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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

[X]      Annual Report Under 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 from __________________ to ______________________.

                         Commission file number 0-26509

                               NATIONAL COAL CORP.

             (Exact name of registrant as specified in its charter)

           FLORIDA                                            65-0601272
 State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization                            Identification No.)

                            8915 GEORGE WILLIAMS ROAD
                               KNOXVILLE, TN 37923
                    (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (865) 690-6900


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

   TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
   -------------------                 -----------------------------------------

 COMMON STOCK, PAR VALUE                        NASDAQ GLOBAL MARKET
   $.0001 PER SHARE

           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 [_]   No [X]

       Indicate by check mark if the  registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.

                                  Yes [_]   No [X]

       Indicate by check mark whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                  Yes [X]   No [_]

         Indicate by check mark 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. [_]


<PAGE>


       Indicate by check mark  whether  the  registrant  is a large  accelerated
filer, and accelerated filer or a non-accelerated filer.

 Large Accelerated Filer [_]  Accelerated Filer [_]  Non-accelerated Filer [X]

       Indicate by check mark  whether  the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Act).

                                  Yes [_]   No [X]

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  of the  registrant  as of June 30,  2006,  based on the
closing  price of the common  stock as reported by The NASDAQ  Global  Market on
such date, was approximately $34,682,421.

         As of March 27, 2007, the issuer had 19,540,745 shares of common stock,
par value $.0001 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the issuer's Proxy Statement for its 2007 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report.

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<PAGE>


                               NATIONAL COAL CORP.
                               INDEX TO FORM 10-K

PART I                                                                      PAGE

Item 1.       Business..................................................       2

Item 1A.      Risk Factors..............................................      14

Item 1B.      Unresolved Staff Comments.................................      24

Item 2.       Properties................................................      24

Item 3.       Legal Proceedings.........................................      27

Item 4.       Submission of Matters to a Vote of Security Holders.......      28


PART II

Item 5.       Market for Registrant's Common Equity, Related
              Stockholder Matters and Issuer purchases of Equity
              Securities................................................      29

Item 6.       Selected Financial Data...................................      31

Item 7.       Management's Discussion and Analysis of Financial
              Condition and Results of Operation........................      32

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk      47

Item 8.       Financial Statements and Supplementary Data...............      50

Item 9.       Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.......................      83

Item 9A.      Controls and Procedures...................................      83

Item 9B       Other Information.........................................      83


PART III

Item 10.      Directors, Executive Officers, and Corporate Governance...      84

Item 11.      Executive Compensation....................................      84

Item 12.      Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters................      84

Item 13.      Certain Relationships, Related Transactions, and Director
              Independence..............................................      84

Item 14.      Principal Accountant Fees and Services....................      84


PART IV

Item 15.      Exhibits and Financial Statement Schedules................      85


<PAGE>


                                     PART I

         This  report,   including  the  sections   entitled   "Risk   Factors,"
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operation" and "Business,"  contains  "forward-looking  statements" that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These  forward-looking   statements  include,  without  limitation,   statements
regarding:  proposed  new  services;  our  expectations  concerning  litigation,
regulatory  developments or other matters;  statements  concerning  projections,
predictions,  expectations,  estimates or forecasts for our business,  financial
and  operating   results  and  future   economic   performance;   statements  of
management's  goals and  objectives;  and other similar  expressions  concerning
matters that are not historical  facts.  Words such as "may," "will,"  "should,"
"could," "would," "predicts," "potential," "continue," "expects," "anticipates,"
"future,"   "intends,"   "plans,"   "believes"  and   "estimates,"  and  similar
expressions,  as well as statements in future  tense,  identify  forward-looking
statements.

         Forward-looking  statements should not be read as a guarantee of future
performance or results,  and will not necessarily be accurate indications of the
times at, or by which,  that  performance  or those  results  will be  achieved.
Forward-looking  statements are based on information  available at the time they
are made and/or  management's  good faith belief as of that time with respect to
future  events,  and are  subject to risks and  uncertainties  that could  cause
actual  performance or results to differ  materially  from those expressed in or
suggested by the forward-looking statements.  Important factors that could cause
these differences include, but are not limited to:

         o        the worldwide demand for coal;

         o        the price of coal;

         o        the supply of coal and other competitive factors;

         o        the costs to mine and transport coal;

         o        the ability to obtain new mining permits;

         o        the costs of reclamation of previously mined properties;

         o        the risks of expanding coal production;

         o        industry competition;

         o        our  ability to  continue  to finance  and  execute our growth
                  strategies;

         o        general economic conditions; and

         o        other factors  discussed  under the headings  "Risk  Factors,"
                  "Management's  Discussion and Analysis of Financial  Condition
                  and Results of Operations" and "Business."

         Forward-looking statements speak only as of the date they are made. You
should not put undue reliance on any  forward-looking  statements.  We assume no
obligation  to update  forward-looking  statements  to reflect  actual  results,
changes in  assumptions  or changes in other factors  affecting  forward-looking
information,  except to the extent required by applicable securities laws. If we
do update one or more forward-looking  statements,  no inference should be drawn
that  we  will  make   additional   updates  with  respect  to  those  or  other
forward-looking statements.


                                       1
<PAGE>


ITEM 1.       BUSINESS.

CORPORATE OVERVIEW

         We mine, process and sell high quality bituminous steam coal from mines
located in East  Tennessee and  Southeastern  Kentucky.  We own the coal mineral
rights  to  approximately   74,600  acres  of  land  and  lease  the  rights  to
approximately   40,900   additional  acres.  We  have  expanded  our  operations
considerably  since commencing  operations at a single surface mine in Tennessee
in July 2003. As of December 31, 2006, our active mining complexes  included two
underground  mines, two surface mines,  and two highwall mines. In addition,  we
have four preparation  plants, two active and two inactive,  and four unit train
loading facilities,  two active and two inactive,  served by the CSX and Norfolk
Southern ("NS") railroads. We hold permits that allow us to open or re-open five
new  mines  close  to our  current  operations.  As of  December  31,  2006,  we
controlled  approximately  36.2  million  estimated  recoverable  tons  of  coal
reserves.  During the year ended December 31, 2006, we generated  total revenues
of $87.5  million,  an  EBITDA  loss of $1.1  million,  and  sold  approximately
1,643,000  tons of coal.  Our goal is to acquire  additional  mines and increase
production from existing reserves as market conditions allow.

         Our revenues have resulted  primarily from the sale of coal to electric
utility  companies  in the  Southeastern  United  States.  According to the U.S.
Department of Energy, Energy Information  Administration  ("EIA"), the long-term
outlook  for coal  demand  in the  Southeast  is  favorable,  as coal  generated
electricity in our region is expected to grow at a rate of 2.5% per year. During
the year ended December 31, 2006, approximately 84% of our revenue was generated
from coal sales to electric utility companies in the Southeastern United States.
Our largest  customers were South  Carolina  Public  Service  Authority  (Santee
Cooper), Georgia Power, and Duke Power, representing  approximately 32%, 25% and
18% of our revenues, respectively.

         In the year ended December 31, 2006,  our mines produced  approximately
1,329,000  tons of  coal.  Approximately  51% of our  production  for  2006  was
produced at  underground  mines and 49% was produced at our surface and highwall
mine operations. We sell a majority of our coal pursuant to long-term contracts.
We plan to pursue additional long-term contracts.

BUSINESS STRATEGY

         FOCUS ON SAFETY AND  ENVIRONMENTAL  STEWARDSHIP.  We are  committed  to
establishing a reputation as the operator of the safest and most environmentally
responsible  mines in the country.  Our ability to minimize  lost-time  injuries
will  improve our cost  structure,  foster  strong  governmental  and  community
relationships   and  enhance  our   financial   performance.   We  believe  that
environmental regulations will continue to become more restrictive, and that our
commitment to  environmental  excellence will enhance our ability to comply with
those regulations.

         INCREASE  PRODUCTION  AND DEVELOP  RESERVES.  We have expanded our coal
sales 35% from  1,216,000  tons in 2005 to  1,643,000  tons in 2006.  We plan to
expand coal production as market  conditions  allow. We hold permits allowing us
to open three new mines and re-open two additional  mines on our properties.  We
also have applied for permits to open and operate  seven  additional  mines.  At
December  31,  2006,  we  controlled   approximately   36.2  million   estimated
recoverable  tons,  and we believe that we have  substantial  unproven  deposits
which can be developed.

         IMPROVE  PRODUCTION  EFFICIENCIES.  We plan to  continue to improve our
operating   efficiencies   through  greater   economies  of  scale  and  capital
improvements.  As we expand our production capabilities, we plan to increasingly
leverage our fixed cost  infrastructure and reduce our per ton production costs.
In order to achieve new  efficiencies,  we spent  approximately  $9.5 million to
modernize our Baldwin  preparation  plant and rail  load-out  facility that will
enable us to reduce cost and expand processing  capacity in the southern portion
of our  Tennessee  reserves.  In February  2006,  we purchased a forty-two  mile
railroad  line that will enable us to transport  coal from the Baldwin  facility
and further reduce our internal transportation costs from this area.


                                       2
<PAGE>


         CONTINUE TO DEVELOP STRONG CUSTOMER  RELATIONSHIPS.  Since we commenced
operations  in July  2003,  we have  worked  hard to  develop a  reputation  for
reliability,  consistent quality and customer service.  We intend to continue to
develop strong  relationships  with our existing  customers and new customers in
order to enhance our market position and secure favorable long-term contracts.

         CONTINUE  TO ACQUIRE  CONTIGUOUS  RESERVES.  Our mining  properties  in
Tennessee  and  Kentucky  are located in close  proximity to one another and are
well served by adjacent railroad and interstate  highway access. We believe that
opportunities  may exist to acquire  nearby  reserves  to further  leverage  our
railroad access and preparation plant facilities.

HISTORY

         Our  operations  prior to April 30, 2003  reflect  only the start-up of
National  Coal  Corporation,  a Tennessee  corporation,  which  consisted of the
formation of the  corporation  and the purchase of the New River Tract discussed
below in "Item 2. Properties".  Prior to April 30, 2003,  National Coal Corp., a
Florida corporation, formerly known as Southern Group International, Inc., was a
"blank check" company,  which is a company that has no specific business plan or
purpose  or has  indicated  that its  business  plan is to engage in a merger or
acquisition  with an  unidentified  company  or  companies.  On April 30,  2003,
National  Coal  Corporation  consummated  a  reorganization  in which all of the
outstanding  shares of National Coal  Corporation,  a  privately-held  Tennessee
corporation,  were exchanged for 8,549,975 shares of Southern Group, Inc., which
subsequently  changed its name to National  Coal Corp.,  a Florida  corporation.
National Coal Corporation was formed in January 2003, and from inception through
June 30, 2003,  National Coal  Corporation was in the exploration  stage with no
operating  revenue.  During the third quarter of 2003, we commenced  coal mining
operations and were no longer in the exploration stage.


                                       3
<PAGE>


MINING OPERATIONS

         Currently we are mining coal from two surface  mines,  two  underground
mines and one highwall mine.

<TABLE>
<CAPTION>
                                                                2006         2005         2004       PERMITTED     YEAR
                                    MINING                   PRODUCTION   PRODUCTION   PRODUCTION    RESERVES    OPENED OR
   MINE NAME         LOCATION       METHOD       STATUS        (000'S)      (000'S)      (000'S)      (000'S)    ACQUIRED
   ---------         --------       ------       ------       -------      -------      -------      -------     --------
      TENNESSEE MINES
<S>              <C>                <C>          <C>                <C>        <C>            <C>       <C>        <C>
Mine #1          New River Tract      UG         Closed               0           19           25            0     2004
Mine #2          New River Tract      UG         Closed               0            0          102            0     2003
Mine #3          New River Tract    Surface      Active              29            0            0          526     2006
Mine #3
HWM              New River Tract      HWM        Active              26            0            0          642     2006
Mine #7          Ketchen Lease      Surface      Active             300          268           12        4,733     2004
Mine #9          New River Tract      UG         Closed               0           35          129            0     2004
Mine #11         TVA Lease            UG         Active             371          327           10          924     2004
Mine #17         New River Tract      UG          Idle               26            0            0        5,765     2006
                                                            ------------ ------------ ------------ ------------
TOTAL TENNESSEE MINES                                               752          649          278       12,590

      KENTUCKY MINES
Mine KY#1        Straight Creek       UG         Active             228          206           15          228     2004
Mine KY#2        Straight Creek       UG          Idle               60           74            0        1,799     2005
Mine KY#3        Straight Creek       HWM        Closed              33          163            0            0     2005
Mine KY#4        Straight Creek     Surface      Closed              57           28            0            0     2005
Mine KY#6        Straight Creek       HWM         Idle              199            0            0            0     2006
                                                            ------------ ------------ ------------ ------------
TOTAL KENTUCKY MINES                                                577          471           15        2,027
                                                            ------------ ------------ ------------ ------------

ALL MINES                                                         1,329        1,120          293       14,617
                                                            ============ ============ ============ ============

</TABLE>

UG=Underground
HWM=Highwall Miner


TENNESSEE MINING AREAS

         We have two mining areas in Tennessee  characterized  by proximity to a
preparation plant and a rail loading facility:

         SMOKY JUNCTION PREPARATION PLANT. The Northern portion of our Tennessee
properties  include Mine #7 and Mine #11. These mines utilize the Smoky Junction
preparation  plant,  as  necessary,  and ship via rail or truck  from the Turley
load-out.  Smoky Junction has an estimated  processing capacity of 720,000 clean
tons per year. Currently,  the coal mined from #3 HWM is also being processed at
Smoky Junction and shipped from Turley.

         BALDWIN  FACILITY.  The Baldwin  Facility,  including the purchase of a
42-mile short line  railroad,  was  refurbished at a cost of $9.5 million during
2006 for the purpose of providing robust processing and


                                       4
<PAGE>


loading facilities to support at least five separate mining opportunities in the
adjacent  area.  The Baldwin  Facility  resides on the New River Tract, a 65,000
acre parcel of owned coal mineral rights. In December 2006 and January 2007, due
to declining coal prices and growing coal  stockpiles at utility  companies,  we
have put our plans for the  development of the Baldwin mining area on hold until
such time as coal demand and pricing supports the effort.

KENTUCKY MINES

         We acquired our  Kentucky  operations  on the  Straight  Creek and Pine
Mountain tracts from Appalachian  Fuels, LLC  ("Appalachian  Fuels") in November
2004. We have two mining areas in Kentucky,  each  geographically  separated and
having access to a preparation plant and loading facility:

         STRAIGHT CREEK.  Currently,  all of our mining in Kentucky is occurring
on this tract of leased  and owned  mineral  rights in  Harlan,  Bell and Leslie
counties.  All coal is processed at the Brittain  preparation plant which has an
estimated annual  processing  capacity of 1.8 million tons per year. All coal is
loaded onto trains at the Viall rail  loading  facility  which is located on the
CSX railroad.  We completely mined two separate  permitted areas during 2006 and
have currently  idled two mines in Kentucky due to high cost in the case of mine
KY#2 and in  anticipation  of  additional  permit  approvals in the case of mine
KY#6. Mine KY#6 is expected to re-open in the last half of 2007.

         PINE  MOUNTAIN.  We are not mining on the Pine Mountain  tracts at this
time. The preparation plant in Pine Mountain,  Kentucky, is not currently in use
and would need capital improvements to become operational. We intend, subject to
availability  of funds,  to improve the loading and  preparation  plant facility
where necessary to serve our growing production needs.

PERMITTED NON-OPERATING MINES

         Currently,  we have three issued mining  permits for mines that are not
yet  operating and two issued  permits for mines which have been idled.  Four of
these permits are for mines located in Tennessee and one is in Kentucky. We have
also  applied for  permits,  or have permit  applications  in various  stages of
processing, that should enable us to operate an additional seven mines.

TRANSPORTATION

         Our  Tennessee and Kentucky  operations  are both within a few miles of
major interstate  highways,  which provide access for trucking  transport of our
coal. Our Turley,  Tennessee rail load-out facility is immediately adjacent to a
portion  of the  Norfolk-Southern  rail  system,  and our  Viall  rail  load-out
facility  located in  Straight  Creek,  Kentucky  is  immediately  adjacent to a
portion  of the CSX rail  system.  In  February  2006,  through  a  wholly-owned
subsidiary, we purchased forty-two miles of railroad track from Norfolk-Southern
Railroad  which  connects  our Baldwin  facility in  Devonia,  Tennessee  to the
Norfolk-Southern rail system in Oneida, Tennessee.

         We use independent contractors to transport coal from the mine sites to
our preparation plants and load-out facilities.

EMPLOYEES

         At December 31, 2006, we had 279 full-time employees, of which 240 were
engaged in direct mining or processing operations, 10 in mining supervision,  14
in other operating capacities, and 15 in executive management,  sales, legal and
general  administration.  None of our  employees  are  covered  by a  collective
bargaining  agreement.  We consider our  relationship  with our  employees to be
favorable.  We utilize the services of independent  consultants  as needed.  The
miners and  supervisors are based in East Tennessee and  Southeastern  Kentucky;
the Chief Executive Officer,  Chief Operating  Officer,  Chief Financial Officer
and General  Counsel are based in Knoxville,  Tennessee.  Additionally,  we used


                                       5
<PAGE>


approximately  100-150  additional  contracted  employees for mining and hauling
services in a typical month during 2006.

MARKETING AND SALES

         Our  marketing  and sales  efforts are  performed by  independent  coal
brokers. Our sales efforts primarily are focused on increasing our customer base
of electric  utilities in the Southeastern  region of the United States.  We are
also targeting industrial  customers.  We do not anticipate exporting any of our
production for the foreseeable future.

         During  the  year  ended  December  31,  2006,  we  sold  approximately
1,643,000  tons of coal at an  average  price of $52.86  per ton,  resulting  in
approximately $86.8 million in coal sales. Of this,  approximately  406,000 tons
were sold in the fourth  quarter at an average  price of $51.90 per ton. Our top
three customers,  all electric utilities,  represented  approximately 76% of the
tonnage relating to these coal sales.

CUSTOMERS

         During the twelve  months ended  December 31, 2006, we generated all of
our coal sales  revenue from  thirteen  customers,  four of which were  electric
utilities  (84%),  eight of which were industrial  companies (16%) and one was a
coal reseller (<1%). All of our sales in the first nine months of 2004 were made
pursuant  to short term  contracts  with our  electric  utility  and  industrial
customers.  Sales to coal resellers were made on a spot basis.  Most of our coal
sales in the  fourth  quarter  2004  through  December  2006 were  derived  from
contracts twelve months or greater.  We intend to expand the number of customers
we serve as our coal production increases, and to enter into long term contracts
for the majority of our coal  production to obtain greater price  certainty.  At
December 31, 2006, we had contracts  with five customers with a term of one year
or longer. The following table summarizes,  as of December 31, 2006, the tons of
coal that we are  committed  to  deliver  at prices  determined  under  existing
long-term  contracts,  which prices are subject to annual  adjustment  under the
terms of our contracts, during the calendar years 2007 through 2010:

                          ------------- -- --------------- ---- ---------------
CALENDAR YEAR                 TONS            AVG. $/ TON         DOLLAR VALUE
                          -------------    ---------------      ---------------

2007..................       1,402,500             $50.86          $71,327,700
2008..................         210,000              52.49           11,022,000
2009..................         197,500              51.16           10,104,500
2010..................         137,879              49.00            6,756,071
                          -------------    ---------------      ---------------
    Total.............       1,947,879             $50.93          $99,210,271
                          =============    ===============      ===============

COMPETITION

         The coal  industry is intensely  competitive.  We compete with numerous
domestic coal  producers and coal  importers.  We also compete with producers of
other fuels used in electricity  generation,  including nuclear and natural gas.
In addition to competition from other fuels, coal quality,  the marginal cost of
producing coal in various regions of the country,  and transportation  costs are
major determinants of the price for which our coal can be sold.

COAL MINING TECHNIQUES

         Coal mining  operations  can be divided  into  surface and  underground
mining methods. The most appropriate mining technique is determined by coal seam
characteristics  such as location and recoverable reserve base.  Drill-hole data
are used  initially  to define the size,  depth and quality of the coal  reserve
area  before  committing  to a specific  extraction  technique.  All coal mining
techniques  rely heavily on technology,  improvements  to which have resulted in
increased  productivity.  The five most common mining  techniques are continuous
mining, longwall mining, truck-and-shovel mining, dragline mining,


                                       6
<PAGE>


and  highwall  mining,   the  newest  technique.   We  use  continuous   mining,
truck-and-shovel mining and highwall mining.

         SURFACE MINING.  Generally, it is easier and cheaper to mine coal seams
that  are  thick  and  located  close  to the  surface  than it is to mine  thin
underground seams.  Typically,  coal-mining operations will begin at the part of
the coal seam that is closest to the surface and most economical to mine. As the
seam is mined,  it becomes more difficult and expensive to mine because the seam
either  becomes  thinner or  protrudes  more  deeply  into the earth,  requiring
removal of more material over the seam,  known as "overburden." As the amount of
overburden increases the cost to mine coal increases. For example, many seams of
coal in  Central  Appalachia  are  between  one to ten feet  thick  and  located
hundreds of feet below the surface. In contrast, seams in the Powder River Basin
of Wyoming may be eighty feet thick and located only 100 feet below the surface.

