudited results of operations as if the acquisition had occurred on January 1, 2005.

	December 31,
	2006			2005
	(in thousands)
Revenue	$	49,766		$	50,751
Net loss	$	(51,284	)	$	(18,342	)
Basic and diluted net loss per share	$	(0.66	)	$	(0.28	)

MR&E Acquisition

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 its significant expertise in thermal process engineering. 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.

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The operating results, including revenue and net income for the years ended December 31, 2005 and 2004 were insignificant. Therefore, pro-forma results as if the acquisition had occurred at the beginning of the period are not presented. As of August 1, 2006, MR&E was legally merged into KFx Operations, a wholly owned subsidiary.

Landrica Acquisition

On May 21, 2004, we acquired all of the outstanding stock of Landrica Development Company from Wyodak Development Corporation for cash of $523,000 and assumption of an asset retirement obligation of $2.7 million. The results of Landrica have been included in the consolidated financial statements from the date of acquisition. Landrica owns a coalmine and related assets that include land, buildings, coal handling equipment, a railroad loop and other pieces of equipment and property. See further discussion of our asset retirement obligation in Note—3 Construction in Progress, Mineral Rights and Mine Development and Property, Plant & Equipment.

Since Landrica was not operating the mine during 2004 the operating results, including revenue and net income were immaterial. Therefore, proforma results as if the acquisition had occurred at the beginning of the respective period are not presented.

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

Construction in progress consisted of the following:

	December 31,
	2006		2005
	(in thousands)
Fort Union plant and operating equipment	$	4,478	$	67,889
Train loadout silo	—		2,410
Future plant sites and equipment	13,981		—
Mine and site improvements	2,597		—
Mining equipment refurbishment	2,307		1,313
Other	145		—
Total construction in progress	$	23,508	$	71,612

Total construction in progress includes:

·$2.6 million and $7.6 million of accrued costs as of December 31, 2006 and 2005, respectively, and

·$726,000 of capitalized asset retirement cost as of December 31, 2005.

In 2006, we impaired assets of $295,000 relating to certain sites specific costs, which we were evaluating for a future K-Fuel facility.

In 2004, we impaired assets of $1.3 million related to certain site-specific and plant size-specific costs incurred associated with evaluating three other locations for our Fort Union plant.

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Property plant and equipment consisted of the following:

			December 31,
	Lives		2006			2005
	(in years)		(in thousands)
Fort Union plant and equipment		—	$	84,093		$	—
Machinery and equipment		3-15	12,189			4,355
K-Fuel demonstration facility		—	10,924			10,924
Ash facility and wash plant		5-10	8,526			—
Other		3-30	6,792			1,541
Total			122,524			16,820
Less accumulated depreciation			(16,092		)	(12,141		)
Property, plant and equipment, net of accumulated depreciation			$	106,432		$	4,679

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. We are depreciating all Fort Union plant assets on a units-of-production method, based on actual tonnage processed through the plant. We are depreciating all other property, plant and equipment on the straight line method over the estimated useful life of the assets. Our K-Fuel demonstration facility is fully depreciated.

Property, plant and equipment includes:

·$919,000 of accounts payable and accrued liabilities as of December 31, 2006.

·$794,000 of capitalized asset retirement cost as of December 31, 2006.

Mineral rights are comprised of leases and mine development 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. We entered the production phase in a portion of our Gillette mine site and mined and sold raw coal in the second quarter of 2006. As we have entered the production phase, we have placed a portion of our Gillette mine site into service and are depleting the mine site using the units-of-production method based on tonnage mined. A portion of our Gillette mine site was moved from mine and site improvements in construction in progress to mineral rights and mine development in our consolidated balance sheet in the second quarter of 2006. As we are incurring costs to continue developing a new site at our Gillette mine, we are capitalizing these new costs as mine and site improvements and they are recorded in construction in progress on our consolidated balance sheet.

Depreciation and depletion expense was $5.3 million, $563,000, and $268,000 in 2006, 2005 and 2004, respectively

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Asset Retirement Obligation

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 and train loadout silo are located. The following table reconciles the change in the asset retirement obligation during the year:

	Changes in Asset Retirement Obligations
	(in thousands)
Balance at January 1, 2006		$	3,558
Liability incurred		1,818
Liability settled		—
Accretion		250
Balance at December 31, 2006		$	5,626

The liability incurred in 2006 primarily relates to the acquisition of Buckeye, for which we have allocated the asset retirement cost to the underlying assets based the 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 liabilities are then accreted over time by applying an interest method of allocation. As the assets are placed into service we are depreciating and depleting the related assets on a units-of-production method based on actual tonnage processed and actual tonnage mined.

(4) Patents

Patents consisted of the following:

			December 31,
	Lives		2006			2005
	(in years)		(in thousands)
Domestic and foreign patents granted		5 to 20	$	1,944		$	1,880
Domestic and foreign patents pending		—	350			274
Total patents			2,294			2,154
Less accumulated amortization			(1,160		)	(1,031		)
Net book value			$	1,134		$	1,123

Patent amortization expense, including amortization of existing patents, was $178,000, $210,000 and $152,000 in 2006, 2005 and 2004, respectively. We estimate amortization expense of approximately $130,000 for each of the years ending December 31, 2007, 2008, and 2009.

Most of our early patents are near their expiration dates. Our later patents will not expire until 2018 through 2021. While our current issued patent protection covers what we believe are certain unique aspects of our K-Fuel process as it is currently conducted, not all of the claims we filed were allowed. The application has been re-filed to conform to the examiner’s comments and we expect some of the claims to be granted as re-filed.

(5) Note Receivable

Through a series of transactions Pegasus Technologies Inc. became indebted to us for $2.7 million. The note receivable bears interest at 7% and 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. As of December 31, 2006 and 2005 the net balance of this note receivable was $87,000 and $463,000, respectively.

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During the year ended December 31, 2005, we 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, 2006, we believe the net remaining balance of $87,000 is collectible.

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.

(6) Deferred Royalty Costs

Deferred royalty costs were comprised of deferred costs related to the issuance of license for K-Fuel and a one-time payment made to Mr. Edward Koppelman, the inventor of the K-Fuel process.

	December 31,
	2006			2005
	(in thousands)
Deferred royalty costs related to issuance of licenses for K-Fuel	$	1,015		$	1,019
Payment to Mr. Koppelman	425			447
Total deferred royalties	1,440			1,466
Less current portion	(5		)	(5		)
Deferred royalty costs	$	1,435		$	1,461

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. In addition, 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. As a result, the payment has been reflected in deferred royalty costs in our Consolidated Balance Sheets. We are amortizing the $500,000 payment as license revenue is generated. As of December 31, 2006, there is $73.0 million remaining under the cap. Also, see discussion in Note 11—Commitments and contingencies—Royalties and Other Rights.

Mr. Theodore Venners, our CTO, is entitled to 50% of net royalties paid to the Koppelman estate. In December 2004, Mr. Venners entered into a waiver agreement with us, under which he agreed to assign his right to payments that became due to him from the estate in connection with the license arrangement entered into in 2004. Pursuant to the waiver, Mr. Venners was obligated to remit any proceeds he received related to this license agreement to us. In February 2005, we paid the previously accrued $1.9 million due to the estate and the estate remitted Mr. Venners’ portion directly back to us.

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(7) Accrued liabilities

Accrued liabilities consist of:

	December 31,
	2006		2005
	(in thousands)
Employee-related	$	2,402	$	1,315
Services or goods received, not invoiced	2,240		6,129
Use tax	889		802
Other	1,041		119
Total accrued liabilities	$	6,572	$	8,365

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. Use tax represents accrued sales and use tax primarily related to our Fort Union plant.

(8) Stockholders’ Equity

On February 1, 2006, we filed a shelf registration statement on Form S-3 with the SEC. Under this universal shelf registration statement, we have the capacity to offer and sell securities from time to time, including common stock, preferred stock, debt securities, warrants and units. Again on February 1, 2006, we filed a preliminary prospectus supplement to the shelf registration statement to sell 5 million shares in a public offering. On February 3, 2006, we filed an amendment increasing the number of shares to 7 million (plus an over allotment of 1,050,000). The final prospectus was declared effective on February 3, 2006.

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 completion of 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 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 10—Warrants.

Based on discussions with Arch Coal, we 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.

During the second quarter of 2004, we sold 245,400 shares of common stock to Arch Coal for gross proceeds of $2 million and incurred $5,000 in placement costs. We used these proceeds for general corporate purposes. On November 24, 2004, we sold 4 million shares of our common stock, in a private placement to a limited number of accredited investors, at $12.00 per share, resulting in net proceeds of

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$45.4 million. We used $39.2 million of the proceeds for future plant and project development and $6.2 million for working capital needs.

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 a result, Richard Spencer, manager of Westcliff Capital Management LLC, was added to our Board of Directors. In the third quarter of 2006, Mr. Spencer resigned from the board of directors to pursue other business opportunities with us. He has not yet been replaced. 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:

·One investor group continues to have the right to select two persons to serve on our Board of Directors.

·All investors may develop or participate, with up to a 15% interest, in the greater of K-Fuel commercial projects with an annual output capacity of 50 million tons per year or six commercial plants. Such right will not be in effect until we have plants in operation or have binding contracts to construct plants for which the aggregate designed or projected annual output is at least 25 million tons per year.

·We can participate in projects developed by the investors, other than in India, up to a 50% interest.

·The investors retain the right to develop in India as long as certain conditions are met.

·The investors are obligated to pay certain royalty and license fees for these plants, if constructed.

The 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.

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

We have five qualified stock plans, under which 12.5 million shares were reserved and 4.2 million shares are available for grant as of December 31, 2006. 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 American 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 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. Stock options granted under the plans generally expire not more than ten years from the date of grant

In the future we plan to grant restricted stock to our employees and stock options to our non-employee directors.

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Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, or SFAS 123R, which 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, or ESPP, based on estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25 and related interpretations for periods beginning January 1, 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123R; we have applied the provisions of SAB 107 in our adoption of SFAS 123R.

We adopted SFAS 123R, using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Share-based compensation expense recognized under SFAS 123R for the year ended December 31, 2006 was $9.8 million, which related to (i) stock options, (ii) restricted stock grants and (iii) the discount and the fair value calculation for our “look back” provision for employee stock purchases under our ESPP. In accordance with the modified prospective transition method, our Consolidated Financial Statements for prior periods, including the years ended December 31, 2005 and 2004, have not been restated to reflect the impact 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 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 reflected in our pro-forma disclosures pursuant to SFAS 123. Stock options and other share-based payments granted to non-employees were accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Abstract No. 96-18. Accordingly, stock options granted to non-employees were measured using the Black Scholes option pricing model and reflected in the consolidated financial statements under guidance of SFAS 123 over the expected service period.

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. SFAS 123R also requires us to estimate forfeitures at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. Historically, the majority of option grants outstanding were to executives, consultants and to our CTO. We have estimated the forfeiture rate on each of these groups based upon historical data. We granted restricted stock awards to non-executive employees during the year ended December 31, 2006. We have based the forfeiture rate for this stratification on the historical data of the executive stratification, as we have no historical data for non-executive employees. Lastly, during the fourth quarter of 2005, we granted restricted stock awards to our CEO, CTO and to our COO, which contain accelerated vesting provisions. Our best 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. 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.

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 volatility of our stock price, the weighted average risk-free rate, and the weighted average expected life of the options. As we do not pay dividends, the

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dividend rate variable in the Black-Scholes model is zero. The following table summarizes the assumptions used to value stock options grant in 2006:

	Year Ended  December 31, 2006
Weighted-average:
Risk free interest rate		4.78	%
Expected option life (years)		3
Expected volatility		57	%
Expected dividends		None

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.

The following table reflects our recorded share-based compensation for the year ended December 31, 2006 under SFAS 123(R):

	Year Ended December 31, 2006
	(in thousands)
Share-based compensation expense included in reported net loss		$	9,803
Earnings per share effect of share-based compensation expense		$	(0.13	)

We have recognized $9.8 million, $2.2 million and $157,000 in non-cash compensation expense related to our employees and directors for the years ended December 31, 2006, 2005 and 2004, respectively, which are reflected in general and administrative expenses. We have recognized $0, $3.0 million and $3.6 million in stock-based compensation expense related to non-employees for the years ended December 31, 2006, 2005 and 2004, respectively, which are reflected in general and administrative expenses and related to services performed. The more significant transactions and expenses are described below.

On November 10, 2005, the Financial Accounting Standards Board issued FASB Staff Position No. SFAS 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool, or APIC pool, related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R). We have calculated a winfall of $4.0 million, which represents the excess of stock-based compensation taken on tax returns over what we had recorded in the proforma disclosure in our Consolidated Financial Statements. Since we have fully allowed for our deferred tax asset, we were not required to record this difference in our Consolidated Financial Statements

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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. All stock options granted during each of the three years ended December 31, 2006 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, 2006:

	Years Ended December 31,
	2006					2005					2004
	Total		Weighted- Average Exercise Price Per Share			Total		Weighted- Average Exercise Price Per Share			Total		Weighted- Average Exercise Price Per Share
	(shares in thousands)
Outstanding, beginning of period	4,678			$	10.36	4,771			$	5.26	4,453			$	3.16
Granted	50			12.31		2,200			11.50		1,800			9.18
Exercised	(555	)		5.91		(1,813	)		3.65		(1,395	)		3.48
Expired and forfeited	(129	)		9.40		(480	)		7.75		(87	)		2.75
Outstanding, end of period	4,044			$	10.86	4,678			$	10.36	4,771			$	5.26
Options exercisable and expected to vest as of December 31, 2006	3,667			$	10.51
Options exercisable, end of period	2,115			$	8.49	2,033			$	6.52	3,251			$	3.73

Plan and non-plan stock options outstanding and exercisable as of December 31, 2006 are summarized below:

	Stock Options Outstanding							Stock Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price			Number of Shares		Weighted Average Exercise Price
	(in thousands)							(in thousands)
$2.75 - $3.00		293		3.2		$	2.75		283		$	2.75
$3.01 - $6.00		720		2.6		4.06			660		4.07
$6.01 - $9.00		250		3.8		8.13			250		8.13
$9.01 - $12.00		280		4.2		9.55			100		9.90
$12.01 - $15.00		2,091		5.1		13.71			732		13.52
$15.01- $18.71		410		5.1		16.58			90		16.77
		4,044		4.4		10.86			2,115		8.46

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The following table summarizes the grant date fair value of our stock option activity, including both plan and non-plan options, during the year ended December 31, 2006:

	Total		Weighted-Average Grant Date  Fair Value
	(shares in thousands)
Non-vested, beginning of period	2,645			$	12.10
Granted	50			5.14
Vested	(637	)		12.62
Expired and forfeited	(129	)		9.72
Non-vested, end of period	1,929			$	13.53

The aggregate intrinsic value of stock options is the difference between our closing stock price on December 31, 2006 and the exercise price multiplied by the number of options. The total intrinsic value of options exercised were $4.6 million, $21.8 million and $7.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Of the 4.0 million options outstanding 1.5 million had exercise prices less than the closing price of our common stock at December 31, 2006. These options had an aggregate intrinsic value of $6.9 million at December 31, 2006.

Of the 2.1 million options exercisable 1.2 million had exercise prices less than the closing price of our common stock at December 31, 2006. These options had an aggregate intrinsic value of $6.2 million at December 31, 2006.

Of the 3.7 million options exercisable and expected to vest 1.5 million options had exercise prices less than the closing price of our common stock at December 31, 2006. These options had an aggregate intrinsic value of $6.9 million at December 31, 2006.

We have granted 50,000, 2.2 million and 1.8 million shares of stock options to our employees, directors and consultants for the years ended December 31, 2006, 2005 and 2004, respectively. The weighted-average grant date fair value of options granted during the years ended December 31, 2005 and 2004 were $14.32 and $9.18, respectively.

The total fair value of stock options vested during the years ended December 31, 2006, 2005 and 2004 were $5.4 million, $3.4 million and $5.7 million, respectively

As of December 31, 2006, total unrecognized compensation expense related to nonvested stock options was $12.4 million. This expense is expected to be recognized over a weighted-average period of 2.88 years.

During the year ended December 31, 2005, we granted 250,000 stock options to our CTO that vested upon achievement of certain operational criteria related to our Fort Union plant. The operational criteria for our Fort Union plant were achieved in March 2006, at which time 20% vested and 20% vest annually thereafter on the anniversary date of the grant. We recorded $543,000 and $281,000 of non-cash expense related to this award during the years ended December 31, 2006 and 2005, respectively

In February 2005, we granted a total of 1 million options to our President. All of the options qualified as inducement options as defined by the American Stock Exchange, were not issued pursuant to a plan and vest 20% per year beginning in January 2006.

In November 2004 and again in February 2005, the Committee voted to extend the exercise periods for vested options for a period of 90 days after the resignation of a director and our former President and Chief Operating Officer, respectively. As a result of these extensions, we recorded general and

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administrative expense of $136,000 in 2004 related to the extension of 40,000 options and $906,000 in 2005 related to the extension of 120,000 options. The expense represents the difference between the fair value of the options on the date the extension was granted and the exercise price.

Restricted Stock Grants

In the fourth quarter of 2005, the committee 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 year period with one-third vesting each year, only if the agreed upon performance criteria have been achieved. In the future, we plan to continue to grant a combination of time-based and time-and-performance-based restricted stock awards.

The following table summarizes our restricted stock grant activity for the years ended December 31, 2006, 2005 and 2004:

	Years Ended December 31,
	2006			2005			2004
	(in thousands)
Outstanding beginning of period		2,100			—			—
Granted		296			2,240			—
Vested		(20	)		(140	)		—
Expired and forfeited		(12	)		—			—
Outstanding end of the period		2,364			2,100			—
Outstanding and expected to vest as of December 31, 2006		2,303

The aggregate intrinsic value of restricted stock outstanding at December 31, 2006 was $23.5 million.

The aggregate intrinsic value of restricted stock outstanding and expected to vest at December 31, 2006 was $22.9.

The weighted-average remaining contractual term of restricted stock outstanding at December 31, 2006 was 5.37 years.

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

The total fair value of restricted stock vested during the years ended December 31, 2006 and 2005 were $358,000 and $2.4 million, respectively

As of December 31, 2006, total unrecognized compensation expense related to outstanding restricted stock grants was $28.4 million. This expense is expected to be recognized over a weighted-average period of 5.37 years.

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During the fourth quarter of 2005, we granted 2.0 million shares of restricted stock to our CEO, COO and our CTO. The 1.4 million issued to the new CEO and COO were not issued pursuant to a plan as they qualified as inducement awards under the American Stock Exchange rules. The 600,000 issued to our CTO were granted from one of our plans. Full vesting of the stock will occur upon attainment of any of the following:

·the average closing price of our common stock for the trading days within any 90 consecutive calendar day period equals or exceeds $45.05 per share;

·annual gross revenues increase to $1 billion;

·annual net operating cash flow increases to $250 million; or

·change in control, as defined in the agreement occurs after the two-year anniversary of the agreement.

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 $4.4 million and $679,000 of non-cash expense during the years ended December 31, 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.

During the year ended December 31, 2005, we granted 140,000 shares of restricted stock to a consultant for services rendered. As a result, we recorded $2.4 million of non-cash compensation during the year ended December 31, 2005. These restricted shares vested immediately upon grant, however at the request of the consultant 100,000 shares were issued in January 2006 and the remaining 40,000 share were issued in January 2007. Additionally, in March 2005, the Committee approved the grant of 100,000 shares of restricted stock to our President, vesting 20% per year beginning January 2006. We recognized $331,000 of non-cash compensation expense related to the restricted stock in each of the years ended December 31, 2006 and 2005.

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 15% discount from the lower of the market price on November 1, 2005 or June 30, 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 the employer 15% match.

F-24

(10) 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, 2006, 2005, and 2004:

	Year Ended December 31,
	2006				2005				2004
	Number of Potentially Exercisable Shares				Number of Potentially Exercisable Shares				Number of Potentially Exercisable Shares
Outstanding, beginning of period		15,856				14,564				18,903
Granted		—				2,547				1,915
Exercised		(3,703		)		(1,255		)		(6,254		)
Expired and cancelled		(2,547		)		—				—
Outstanding, end of period		9,606				15,856				14,564
Expiration		2007-2010				2006-2010				2005-2010
Exercise price per share		$	2.75 - $8.52			$	2.64 - $20.69			$	2.64 - $11.00

As discussed above, 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%.

On June 25, 2004, we entered into agreements to raise capital proceeds from two of our warrant holders. In return for 1.3 million additional warrants at an exercise price of $11.00 per share, these warrant holders agreed to exercise 3.9 million of their warrants before their contractual expiration date. On June 28, 2004, we received $7.2 million of proceeds from the exercise of 2.6 million of these warrants. On July 22, 2004, we received $3.4 million of proceeds from the exercise of the remaining 1.3 million warrants from the other warrant holder. As of December 31, 2006, all of these warrants were exercised.

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(11) Commitments and Contingencies

Payment Obligations

The following table summarizes our future commitments as of December 31, 2006:

	Payments due by period
	2007		2008		2009		2010		2011		Thereafter			Total
	(in thousands)
Operating leases	$	1,183	$	1,421	$	1,437	$	1,301	$	1,105		$	26,060	$	32,507
Capital lease and other obligations	100		16		16		8		—			—		140
Purchase commitment obligations	25,268		26,637		9,459		—		—			—		61,364
Consulting and service commitments	4,020		3,045		240		240		—			—		7,545
Total commitments	$	30,571	$	31,119	$	11,152	$	1,549	$	1,105		$	26,060	$	101,556

This table does not include accounts payable, accrued expenses nor asset retirement obligations, which are reported in our December 31, 2006 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 in the years ended December 31, 2006, 2005 and 2004 was $415,000, $242,000 and $226,000, respectively. Included in operating leases is a 50 year port dock lease on the Ohio River, we have the right to cancel this lease upon six months written notice, if we cancelled this lease as of December 31, 2006, we would be obligated to pay only $250,000 of the $25.0 million included in the table.

Purchase commitments include our 700,000 pound per hour Circulating Fluidized Bed coal-fired boiler island that is being constructed. We have the right to cancel this at any time with a 17.5% penalty, if we cancelled this as of December 31, 2006, we would be obligated to pay only $10.7 million of the $61.1 million included in the table.

Consulting and service commitments include agreements with consultants to advise us on proposed legislation and regulations and advocate our interests before the U.S. Congress and regulatory agencies, these agreements are for 18 months. Also included in consulting and service agreements is an agreement for technical and engineering services in which we have the right to cancel upon six months written notice. If we cancelled this agreement as of December 31, 2006, we would be obligated to pay only $1.8 million of the $6.3 million included in the table. Effective February 15, 2007, we amended and restated a service agreement for technical and engineering services, as result of this, if we were to cancel early we would be required to pay up to a $5 million termination fee.

Litigation

Except as provided below, we are not engaged in any material legal proceedings to which we or any of our subsidiaries are a party.