         TRUCK-AND-SHOVEL  MINING.  Truck-and-shovel  mining is a surface mining
method  that uses  either  large  electric-powered  shovels or front end loaders
("loaders")  to remove  the  earth or  OVERBURDEN  that  covers  the  coal.  The
overburden is loaded onto large off-road  trucks,  and the overburden is used to
backfill  pits  after  coal  removal.  Loaders  load coal into coal  trucks  for
transportation  to the preparation  plant or rail load-out.  Seam recovery using
the  truck-and-shovel  method is typically 90%.  Productivity depends on size of
equipment,   geological  composition  and  the  ratio  of  overburden  to  coal.
Productivity  varies between 250 to 400 tons per miner shift in the Powder River
Basin where the overburden ratio is approximately  four to one, versus thirty to
eighty tons per miner shift in Central  Appalachia where the overburden ratio is
approximately twenty to one.

         HIGHWALL  MINING.  Highwall  mining  is a  mining  method  in  which  a
continuous  mining  machine is driven by remote control into the seam exposed by
previous open cut  operations,  or  "highwall",  which was the result of surface
mining operations. A continuous haulage system carries the coal from the digging
face to the surface for stockpiling  and transport.  This process forms a series
of  parallel,  unsupported  cuts along the  highwall.  It is vital that the coal
pillars  remaining  between  adjacent  drives  are  capable  of  supporting  the
overburden structure.

         UNDERGROUND  MINING.  Those seams that are too deep to surface mine can
be economically mined with specialized equipment matched to the thickness of the
coal seam. Underground mining methods consist of "room and pillar" and "longwall
mining." Room and pillar mining  typically  requires using a continuous miner to
cut a system of entries  into the coal,  leaving  pillars to support  the strata
above the coal.  Shuttle cars then transport the coal from the digging face to a
conveyor  belt for  transport to the surface.  This method is often used to mine
thin seams, and seam recovery is typically 50% or less. Longwall mining requires
a  sophisticated  array of  equipment  that cuts a block of coal as wide as 1000
feet and as long as 5000 feet. This mining method  requires a very large,  thick
seam of coal and a  sophisticated  array of  expensive  mining  equipment.  Most
underground mining in the U.S. is performed using continuous miners.

COAL CHARACTERISTICS

         HEAT  VALUE.  The heat value of coal is  commonly  measured  in Btu per
pound of coal. Coal found in the Eastern and  mid-Western  regions of the United
States, including Central Appalachia,  tends to have a heat content ranging from
10,000 to 15,000 Btu per pound.  Most coal found in the  Western  United  States
ranges from 8,000 to 10,000 Btu per pound.  The weight of  moisture in coal,  as
sold,  is  included in  references  to Btu per pound of coal,  unless  otherwise
indicated.

         SULFUR CONTENT. Sulfur content can vary from seam to seam and sometimes
within each seam. Coal combustion  produces sulfur dioxide,  the amount of which
varies depending on the chemical  composition and the concentration of sulfur in
the coal. Low sulfur coal has a variety of definitions,  and in using this term,
we refer to coal with sulfur content of 2.0% or less by weight.  Compliance coal
refers to coal with a sulfur  content of less than 1.2 pounds of sulfur  dioxide
per million Btu. The strict emissions standards of


                                       7
<PAGE>


the Clean Air Act have increased demand for low sulfur coal. We expect continued
high demand for low sulfur coal as electric generators meet the current Phase II
requirements  of the Clean Air Act (1.2  pounds  or less of sulfur  dioxide  per
million Btu).

         Sub-bituminous  coal typically has lower sulfur content than bituminous
coal,  but  some  bituminous  coal in  Colorado,  Eastern  Kentucky,  Tennessee,
Southern West Virginia and Utah also has a low sulfur content.

         OTHER. Ash is the inorganic  residue  remaining after the combustion of
coal. As with sulfur content,  ash content varies from seam to seam. Ash content
is an  important  characteristic  of coal for electric  generating  plants as it
affects  combustion  performance  and  utilities  must handle and dispose of ash
following combustion.

         Moisture  content of coal varies by the type of coal,  the region where
it is mined and the location of coal within a seam.  In general,  high  moisture
content  decreases the heat value and increases the weight of the coal,  thereby
making it more expensive to transport with less combustion efficiency.  Moisture
content in coal, as sold, can range from  approximately  5% to 30% of the coal's
weight.  Generally,  the moisture content of coal from Central Appalachia ranges
from 5% to 9%.

         The other major market for coal is the steel industry. The type of coal
used in steel making is referred to as  metallurgical  coal and is distinguished
by special  quality  characteristics  that  include  high  carbon  content,  low
expansion pressure and various other chemical attributes.  Metallurgical coal is
also high in heat  content (as measured in Btu),  and  therefore is desirable to
utilities as fuel for electricity generation.  Consequently,  metallurgical coal
producers  have the  ongoing  opportunity  to select  the market  that  provides
maximum revenue. The premium price offered by steel makers for the metallurgical
quality  attributes  is typically  higher than the price offered by utility coal
buyers that value only the heat content.

         Once raw coal is  mined,  it is often  crushed,  sized  and  washed  in
preparation plants where product consistency and heat content are improved. This
process  involves  crushing the coal to the required size,  removing  impurities
and,   where   necessary,   blending  it  with  other  coal  to  match  customer
specifications.

         When some types of coal are super-heated in the absence of oxygen, they
form a hard, dry, caking form of coal called "coke." Steel  production uses coke
as a fuel and reducing agent to smelt iron ore in a blast  furnace.  Most of the
coking coal comes from coal found in Northern and Central Appalachia.

COAL PRICES

         Coal prices vary  dramatically by region and are determined by a number
of factors.  The two principal components of the delivered price of coal are the
price of coal at the mine,  which is influenced by mine operating costs and coal
quality,  and the cost of  transporting  coal from the mine to the point of use.
Electric  utilities  purchase coal on the basis of its total  delivered cost per
million Btu. The higher the Btu of the coal, the fewer tons the utility needs to
buy to meet its requirements.

         PRICE AT THE  MINE.  The  price of coal at the  mine is  influenced  by
geological  characteristics such as seam thickness,  overburden ratios and depth
of  underground  reserves.  Eastern United States coal is more expensive to mine
than  Western  coal  because  of  thinner  coal  seams and  thicker  overburden.
Underground  mining,  prevalent in the Eastern United  States,  has higher costs
than surface mining because it requires more people,  greater development costs,
and higher costs to remove impurities.

         In addition to direct  mining  costs,  the price of coal at the mine is
also a function of quality  characteristics  such as heat value, sulfur, ash and
moisture content. Metallurgical coal has higher carbon and lower ash content and
is usually  priced higher than steam coal  produced in the same regions.  Higher
prices are paid for  special  coking coal with low  volatility  characteristics.
Very few coal seams possess these unique metallurgical coal qualities.


                                       8
<PAGE>


         TRANSPORTATION  COSTS. Coal used for domestic  consumption is generally
sold FREIGHT ON BOARD,  or FOB, at the mine and shipped by railroad or by truck.
The buyer normally bears the  transportation  costs.  Export coal,  however,  is
usually  sold at the  loading  port,  and coal  producers  are  responsible  for
arranging and paying for shipment to the export coal-loading facility. The buyer
does not acquire ownership of the coal or pay for it until it is loaded onto the
ship.

         Most electric  generators  arrange  long-term  shipping  contracts with
rail, truck, or barge companies to assure stable delivered costs. Transportation
can be a large  component of a buyer's cost,  especially  if long  distances are
involved  such as from  Wyoming to the  Southeast.  Although  the buyer pays the
freight,  transportation  costs are still  important  to coal  mining  companies
because  the buyer may  choose a supplier  based on the cost of  transportation.
According  to the  National  Mining  Association,  railroads  account for nearly
two-thirds  of total coal  shipments in the United  States.  Trucks and overland
conveyors  haul coal over  shorter  distances,  while  lake  carriers  and ocean
vessels move coal mainly to export  markets.  Some domestic coal is shipped over
the Great Lakes.  Most coal mines are served by a single rail company,  but much
of the Powder River Basin is served by two competing rail  carriers.  Coal mines
in Central Appalachia generally are served by either the Norfolk-Southern or the
CSX rail lines.

REGULATORY MATTERS

         Federal,  state and local  authorities  regulate the United States coal
mining  industry  with  respect to matters  such as employee  health and safety,
permitting and licensing requirements,  air quality standards,  water pollution,
plant  and  wildlife  protection,  the  reclamation  and  restoration  of mining
properties, the discharge of materials into the environment,  surface subsidence
from underground  mining,  and the effects of mining on groundwater  quality and
availability.  The Mine Safety and Health  Administration,  or MSHA, is the U.S.
Department of Labor agency  responsible for the health and safety of miners. The
Office of Surface Mining, or OSM, is the Department of the Interior agency which
governs  the  issuance  of  permits  and  is  responsible   for  overseeing  the
reclamation,  restoration and other environmental  processes for the coal mining
industry.

         The  industry is also  affected by  significant  legislation  mandating
certain benefits for current and retired coal miners.  Numerous  federal,  state
and local governmental permits and approvals are required for mining operations.
We believe that we have obtained all permits  currently  required to conduct our
present  mining  operations  and  are  in  compliance  with  all  MSHA  and  OSM
regulations  pursuant  to our  operations.  We may be  required  to prepare  and
present to federal,  state or local authorities data pertaining to the effect or
impact that a proposed  development  for, or production of, coal may have on the
environment. These requirements could prove costly and time-consuming, and could
delay  commencing or continuing  development  or production  operations.  Future
legislation and  administrative  regulations may emphasize the protection of the
environment and, as a consequence, our activities may be more closely regulated.
Such legislation and  regulations,  as well as future  interpretations  and more
rigorous  enforcement  of existing laws,  may require  substantial  increases in
equipment  and operating  costs and delays,  interruptions  or a termination  of
operations, the extent of which cannot be predicted.

         We endeavor to conduct our mining  operations  in  compliance  with all
applicable federal,  state and local laws and regulations.  However,  because of
extensive and comprehensive  regulatory  requirements,  violations during mining
operations  occur from time to time. The majority of any such violations  result
from natural causes, such as heavy rainfall or diverse  temperature  conditions,
that cause  physical  changes to the land surface or water  levels  resulting in
excess  sedimentation in streams or land slides.  None of the violations to date
or the monetary penalties assessed upon us have been material.

     MINE SAFETY AND HEALTH

         Stringent  health  and  safety  standards  have  been in  effect  since
Congress  enacted the Coal Mine Health and Safety Act of 1969.  The Federal Mine
Safety and Health Act of 1977 significantly expanded


                                       9
<PAGE>


the  enforcement  of safety and health  standards and imposed  safety and health
standards on all aspects of mining operations.

         Most states,  including  the states in which we operate,  have programs
for mine safety and health regulation and enforcement. Collectively, federal and
state safety and health  regulation  in the coal mining  industry is perhaps the
most  comprehensive  and pervasive  system for protection of employee health and
safety affecting any segment of United States  industry.  While regulation has a
significant effect on our operating costs, our regional  competitors are subject
to the same degree of regulation.

     ENVIRONMENTAL LAWS

         We are subject to various federal and state environmental laws. Some of
these  laws,  discussed  below,  place  many  requirements  on our  coal  mining
operations.  Federal and state  regulations  require  regular  monitoring of our
mines and other facilities to ensure compliance.

     SURFACE MINING CONTROL AND RECLAMATION ACT

         The Surface Mining  Control and  Reclamation  Act  ("SMCRA"),  which is
administered  by  OSM,   establishes   mining,   environmental   protection  and
reclamation  standards for all aspects of surface mining as well as many aspects
of  underground  mining.  Mine  operators  must obtain SMCRA  permits and permit
renewals for mining  operations  from the OSM. Where state  regulatory  agencies
have adopted  federal mining  programs  under the act as in Kentucky,  the state
becomes the regulatory authority.

         SMCRA permit provisions include requirements for coal prospecting; mine
plan development;  topsoil removal, storage and replacement;  selective handling
of overburden  materials;  mine pit backfilling  and grading;  protection of the
hydrologic balance;  subsidence control for underground mines;  surface drainage
control;   mine  drainage  and  mine  discharge   control  and  treatment;   and
re-vegetation.

         Before a SMCRA permit is issued,  a mine operator must submit a bond or
otherwise secure the performance of reclamation obligations.  The Abandoned Mine
Land  Fund,  which is part of SMCRA,  requires a fee on all coal  produced.  The
proceeds  are used to reclaim  mine lands closed prior to 1977 and to pay health
care benefit costs of orphan  beneficiaries of the Combined Fund. The fee, which
partially expired on September 30, 2004, is $0.35 per ton on surface-mined  coal
and $0.15 per ton on  deep-mined  coal.  Beginning  on October 1, 2007,  the fee
drops  to  $0.315  per  ton  on  surface-mined   coal  and  $0.135  per  ton  on
underground-mined coal. Since September 30, 2004, a fee is assessed each year to
cover the expected health care benefit costs of the orphan beneficiaries.

         SMCRA  stipulates   compliance  with  many  other  major  environmental
programs.  These programs  include the Clean Air Act, Clean Water Act,  Resource
Conservation and Recovery Act ("RCRA"),  Comprehensive  Environmental  Response,
Compensation, and Liability Acts ("CERCLA") superfund and employee right-to-know
provisions.  Besides  OSM,  other  Federal  and State  regulatory  agencies  are
involved in monitoring or permitting specific aspects of mining operations.  The
United States  Environmental  Protection  Agency  ("EPA") is the lead agency for
States or Tribes with no authorized programs under the Clean Water Act, RCRA and
CERCLA.  The United States Army Corps of Engineers ("COE") regulates  activities
affecting navigable waters and the United States Bureau of Alcohol,  Tobacco and
Firearms ("ATF") regulates the use of explosive blasting.

         We do not believe there are any substantial matters that pose a risk to
maintaining  our existing mining permits or hinder our ability to acquire future
mining permits.  It is our policy to comply with all requirements of the Surface
Mining Control and Reclamation Act and the state laws and regulations  governing
mine reclamation.

     CLEAN AIR ACT

         The coal  industry has witnessed a recent shift in demand to low sulfur
coal production  driven by regulatory  restrictions on sulfur dioxide  emissions
from coal-fired power plants. The Clean Air Act, the


                                       10
<PAGE>


Clean Air Act  Amendments  and the  corresponding  state laws that  regulate the
emissions of materials into the air, affect coal mining operations both directly
and  indirectly.  Direct  impacts on coal mining and  processing  operations may
occur through Clean Air Act  permitting  requirements  and/or  emission  control
requirements  relating to particulate matter,  such as fugitive dust,  including
future  regulation  of fine  particulate  matter  measuring ten  micrometers  in
diameter or smaller. The Clean Air Act indirectly affects coal mining operations
by extensively regulating the air emissions of sulfur dioxide,  nitrogen oxides,
mercury  and other  compounds  emitted  by  coal-fueled  electricity  generating
plants.

         For  example,  in 1995,  Phase I of the Clean Air Act Acid Rain program
required high sulfur coal plants to reduce their  emissions of sulfur dioxide to
2.5 pounds or less per million Btu,  and in 2000,  Phase II of the Clean Air Act
tightened  these  sulfur  dioxide  restrictions  further to 1.2 pounds of sulfur
dioxide  per  million  Btu.  Currently,   electric  power  generators  operating
coal-fired plants can comply with these requirements by:

         o        burning lower sulfur coal,  either  exclusively  or mixed with
                  higher sulfur coal;

         o        installing pollution control devices such as scrubbers,  which
                  reduce the emissions from high sulfur coal;

         o        reducing electricity generating levels; or

         o        purchasing or trading emission credits to allow them to comply
                  with the sulfur dioxide emission compliance requirements.

     However, as new and proposed laws and regulations,  including the Clean Air
Interstate Rule and the Clean Air Mercury Rule,  require  further  reductions in
emissions, coal-fired utilities may need to install additional pollution control
equipment,  such as wet scrubbers,  to comply.  Installation  of such additional
pollution control equipment could potentially result in a decrease in the demand
for low sulfur  coal  (because  sulfur  would be removed by the new  equipment),
potentially driving down prices for low sulfur coal.

     CLEAN WATER ACT

         The  Clean  Water  Act  of  1972  affects  coal  mining  operations  by
establishing water quality standards and regulating  alteration of surface water
bodies.  Much  of the  responsibility  for  standard  setting,  monitoring,  and
enforcement is delegated to state agencies,  with federal  oversight.  There are
three major aspects in the standard-setting process. First, the states establish
use  designations  for all surface  water bodies.  Second,  scientifically-based
water quality  criteria  (numeric or narrative) are established to be protective
of the designated uses. These criteria include total maximum daily load ("TMDL")
discharge  standards  which are  monitored  and  enforced  through the  National
Pollution  Discharge  Elimination  System ("NPDES").  Water discharges from each
mine operation are regulated  within the NPDES process.  The third  component is
the  anti-degradation  standard,  which  establishes  characteristics  of  "high
quality  streams",  and prohibits their  degradation.  Standards for discharging
water from mine sites to high  quality  streams  are very  stringent.  Upgrading
stream designations to "high quality" in the areas in which coal mine operations
are located can  potentially  result in increased water treatment costs that can
increase both permitting costs and coal production costs.

     RESOURCE CONSERVATION AND RECOVERY ACT

         The Resource  Conservation and Recovery Act, which was enacted in 1976,
affects coal mining  operations by establishing  requirements for the treatment,
storage and disposal of hazardous waste. Coal mine waste, such as overburden and
coal cleaning waste, are exempted from hazardous waste management.

         Subtitle  C  of  RCRA  exempted  fossil  fuel  combustion  wastes  from
hazardous waste regulation until the EPA completed a report to Congress and made
a  determination  on whether the wastes should be regulated as  hazardous.  In a
1993 regulatory determination, the EPA addressed some high-volume, low- toxicity
coal  combustion  wastes  generated at electric  utility and  independent  power
producing facilities.


                                       11
<PAGE>


         In May  2000,  the EPA  concluded  that coal  combustion  wastes do not
warrant  regulation as hazardous  under RCRA. The EPA is retaining the hazardous
waste exemption for these wastes.  However, the EPA has determined that national
non-hazardous  waste  regulations  under  RCRA  Subtitle  D are  needed for coal
combustion  wastes  disposed in surface  impoundments  and landfills and used as
mine-fill. The agency also concluded beneficial uses of these wastes, other than
for  mine  filling,   pose  no  significant  risk  and  no  additional  national
regulations are needed.  As long as this exemption  remains in effect, it is not
anticipated  that  regulation  of coal  combustion  waste will have any material
effect on the amount of coal used by electricity generators.

     FEDERAL AND STATE SUPERFUND STATUTES

         Superfund  and  similar  state laws  affect  coal  mining and hard rock
operations by creating a liability for investigation and remediation in response
to releases of  hazardous  substances  into the  environment  and for damages to
natural resources. Under Superfund, joint and several liabilities may be imposed
on waste generators, site owners or operators and others regardless of fault.

     GLOBAL CLIMATE CHANGE

         The  United  States,  Australia,  and more than 160 other  nations  are
signatories  to the  1992  Framework  Convention  on  Climate  Change,  which is
intended to limit  emissions  of  greenhouse  gases such as carbon  dioxide.  In
December 1997, in Kyoto, Japan, the signatories to the convention  established a
binding set of emission  targets for  developed  nations.  Although the specific
emission  targets  vary from  country to  country,  the United  States  would be
required to reduce  emissions  to 93% of 1990  levels  over a  five-year  budget
period from 2008 through  2012.  Although  the United  States did not ratify the
emission  targets and no  comprehensive  regulations  focusing on greenhouse gas
emissions are in place, these restrictions,  whether through ratification of the
emission  targets  or other  efforts  to  stabilize  or  reduce  greenhouse  gas
emissions,  could adversely  affect the price and demand for coal.  According to
the Energy  Information  Administration's  Emissions of Greenhouse  Gases in the
United States 2001,  coal  accounts for 32% of  greenhouse  gas emissions in the
United States,  and efforts to control  greenhouse gas emissions could result in
reduced use of coal if electricity  generators switch to lower carbon sources of
fuel.  In March 2001,  President  Bush  reiterated  his  opposition to the Kyoto
Protocol and further stated that he did not believe that the  government  should
impose mandatory carbon dioxide emission reductions on power plants. In February
2002, President Bush announced a new approach to climate change,  confirming the
Administration's  opposition  to the  Kyoto  Protocol  and  proposing  voluntary
actions to reduce the greenhouse gas intensity of the United States.  Greenhouse
gas intensity  measures the ratio of greenhouse  gas  emissions,  such as carbon
dioxide, to economic output. The President's climate change initiative calls for
a  reduction  in  greenhouse  gas  intensity  over the next ten years,  which is
approximately  equivalent  to the  reduction  that has occurred over each of the
past two decades.

PERMITTING

         Mining  companies  must obtain  numerous  permits  that  impose  strict
environmental  and safety  regulations  on their  operations.  These  provisions
include  requirements  for coal  prospecting,  mine  plan  development,  topsoil
removal,  storage and replacement,  selective handling of overburden  materials,
mine  pit  backfilling  and  grading,  protection  of  the  hydrologic  balance,
subsidence  control  for  underground  mines,  surface  drainage  control,  mine
drainage and mine discharge control and treatment, and revegetation.

         We must obtain permits from  applicable  state  regulatory  authorities
before we begin to mine  reserves.  The  mining  permit  application  process is
initiated by collecting  baseline data to adequately  characterize  the pre-mine
environmental  condition  of the  permit  area.  This work  includes  surveys of
cultural  resources,  soils,  vegetation,  wildlife,  assessment  of surface and
ground water  hydrology,  climatology and wetlands.  In conducting this work, we
collect  geologic data to define and model the soil and rock structures and coal
that will be mined.  We develop mine and  reclamation  plans by  utilizing  this
geologic data and incorporating elements of the environmental data. The mine and
reclamation plans


                                       12
<PAGE>


incorporate  the provisions of the Surface Mining Control and Reclamation Act of
1977 (the "SMCRA"), state programs and the complementary  environmental programs
that impact coal mining.  Also included in the permit  application are documents
defining  ownership and agreements  pertaining to coal,  minerals,  oil and gas,
water rights,  rights of way, and surface land along with documents  required of
the Office of Surface Mining's Applicant Violator System.

         Once a permit  application  is prepared and submitted to the regulatory
agency,  it goes  through a  completeness  review,  technical  review and public
notice and comment period prior to approval.  SMCRA mine permits can take over a
year to prepare,  depending on the size and  complexity  of the mine,  and often
require  six  months to two  years for  approval.  Regulatory  authorities  have
considerable  discretion in the timing of permit issuance and the public has the
right to comment on and otherwise  engage in the permitting  process,  including
through intervention in the courts.

         We do not believe there are any substantial matters that pose a risk to
maintaining  our existing mining permits or hinder our ability to acquire future
mining.  It is our policy to ensure that our operations  are in full  compliance
with the requirements of the SMCRA and state laws and regulations governing mine
reclamation

GLOSSARY OF TERMS

         ASH. The impurities consisting of iron, alumina and other incombustible
matter contained in coal. Since ash increases the weight of coal, it adds to the
cost of handling and can affect the burning characteristics of coal.

         BRITISH THERMAL UNIT OR "BTU." A measure of the thermal energy required
to raise the temperature of one pound of pure liquid water one degree Fahrenheit
at the  temperature  at  which  water  has  its  greatest  density  (39  degrees
Fahrenheit).

         COAL  SEAM.  Coal  deposits  occur in  layers.  Each  layer is called a
"seam."

         COMPLIANCE COAL. The coal having a sulfur dioxide content of 1.2 pounds
or less per million Btu, as required by Phase II of the Clean Air Act.

         CONTINUOUS MINING. A form of underground,  room-and-pillar  mining that
uses a  continuous  mining  machine  to cut coal  from the seam and load it onto
conveyors or into shuttle cars which transport it to the surface for processing.

         FOSSIL  FUEL.  Fuel such as coal,  petroleum or natural gas formed from
the fossil remains of organic material.

         OVERBURDEN.  The  layers of earth and rock  covering  a coal  seam.  In
surface mining operations, overburden is removed prior to coal extraction.

         RECLAMATION.  A process of  restoring  land and the  environment  to an
approved  state  following  mining  activities.  The process  commonly  includes
"re-contouring"  or reshaping the land to its approximate  original  appearance,
restoring  topsoil and  planting  native  grass and ground  covers.  Reclamation
operations  are  usually  underway  before  the mining of a  particular  site is
completed. Reclamation is closely regulated by both state and federal law.

         RESERVES. That part of a mineral deposit that could be economically and
legally extracted or produced at the time of the reserve determination.

         ROOM-AND-PILLAR MINING. The most common method of underground mining in
which  the  mine  roof is  supported  mainly  by coal  pillars  left at  regular
intervals.  Rooms are placed where the coal is mined;  pillars are areas of coal
left  between  the rooms.  Pillars  are areas of coal left  between the rooms to
support overlying strata and surface structures.


                                       13
<PAGE>


         SCRUBBER  (FLUE GAS  DESULFURIZATION  UNIT).  Any of  several  forms of
chemical/physical  devices which operate to neutralize  sulfur  compounds formed
during coal  combustion.  These devices combine the sulfur in gaseous  emissions
with other chemicals to form inert compounds,  such as gypsum, that must then be
removed for disposal.  Although effective in substantially  reducing sulfur from
combustion gases, scrubbers require about 6% to 7% of a power plant's electrical
output and thousands of gallons of water to operate.

         STEAM COAL.  Coal used by power plants and industrial  steam boilers to
produce  electricity or process steam. It generally is lower in Btu heat content
and higher in volatile matter than metallurgical coal.

         SUB-BITUMINOUS  COAL. A dull, black coal that ranks between lignite and
bituminous coal. Its moisture content is between 20% and 30% by weight,  and its
heat content ranges from 7,800 to 9,500 Btu per pound of coal.

         SULFUR.  One of the elements present in varying quantities in coal that
contributes to environmental  degradation when coal is burned. Sulfur dioxide is
produced as a gaseous by-product of coal combustion. Coal is commonly classified
by  its  sulfur  content  due to  the  importance  of  sulfur  in  environmental
regulations.  "Low sulfur" coal has a variety of  definitions  but  typically is
used as a classification for coal containing 2.0% or less sulfur.

         TON. A "short" or net ton is equal to 2,000 pounds. A "long" or British
ton is 2,240 pounds; a "metric" ton is approximately 2,205 pounds. The short ton
is the unit of measure referred to in this document.

ITEM 1A.      RISK FACTORS.

         Several   of  the   matters   discussed   in  this   document   contain
forward-looking  statements  that  involve  risks  and  uncertainties.   Factors
associated with the  forward-looking  statements that could cause actual results
to differ  materially  from those  projected  or  forecast  are  included in the
statements  below.  In addition to other  information  contained in this report,
readers should carefully consider the following cautionary statements.

                          RISKS RELATED TO OUR BUSINESS

OUR  SUBSTANTIAL  LEVEL OF  INDEBTEDNESS  COULD  ADVERSELY  AFFECT OUR FINANCIAL
CONDITION.

         We  have,  and  will  continue  to have  substantial  indebtedness.  At
December 31, 2006, we had  approximately  $63.0 million principal value of total
senior debt.  Subsequent to year-end, we incurred another $2.0 million in senior
debt.  Our  high  level  of  indebtedness  could  have  important  consequences,
including the following:

         o        reducing our ability to obtain additional financing;

         o        reducing our cash flow;

         o        placing  us at a  competitive  disadvantage  compared  to  our
                  competitors that may have proportionately less debt or greater
                  financial resources;

         o        hindering  our  flexibility  in  dealing  with  changes in our
                  business and the industry; and

         o        making us more  vulnerable  to economic  downturns and adverse
                  developments.


                                       14
<PAGE>


DESPITE EXISTING DEBT LEVELS, WE MAY STILL BE ABLE TO INCUR  SUBSTANTIALLY  MORE
DEBT, WHICH WOULD INCREASE THE RISKS ASSOCIATED WITH OUR LEVERAGE.

         We may be able to incur  substantial  amounts of additional debt in the
future.  Although  the terms of the  10.5%  Senior  Secured  Notes and Term Loan
Credit  Facility may limit our ability to incur  additional  debt, such terms do
not and will not prohibit us from  incurring  substantial  amounts of additional
debt for specific  purposes or under certain  circumstances.  The  incurrence of
additional debt could adversely impact our ability to service payments on senior
debt.

WE MAY NOT BE ABLE TO  GENERATE  THE AMOUNT OF CASH NEEDED TO PAY  INTEREST  AND
PRINCIPAL AMOUNTS ON OUR DEBT.

         We rely  primarily  on our  ability to  generate  cash in the future to
service our debt. If we do not generate  sufficient  cash flows to meet our debt
service  and  working  capital  requirements,  we may  need to  seek  additional
financing.  If we are unable to obtain financing on terms that are acceptable to
us, we could be forced to sell our assets or those of our  subsidiaries  to make
up for any shortfall in our payment obligations under unfavorable circumstances.
The 10.5% Senior Secured Notes indenture and Term Loan Credit Facility limit our
ability to sell assets and also  restrict the use of the proceeds  from any such
sale.  Therefore,  even if forced  to do so,  we may not be able to sell  assets
quickly  enough  or for  sufficient  amounts  to  enable  us to  meet  our  debt
obligations.

WE FACE NUMEROUS  UNCERTAINTIES IN ESTIMATING OUR ECONOMICALLY  RECOVERABLE COAL
RESERVES,  AND INACCURACIES IN OUR ESTIMATES COULD RESULT IN LOWER THAN EXPECTED
REVENUES, HIGHER THAN EXPECTED COSTS OR DECREASED PROFITABILITY.

         We estimate that as of December 31, 2006, we control approximately 36.2
million tons of proven and probable  reserves that are recoverable at this time.
We base our reserve  estimates  on  engineering,  economic and  geological  data
assembled and analyzed by our staff and an independent  mining engineering firm.
Our estimates of our proven and probable reserves and our recoverable  reserves,
as well as the Btu or sulfur  content of our  reserves  are  revised and updated
periodically to reflect the resolution of  uncertainties  and  assumptions,  the
production of coal from the reserves and new drilling or other data received.

         There are numerous  uncertainties inherent in estimating quantities and
qualities  of and costs to mine  recoverable  reserves,  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,
all of which may vary considerably from actual results such as:

         o        geological  and  mining  conditions  which  may  not be  fully
                  identified by available  exploration  data or which may differ
                  from experience in current operations;

         o        historical  production  from the area compared with production
                  from other similar producing areas;

         o        the assumed  effects of regulation  and taxes by  governmental
                  agencies; and

         o        assumptions  concerning coal prices,  operating costs,  mining
                  technology improvements, severance and excise tax, development
                  costs and reclamation costs.

         For these reasons, estimates of the economically recoverable quantities
and   qualities   attributable   to  any   particular   group   of   properties,
classifications  of reserves based on risk of recovery and estimates of net cash
flows expected from particular  reserves  prepared by different  engineers or by
the same  engineers  at  different  times may vary  substantially.  Actual  coal
tonnage  recovered from identified  reserve areas or properties and revenues and
expenditures with respect to our reserves may vary materially from estimates. As
a result,  the reserve  estimates set forth in this report may differ materially
from our actual reserves.  Inaccuracies in our estimates related to our reserves
could result in lower than expected  revenues,  higher than expected  costs,  or
decreased profitability.


                                       15
<PAGE>


OUR FUTURE SUCCESS DEPENDS UPON OUR ABILITY TO CONTINUE ACQUIRING AND DEVELOPING
COAL  RESERVES  THAT  ARE  ECONOMICALLY  RECOVERABLE  AND TO RAISE  THE  CAPITAL
NECESSARY TO FUND OUR EXPANSION.

         Our  recoverable  reserves will decline as we produce coal. We have not
yet applied for the permits required or developed the mines necessary to use all
of the coal deposits under our mineral rights.  Furthermore,  we may not be able
to  mine  all  of our  coal  deposits  as  efficiently  as we do at our  current
operations.   Our  future  success   depends  upon  our  conducting   successful
exploration  and  development  activities  and acquiring  properties  containing
economically  recoverable  coal  deposits.  In addition,  we must also  generate
enough capital,  either through our operations or through outside financing,  to
mine these additional  reserves.  Our current strategy  includes  increasing our
coal deposits base through  acquisitions  of other mineral  rights,  leases,  or
producing properties and continuing to use our existing properties.  Our ability
to further  expand our  operations  may be  dependent  on our  ability to obtain
sufficient working capital, either through cash flows generated from operations,
or financing activities,  or both. Mining coal in Central Appalachia can present
special  difficulties.  Characteristics  of the land and  permitting  process in
Central Appalachia, where all of our mines are located, may adversely affect our
mining  operations,  our costs and the ability of our  customers to use the coal
that we  mine.  The  geological  characteristics  of  Central  Appalachian  coal
reserves, such as depth of overburden and coal seam thickness, make them complex
and costly to mine. As mines become  depleted,  replacement  reserves may not be
available  when required or, if available,  may not be capable of being mined at
costs comparable to those characteristic of the depleting mines. In addition, as
compared to mines in the Powder River  Basin,  permitting,  licensing  and other
environmental and regulatory  requirements are more costly and time-consuming to
satisfy.  These factors could materially  adversely affect our mining operations
and costs, and our customers' abilities to use the coal we mine.

OUR ABILITY TO IMPLEMENT OUR PLANNED  DEVELOPMENT  AND  EXPLORATION  PROJECTS IS
DEPENDENT ON MANY FACTORS,  INCLUDING THE ABILITY TO RECEIVE VARIOUS  GOVERNMENT
PERMITS.

         Our  planned  development  and  exploration  projects  and  acquisition
activities  may not result in the  acquisition of  significant  additional  coal
deposits and we may not have continuing success developing additional mines. For
example, we may not be successful in acquiring  contiguous  properties that will
leverage our  existing  facilities.  In  addition,  in order to develop our coal
deposits, we must receive various governmental  permits.  Before a mining permit
is issued on a  particular  parcel,  interested  parties  are  eligible  to file
petitions to declare the land  unsuitable for mining.  For example,  on November
10, 2005,  two  environmental  groups filed a petition to halt the  expansion of
surface mining activities on the New River Tract and surrounding areas. Although
this petition was dismissed,  management's  time and company resources were used
in the  process.  We cannot  predict  whether we will  continue  to receive  the
permits necessary for us to expand our operations.

DEFECTS IN TITLE OR LOSS OF ANY  LEASEHOLD  INTERESTS  IN OUR  PROPERTIES  COULD
ADVERSELY AFFECT OUR ABILITY TO MINE THESE PROPERTIES.

         We  conduct,  or plan to  conduct,  a  significant  part of our  mining
operations on properties  that we lease. A title defect or the loss of any lease
could  adversely  affect our ability to mine the associated  reserves.  Title to
most of our  owned or  leased  properties  and  mineral  rights  is not  usually
verified  until we make a commitment to develop a property,  which may not occur
until after we have obtained necessary permits and completed  exploration of the
property.  In some cases, we rely on title  information or  representations  and
warranties  provided by our lessors or  grantors.  Our right to mine some of our
reserves may be adversely affected if defects in title or boundaries exist or if
a lease  expires.  Any  challenge to our title could delay the  exploration  and
development of the property and could  ultimately  result in the loss of some or
all of our interest in the property and could  increase our costs.  In addition,
if we mine on property that we do not own or lease, we could incur liability for
such mining.  Some leases have minimum production  requirements or require us to
commence  mining in a specified term to retain the lease.  Failure to meet those
requirements  could  result in losses of  prepaid  royalties  and,  in some rare
cases, could result in a loss of the lease itself.


                                       16
<PAGE>


DUE TO VARIABILITY IN COAL PRICES AND IN OUR COST OF PRODUCING  COAL, AS WELL AS
CERTAIN PROVISIONS IN OUR CONTRACTS, WE MAY BE UNABLE TO SELL COAL AT A PROFIT.

         We  typically  sell our coal for a  specified  tonnage  amount and at a
negotiated  price  pursuant to  short-term  and  contracts  of twelve  months or
greater.  For the year ended  December 31, 2006, 98% of the coal we produced was
sold under  contracts  of twelve  months or greater.  Price  adjustment,  "price
reopener" and other similar provisions in long-term supply agreements may reduce
the protection from short-term coal price volatility  traditionally  provided by
such contracts.  Three of our contracts,  representing  43% of our coal sales in
the year ended December 31, 2006 and which expire during 2007 and 2010,  contain
provisions  allowing the purchase price to be  renegotiated or adjusted based on
market prices at the time at periodic  intervals.  One of the contracts  that is
expiring in 2007, which  represented  approximately 9% of our coal sales, is not
being renewed. Any adjustment or renegotiation  leading to a significantly lower
contract  price would result in decreased  revenues and lower our gross margins.
Coal supply agreements also typically contain force majeure provisions  allowing
temporary  suspension of performance by us or our customers  during the duration
of specified  events beyond the control of the affected party.  Most of our coal
supply  agreements  contain  provisions  requiring  us to deliver  coal  meeting
quality thresholds for certain  characteristics such as Btu, sulfur content, ash
content,   hardness   and  ash  fusion   temperature.   Failure  to  meet  these
specifications could result in economic penalties,  including price adjustments,
the rejection of deliveries  or, in the extreme,  termination  of the contracts.
Consequently,  due to the risks mentioned above with respect to long-term supply
agreements,  we may not achieve the revenue or profit we expect to achieve  from
these sales commitments. In addition, we may not be able to successfully convert
these sales commitments into long-term supply agreements.

THE COAL  INDUSTRY IS HIGHLY  CYCLICAL,  WHICH  SUBJECTS US TO  FLUCTUATIONS  IN
PRICES FOR OUR COAL.

         We are exposed to swings in the demand for coal, which has an impact on
the prices for our coal.  The demand for coal products and,  thus, the financial
condition and results of operations of companies in the coal industry, including
us, are generally  affected by  macroeconomic  fluctuations in the world economy
and the domestic and international demand for energy. In recent years, the price
of coal has been at  historically  high  levels,  but these price levels may not
continue. Any material decrease in demand for coal could have a material adverse
effect on our operations and profitability.

WE DEPEND HEAVILY ON A SMALL NUMBER OF LARGE CUSTOMERS, THE LOSS OF ANY OF WHICH
WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.

         For the year ended December 31, 2006, we derived  approximately  75% of
our coal  revenues from sales to our three  largest  customers.  At December 31,
2006, we had coal supply  agreements with these customers that expire at various
times throughout 2007. When these agreements expire, we may not be successful at
renegotiating them and these customers may not continue to purchase coal from us
pursuant to long-term  coal supply  agreements.  If a number of these  customers
were to  significantly  reduce  their  purchases  of coal from us, or if we were
unable to sell coal to them on terms as  favorable  to us as the terms under our
current  agreements,  our financial  condition  and results of operations  could
suffer materially.

SIGNIFICANT COMPETITION FROM ENTITIES WITH GREATER RESOURCES COULD RESULT IN OUR
FAILURE.

         We  operate  in  a  highly  competitive   industry  with  national  and
international  energy resources  companies.  Some of our competitors have longer
operating histories and substantially greater financial and other resources than
we do. Our  competitors'  use of their  substantially  greater  resources  could
overwhelm our efforts to operate successfully and could cause our failure.


                                       17
<PAGE>


THERE IS NO ASSURANCE  THAT OUR LIMITED  REVENUES  WILL BE SUFFICIENT TO OPERATE
PROFITABLY, OR THAT WE WILL GENERATE GREATER REVENUES IN THE FUTURE.

         We were formed to create a regional coal producer in Tennessee.  We had
no revenues  from  inception  until the third  quarter 2003 when we began mining
operations.  We are not profitable and have a limited operating history. We must
be regarded  as a risky  venture  with all of the  unforeseen  costs,  expenses,
problems, risks and difficulties to which such ventures are subject.

         Our coal sales for the year ended December 31, 2006 were  approximately
$86.8  million.  There is no  assurance  that we can  achieve  greater  sales or
generate  profitable sales. We expect that many coal producers could produce and
sell coal at cheaper prices per ton than our production cost rates,  which could
adversely affect our revenues and profits, if any. There is no assurance that we
will  ever  operate  profitably.  There is no  assurance  that we will  generate
continued revenues or any profits,  or that the market price of our common stock
will be increased thereby.

OUR  INABILITY  TO  DIVERSIFY  OUR   OPERATIONS   MAY  SUBJECT  US  TO  ECONOMIC
FLUCTUATIONS WITHIN OUR INDUSTRY.

         Our limited  financial  resources reduce the likelihood that we will be
able to  diversify  our  operations.  Our probable  inability  to diversify  our
activities  into  more  than one  business  area  will  subject  us to  economic
fluctuations within a particular business or industry and therefore increase the
risks associated with our operations.

CERTAIN  PROVISIONS IN OUR SERIES A CUMULATIVE  CONVERTIBLE  PREFERRED STOCK MAY
IMPACT OUR ABILITY TO OBTAIN ADDITIONAL FINANCING IN THE FUTURE.

         In addition to cash flows  generated  from  operations,  we may need to
raise  capital in the future  through the  issuance of  securities.  In order to
issue  securities  that  rank  senior  to our  Series A  cumulative  convertible
preferred  stock  in terms  of  liquidation  preference,  redemption  rights  or
dividend rights,  we must obtain the affirmative  consent of holders of at least
75% of the outstanding shares of our Series A cumulative  convertible  preferred
stock.  If we are unable to obtain the  consent of these  holders in  connection
with  future  financings,  we may be  unable  to  raise  additional  capital  on
acceptable terms, or at all.

THE LOSS OF KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.

         We are heavily dependent upon the skills, talents, and abilities of our
executive  officers and board of directors to implement our business plan. Given
the intense competition for qualified management personnel in our industry,  the
loss of the  services of any key  management  personnel  may  significantly  and
detrimentally  affect our business and  prospects.  We may not be able to retain
some or all of our key management personnel, and even if replaceable,  it may be
time consuming and costly to recruit qualified replacement personnel.