On April 14, 2005, we were notified that we were named in a Demand for Arbitration by Ohio based Ultramax Corporation and its affiliate, Decision Control Analysis Corporation (“Ultramax”). In April 2002, Ultramax granted a License Agreement to Pegasus Technologies, Ltd., which we owned at the time, for certain software which was to be used for the optimization of industrial and other processes,

F-26

including processes used in the electric power generation industry. In May, 2006, a settlement was reached to resolve the dispute. We did not incur any of the settlement costs.

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:

·Pursuant to an exchange transaction in 2003, we gave licenses for up to three plants, with certain limitations on the location of the plants, each plant having a maximum annual capacity of three million tons per year. The counterparty is obligated to pay certain royalty and license fees for these three plants, if constructed.

·As described in further detail in Note 8—Stockholders’ Equity, certain investors have the right to, among other things, develop or participate in the greater of K-Fuel commercial projects with an annual output capacity of 50 million tons per year or six commercial projects, subject to certain qualifications.

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(12) Segments

With the acquisition of Buckeye, we have expanded our segments and our segment presentation. We have identified three segments: our Plant and Licensing segment, Mining segment and Operating segment. Our results of operations are evaluated and allocations of capital resources are based upon the overall operations of these segments. The Plant and Licensing segment represents revenue and costs related to the use and application of our proprietary, patented K-Fuel process and our mine site in Gillette, Wyoming. The Mining segment represents our mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility and the blending facility. The Operating segment is comprised of all other operations, primarily our headquarters and related operations. Our operations are principally conducted in the United States

	Year ended December 31, 2006
	Plant and Licensing			Mining		Operating			Total
Operating revenues:
Mining coal sales	$	—		$	31,207	$	—		$	31,207
Mining ash sales	—			4,730		—			4,730
K-Fuel refined coal	420			—		—			420
Licensing	319			—		—			319
Consulting and other	—			—		34			34
Total operating revenue	739			35,937		34			36,710
Operating expenses:
Coal mining operating costs	—			32,311		—			32,311
General and administrative	—			—		28,842			28,842
Plant start-up costs	26,332			—		—			26,332
Cost of license and consulting revenue	102			—		32			134
Total segment operating expense	26,434			32,311		28,874			87, 619
Segment operating loss income	$	(25,695	)	$	3,626	$	(28,840	)	$	(50,909	)
Total assets	$	98,349		$	46,675	$	107,046		$	252,070
Reconciliation to net loss:
Total Segment operating loss									$	(50,909	)
Depreciation, depletion and amortization									(5,526		)
Research and development									(1,438		)
Bad debt and asset impairment									(335		)
Other income (expense)									6,681
Net loss									$	(51,527	)

F-28

	Year ended December 31, 2005
	Plant and Licensing				Mining			Operating			Total
Operating revenues:
Licensing		$	787			$	—	$	—		$	787
Consulting and other		—				—		197			197
Total operating revenue		787				—		197			984
Operating expenses:
General and administrative		—				—		20,588			20,588
Plant start-up costs		1,522				—		—			1,522
Cost of license and consulting revenue		259				—		142			401
Total segment operating expense		1,781				—		20,730			22,511
Segment operating loss		$	(994	)		$	—	$	(20,533	)	$	(21,527	)
Total assets		$	71,710			$	—	$	42,462		$	114,172
Reconciliation to net loss:
Total Segment operating loss											$	(21,527	)
Depreciation, depletion and amortization											(773		)
Bad debt											(1,255		)
Research and development											(1,605		)
Other income (expense)											1,847
Net loss income											$	(23,313	)

	Year ended December 31, 2004
	Plant and Licensing				Mining			Operating				Total
Operating revenues:
Licensing		$	20			$	—		$	—		$	20
Consulting and other		—				—			8			8
Total operating revenue		20				—			8			28
Operating expenses:
General and administrative		—				—			8,787			8,787
Plant start-up costs		154				—			—			154
Cost of license and consulting revenue		—				—			5			5
Total segment operating expense		154				—			8,792			8,946
Segment operating loss		$	(134	)		$	—		$	(8,784	)	$	(8,918	)
Reconciliation to net loss:
Total Segment operating loss												$	(8,918	)
Depreciation, depletion and amortization												(420		)
Research and development												(696		)
Bad debt and asset impairment												(1,313		)
Other income (expense)												792
Net loss income												$	(10,555	)

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(13) 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:

	2006			2005
	(in thousands)
Gross deferred tax assets:
Net operating loss carryforwards	$	61,781		$	41,676
Depreciation and amortization	(1,143		)	81
Accrued liabilities	2,166			525
Stock options and warrants	4,417			4,655
Deferred revenue	2,535			2,525
Deferred royalty costs	—			(380		)
Reserve on note receivable	469			468
Other	164			164
Gross deferred tax assets	70,389			49,714
Deferred tax assets valuation allowance	(70,389		)	(49,714		)
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. Our tax return net operating loss carryforwards of approximately $166 million expire in various amounts beginning in 2007. 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 total provision for income taxes in 2006, 2005 and 2004 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:

	2006			2005			2004
	(in thousands)
Expected tax benefit on loss before income taxes	$	(17,519	)	$	(7,926	)	$	(3,589	)
Expected state tax benefit, net	(1,700		)	(769		)	(348		)
Stock options and warrant exercises	(910)			(12,032		)	(264		)
Non-deductible items and other	(546		)	1,070			3,449
Expiring net operating loss	—			1,655			—
Increase in valuation allowance	20,675			18,002			752
	$	—		$	—		$	—

(14) 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.

F-30

We have a consulting agreement 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 CTO. Prior to April 1, 2004, the agreement provided for monthly consulting fees of $12,000, reimbursement of expenses related to our business and certain performance-based bonuses. Effective April 1, 2004, we negotiated a revised agreement with Venners & Company, Ltd. for the provision of these services at a fixed cost of $18,000 per month, which either party can terminate the agreement upon written notice. In January 2005, this amount was increased to $25,500. The additional $7,500 per months is non-cancellable and expires on July, 2008. During the years ended December 31, 2006, 2005 and 2004, we paid Venners & Company $306,000, $346,000 and $198,000 respectively, in cash for consulting fees and $0, $10,000 and $58,000, respectively, for reimbursement of expenses, excluding certain bonuses.

In 2004, Venners & Company, Ltd. was entitled to bonus compensation as a result of the passage of legislation establishing certain tax credits. We were required to (i) make cash payments of approximately $25,000, (ii) extend the consulting agreement for a period of 43 months, (iii) issue 4,800 shares of common stock for services provided, and (iv) issue warrants for the purchase of 150,000 shares at an average exercise price of $7.35 per share with a term of three years. We paid $25,000 in cash which, was reflected in general and administrative expenses related to the issuance of common stock. Based on the Black-Scholes option-pricing model (assuming a weighted average risk free interest rate of 2.83%, expected option life of 3 years, expected volatility of 46.6% and no dividends) we expensed $519,000 for issuing these warrants. In addition, we recognized $25,000 of expense related to the issuance of common stock. As a result, we recognized a total of $544,000 of general and administrative expense related to this success-based fee for the year ended December 31, 2004.

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 CTO, 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 CTO. See further discussion in Note 6—Deferred Royalty Costs and Note 11—Commitments and Contingencies.

(15) Selected Quarterly Financial Data (Unaudited)

The following table presents selected unaudited quarterly financial data for the years ended December 31, 2006 and 2005:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
	(in thousands, except per share amounts)
2006
Revenues	$	185		$	11,499		$	12,097		$	12,929		$	36,710
Operating loss	(7,338		)	(12,195		)	(18,907		)	(19,768		)	(58,208		)
Net loss	(6,228		)	(9,539		)	(17,363		)	(18,397		)	(51,527		)
Basic and diluted net loss per common share	(0.09		)	(0.12		)	(0.22		)	(0.23		)	(0.66		)
2005
Revenues	799			54			100			31			984
Operating loss	(3,611		)	(4,194		)	(5,355		)	(12,000		)	(25,160		)
Net loss	(3,210		)	(3,659		)	(4,856		)	(11,588		)	(23,313		)
Basic and diluted net loss per common share	$	(0.05	)	$	(0.06	)	$	(0.07	)	$	(0.17	)	$	(0.35	)

F-31

Fourth Quarter 2006 Discussions

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

Fourth Quarter 2005 Discussions

We recognized non-cash compensation expense of $2.7 million related to certain restricted stock grants to employees and consultants during the fourth quarter of 2005. In addition, we recognized $5.8 million related to the issuance of warrants to Arch in October 2005.

F-32

EX-3.4

Exhibit 3.4

CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
KFX, INC.

Pursuant to Section 242 of the General
Corporation Law of the State of Delaware

KFx, Inc. (the “Corporation”), a corporation organized and existing under an by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST:  That at a meeting of the Board of Directors of the Corporation on January 22, 2003, at which a quorum was present and acted throughout, resolutions were duly adopted setting forth an amendment (the “Amendment”) to the Restated Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”), declaring the Amendment to be advisable, and directing that the Amendment be considered at the next annual meeting of stockholders of the Corporation.

SECOND:  That thereafter on May 22, 2003, the 2003 annual meeting of the Corporation was duly held in accordance with the By-laws of the Corporation and the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares of stock as required by statute and the Certificate of Incorporation were voted in favor of the following resolution adopting the Amendment;

NOW, THEREFORE, BE IT RESOLVED, that the first paragraph of Article III of the Certificate of Incorporation of the Corporation be amended so that the first paragraph of said Article III shall read as follows:

“The aggregate number of shares of which the Corporation shall have the authority to issue is 140,000,000, of which 120,000,000 shares shall be designated Common Stock with each share having a par value of $.001; and 20,000,000 shares shall be designated Preferred Stock with each share having a par value of $.001.  The designations and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions for redemption of the shares of each class of capital stock are as follows:”

THIRD:  That the Amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to the Amended and Restated Certificate of Incorporation to be signed by Rudolph G. Swenson, its Secretary, this 2nd day of June 2003.

By	/s/ Rudy G. Swenson
	Name:	Rudolph G. Swenson
	Title:	Secretary

EX-3.6

Exhibit 3.6

CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
KFX INC.

Pursuant to Section 242 of the Delaware General Corporation Law, William G. Laughlin hereby certifies that:

1.             He is the Vice President, General Counsel and Secretary of KFx Inc., a Delaware corporation (the “Corporation”).

2.             At a meeting of the Board of Directors of the Corporation held on September 19, 2006, at which a quorum was present and acted throughout, resolutions were duly adopted setting forth an amendment to the Restated Certificate of Incorporation of the Corporation in the form attached hereto as Exhibit A (the “Amendment”), declaring the Amendment to be advisable, and directing that a special meeting of the stockholders be held for the purpose of voting upon the adoption of the Amendment.

3.             A meeting of the stockholders of the Corporation was held on November 9, 2006, pursuant to proper notice and in accordance with the Bylaws of the Corporation and the Delaware General Corporation Law.  At such meeting of the stockholders, the necessary number of shares of stock as required by the Delaware General Corporation Law and by the Corporation’s Restated Certificate of Incorporation were voted in favor of adopting the Amendment.

4.             The Amendment was duly adopted in accordance with Section 242 of the Delaware General Corporation Law.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to the Restated Certificate of Incorporation to be signed by William G. Laughlin, its Vice President, General Counsel and Secretary, this 9th day of November, 2006.

/s/ William G. Laughlin

William G. Laughlin,

Senior Vice President,

General Counsel and Secretary

EXHIBIT A

AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
KFX INC.

The Restated Certificate of Incorporation, as amended, is hereby further amended by deleting Article I thereof in its entirety and replacing it with the following:

“ARTICLE I

The name of the Corporation is Evergreen Energy Inc.”

EX-10.37

Exhibit 10.37

NET LEASE AGREEMENT

SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY,

a Delaware Corporation,

Landlord

and

EVERGREEN ENERGY INC.,
a Delaware corporation

Tenant

Dated:  November 17, 2006

NET LEASE AGREEMENT

between

SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY

and

EVERGREEN ENERGY INC.

Table of Contents
SECTION		PAGE
1.	DEFINITIONS	1
2.	PREMISES	2
3.	TERM	2
4.	RENTAL	3
5.	ADJUSTMENT OF RENT	3
6.	MISCELLANEOUS TAXES	6
7.	USE	6
8.	PREPARATION FOR OCCUPANCY	7
9.	SERVICES	7
10.	MECHANIC’S LIENS	9
11.	QUIET ENJOYMENT	9
12.	CERTAIN RIGHTS RESERVED TO THE LANDLORD	9
13.	ESTOPPEL CERTIFICATE BY TENANT	10
14.	WAIVER OF CLAIMS AND INDEMNITY	10
15.	INSURANCE	11
16.	HOLDING OVER	12
17.	ASSIGNMENT AND SUBLETTING	12
18.	CONDITION OF PREMISES	15
19.	RULES AND REGULATIONS	15
20.	REPAIRS	18
21.	UNTENANTABILITY	18
22.	EMINENT DOMAIN	18
23.	TENANT’S DEFAULT AND LANDLORD’S REMEDIES	19
24.	SALE AND ASSIGNMENT	21
25.	SUBORDINATION OF LEASE	22
26.	NOTICES AND CONSENTS	22
27.	SPRINKLERS	22

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28.	NO ESTATE IN LAND	22
29.	INVALIDITY OF PARTICULAR PROVISIONS	22
30.	WAIVER OF BENEFITS	23
31.	WAIVER OF TRIAL BY JURY	23
32.	SECURITY DEPOSIT	23
33.	SUBSTITUTE PREMISES	23
34.	PARKING	23
35.	BROKERAGE	23
36.	ENVIRONMENTAL PROVISIONS	24
37.	TELECOMMUNICATIONS	26
38.	ERISA REPRESENTATION	28
39.	SPECIAL STIPULATION	29
40.	EXHIBITS	30

(i)            Exhibit A - Lease Commencement Date Statement

(ii)           Exhibit B - Workletter Agreement

(iii)          Exhibit C - Cleaning Schedule

(iv)          Rider to Lease

ii

NET LEASE AGREEMENT

THIS LEASE, made the 17th day of November, 2006, between SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY, a Delaware corporation, having its principal place of business at 245 Park Avenue, Second Floor, New York, New York 10167 (the “Landlord”), and EVERGREEN ENERGY INC., a Delaware corporation, having its principal place of business at 55 Madison Street, Suite 500, Denver, Colorado 80206 (the “Tenant”).

LEASE SUMMARY:

2.	Premises:	Suite 1300 and Suite 1400, located on the 13th and 14th floors of the Building and consisting of approximately 32,727 square feet of Rentable Area Leased.
3.	Term:	Ten (10) years and three (3) months.
		Commencement Date: March 1, 2007 (as the same may be adjusted by the terms of Section 3 of this Lease)
		Expiration Date: May 31, 2017 (as the same may be adjusted by the terms of Section 3 of this Lease)
4.	Rental:	Annual Base Rental: See Rider Paragraph 1, attached hereto.
5.	Adjustment of Rent:	Tenant’s Proportionate Share: 4.909%
26.	Notice to Landlord:			Notice to Tenant:
	J.P. Morgan Investment Management, Inc.			Prior to the Commencement Date:
	245 Park Avenue, Second Floor
	New York, New York 10167			55 Madison Street, Suite 500
	Attention:  Asset Manager			Denver, Colorado 80206
				Attn:  Chief Operating Officer
				After the Commencement Date:
				1225 — 17th Street, Suite 1400
				Denver, Colorado 80202
				Attn:  Chief Operating Officer
				With a copy to:
				1225 — 17th Street, Suite 1400
				Denver, Colorado 80202
				Attn:  General Counsel
32.	Security Deposit:		Letter of Credit as more fully set forth in Paragraph 7 of the Rider, attached hereto.
34	Parking:		Tenant shall be entitled to one (1) unreserved space for every one thousand (1,000) rentable square feet leased; Tenant may allocate up to eight (8) of the foregoing spaces as reserved spaces as more fully set forth in Paragraph 34 hereof, but in no event may Tenant utilize more parking spaces than 1:1,000 in the aggregate.
	Rider:		See attached Rider for specific terms.

W I T N E S S E T H:

1.             DEFINITIONS.  The terms defined in this section shall, for all purposes of this Lease, and all agreements amending or supplementing this Lease, have the meanings herein specified unless the context otherwise requires.

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(a)           The “Building” shall mean the commercial office structure together with all appurtenant plazas, subgrade areas, garages and other improvements, situated on the Land, known as Seventeenth Street Plaza, 1225 Seventeenth Street, Denver, Colorado.

(b)           The “Land” shall mean the real property whose legal address is Lots 1 to 32 inclusive, Block 67, together with vacated alley in said Block 67, East Denver, State of Colorado.  The “Property” shall mean the Building and the Land.

(c)           “Rentable Area” shall mean the total number of square feet of rentable floor area of office space in the Building; and that number is 666,653 square feet.

(d)           “Rentable Area Leased” shall mean the total number of square feet of rentable floor area of office space in the Premises, and that number is 32,727 square feet.

(e)           Tenant’s “Proportionate Share” shall be that percentage the Rentable Area Leased is of the Rentable Area.  Such percentage is 4.909%.

2.             PREMISES.  In consideration of the rents, charges, covenants and agreements herein contained, Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord the space referred to as Suite 1300 and Suite 1400, located on the 13th and 14th floors of the Building (the “Premises”), together with the non-exclusive right to use, in common with others, the public areas of the Building including, without limitation, the lobby, stairs, elevators, entrances and loading docks.  No easement for air or light or view is included with the Premises.  Landlord and Tenant agree that the rentable square footage of the Premises is square feet of rentable area, and waive and release any right to assert or claim otherwise, unless otherwise expressly set forth to the contrary herein.

3.             TERM.  The term (hereinafter called the “Term”) of this Lease shall commence on the earlier of occupancy of the Premises by Tenant, or substantial completion of the work to be performed by Landlord in accordance with Section 8 hereof, the target date (“Target Date”) for which is March 1, 2007, subject to items which will not materially affect the use of the Premises for the use in accordance with Section 7 here of, and extension and earlier termination as hereinafter provided.  Prior to occupying the Premises, and after receipt thereof from Landlord, Tenant shall execute and deliver to Landlord a letter in the form attached hereto and made a part hereof as Exhibit ”A”, acknowledging the commencement date (hereinafter called the “Commencement Date”) and the expiration date (hereinafter called the “Expiration Date”) of the Term for the Premises and, if applicable and unless agreed to otherwise, any Excess Allowance owed pursuant to the Lease for Tenant Improvements.  In the event the Tenant does not either provide to Landlord such letter or provide to Landlord written objections to such letter within thirty (30) days after the later of the date of receipt thereof from Landlord or that date that Tenant first occupies the Premises, then the Commencement Date shall be deemed to be the date set forth by Landlord in such commencement letter.  However, in the event Landlord shall be delayed in substantially completing said work as a result of:

(a)           Tenant’s delay or failure to meet with the space planner on or before the dates specified in the Workletter Agreement, or other delays deemed caused by Tenant as described therein, (marked Exhibit ”B” and attached hereto) or delays due to changes in or additions to plans for improvements to the Premises (other than as allowed in the Workletter Agreement); or

(b)           Tenant’s requirement of Special Work or materials, finishes or installations other than Building Standard Improvements as set forth in the Workletter Agreement; or

(c)           The performance of the work by a person, firm or corporation employed by Tenant or the failure to complete such work by said person, firm or corporation; then the commencement of the Term of the Lease and the payment of rent thereunder shall be accelerated by the number of days of such delay (“Tenant’s Delay”).

Landlord shall use reasonable efforts to give Tenant at least thirty (30) days’ notice of the date upon which, in Landlord’s opinion, the Commencement Date shall occur, provided that Landlord shall have no liability in the event the Commencement Date shall

2

not occur on the date specified, and failure to give possession on the date specified shall in no way affect the validity of this Lease or the obligations of the Tenant hereunder.

Expiration Date.  Unless otherwise terminated herein, if the Term commences on a date other than the first day of a month, it shall expire at the end of the day ten (10) years and three (3) months from the last day of the month in which it commenced.  If the Term commences on the first day of a month, it shall expire at the end of the day ten (10) years and three (3) months from the last day of the calendar month preceding the Commencement Date.  The expiration date is hereinafter referred to as the “Expiration Date”.

4.             RENTAL.

(a)           Tenant agrees to pay to Landlord for use and occupancy of the Premises, lawful money of the United States, payable without notice or demand in advance on the first day of each calendar month during the term, an initial annual base rental (hereinafter, “Initial Annual Base Rental”) in the amounts set forth in Paragraph 1 of the Rider attached hereto.  Tenant shall also pay the Landlord, at the times and in the manner provided in Section 5, the Operating Costs and Real Estate Taxes (as defined therein).

(b)           All payments of Annual Base Rental required to be made under this Section 4, or payments to be made by Tenant under any other section of this Lease (hereinafter designated “Additional Rent”), shall, except to the extent expressly provided to the contrary herein, be made without any setoff or counterclaim whatsoever, and shall be made payable to and sent to Landlord at the management office of Landlord in the Building or such other place as Landlord may designate.

(c)           Annual Base Rental and Additional Rent are sometimes hereinafter collectively referred to as “Rent”.

The first monthly installment of Annual Base Rental shall be paid on the Commencement Date, except that in the event the Commencement Date shall be a date other than the first day of the calendar month, then Tenant shall pay on the Commencement Date an amount equal to such portion of an equal monthly installment as the number of days from the Commencement Date to the end of the calendar month in which the Commencement Date occurs bears to the total number of days in said calendar month, and said payment shall represent the pro-rata Annual Base Rental from the Commencement Date to the end of such calendar month.

5.             ADJUSTMENT OF RENT.

(a)           Payment of Operating Costs and Real Estate Taxes.

(i)            Prior to the Commencement Date, Landlord shall provide to Tenant an estimate of the amount owed for Tenant’s Proportionate Share of Operating Costs and Real Estate Taxes (as defined herein).  Tenant, without further notice, shall pay to Landlord in monthly installments one-twelfth (1/12th) of such estimate simultaneously with Tenant’s payment of Annual Base Rental.  Any failure by Landlord to deliver any such estimate shall not relieve Tenant of its obligations to pay Operating Costs and Real Estate Taxes as herein provided.  Landlord shall provide an adjusted estimate to Tenant during the first quarter of every subsequent calendar year during the Term.  Upon receipt of any such adjusted estimate, Tenant shall pay any true-up amounts (the difference between the amount paid prior to the adjusted estimate and the adjusted estimate) and one-twelfth (1/12th) of such adjusted estimate simultaneously with Tenant’s payment of Annual Base Rental.  If, at any other time during the Term, it reasonably appears to Landlord that the Operating Costs or Real Estate Taxes for the current calendar year will vary from Landlord’s estimate, then Landlord may readjust the estimate for Operating Costs or the Real Estate Taxes for such calendar year by notice delivered to Tenant, and subsequent payments by Tenant for such calendar year will be based upon such estimate.