         In May  2006,  Jon E. Nix  announced  he would  be  resigning  as Chief
Executive   Officer.   Our  Board  of  Directors  approved  Daniel  A.  Roling's
appointment  in May 2006 in  keeping  with  plans for  succession  of its senior
management.  Mr. Nix remains as Chairman and continues to be involved in setting
the   company's   strategic   direction.   Mr.  Roling   officially   began  his
responsibilities in August 2006.

OUR  DIRECTOR  AND  OFFICER  INDEMNIFICATION  POLICIES IN  CONJUNCTION  WITH THE
PROVISIONS OF FLORIDA LAW COULD RESULT IN SUBSTANTIAL UN-RECOUPABLE EXPENDITURES
AND REDUCED REMEDIES AGAINST DIRECTORS AND OFFICERS.

         Florida  Revised  Statutes  provide  for  the  indemnification  of  our
directors, officers, employees, and agents, under certain circumstances, against
attorney's  fees and other expenses  incurred by them in any litigation to which
they become a party  arising from their  association  with or  activities on our
behalf.  We


                                       18
<PAGE>


will  also  bear  the  expenses  of such  litigation  for any of our  directors,
officers,  employees,  or agents,  upon such  person's  promise to repay us such
amounts,  if it is  ultimately  determined  that such person was not entitled to
indemnification.   This  indemnification  policy  could  result  in  substantial
expenditures by us that we will be unable to recoup.

         Florida Revised Statutes exclude personal liability of our directors to
us and our stockholders for monetary damages for breach of fiduciary duty except
in  certain  specified  circumstances.  Accordingly,  we will  have a much  more
limited right of action against our directors than otherwise  would be the case.
This  provision  does not affect the liability of any director  under federal or
applicable state securities laws.

THERE IS NO ASSURANCE THAT WE WILL FIND  PURCHASERS OF OUR PRODUCT AT PROFITABLE
PRICES.

         If we are unable to  achieve  supply  contracts,  or are unable to find
buyers  willing to purchase  our coal at  profitable  prices,  our  revenues and
operating profits could suffer.

THE  COAL  INDUSTRY  IS  INTENSELY  COMPETITIVE,  AND  OUR  FAILURE  TO  COMPETE
EFFECTIVELY  COULD  REDUCE OUR  REVENUE  AND  MARGINS,  AND DELAY OR PREVENT OUR
ABILITY TO SERVICE OUR DEBT.

         We operate in a highly competitive industry with regional, national and
international energy resources  companies.  We compete based primarily on price,
and we believe that the principal factors that determine the price for which our
coal can be sold are:

         o        competition from energy sources other than coal;

         o        coal quality;

         o        efficiency in extracting and transporting coal; and

         o        proximity to customers.

         Some  of  our   competitors   have  longer   operating   histories  and
substantially  greater  financial and other resources than we do. Our failure to
compete effectively could reduce our revenues and margins,  and delay or prevent
our ability to make payments on our debt.

IF  TRANSPORTATION  FOR OUR  COAL  BECOMES  UNAVAILABLE  OR  UNECONOMIC  FOR OUR
CUSTOMERS, OUR ABILITY TO SELL COAL COULD SUFFER.

         Transportation  costs represent a significant portion of the total cost
of  delivered  coal  and,  as a result,  play a  critical  role in a  customer's
purchasing decision.  Increases in transportation costs could make our coal less
competitive  as a source  of energy or could  make some of our  operations  less
competitive than other sources of coal.

         Coal producers depend upon rail, barge, trucking, overland conveyor and
other  systems to deliver  coal to its  customers.  While  U.S.  coal  customers
typically arrange and pay for  transportation of coal from the mine to the point
of use, disruption of these  transportation  services because of weather-related
problems,  strikes,  lock-outs  or other  events  could  temporarily  impair our
ability to supply  coal to our  customers  and thus could  adversely  affect our
results of operations.

         Our   customers   have  had   difficulty   negotiating   an   agreeable
transportation  rate for coal to be shipped by a  third-party  carrier  from our
Baldwin  rail  load-out   facility  in  Devonia,   TN.  However,   we  have  had
complications due to rail logistics and customer requirements that have hindered
our  ability  to  transport  this coal on this rail  line.  If we are  unable to
achieve a solution to these issues,  it may not be economically  feasible for us
to expand our operations in the New River Tract.

WE FACE RISKS  INHERENT TO MINING WHICH COULD INCREASE THE COST OF OPERATING OUR
BUSINESS.

         Our mining operations are subject to conditions beyond our control that
can delay coal deliveries or increase the cost of mining at particular mines for
varying lengths of time. These conditions include


                                       19
<PAGE>


weather and natural disasters,  unexpected  maintenance problems,  key equipment
failures,  variations in coal seam  thickness,  variations in the amount of rock
and soil  overlying  the coal  deposit,  variations  in rock and  other  natural
materials  and  variations  in geologic  conditions.  Any of these factors could
increase the cost of operating our business,  which would lower or eliminate our
margins.

A  SHORTAGE  OF  SKILLED  LABOR  IN THE  MINING  INDUSTRY  COULD  POSE A RISK TO
ACHIEVING  OPTIMAL  LABOR   PRODUCTIVITY  AND  COMPETITIVE  COSTS,  WHICH  COULD
ADVERSELY AFFECT OUR PROFITABILITY.

         Efficient coal mining using modern  techniques  and equipment  requires
skilled laborers,  preferably with at least a year of experience and proficiency
in  multiple   mining  tasks.   In  order  to  support  our  planned   expansion
opportunities,  we intend to sponsor both  in-house and  vocational  coal mining
programs at the local level in order to train additional  skilled  laborers.  In
the event the  shortage  of  experienced  labor  continues  or worsens or we are
unable to train the  necessary  amount of skilled  laborers,  there  could be an
adverse  impact on our labor  productivity  and costs and our  ability to expand
production  and therefore  have a material  adverse  effect on our earnings.  In
addition,  we have supplemented our direct workforce through the use of contract
miners.  If our contract  miners are unable to perform their duties as expected,
we may experience temporary disruptions in our production.  If difficulties with
our contract miners arise in the future, there could be an adverse effect on our
productivity and costs and our ability to expand production and therefore have a
material adverse effect on our earnings.

THE GOVERNMENT  REGULATES MINING OPERATIONS,  WHICH IMPOSES SIGNIFICANT COSTS ON
US, AND FUTURE  REGULATIONS  COULD  INCREASE THOSE COSTS OR LIMIT OUR ABILITY TO
PRODUCE COAL.

         Federal,  state and local authorities regulate the coal mining industry
with  respect to matters  such as  employee  health and safety,  permitting  and
licensing  requirements,  air  quality  standards,  water  pollution,  plant and
wildlife  protection,  reclamation  and restoration of mining  properties  after
mining is completed,  the discharge of materials into the  environment,  surface
subsidence  from  underground   mining  and  the  effects  that  mining  has  on
groundwater  quality  and  availability.  In  addition,   legislation  mandating
specified benefits for retired coal miners affects our industry.

         Numerous  governmental  permits and  approvals  are required for mining
operations.  We are  required to prepare and present to federal,  state or local
authorities   data  pertaining  to  the  effect  or  impact  that  any  proposed
exploration for or production of coal may have upon the environment.  The costs,
liabilities and requirements associated with these regulations may be costly and
time-consuming  and may delay  commencement  or  continuation  of exploration or
production  operations.  The  possibility  exists  that new  legislation  and/or
regulations and orders may be adopted that may materially  adversely  affect our
mining operations, our cost structure and/or our customers' ability to use coal.
New legislation or administrative  regulations (or judicial  interpretations  of
existing laws and regulations), including proposals related to the protection of
the environment that would further regulate and tax the coal industry,  may also
require  us or  our  customers  to  change  operations  significantly  or  incur
increased costs. The majority of our coal supply agreements  contain  provisions
that allow a purchaser to terminate its contract if  legislation  is passed that
either restricts the use or type of coal permissible at the purchaser's plant or
results in specified increases in the cost of coal or its use. These factors and
legislation,  if enacted,  could have a material adverse effect on our financial
condition and results of operations. In addition, the United States and over 160
other nations are signatories to the 1992 Framework Convention on Climate Change
which is  intended  to limit  emissions  of  greenhouse  gases,  such as  carbon
dioxide.  In December 1997, in Kyoto,  Japan,  the signatories to the convention
established a binding set of emission  targets for developed  nations.  Although
the specific  emission  targets vary from country to country,  the United States
would be required to reduce emissions to by 5% from 1990 levels over a five-year
period from 2008 through  2012.  Although the United States has not ratified the
emission targets and no comprehensive  regulations  focusing on U.S.  greenhouse
gas emissions are in place, these restrictions,  whether through ratification of
the emission  targets or other  efforts to stabilize  or reduce  greenhouse  gas
emissions, could adversely impact the price of and demand for coal. According to
the EIA's  "Emissions  of  Greenhouse  Gases in the United  States  2001,"  coal
accounts for approximately one-third of carbon


                                       20
<PAGE>


dioxide  emissions in the United  States,  and efforts to control carbon dioxide
emissions could result in reduced use of coal if electricity  generators  switch
to sources of fuel with lower carbon dioxide emissions.  Further developments in
connection  with  regulations or other limits on carbon dioxide  emissions could
have a  material  adverse  effect  on our  financial  condition  or  results  of
operations.

IF THE COAL INDUSTRY  EXPERIENCES  OVERCAPACITY IN THE FUTURE, OUR PROFITABILITY
COULD BE IMPAIRED.

         During  the  mid-1970s  and early  1980s,  a growing  coal  market  and
increased demand for coal attracted new investors to the coal industry,  spurred
the  development  of  new  mines  and  resulted  in  added  production  capacity
throughout  the industry,  all of which led to increased  competition  and lower
coal prices.  Similarly,  an increase in future coal prices could  encourage the
development  of  expanded  capacity  by  new or  existing  coal  producers.  Any
overcapacity could reduce coal prices in the future.

OUR  OPERATIONS  COULD BE  ADVERSELY  AFFECTED IF WE FAIL TO  MAINTAIN  REQUIRED
BONDS.

         Federal  and state laws  require  bonds or cash  deposits to secure our
obligations to reclaim lands used for mining,  to pay federal and state workers'
compensation,   to  secure  coal  lease   obligations   and  to  satisfy   other
miscellaneous  obligations.  At December 31, 2006,  $257,500 was on deposit with
OSM for reclamation bonds related to our Patterson  Mountain mining  operations.
In  addition,   we  have  approximately   $14.4  million  of  cash  invested  in
certificates of deposit,  against which  irrevocable  bank letters of credit are
written in favor of OSM and have posted a $700,000  letter of credit  secured by
our executive office building in favor of OSM.  Reclamation  bonds are typically
renewable  on a yearly  basis if they are not posted  with cash.  Our failure to
maintain, or inability to acquire,  bonds that are required by state and federal
law would have a material adverse effect on us. That failure could result from a
variety of factors including the following:

         o        lack of  availability,  higher expense or  unfavorable  market
                  terms of new bonds;

         o        restrictions on the availability of collateral for current and
                  future  third-party  bond  issuers  under  the  terms  of  our
                  indenture or new Term Loan Credit Facility; and

         o        the  exercise by  third-party  bond  issuers of their right to
                  refuse to renew the bonds.

TERRORIST THREATS AND ENVIRONMENTAL ZEALOTRY MAY NEGATIVELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         Our business is affected by general economic  conditions,  fluctuations
in consumer confidence and spending, and market liquidity,  which can decline as
a result of numerous factors outside of our control,  such as terrorist  attacks
and acts of war. Our business  also may be affected by  environmental  activists
who  engage in  activities  intended  to disrupt  our  business  operations.  In
particular, environmental activists have conducted protests outside the homes of
certain of our executives, including our former Chief Executive Officer. We have
spent approximately $875,000 during the year ended December 31, 2006 on security
measures.  We have taken steps to reduce our security  expenses  going  forward.
Future terrorist attacks against U.S. targets,  rumors or threats of war, actual
conflicts  involving  the United  States or its  allies,  or  military  or trade
disruptions   affecting  our  customers  may  materially  adversely  affect  our
operations.  As a result,  there could be delays or losses in transportation and
deliveries of coal to our customers,  decreased  sales of our coal and extension
of time for payment of accounts receivable from our customers. Strategic targets
such as energy-related assets may be at greater risk of future terrorist attacks
than other targets in the United States. In addition,  disruption or significant
increases in energy prices could result in government-imposed price controls. It
is  possible  that any,  or a  combination,  of these  occurrences  could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.


                                       21
<PAGE>


A SUBSTANTIAL  OR EXTENDED  DECLINE IN COAL PRICES COULD REDUCE OUR REVENUES AND
THE VALUE OF OUR COAL RESERVES.

         The prices we charge for coal depend upon  factors  beyond our control,
including:

         o        the supply of, and demand for, domestic and foreign coal;

         o        the demand for electricity;

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

         o        domestic and foreign governmental regulations and taxes;

         o        air emission standards for coal-fired power plants;

         o        regulatory, administrative and court decisions;

         o        the price and availability of alternative fuels, including the
                  effects of technological developments; and

         o        the effect of worldwide energy conservation measures.

         Our results of operations  are dependent  upon the prices we charge for
our coal as well as our  ability  to improve  productivity  and  control  costs.
Decreased  demand  would cause spot prices to decline and require us to increase
productivity  and lower costs in order to maintain  our  margins.  If we are not
able to maintain our margins, our operating results could be adversely affected.
Therefore,  price  declines may adversely  affect  operating  results for future
periods and our ability to generate cash flows necessary to improve productivity
and invest in operations.

OUR ABILITY TO COLLECT  PAYMENTS  FROM OUR  CUSTOMERS  COULD BE IMPAIRED  DUE TO
CREDIT ISSUES.

         Our ability to receive  payment for coal sold and delivered  depends on
the continued  creditworthiness  of our customers.  Our customer base may not be
highly  creditworthy.  If deterioration of the  creditworthiness of customers or
trading counterparties occurs, our business could be adversely affected.

                        RISKS RELATED TO OUR COMMON STOCK

A LIMITED  PUBLIC  MARKET  EXISTS FOR OUR  SECURITIES,  WHICH MAY  RESTRICT  OUR
SHAREHOLDERS' ABILITY TO TRADE IN OUR STOCK.

         There is a limited  public market for our common stock and no assurance
can be given that a market will continue or that a shareholder will ever be able
to liquidate his investment  without  considerable  delay,  if at all. Our stock
price may be highly  volatile.  Factors such as those  discussed in this section
may have a significant  impact upon the market price of our  securities.  Due to
the low price of our  securities,  many  brokerage  firms may not be  willing to
effect  transactions  in our  securities.  Even if a  purchaser  finds a  broker
willing to effect a transaction in our securities,  the combination of brokerage
commissions,  state  transfer  taxes,  if any, and any other  selling  costs may
exceed the selling price. Further, many lending institutions will not permit the
use of such securities as collateral for any loans.

WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK.

         Historically,  we have not paid dividends on shares of our common stock
and do not anticipate paying any cash dividends on shares of our common stock in
the foreseeable  future.  The terms of the indenture related to our 10.5% Senior
Secured  Notes due 2010 and our Term Loan  Credit  facility  each  restrict  our
ability to pay dividends on shares of our common stock.

OUR ISSUANCE OF MORE SHARES OF COMMON STOCK MAY RESULT IN THE LOSS OF CONTROL BY
PRESENT MANAGEMENT AND SHAREHOLDERS.

         We may issue  further  shares  as  consideration  for  cash,  assets or
services out of our  authorized  but not issued  common  stock that could,  upon
issuance,  represent  a majority of our voting  power and equity.  The result of
such an  issuance  would be that those new  shareholders  and  management  would
control us,


                                       22
<PAGE>


and  unknown  persons  could  replace  our  management  at  that  time.  Such an
occurrence  would result in a greatly  reduced  percentage of ownership of us by
our current shareholders.

WE  OPERATE  IN AN  INDUSTRY  THAT IS SUBJECT  TO  SIGNIFICANT  FLUCTUATIONS  IN
OPERATING  RESULTS  FROM  QUARTER  TO  QUARTER  THAT MAY  RESULT  IN  UNEXPECTED
REDUCTIONS IN REVENUE AND STOCK PRICE VOLATILITY.

         Factors that may influence our quarterly operating results include:

         o        the worldwide demand for coal;

         o        the price of coal;

         o        the supply of coal and other competitive factors;

         o        the costs to mine and transport coal;

         o        the ability to obtain new mining permits;

         o        the costs of reclamation of previously mined  properties;  and
                  industry competition.

         Due to  these  factors,  it is  possible  that  in  some  quarters  our
operating  results  may be below  our  shareholders'  expectations  and those of
public  market  analysts.  If this  occurs,  the price of our common stock would
likely be adversely affected.

OUR STOCK PRICE MAY  DECREASE,  WHICH COULD  ADVERSELY  AFFECT OUR  BUSINESS AND
CAUSE OUR SHAREHOLDERS TO SUFFER SIGNIFICANT LOSSES.

         The following  factors could cause the market price of our common stock
to decrease, perhaps substantially:

         o        the  failure  of  our  quarterly  operating  results  to  meet
                  expectations of investors or securities analysts;

         o        adverse  developments in the financial  markets,  the coal and
                  energy industries and the worldwide or regional economies;

         o        interest rates;

         o        changes in accounting principles;

         o        sales of common stock by existing security holders;

         o        announcements of key developments by our competitors; and

         o        the   reaction   of  markets   and   securities   analysts  to
                  announcements and developments involving our Company. industry
                  competition.

IF WE  NEED TO SELL OR  ISSUE  ADDITIONAL  SHARES  OF  COMMON  STOCK  OR  ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH,  OUR SHAREHOLDERS'  OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED.

         Our business  strategy may include expansion through internal growth by
acquiring  complementary  businesses or by establishing strategic  relationships
with targeted customers. In order to do so, or to fund our other activities,  we
may issue additional equity securities that could dilute our shareholders' stock
percentage  ownership.  We may also assume  additional debt and incur impairment
losses  related to  goodwill  and other  tangible  assets if we acquire  another
company which could negatively impact our results of operations.

OFFICERS AND  DIRECTORS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH
COULD  LIMIT  OUR  SHAREHOLDERS'   ABILITY  TO  INFLUENCE  THE  OUTCOME  OF  KEY
TRANSACTIONS.

         As of March 27, 2007,  our officers and directors and their  affiliates
owned  approximately  34.5% of our outstanding  voting shares. As a result,  our
officers and directors are able to exert considerable influence over the outcome
of any matters submitted to a vote of the holders of our common stock,


                                       23
<PAGE>


including  the  election of our Board of  Directors.  The voting  power of these
shareholders  could also discourage others from seeking to acquire control of us
through the  purchase of our common  stock which might  depress the price of our
common stock.

ITEM 1B.      UNRESOLVED STAFF COMMENTS.

         None.

ITEM 2.       PROPERTIES.

         Our  executive  offices  are  located  at 8915  George  Williams  Road,
Knoxville,  Tennessee  37923;  the  telephone  number is (865)  690-6900 and the
facsimile number is (865) 691-9982. We own our corporate office space. The bases
of operations for our mining  activities  are located in Anderson,  Campbell and
Scott Counties,  Tennessee,  and Bell, Harlan and Leslie Counties,  Kentucky. We
also  lease  storage  space  in East  Tennessee  to house  our  maps  and  other
geological  data.  We have pledged our  corporate  office space as collateral to
secure a bank  letter of credit  issued in favor of OSM for a portion  of one of
our reclamation  bonds.  Additionally,  we have granted our 10.5% Senior Secured
Notes lender a security interest in all our owned and leased mining properties.

         Additionally, we own, either fee simple or right-of-way,  approximately
42 miles of a railroad track between Oneida,  Tennessee and Devonia,  Tennessee.
The property is approximately  500 acres. The rail line gives access between the
Baldwin  preparation  plant and  load-out  facility  on the New  River  Tract in
Devonia, Tennessee, and the Norfolk Southern main line in Oneida, Tennessee.

         We decide on a case by case basis whether to obtain a title review from
a licensed  attorney  prior to purchasing or leasing  property.  In  determining
whether to conduct a title review,  we will consider  information  we have about
the  particular  property,  including,  for example,  personal  knowledge of our
employees or consultants, or historical information from the previous owners, or
information  obtained from  surrounding  property  owners.  We have not obtained
title insurance in connection with acquisitions of coal reserves,  and generally
will not do so in future  acquisitions.  However,  we do have title insurance on
our Tennessee  properties obtained in conjunction with the issuance of our 10.5%
Senior Secured  Notes.  We had a title  examination  made of the New River Tract
when we purchased it from Cumberland  Timber Company,  LLC. We did not conduct a
title review of the Straight  Creek Tract we acquired  from  Appalachian  Fuels,
LLC,  because title thereto was obtained by  Appalachian  Fuels,  LLC in January
2004 pursuant to a sale and order from the United States Bankruptcy Court in the
Eastern District of Kentucky.

GEOLOGY

         The strata that exists above the water drainage level consist mainly of
relatively thick shale and siltstone sequences with sandstone layers. Coal seams
occur in the shale  sequences.  There are nine coal seams on the New River Tract
that we are  targeting,  and all of these  seams are  above  the water  drainage
level.  There  are  other  coal  seams  in this  area  that  contain  coal,  but
insufficient  information  is  available to estimate  mineability.  The northern
portion of the New River Tract  property has not been  explored by core drilling
because  the  terrain  generally  is more  difficult  to access and the costs to
explore this area are greater than we are willing to expend at this time.

COAL RESERVES

         "Reserves" are defined by the U.S. Securities and Exchange Commission's
("SEC")  Industry  Guide 7 as that part of a  mineral  deposit,  which  could be
economically  and  legally  extracted  or  produced  at the time of the  reserve
determination.  "Recoverable"  reserves are defined as coal that is economically
recoverable  using  existing  equipment and methods under federal and state laws
currently in effect.  Some of our reserves are  classified  as proven  reserves.
"Proven (Measured) Reserves" are defined by the SEC Industry Guide 7 as reserves
for which (a)  quantity  is  computed  from  dimensions  revealed  in  outcrops,
trenches,  workings or drill holes;  grade and/or  quality are computed from the
results of detailed sampling,


                                       24
<PAGE>


and (b) the sites for inspection, sampling and measurement are spaced so closely
and the  geologic  character  is so well  defined  that size,  shape,  depth and
mineral content of reserves are well-established. Information about our reserves
consists  of  estimates  based on  engineering,  economic  and  geological  data
assembled and analyzed by our internal engineers, as well as studies prepared by
certified  professional  geologists  based upon data  provided by us.  "Probable
(Indicated)  Reserves" for which  quantity and grade and/or quality are computed
from information  similar to that used for proven (measured)  reserves,  but the
sites  for  inspection,  sampling,  and  measurement  are  farther  apart or are
otherwise less adequately spaced.  The degree of assurance,  although lower than
that for Proven (Measured) Reserves, is high enough to assume continuity between
points of observation. Reserve estimates are updated periodically using geologic
data taken from drill holes,  adjacent mine workings,  outcrop prospect openings
and other sources. Coal tonnages are categorized according to coal quality, seam
thickness,   mineability   and   location   relative  to   existing   mines  and
infrastructure.

         As with most other  coal-producing  companies in Central Appalachia,  a
portion of our coal reserves are controlled  pursuant to leases from third party
landowners.  These leases  convey mining rights to the coal producer in exchange
for a per ton or percentage of gross sales price royalty  payment to the lessor.
These leases are not scheduled to expire prior to expiration of projected mining
activities.  Under  current  mining  plans,  we expect that all reported  leased
reserves  will be mined out within the period of  existing  leases or within the
time period of assured lease renewals.

         Our  reported  coal  reserves  are those that can be  economically  and
legally extracted or produced at the time of their determination. In determining
whether our  reserves  meet this  standard,  we take into  account,  among other
things,  mining methods, seam thickness,  previous mining,  outcrop variability,
and coal  quality.  We  calculated  our  reserves  by relying on  measured  seam
thickness,  known coal  densities,  measured coal acres and  anticipated  mining
methodology minus any previous mining. We have obtained, or we believe we have a
high probability of obtaining, all required permits or government approvals with
respect to our reserves.

         We currently  estimate that at December 31, 2006,  36.2 million tons of
our proven and probable in-place  reserves are recoverable.  This estimate takes
into account  various  factors that affect our ability to recover our  reserves,
including but not limited to current coal prices; the mining methods that may be
used  to  extract  particular   reserves;   geological  and  mining  conditions;
historical  production from similar areas with similar  conditions;  the assumed
effects of regulations and taxes by governmental agencies; assumptions governing
future prices;  future operating,  development and reclamation costs; and mining
technology improvements.

         Our  reserve  estimates  are based on  geological  data  assembled  and
analyzed  by our staff of  engineers.  Reserve  estimates  will be  periodically
updated to reflect  past coal  production,  new drilling  information  and other
geologic or mining  data.  Acquisitions  or sales of coal  properties  will also
change our reserves.  Changes in mining  methods or  technology  may increase or
decrease the recovery basis for a coal seam.  Our reserve  estimates are subject
to change as a result of various factors, including the acquisition, divestiture
or depletion of reserves or the future  analysis of known or existing  data.  We
engage third parties periodically to review or audit our reserve estimates.  The
most recent third party audit of certain of our  reserves was  conducted in 2006
by Marshall Miller & Associates, Inc. (Marshall Miller). Future estimates of our
reserves,  including estimates prepared by Marshall Miller,  could be materially
different from current estimates.  There are numerous  uncertainties inherent in
estimating  quantities  and qualities of  recoverable  reserves,  including many
factors beyond our control.

         In addition,  we believe that we have  unproven  deposits that have not
yet been classified as reserves.  Unproven deposits are coal-bearing bodies that
have not been sufficiently sampled and analyzed in trenches, outcrops, drilling,
and underground  workings to assume continuity between sample points.  This coal
does not  qualify  as a  commercially  viable  coal  reserve  as  defined by SEC
standards  until a final  comprehensive  evaluation  based on unit cost per ton,
recoverability,   and  other  material  factors  concludes  legal  and  economic
feasibility.  Unproven coal deposits may be classified as such by either limited
property control or geologic  limitations,  or both. These unproven deposits are
located


                                       25
<PAGE>


immediately  adjacent  to our known  reserves.  There has been  previous  mining
activity  on or near  some of these  sites,  but we have  not yet done  adequate
drilling  or other  exploration  necessary  to  properly  define  these areas as
reserves.

         With  respect to our  reserve  estimates,  see "Risk  Factors - We face
numerous uncertainties in estimating our economically recoverable coal reserves,
and inaccuracies in our estimates could result in lower than expected  revenues,
higher than expected costs or decreased profitability."

         The following table provides proven and probable,  recoverable  reserve
data assigned to specific tracts and coal seams as of December 31, 2006:

<TABLE>
<CAPTION>
                                                                                                                          QUALITY:
                                                                                       RECOVERABLE                      SULFUR (LBS
      LOCATION                    COAL SEAM             CONTROL          ACRES          RESERVES      QUALITY: BTU         S02)
<C>                         <C>                          <C>            <C>                <C>            <C>                <C>
TENNESSEE RESERVES:

NEW RIVER TRACT                                          OWNED           65,000
(Anderson, Campell and         Big Mary Seam                                872             2.4           13,383             4.98
Scott County)
                              Beech Grove Seam                              502             1.1           12,698             3.15
                               Lower Dean Seam                              622             1.5           13,737             2.02
                                Windrock Seam                               880             1.8           13,631             1.91


                               Lower Dean Thru                              457             1.8           13,500             2.00
                                  Windrock
                                 Peewee Seam                                714             1.4           13,627             1.37
                                Jellico Seam                              2,527             5.7           13,960             5.28
                              Peewee Rider Seam                             241             0.6           14,260             1.21

KETCHEN TRACT                                            LEASED           7,000
(Campbell County)               Red Ash Seam                                365             2.5           12,558             1.79


                                Windrock Seam                               547             0.7           14,067             1.94
                                 Splint Seam                                746             1.5           14,222             2.48
                            Walnut Mountain Seam                            240             1.3           13,130             1.28

TVA TRACT                                                LEASED           4,400
(Campbell and Scott             Red Ash Seam                                563             0.9           14,143             2.22
County)
                            Walnut Mountain Seam                            242             0.8           14,092             1.77
OTHER                                                                     1,400
KENTUCKY RESERVES:

STRAIGHT CREEK TRACT                                     LEASED          27,350
(Bell, Harlan, and                Hazard 4                                1,077             2.1           14,429             1.31
Leslie County)
                                  Hazard 8                                1,240             3.6           13,732             1.84
                                  Hazard 9                                  507             1.2           13,846             2.20
                               Hazard 10 - 12                               638             2.1           13,712             1.41



PINE MOUNTAIN TRACT                                   OWNED/LEASED       10,400
(Bell, Harlan, and                Hazard 4a                                 656             3.2           14,124             1.08
Leslie County)
                                                                     ---------------------------
Totals                                                                  115,550            36.2
</TABLE>


Note: Quality is provided on a "washed, dry basis" based on an
average of samples taken and reported by Marshall Miller



                                       26
<PAGE>


         A map showing the locations of National  Coal's  properties is included
as Exhibit 99.1 to this Report on Form 10-K.

ITEM 3.       LEGAL PROCEEDINGS.

         In October 2004,  we succeeded to a permit for a coal mining  operation
in Campbell County,  Tennessee and in so doing became the real party in interest
in a pending civil action filed by a group of environmental organizations in the
United States District Court for the Eastern  District of Tennessee.  Plaintiffs
alleged that  issuance of the original  permit was flawed  because the Office of
Surface  mining  ("OSM"),  the federal  agency which issued the permit,  had not
complied with the requirements of the National Environmental Policy Act ("NEPA")
and asked that the permit be revoked by the Court.  The District Court dismissed
the  plaintiffs'  action and the  plaintiffs  subsequently  appealed to the U.S.
Sixth Circuit  Court.  The dismissal of this action was upheld by final Order of
the Sixth Circuit Court entered on January 3, 2007.

         The same plaintiffs filed a similar action in U.S. District Court based
on essentially the same facts alleging NEPA violations  regarding OSM's approval
of an application for a revision of the same permit.  An unfavorable  outcome of
this action  would not involve  direct  monetary  damages;  however  significant
financial losses could result from curtailed mining operations.  We believe that
the U. S. District Court will dismiss this action based upon the prior ruling in
the similar case by the U.S. Sixth Circuit Court.

         During  2005,  we were audited by our  previous  workers'  compensation
insurance provider which contends that an additional  approximately $1.4 million
in  premiums  is owed for the year ended April 15,  2005.  The matter  primarily
involves the  application of premium rates to employees  performing  certain job
functions.  In January  2006,  we paid  approximately  $427,000 to the  previous
insurance provider representing additional premium for new employees about which
there was no  dispute.  Currently,  the  matter has not been  resolved  and both
parties have pursued  legal action in the United  States  Dictrict  Court of the
Eastern  District of Tennessee.  While  management  believes  legal reserves are
sufficient for this matter, it is possible that the actual outcome of the matter
could vary  significantly  from this amount.  Management will continue to review
the amount of the  accrual and any  adjustment  required to increase or decrease
the  accrual  based on  development  of the  matter  will be made in the  period
determined.

         In March 2006,  we were named as defendant in a complaint  filed in the
United  States  District  Court for the  Eastern  District  of  Kentucky  by the
sublessee of certain coal mining rights concurrent with the Company's operations
in  Kentucky.  We are  the  sublessee  of the  right  to  mine  coal  using  the
underground  method  on  the  property  in  question,  as the  result  of a 2004
acquisition. The complainant claims that it possesses the right to mine the coal
at this property  through the surface  mining method and that by mining the coal
by the highwall mining method,  we committed  either an intentional or negligent
trespass.  The  complainant  seeks  damages in the range of $1.2 million to $2.8
million,  which it estimates to be the range of gross  profits from the revenues
of the coal  mined.  We  acknowledge  that we mined  the coal in  question,  but
contend that by using the highwall mining method,  we mined the coal pursuant to
the Lease by an underground  mining method and therefore  committed no trespass.
As an  additional  defense,  we have  filed a  third-party  complaint  against a
consultant,  who  advised  us that we had the  right  to  mine  the  coal.  This
counterclaim  could  allow us to recover a portion of any amounts  lost,  if the
original complainant is successful.  A settlement was reached and documented for
entry by Order of the Court in February 2007.

         In  February   2006,   we  purchased  a  second   highwall   miner  for
approximately  $6,500,000,  which  was  immediately  placed  in  service  on the
Straight Creek tracts in  Southeastern  Kentucky.  In March 2006,  this highwall
miner was damaged by a rock  collapse,  which  resulted in  approximately  three
months of lost service. Repairs to the highwall miner have totaled approximately
$1,934,000  and were  recorded  as a cost of sales in the first two  quarters of
2006.  The initial  insurance  claim was denied,  and in April 2006,  management
threatened legal action against the insurance  provider.  In September 2006, the
insurance   provider  agreed  to  the  claim,  and  we  received   approximately
$1,867,000, which has been recorded as a reduction of cost of sales in the third
quarter of 2006. We were also in discussion with a second insurance  provider on
a related claim  pertaining to a front-end loader that was destroyed in the same
March  2006  rock  collapse.  We  have  agreed  to  a  settlement  and  received
compensatory  proceeds of  approximately  $155,000  during the first  quarter of
2007.


                                       27
<PAGE>


         On  April  12,  2006,  we  were  named  as a  defendant  in a  suit  by
Appalachian Fuels, LLC (the "Plaintiff"),  along with Calvary Coal Company, Inc.
("Calvary"),  an  independent  contractor  who was the  Contract  Miner  for the
Company's  Kentucky  operations during a portion of 2004 and 2005. The Plaintiff
seeks to recover approximately $360,000,  funds allegedly supplied to Calvary by
the Plaintiff prior to the time of our purchase of the Kentucky  operations from
the Plaintiff. The purchase agreement relating to the Kentucky operations allows
for the  deduction  of the funds in question  from the  payments to Calvary only
upon Calvary's written consent,  which the Plaintiff did not obtain. Because the
required  written  consent  was not  obtained,  we did not  deduct  the funds in
question and submit them to the Plaintiff. This matter was dismissed by the Boyd
County Kentucky Circuit Court in February 2007 and has not been appealed.

         On September 1, 2006,  the  Tennessee  Department  of  Environment  and
Conservation ("TDEC") issued a STOP WORK ORDER (the "Order") with respect to the
operations  at Mine # 7 in  Tennessee.  The Order  alleged that we disturbed two
unnamed  streams  outside of the  permitted  mining  area.  The Order sought the
reclamation of the two streams and the assessment of penalties of  approximately
$173,000 if the various requirements sought by the Order were not satisfied.  We
filed an  appeal of the Order and in  November  2006 came to an  agreement  with
TDEC, which requires reclamation of the area in question with no penalties to be
assessed.

         We are made a party to other legal  actions,  claims,  arbitration  and
administrative proceedings from time to time in the ordinary course of business.
Management  regularly  assesses the  potential for these  proceedings  to have a
material impact on our cash flows, results of operations or financial condition.


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

         None


                                       28
<PAGE>


                                     PART II

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

COMMON STOCK

         Our common stock is listed on the NASDAQ Global Market  (formerly known
as the NASDAQ National Market), trading under the symbol "NCOC".

         From April 23, 2005 to April 20,  2006,  our common stock traded on the
NASDAQ Capital Market  (formerly known as the NASDAQ SmallCap  Market) under the
symbol  "NCOC".  Prior to  April  22,  2005,  our  common  stock  traded  on the
Over-the-Counter  Bulletin  Board  under the symbol  "NCOC".  Prior to the third
quarter of 2003,  there was no established  trading market for our common stock.
The  following  table sets forth,  for the periods  indicated,  the high and low
sales  prices for our common  stock from  January 1, 2005  through  December 31,
2006. The information has been adjusted to reflect a one-for-four  reverse stock
split of our common  stock which took effect at the close of business on January
12, 2005. The following quotations reflect  inter-dealer prices,  without retail
mark-up, mark-down or commission, and may not represent actual transactions.

                                                             HIGH           LOW

         YEAR ENDED DECEMBER 31, 2005
              First Quarter........................       $ 13.50       $  7.00
              Second Quarter.......................          7.85          5.45
              Third Quarter........................          8.25          5.50
              Fourth Quarter.......................          7.45          6.10

         YEAR ENDED DECEMBER 31, 2006
              First Quarter........................       $  7.01       $  6.10
              Second Quarter.......................         11.41          6.58
              Third Quarter........................          7.98          5.30
              Fourth Quarter.......................          6.90          4.52



         On March 27,  2007,  the  closing  sales  price of our common  stock as
reported on the NASDAQ Global Market was $4.70 per share.  As of March 27, 2007,
there were approximately 111 holders of record of our common stock.

DIVIDENDS

         We are  restricted  from  making cash  dividend  payments on our common
stock under the terms of our Series A cumulative  convertible  preferred  stock,
our 10.5% Senior Secured Notes due 2010, and our Term Loan Credit  Facility.  We
do not intend to pay dividends on our common stock.

         Historically  we have made  semi-annual  cash dividend  payments to the
holder of the Series A preferred  stock on June 30 and December 31. The dividend
rate of our Series A preferred  stock  increased  from 5% to 8% on  September 1,
2006.  During the year ended  December  31,  2006,  we accrued  dividends to the
holders of our Series A cumulative  convertible preferred stock in the aggregate
of approximately  $1,029,933. We paid approximately $362,886 in dividends to the
holders of our Series A cumulative  convertible preferred stock in June and July
2006, $413,567 in February 2007, and issued $118,567 in common shares in lieu of
preferred  dividends as a result of the conversion of shares of preferred  stock
to common stock and a covenant failure. At December 31, 2006, there were accrued
but unpaid dividends on our Series A cumulative  convertible  preferred stock of
$548,480.


                                       29
<PAGE>


PERFORMANCE GRAPH

      The following  performance  graph compares the yearly percentage change in
the  cumulative  total  shareholder  return on the common stock of National Coal
Corp. to the cumulative  shareholder  return for the same period of a peer group
and the Russell 2000 Stock Index.  The peer group is comprised of National  Coal
Corp.,  CONSOL  Energy,  Arch Coal,  Inc.,  and Peabody  Energy Corp.  The graph
assumes that the value of the investment in National Coal Corp. common stock and
each index was $100 at May 30, 2004.  The graph also assumes that all  dividends
were reinvested and that the investments were held through December 31, 2006.



                          [PERFORMANCE GRAPH OMITTED]




                            MAY 30,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                             2004        2004           2005           2006
                          ------------------------------------------------------
National Coal Corp.         100.0        289.5          151.3          131.6
Peer Group                  100.0        151.8          269.7          241.8
Russell 2000 Stock Index    100.0        121.0          126.5          149.8


                                       30
<PAGE>


ITEM 6.       SELECTED FINANCIAL DATA

                                              TWELVE MONTHS ENDED DECEMBER 31,
                                           ------------------------------------
                                             2006          2005          2004
                                           --------      --------      --------
CONSOLIDATED STATEMENT OF INCOME DATA:       (In thousands, except per share,
                                              per ton and number of employee
                                                          amounts)

Coal Sales Revenue ...................     $ 86,830      $ 65,258      $ 16,871
Total Revenue ........................       87,517        65,873        16,999
Operating Loss .......................      (16,457)       (2,564)       (7,040)
Net Loss .............................      (23,421)       (6,791)      (10,429)
Net loss attributable to common
   shareholders per share - basic ....        (1.59)        (0.58)        (2.60)
Net loss attributable to common
   shareholders per share - diluted ..        (1.59)        (0.58)        (2.60)
Preferred Dividends Per Share ........        (0.07)        (0.08)        (0.02)

CONSOLIDATED BALANCE SHEET DATA:
Working Capital (Deficit) ............     $ (9,450)     $ 18,331      $ (3,921)
Restricted Cash(1) ...................       17,247         7,323         4,527
Property, plant and equipment(2) .....       55,838        50,902        35,909
Total assets .........................       85,992        90,407        44,551
Long-term debt(3) ....................       67,487        60,015        19,724
Total Liabilities ....................       87,915        73,791        25,949
Shareholders' (deficit) equity .......       (1,923)       16,616        18,601

OTHER DATA:
EBITDA(4) ............................     $ (1,094)     $  7,545      $ (4,566)
Tons of coal sold ....................        1,643         1,216           357
Average cash cost per produced
   ton sold(5) .......................     $  56.30      $  44.29      $  53.89
Coal revenue per ton sold ............     $  52.84      $  53.67      $  47.32
Capital expenditures, net ............     $ 18,925      $ 19,853      $ 22,527
Number of Employees ..................          279           244           133

(1)      Consists of certificates of deposit and other cash primarily serving as
         collateral for reclamation liabilities and an operating lease, deposits
         for  worker's  compensation  liabilities,  and utility and  performance
         bonds.

(2)      Includes  coal mineral  rights,  net of  accumulated  amortization  and
         depletion. Excludes assets held for sale.

(3)      Includes obligations under capital leases.