(ii)           Landlord shall deliver to Tenant, within one hundred twenty (120) days after the end of each calendar year during the Term, unless delayed by causes beyond Landlord’s reasonable control, a written statement

3

(“Statement”) setting out in reasonable detail the amount of Operating Costs and Real Estate Taxes for the preceding calendar year.  If the aggregate of monthly installments of Operating Costs and/or Real Estate Taxes actually paid by Tenant to Landlord differ from the amount due in the Statement, then, as the case may be, Tenant shall pay the difference to Landlord or Landlord shall issue a credit to Tenant against the Rent remaining to be paid hereunder for the difference, or if no Rent then remains to be paid, refund the difference to Tenant, without interest or penalty, within thirty (30) days after the date of delivery of the Statement.  However, Landlord’s failure to provide said Statement by the date set forth herein shall in no way excuse Tenant from its obligation to pay its pro-rata share of Operating Costs and Real Estate Taxes or constitute a waiver of Landlord’s right to bill and collect such pro-rata share of Operating Costs and Real Estate Taxes from Tenant.

(iii)          In the event Tenant disputes the amounts set forth in the Statement set forth in Section 5(a)(ii) above, upon no less than ten (10) business days’ prior written notice to Landlord, Tenant or Tenant’s in-house employees, or external auditors who are certified public accountants shall have the right to examine Landlord’s books and records as to amounts due in the Statement.  Any examination is subject to a confidentiality agreement executed by Tenant and Tenant’s in-house employees or external auditors, as applicable, and shall occur at the location where said records are maintained (if such records are generally maintained at the Building or elsewhere in the Denver, Colorado metropolitan area, they will be made available in the Denver, Colorado metropolitan area) during normal business hours.  Tenant shall have ninety (90) calendar days after delivery of the Statement set forth in Section 5(a)(ii) above to provide Landlord with written notice of exception of any item in the Statement.  Unless Tenant provides said written notice of exception detailing any disputed charges to Landlord within said time, Tenant shall conclusively be deemed to have accepted the accuracy of the Statement and to have waived any right to claim any readjustment in connection therewith.  If Tenant makes such timely written notice of exception, a statement as to the proper amount of any item set forth in Tenant’s written notice of exception shall be made by a reputable accounting firm and paid for by Tenant.  Under no circumstances shall Tenant conduct a review of Landlord’s books and records whereby the person or firm performing the review operates on a contingency fee or similar payment arrangement or if there exists an uncured Event of Default as defined herein, by Tenant.

(b)           Operating Costs:

(i)            Operating Costs shall be deemed to include all costs which, for federal tax purposes, may be expensed rather than capitalized and which Landlord will incur in owning, maintaining and operating the Building or the Land, exclusive of Real Estate Taxes, as hereinafter defined, mortgage interest and depreciation.  Without limitation to the foregoing, the term “Operating Costs” shall mean those costs incurred during each year of the Term in respect of the operations and maintenance of the Land and the Building in accordance with accepted principles of sound management and accounting practices as applied to the operation and maintenance of first class office buildings in Denver, including the cost of or charges for the following by way of illustration but without limitation:  landscaping and snow removal, water and sewer, insurance premiums, licenses, permits and inspections, heat, light, electrical power, steam, security, janitorial services, maintenance of and repairs to equipment servicing the Land or the Building (including costs associated to ensure the accurate processing of data), window cleaning, refuse removal services, air conditioning, supplies, materials, equipment and tools, administration and management of the Land and the Building, changing the Building’s electric service provider and associated installation, maintenance, repair and service costs, personal property taxes on the personal property used in the operation of the Land or the Building, the cost, as reasonably amortized by Landlord with interest at One and One-Half Percent (1-1/2%) above the prime rate announced from time to time by the Wells Fargo Bank of Denver, N.A., or its successor, on the unamortized amount of any capital improvement made after

4

the Commencement Date which reduces Operating Costs but in an amount not to exceed such reduction for the relevant year, and the cost of contesting by appropriate proceedings the applicability to the Building or the Land or the validity of any statute, ordinance, rule or regulation affecting the Building and the Land which might increase Operating Costs.  If the occupancy level in the Building is less than 95%, Operating Costs will be adjusted to reflect the Building at a 95% occupancy level.  Operating Costs shall not include costs for repairs or other work occasioned by fire, windstorm or other insured casualty to the extent recovered by insurance proceeds; cost incurred in leasing or procuring new tenants (i.e., lease commissions, advertising costs and costs for renovating space for new tenants); legal costs in enforcing the terms of any lease; interest or amortization payments on any mortgage or mortgages; or rental for any ground or underlying lease or leases.  If Landlord makes any capital improvement during the Term of this Lease in order to comply with safety or any other requirements of any Federal, State or local law or governmental regulation, then the Tenant shall be responsible for its Proportionate Share of any such charges, with interest at One and One-Half Percent (1-1/2%) above the prime rate announced from time to time by Wells Fargo Bank of Denver, N.A., or its successors.  For the preceding sentence, Tenant’s Proportionate Share of said charges is determined by multiplying the annual amortization of said charges as determined by generally accepted accounting principles by Tenant’s Proportionate Share.  Said amount with interest shall be deemed an Operating Cost in each of the calendar years during which such amortization occurs.

Operating Costs allocated to Tenant shall not reflect any type or degree of service or duty performed by or through Landlord for any other Tenant which is not required to be performed for Tenant under this Lease which results in a cost in excess of the services or duties required to be provided by Landlord under this Lease.

(c)           Real Estate Taxes:

(i)            The term “Real Estate Taxes” means all taxes and assessments, special or otherwise levied upon or with respect to the Building and the Land (including air rights) imposed by Federal, State or local governments, use, occupancy, excise or similar taxes, and taxes on rent, the cost of contesting by appropriate proceeding the amount or validity of any of the aforementioned taxes or assessments and taxes and assessments of every kind and nature whatsoever levied and assessed and imposed on Landlord in lieu of or in substitution for existing or additional real or personal property taxes or assessments on the Land, Building, or said personal property; except that Real Estate Taxes shall not include general income, franchise, capital stock, estate or inheritance taxes. In the case of special taxes and assessments payable in installments, only the amount of each installment due and payable during a single calendar year shall be included in Real Estate Taxes for that year.

(d)           If the term shall terminate on a date other than December 31st, the adjustments in Annual Rent described in this section shall be increased or decreased, as the case may be, for the period commencing on the January 1st following the last full calendar year of the Term and continuing to the end of the Term, in the manner set forth in this section and the adjustment for such period shall be made within twenty (20) days after Landlord shall render its statements for the last monthly installment of the Annual Base Rental payable under this Lease, or if that is not reasonably feasible as soon thereafter as is reasonably feasible, and this obligation shall survive the expiration or earlier termination of the term.

(e)           Intentionally omitted.

(f)            Any amount due from Tenant to Landlord which is not paid when due shall bear interest at a rate of Twelve Percent (12%) from the date such payment is due until paid, except that amount spent by Landlord on behalf of Tenant shall bear interest at such rate from the date of disbursement by Landlord.  Notwithstanding the foregoing, Landlord will not assess interest as provided above for the first occurrence of any late payment in any twelve (12) month period, if Tenant makes such payment within five (5) days after receipt of notice from Landlord of such late payment, (it being expressly understood and agreed that if Tenant does not

5

make such payment after notice, interest shall commence to accrue on the 5th day after such notice, and it further being expressly understood and agreed that any notice of non-payment which Landlord may provide Tenant pursuant to Section 23(a) hereof shall be deemed to constitute such notice).

Tenant hereby acknowledges that in addition to lost interest, the late payment by Tenant to Landlord of rent or any other sums due hereunder will cause Landlord to incur other costs not contemplated in this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain.  Such other costs include, but are not limited to, processing, administrative and accounting costs.  Accordingly, if any installment of rent or any additional rent or other sum due from Tenant shall not be received by Landlord within five (5) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to Ten Percent (10%) of such overdue amount.  The parties hereby agree that (i) such late charge represents a fair and reasonable estimate of the costs Landlord will incur in processing such delinquent payment by Tenant, (ii) such late charge shall be paid to Landlord as liquidated damages for each delinquent payment, and (iii) the payment of the late charges and the payment of interest is to compensate Landlord for the use of Landlord’s money by Tenant, while the payment of the late charges is to compensate Landlord for the additional administrative expense incurred by Landlord in handling and processing delinquent payments.  Notwithstanding the foregoing, Landlord will not assess a late charge as provided above for the first occurrence of any late payment in any twelve (12) month period, if Tenant makes such payment within five (5) days after receipt of notice from Landlord of such late payment (it being expressly understood and agreed that any notice of non-payment which Landlord may provide Tenant pursuant to Section 23(a) hereof shall be deemed to constitute such notice).

Neither assessment nor acceptance of interest or late charges by Landlord shall constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies under this Lease.  Nothing contained in this section shall be deemed to condone, authorize, sanction or grant to Tenant an option for the late payment of rent, additional rent or other sums due hereunder, and Tenant shall be deemed in default with regard to any such payments should the same not be made by the date on which they are due.

(g)           All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of non-payment thereof, Landlord shall have all the rights and remedies herein provided for in case of non-payment of Rent.

6.             MISCELLANEOUS TAXES.  Tenant shall pay prior to delinquency all taxes assessed against or levied upon its occupancy of the Premises, or upon the fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises, if non-payment thereof shall give rise to a lien on the real estate, and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord.  In the event any or all of Tenant’s fixtures, furnishings, equipment and other personal property, or taxes upon Tenant’s occupancy of the Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes within ten (10) business days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant’s fixtures, furnishings, equipment or personal property.

7.             USE.  The Premises shall be used and occupied by Tenant for general office purposes and for no other purpose.

(a)           Tenant shall not at any time use or occupy the Premises or the Building, or suffer or permit anyone to use or occupy the Premises, or do anything in the Premises or the Building, or suffer or permit anything to be done in, brought into or kept on the Premises, which in any manner in the sole discretion of Landlord (a) violates the Certificate of Occupancy for the Premises or for the Building; (b) causes or is liable to cause injury to the Premises or the Building or any equipment, facilities or systems therein; (c) constitutes a violation of the laws and requirements of any public authorities or the requirements of insurance bodies; (d) impairs or tends to impair the character, reputation or appearance of the Building as a first-class office building; (e) impairs or tends to impair the proper and economic maintenance, operation and

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repair of the Building and/or its equipment, facilities or systems; or (f) constitutes a nuisance, public or private.

(b)           Notwithstanding any other provision of this Lease to the contrary (including without limitation, Paragraph 9 regarding heating, ventilation and air conditioning and Paragraph 19 regarding rules and regulations), Tenant hereby agrees that the aggregate number of people (including, without limitation, full-time employees, part-time employees, independent contractors and agents of Tenant) which may use or perform services or activities in the Lease Premises shall not exceed a ratio of one (1) person for each two hundred (200) rentable square feet of space in the Leased Premises, regardless of whether such people “office share”, “job share” or work in shifts.  Landlord hereby acknowledges that Tenant may, from time to time, allow invitees, guests and repair workers to enter the Premises for the purposes of meeting with employees and making repairs, and that the presence of such people shall not be included in the aforementioned calculation.  Any violation by Tenant of the terms and conditions of the Paragraph 7 shall be deemed to be an Event of Default as defined in Paragraph 23 of the Lease for which there is no cure period.

8.             PREPARATION FOR OCCUPANCY.  Prior to the Commencement Date, Landlord shall, at Landlord’s sole cost and expense, alter and fit-up the Premises to the extent set forth in the Workletter Agreement of even date herewith, marked Exhibit ”B” and attached hereto (herein referred to as “Building Standard Improvements”).

Other than Building Standard Improvements, all pre-occupancy alteration and fit-up of the Premises shall be performed at Tenant’s sole cost and expense (herein referred to collectively as “Special Work”), subject to the terms and provisions of the Workletter Agreement and this Lease.

9.             SERVICES.  The Landlord shall provide, at Landlord’s expense, except as otherwise provided, the following services:

(a)           Janitor service as described in Exhibit “C” attached hereto, in and about the office space, Saturdays, Sundays, and legal and union holidays excepted.

(b)           Heat and, except for basement space, air-conditioning required in Landlord’s reasonable judgment for the comfortable use and occupation of the Premises, from 7:00 a.m. to 6:00 p.m. on Mondays through Fridays, and from 8:00 a.m. to 1:00 p.m. on Saturdays, excepting union and legal holidays in each instance.  If Tenant desires HVAC service outside of such hours, Tenant shall provide Landlord at least twenty-four (24) hours’ prior notice and shall pay to Landlord the then current standard charge for such after-hours HVAC service.  The rates for after-hours HVAC service as of the date of this Lease are $200 per hour for the first one (1) hour and $160 per hour thereafter for full cooling (chiller and fans), and $84 per hour for fans only, which rates are subject to change from time to time without notice to Tenant.

Whenever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air-conditioning system, Landlord reserves the right, at its option, either to require Tenant to discontinue the use of such heat generating machines or equipment or to install supplementary air-conditioning equipment in the Premises; the cost of such installation shall be paid by Tenant to Landlord promptly on being billed therefor, and the cost of operation and maintenance of said supplementary equipment shall be paid by Tenant to Landlord on the monthly rent payment dates as such rates as may be agreed on, but in no event at a rate less than Landlord’s actual cost therefor of labor, materials and utilities.

(c)           Hot and cold (or tempered) water for drinking, lavatory and toilet purposes within the public areas only (and, in the standard restrooms serving the Premises).

(d)           Passenger elevator service at all times.

(e)           Window washing of all exterior windows, both inside and out.

(f)            Building Standard Electricity (hereinafter defined).

(g)           On-site building safety personnel services consistent with comparable buildings in the downtown Denver, Colorado central business district.

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If Tenant shall require electric current design capacity in excess of 5.00 watts per square foot at 208/120v (three phase) for use of the Premises as general office space (the “Building Standard Electricity”), Tenant shall first procure the consent of Landlord, which Landlord may not unreasonably withhold, to the use thereof and Landlord may cause an electric check meter to be installed in the Premises or Landlord shall have the right to cause a reputable independent electrical engineering or consulting firm to survey and determine the value of the electric service furnished for such excess electric current. The reasonable cost of any such survey or meters and/or installation, maintenance and repair thereof shall be paid for by Tenant.  Tenant agrees to pay to Landlord promptly within thirty (30) days after receipt of Landlord’s statement, for all such electric current consumed as shown by said meters or by said survey at the rates charged for such services by the City, or the local public utility, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the electric current so consumed.  It is understood that cost, as determined by Landlord, of material and labor for replacing light bulbs, tubes, ballasts, starters, switches and any other parts and fixtures used in furnishing electricity to the leased Premises shall also be paid by Tenant.

Any riser or risers or wiring to meet Tenant’s excess electrical requirements, upon written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant if, in Landlord’s sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alteration, repairs or expense or interfere with or disturb other tenants or occupants.

Landlord has advised Tenant that presently Xcel Energies (“Electric Service Provider”) is the utility company selected by Landlord to provide electricity service for the Building.  Notwithstanding the foregoing, if permitted by law, Landlord shall have the right at any time and from time to time during the Term of the Lease and any extension thereof to either contract for service from a different company or companies providing electricity service (each such company shall hereinafter be referred to as an “Alternate Service Provider”) or continue to contract for service from the Electric Service Provider.  Tenant shall cooperate with Landlord, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Landlord, Electric Service Provider, and any Alternate Service Provider reasonable access to the Building’s electric lines, feeders, risers, wiring, and any other machinery within the Premises and accept reasonable disturbances caused thereby, provided that Landlord will use commercially reasonable efforts to minimize disruption to Tenant’s use of the Premises.

Should Tenant require any additional work or service, including but not limited to the additional work or service described above, including service furnished outside the stipulated hours, Landlord may, upon reasonable advance notice by Tenant, furnish such additional service and Tenant agrees to pay the Landlord such charges as may be agreed on, but in no event at a charge less than Landlord’s actual cost plus overhead for additional services provided, it being agreed that the cost to the Landlord of such additional services shall be excluded from Operating Expense.

It is understood that Landlord does not warrant that any of the services referred to above, or any other services which Landlord may supply, will be free from interruption, Tenant acknowledging that any one or more such services may be suspended by reason of accident or of repairs, maintenance, tests, change of electric service provider (or the modification of facilities in connection therewith) alterations or improvements necessary or advisable to be made, or by strikes or lockouts, or by reason of operation of law, or causes beyond the reasonable control of Landlord.  Landlord will use commercially reasonable efforts to notify Tenant of any planned suspension of any of the foregoing services, and will use commercially reasonable efforts to restore any interrupted service.  Any such interruption of service shall never be deemed an eviction or disturbance of Tenant’s use and possession of the Premises, or any part thereof, or render Landlord liable to Tenant for damages by abatement of Rent or otherwise, or relieve Tenant from performance of Tenant’s obligations under this Lease; provided, however, that in connection with any planned interruptions, Landlord will use reasonable efforts to minimize disruption to Tenant’s business activities in the Premises.  Notwithstanding the foregoing, in the event of any interruption of services caused by Landlord, its employees, agents or contractors and within Landlord’s sole and absolute control which materially impairs Tenant’s normal business operations in the Premises for a period in excess of five (5) consecutive business days, following Landlord’s receipt of notice from Tenant, then, as Tenant’s sole and exclusive remedy, Tenant shall be entitled to an abatement of Tenant’ s Annual Base Rental obligations hereunder

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for such period which exceeds such five (5) consecutive business days until the service is restored; provided, however that such rental abatement shall be on a pro rata basis to reflect only that portion of the Premises affected by the interruption of services.  The abatement of Annual Base Rental obligations as provided in this paragraph shall not be applicable either (a) in the case of any interruption or malfunction resulting from any service providers or any governmental action which reduces or eliminates a service to the Building; provided, however, that Landlord agrees to use commercially reasonable efforts to restore any interrupted services, or (b) in the case of damage by casualty, in which case the provisions of Article 21 shall control.

10.          MECHANIC’S LIENS.  Tenant shall pay before delinquency all costs for work done or caused to be done by Tenant in the Premises which could result in any lien or encumbrance on Landlord’s interest in the Land or Building or any part thereof, shall keep the title to the Land or Building and every part thereof free and clear of any lien or encumbrance in respect of such work and shall indemnify and hold harmless Landlord against any claim, loss, cost, demand and legal or other expense, whether in respect of any lien or otherwise, arising out of the supply of material, services or labor for such work.  Tenant shall promptly notify Landlord of any such lien, claim of lien or other action of which it has knowledge and which affects, or could affect, the title to the Land or Building or any part thereof and Tenant shall cause the same to be removed or bonded over in a manner reasonably acceptable to Landlord and/or its lenders within ten (10) days, failing which Landlord may take such action as Landlord deems necessary to remove the same and the entire cost thereof shall be immediately due and payable by Tenant to Landlord.

11.          QUIET ENJOYMENT.  So long as Tenant shall observe and perform the covenants and agreements binding on it hereunder, the Tenant shall at all times during the Term herein granted peacefully and quietly have and enjoy possession of the Premises without any encumbrance or hindrance by, from or through the Landlord, its successors or assigns.

12.          CERTAIN RIGHTS RESERVED TO THE LANDLORD.  The Landlord reserves the following rights:

(a)           To name the Building and to change the name or street address of the Building.

(b)           To install and maintain a sign or signs on the exterior or interior of the Building.

(c)           To designate all sources furnishing sign painting and lettering, ice, drinking water, towels, toilet supplies, shoe shining, vending machines, mobile vending service, catering, and like services used on the Premises.

(d)           During the last ninety (90) days of the Term, if during or prior to that time the Tenant vacates the Premises, after confirming with Tenant that Tenant has vacated the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy, without affecting Tenant’s obligation to pay rental for the Premises.

(e)           To constantly have pass keys to the Premises.

(f)            On reasonable prior notice to the Tenant, to exhibit the Premises to prospective tenants during the last nine (9) months of the Term (unless Tenant has previously exercised its renewal option as provided herein), and to any prospective purchaser, mortgagee, or assignee of any mortgage of the Property and to others having a legitimate interest at any time during the Term.

(g)           At any time in the event of an emergency, otherwise at reasonable times and except for standard building services (e.g., janitorial) upon reasonable advance notice (which may be given orally), to take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or the Landlord’s interests, or as may be necessary or desirable in the operation or improvement of the Building or in order to comply with all laws, orders and requirements of governmental or other authority.

(h)           To install vending machines of all kinds in the Premises, and to provide mobile vending service therefor, and to receive all of the revenue derived therefrom, provided,

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however, that no vending machines shall be installed by Landlord in the Premises nor shall any mobile vending service be provided therefor, unless Tenant so requests.

13.          ESTOPPEL CERTIFICATE BY TENANT.  The Tenant agrees that from time to time upon not less than ten (10) business days’ prior request by the Landlord, the Tenant will deliver to the Landlord a statement in writing certifying (a) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and identifying the modifications), (b) the Commencement Date, Termination Date, and the dates to which the Rent and other charges have been paid, and (c) that, to the best knowledge of the person making the certificate knows, the Landlord is not in default under any provision of this Lease, and, if the Landlord is in default, specifying each such default of which the person making the certificate may have knowledge, it being understood that any such statement so delivered may be relied upon by the Landlord, any landlord under any ground or underlying lease, or any prospective purchaser, mortgagee, or any assignee of any mortgage on the Property.  Tenant also shall include or confirm in any such statement such other information concerning this Lease as Landlord may reasonably request.

14.          WAIVER OF CLAIMS AND INDEMNITY.  Landlord and Tenant, to the extent permitted by law, expressly, knowingly and voluntarily waive and release any and all claims it may have against the other party, and against the other party’s agents, employees and contractors, including, but not limited to, claims for theft or damage to property (including business interruption of Tenant’s Business) or loss of income.  Moreover, Tenant, to the extent permitted by law, expressly, knowingly and voluntarily waives and releases any and all claims it may have against the Landlord, its agents, employees and contractors, for injury to person sustained by the Tenant or by any occupant of the Premises, or by any other person, as a result of the acts or omissions of Landlord or Landlord’s employees, agents, or contractors, unless caused as a result of the negligence or willful misconduct of Landlord or its employees, agents, or contractors.  Without limiting the foregoing, Tenant waives any claims against Landlord arising from theft or damage to person or property as a result of any part of the Property or any equipment or appurtenances becoming out of repair, or resulting from any accident in or about the Property or resulting directly or indirectly from any act or neglect of any tenant or occupant of any part of the Property or of any other person.  This provision shall apply especially (but not exclusively) to damage caused by water, frost, weather, steam, sewage, electricity, gas, sewer gas or odors, or by the bursting or leaking of pipes or plumbing work, and shall apply equally whether such damage is caused or occasioned by anything or circumstance above mentioned or referred to, or by any other thing or circumstance whether of a like or wholly different nature.  All personal property belonging to the Tenant or any occupant of the Premises that is in or on any part of the Property shall be there at the risk of the Tenant or of such other person only, and the Landlord, its agents and employees shall not be liable for any damage thereto or for the theft or misappropriation thereof.