(4)      EBITDA is defined  as net loss plus (i) other  (income)  expense,  net,
         (ii) interest expense,  (iii)  depreciation,  depletion,  accretion and
         amortization  minus (iv) interest income.  We present EBITDA to enhance
         understanding  of  our  operating  performance.  We  use  EBITDA  as  a
         criterion for evaluating our performance relative to that of our peers,
         including  measuring  our cost  effectiveness  and  return on  capital,
         assessing our allocations of resources and production  efficiencies and
         making compensation  decisions.  We believe that EBITDA is an operating
         performance measure that provides investors and analysts with a measure
         of our  operating  performance  and permits  them to evaluate  our cost
         effectiveness and production  efficiencies relative to competitors.  In
         addition,  our  management  uses  EBITDA to monitor  and  evaluate  our
         business operations.  However, EBITDA is not a measurement of financial
         performance  under  accounting  principles  generally  accepted  in the
         United  States of America  ("GAAP") and may not be  comparable to other
         similarly  titled  measures of other  companies.  EBITDA  should not be
         considered as an alternative  to cash flows from operating  activities,
         determined  in accordance  with GAAP, as indicators of cash flows.  The
         following reconciles our net loss to EBITDA:


                                       31
<PAGE>


                                                     TWELVE MONTHS ENDED
                                                         DECEMBER 31,
                                               --------------------------------
                                                 2006        2005        2004
                                               --------    --------    --------
Net loss ...................................   $(23,421)   $ (6,791)   $(10,429)
Other (income) expense, net ................        280         390          41
Interest expense ...........................      7,476       3,967       3,349
Interest income ............................       (792)       (129)       --
Depreciation, depletion, accretion and
     amortization ..........................     15,363      10,108       2,473
                                               --------    --------    --------
EBITDA .....................................   $ (1,094)   $  7,545    $ (4,566)
                                               ========    ========    ========


(5)      Average cash cost per ton is calculated as the sum of cost of sales and
         general and administrative expense (excluding depreciation,  depletion,
         accretion  and  amortization),  divided by the number of produced  tons
         sold.  Although  average  cash  cost  per  ton  is  not  a  measure  of
         performance  calculated in accordance  with GAAP,  management  believes
         that it is useful to investors in evaluating the Company  because it is
         widely  used in the coal  industry as a measure to evaluate a company's
         control  over its cash costs.  Average  cash cost per ton should not be
         considered in isolation or as a substitute  for measures of performance
         in accordance with GAAP. In addition, because average cash cost per ton
         is not calculated  identically by all companies,  the presentation here
         may not be  comparable  to other  similarly  titled  measures  of other
         companies.  The  table  below  reconciles  the  GAAP  measure  of total
         operating costs and expenses to average cash cost per ton:

<TABLE>
<CAPTION>
                                                  TWELVE MONTHS ENDED DECEMBER 31,
                                  -------------------------------------------------------------
                                         2006                   2005                  2004
                                  -------------------   -------------------   -------------------
                                      $       PER TON       $       PER TON       $       PER TON
                                  --------   --------   --------   --------   --------   --------
<S>                               <C>        <C>        <C>        <C>        <C>        <C>
Total operating expenses ......   $103,974              $ 68,436              $ 24,038
Less: Cost of purchased coal ..     15,584                 4,446                 2,351
Less: Depreciation, depletion,
     accretion and amortization     15,363                10,108                 2,473
                                  --------              --------              --------
AVERAGE CASH COST .............   $ 73,027   $  56.30   $ 53,882   $  44.29   $ 19,214   $  53.89
</TABLE>


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

         The following  discussion and analysis should be read together with the
Consolidated  Financial  Statements  of  National  Coal  Corp.  and the Notes to
Consolidated  Financial  Statements  included  elsewhere  in this  report.  This
discussion   summarizes  the  significant  factors  affecting  the  consolidated
operating results,  financial condition and liquidity and cash flows of National
Coal Corp. for the fiscal years ended December 31, 2006,  2005 and 2004.  Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion  and Analysis of  Financial  Condition  and Results of Operation  are
forward-looking  statements that involve risks and  uncertainties  and are based
upon judgments concerning various factors that are beyond our control.

         We mine, process and sell high quality bituminous steam coal from mines
located in East  Tennessee and  Southeastern  Kentucky.  We own the coal mineral
rights  to  approximately   74,600  acres  of  land  and  lease  the  rights  to
approximately   40,900   additional  acres.  We  have  expanded  our  operations
considerably  since commencing  operations at a single surface mine in Tennessee
in July 2003. As of December 31, 2006, our active mining complexes  included two
underground  mines, two surface mines,  and two highwall mines. In addition,  we
have four preparation  plants, two active and two inactive,  and four unit train
loading facilities, three active and one inactive, served by the CSX and Norfolk
Southern ("NS") railroads. We hold permits that allow us to open or re-open five
new  mines  close  to our  current  operations.  As of  December  31,  2006,  we
controlled  approximately  36.2  million  estimated  recoverable  tons  of  coal
reserves.  During the year ended December 31, 2006, we generated  total revenues
of $87.5 million,  an EBITDA (a  reconciliation of non-GAAP figures is presented
in footnote 4 of Item 6. Selected Financial Data) loss of $1.1 million, and sold
approximately  1,643,000 tons of coal.  Our goals continue to include  expansion
and increasing mine production, as market conditions allow.


                                       32
<PAGE>


         The  majority  of our  revenues  have  come  from  the  sale of coal we
produce.  We have  also  sold  coal  that we  purchase  from  third  party  coal
producers, both on a contract and a case by case basis. Additionally,  we charge
third party coal producers a negotiated price per ton for coal loading services.
For 2007, we expect our  production to be be slightly  lower than in 2006 due to
business  decisions to temporarily idle or delay the opening of certain mines, a
preparation  plant,  and a  load-out  facility.  We will  resume  and expand our
production  activities  when  economic  conditions  are  favorable.  We  plan to
increase the purchase of coal from third-party  producers to fulfill contractual
obligations as part of our business strategy in 2007.

         Our revenues  depend  largely on the price at which we are able to sell
our coal. Coal prices decreased between 2005 and 2006.  Decreases in coal prices
are primarily due to the supply and demand  balance of coal in the market - both
domestic and  imported,  as well as the price and  availability  of  alternative
fuels for electricity  generation.  Continued low prices could adversely  affect
our revenues and our ability to generate  cash flows in the future.  As a result
of supply having  exceeded  demand during 2006,  which resulted in the currently
low coal price environment, we have idled certain operations.

         Our long-term sales agreements  generally  require our customers to buy
coal from us at prices averaging over $50 per ton, subject to customary  quality
adjustment provisions. Three of our contracts,  pursuant to which we sold 43% of
our coal in the twelve months ended  December 31, 2006, and which expire in 2007
and  2010,  provide  for  adjustment  of coal  purchase  prices  based on market
conditions.  One of the contracts expiring in 2007, which represented 9% of coal
sales for the twelve months ended December 31, 2006, is not being renewed due to
our inability to obtain a contract with an  acceptable  sales price.  We plan to
capitalize  on upswings in the pricing  environment,  if such market  conditions
emerge, by pursuing additional long-term contracts when economically  acceptable
to us. In the interim,  any  uncommitted  coal produced will be sold on the spot
market for an economically acceptable price.

         We have expanded our production capacity  significantly.  In Tennessee,
we made $9.5 million of major  improvements  to our  infrastructure  through the
purchase  of a 42-mile  short line  railroad  and the  modernization  of a large
preparation plant and rail load-out  facility.  In February 2006, we purchased a
short line  railroad  for  approximately  $2 million  which  connects  our owned
reserves  to the  Norfolk-Southern  Railroad at Oneida,  Tennessee.  We spent an
additional $0.5 million to refurbish the line and make it  operational.  We also
acquired the Baldwin  preparation  plant and rail  load-out  facility in 2005 in
return for the  assumption  of certain  reclamation  liabilities  and spent $7.0
million during 2006 to refurbish and modernize the Baldwin Preparation plant and
rail  load-out  facility.  These  investments  will  provide the  capability  to
efficiently  process and transport our coal produced from our owned  reserves to
market. In addition we spent $4.1 million on developing new mining operations in
Tennessee  during  2006.  The capital  expenditures  on mines,  processing,  and
transportation  should help us lower our operating costs. Also, the expenditures
made on our  transportation  infrastructure  should help reduce delivery cost to
our Southeast U.S. utility customers. When economically advantageous,  we intend
to utilize our  increased  production  capacity by  increasing  our  production.
Longer term, we plan to permit and develop additional production capability from
our current reserve base.

         Our financial results from operations  depends heavily upon the cost of
producing  coal.  Our  primary  expenses  are wages and  benefits,  repairs  and
maintenance  expenditures,   diesel  fuel  purchases,  blasting  supplies,  coal
transportation  costs,  cost of purchased  coal,  freight and handling costs and
taxes incurred in selling coal. We expect that our exploration costs in the next
few years will be relatively  significant  but that our  exploration  costs will
decline  as a  percentage  of  revenues.  Because  of  rising  fuel  costs,  our
transportation  costs have increased  significantly.  Given that the coal mining
business is capital intensive,  we expect our depreciation  expenses to increase
in 2007 and beyond as we increase our capital  expenditures for mining and other
equipment needed to expand our business.

         For   additional   information   regarding   some  of  the   risks  and
uncertainties that affect us and our industry, see "Risk Factors."


                                       33
<PAGE>


CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

         The discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of  America.  The  preparation  of these  consolidated  financial
statements  requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent  assets and  liabilities.  On an  on-going  basis,  we  evaluate  our
estimates,  including  those  related  to  computing  depreciation,   depletion,
amortization,  accretion,  the basis of  reclamation  and  workers  compensation
liabilities,  asset impairment,  valuing non-cash transactions,  and recovery of
receivables.  Estimates are then based on historical  experience  and on various
other  assumptions that are believed to be reasonable  under the  circumstances,
the  results  of which form the basis for making  judgments  about the  carrying
values of assets  and  liabilities  that are not  readily  apparent  from  other
sources.  Actual  results  may  differ  from  these  estimates  under  different
assumptions or conditions.

         We  believe  our most  critical  accounting  policies  include  revenue
recognition, the corresponding accounts receivable and the methods of estimating
depletion and  reclamation  expense of actual  mining  operations in relation to
estimated total mineable tonnage on our properties.

         REVENUE  RECOGNITION.  Under SEC Staff  Accounting  Bulletin  No.  104,
REVENUE RECOGNITION, we recognize revenue when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred
or services have been rendered,  (3) the seller's price to the buyer is fixed or
determinable,  and (4) collectibility is reasonably assured. In the case of coal
we mine and sell, we negotiate a specific  sales  contract  with each  customer,
which  includes  a fixed  price  per ton,  a  delivery  schedule,  and terms for
payment.  When applicable,  freight costs billed to the customers as part of the
contract price are included as coal sales with the offsetting  expense  included
in cost of sales.  We  recognize  revenue  from  sales  made  pursuant  to these
contracts  at the time the coal is  loaded  onto  rail  cars and  trucks  at our
load-out, mine, and processing plant facilities.

         PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT. Property and equipment
are stated at cost.  Maintenance  and repairs that do not improve  efficiency or
extend  economic  life  are  expensed  as  incurred.  Plant  and  equipment  are
depreciated  using the  straight-line  method over the estimated useful lives of
assets which  generally  range from seven to thirty years for building and plant
and one to five  years for  equipment.  On sale or  retirement,  asset  cost and
related  accumulated  depreciation are removed from the accounts and any related
gain or loss is reflected in income.

         Leasing is used for certain  capital  additions  when  considered  cost
effective  relative to other  capital  sources.  All leases with an initial term
greater than one year are accounted for under Statement of Financial  Accounting
Standards,  or SFAS, 13,  ACCOUNTING FOR LEASES.  These leases are classified as
either capital or operating as appropriate. Leased equipment meeting the capital
lease  criteria of SFAS 13 is  capitalized  and the present value of the related
minimum lease payments is recorded as a liability.  Amortization  of capitalized
leased  assets is computed on the  straight-line  method over the shorter of the
estimated useful life or the initial lease term.

         Reserves  and mine  development  costs are  recorded at cost or at fair
value in the case of  acquired  businesses.  Our coal  reserves  are  controlled
either through direct ownership or through leasing  arrangements which generally
last until the  recoverable  reserves  are  depleted.  Depletion of reserves and
amortization of mine development costs is computed using the units-of-production
method over the  estimated  recoverable  tons.  Costs  related to locating  coal
deposits  and  determining  the  extractive  feasibility  of such  deposits  are
expensed as incurred.

         Exclusive  of the  approximately  $55.8  million  of  property,  plant,
equipment  and  mine  development, net  we  had  as  of  December  31,  2006  is
approximately  $0.6 million of mining  equipment  classified  as assets held for
sale.  This equipment was sold in January 2007 for a small gain.

         We review our long-lived  assets for impairment  when events or changes
in  circumstances  indicate  that the  carrying  amount of the assets may not be
recoverable.  If impairment  indicators are present and the future  undiscounted
cash flows are less than the carrying value of the assets,  the carrying  values
are reduced to the estimated fair value.


                                       34
<PAGE>


         ASSET RETIREMENT OBLIGATION. The Surface Mining Control and Reclamation
Act of 1977 and similar state statutes  require that mine properties be restored
in  accordance  with  specified  standards  and an  approved  reclamation  plan.
Significant  reclamation  activities include reclaiming refuse and slurry ponds,
reclaiming the pit and support acreage at surface mines,  and sealing portals at
underground  mines.  Reclamation  activities  that are performed  outside of the
normal  mining  process are  accounted for as asset  retirement  obligations  in
accordance  with the  provisions of SFAS 143,  ACCOUNTING  FOR ASSET  RETIREMENT
OBLIGATIONS   ("SFAS  143").  We  record  our   reclamation   obligations  on  a
mine-by-mine  basis  based  upon  current  permit   requirements  and  estimated
reclamation  obligations for such mines as determined by engineering  estimates.
In accordance with SFAS 143, we determine the fair value of our asset retirement
obligations  using a discounted cash flow  methodology  based on a discount rate
related  to the  rates of US  treasury  bonds  with  maturities  similar  to the
expected life of a mine, adjusted for our credit standing.  In estimating future
cash  flows,  we  consider  third party  profit and apply  inflation  factors as
required by SFAS 143.

         On at least an annual basis, we review our entire reclamation liability
and make necessary  adjustments for permit changes granted by state authorities,
additional costs resulting from accelerated mine closures, and revisions to cost
estimates and productivity assumptions, to reflect current experience.

         STOCK-BASED COMPENSATION. We account for stock-based compensation using
Statement of Financial Accounting Standards No. 123 (Revised 2004),  SHARE-BASED
PAYMENT  ("SFAS  123(R)").  We currently use a standard  option pricing model to
measure  the fair value of stock  options  granted  to  employees.  SFAS  123(R)
requires  all  companies  to  measure  compensation  cost  for  all  share-based
payments,  including employee stock options,  at fair value and is effective for
interim or annual  periods  beginning  after  December 15, 2005. We adopted this
standard  effective  January 1, 2006 and have elected the  modified  prospective
application  transition  method.  Under  the  modified  prospective  application
transition method, awards that are granted, modified,  repurchased, or cancelled
after the date of adoption  should be measured and  accounted  for in accordance
with the  provisions of SFAS 123(R).  Awards granted prior to the effective date
should  continue to be accounted for in accordance  with the  provisions of SFAS
123(R) with the exception that compensation  expense related to unvested options
must be  recognized  in the  income  statement  based on the  fair  value of the
options on the date of grant.  SFAS 123(R)  also  requires  the  benefits of tax
deductions  in  excess  of  recognized  compensation  cost to be  reported  as a
financing  cash flow,  rather than as an operating  cash flow as required  under
current literature.

         MINERAL RESERVES. We amortize our acquisition costs, development costs,
capitalized  asset  retirement  costs  and some  plant and  equipment  using the
units-of-production  method and  estimates  of  recoverable  proven and probable
reserves.  We review  these  estimates  on a regular  basis and  adjust  them to
reflect our current  mining plans.  The rate at which we record  depletion  also
depends on the estimates of our reserves. If the estimates of recoverable proven
and probable reserves decline,  the rate at which we record depletion increases.
Such a decline in reserves may result from geological conditions,  coal quality,
effects of  governmental,  environmental  and tax  regulations,  and assumptions
about future prices and future operating costs.

RECENT ACCOUNTING PRONOUNCEMENTS

         In March 2005, the Financial Accounting Standards Board ("FASB") issued
Interpretation  No. 47 ("FIN 47"),  ACCOUNTING FOR CONDITIONAL  ASSET RETIREMENT
OBLIGATIONS, which clarifies that an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation when incurred if
the  liability's  fair value can be reasonably  estimated.  A conditional  asset
retirement  obligation  is  defined  as a  legal  obligation  to  perform  asset
retirement  activity  in which the  timing  and (or)  method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity.  FIN 47 is  effective no later than the end of fiscal years ending after
December 15, 2005.  Our adoption of FIN 47 did not result in a change to current
practice.


                                       35
<PAGE>


         At its March 30, 2005 meeting,  the FASB ratified the consensus reached
by the Emerging  Issues Task Force  ("EITF") in Issue No. 04-6,  ACCOUNTING  FOR
STRIPPING COSTS INCURRED  DURING  PRODUCTION IN THE MINING  INDUSTRY.  Issue No.
04-6  requires  that the costs of removing  overburden  and waste  materials  to
access mineral deposits during the production phase of a mine, commonly referred
to as STRIPPING COSTS, be included in the costs of the inventory produced.  EITF
Issue No.  04-6 is  effective  for the  first  fiscal  period  in  fiscal  years
beginning  after  December  15, 2005,  with early  adoption  permitted.  We have
adopted  the EITF  effective  January 1, 2006.  Adoption of this EITF has had no
material impact on our financial statements.

         In  May  2005,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 154,  ACCOUNTING CHANGES AND ERROR  CORRECTIONS,  A REPLACEMENT OF
APB OPINION NO. 20 AND FASB STATEMENT NO. 3, which changes the  requirements for
the  accounting  for and  reporting of a change in  accounting  principle.  This
statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine the  period-specific  effects or the cumulative effect of change. When
it is  impracticable to determine the  period-specific  effects of an accounting
change  on one or  more  individual  prior  periods  presented,  this  Statement
requires that the new accounting  principle be applied to the balances of assets
and   liabilities  as  of  the  beginning  of  the  earliest  period  for  which
retrospective  application is practicable and that a corresponding adjustment be
made to the opening  balance of retained  earnings  for that period  rather than
being reported in the income statement.  Management believes this statement will
have no impact on our financial statements.

         In June  2006,  the FASB  issued  Interpretation  No.  48  ("FIN  48"),
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT
NO. 109. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to  be  taken  in  a  tax  return.   It  also  provides   guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosure  and  transition.  FIN 48 is  effective  for  fiscal  years
beginning  after  December 15, 2006.  We are  currently  assessing the potential
impact  of  the   interpretation  on  our  financial  position  and  results  of
operations.

         In September  2006, the FASB issued  Statement of Financial  Accounting
Standards No. 157, FAIR VALUE  MEASUREMENTS  ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about  fair  value  measurements.   SFAS  157  applies  under  other  accounting
pronouncements  that  require  or permit  fair value  measurements.  SFAS 157 is
effective  prospectively  for fiscal years beginning after November 15, 2007 and
interim  periods  within that fiscal year.  We are still  analyzing  SFAS 157 to
determine the impact of adoption.


                                       36
<PAGE>


RESULTS OF OPERATIONS

         The following table presents consolidated  statement of operations data
for each of the periods indicated as a percentage of revenues.

                                                        TWELVE MONTHS
                                                      ENDED DECEMBER 31
                                               -------------------------------
                                                 2006        2005        2004
                                               -------     -------     -------

Revenues ...................................     100.0%      100.0%      100.0%
                                               -------     -------     -------
Operating expenses:
   Cost of sales ...........................      90.6        77.6        96.0
   Depreciation, depletion amortization,
      and accretion ........................      17.6        15.3        14.6
   General and administrative ..............      10.6        11.0        30.8
                                               -------     -------     -------
     Total operating expenses ..............     118.8       103.9       141.4
                                               -------     -------     -------
Operating loss .............................     (18.8)       (3.9)      (41.4)
Other income (expense):
   Interest expense ........................      (8.6)       (6.0)      (19.7)
   Interest income .........................       0.9         0.2        --
   Other income (expense), net .............      (0.3)       (0.6)       (0.3)
                                               -------     -------     -------
Net loss ...................................     (26.8)%     (10.3)%     (61.4)%
                                               =======     =======     =======

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005

     REVENUES
                                              TWELVE MONTHS            PERCENT
                                            ENDED DECEMBER 31          CHANGE
                                        -------------------------    -----------
                                            2006         2005

Coal sales ..........................   $86,830,095   $65,258,071       33.1%
Other revenue .......................       686,992       614,563       11.8%
                                        -----------   -----------
   Total revenues ...................   $87,517,087   $65,872,634       32.9%
                                        ===========   ===========


         For the twelve  months  ended  December 31,  2006,  our  revenues  were
derived  from coal sales to thirteen  customers,  four of which were  utilities,
eight of which were  industrial  customers and one of which was a coal reseller.
Our five largest customers represent 92% of our total coal sales. For the twelve
months ended  December 31,  2005,  our revenues  were derived from coal sales to
fifteen customers,  eight of which were utilities,  six of which were industrial
customers  and one of which  was a coal  reseller.  Our five  largest  customers
represent 84% of our total coal sales.  The 33.1%  increase in coal sales during
the year ended December 31, 2006 is primarily  attributable to a 35% increase in
sales  volume  and the  addition  of a new  customer  partially  offset  by a 4%
decrease in average net sales prices, including penalties and premiums.

         In  2005,  coal  prices  in  Central  Appalachia   remained  relatively
unchanged despite unseasonable weather in the Southeast,  however, a second year
of cooler summer  temperatures and warmer winter temperatures in 2006 did have a
large negative impact on coal prices.  Also, many producers increased production
to meet the higher demand.