The Tenant agrees to hold the Landlord harmless and indemnified (including reasonable attorney fees) against claims and liability for injuries to all persons and for damage to or loss of property occurring in or about the Property, due to any act of negligence or default under this Lease by the Tenant, its contractors, agents, employees, invitees, or those on the Property by or through Tenant.  Such obligation shall not be construed to negate, abridge or otherwise reduce any other right or obligation of indemnity that would otherwise exist as to any party or person described in this paragraph.  Tenant agrees that in the event Tenant shall have any claim against Landlord under the Lease or arising out of the subject matter of the Lease, as amended from time to time, Tenant’s sole recourse shall be against the Landlord’s interest in the Building, for the satisfaction of any claim, judgment or decree requiring the payment of money by Landlord as a result of a breach hereof or otherwise in connection with the Lease, and no other property or assets of Landlord, its successors or assigns, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction or decree.  Moreover, Tenant agrees that Landlord shall in no event and under no circumstances be responsible for any consequential damages incurred or sustained by Tenant, or its employees, agents, contractors or invitees as a result of or in any way connected to Tenant’s occupancy of the Premises.  In any and all claims against Landlord and its subsidiaries or any of their agents or employees by an employee of the Tenant or anyone directly or indirectly employed by Tenant or anyone for whose acts Tenant may be liable, the indemnification obligation under this paragraph shall not be limited in any way by any limitation on the amount

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or type of damages, compensation or benefits payable by or for the Tenant under workers’ compensation acts, disability benefit acts or other employee benefit acts.  Tenant understands and acknowledges the significance and consequence of the waivers and indemnifications set forth herein.  The indemnity and hold harmless obligations of the Tenant shall survive termination of this Lease.

The Landlord agrees to hold Tenant harmless and indemnified (including reasonable attorney fees) against claims and liability for injuries to all persons and for damage to or loss of Property occurring in or about Property, due to any act of negligence or default under this Lease by Landlord, its contractors, agents, employees, invitees or those on the Property by or through Tenant.

15.          INSURANCE.

(a)           Tenant shall carry and maintain, or cause to be carried and maintained, at all times during the Term of this Lease and at Tenant’s sole cost and expense All Risk Property insurance including, but not limited to, coverage, after commercially reasonable deductibles, the full replacement value of Tenant’s improvements, including all Tenant Improvements completed by Landlord or Tenant, betterments, furniture, fixtures, equipment and all contents in the Premises.

(b)           Tenant shall carry and maintain, or cause to be carried and maintained, at all times during the term of this Lease and at Tenant’s sole cost and expense a commercial general liability insurance policy (hereinafter referred to as a “Liability Policy”).  Such Liability Policy shall include Landlord, Jones Lang LaSalle Americas, Inc. (and any other party reasonably required by Lessor), as Additional Insured and be written on an “occurrence basis” including, without limitation, blanket contractual liability coverage, broad form property damage, and personal injury coverage protecting Landlord against liability occasioned by any occurrence on or about the Premises or the Building.  Such Liability Policy shall be maintained in an amount not less than $1,000,000.00 for a single occurrence limit and $2,000,000.00 for an aggregate limit, and, in addition, $5,000,000.00 of excess or umbrella liability insurance.

(c)           Tenant shall carry and maintain, or cause to be carried and maintained, at all times during the Term of this Lease and at Tenant’s expense statutory workers compensation and employers liability insurance with the following minimum limits:

Bodily injury by disease per person                             $1,000,000

Bodily injury by accident policy limit                           $1,000,000

Bodily injury by disease policy limit                             $1,000,000

(d)           Tenant shall carry and maintain, or cause to be carried and maintained, at all times during the Term of this Lease and at Tenant’s expense such other insurance or such additional amounts of insurance with respect to the Premises as is generally maintained by persons having similar exposures or properties similarly situated and as the Landlord shall from time to time reasonably require.

(e)           The insurance required under this section shall be written by insurers authorized and licensed to conduct business in the state where the property is located and shall have an A.M. Best Company rating of “A -” or better and shall have financial size category of not less than VIII.  All insurers used by Tenant hereunder shall waive any and all rights of subrogation against Landlord, its agents, contractors, directors, officers and shareholders for losses payable.

(f)            In the event any of the insurance required under this section is cancelled (in whole or in part) for any reason whatsoever, including nonpayment of premium, such cancellation shall not be effective as to the Landlord until at least thirty (30) days after receipt by the Landlord and Tenant of written notice from each insurer of such cancellation.

(g)           Certificates of Insurance (in a form substantially similar to an Accord Form 27) executed by authorized representatives of insurance companies shall be issued in connection with each of the policies required under Sections (b), (c), (d) and (e) and delivered to the Landlord prior to the Commencement Date and from time to time upon renewal of such coverage as soon as reasonably practicable, but in no event later than thirty (30) days prior to the

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expiration date of the policy, providing that the policies are not subject to cancellation or non-renewal without at least thirty (30) days’ prior written notice to Landlord.

(h)           The Tenant may effect the coverage required under this section under blanket insurance policies covering other properties of the Tenant provided that (i) any such blanket insurance policy shall specify therein, or the insurer under such policy shall certify to the Landlord, any material sublimits in such blanket policy applicable to the Premises, which sublimits shall not be less than the amounts required pursuant to this section, and (ii) any such blanket insurance policy shall comply in all respects with other provisions of this section, and (iii) any deductibles and self-insured retention must be approved by Landlord.

16.          HOLDING OVER.  If the Tenant retains possession of the Premises or any part thereof after the expiration or earlier termination of the Term, the Tenant shall pay the Landlord Annual Base Rental and Additional Rent at one hundred fifty percent (150%) the monthly rate specified in Section 4 for the time the Tenant thus remains in possession and, in addition thereto, shall pay the Landlord for all damages, consequential as well as direct, sustained by reason of the Tenant’s retention of possession (collectively, “Holdover Damages”).  If the Tenant remains in possession of the Premises, or any part thereof, after the termination of the term, Tenant shall be considered a month-to-month tenant, and except as provided in this Section 16, shall continue to be subject to the terms and conditions of this Lease.  The provisions of this section do not exclude the Landlord’s rights of re-entry or any other right hereunder.  Notwithstanding the foregoing, Tenant shall not be liable to Landlord for any Holdover Damages unless Landlord gives Tenant written notice that Tenant’s holdover is prohibiting Landlord from delivering the Premises to a prospective Tenant and Tenant still fails to vacate the Premises within five (5) business days after the date of such notice.  In such event, Tenant shall be liable for any Holdover Damages sustained by Landlord after the expiration of such five (5) business day period.

17.          ASSIGNMENT AND SUBLETTING.

(a)           The Tenant, or any other occupant, shall not, without the Landlord’s prior written consent, which consent shall not be unreasonably withheld:  (i) assign, convey, mortgage, pledge, encumber or otherwise transfer (whether voluntarily or otherwise) this Lease or any interest under it; (ii) allow any transfer thereof or any lien upon the Tenant’s interest by operation of law; (iii) sublet the Premises or any part thereof, or (iv) permit the use or occupancy of the Premises or any part thereof by any one other than the Tenant.

(b)           Notwithstanding anything herein to the contrary, if at any time or from time to time during the Term, Tenant desires to sublet or assign the Lease with respect to all or part of the Premises, Tenant shall notify Landlord in writing (hereinafter referred to in this section as the “Notice”) of the terms of the proposed subletting or assignment and identify the proposed assignee or subtenant, including proposed use, and the area proposed to be sublet or covered by the assignment and shall give Landlord the option to sublet from Tenant such space (hereinafter referred to as “Sublet Space”) at the same Rent and Additional Rent as Tenant is required to pay to Landlord under this Lease for the same space, or, at Landlord’s option, to terminate this Lease with respect to the Sublet Space.  If the Sublet Space does not constitute the entire Premises and Landlord exercises its option to terminate this Lease with respect to the Sublet Space, then as to that portion of the Premises which is not part of the Sublet Space, this Lease shall remain in full force and effect except that the Rent and Additional Rent shall be reduced by a fraction, the numerator of which shall be the rentable square feet of the Sublet Space and the denominator of which shall be the rentable square feet of the Premises.  The option to sublet, or to terminate this Lease, shall be exercisable by Landlord in writing within a period of thirty (30) calendar days after receipt of the Notice (“Landlord’s Sublet/Termination Notice”).  Tenant shall have the right to withdraw its request for Landlord’s consent to the proposed transfer (“Withdrawal Right”), provided Tenant exercises such Withdrawal Right within five (5) business days after receipt of Landlord’s Sublet/Termination Notice.  If Tenant timely exercises its Withdrawal Right, the Lease shall continue in full force and effect as if Tenant had not requested Landlord’s consent to the proposed transfer.

In the event Landlord exercises the option to sublet the Sublet Space, the term of the subletting from the Tenant to Landlord shall be the term set forth in the Notice and shall be on such terms and conditions as are contained in this Lease to the extent applicable,

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except that the Landlord shall have the right to further sublet the Sublet Space, in its sole and absolute discretion.

If Landlord fails to exercise either of its options within the said thirty (30) day period, the Tenant may submit to Landlord within twenty (20) days after said period a copy of the proposed assignment or sublease and such information concerning the proposed assignment or sublease as may be requested by Landlord for Landlord’s review.  If Landlord, in its reasonable discretion, approves in writing the terms of the proposed assignment or sublease and the proposed assignee or sublessee but a fully executed counterpart of such assignment or sublease is not delivered to Landlord within sixty (60) days after the date of Landlord’s approval, then Landlord’s approval of the proposed assignment or sublease shall be deemed null and void and Tenant shall again comply with all the conditions of this section as if the Notice and options hereinabove referred to had not been given and received.

(c)           Assignment under the Lease.  The following shall be deemed to be an assignment under this Lease:

(i)            the sale, transfer or creation of a total of more than Fifty Percent (50%) of the shares of the stock of a corporation, or more than Fifty Percent (50%) of the ownership interests of any other type of entity which is then the Tenant under this Lease, including, but not limited to, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, limited liability companies, and limited partnership associations; or

(ii)           the merger of the Tenant with another entity whereby the Tenant is not the surviving entity; or

(iii)          the conversion of the Tenant into another entity; or

(iv)          if the Tenant is a general or limited partnership, its registration with the Colorado Secretary of State’s office pursuant to C.R.S. Section 7-60-144; or

(v)           if the Tenant is a general or limited partnership formed on or before December 31, 1997, its election to be governed by C.R.S. Section 7-64-101, et seq.

(d)           Tenant agrees to pay to Landlord, within thirty (30) days after invoice from Landlord therefor, reasonable costs incurred by Landlord in connection with any request by Tenant for Landlord to consent to an assignment or subletting by Tenant, not to exceed $1,000.00 in any one instance provided that Tenant utilizes Landlord’s standard forms.

(e)           If Landlord fails to exercise either of its options under Subsection (b) above, and if this Lease is assigned or if the Premises or any part thereof is sublet or occupied by anybody other than Tenant, Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of all of the Excess Sublease Rent (as hereinafter defined) less the reasonable and customary out-of-pocket transaction costs incurred by Tenant in connection with such subletting or assignment, including attorney’s fees, brokerage commissions, and alteration costs (which transaction costs shall be amortized on a straight-line basis over the sublease or assignment term).  Excess Sublease Rent shall include all rents, additional charges, and any and all other consideration payable to Tenant by the subtenant or assignee for or by reason of such sublease or assignment and which are, in the aggregate, in excess of the rent payable under this Lease for the subleased or assigned space during the term of the sublease or assignment, and shall include but not be limited to any sums paid for the sale or rental of Tenant’s fixtures, leasehold improvements, equipment, furniture, furnishings, or other personal property, and sums paid for services provided by Tenant to such subtenant (including, without limitation, secretarial, word-processing, receptionist, conference room, library, etc.).

Any amounts payable by Tenant under this Subsection (e) shall be paid by Tenant to Landlord as and when amounts on account thereof are paid, by any subtenant or assignee to Tenant, and Tenant agrees to promptly advise Landlord thereof and furnish such information and documentation with regard thereto as Landlord may request from time to time.

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Landlord shall have the right at any time and from time to time for up to two (2) years following the Expiration Date, upon prior notice to Tenant to audit and inspect Tenant’s books, records, accounts, and federal income tax returns to verify the determination of Additional Rent payable under this section.

(f)            If this Lease is assigned or if the Premises or any part thereof is sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent and Additional Rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of Tenant’s covenants contained in this Lease or the acceptance of the assignee, subtenant or occupant as Tenant, or a release of Tenant from further performance by Tenant of covenants on the part of Tenant herein contained.

(g)           Any consent by Landlord to a particular assignment or sublease shall not constitute Landlord’s consent to any other or subsequent assignment or sublease.  Any assignment, subletting, or occupancy without Landlord’s prior written consent shall be voidable by Landlord and shall, at the option of Landlord, constitute an Event of Default (as defined in Section 23 hereof) under this Lease.

(h)           In the event of a permitted subletting or assignment, any and all allowances, concessions and options set forth in this Lease shall, effective as of the date of the subletting or assignment, be deemed null and void, it being understood that said allowances, concessions and options were solely for the benefit of the original Tenant.  In no event shall this be deemed to retroactively void any allowances or concessions disbursed prior to the subletting or assignment.

(i)            The parties agree that, without limiting Landlord’s discretion in connection with a requested transfer hereunder, it shall not be unreasonable for Landlord to withhold its consent if the requested subletting or assignment is (A) to any existing tenant or subtenant of the Building, or any other Building in metropolitan Denver then owned by Landlord, unless Landlord is not able to accommodate such tenant’s/subtenant’s expansion needs in the Building, or (B) to any person or entity with whom Landlord, or its agent, is or was negotiating and to or from whom Landlord, or its agent, has given or received any written or oral proposal within the past six (6) months regarding a lease of space in the Building.  It is understood and agreed that said subletting or assignment would damage Landlord in an amount which would be difficult to determine and the parties hereby agree that any such subletting or assignment shall be void and of no further force and effect and that, in the event of an assignment or subletting under the terms of subparagraph (A) above, Tenant shall be liable to Landlord for damages in an amount equal to the then prevailing market rental rate for the Building in which the subtenant or assignee was located, for new leases multiplied by the number of rentable square feet in the Premises which were sublet or assigned, which give a per annum rental amount, which amount shall be multiplied by the number of lease years of the sublease or assignment, pro rata for any partial year.  Said amount shall be due and payable upon demand from Landlord and shall be in addition to and not in limitation of any other rights or other remedies of Landlord under this Lease for default.

(j)            Intentionally Omitted.

(k)           In no event may Tenant assign this Lease or sublet all or any portion of the Premises nor is any proposed assignment or sublease effective if there exists at the time of the proposed assignment or sublease an Event of Default under the Lease (as defined in Section 23 hereof) or Tenant has failed to pay Rent when due.

(l)            All public advertisements of the assignment of the Lease or sublet of Premises, or any portion thereof, shall be subject to the prior written approval of Landlord, which shall not be unreasonably withheld.  Said public advertisements shall include, but not be limited to, the placement or display of any signs or lettering on the exterior of the Premises, or on the glass or any window or door of the Premises, or in the interior of the Premises if it is visible from the exterior.

(m)          Except for a Permitted Transfer (hereinafter defined) or a transfer to which Landlord has consented pursuant to the provisions hereof which creates a relationship directly between Landlord and such transferee, the listing of any name other than that of Tenant, whether

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on the doors of the Premises or the Building directory or otherwise, or the acceptance of payment for Rent or other charges from any person or entity other than Tenant, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others.

(n)           Notwithstanding anything to the contrary in this Article 17, Tenant shall have the right, upon ten (10) business days’ prior written notice to Landlord, to (i) sublet all or part of the Premises or otherwise share the Premises with any Affiliate (hereinafter defined); or (ii) assign this Lease to an Affiliate or a successor corporation or other successor entity either into which or with which Tenant is merged or consolidated or which acquired substantially all of Tenant’s assets and property; provided that (A) in the case of a successor corporation or other successor entity or a converted entity under Section 17(c)(iii), (iv) or (v), such successor corporation, other successor entity or converted entity assumes substantially all of the obligations and liabilities of Tenant and shall have assets, capitalization and net worth at least equal to the assets, capitalization and net worth of Tenant as of the date of this Lease as determined by generally accepted accounting principles, and (B) Tenant shall provide in its notice to Landlord information evidencing that the assignee is an Affiliate and/or a successor corporation, other successor entity or converted entity meeting the requirements set forth herein.  For purposes of this Section 17(n), the term “Affiliate” shall mean any entity controlling, controlled by or under common control with Tenant.

18.          CONDITION OF PREMISES.  Except for any Punch List Items (as defined in the Workletter Agreement), Tenant’s taking possession of the Premises shall be conclusive evidence as against the Tenant that the Premises were in good order and satisfactory condition when the Tenant took possession, except as to latent defects.  No promise of the Landlord to alter, remodel, repair or improve the Premises or the Building and no representation respecting the condition of the Premises or the Building have been made by Landlord to Tenant, other than the Workletter Agreement, attached hereto as Exhibit ”B”.  At the termination of this Lease, the Tenant shall return the Premises broom-clean and in as good condition as when the Tenant took possession;  (i) ordinary wear or (ii) damage caused by fire or other casualty not caused by Tenant or Tenant’s agents, employees or invitees excepted, failing which the Landlord may restore the Premises to such condition and the Tenant shall pay the cost thereof on demand.  Notwithstanding anything to the contrary in the foregoing or in Section 19(g) hereof, Tenant shall be required to remove upon the expiration or other termination of this Lease, without further notice from Landlord, telecommunications lines (as that term is defined in Section 37[a]) as well as any other electronic, computer, telecommunications, data and/or any other cabling or wiring and related equipment (all, collectively, “cabling”) which is installed by or for the benefit of Tenant and located in the Premises or any other portion of the Building, unless Landlord notifies Tenant in writing prior to such expiration (or, in the event of such earlier termination, as soon as reasonably practicable after such termination) that Landlord elects to have Tenant leave such cabling in the Building.

19.          RULES AND REGULATIONS.  The Tenant agrees to comply with the following rules and regulations and with such reasonable modifications thereof and additions thereto as the Landlord may hereafter from time to time make for the Building.  The Landlord shall not be responsible for the non-observance by any other tenant of any said rules and regulations:

(a)           The Tenant shall occupy and use the Premises during the Term for general office and no other purpose whatsoever.

(b)           The Tenant shall not exhibit, sell or offer for sale on the Premises or in the Building any article or thing except those articles and things essentially connected with the stated use of the Premises by the Tenant without the advance consent of the Landlord.

(c)           The Tenant will not make or permit to be made any use of the Premises or any part thereof which would violate any of the covenants, agreement, terms, provisions and conditions of this Lease or which directly or indirectly is forbidden by public law, ordinance or governmental regulation or which may be dangerous to life, limb, or property, or which may invalidate or increase the premium cost of any policy of insurance carried on the Building or covering its operation, or which will suffer or permit the Premises or any part thereof to be used in any manner or anything to be brought into or kept therein which, in the judgment of Landlord,

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shall in any way impair or tend to impair the character, reputation or appearance of the Property as a high quality office building, or which will impair or interfere with or tend to impair or interfere with any of the services performed by Landlord for the Property.  Bicycles or other vehicles shall not be permitted in the offices, halls, corridors and elevators in the Building, nor shall any obstruction of sidewalks or entrances of the Building by such be permitted.

(d)           The Tenant shall not display, inscribe, print, paint, maintain or affix on any place in or about the Building (except within the Premises and not visible from outside the Premises) any sign, notice, legend, direction, figure or advertisement, except on the designated areas of the Premises and on the Directory Board, and then only such name(s) and matter, and in such color, size, style, place and materials, as shall first have been approved by the Landlord, which approval shall not be unreasonably withheld; provided, however, it shall not be considered unreasonable for Landlord to withhold consent if the requested posting is not consistent with what Landlord designates as standard for the Building.  The listing of any name other than that of Tenant, whether on the door of the Premises, on the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises or be deemed to be the written consent of Landlord mentioned in Section 17, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant.

(e)           The Tenant shall not advertise the business, profession or activities of the Tenant conducted in the Building in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession or activities, and shall not use the name of the Building for any purposes other than that of the business address of the Tenant, and shall never use any pictures or likeness of the Building in any circulars, notices, advertisements or correspondence without the Landlord’s consent.

(f)            No additional locks or similar devices shall be attached to any door or window outside the Premises without Landlord’s prior written consent, which consent shall not be unreasonably withheld; provided, however that Tenant shall provide Landlord with copies of any keys for any such locks and Landlord shall at all times have the ability to access the Premises as provided herein.  No keys for any door other than those provided by the Landlord shall be made.  Tenant will be supplied, free of charge, with two keys for the main door entering the Premises.  If more than two keys for one lock are desired, the Landlord will provide the same upon payment by the Tenant.  All keys shall remain the property of the Landlord and must be returned to the Landlord at the expiration or termination of this Lease.  Tenant shall also provide Landlord the explanation of the combination to all locks for safes, safe cabinets and vault doors, if any, in the Premises.

(g)           Following the initial construction and installations conducted pursuant to the Workletter Agreement, the Tenant shall not make any alterations, improvements or additions to the Premises including, but not limited to, wall coverings, floor coverings and special lighting installations, without the Landlord’s advance written consent in each and every instance, which approval shall not be unreasonably withheld.  Notwithstanding anything contained to the contrary herein, Tenant shall, without Landlord’s consent, but upon prior written notice to Landlord, have the right to make alterations or minor decorations within the Premises where the aggregate cost of such alterations or decorations is less than $5,000 (“Minor Decorations”), employing contractors selected by Tenant and reasonably approved by Landlord, provided such Minor Decorations are in keeping with the standards of Tenant’s existing Premises and do not affect the structure of the Building or the Building mechanical systems.  In the event Tenant desires to make any alterations, improvements or additions other than Minor Decorations, Tenant shall first submit to Landlord plans and specifications therefor and obtain Landlord’s written approval thereof prior to commencing any such work.  All alterations, improvements or additions, including Minor Decorations, whether temporary or permanent in character, made by Landlord or Tenant in or upon the Premises shall become Landlord’s property and shall remain upon the Premises at the termination of this Lease without compensation to Tenant (excepting only Tenant’s movable office furniture, trade fixtures, office and professional equipment provided, however, that Landlord shall have the right to require Tenant to remove such alterations, improvements or additions, at Tenant’s cost, upon the termination of this Lease and to repair any damage to the Premises resulting therefrom.  Without limiting the foregoing, Landlord will also have the right to require Tenant to remove any alterations or improvements constructed as part of the initial construction if Landlord notifies Tenant at the time of approval of the Tenant Working Drawings that Tenant will be required to remove such installations.

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(h)           Neither Tenant, its clerks, agents or servants, shall bring into the Building, without written consent, and under the direction of Landlord, gas pipes or any telephone, telegraph or electric wires for any purpose.

(i)            All persons entering or leaving the Building after hours on Monday through Friday, or at any time on Saturdays, Sundays or holidays, may be required to do so under such regulations as the Landlord may impose.  The Landlord may exclude or expel any peddler.

(j)            The Tenant shall not overload any floor.  The Landlord may direct the time and manner of delivery, routing and removal, and the location of safes and other heavy articles.