         The  increase in other  revenues is due to the  increase in receipts of
loading fees of $288,000 from a coal company with property  located  adjacent to
ours and  approximately  $77,000 of wheelage  revenue  under a lease  agreement,
offset by a prior year negotiated termination of a sales contract of $350,000.


                                       37
<PAGE>


<TABLE>
     OPERATING EXPENSES
<CAPTION>
                                                     TWELVE MONTHS            PERCENT
                                                   ENDED DECEMBER 31          CHANGE
                                             ---------------------------   ------------
                                                  2006          2005
<S>                                          <C>            <C>                <C>
Cost of sales ............................   $ 79,354,327   $ 51,115,116       55.2%
General and administrative expenses ......      9,257,241      7,213,346       28.3%
Depreciation, depletion, accretion
   and amortization expense ..............     15,362,829     10,107,723       52.0%
                                             ------------   ------------
Total operating expenses .................   $103,974,397   $ 68,436,185       51.9%
                                             ============   ============
</TABLE>

         COST OF SALES

         Cost of  sales  consists  primarily  of  salary,  benefits,  and  other
compensation costs paid directly to miners, and direct costs paid to third party
vendors  whose goods and services were directly used in the process of producing
coal  inventory.   Third  party  vendor  costs  include   equipment  leases  and
maintenance  costs,  blasting  costs,  fuel  costs,  parts  and  supplies,  coal
purchases,  and transportation  costs. The increase in cost of sales in the year
ended  December  31,  2006 as compared  to the year ended  December  31, 2005 is
primarily due to a 39% increase in mined and purchased coal.

         Cost of sales as a percentage of revenue  increased  from 77.6% in 2005
to 90.6% in 2006. This was primarily due to  inefficiencies  incurred during the
early stages of opening  three new mines and building  significant  inventories,
operating the refurbished Baldwin wash plant (with insufficient volume to absorb
fixed  costs),  and the start-up of our  short-line  railroad.  Operating  costs
associated with these projects for the year totaled $4.7 million.  A significant
portion of the cost increase,  about $2.2 million was associated  with the three
capital projects that were completed,  but then idled.  Those projects were Mine
#17, the Baldwin preparation  facility,  and the shortline railroad. In addition
to the above,  three other events  contributed  to higher costs during the year:
lost production  from a highwall miner due to an accident in March 2006,  higher
costs  associated with purchasing and processing coal from third parties,  and a
significant increase in our cost structure in Kentucky due to the termination of
a subcontractor.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative  expenses  primarily include  non-operations
salary,   benefits  and  related  expenses;   consulting  expenses;   legal  and
professional fees;  insurance expenses;  and travel and travel related expenses.
The change in general and administrative  expenses was primarily attributable to
changes in three  major  components:  1)  $1,423,000  increase  in stock  option
expense primarily due to our adoption of SFAS 123(R) and an accelerated  vesting
of executive  stock options for the former CEO, the former  General  Counsel and
Secretary  (who is also the spouse of the former  CEO),  and the former  COO, 2)
$514,000  increase in professional  fees,  primarily legal fees, and 3) $274,000
increase in payroll,  primarily  due to an increase in  corporate  personnel  in
2006.

         As a percentage of revenues,  general and administrative  expenses have
decreased from 11.0% in 2005 to 10.6% in 2006.

         DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION  EXPENSE

         The increase in  depreciation,  depletion,  accretion and  amortization
expense in the twelve  month  period  ended  December  31, 2006  compared to the
twelve month period ended December 31, 2005 is primarily attributable to a 56.1%
increase  in  depreciation.  This  change  was due to the  acquisition  of $28.0
million  of  fixed  assets,  primarily  mining  equipment,  net of  fixed  asset
disposals with a gross value of  approximately  $9.7 million and a change in the
estimated  useful lives of certain  mining  equipment at April 1, 2005. Had this
revision been made as of January 1, 2005, the effect would have been to increase
depreciation  expense by approximately  $1.6 million for the year ended December
31, 2005.


                                       38
<PAGE>


<TABLE>
         Other Income (Expense)
<CAPTION>
                                                   TWELVE MONTHS           PERCENT
                                                 ENDED DECEMBER 31         CHANGE
                                           --------------------------    -----------
                                                2006          2005
<S>                                        <C>            <C>              <C>
Interest expense and financing fees ....   $(7,475,824)   $(3,966,715)      88.4%
Interest income ........................       791,852        129,200      512.9%
Other income (expense), net ............      (279,928)      (390,105)     (28.2)%
                                           -----------    -----------
   Total other income (expense) ........   $(6,963,900)   $(4,227,620)      64.7%
                                           ===========    ===========
</TABLE>


         The 88.4%  increase in interest  expense  for the twelve  month  period
ended  December 31, 2006 compared to the twelve month period ended  December 31,
2005 is  attributable to an increase in the average  outstanding  balance of our
debt related  primarily  to the issuance of $55 million of 10.5% Senior  Secured
Notes  obtained  immediately  prior to  year-end  2005,  partially  offset  by a
decrease in financing fees of  approximately  $1.9 million  related to our prior
year bond  offering  and a decrease in our  weighted  average  interest  rate of
approximately  2.3%. Interest income increased by 512.9% primarily due to larger
average  short-term  deposit  balances Other income  (expense),  net of $279,928
expense  consists  primarily of the write-off of acquisition  costs and a rebate
from a  third-party  railroad  agreement  in the current  year versus a $390,106
expense  in  the  prior  year   related   primarily  to  a  loss  on  the  early
extinguishment of notes payable.


COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

     REVENUES
                                              TWELVE MONTHS           PERCENT
                                            ENDED DECEMBER 31         CHANGE
                                        -------------------------   -----------
                                            2005          2004

Coal sales ..........................   $65,258,071   $16,871,346      286.8%
Other revenue .......................       614,563       127,567      381.8%
                                        -----------   -----------
   Total revenues ...................   $65,872,634   $16,998,913      287.5%
                                        ===========   ===========




         For the twelve  months  ended  December 31,  2005,  our  revenues  were
derived from coal sales to fifteen customers, eight of which were utilities, six
of which were  industrial  customers and one of which was a coal  reseller.  Our
five largest customers represent 84% of our revenue. For the twelve months ended
December  31,  2004,  we had a total of  twelve  customers,  two of  which  were
utilities  that  accounted  for  approximately  77% of our  revenue.  The 286.8%
increase in coal sales  during the year ended  December  31,  2005 is  primarily
attributable to a 244% increase in production  volume, the addition of three new
customers and a 15% increase in average sales prices.  The significant  increase
in production volume over 2004 is primarily the result of experiencing four full
quarters of  operations  in 2005 as  compared to a single  quarter in 2004 along
with the closure of two lower volume mines and commencement of operations at two
higher volume mines, one of which was a highwall mine.

         During the two year period  ended  December  31,  2005,  the market for
Central  Appalachian  coal experienced an increase in demand and strong pricing.
During the year ended  December  31,  2004,  28% of our sales were below $40 per
ton, 25.2% were between $40 and $50 per ton and 53.2% was sold above


                                       39
<PAGE>


$50 per ton. All sales under contract  during 2005 were made at an average price
above $50 per ton. All average  prices  include  premiums and penalties for coal
quality variances from contractual requirements.

         The increase in other revenue is due to the receipt of TIPPLING FEES of
$250,610  from a coal  company  with  property  located  adjacent  to ours and a
negotiated  termination of a sales  contract of $350,000.  At December 31, 2005,
the sales  contract had thirteen  months  remaining and required the delivery of
130,000  tons  of  coal  through  2006.  These  increases  were  offset  by  the
elimination of $103,403 in royalty revenue during 2004.

<TABLE>
     OPERATING EXPENSES
<CAPTION>
                                                     TWELVE MONTHS           PERCENT
                                                   ENDED DECEMBER 31         CHANGE
                                              -------------------------   -----------
                                                  2005          2004
<S>                                           <C>           <C>                 <C>
Cost of sales .............................   $51,115,116   $16,322,632         213.2%
General and administrative expenses .......     7,213,346     5,242,437          37.6%
Depreciation, depletion, accretion and
   amortization expense ...................    10,107,723     2,473,369         308.7%
                                              -----------   -----------
Total operating expenses ..................   $68,436,185   $24,038,438         184.7%
                                              ===========   ===========
</TABLE>

         COST OF SALES

         Cost of  sales  consists  primarily  of  salary,  benefits,  and  other
compensation costs paid directly to miners, and direct costs paid to third party
vendors  whose goods and services were directly used in the process of producing
coal  inventory.   Third  party  vendor  costs  include   equipment  leases  and
maintenance  costs,  blasting  costs,  fuel  costs,  parts  and  supplies,  coal
purchases,  and transportation  costs. The increase in cost of sales in the year
ended  December  31,  2005 as compared  to the year ended  December  31, 2004 is
primarily due to a 241% increase in mined and purchased coal.

         As  the  production  of  coal  tons  increases  the  cost  per  ton  is
decreasing. Our cost of sales as a percentage of total revenue has improved from
96.0% in 2005 to 77.6% in 2006.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative  expenses  primarily include  non-operations
salary,   benefits  and  related  expenses;   consulting  expenses;   legal  and
professional fees;  insurance expenses;  and travel and travel related expenses.
The change in general and administrative  expenses was primarily attributable to
changes in six major components: 1) $710,335 increase in payroll,  primarily due
to an  increase  in  corporate  personnel  in 2005 and  incurring a full year of
expense on eleven  corporate  employees  hired in 2004, 2) $329,075  increase in
professional fees,  primarily legal fees, 3) $367,000 increase in security costs
related  to  securing  our mine  sites and  corporate  offices  against  various
threats,  4) the addition of $187,500 in  directors  fees due to the addition of
independent   directors,   5)  $150,000  forfeited  deposit  on  a  real  estate
transaction,  and 6) a $118,000  increase in  consultants,  primarily  financial
consultants.

         As a percentage of revenues,  general and administrative  expenses have
decreased from 30.8% in 2005 to 11.0% in 2006.

         DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION EXPENSE

         The increase in  depreciation,  depletion,  accretion and  amortization
expense in the twelve  month  period  ended  December  31, 2005  compared to the
twelve  month period ended  December  31, 2004 is  primarily  attributable  to a
493.3% increase in depreciation. This change was due to the acquisition of $19.3
million  of fixed  assets,  primarily  mining  equipment,  and a  change  in the
estimated useful lives of our mining equipment. On April 1, 2005, we changed our
policy for the depreciable life of mining


                                       40
<PAGE>


equipment  to three to five years from seven  years.  Subsequently,  most of our
equipment was estimated to have a three year useful life. This had the impact of
increasing depreciation on mining equipment by approximately $3.6 million during
2005.  This  adjustment  was  treated  as a change in  accounting  estimate  and
depreciation expense was adjusted on a prospective basis.

<TABLE>
     OTHER INCOME (EXPENSE)
<CAPTION>
                                                    TWELVE MONTHS          PERCENT
                                                  ENDED DECEMBER 31        CHANGE
                                            --------------------------   -----------
                                                 2005          2004
<S>                                         <C>            <C>             <C>
Interest expense and financing fees .....   $(3,966,715)   $(3,348,922)     18.4%
Interest income .........................       129,200           --          --
Other income (expense), net .............      (390,105)       (40,683)    541.3%
                                            -----------    -----------
   Total other income (expense) .........   $(4,227,620)   $(3,389,605)     24.7%
                                            ===========    ===========
</TABLE>

         The increase in other income (expense), net, in the year ended December
31, 2005 compared to the year ended December 31, 2004 is primarily  attributable
to an increase in interest  expense of $617,793 and an increase in other expense
of $220,223.  The increase in interest  expense is due to added  borrowings  for
asset  acquisitions  made during  calendar 2005 of  approximately  $16.8 million
offset by the $1.7 million  interest  expense  recognized in 2004 as a result of
the beneficial  conversion feature of $3.0 million of preferred shares issued in
August 2004. The added  borrowings do not include the  $55,000,000  10.5% Senior
Secured Notes due 2010, which were issued on December 29, 2005.

RELATED TRANSACTIONS

         See "Certain Relationships and Related Transactions" included elsewhere
in this report for a full  description of  transactions to which we were or will
be a party, in which the transaction  involved exceeds a material amount, and in
which any director, executive officer, shareholder of more than 5% of our common
stock or any  member  of their  immediate  family  had or will  have a direct or
indirect material interest.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2006, we had cash and cash equivalents of approximately
$2.2 million,  negative working capital of approximately $9.5 million,  and cash
flows used in operations of approximately  $3.8 million for the year then ended.
In order to fund general  operating and working capital needs, we entered into a
Term Loan Credit  Facility in October  2006 that  provides  borrowings  of up to
$10.0 million with Guggenheim  Corporate Funding,  LLC. We borrowed $5.0 million
at closing,  an additional  $3.0 million in December 2006, and the the remaining
$2.0 million subsequent to year-end.

         As noted previously, we have made significant investments over the past
three years to expand our  production  capacity  significantly.  We are now in a
position  to  increase  our  production  when  doing  so  will  be  economically
advantageous.  We have no  material  capital  projects  planned for 2007 and our
budgeted capital expenditures for the year are less than $3 million.

         At December 31, 2006,  we had a  shareholders'  deficit of $1.9 million
and incurred net losses of $23.4 million  (excluding  preferred stock dividends)
for the year then  ended.  We expect  that we will  continue to incur net losses
into the foreseeable  future which will increase our shareholders'  deficit.  On
March 2, 2007 we sold 3 million  shares of our common  stock in a private  sale.
Two  institutional  investors  purchased 2.8 million  shares and our current CEO
purchased  the   remaining   200,000   shares.   Proceeds  from  the  sale  were
approximately $14.0 million and will be used for potential internal and external
growth opportunities and to fund general operating and working capital needs. We
are required to file a registration statement to register the shares as early as
practicable, but no later than April 30, 2007.

         We  expect  to be able  to  meet  our  liquidity  requirements  for the
foreseeable   future  through   current  cash  reserves  and  cash  provided  by
operations.  If our  operating  plans  for  2007  vary  significantly  from  our
expectations, we may have to seek additional financing sources. In the case that
market conditions improve and we determine that it is economically  advantageous
to resume  expansion  plans, we may have to seek additional  financing  sources.
There are no assurances that our efforts to raise additional financial resources
will be successful.


                                       41
<PAGE>


     DEBT OBLIGATIONS

         The  following  table   summarizes  our  long-term  debt   obligations,
excluding capital leases:

                                                   DECEMBER 31,    DECEMBER 31,
                                                       2006            2005
                                                   ------------    ------------
10.5% Senior Secured Notes, due 2010 ...........   $ 55,000,000    $ 55,000,000
Term Loan Credit Facility ......................      8,000,000            --
Bank note (prime + 1%), due 2007 ...............        637,374       1,200,018
Installment purchase obligations, due 2009 .....      3,200,286            --
Installment purchase obligations, due 2008 .....      2,825,209       5,270,611
Equipment note (non-interest bearing), due 2006            --           280,000
Equipment notes (8.39%-9.28%, due 2009-2011) ...        125,382            --
Equipment note (4.48%, due 2009) ...............        234,721            --
Other ..........................................         89,512          19,931
Less unamortized discounts .....................     (3,298,679)     (3,910,160)
                                                   ------------    ------------
                                                     66,813,805      57,860,400
Less current portion of long-term debt .........     (4,720,671)     (3,319,175)
                                                   ------------    ------------
Long-term debt .................................   $ 62,093,134    $ 54,541,225
                                                   ============    ============

              TERM LOAN CREDIT FACILITY

         On  October  12,  2006,  our  wholly-owned  subsidiary,  National  Coal
Corporation,  entered  into  a Term  Loan  Credit  Facility  that  provides  for
borrowings  of up to $10.0 million with  Guggenheim  Corporate  Funding,  LLC in
order to fund general  operating  and working  capital  needs.  We borrowed $5.0
million at  closing,  an  additional  $3.0  million in  December  2006,  and the
remaining $2.0 million subsequent to year-end.

         Under this Credit  Facility,  our obligations are secured by a priority
senior lien on  substantially  all of our assets.  All amounts  under the Credit
Facility  become  due and  payable  in March  2010 and the  interest  under this
facility is payable at a rate equal to, at our option,  the Eurodollar Rate plus
3.5% or the Base Rate (which  approximates  the prime rate) plus 2.5%.  The Term
Loan  Credit  Facility  contains  financial  covenants  and  default  provisions
including  that the Company  maintain  minimum  levels of EBITDA and  liquidity,
maintain minimum interest  coverage ratios,  not exceed maximum leverage ratios,
and  that  it  limit  certain  future  categories  of  transactions  such as the
incurrence  of  additional  indebtedness  and the sale of assets.  Subsequent to
year-end,  Guggenheim  has  agreed to amend the credit  agreement  and reset the
financial covenants including:  EBITDA,  consolidated leverage, and consolidated
interest  coverage.  As a result of the amendment,  the applicable margin on the
credit  facility will increase by 1.0%. The applicable  margin is the rate which
is added to the  Eurodollar  Rate or Base Rate,  to determine  the full interest
rate on the facility. The applicable margin increase will remain in effect until
we are back in  compliance  with the  original  covenant  schedule in the credit
agreement.

              10.5% SENIOR SECURED NOTES DUE 2010

         On December  29, 2005,  we issued  $55,000,000  in aggregate  principal
amount of 10.5% Senior Secured Notes due 2010 (the "Senior  Secured  Notes") and
55,000 warrants to purchase a total of 1,732,632  shares of the Company's common
stock (the "Warrants"). The Senior Secured Notes and Warrants were sold in Units
(the "Units")  consisting of one $1,000  principal  amount Note and one Warrant,
which entitled the holder to purchase  31.5024 shares of Company common stock at
an exercise price of $8.50 per share,  subject to  adjustment.  The warrants are
subject to  mandatory  conversion  if the price of the  Company's  common  stock
remains above $12.75 for more than twenty days out of a thirty-day  period.  The
Units were sold in a private placement exempt from the registration requirements
under


                                       42
<PAGE>


the  Securities  Act of 1933,  as amended  (the  "Securities  Act").  The Senior
Secured  Notes  are  fully  and   unconditionally   guaranteed  by  all  of  our
wholly-owned  subsidiaries  and were  offered and sold within the United  States
only to  qualified  institutional  buyers in  reliance  on Rule  144A  under the
Securities Act.

         The Senior  Secured  Notes were issued  pursuant to an  indenture  with
Wells  Fargo Bank  National  Association,  as  trustee.  Interest  on the Senior
Secured  Notes  accrues  from the date of issuance  or the most recent  interest
payment date, and is payable in cash  semi-annually  in arrears on June 15th and
September  15th of each year,  commencing  on June 15,  2006.  The  warrants are
exercisable  on or after  December  29,  2006 and the  warrants  will  expire on
December  15,  2010.  All of the  securities  in this  offering  were  initially
purchased by the underwriter.

         The Senior  Secured Notes and the related  guarantees  are secured by a
lien on  substantially  all of our  and the  guarantors'  property  and  assets,
including a pledge of 100% of the capital stock or other equity interests of our
domestic  subsidiaries.  The Senior  Secured  Notes will mature on December  15,
2010. The Senior Secured Notes are subordinated to our new $10 million Term Loan
Credit  Facility with  Guggenheim  Corporate  Funding,  LLC, which holds a first
priority  secured lien senior to the Notes, and ranks senior to our existing and
future subordinated debt.

         Before  December  15,  2008,  we may, at any time or from time to time,
redeem up to 35% of the aggregate  principal  amount of the Senior Secured Notes
with the net proceeds of a public or private equity  offering at 110.500% of the
principal  amount of the  Senior  Secured  Notes,  plus any  accrued  and unpaid
interest, if at least 65% of the aggregate principal amount of the notes remains
outstanding  after such  redemption and the redemption  occurs within 90 days of
the date of the closing of such equity offering.  In addition,  up to 35% of the
Senior Secured Notes are redeemable,  at our option, in whole or in part, at any
time up to December 15, 2008 at a redemption  price of 110.500%.  The  remaining
65% of the Senior Secured Notes are redeemable, at our option, in whole or part,
on or after December 15, 2008, in each case at the redemption  prices  described
in the table below.  All  redemptions  prices are in addition to any accrued and
unpaid interest to the date of the redemption.

              TIME PERIOD                               PERCENTAGE
              -----------                               ----------
 December 15, 2008 - December 14, 2009                   105.250%
   December 15, 2009 - June 14, 2010                     102.625%
      June 15, 2010 and thereafter                       100.000%

         The indenture  governing the Senior Secured  Notes,  among other things
and  subject to certain  exceptions,  limits our  ability and the ability of our
subsidiaries to:

         o        incur or guarantee additional  indebtedness or issue preferred
                  stock;

         o        pay dividends or  distributions  on, or redeem or  repurchase,
                  capital stock;

         o        make investments;

         o        issue or sell capital stock of restricted subsidiaries;

         o        engage in transactions with affiliates;

         o        grant or assume liens; or

         o        consolidate, merge or transfer all or substantially all of our
                  assets.

         Our failure to make required  payments of interest and principal and to
comply with other  covenants may result in the  acceleration of the principal of
the Senior Secured Notes.