(k)           Unless the Landlord gives advance written consent, the Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, refrigerating (other than use of standard non-commercial refrigerators for keeping food cool) or heating device or air-conditioning apparatus in or about the Premises, or carry on any mechanical business therein, or use the Premises for housing accommodations or lodging or sleeping purposes, or do any cooking therein (other than use of standard non-commercial microwave ovens), or use any illumination or other electric light, or use or permit to be brought into the Building any inflammable fluids such as gasoline, kerosene, naphtha, and benzene, or any explosives, radioactive materials or other articles deemed extra hazardous to life, limb or property except in a manner which would not violate any ordinance or governmental regulations.  The Tenant shall not use the Premises for any illegal or immoral purpose.

(l)            The Tenant shall cooperate fully with the Landlord to assure the effective operation of the Building’s air-conditioning system, including the closing of venetian blinds and drapes, and if windows are operable to keep them closed when the air-conditioning system is in use.

(m)          The Tenant shall not contract for or perform any work or service which might involve the employment of labor incompatible with the Building employees or employees of contractors doing work or performing services by or on behalf of the Landlord.

(n)           No freight, furniture, packages of bulky matter of any description will be received in the Building or carried up or down in the elevators except during such hours as the management may prescribe.

(o)           The sidewalk, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by the Tenant or used for any purpose other than for ingress to and egress from its Premises.  The halls, passages, exits, entrances, elevators, stairways and roof are not for the use of the general public and the Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of the Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom the Tenant normally deals in the ordinary course of Tenant’s business unless such persons are engaged in illegal activities.  No tenant and no employees or invitees or any tenant shall go upon the roof or mechanical floors of the Building.

(p)           Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals other than guide dogs for disabled visitors or employees or birds be brought in or kept in or about the Premises or the Building.

(q)           Tenant shall use reasonable efforts to ensure that the doors, and windows, if operable, of the Premises are closed and securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant’s employees leave the Building, and that all electricity shall likewise be carefully shut off so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries or losses sustained by other tenants or occupants of the Building or Landlord.

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In addition to all other liabilities for breach of any covenant of this section, the Tenant shall pay to the Landlord an amount equal to any increase in insurance premiums payable by the Landlord or any other tenant in the Building caused by such breach.

20.          REPAIRS.  Tenant shall give to Landlord prompt written notice of any damage to, or defective condition in any part or appurtenance of the Building’s plumbing, electrical, heating, air-conditioning or other systems serving, located in, or passing through the Premises.  Subject to the provisions of this Section 20, the Tenant shall, at the Tenant’s own expense, keep the Premises in good order, condition and repair during the Term, except that the Landlord, at the Landlord’s expense (unless caused by the fault or negligence of the Tenant, its contractors, agents, or employees) shall keep in repair the elevators, electrical lines, plumbing fixtures located in the Building (except those installed by Tenant) heating and air-conditioning equipment, outside walls, including windows, and roof.  In addition, if any damage to the Building or Premises results from any act or neglect of Tenant or Tenant’s agents, employees or invitees, the Landlord may, at the Landlord’s option, repair such damages and the Tenant shall thereupon pay to the Landlord the total cost of such repair.  The Tenant at the Tenant’s expense, shall comply with all laws and ordinances, and all rules and regulations of all governmental authorities and of all insurance bodies at any time in force, applicable to the Premises or to the Tenant’s use thereof, except that the Tenant shall not hereby be under any obligation to comply with any law, ordinance, rule or regulation requiring any structural alteration of or in connection with the Premises, unless such alteration is required by reason of a condition which has been created by, or at the instance of, the Tenant, or is required by reason of a breach of any of the Tenant’s covenants and agreements hereunder.  Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railing, ceiling, floor covering, partitions, or any other property installed in the Premises by the Tenant.

21.          UNTENANTABILITY.  If the Premises are made untenantable in whole or in part by fire or other casualty the Rent, until repairs shall be made or the Lease terminated as hereinafter provided, shall be apportioned on a per diem basis according to the part of the Premises which is usable by the Tenant, if, but only if, such fire or other casualty be not caused by the gross negligence or willful misconduct of the Tenant, its contractors, agents, or employees.  If such damage shall be so extensive that the Premises cannot be restored to Building Standard by the Landlord within a period of four (4) months, either party shall have the right to cancel this Lease by notice to the other given at any time within thirty (30) days after the date of such damage, except that if such fire or casualty resulted from the gross negligence or willful misconduct of  Tenant the Tenant shall have no right to cancel.  If a portion of the Building other than the Premises shall be so damaged that in the opinion of the Landlord the Building should be restored in such a way as to alter the Premises materially, the Landlord may cancel this Lease by notice to the Tenant given at any time within thirty (30) days after the date of such damage.  In the event of giving effective notice pursuant to this section, this Lease and the term and the estate hereby granted shall expire on the date fifteen (15) days after the giving of such notice as fully and completely as if such date were the date hereinbefore set for the expiration of the Term of this Lease.  If this Lease is not so terminated, the Landlord will promptly repair the damage.  In the event that Landlord has not completed any such repairs within six (6) months after the date of casualty (as the same may be extended, not to exceed eight [8] months after the date of casualty, due to delays outside Landlord’s reasonable control) (the “Outside Repair Date”), at any time after the Outside Repair Date, but prior to the date that such repairs are completed, Tenant may give notice to Landlord of its intent to terminate this Lease, and if Landlord still fails to complete the repairs within thirty (30) days of Tenant’s notice, Tenant may, as its sole and exclusive remedy, terminate this Lease.

22.          EMINENT DOMAIN.

(a)           In the event that title to the whole or any part of the Premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title and the Landlord shall be entitled to receive the entire award, the Tenant hereby assigning to the Landlord the Tenant’s interest therein, if any; provided, however, that Tenant shall be entitled to claim any proceeds for the taking of Tenant’s trade fixtures, equipment or personal property and for relocation expenses so long as any such claim does not diminish any award to Landlord.

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(b)           In the event that title to a part of the Building other than the Premises shall be so condemned or taken and if in the opinion of the Landlord, the Building should be restored in such a way as to alter the Premises materially, the Landlord may terminate this Lease and the term and estate hereby granted by notifying the Tenant of such termination within sixty (60) days following the date of vesting of title, and this Lease and the term and estate hereby granted shall expire on the date specified in the notice of termination, not less than sixty (60) days after the giving of such notice, as fully and completely as if such date were the date hereinbefore set for the expiration of the Term of this Lease, and the Rent hereunder shall be apportioned as of such date.

23.          TENANT’S DEFAULT AND LANDLORD’S REMEDIES.  All rights and remedies of the Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law.  In addition to the other remedies in this Lease provided, the Landlord shall be entitled to restraint by injunction of the violation or attempted violation of any of the covenants, agreements or conditions of this Lease.

(a)           Any one of the following events shall be deemed to be an “Event of Default” by Tenant under this Lease:

(i)            Tenant fails to pay any installment of Annual Base Rental or Additional Rent when due, or any other payment or reimbursement to Landlord required herein when due, and such failure shall continue for a period of five (5) days from the date such payment was due and Landlord shall provide Tenant notice of said non-payment and allow an additional five (5) day period to cure; however, Landlord shall only be required to provide said notice once to Tenant in any twelve (12) month period;

(ii)           Tenant defaults in the prompt and full performance of any other provision of this Lease and such default continues for thirty (30) days after notice from Landlord to Tenant; or, if such breach or noncompliance cannot be reasonably cured within such thirty (30) day period, Tenant does not, in good faith, commence to cure such breach or noncompliance within such thirty (30) day period;

(iii)          If the Tenant shall (a) apply for consent to the appointment of a receiver, trustee or liquidator of the Tenant or of all or a substantial part of its assets; (b) admit in writing its inability to pay its debts as they come due; (c) make a general assignment for the benefit of creditors; (d) file a petition or any answer seeking reorganization or arrangement with creditors or to take advantage of any insolvency law other than the Federal Bankruptcy Code; (e) file an answer admitting the material allegations of a petition filed against the Tenant in any reorganization or insolvency proceeding, other than a proceeding commenced pursuant to the Federal Bankruptcy Code, or if any order, judgment or decree shall be entered by any court of competent jurisdiction, except for a bankruptcy court or a federal court sitting as a bankruptcy court, adjudicating the Tenant insolvent or approving a petition seeking reorganization of the Tenant or appointing a receiver, trustee or liquidator of the Tenant or of all or a substantial part of its assets; or (f) make a transfer in fraud of creditors, then in any such events, in addition to other rights provided for herein, Landlord may give to the Tenant a notice of intention to end the Term of this Lease, specifying a day not earlier than ten (10) days thereafter, and upon the giving of such notice the Term of this Lease and all rights, title and interest of the Tenant hereunder shall expire as fully and completely on the day so specified as if that day were the date herein specifically fixed for the expiration of the Term;

(iv)          Intentionally Omitted;

(v)           Tenant’s interest under this Lease or in the Premises is transferred or passes to, or devolves upon, any other person or entity in violation of Section 17 of this Lease;

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(vi)          Tenant shall fail to discharge any lien placed upon the Premises or upon Tenant’s interest in the Premises by any creditor and such lien is not discharged or disposed of in accordance with this Lease; or

(vii)         Except in such circumstances that would constitute a Permitted Transfer pursuant to the provisions of Section 17(n) hereof, the commencement of steps or proceedings toward the dissolution, winding up, or other termination of the existence of the Tenant or of any guarantor of the Tenant’s obligations, or toward the liquidation of either of their respective assets.

(b)           Upon the occurrence of any of such Event of Default described herein, Landlord shall have the option to pursue any or all of the following remedies:

(i)            If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, the Landlord may, but shall not be obligated to, after reasonable notice to Tenant and without waiving or releasing the Tenant from any obligation under this Lease, make such payment or perform such other act to the extent the Landlord may deem desirable, and in connection therewith to pay expenses and employ counsel.  The Tenant agrees to pay reasonable attorney’s fees if legal action is required to enforce performance by Tenant of any condition, obligation or requirement hereunder.  All sums so paid by the Landlord and all expenses in connection therewith, together with interest thereon at the rate of Twelve Percent (12%) per annum from the date of payment, shall be deemed Additional Rent hereunder and payable at the time of any installment of Rent thereafter becoming due, and the Landlord shall have the same rights and remedies for the non-payment thereof, or of any other Additional Rent, as in the case of default in the payment of Rent.

(ii)           Terminate this Lease by giving to the Tenant a notice of intention to end the Term of this Lease, specifying a day not earlier than three (3) days thereafter, and, upon the giving of such notice, this Lease shall terminate on the day so specified, except as to Tenant’s liability to pay rent and other charges for the remaining Term of this Lease, together with all arrearages, whereupon Tenant shall immediately surrender possession of the Premises to Landlord, and hereby grants to the Landlord full and free license to enter into and upon the Premises in such event with or without process of law and to repossess the Premises as the Landlord’s former estate and, if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Annual Base Rent, Additional Rent, or other charges, enter upon and take possession of the Premises and expel or remove Tenant, as well as any other person who may be occupying such Premises or any part thereof, by force if necessary, including removal of all personal property therein, without being liable for prosecution or any claim of damages therefor, and change the locks on the Premises.

(iii)          If the Landlord becomes entitled so to elect, and the Landlord elects, without terminating the Lease, to endeavor to relet the Premises, the Landlord may, at the Landlord’s option, enter into the Premises, remove the Tenant’s signs, personal property, and other evidence of tenancy, and take and hold possession thereof, without such entry and possession terminating the Lease or releasing the Tenant, in whole or in part, from the Tenant’s obligation to pay the Rent hereunder for the full Term as provided in the Lease.  Upon and after entry into possession without termination of the Lease, the Landlord may relet the Premises or any part thereof for the account of the Tenant to any person, firm or corporation other than the Tenant for such rent, for such time and upon such terms as the Landlord shall determine to be reasonable.  In any such case, the Landlord may make repairs, alterations and additions in or to the Premises and redecorate the same to the extent deemed by the Landlord necessary or desirable.

(c)           If this Lease is terminated under the provisions of Section 23(b)(ii) or if the Landlord shall reenter the Premises under the provisions of Section 23(b)(iii), or in the event of the termination of this Lease, or of reentry, by or under any summary or other proceeding or action of any provision of law by reason of default hereunder on the part of the Tenant, Tenant

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shall pay to Landlord as damages in an amount equal to the Rent and other sums which would have been owed by Tenant hereunder for the balance of the Term had this Lease, less the net proceeds, if any, of any reletting of the Premises by Landlord, after deducting all Landlord’s expenses in connection with such reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, expenses of employees, alteration and repair costs, and expenses of preparation for such reletting of the Premises.  As used herein, the phrase “Preparation for such Reletting” shall mean restoring the Premises to a condition that is suitable for a new tenant, including any and all costs for tenant finish work for a new tenant.  Landlord shall be entitled to collect such damages from Tenant monthly on the days on which the Rent and other amounts would have been payable under this Lease, and Landlord shall be entitled to receive the same from Tenant on each such day.  Alternatively, at the option of Landlord, Landlord shall be entitled to recover forthwith against Tenant, as damages for the loss of the bargain and not as a penalty:  (i) the worth at the time of award of any unpaid Rent and other sums due and payable which had been earned prior to return of possession of the Premises to Landlord; plus (ii) the worth at the time of award of the amount of unpaid Rent and other sums which would have been payable after the date of return of possession of the Premises until the time of award which exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided by Landlord; plus (iii) the worth at the time of award of the amount by which the unpaid Rent including sums for estimated Operating Costs which would have been incurred and any other sums due for the balance of the Term after the time of award that exceeds the amount that Tenant proves could be reasonably avoided by Landlord; plus (iv) any other amounts to compensate Landlord for the detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord:  (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (v) at Landlord’s election, such other amounts and remedies in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of Colorado.  Any amounts owed by Tenant to Landlord shall bear pre- and post-judgment interest at Twelve Percent (12%) compounded annually until paid.

The “worth at the time of award” of the amounts due prior to the date of the award is computed by allowing interest compounded annually, at the rate of Two Percent (2%) over the prime rate charged from time to time by Wells Fargo Bank, N.A., in Denver, Colorado, or its successor(s), on all unpaid Rent and other sums due and payable.  The “worth at the time of award” of the amounts due after the date of the award is computed by discounting such amount at the discount rate equal to the prime rate charged from time to time by Wells Fargo Bank, N.A., in Denver, Colorado, or its successor(s).

(d)           Tenant agrees it would be difficult for the Landlord to prove the amount of damages it will incur as a result of any breach of the Lease by Tenant.  Tenant hereby agrees that providing for the above liquidated sums in addition to, and not in lieu of, other amounts due and owing amount to a reasonable sum due and owing the Landlord in the event of a breach of this Lease by Tenant.

(e)           Any and all property which may be removed from the Premises by the Landlord pursuant to the authority of the Lease or of law, to which the Tenant is or may be entitled, may be handled, removed or stored by the Landlord at the risk, cost and expense of the Tenant, and the Landlord shall in no event be responsible for the value, preservation or safekeeping thereof.  The Tenant shall pay to the Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in the Landlord’s possession or under the Landlord’s control.  Any such property of the Tenant not removed from the Premises or retaken from storage by the Tenant within thirty (30) days after the end of the Term or of the Tenant’s right to possession of the Premises, however terminated, shall be conclusively deemed to have been forever abandoned by the Tenant and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit.

24.          SALE AND ASSIGNMENT.  Landlord shall have full right to sell or assign its interest and rights to this Lease to any other person, firm or corporation capable of accepting such sale or assignment.  In the event that the purchaser or assignee expressly covenants and

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agrees to accept and assume all the covenants, conditions and stipulations of the Lease and to comply with and be bound thereby, and to assume all liability of Landlord theretofore or thereafter arising, then Landlord shall thereupon be released from all liability under this Lease, and thereafter all liability in respect thereof shall rest upon the assignee alone.  Any purchaser or assignee from Landlord may, subject to the provision hereof and upon the same terms and conditions, sell or assign his or its interest in and rights to this lease and like subsequent assignments may be made from time to time by anyone at any time owning such interest in and rights to this lease.

25.          SUBORDINATION OF LEASE.  The rights of the Tenant under this Lease shall be and are subject and subordinate at all times to all ground leases, and/or underlying leases, if any, now or hereafter in force against the Property, and to the lien of any mortgage or mortgages now or hereafter in force against such leases and/or the Property, and to all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof.  This section is self-operative and no further instrument of subordination shall be required.  In confirmation of such subordination, Tenant shall promptly execute such further commercially reasonable instruments as may be requested by the Landlord.  Tenant, at the option of any mortgagee, agrees to attorn to such mortgagee in the event of a foreclosure sale or deed in lieu thereof.

26.          NOTICES AND CONSENTS.  All notices, demands, requests, consents or approvals which may or are required to be given by either party to the other shall be in writing and shall be deemed given when sent by United States Certified or Registered Mail, postage prepaid, (a) if for the Tenant, addressed to the Tenant at the Building, or at such other place as the Tenant may from time to time designate by notice to the Landlord, or (b) if for the Landlord, addressed to the management office of the Landlord in the Building, with a copy to Landlord c/o J.P. Morgan Investment Management, Inc., 245 Park Avenue, Second Floor, New York, New York  10167, Attention:  Asset Manager, or at such other place as the Landlord may from time to time designate by notice to the Tenant.  All consents and approvals provided for herein must be in writing to be valid.  The date of service of such notices shall be the date such notices are received or refused, as the case may be, as evidenced by addressee’s registry or certification receipt.  If the term “Tenant” as used in this Lease refers to more than one person, any notice, consent, approval, request, bill, demand or statement, given as aforesaid to any one of such persons shall be deemed to have been duly given to Tenant.

27.          SPRINKLERS.  If there now is or shall be installed in the Building a “sprinkler system”, and such system or any of its appliances shall be damaged or injured or not in proper working order by reason of any act or omission of the Tenant, Tenant’s agents, servants, employees, licensees or visitors, the Tenant shall forthwith restore the same to good working conditions at its own expense, and if the Board of Fire Underwriters of Fire Insurance Exchange or any bureau, department or official of the state or city government, require or recommend that any changes, modifications, alterations or additional sprinkler heads or other equipment be made or supplied by reason of the Tenant’s business, or the location of partitions, trade fixtures, or other contents, of the Premises, or for any other reason, or if any such changes, modifications, alterations, additional sprinkler heads or other equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate as fixed by said Exchange, or by any fire insurance company, Tenant shall, at the Tenant’s expense, promptly make and supply such changes, modifications, alterations, additional sprinkler head or other equipment.

28.          NO ESTATE IN LAND.  This contract and Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; and Tenant has only a usufruct which is not subject to levy and sale.

29.          INVALIDITY OF PARTICULAR PROVISIONS.  If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future laws or any rule or regulation of any governmental body or entity, effective during its term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is, in the sole determination of Landlord, essential to the rights of both parties in which event Landlord has the right to terminate this Lease on written notice to Tenant.

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30.          WAIVER OF BENEFITS.  Tenant waives the benefits of all existing and future Rent Control Legislation and Statutes and similar governmental rules and regulations, whether in time of war or not, to the extent permitted by law.

31.          WAIVER OF TRIAL BY JURY.  It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of landlord and tenant, Tenant’s use or occupancy of the Premises, and any emergency statutory or any other statutory remedy.

32.          SECURITY DEPOSIT.  See Rider to Lease, Paragraph 7.

33.          SUBSTITUTE PREMISES.  Intentionally Omitted.

34.          PARKING.  Tenant shall have the right, during the term of this Lease, to rent unreserved garage stalls for the parking of motor vehicles used by Tenant, its officers and employees at a ratio of one (1) such stall for every one thousand (1,000) rentable square feet leased by Tenant, at the monthly rates and upon the terms and conditions as may from time to time be established by Landlord, or the operator of the garage facility.  Such garage stalls shall be at locations designated by Landlord or the operator of the garage facility.  In the event Tenant does not continuously and at all times following that date which is six (6) months following the Commencement Date elect to pay rent on the garage stalls, Landlord shall have the right to cancel Tenant’s right to use said garage stalls.  In addition, Tenant shall have the right to convert up to eight (8) of the foregoing unreserved garage stalls to stalls in the reserved area of the parking garage facility.  In the event that Tenant elects to convert such stalls to reserved stalls, the use of such reserved stalls shall be subject to the terms and conditions of this paragraph, except that they shall be located in the reserved area of the parking garage, as such area may be designated by Landlord or the operator of the garage facility from time to time, and Tenant acknowledges that the designated area for such reserved parking spaces will not necessarily be located close to the Building entrances or elevators or otherwise “close in” parking.  In no event shall Tenant be entitled to utilize parking spaces in excess of the foregoing 1:1,000 parking ratio, taking into account both reserved and unreserved spaces.  The current parking charges are $155.00 per space per month (plus any taxes thereon) for unreserved spaces and $210.00 per space per month (plus any taxes thereon) for reserved spaces, which rates are subject to change from time to time as more fully set forth above.  In addition, and subject to availability, Landlord will provide Tenant with additional permits allowing access to unreserved spaces in the Parking Facilities (each, a “Month-to-Month Permit” and collectively, the “Month-to-Month Permits”) upon no less than thirty (30) days’ prior written request by Tenant (“Tenant’s Request”).  The foregoing Month-to-Month Permits shall be made available on a month-to-month basis only, subject to availability, and either Landlord or Tenant shall have the ability to cancel any or all of the Month-to-Month Permits at any time upon thirty (30) days’ prior written notice.  In the event that such requested Month-to-Month Permits are not then available at the time that Tenant provides Tenant’s Request, Landlord shall so advise Tenant, and Tenant shall revise its Month-to-Month Permit request to a number which is mutually agreeable to the parties, based on, among other things, availability of the requested Month-to-Month Permits.  In no event will Landlord have any obligation to provide Month-to-Month Permits if the same are not then available, and Landlord shall have no obligation to cause any such Month-to-Month Permits to be made available; provided, however, Landlord agrees that Tenant shall have preference for Month-to-Month Permits over parkers in the garage that are not tenants of the Building.  If such Month-to-Month Permits are then available, Tenant shall pay Landlord’s then current parking charges for each Month-to-Month Permit (plus any taxes thereon) from the date of the taking of such Month-to-Month Permits on a month-to-month basis, subject to termination by either party as provided above.  During the period of use of any such Month-to-Month Permits by Tenant, such Month-to-Month Permits shall be subject to all other terms and conditions related to parking contained in the Lease, including without limitation all terms and conditions of this Paragraph.

35.          BROKERAGE.  See Rider to Lease, Paragraph 9.

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36.          ENVIRONMENTAL PROVISIONS.

(a)           Tenant’s Representations, Warranties and Covenants.  Tenant represents, warrants and covenants that (1) the Premises will not be used for any dangerous, noxious or offensive trade or business and that it will not cause or maintain a nuisance there, (2) it will not bring, generate, treat, store, use or dispose of Hazardous Substances (as hereinafter defined) at the Premises, (3) it shall at all times comply with all Environmental Laws (as hereinafter defined) and shall cause the Premises to comply, and (4) Tenant will keep the Premises free of any lien imposed pursuant to any Environmental Laws.  Premises for the purposes of this Article shall mean the Building and Property, including parking areas.  Upon the request of Landlord, Tenant shall provide Landlord with evidence of compliance with Environmental Laws.  At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord free of any and all Hazardous Substances and in compliance with all Environmental Laws and to the complete satisfaction of Landlord.

(b)           Subject to the provisions of this Article and to the prior written consent by Landlord which may be given or withheld in Landlord’s sole discretion, Tenant shall be entitled to use and store only those Hazardous Substances that are necessary for Tenant’s business, provided that such usage and storage is in full compliance with all applicable Environmental Laws.

(c)           Tenant will cooperate with Landlord and allow Landlord and Landlord’s representatives access to any and all parts of the Premises and to the records of Tenant with respect to the Premises for environmental inspection purposes at any reasonable time.  In connection therewith, Tenant hereby agrees that Landlord or Landlord’s representatives may perform any testing upon or of the Premises that Landlord deems reasonably necessary for the evaluation of environmental risks, costs, or procedures, including soils or other sampling or coring.

(d)           Violations — Environmental Defaults:

(i)            Tenant shall give to Landlord prompt verbal and follow-up written notice as soon as it becomes aware of any actual or threatened spills, releases or discharges of Hazardous Substances on the Premises, caused by the acts or omissions of Tenant or its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors.  Tenant covenants to promptly investigate, clean up and otherwise remediate any spill, release or discharge of Hazardous Substances caused by the acts or omissions of Tenant or its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors at Tenant’s sole cost and expense; such investigation, clean up and remediation to be performed in accordance with all Environmental Laws and to the reasonable satisfaction of Landlord, Landlord’s lenders, if any, and any governmental agency, and after Tenant has obtained Landlord’s written consent, which shall not be unreasonably withheld.  Tenant shall return the Premises to the condition existing prior to the introduction of any such Hazardous Substances.

(ii)           In the event of (1) a violation of an Environmental Law which is Tenant’s responsibility hereunder, (2) a release, spill or discharge of a Hazardous Substance on or from the Premises, (3) the discovery of an environmental condition requiring response which violation, release, or condition is attributable to the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors, or (4) an emergency environmental condition which is Tenant’s responsibility hereunder (collectively “Environmental Defaults”), Landlord shall have the right, but not the obligation, to immediately enter the Premises, to supervise and approve any actions taken by Tenant to address the violation, release or environmental condition; and in the event Tenant fails to immediately address such violation, release, or environmental condition, or if the Landlord deems it necessary, then Landlord may perform, at Tenant’s expense, any lawful actions necessary to address the violation, release, or environmental condition.

(iii)          Landlord has the right, but not the obligation, to cure any Environmental Defaults, has the right to suspend some or all of the operations of the Tenant until it has determined to is sole satisfaction that appropriate measures

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have been taken, and has the right to terminate the Lease upon the occurrence of an Environmental Default.

(e)           Additional Rent.  Any expenses which the Landlord incurs, which are to be at Tenant’s expense pursuant to this Article, will be considered Additional Rent under this Lease and shall be paid by Tenant on demand by Landlord.

(f)            Indemnification.  Tenant shall indemnify, defend (with counsel approved by Landlord) and hold Landlord and Landlord’s affiliates, shareholders, directors, officers, employees and agents harmless from and against any and all claims, judgments, damages (including consequential damages), penalties, fines, liabilities, losses, suits, administrative proceedings, costs and expenses of any kind or nature, known or unknown, contingent or otherwise, which arise out of or in any way related to the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors during or after the term of this Lease (including, but not limited to, attorney, consultant, laboratory and expert fees and including without limitation, diminution in the value of the Premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises and damages arising from any adverse impact on marketing of space), arising from or related to the use, presence, transportation, storage, disposal, spill, release or discharge of Hazardous Substances on or about the Premises.

(g)           Definitions.

(i)            “Hazardous Substance” means (A) asbestos and any asbestos-containing material and any substance that is then defined or listed in, or otherwise classified pursuant to, any Environmental Laws or any applicable laws or regulations as a “hazardous substance”, “hazardous material”, “hazardous waste”, “infectious waste”, “toxic substance”, “toxic pollutant” or any other formation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or Toxicity Characteristic Leaching Procedure (TCLP) toxicity, (B) any petroleum and drilling fluids, produced waters, and other wastes associated with the exploration, development or production of crude oil natural gas, or geothermal resource, and (C) petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactivity material (including any source, special nuclear, or by-product material), and medical waste.

(ii)           “Environmental Laws” collectively means and includes all present and future laws and any amendments (whether common law, statute, rule, order, regulation or otherwise), permits, and other requirements or guidelines of governmental authorities applicable to the Premises and relating to the environmental and environmental conditions or to any Hazardous Substance (including, without limitation, CERCLA, 42 U.S.C. §9601, et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C., §6901, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. §1801, et seq.; the Federal Water Pollution Control Act, 33 U.S.C. §1251, et seq.; the Clean Air Act, 33 U.S.C. §7401, et seq.; the Clean Air Act, 42 U.S.C. §741, et seq.; the Toxic Substances Control Act, 15 U.S.C. §2601-2629; the Safe Drinking Water Act, 42 U.S.C. §300f-300j; the Emergency Planning and Community Right-To-Know Act, 42 U.S.C. §1101, et seq.; and any so-called “Super Fund” or “Super Lien” law, any law requiring the filing of reports and notices relating to hazardous substances, environmental laws administered by the Environmental Protection Agency, and any similar state and local laws and regulations, all amendments thereto and all regulations, orders, decisions, and decrees now or hereafter promulgated thereunder concerning the environment, industrial hygiene or public health or safety).

(h)           Survival.  The provisions of this Article shall survive the expiration or earlier termination of this Lease.

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37.          TELECOMMUNICATIONS.

(a)           Limitation of Responsibility.  Tenant shall have the right to use any telecommunication provider chosen by Tenant, subject to reasonable requirements of Landlord to allocate space in the Building’s conduits and/or equipment rooms.  In no instance shall Landlord charge a telecommunications provider chosen by Tenant fees, rents or other sums in order for such provider to serve Tenant in the Premises; provided, however, that nothing contained in the foregoing shall be deemed to preclude Landlord from charging any such telecommunications provider Landlord’s standard charge for access to areas outside the Premises, including without limitation, riser cables or terminal blocks.  If there is more than one tenant on a floor, Landlord will allocate hook ups to the terminal block based on the proportion of rentable square feet that each tenant occupies on the floor.  Tenant acknowledges and agrees that all telephone and telecommunications services desired by Tenant shall be ordered and utilized at the sole cost and expense of Tenant, subject to reimbursement from the tenant allowance. Subject to Landlord’s supervision and approval, Tenant shall have the right to use the riser cables by installing telecommunication lines from the Premises to the terminal block on the floor or floors on which the Premises are located (such lines, and any other voice/data cables, lines or wires used or installed by or for Tenant and serving the Premises are referred to as the “telecommunication lines”). Landlord makes no representations or warranties with respect to the capacity, suitability or design of the riser cables or terminal blocks.  The installation and hook-up of telecommunication lines by Tenant will be subject to Paragraph 21 of this Lease. Tenant will have no rights or interest in the riser cables and terminal blocks in the Building therein except as set forth herein.  Other than in the case of Landlord’s gross negligence or willful misconduct, Landlord shall not be liable for: (a) any damage to Tenant’s or its subtenants’ telephone lines, telephones or other equipment connected to the telecommunication lines, (b) interruption or failure of, or interference with, telephone or other service coming through the telecommunication lines to the Premises, or (c) unauthorized eavesdropping or wiretapping.  All telephone and telecommunications desired by Tenant must be ordered and utilized at the sole expense of Tenant. All of Tenant’s telecommunications equipment must be and remain solely in the Premises, in accordance with this Lease and with the reasonable rules and regulations adopted by Landlord from time to time. Unless otherwise specifically agreed to in writing, Landlord shall have no responsibility for the maintenance of Tenant’s telecommunications equipment, including wiring; nor for any wiring or other infrastructure to which Tenant’s telecommunications equipment may be connected.  Tenant agrees that, to the extent any such service is interrupted, curtailed or discontinued, unless caused by the gross negligence or willful misconduct of Landlord, Landlord shall have no obligation or liability with respect thereto and it shall be the sole obligation of Tenant at its expense to obtain substitute service.

(b)           Necessary Service Interruptions.  Landlord shall have the right, upon reasonable prior notice to Tenant, to interrupt or turn off telecommunications facilities in the event of emergency or as necessary in connection with repairs to the Building or installation of telecommunications equipment for other tenants of the Building.

(c)           Removal of Equipment, Wiring and Other Facilities.  Any and all telecommunications equipment installed in the Premises or elsewhere in the Building by or on behalf of Tenant, including wiring, or other facilities for telecommunications transmittal, shall be removed prior to the expiration or earlier termination of the Lease term, by Tenant at its sole cost or, at Landlord’s election, by Landlord at Tenant’s sole cost, with the cost thereof to be paid as Additional Rent.  Landlord shall have the right, however, upon written notice to Tenant to require Tenant to abandon and leave in place, without additional payment to Tenant or credit against Rent, any and all telecommunications wiring and related infrastructure, or selected components thereof, whether located in the Premises or elsewhere in the Building.  Tenant covenants that Tenant shall be the sole owner of such wiring and related infrastructure and shall have good right to surrender said wiring and related infrastructure, which is free of all liens and encumbrances and shall be in good working order.

(d)           New Provider Installations.  In the event that Tenant wishes at any time to utilize the services of a telephone or telecommunications provider whose equipment is not then servicing the Building, no such provider shall be permitted to install its lines or other equipment within the Building without first securing the prior written approval of the Landlord, which approval may not be unreasonably withheld, conditioned or delayed by Landlord. The parties agree that without limiting Landlord’s rights to reasonably approve and/or reasonably condition approval, Landlord will not be deemed to have unreasonably withheld its approval if the Building does not have the capacity (as reasonably determined by Landlord and confirmed by an independent third party telecommunications engineer retained by Tenant at Tenant’s sole cost) to

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support another service provider.  Landlord’s approval shall not be deemed any kind of warranty or representation by Landlord, including, without limitation, any warranty or representation as to the suitability, competence, or financial strength of the provider. Without limitation of the foregoing standard, unless all of the following conditions are satisfied to Landlord’s commercially reasonable satisfaction, Landlord shall decline to give its approval:

(i)            Landlord shall incur no expenses whatsoever with respect to any aspect of the provider’s provision of its services, including without limitation, the costs of installation, materials, services and supervision;

(ii)           Prior to commencement of any work in or about the Building by the provider, the provider shall supply Landlord with such written indemnities, insurance, financial statements, and such other items as Landlord determines to be necessary to protect its financial interests and the interests of the Building relating to the proposed activities of the provider;

(iii)          The provider agrees to abide by such rules and regulations, building and other codes, job site rules and such other requirements as are determined by Landlord to be necessary to protect the interests of the Building, the Tenants in the Building and Landlord, in the same or similar manner as Landlord has the right to protect itself and the Building with respect to proposed alterations;

(iv)          Landlord reasonably determines that there is sufficient space in the Building for the placement of the provider’s equipment and materials;

(v)           The provider agrees to abide by Landlord requirements, if any, that provider use existing building conduits and pipes or use building contractors (or other contractors approved by Landlord);

(vi)          Landlord receives from the provider such compensation as is determined by Landlord to compensate it for space used in the Building for the storage and maintenance of the provider’s equipment, for the fair market value of a provider’s access to the Building, and the costs which may reasonably be expected to be incurred by Landlord;

(vii)         The provider agrees to deliver to Landlord detailed “as built” plans immediately after the installation of the provider’s equipment is complete; and

(viii)        All of the foregoing matters are documented in a written license agreement between Landlord and the provider, the form and content of which is reasonably satisfactory to Landlord;

(e)           Limit of Default or Breach.  Notwithstanding any provision of the proceeding paragraphs to the contrary, the refusal of Landlord to grant its approval to any prospective telecommunications provider shall not be deemed a default or breach by Landlord of its obligation under this Lease unless and until Landlord is adjudicated to have acted recklessly or maliciously with respect to Tenant’s request for approval, and in that event, Tenant shall still have no right to terminate the Lease or claim an entitlement to rent abatement, but may as Tenant’s sole and exclusive recourse seek a judicial order of specific performance compelling Landlord to grant its approval as to the prospective provider in question.  The provisions of this paragraph may be enforced solely by Tenant and Landlord, are not for the benefit of any other party (including any subtenant), and specifically but without limitation, no telephone or telecommunications provider shall be deemed a third party beneficiary of this Lease.

(f)            Installation and Use of Wireless Technologies.  Tenant shall not utilize any wireless communications equipment (other than usual and customary cellular telephones), including antennae and satellite receiver dishes, within the Premises or the Building, without Landlord’s prior written consent.  Such consent may be conditioned in such a manner so as to protect Landlord’s financial interests and the interests of the Building, and the other Tenants

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therein, in a manner similar to the arrangements described in the immediately preceding paragraphs.

(g)           Limitation of Liability for Equipment Interference.  In the event that telecommunications equipment, wiring and facilities or satellite and antennae equipment of any type installed by or at the request of Tenant within the Tenant’s Premises, on the roof, or elsewhere within or on the Building causes interference to equipment used by another party, Tenant shall assume all liability related to such interference.  Tenant shall use reasonable efforts, and shall cooperate with Landlord and other parties, to promptly eliminate such interference.  In the event that Tenant is unable to do so, Tenant will substitute alternative equipment which remedies the situation.  If such interference persists, Tenant shall discontinue the use of such equipment, and, at Landlord’s discretion, remove such equipment according to foregoing specifications.

38.          ERISA REPRESENTATION.

(a)           Tenant acknowledges that it has been advised that an affiliate of Landlord is a collective investment fund (the “Fund”) which holds the assets of one or more employee benefit plans or retirement arrangements which are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and/or Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (each a “Plan”), and with respect to which Morgan Guaranty Trust Company of New York (“MGT”) is the Trustee and that, as a result, Landlord may be prohibited by law from engaging in certain transactions.

(b)           Landlord hereby represents and warrants to Tenant that, as of the date hereof, that Landlord has no Plans whose assets are invested in the Fund which, together with the interests of any other Plans maintained by the same employer or employee organization, represent a collective interest in the Fund in excess of Ten Percent (10%) of the total interests in the Fund (each, a “10% Plan”).  In the event Landlord participates in one or more 10% Plans (collectively, the “Existing 10% Plan”), Tenant shall comply with the provisions in Subparagraph (d) below.

(c)           Tenant represents and warrants that as of the date hereof, and at all times while it is a Tenant under this Lease, one of the following statements is, and will continue to be, true:  (1) Tenant is not a “party in interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975 of the Code) (each a “Party in Interest”) with respect to the Existing 10% Plan or, (2) if Tenant is a Party in Interest, that:

(A)          neither Tenant nor its “affiliate” (as defined in Section V(c) of PTCE 84-14, “Affiliate”) has, or during the immediately preceding one (1) year has, exercised the authority to either:  (i) appoint or terminate MGT as the qualified professional asset manager (as defined in Section V(a) of PTCE 84-14, “QPAM”) of any of the assets of the Existing 10% Plan with respect to which Tenant or its Affiliate is a Party in Interest; or (ii) negotiate the terms of the management agreement with MGT, including renewals or modifications thereof, on behalf of the Existing 10% Plan; and

(B)           neither Tenant nor any entity controlling, or controlled by, Tenant owns a Five Percent (5%) or more interest (within the meaning of PTCE 84-14, “5% Interest”) in MGT or JP Morgan & Co. Incorporated.

(d)           In the event that Landlord or the Fund notifies Tenant in writing that a Plan other than the Existing 10% Plan may become a 10% Plan, Tenant will, within 10 days of such notification, inform the Fund in writing as to whether it can make the same representations which it made in Subsection (c) of this section with respect to such prospective 10% Plan.  Thereafter, if based on such representations made by Tenant such Plan becomes a 10% Plan, Tenant represents and warrants that, at all times during the period Tenant is a tenant under the Lease, one of the statements set forth in Subsection (c) will be true with respect to such 10% Plan.

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39.          SPECIAL STIPULATION.

(a)           No receipt of money by the Landlord from the Tenant after the termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord’s consent is required.

(b)           Intentionally Omitted.

(c)           No waiver of any default of the Tenant hereunder shall be implied from any omission by the Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated.

(d)           The term “Landlord” as used in this Lease, so far as covenants or agreements on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners of the Landlord’s interest in this lease at the time in question, and in the event of any transfer or transfers of such interest the Landlord herein named (and in case of any subsequent transfer, the then transferor) shall be automatically freed and relieved from and after the date of such transfer of all personal liability as respects the performance of any covenants or agreements on the part of the Landlord contained in this Lease thereafter to be performed.

(e)           It is understood that the Landlord may occupy portions of the Building in the conduct of the Landlord’s business.  In such event, all references herein to other tenants of the Building shall be deemed to include the Landlord as an occupant.

(f)            The term “City” as used in this Lease shall be understood to mean the City in which the Property is located.

(g)           All of the covenants of the Tenant hereunder shall be deemed and construed to be “conditions” as well as “covenants” as though the words specifically expressing or importing covenants and conditions were used in each separate instance.

(h)           The Tenant agrees that, upon receiving a written request from the Landlord, the Tenant will within ten (10) days deliver a copy of this Lease, or, if the Landlord so requests, a Memorandum of this Lease, in recordable form to the Landlord.  Tenant shall not record this Lease or a Memorandum thereof, without the prior written consent of the Landlord.

(i)            Neither party has made any representations or promise, except as contained herein, or in some further writing signed by the party making such representation or promise.

(j)            In the absence of fraud, no person, firm or corporation, or the heirs, legal representatives, successors and assigns, respectively, thereof, executing this Lease for Landlord as agent, trustee or in any other representative capacity shall ever be deemed or held individually liable hereunder for any reason or cause whatsoever.

(k)           In the event of variation or discrepancy, the Landlord’s original copy of the Lease shall control.

(l)            Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of the Landlord and the Tenant and their respective heirs, legal representatives and successors, and assigns in the event this Lease has been assigned with the express written consent of the Landlord.

(m)          The Tenant agrees that it is Tenant’s sole obligation to comply with the provisions of the Americans with Disabilities Act (“ADA”), as amended from time to time, with regard to the Premises.  Tenant agrees to indemnify, defend and protect Landlord from any claim or suit brought against Landlord for Tenant’s failure to comply with the Tenant’s obligations to maintain the Leased Premises pursuant to ADA.

(n)           Each of Landlord and Tenant, and each person signing for them, hereby warrants and represents to the other that the individual signing on behalf of that party is fully authorized to sign on behalf of, and to bind, such party and that, when signed by the parties, this

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Lease shall be fully binding on the party on whose behalf this Lease is executed by such individual.

(o)           If there be more than one Tenant, the obligations under the Lease imposed upon Tenant shall be joint and several.

(p)           This Lease represents the entire agreement of Landlord and Tenant with regard to the Lease, with all prior writings and verbal negotiations with regard thereto being merged herein.

(q)           Tenant acknowledges and agrees that Landlord, at its sole cost and discretion, shall have the right to remeasure the Building at any time.  Such remeasurement shall be performed in accordance with the then existing standards established by Building Owners and Managers Association International (“BOMA”).  The Landlord has the sole right and discretion to implement the remeasurement of the Building and revise Rentable Area, Rentable Area Leased, and any other remeasurements of the Building as provided for in this Lease upon thirty (30) days’ notice to Tenant.

(r)            It is understood and agreed that this Lease shall not be binding until and unless all parties have signed it.

40.          EXHIBITS.  Exhibits A, B and C and the Rider to Lease, which Rider consists of 8 pages, are attached hereto and become part of this Lease.

[The remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease as of the day and year first above written.

LANDLORD:		TENANT:
SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY		EVERGREEN ENERGY INC., a Delaware corporation
By:	/s/ Dennis Keyes	By:	/s/ Kevin R. Collins
Print Name:	Dennis Keyes	Print Name:	Kevin R. Collins
Its:	Vice President	Its:	EVP & COO

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EXHIBIT “A”

LEASE COMMENCEMENT DATE STATEMENT

Date:                    , 200     

TO:         Jones Lang LaSalle Americas, Inc.

Agent for Seventeenth Street Plaza Realty Holding Company

RE:

Dear Jones Lang LaSalle Americas, Inc.:

This letter is being delivered to you in accordance with Paragraph 3 of the Office Lease dated                                                                                                                                   , 2006, between Evergreen Energy Inc. and Seventeenth Street Plaza Realty Holding Company, pertaining to the Premises referred to in the Lease.

The undersigned hereby acknowledges and agrees that the Lease Commencement Date (as defined in the Lease) for the Premises is                                     , 200       , and the Expiration Date (as defined in the Lease for the Premises) is                                   , 200           .

LANDLORD:	TENANT:
SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY	EVERGREEN ENERGY INC., a Delaware corporation
By:	By:
Print Name:	Print Name:
Its:	Its:
	Attest:
	Print Name:
	Its:	Secretary

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EXHIBIT “B”

WORKLETTERAGREEMENT

THIS WORKLETTER is dated November 17, 2006, by and between SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY (“Landlord”) and EVERGREEN ENERGY INC. (“Tenant”).

R E C I T A L S:

1.             This Workletter is attached to and forms a part of that certain Office Lease dated November 17, 2006 (“Lease”), pursuant to which Landlord has leased to Tenant office space in that building known as Seventeenth Street Plaza, Denver, Colorado.

2.             The parties have agreed to make certain improvements to the Premises, upon the terms and conditions contained in the Lease and this Workletter.

3.             Tenant Improvements.  Landlord has granted to Tenant an allowance of up to Thirty-Five and No/100 Dollars ($35.00) per rentable square foot of the Premises, for a total allowance of up to One Million One Hundred Forty-Five Thousand Four Hundred Forty-Five and No/100 Dollars ($1,145,445.00) (the “Tenant Improvement Allowance”), for completion of slab-to-slab Tenant Improvements in accordance with the Space Plan (hereinafter defined).  Except as provided herein, the Tenant Improvement Allowance is for Tenant Improvements in the Premises.  Landlord shall not charge to Tenant the costs of removal of any previous tenants’ wiring or cabling, nor shall the same be taken from the Tenant Improvement Allowance.  Notwithstanding the foregoing, in the event that sufficient funds are available in the Tenant Improvement Allowance after completion of and payment for, the Tenant Work (hereinafter defined), Tenant may elect to utilize a portion of the Tenant Improvement Allowance, not to exceed $5.00 per rentable square foot of the Premises in the aggregate (for a total of up to $163,635.00) toward the costs associated with Tenant’s furniture, fixtures and equipment for the Premises, cabling and/or wiring in the Premises, and/or relocation costs (collectively, the “Additional Tenant Costs”).  Landlord shall reimburse Tenant for its Additional Tenant Costs, not to exceed the foregoing limits, within thirty (30) days after receipt of Tenant’s documented third-party invoices therefor.  Tenant expressly acknowledges and agrees that Landlord shall have no obligation to fund any Additional Tenant Costs from the Tenant Improvement Allowance unless and until all of the Tenant Work has been fully paid for from the Tenant Improvement Allowance and any Tenant Improvement Allowance still remains.  In the event the Tenant Improvement Allowance is not used on or before June 1, 2007, Landlord shall retain such unused portion of the Tenant Improvement Allowance, and Tenant shall have no further rights thereto or hereunder.  In the event that the cost of the Tenant Improvements exceed the Tenant Improvement Allowance, Landlord shall provide Tenant with an additional allowance above the Tenant Improvement Allowance, to apply towards payment of the excess costs of the Tenant Improvements (the “Excess Allowance”), and Tenant shall deposit with Landlord funds sufficient to cover any additional projected excess costs and promptly pay to Landlord any costs in excess thereof.  Any portion of the Excess Allowance paid by Landlord shall be paid for directly by the Tenant.  Landlord shall have the work depicted in the Tenant Space Plan (the “Tenant Work”) constructed with, unless otherwise specified, Building standard materials and in a good and workmanlike manner pursuant to the schedule provided for herein, subject, however, to extensions equal to the delays suffered by Landlord and caused by Tenant or by strike, lockouts, fire or other casualty loss, acts of God, unavailability of materials, hostile or war like action, riot or other causes beyond Landlord’s reasonable control.  The Tenant Work, as modified from time to time pursuant to the provisions of this Workletter, shall be known as the “Tenant Improvements”.  Subject to the foregoing limitations, the cost of preparing the Space Plan, any other architectural or engineering fees and the construction management fee to Jones Lang LaSalle Americas, Inc. set forth below shall be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements.

4.             Tenant Space Plan.  Landlord and Tenant hereby approve the general space layout and “test fit” (the “Space Plan” or “Tenant Space Plan”) prepared by Newman Cavendar & Doane and attached hereto as Exhibit B-1.

5.             Tenant Working Drawings.  Based upon the Tenant Space Plan, Landlord will cause working drawings for the improvements to the Premises (“Tenant Working Drawings”) to

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be prepared and delivered to Tenant within a period as may be reasonably needed because of the complexity of Tenant’s improvements or the nature of Tenant’s non-building standard improvements, if any.  The Tenant Working Drawings will include Tenant’s partition layout, ceiling plan, electrical outlets and switches, telephone outlets, and detailed plans and specifications for the construction of the improvements called for under this Workletter.  Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Working Drawings as soon as possible, but in no event more than ten (10) business days after execution of this Lease.  Tenant shall further respond to all requests by Landlord, or its planner, for clarification on said information provided within three (3) business days of said request.  The cost of all working drawings for Tenant Improvements will be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements.  Tenant will deliver to Landlord written acceptance or rejection of any Tenant Working Drawings (initial or revised) within three (3) business days after Tenant receives any such item.  If Tenant fails to provide the information or clarification outlined above, rejects the Tenant Working Drawings (initial or revised), or fails to provide written acceptance or rejection within the period outlined above, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant.

6.             Tenant Cost Estimate.  Once the Tenant Working Drawings have been prepared and approved as provided above, Landlord shall seek three (3) competitive bids from general contractors from Landlord’s approved bidding list.  Tenant may submit the name of one contractor to be included in the bidding process.  Tenant shall be allowed to participate in the selection of the successful bidder; provided Landlord shall make the final selection of the general contractor.  In connection with the foregoing, Landlord shall also cause a cost estimate for the improvements to the Premises (“Tenant Cost Estimate”) to be prepared and delivered to Tenant.  The Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Cost Estimate.  The cost of all cost estimates for Tenant Improvements will be paid as part of the costs of the Tenant Improvements.  Tenant will deliver to Landlord written acceptance or rejection of any Tenant Cost Estimate (initial or revised) within three (3) business days after Tenant receives any such item.  If Tenant rejects the Tenant Cost Estimate, or fails to provide written acceptance or rejection within said three (3) business day period, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant.  If at any time the costs of the Tenant Improvements as reasonably projected by Landlord exceed the Tenant Improvement Allowance, Tenant shall pay any such excess to Landlord in a manner reasonably acceptable to Landlord, and, until such payment, Landlord shall not be obligated to proceed with any improvements of the Premises, and any delays in construction as a result thereof shall be deemed delays caused by Tenant.

7.             Upon written approval of the Tenant Working Drawings and the Tenant Cost Estimate by Tenant, Landlord and Tenant shall be deemed to have given final approval to the Working Drawings, and the costs thereof, and Landlord shall be authorized to proceed with construction.

8.             Change Orders.  Tenant may request changes in the work during construction only by written requests to Landlord’s Representative on a form approved by Landlord.  All such changes will be subject to Landlord’s prior written approval, which shall not be unreasonably withheld or delayed.  Before commencing any change, Landlord or Landlord’s agent will prepare and deliver to Tenant, for Tenant’s written approval, a change order setting forth the cost of such change, which will include associated architectural, engineering and construction contractor’s fees.  If Tenant fails to approve such change order within three (3) business days, Landlord will not proceed to perform the change.  If Tenant timely approves such change order, Tenant agrees to pay any amounts payable by Tenant in connection with the change order in the manner provided in Paragraph #6 above, to the extent the Tenant Improvement Allowance is exceeded.  If a request for changes in the work delays Landlord’s completion of the Tenant Improvements, then such delay shall constitute a Tenant’s Delay.

9.             Completion and Commencement of Rent.  The term of the Lease shall commence as provided in Section #3 of the Lease.

10.           Failure to Perform.  Intentionally Omitted.

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11.           Construction Administration.  Landlord shall coordinate and administer all activities of contractor(s) in the performance of Tenant’s Improvements in accordance with the plans and specifications.  Tenant agrees that it will not contract with any contractor, laborer or material supplier to perform any improvements in the Premises without providing Landlord with notice ten (10) days prior to any improvements and requiring said contractor, laborer or material supplier to execute an agreement acknowledging non-liability for payment by Landlord in accordance with C.R.S. § 38-22-105.5, as amended from time to time.  After the completion of the Tenant Improvements, and within 10 days following the date of invoice, Tenant shall, for supervision and administration of the construction and installation of the Tenant Improvements, pay to Jones Lang LaSalle Americas, Inc. a construction management fee equal to 1% of the total cost of the Tenant Improvements, which may be paid from the unused portion of the Tenant Improvement Allowance (if any).  Tenant’s failure to pay such construction management fee when due shall constitute an event of default under the Lease.

12.           Miscellaneous.

(a)           Except to the extent otherwise indicated herein, the initially capitalized terms used in this Workletter Agreement shall have the meaning assigned to them in the Lease.

(b)           The terms and provisions of this Tenant Workletter are intended to supplement and are intended as an Amendment to the Lease and are specifically subject to all the terms and provisions of the Lease.  In the event of conflict between the terms of this Tenant Workletter and the Lease, then the provisions of the Workletter shall govern.

(c)           Prior to the date the Premises are ready for occupancy Landlord’s contractor and Tenant shall inspect the Premises and jointly complete a “punch list” of incomplete or defective work (the “Punch List Items”), and thereafter Landlord shall exercise due diligence to cause such Punch List Items to be completed within thirty (30) days following the date the Premises are ready for occupancy (except for any punch list items which, despite due diligence, cannot be completed within said thirty (30) day period).

(d)           This Tenant Workletter may not be amended or modified other than by supplemental written agreement executed by authorized representatives of the parties hereto.

(e)           Landlord shall have the right to issue reasonable construction rules, regulations and policies.  If Tenant contests any of these rules, regulations, or policies, Landlord agrees to take reasonable steps to modify such rules, regulation, and policies at Tenant’s request, except that Tenant shall pay directly any related expenses of construction or of consultants due to said changes to the extent said change exceeds the Tenant Improvement Allowance.

(f)            No waiver of any default of the Tenant hereunder shall be implied from any omission by the Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver, and that only for the time and to the extent therein stated.

(g)           Except as modified herein, the provisions of the Lease shall continue in full force and effect.

(h)           Landlord neither warrants nor guarantees the accuracy of any estimated Costs or Tenant Cost Estimates.

(i)            Time is of the essence in this Workletter Agreement, and the failure by Tenant to timely respond or perform shall be deemed to be a Tenant’s Delay, and in addition, subject to any applicable notice and cure periods, Landlord may deem such Tenant’s Delay an Event of Default under the Lease.  Tenant undertakes and agrees to, upon written request, meet or provide written response, as the case may be, within one business day of such written request, except as otherwise provided in this Workletter Agreement.  Any delay caused by Tenant’s failure to do so shall be deemed to be a delay caused by Tenant.

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LANDLORD:		TENANT:
SEVENTEENTH STREET PLAZA REALTY HOLDING COMPANY		EVERGREEN ENERGY INC., a Delaware corporation
By:	/s/ Dennis Keyes	By:	/s/ Kevin R. Collins
Print Name:	Dennis Keyes	Print Name:	Kevin R. Collins
Its:	Vice President	Its:	EVP & COO
		Attest:	/s/ William G. Laughlin
		Print Name:	William G. Laughlin
		Its:	Secretary

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EXHIBIT B-1

TENANT SPACE PLAN

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EXHIBIT “C”

CLEANING SCHEDULE

Landlord shall furnish janitorial service to the Premises and the Building Complex as described below:

DAILY SUNDAY THROUGH THURSDAY, INCLUSIVE

1.             Sweep, dry mop or vacuum all floors complete.  Remove gum, tar, etc., adhering to the floor.

2.             Empty and damp wipe all ashtrays.

3.             Dust all horizontal surfaces that can be reached without a ladder with a treated cloth, mitt or duster.

4.             Clean, polish and sanitize all drinking fountains.

5.             Sweep all steps, sidewalks and plazas.

6.             Clean passenger elevator cab and landing doors, including floors.

7.             Empty all waste containers.

8.             Clean all public and private (within Premises) wash and restrooms.

(a)           All cleaning will be performed with approved germicidal detergents at disinfectant strengths.

(b)           All toilets and urinals will be cleaned on all surfaces nightly; acid bowl cleaner to be used in the interior.

(c)           All wash basins, shelves, dispensers and all other washroom fixtures will be cleaned nightly.

(d)           All mirrors will be cleaned and polished nightly.

(e)           All chrome and other bright work, including exposed plumbing, toilet seat hinges, etc., will be cleaned and polished nightly.

(f)            All waste receptacles are to be emptied and cleaned nightly.

(g)           All lavatory floors will be swept and mopped with a germicidal detergent solution nightly.

(h)           All lavatory floors will be machine scrubbed once every three months.

(i)            Washroom supplies will be replenished nightly and at all other times as needed.

(j)            Once each month, remove hard water stains from toilet fixtures by using bowl cleaner after normal cleaning.  Follow manufacturer’s recommendations.

9.             All normal rubbish and office waste paper shall be removed from the tenant floors.

WEEKLY

1.             Dust and wipe clean with dust cloth all desk tops.

2.             Spot clean all doors, switch plates, wall and glass areas.

3.             Dust and wipe all tops of all file cabinets and counters.

4.             Sweep building stairwells.

5.             Damp mop floors and/or spray buff for heavy scuffs, if necessary.

6.             Clean glass in building directory.

7.             Wipe all waste containers.

8.             Wash all glass entrance doors and side panels inside and out.

MONTHLY

1.             When possible, sweep and hose down outside Plaza space, exterior walks, trucking areas and shipping platforms.

2.             Shampoo all elevator carpeting.

3.             Dust all windowsills.

EVERY THREE MONTHS

1.             When possible, wash all windows, both interior and exterior, but not less than three times per year.

2.             Dust vertical surfaces of all furniture.

3.             Scrub all resilient floor areas so as to maintain a highly polished surface.

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SNOW AND ICE REMOVAL

1.             Landlord shall be responsible for snow and ice removal from the parking lots, sidewalks and private roadways servicing the Property.

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RIDER TO LEASE

1.             Annual Base Rental.  Commencing on the Commencement Date, and continuing through the Term, Tenant shall pay Annual Base Rental for the Premises as follows:

Months	Annual Base Rental/ Square Foot of Rentable Area	Monthly Base Rental	Annual Base Rental
Months 1 — 12	$16.70	$45,545.08	$546,540.96
Months 13 — 24	$17.20	$46,908.70	$562,904.40
Months 25 — 36	$17.70	$48,272.33	$579,267.96
Months 37 — 48	$18.20	$49,635.95	$595,631.40
Months 49 — 60	$18.70	$50,999.58	$611,994.96
Months 61 — 72	$19.20	$52,363.20	$628,358.40
Months 73 — 84	$19.70	$53,726.83	$644,721.96
Months 85 — 96	$20.20	$55,090.45	$661,085.40
Months 97 — 108	$20.70	$56,454.08	$677,448.96
Months 109 — 123	$21.20	$57,817.70	$693,812.40

Notwithstanding the foregoing, and on the express condition that Tenant abides by all of the terms and conditions of this Lease and no Event of Default occurs hereunder, Tenant shall be entitled to an abatement of Annual Base Rental, commencing on the Commencement Date (hereinafter defined) and ending three (3) months thereafter (the “Abated Rent”), such that the effective Annual Base Rental rate for the first three (3) months shall be $Zero.  Notwithstanding such concession of Base Rental, Landlord and Tenant agree that Tenant’s obligation to pay the Annual Base Rental as provided in the Lease shall continue throughout the Term of the Lease, and in the event that Tenant fails to abide by any term or condition of the Lease or otherwise defaults hereunder, then all Annual Base Rental not collected by Landlord during the Term due to the foregoing Base Rental abatement shall, as of the date of Tenant’s default, become immediately due and payable with interest on such sums at the lesser of 12% per annum or the maximum rate permitted by law from the date such Base Rental was originally due to the date of payment.  Such obligation of Tenant for payment of Annual Base Rental not collected during the Term shall be independent of and in addition to Landlord’s other rights and remedies available to it pursuant to the Lease or otherwise available at law or in equity.

2.             Special Provisions Regarding Early Occupancy.  Notwithstanding anything to the contrary contained in the Lease, Landlord agrees that Tenant may enter the Premises no more than thirty (30) days prior to the Commencement Date for the sole purpose of installation of furniture, fixtures and voice and data cabling (the “Early Occupancy”) provided that such Early Occupancy is conducted in a manner as to not unreasonably interfere with the construction of any Tenant Work occurring in or around the Premises pursuant to Exhibit “B” of the Lease, and further provided that such Early Occupancy shall be subject to all of the terms and conditions contained in the Lease (other than the payment of Annual Base Rental and Additional Rent), including, without limitation, Tenant’s insurance and indemnity obligations as contained in the Lease.  Prior to any such Early Occupancy, Tenant shall provide Landlord with certificates of insurance or other evidence acceptable to Landlord evidencing Tenant’s compliance with its insurance obligations.  In the event that Tenant’s Early Occupancy materially interferes with the construction of the Tenant Work or otherwise disrupts Landlord’s operations or the operations of other tenants in the Building, Landlord may terminate Tenant’s right to Early Occupancy, and any delay in the Tenant Work attributable to such Early Occupancy will be deemed a Tenant’s Delay as provided in the Lease.

3.             Building Directory Signage.  Landlord agrees that Tenant shall have the right to have its company name listed on the building directory located in the main lobby of the Building (the “Directory Signage”), along with other tenants, with the size, color, and other aesthetics of both the Directory Signage and Tenant’s designation thereon to be determined by Landlord in its sole and absolute discretion.  In addition, so long as Landlord’s Directory Signage is in the form of an electronic directory, Tenant shall also have the right to have its officers and executive personnel listed by name in the electronic directory constituting the Directory Signage

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4.             Elevator Lobby Directional Signage.  Landlord will provide building standard lobby directional signage in the elevator lobby area of the 14th floor (the “Directional Signage”), with the exact location, size, color and other aesthetics of the Directional Signage to be determined by Landlord in its sole and absolute discretion.  Because Tenant will be occupying the entire leasable area of the 13th floor, Landlord will have no obligation to provide Directional Signage on the 13th floor.  Any Directional Signage which Tenant desires to install on the 13th floor shall be subject to Landlord’s prior written approval, not to be unreasonably withheld, and shall be installed and maintained at Tenant’s sole cost and expense.

5.             Option to Renew.

(a)           Renewal Period.  Tenant may, at its option, extend the Term for the entire, but not less than the entire, Premises, for one (1) renewal period of five (5) years (the “Renewal Period”) by written notice to Landlord (the “Renewal Notice”) given no earlier than twelve (12) nor later than nine (9) months prior to the expiration of the Term, provided that at the time of such notice and at the commencement of such Renewal Period: (i) Tenant remains in occupancy of the entire Premises; (ii) Tenant remains in good financial standing, as reasonably determined by Landlord (and in connection therewith, Tenant shall provide Landlord with any reasonably required documentation regarding Tenant’s financial standing); and (iii) no uncured event of default exists under the Lease (and no condition exists, but for the passage of time or giving of notice, would constitute an event of default) (such foregoing conditions are referred to herein as the “Preferential Right Conditions”).  Such Renewal Period shall commence upon the expiration date of the Term.  The Annual Base Rental payable during the Renewal Period shall be at the Market Rate (hereinafter defined) for the Premises.  Except as provided in this Paragraph as pertains to modification of Annual Base Rental, all terms and conditions of the Lease shall continue to apply during the Renewal Period.  Except in connection with a Permitted Transfer, Tenant’s option to renew shall automatically terminate upon assignment of the Lease or subletting of all or any portion of the Premises.

(b)           Acceptance.  Within 30 days of the Renewal Notice, Landlord shall notify Tenant of the Annual Base Rental for such Renewal Period (the “Base Rental Notice”).  Tenant shall have thirty (30) days from the date of the Base Rental Notice in which to dispute, in writing, Landlord’s finding of Market Rate (the “Market Rate Dispute Notice”) or to accept, in writing, the terms of the Renewal Notice (the “Renewal Acceptance Notice”).  If Tenant timely delivers its Renewal Acceptance Notice, Tenant shall, within 15 days after receipt, execute a lease amendment confirming the Annual Base Rental and tenant finish allowance (if any) applicable during the Renewal Period in form and substance reasonably acceptable to Tenant.  If Tenant timely delivers its Market Rate Dispute Notice, the parties shall proceed in accordance with subsection (d).  If Tenant fails timely to deliver its Renewal Acceptance Notice; or to deliver a Market Rate Dispute Notice, then this option to renew shall automatically expire and be of no further force or effect.

(c)           Market Rate.  The “Market Rate” is the rate (or rates) a willing tenant would pay and a willing landlord would accept for a non-renewing/non-extending tenant in a comparable transaction, in comparable space and in a comparable Class AA building located in the downtown Denver, Colorado central business district as of the commencement date of the applicable term.  In calculating the Market Rate, all relevant “market” terms and conditions will be taken into account, including the location and quality of the Building, floor level, finish allowance, common area factors, rental abatements, rental adjustments, parking charges, lease assumptions, moving allowances, space planning allowances, lease term, credit standing of Tenant, or any other concession or inducement provided in the marketplace that would be relevant in making a fair market value determination.

(d)           Market Rate Dispute Procedures.  If, within ten (10) business days of Landlord’s receipt of the Market Rate Dispute Notice the parties have not agreed upon Market Rate, it shall be established by arbitration under the rules of the American Arbitration Association (the “AAA”) then in effect, or by such other method, if any, as the parties may then agree upon.  The parties hereto agree to prevail upon the AAA, or such other party as may then be agreed upon, to select qualified, dis-interested, real estate brokers to comprise the arbitration panel, and agree further that the Market Rate established by the arbitration panel shall be binding.  In the event the results of the arbitration are not known by the Expiration Date, Tenant shall pay a rental equal to the Annual Base Rental and any Additional Rent pursuant to Article 5 payable in the month

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immediately preceding the Expiration Date (the “Interim Rent”) until such time as the Market Rate has been established by the arbitration panel.  The Market Rate shall be used to calculate the Rent which would have been payable by Tenant commencing from the Expiration Date and ending on the date Market Rate is established by arbitration, had Market Rate been charged.  In the event that Tenant pays any Interim Rent as provided herein, Tenant shall pay the difference, in lump sum, on the first day of the month following the determination of Market Rate or, in the event Market Rent is less than the Interim Rent, Landlord shall issue a credit for the difference against Rent otherwise payable on the first day of the month following determination of Market Rate.

5.             Right of First Refusal.  During the first five years of the Term (the “ROFR Period”), and provided that all Preferential Right Conditions remain satisfied, Tenant shall have a continuing right of first refusal as hereinafter described (the “Right of First Refusal”) to lease any remaining leasable space on the 14th floor of the Building (the “Right of First Refusal Space”) at such time as Landlord engages in negotiations with a prospective tenant for any portion of the Right of First Refusal Space, exercisable at the following times and upon the following conditions:

(a)           If Landlord enters into negotiations with a prospective tenant to lease all or any part of the Right of First Refusal Space, and Landlord obtains a bona fide offer from a prospective tenant which is acceptable to Landlord in its sole and absolute discretion, Landlord shall notify Tenant of such fact and shall include in such notice the rent, term, and other terms (including tenant improvements and any other Landlord concessions) at which Landlord is prepared to offer such Right of First Refusal Space (such portion then being offered being referred to herein as the “Offered Space” and the terms set out in such offer being referred to herein as the “Offer Terms”) to such prospective tenant (“Landlord’s Right of First Refusal Notice”).  Tenant shall have a period of five (5) business days from the date of delivery of Landlord’s Right of First Refusal Notice to notify Landlord whether Tenant elects to exercise the right granted hereby to lease the entire Offered Space under the Offer Terms.  Tenant may not lease less than the entire Offered Space, and to exercise its Right of First Refusal, must accept the Offered Space on the exact Offer Terms (even if such terms are for a term longer or shorter than the current Term of the Lease), unless otherwise mutually agreed upon by the parties.  If Tenant fails to give any notice to Landlord within the required five (5) business day period, Tenant shall be deemed to have waived its right to lease the Offered Space.

(b)           If Tenant so waives its right to lease the Offered Space (either by giving written notice thereof or by failing to give any notice), Landlord shall have the right to lease the Offered Space to the prospective tenant upon the Offer Terms, and upon the execution of  such lease between Landlord and the prospective tenant this Right of First Refusal shall thereafter be null, void and of no further force or effect as pertains to the Offered Space.  However, if Landlord does not enter into a lease with such prospective tenant covering the Offered Space, or if the Offer Terms are materially modified, Landlord shall not thereafter engage in other lease negotiations with respect to the Offered Space first complying with the provisions of this Paragraph.  Moreover, even if Tenant waives its right to lease any particular Offered Space, Tenant shall still have a Right of First Refusal with respect to any portion of the Right of First Refusal Space that has not previously been offered to Tenant pursuant to this Paragraph.

(c)           If Tenant exercises its Right of First Refusal as provided in this Paragraph, Landlord and Tenant shall, within fifteen (15) days after Tenant delivers to Landlord notice of its election, enter into a lease amendment covering the Offered Space upon the Offer Terms.

(d)           Any assignment or subletting by Tenant pursuant to the provisions of the Lease, other than in connection with a Permitted Transfer, shall terminate the Right of First Refusal of Tenant contained herein.  In addition, the Right of First Refusal granted herein shall automatically terminate at the end of the ROFR Period.

(e)           The Right of First Refusal of Tenant contained herein shall be subject and subordinate to any rights of refusal, offer, renewal, expansion or extension or any other similar preferential rights existing under any other tenant leases for the Building as of the date of this Lease.

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6.             Expansion Option.  Tenant shall have the option to lease up to all of the Right of First Refusal Space (the “Expansion Option”) for a term commencing on the Expansion Space Commencement Date (hereinafter defined) and continuing through the expiration or earlier termination of the Term (as it may be extended or renewed), by giving written notice to Landlord (the “Expansion Notice”) at any time after the date of this Lease but no later than six (6) months after the Commencement Date (the “Expansion Space Notice Deadline”), subject to the terms and conditions of this Paragraph.  If Tenant timely exercises its Expansion Option, it shall include in its Expansion Notice an identification of the portion of the Right of First Refusal Space which it desires to take (the “Actual Expansion Space”) and if the Actual Expansion Space is less than the entire Right of First Refusal Space, the remainder of the Right of First Refusal Space (the “Remaining ROFR Space”) shall be an area that is in a commercially leasable configuration, as determined by Landlord in its sole discretion.  If Landlord determines that the Remaining ROFR Space is not in a commercially leasable configuration, Landlord shall notify Tenant as soon as reasonably practicable after receipt of Tenant’s Expansion Notice, and the parties shall work in good faith to attempt to determine a mutually agreeable configuration for the Actual Expansion Space and the Remaining ROFR.  If the parties are unable to reach agreement within fifteen (15) days thereafter, regardless of the reason therefor, then this Expansion Option shall be deemed terminated and shall be considered null, void and of no further effect.  If Landlord is satisfied with the configuration of the Actual Expansion Space and the Remaining ROFR Space, it shall notify Tenant thereof, and the Actual Expansion Space will be deemed the “Right of First Refusal Space” hereunder.

(a)           Conditions to Exercise of Option.  In order to exercise its Expansion Option, all Preferential Right Conditions must remain satisfied at the time that Tenant gives its Expansion Notice and upon the Expansion Space Commencement Date.  Any assignment or subletting by Tenant pursuant to the provisions of this Lease shall terminate the Expansion Option of Tenant contained herein.  In addition, and notwithstanding anything to the contrary contained herein, the Expansion Option granted to Tenant herein shall expire by its own terms as of the Expansion Space Notice Deadline unless Tenant shall have timely given its Expansion Notice by such date, time being of the essence with respect to Tenant’s exercise of its Expansion Option hereunder.  Finally, this Expansion Option shall terminate with respect to any portion of the Right of First Refusal Space which is identified as Offered Space in any Landlord’s Right of First Refusal Notice, if such Offered Space is identified prior to the time that Tenant delivers an Expansion Notice to Landlord with respect to such Offered Space, it being expressly understood and agreed to the parties that in terms of priority, Tenant’s Expansion Option is subject and subordinate to the Right of First Refusal contained herein.

(b)           Delivery of Expansion Space; Terms.  If all of the conditions to Tenant’s exercise of its Expansion Option as provided herein are satisfied, the following terms shall apply:  (A)  Annual Base Rental shall be the same Base Rental per square foot of Rentable Area Leased of the Right of First Refusal Space as Tenant is paying in Annual Base Rental for the Premises hereunder (including any subsequent escalations in such Annual Base Rental); (B) Landlord will provide Tenant with a construction allowance per square foot of Rentable Area Leased in the same amount per square foot of Rentable Area Leased that Landlord has made available to Tenant pursuant to Exhibit “B” attached to this Lease (the “Expansion Space Improvement Allowance”), which Expansion Space Improvement Allowance shall be reduced pro rata on a monthly basis, based on the number of months remaining in the Term as of the commencement date of Tenant’s occupancy of the Right of First Refusal Space Space; (C) the amount of the Letter of Credit (hereinafter defined) shall be proportionately increased based on the Transaction Costs (hereinafter defined) associated with the leasing of the Right of First Refusal Space; and (D) Landlord will construct leasehold improvements in the Right of First Refusal Space pursuant to the same terms and conditions as pertain to the construction of the Tenant Work in the Work Letter attached to this Lease, with the following modifications:  (i) the term “Tenant Improvement Allowance” will be deemed replaced with the “Expansion Space Improvement Allowance” and the outside date for use of the Expansion Space Improvement Allowance will be six (6) months from the date of Tenant’s Expansion Notice; (ii) Tenant will submit a Space Plan for Landlord’s approval no later than seven (7) days after the date of Tenant’s Expansion Notice (and any delay by Tenant in submitting such Space Plan shall constitute a Tenant’s Delay); and (iii) all time frames in the Work Letter that run from the mutual execution of the Lease shall be deemed to run from the date of Tenant’s Expansion Notice.  The “Expansion Space Commencement Date” (herein so called) shall occur ninety (90) days after the date of Tenant’s Expansion Notice, which date shall be extended if the Tenant Work is not complete by such date,

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unless the failure to complete the Tenant Work by such date is due to Tenant’s Delay.  Subject to the foregoing, Landlord will deliver the Right of First Refusal Space to Tenant in its then current “as is” condition as of the Expansion Space Commencement Date.  Tenant shall, within fifteen (15) business days after Landlord’s written request, execute and return a lease amendment adding the Right of First Refusal Space as part of the Premises for all purposes under the Lease (including any extensions or renewals) effective as of the Expansion Space Commencement Date and confirming the Annual Base Rental and other terms applicable to the Right of First Refusal Space.  If Tenant fails timely to execute and return the required lease amendment, then this Expansion Option shall automatically expire and be of no further force or effect.

7.             Termination Option.  Tenant shall have the one-time option to terminate the Lease (the “Option to Terminate”), with such termination to be effective as of end of the sixty-third (63rd) full calendar month following the Commencement Date (the “Termination Date”) (e.g., if the Commencement Date is January 1, 2007, the Termination Date will be March 31, 2012), provided Tenant gives Landlord not less than twelve (12) months’ prior written notice to terminate (the “Termination Notice”), and further provided Tenant is not in default under the Lease at the time of the giving of such notice nor on the Termination Date and that at the time that Tenant gives its Termination Notice Tenant pays to Landlord the Termination Fee (hereinafter defined) as provided herein.  The “Termination Fee” shall consist of: (a) all unamortized improvement allowances, leasing commissions and other reasonable incidental transaction costs (including professional fees) incurred by Landlord in connection with the negotiation of the Lease and any subsequent amendments thereto (collectively, the “Transaction Costs”), amortized at the rate of ten percent (10%); plus (b) all Abated Rent.  Upon Tenant’s written request, Landlord will provide Tenant with documentation outlining the actual amount of the Transaction Costs.  As of the Termination Date: (x) the Termination Fee (which shall be paid at the time of the Termination Notice), plus all Annual Base Rental, Additional Rent and other sums payable by Tenant under the Lease shall be paid through and apportioned as of the Termination Date; (y) neither party shall have any rights, liabilities or obligations under the Lease for the period accruing after the Termination Date, except those which, by the provisions of the Lease, expressly survive the termination of the Lease, and which will expressly include a reconciliation of any Additional Rent that may be due or owing under the Lease; and (z) Tenant shall surrender the Premises in the condition required under the Lease.  Except in connection with a Permitted Transfer, Tenant’s option to terminate as provided in this paragraph shall automatically terminate upon assignment of the Lease or subletting of all or any portion of the Premises.

8.             Letter of Credit.  In addition to the cash security deposit required pursuant to the terms of Section 32 of the Lease, as additional security, Tenant shall deliver to Landlord concurrently with the execution of the Lease by Tenant, an irrevocable, unconditional letter of credit in the amount equal to $1,500,000.00 (which the parties agree is a reasonable estimate of the Transaction Costs (the “Letter of Credit”).  The Letter of Credit shall be addressed to Landlord (and/or any other beneficiary designated by Landlord), issued in a form and substance approved by Landlord in Landlord’s sole discretion and by a financial institution approved by Landlord in Landlord’s sole discretion, and shall be transferable one or more times by Landlord without the consent of Tenant.  In the event that the term of the Letter of Credit obtained by Tenant is less than the Term of the Lease, Tenant shall provide to Landlord, sixty (60) days prior to the expiration of the term of the Letter of Credit, a substitute Letter of Credit, in form, scope, and substance satisfactory to Landlord, all in its sole discretion, for the duration of the Term of the Lease plus 30 days.  Tenant agrees to pay upon Landlord’s request, any and all costs or fees charged in connection with the Letter of Credit that arise due to: (i) Landlord’s sale or transfer of all or any portion of the Building; or (ii) the addition, deletion, or modification of any beneficiary under the Letter of Credit.  The bank issuing the Letter of Credit shall have banking offices in the city in which the Building is located, at which offices the Letter of Credit may be drawn.  Tenant agrees that upon any default by Tenant under the terms and provisions of this Lease, including the failure of Tenant to timely deliver any replacement Letter of Credit, Landlord shall have the right to receive payment under any Letter of Credit of the entire amount of such Letter of Credit at such time, and any such amounts received by Landlord shall be held by Landlord and applied to any default hereunder in such manner as Landlord deems appropriate.  Subject only to the provisions set forth in the following sentences, Landlord shall at all times during the Term, hold a letter of credit in the amounts described above.  Notwithstanding the foregoing, and provided that between the date of this Lease and the applicable Reduction Date (hereinafter defined): (a) there has been no default on the part of Tenant under the terms of the Lease; and (b) there has

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been no assignment of the Lease, subletting of the Premises or any portion thereof, or any other action on the part of the Tenant which would constitute a transfer as provided in Section 17 of the Lease (the items referred to in (b) being referred to collectively as a “Transfer” and the conditions set forth in (a) and (b) being referred to as the “Conditions”), on the first anniversary date of the Commencement Date and each anniversary date thereafter (each, a “Reduction Date”), the Letter of Credit shall be reduced by an amount equal to one-tenth (1/10th) of the amount of the original Letter of Credit.  In connection therewith, provided that as of each applicable Reduction Date the Conditions shall have remained satisfied, Tenant shall be entitled to replace the then current Letter of Credit with a replacement Letter of Credit which shall meet all of the requirements set forth above, except as to amount, and the amount of the replacement Letter of Credit shall be reduced accordingly.  If at any time during the Term a Transfer occurs, Tenant shall no longer be entitled to any further reductions in the amount of the then-existing Letter of Credit, and in addition, as a condition to entering into the Transfer, and without otherwise modifying Landlord’s rights with respect to any such Transfer as more fully set forth in Section 17 of this Lease, Tenant shall be required to replace the then-existing Letter of Credit with a Letter of Credit in the original amount equal to the Transaction Costs.

9.             Brokers.  Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Red Hawk Properties, Inc, which has acted as Tenant’s broker, and Jones Lang LaSalle Americas, Inc., which has acted as Landlord’s broker, and whose commissions shall be paid by Landlord pursuant to a separate written agreement.  Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys’ fees, and other liability for any commissions or other compensation claimed by any other broker or agent claiming the same by, through, or under the indemnifying party.

10.           Storage Space.  Tenant shall have the right to request from Landlord on-site storage space in the core area of the Building’s parking garage or in such areas as otherwise designated by Landlord.  Landlord’s obligation to provide Tenant with any such storage space shall be subject to availability of space (as reasonably determined by Landlord) and also subject to Tenant entering into Landlord’s then current form of storage space license or rental agreement for any such space.  Landlord hereby agree to negotiate in good faith the non-economic terms and conditions of such storage space license or rental agreement. Without limiting the generality of the foregoing, any such storage space rental or license agreement shall provide that Tenant shall pay Landlord’s then current fee for the use of any such space (which fee is currently $12.00 per square foot of any storage space so used and is subject to change without notice).

11.           Satellite Dish.  Tenant shall have the right to request from Landlord a license for the placement of a satellite dish on the roof of the Building.  Landlord’s obligation to provide Tenant with any such license shall be subject to availability of space (as reasonably determined by Landlord) and also subject to Tenant entering into Landlord’s then current form of license agreement for any such space.  Without limiting the generality of the foregoing, any such license agreement shall provide that Tenant shall pay Landlord’s then current fee for the use of any such space (which fee is currently $500.00 per month for “receive only” antenna roof access rights and is subject to change without notice), and shall also be subject to Landlord’s prior approval of the type, size, quantity and other aspects of the equipment which Tenant desires to place in such space.

12.           Monument Signage.  Subject to Landlord’s Monument Signage Re-Capture Right (hereinafter defined), during the initial Term Tenant shall have the non-exclusive right to place its name on the existing monument sign in front of the Building and located at the corner of 17th Street and Larimer Street (the “Signage”).  The Signage shall be installed and maintained at Tenant’s sole cost and expense throughout the Term.  In addition to payment of the foregoing costs, Tenant shall pay to Landlord the amount of $2,500.00 per year (the “Signage Fee”) for its use of the monument and the Signage thereon, payable annually in advance, with the first such Signage Fee payment due on the Commencement Date (pro-rated for such partial year) and all subsequent Signage Fee payments due on or before January 1st of each subsequent calendar year in the Term.  In the event that Landlord exercises its Monument Signage Re-Capture Right, the Signage Fee for the calendar year in which such termination occurs shall be pro-rated and if such termination is other than at the end of a calendar year, Tenant shall be entitled to a credit against rent for any overpayment of the Signage Fee as so prorated (or if no further rent is due, Landlord shall refund any such overpayment to Tenant).  The location, size, material, design and other aesthetics of the Signage shall be subject to the prior written approval of Landlord, and Tenant

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shall be responsible for compliance with all applicable laws, including without limitation, obtaining all appropriate permits from applicable governmental authorities having jurisdiction.  Upon the expiration or earlier termination of the Lease, or if Landlord exercises its Monument Signage Re-Capture Right, Tenant shall remove the Signage, at Tenant’s sole cost and expense, and restore the monument sign to its condition immediately prior to the installation of the Signage, which obligations shall survive the expiration date of the Lease.  However, if the Signage is not removed as required within five (5) days after Landlord’s notice, then the Signage shall conclusively be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without further notice to Tenant or any other person and without obligation to account therefor.  Tenant shall pay Landlord all expenses incurred in connection with the disposition of the Signage, which obligations shall survive the expiration date of the Lease.  Landlord reserves the right, in its sole discretion and at its expense, to change any existing signage or modify its signage guidelines for the Property at any time and from time to time.  The Signage rights granted to Tenant herein are personal to Tenant, and shall not be transferable in the event of any assignment, subletting or other transfer of Tenant’s interest in the Lease (as amended hereby).  If Tenant installs such Signage but Landlord thereafter determines that it desires to re-capture such space on the monument, regardless of the reason therefor, Landlord shall have the right to re-capture such space (the “Landlord’s Monument Signage Re-Capture Right”) by giving Tenant at least ninety (90) days’ prior written notice to remove the Signage (such date as designated by Landlord being referred to herein as the “Monument Signage Surrender Date”).  In such event, on or before the Monument Signage Surrender Date, Tenant shall remove the Signage and repair all damage caused by such removal, all at Tenant’s cost and otherwise in accordance with the terms of this Lease.  If Tenant fails to remove the Signage as required, Landlord shall have all rights as provided in subparagraph above with respect to the removal of the Signage.

13.           Provisions Regarding Stairwells.

(a)           Access to Stairwells.  Tenant has indicated a desire to have access to the stairwells connecting the 13th and 14th floors of the Building (each, a “Stairwell” and collectively, the “Stairwells”) for the purposes of allowing Tenant and its employees to travel between the Premises located on each of such floors.  Landlord and Tenant agree that, so long as Tenant’s access to the Stairwells as provided herein is permitted by applicable laws, and Tenant otherwise complies with the provisions of this paragraph, Tenant shall be permitted limited access to the Stairwells as provided herein.

(b)           Construction of Access-Card or other Similar System.  Prior to being permitted to access the Stairwells as provided herein, Tenant shall have constructed and installed, at its sole cost and expense, an access-card or other security system allowing limited access by Tenant and its employees to and from the 13th and 14th floors of the Building from the Stairwells and cosmetic work related thereto (the “Stairwell Work”).  In no event shall the Stairwell Work prohibit or otherwise limit the access to the Stairwells by Landlord or any other third parties as may be required to comply with any applicable fire codes or other applicable laws.  The Stairwell Work shall be conducted, if at all, subject to Tenant entering into Landlord’s standard form of work letter and at Tenant’s sole cost and expense, and otherwise in accordance with the terms and conditions of the Lease.

(c)           Waiver; Indemnity; Insurance.  Tenant assumes all risk and waives all claims it may have against Landlord, its managing agent, and their respective partners, directors, officers, agents, employees, affiliates and successors-in-interest (collectively and together with Landlord, the “Landlord Parties”) for damage to or loss of property (including theft) or injury to persons within the Stairwells, except for such damage, loss or injury caused by the gross negligence or willful misconduct of Landlord or Landlord’s managing agent.  Such assumption and waiver shall include an obligation on Tenant’s part to indemnify, defend and hold harmless the Landlord Parties from and against all costs, expenses, claims and liabilities arising from such damage, loss or injury, including attorneys’ fees and costs, which obligation shall survive the expiration or earlier termination of the Lease.  Tenant agrees to cause its insurance policies to insure against any property damage or bodily or personal injury occurring in or around the Stairwells to the same extent as if such damage or injury arose from an act or omission occurring in or upon the Premises.  The waivers and indemnities contained herein are in addition to, and not in lieu of, any waivers and indemnities contained elsewhere in the Lease.

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(d)           Limitation or Suspension of Access.  Landlord shall have the right to temporarily limit, suspend or otherwise restrict Tenant’s access to the Stairwells (or any portion thereof) or Tenant’s access to and from the 13th and/or 14th floors through the Stairwells (or any portion thereof) at any time, without notice, for the purposes of maintaining or repairing the Stairwells, or if Landlord otherwise determines, in its sole and absolute discretion, that such limitation, suspension or restriction is in the best interests of a safe and orderly operation of the Building.  Notwithstanding the foregoing, Landlord will use commercially reasonable efforts to give Tenant at least 24 hours prior telephonic notice prior to imposing any temporary limitation or restriction of Stairwells access as provided in the foregoing sentence, emergencies (as determined by Landlord) excepted, but Landlord shall not be subject to any liability for failure to give Tenant prior telephonic notice of such temporary limitation or restriction, nor shall such failure render the Lease void or voidable or be cause for any abatement of Tenant’s rental obligations for the Premises.  Additionally, Landlord shall have the right to permanently suspend Tenant’s access to and from the Stairwells as provided herein at any time upon ten days’ prior written notice in any of the following events:  (i) if the access permitted herein becomes prohibited by any applicable laws; (ii) if Landlord determines, in its sole discretion, that the access permitted herein is causing unreasonable interference with Landlord’s or other third parties’ use and/or operation of the Building; and/or (iii) if Landlord desires to install an access system to the Stairwells similar in nature to the Stairwell Work.  Notwithstanding the foregoing notice requirement, no advance notice of termination of access to and from the Stairwell as provided herein shall be required in the event of an emergency (as determined by Landlord) requiring immediate termination, or if such termination is based on subparagraph (i) above.

(e)           Removal of Stairwell Work.  At the end of the Term or at such time that Tenant’s right of access to the Stairwells is otherwise terminated as provided herein, whichever first occurs, Tenant shall, at its sole cost and expense, remove the Stairwell Work and restore the Stairwells to the same condition as existed prior to the installation of the same, ordinary wear and tear excepted.  In the event that Tenant does not remove the Stairwell Work and restore the Stairwells as provided herein, Landlord may remove the Stairwell Work and charge the costs to Tenant as additional rent, which obligations shall survive the expiration or earlier termination of the Lease.

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EX-21.1

Exhibit 21.1

SUBSIDIARIES OF EVERGREEN ENERGY INC.

KFx Plant, LLC, a Wyoming limited liability company

KFx Operations, LLC, a Wyoming limited liability company

Landrica Development Company, a South Dakota corporation

KFx Technology, LLC, a Delaware limited liability company

Buckeye Industrial Mining Company, an Ohio corporation

All subsidiaries listed above are 100% owned by Evergreen Energy Inc.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 333-09873, 333-82357, 333-106129, 333-129447 and 333-130336) and Registration Statements on Form S-3 (Nos. 333-04298, 333-28129, 333-82455, 333-88211, 333-87774, 333-104677, 333-106207, 333-121312, 333-128181 and 333-131426) of our reports dated February 28, 2007, relating to the consolidated financial statements of Evergreen Energy Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in method of accounting for stock-based compensation) and management’s report on the effectiveness of internal control over financial reporting of Evergreen Energy Inc., appearing in the Annual Report on Form 10-K of Evergreen Energy Inc. for the year ended December 31, 2006.

Deloitte & Touche LLP

Denver, CO
February 28, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Mark S. Sexton, certify that:

1.             I have reviewed this annual report on Form 10-K of Evergreen Energy Inc.:

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.             The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)           Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the company’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.             The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

/s/ MARK S. SEXTON

Mark S. Sexton

Title: Chief Executive Officer

Date: March 1, 2007

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Diana L. Kubik, certify that:

1.             I have reviewed this annual report on Form 10-K of Evergreen Energy Inc.:

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.             The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)           Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the company’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.             The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

/s/  DIANA L. KUBIK

Diana L. Kubik

Title: Vice President and Chief Financial Officer

Date:  March 1, 2007

EX-32.1

EXHIBIT 32.1

EVERGREEN ENERGY INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Mark S. Sexton, state and attest that:

1.             I am the Chief Executive Officer of Evergreen Energy Inc. (the “Issuer”),

2.             Accompanying this certification is the Form 10-K for the year ended December 31, 2006, a periodic report (the “Periodic Report”) filed by the Issuer with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which contains financial statements.

3.             I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

·the Periodic Report containing the financial statements fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

·the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer for the periods presented therein.

/s/ MARK S. SEXTON

Mark S. Sexton

Title: Chief Executive Officer

Date: March 1, 2007

A signed original of this written statement required by Section 906 has been provided to Evergreen Energy Inc. and will be retained by Evergreen Energy Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

EVERGREEN ENERGY INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Diana L. Kubik, state and attest that:

1.             I am the Vice President and Chief Financial Officer of Evergreen Energy Inc. (the “Issuer”),

2.             Accompanying this certification is the Form 10-K for the year ended December 31, 2006, a periodic report (the “Periodic Report”) filed by the Issuer with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which contains financial statements.

3.             I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

·the Periodic Report containing the financial statements fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

·the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer for the periods presented therein.

/s/  DIANA L. KUBIK

Diana L. Kubik

Title: Vice President and Chief Financial Officer

Date:  March 1, 2007

A signed original of this written statement required by Section 906 has been provided to KFx Inc. and will be retained by Evergreen Energy Inc. and furnished to the Securities and Exchange Commission or its staff upon request.