         We agreed, pursuant to a registration rights agreement with the initial
purchaser,  to use our commercially  reasonable efforts to (a) register with the
SEC a new issue of notes  having  substantially  identical  terms as the  Senior
Secured Notes in order to exchange  freely tradable notes for the Senior Secured
Notes,  and (b) file a shelf  registration  statement  with the SEC covering the
resale of the Warrants and shares of our common stock  issuable upon exercise of
the  Warrants,  and to use our  commercially  reasonable  efforts  to cause that
resale registration statement to be declared effective within 240 days after


                                       43
<PAGE>


the sale date. We filed registration statements subject to our obligations under
the registration rights agreement on May 15, 2006. Both registration  statements
were  declared  effective  on July 28,  2006,  and we issued  $51.0  million  in
principal  amount of freely  tradable  notes in exchange for the same  principal
amount of Senior Secured Notes.

         We immediately used approximately  $22.1 million of the proceeds of the
Senior  Secured Note offering to repay  existing  indebtedness.  During the year
ended  December  31,  2006 we used  approximately  $2.0  million  to  purchase a
forty-two mile rail line in Tennessee,  approximately $8.3 million as collateral
to support  reclamation  bonds,  and $19.7 million to purchase other  equipment,
refurbish a preparation plant and rail load-out, and to use as working capital.

              EQUIPMENT NOTES

         In November  2005,  we  purchased  mining  equipment  to be used in our
Kentucky  operations from two former contract mining companies for approximately
$1,775,000.  We financed the purchase with a $400,000, four month,  non-interest
bearing  note  payable  to  one  of  the  mining  companies  and  a  $1,300,000,
twenty-four month bank note at the prime rate plus 1%. Both notes are secured by
the purchased equipment. The $400,000 note was repaid early in January 2006 at a
$20,000 discount.

         In February and March 2006,  we purchased  service  vehicles and mining
equipment for  approximately  $478,000.  We financed the purchases with interest
bearing notes ranging in term from  thirty-six to sixty months and with interest
rates  ranging  from  approximately  4.5% to 9.3%.  All notes are secured by the
purchased equipment.

              INSTALLMENT PURCHASE OBLIGATIONS AND SALE-LEASEBACK

         In August 2005, our wholly-owned subsidiary, National Coal Corporation,
entered  into  installment  sale  contracts  with  an  equipment   manufacturer,
effective in July 2005,  pursuant to which National Coal  Corporation  purchased
and financed or refinanced certain equipment used in its coal mining operations.
Pursuant  to  the  installment   sale  contracts,   we  financed  or  refinanced
approximately $7.3 million in equipment at rates ranging from 5.22% to 7.65%.

         The total  $6,717,650  aggregate  principal  balance of these contracts
included   refinancing   obligations   previously   under   capital   leases  of
approximately  $2,937,000  at September  30, 2005  representing  gross assets of
approximately  $4,372,000.  This  resulted  in  the  recognition  of a  gain  on
extinguishment of debt of approximately  $328,000.  The remaining  $3,781,000 is
related to the  purchase of equipment  formerly  under  operating  lease and new
equipment.  The installment sale contracts require monthly payments of principal
and interest through January 14, 2008.

         In April 2006, we entered into new  installment  sale contracts with an
equipment  manufacturer  pursuant  to  which  we  refinanced  equipment  with an
aggregate  principal value of approximately  $2,729,000  formerly acquired under
various  capital  leases  resulting  in a loss  on  extinguishment  of  debt  of
approximately $10,000. These installment sale contracts require payments over 36
months at fixed  interest  rates  ranging from 7.03% to 7.50%.  The  obligations
under the installment sale contracts are secured by the equipment purchased.

         In August 2006 and September 2006, we entered into new installment sale
contracts  with an  equipment  manufacturer  pursuant  to  which  we  refinanced
equipment with an aggregate principal value of approximately  $1,447,000.  These
installment  sale contracts  require payments over periods ranging from 30 to 36
months at fixed  interest  rates  ranging from 7.42% to 8.10%.  The  obligations
under the installment sale contracts are secured by the equipment purchased.


                                       44
<PAGE>


         On September 18, 2006 we entered into a sale-leaseback transaction with
First National  Capital  Corporation's  assignee,  GATX  Financial  Corporation,
involving our highwall miner  initially  purchased in February 2006. We sold the
highwall  miner for  approximately  $6.4 million and recorded a deferred gain of
approximately $875,000 which will be recognized over the forty-two month term of
the  operating  lease.  The lease is a "net" lease and requires that we maintain
and insure the  equipment as well as pay rental  payments of $166,568 per month.
As a condition of the lease,  we provided two standby letters of credit totaling
$1,288,883 in lieu of security deposits which are 100%  collateralized with cash
on deposit at two financial institutions.

         SENIOR SECURED CREDIT FACILITY

         On November  26,  2004,  our  wholly-owned  subsidiary,  National  Coal
Corporation,  in  connection  with our  acquisition  of assets from  Appalachian
Fuels,   LLC  entered  into  a  credit   agreement  with  D.  B.  Zwirn  Special
Opportunities  Fund, L.P., as Lender and  administrative  agent for the Lenders.
The credit agreement provided for an initial credit facility of $15 million with
a subsequent credit facility not to exceed $6 million. We exercised our right to
borrow $15 million on November 29, 2004,  the proceeds of which were used to pay
the remaining  $12,250,000  of acquisition  costs related to the  acquisition of
assets of  Appalachian  Fuels,  LLC, pay  transaction  costs with respect to the
closing of the credit facility and asset purchase,  and fund working capital. We
borrowed an additional  $1.4 million in January 2005 to fund our  acquisition of
mining  equipment.  Borrowings  under the credit  agreement bear interest at the
prime rate, plus 5.75%. The obligation under the credit agreement was secured by
substantially all of our assets and those of our  subsidiaries.  At December 29,
2005, we repaid and terminated this credit  facility  resulting in the write-off
of approximately $407,000 of deferred financing costs.

              CASH FLOWS

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and sales of debt and equity  securities.
For the twelve months ended  December 31, 2006, we had a net decrease in cash of
approximately $23.3 million. Cash flows from operating,  financing and investing
activities  for the twelve months ended  December 31, 2006,  2005,  and 2004 are
summarized in the following table:

ACTIVITY                                       TWELVE MONTHS ENDED DECEMBER 31,
                                             ----------------------------------
                                               2006         2005         2004
                                             --------     --------     --------

Operating activities ....................    $ (3,835)    $  6,040     $ (4,342
Investing activities ....................     (26,364)     (19,473)     (33,466)
Financing activities ....................       6,945       38,565       38,111
                                             --------     --------     --------
   Net increase (decrease) in cash ......    $(23,254)    $ 25,131     $    303
                                             ========     ========     ========

         OPERATING ACTIVITIES

         The  decrease  in  net  cash   provided  by  operating   activities  of
approximately  $9.4 million to $3.8 million used in operating  activities during
the year ended  December 31, 2006 was primarily the result of an increase in net
loss, net of  depreciation,  depletion,  amortization and accretion and non-cash
stock option expense,  of $9.9 million.  The increase was primarily due to lower
contract prices,  increased  purchases of coal due in part to the highwall miner
damage during the year, and the termination of a financially favorable agreement
with a subcontractor  for the management of our Kentucky  properties,  partially
offset by increased  non-cash  stock option  expenses of $1.4 million over prior
year due to the adoption of SFAS123(R)  and the  accelerated  vesting of certain
executive options.  Offsetting the overall decrease in cash flow from operations
is a greater increase in accounts payable of $3.6 million primarily attributable
to the  refurbishment  of our Baldwin  preparation  plant and load-out  facility
which  has  taken  place in 2006  and  increased  interest  due to  higher  debt
balances.  These and other expansion  activities have also resulted in a greater
increase in  inventory of $1.7 million in current year and $1.1 million of asset
retirement obligation settlements, both of which decreased cash from operations.


                                       45
<PAGE>


         The net cash  provided by operating  activities of  approximately  $6.0
million  during the twelve  months  ended  December 31, 2005 was  primarily  the
result of an improving net loss. When the impact of depreciation is removed from
the net loss,  there is an improvement  of $11.3  million.  The reduction of net
loss is due to a significant  increase in coal sales and resulting  improvements
in the  percentage  of cost of sales and  general and  administrative  expenses.
Although many operating costs are variable,  gross margin percentage improves as
volume  increases due to the fixed mine operating costs.  Additionally,  general
and  administrative  costs are not variable and growth in those costs is slowing
significantly  relative to the  increase in coal  volumes as the securing of the
management team and related corporate costs is completed.

         The net cash used in operating activities of approximately $4.3 million
during the twelve months ended December 31, 2004 was primarily the result of the
net loss of  approximately  $10.4  million  and an increase  in  receivables  of
approximately  $1.9  million,  inventory  of  approximately  $119,000,  deferred
revenue of  approximately  $179,000,  payments for  reclamation  obligations  of
approximately  $87,100  and prepaid  and other of  approximately  $233,500 as we
increased coal production  during the year,  partially  offset by an increase in
accounts  payable and accrued  liabilities  of  approximately  $3.30 million and
non-cash expenses of approximately $5.20 million. The non-cash expenses recorded
during  the  period  included  $1,700,000  of  interest  expense  related to the
beneficial conversion feature of the $3.0 million convertible  debentures issued
in August  2004,  $903,000  of  non-cash  compensation  expense  related  to the
issuance of stock options with an exercise  price below the closing price of our
common stock on the date of grant, $227,000 of non-cash compensation expense for
the issuance of common stock in  consideration  of salary,  $165,000 of non-cash
interest expense for the issuance of common stock in lieu of interest  payments,
and $49,000 of non-cash  consulting expense for the Black-Scholes  pricing model
valuation of warrants issued as consideration for consulting services rendered.

         INVESTING ACTIVITIES

         Cash used in investing  activities for the twelve months ended December
31, 2006 of $26.4 million was primarily  related to net capital  expenditures of
approximately  $16.3 million  including the acquisition of a forty-two mile rail
line in Tennessee and  renovations to a processing  facility in Tennessee  along
with  an  increase  in  cash   collateral   supporting   reclamation   bonds  of
approximately $9.9 million.

         Cash used in investing  activities for the twelve months ended December
31, 2005 of $19.5 million was primarily related to capital expenditures of $16.5
million and an increase in cash collateral supporting  reclamation bonds of $2.8
million. The capital  expenditures were used to open two new mines,  including a
highwall mine, and to acquire additional equipment for existing mines.

         The  approximately  $33.4 million of cash used in investing  activities
during the twelve  months  ended  December  31,  2004 was due  primarily  to the
purchase of approximately $17.7 million of property, plant and equipment,  $10.9
million for the purchase of coal and mineral assets, $4.3 million deposited with
a bank as collateral for OSM reclamation requirements,  $150,000 in deposits for
a  potential  purchase of mining  rights,  and  $392,000  of prepaid  royalty in
advance of royalties to be paid on property we lease and expect to mine within a
few years.

         FINANCING ACTIVITIES

         The  decrease  in  net  cash   provided  by  financing   activities  of
approximately  $35.2  million to  approximately  $6.9 million  during the twelve
months  ended  December  31, 2006 was  primarily  the result of the Senior Notes
issued in December 2005 which decreased the need for additional funding.

         The net cash provided by financing  activities of  approximately  $38.6
million  during the twelve  months  ended  December 31, 2005 was  primarily  the
result of $55.0  million  raised from the issuance of our 10.5%  Senior  Secured
Notes,  offset by the repayment of $22.1 million  including our previous  Senior
Credit Facility and certain other notes and leases. Additionally,  approximately
$5.1 million was through the issuance of a note payable.


                                       46
<PAGE>


         The net cash provided by financing  activities of  approximately  $38.1
million  during the twelve  months  ended  December 31, 2004 was  primarily  the
result of $24.5 million raised from sales of debt securities net of $1.0 million
in fees,  and $17.7  million  raised from the sale of common  stock and Series A
cumulative  convertible  preferred  stock net of $1.0  million  in fees,  offset
primarily  by $3.1  million  paid to debt  holders,  $950,000  paid  pursuant to
capital leases and a bank loan, $560,000 paid on related party debt and $281,000
paid as a dividend to holders of our Series A preferred stock.

OFF-BALANCE SHEET ARRANGEMENTS

         At December 31, 2006, 2005, and 2004, we did not have any relationships
with unconsolidated entities or financial  partnerships,  such as entities often
referred  to  as  structured  finance,  variable  interest  or  special  purpose
entities,  which would have been  established  for the  purpose of  facilitating
off-balance  sheet  arrangements  or  other  contractually   narrow  or  limited
purposes.  As such, we are not exposed to any  financing,  liquidity,  market or
credit risk that could arise if we had engaged in such relationships.

CONTRACTUAL OBLIGATIONS

         The following  summarizes our  contractual  obligations at December 31,
2006 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

<TABLE>
<CAPTION>
                                                                       PAYMENTS DUE BY PERIOD
                                      ---------------------------------------------------------------------------------
                                                          LESS THAN 1          1-3              3-5            AFTER
                                           TOTAL             YEAR             YEARS            YEARS          5 YEARS
----------------------------------    ---------------   --------------   --------------   --------------   ------------
<S>                                     <C>              <C>              <C>              <C>              <C>
Long-term debt (including interest)     $ 95,693,387     $ 11,252,747     $ 15,326,015     $ 69,114,625     $       --
Operating leases .................         6,515,376        2,090,226        3,997,626          427,524             --
Capital leases ...................           752,703          414,897          337,806               --             --
                                      ---------------   --------------   --------------   --------------   ------------
     Total contractual obligations      $102,961,466     $ 13,757,870     $ 19,661,447     $ 69,542,149     $       --
                                      ===============   ==============   ==============   ==============   ============
</TABLE>

         We rent mining equipment  pursuant to operating lease  agreements,  and
made lease  payments  totaling  approximately  $1,011,323  during the year ended
December 31, 2006.

         For the year ended  December  31,  2006,  we accrued  dividends  to the
holders of our Series A cumulative  convertible preferred stock in the aggregate
of approximately $1,029,933,  $118,567 of which we paid as common shares in lieu
of preferred  dividends  as a result  conversion  of preferred  shares to common
stock  and a  covenant  failure.  Historically  we have  made  semi-annual  cash
dividend  payments to the holder of the Series A preferred  stock on June 30 and
December 31. Dividends accrued on our Series A cumulative  convertible preferred
stock of  $362,886  were  paid in June and July  2006 and  $413,567  was paid in
February 2007. At December 31, 2006,  there were accrued but unpaid dividends on
our Series A cumulative  convertible  preferred stock of $548,480.  The dividend
rate of our Series A preferred  stock  increased  from 5% to 8% on  September 1,
2006.  We intend  to make  dividend  payments  going  forward  as long as (1) no
default  of our  debt  covenants  has  occurred,  (2) we  will  be in  pro-forma
compliance  with our debt  agreements,  and (3) the  available  credit  and cash
equivalents we have is not less than $1.5 million.


ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Market Risk is the risk of loss arising from adverse  changes in market
rates and prices,  such as interest rates,  foreign currency  exchange rates and
commodity prices.


                                       47
<PAGE>


     INTEREST RATE RISKS

         Our interest  expense is  sensitive to changes in the general  level of
interest rates in the U.S. At December 31, 2006, we had $61.5 million  aggregate
principal  amount of debt under fixed rate  instruments and $8.6 million of debt
under variable rate  instruments,  with our Term Loan Credit  Facility making up
93%  of the  variable  rate  instruments  and  equipment  financing  making  the
remaining  7%. At December 31, 2005, we had $60.6  million  aggregate  principal
amount of debt  under  fixed  rate  instruments  and $1.2  million of debt under
variable  rate  instruments,  with  equipment  financing  making  up 100% of the
variable rate instruments.

         Under the  terms of our Term Loan  Credit  Facility  and our  equipment
financing agreements, the interest rate on borrowings there under was determined
based on the Eurodollar  rate and the prime rate,  respectively.  We are able to
lock in the existing  interest rate on our Term Loan Credit Facility for periods
of up to six months.  Based on the variable rate debt outstanding as of December
31, 2006, a 100 basis point  increase in interest  rates would  increase  annual
interest  expense by  approximately  $83,000.  Based on the  variable  rate debt
outstanding  as of December  31,  2005,  a 100 basis point  increase in interest
rates would increase annual interest expense by approximately $12,000.

     COMMODITY RISKS

         We are subject to commodity price risk based on the fluctuating  market
price of coal.  We manage  this risk  through  securing  long-term  coal  supply
agreements rather than through use of derivative instruments.  In the future, as
existing  long-term  contracts  expire or become subject to repricing,  our coal
sales will be made at then-current  market prices. As a result, our revenues and
net income will be significantly affected by fluctuations in the price of coal.

         Coal prices are influenced by a number of factors and vary dramatically
by region.  The two principal  components of the delivered price of coal are the
price of coal at the mine, which is influenced by coal quality,  and the cost of
transporting  coal  from the mine to the  point of use.  Electricity  generators
purchase coal on the basis of its  delivered  cost per million Btu. The price of
coal is  generally in parity with oil and natural gas prices.  As  macroeconomic
factors  affect  these  commodity  prices,  the price of coal will  similarly be
impacted.

         The   cost  of   operating   a  mine  is   influenced   by   geological
characteristics  such  as  seam  thickness,   overburden  ratios  and  depth  of
underground  reserves. It is generally cheaper to mine coal seams that are thick
and located close to the surface than to mine thin underground seams. Typically,
coal mining  operations  will begin at the part of the coal seam that is easiest
and  most  economical  to  mine.  In the  coal  industry,  this  surface  mining
characteristic  is  referred to as low ratio.  As the seam is mined,  it becomes
more difficult and expensive to mine because the seam either becomes  thinner or
extends  more  deeply  into the earth,  requiring  removal  of more  overburden.
Underground  mining is generally  more expensive than surface mining as a result
of  high  capital  costs  including  costs  for  modern  mining   equipment  and
construction of extensive ventilation systems and higher labor costs,  including
costs for labor benefits and health care.

         In  addition to the cost of mine  operations,  the price of coal at the
mine is also a  function  of  quality  characteristics  such as heat  value  and
sulfur,  ash and  moisture  content.  Coal  used  for  domestic  consumption  is
generally sold free on board at a loading point, and the purchaser normally pays
the transportation costs. Export coal is usually sold at an export terminal, and
the seller is responsible for shipment to the export coal loading facility while
the purchaser pays the ocean freight.  Most electric  power  generators  arrange
long-term  shipping  contracts  with rail or barge  companies  to assure  stable
delivery costs.  Transportation cost can be a large component of the purchaser's
cost.  Although the  customer  pays the  freight,  transportation  cost is still
important  to coal mining  companies  because the customer may choose a supplier
largely based on the cost of transportation.  Trucks and overland conveyors haul
coal over shorter distances,  while lake carriers and ocean vessels move coal to
export  markets.  Some domestic coal is shipped over the Great Lakes.  Railroads
move more coal than any other  product,  and in 1999,  coal accounted for 22% of
total U.S.  rail  freight  revenue and more than 44% of total  freight  tonnage.
Railroads typically handle  approximately 60% of U.S. coal production,  with CSX
and Norfolk Southern the dominant carriers in the eastern United States.


                                       48
<PAGE>


         Some  products  used in mining  activities,  such as diesel  fuel,  are
subject to price  volatility.  We use  short-term  fuel  contracts to manage the
volatility related to this exposure.

FOREIGN  CURRENCY

         All of our  transactions  are  denominated  in U.S.  dollars,  and as a
result, we do not have material exposure to currency exchange rate risk.


                                       49
<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----


   Reports of Independent Registered Public Accounting Firms............      51

   Consolidated Balance Sheets at December 31, 2006 and 2005............      53

   Consolidated Statements of Operations for the Years Ended
      December 31, 2006, 2005, and 2004.................................      54

   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2006, 2005, and 2004.................................      55

   Consolidated Statements of Changes in Stockholders' (Deficit)
      Equity for the Years Ended December 31, 2006, 2005, and 2004......      57

   Notes to the Consolidated Financial Statements.......................      58


                                       50
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of
National Coal Corp.
Knoxville, Tennessee

We have  audited the  consolidated  balance  sheet of National  Coal Corp.  (the
"Company")  as of December 31, 2006 and the related  consolidated  statements of
operations,  stockholders'  (deficit)  equity  and cash  flows for the year then
ended.  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 audit.  The financial  statements of the Company for the
years ended  December  31, 2005 and 2004 were  audited by other  auditors  whose
report  dated  February  17,  2006  expressed  an  unqualified  opinion on those
statements.

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 the financial
statements are free of material misstatement.  We were not engaged to perform an
audit of the Company's  internal  control over  financial  reporting.  Our audit
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such opinion. 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 audit provides a reasonable basis for our opinion.

In our opinion,  the 2006 financial statements referred to above present fairly,
in all material respects,  the consolidated  financial position of National Coal
Corp. at December 31, 2006, and the  consolidated  results of its operations and
its cash  flows for the year  then  ended,  in  conformity  with U.S.  generally
accepted accounting principles.

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
changed its method of accounting  for  share-based  payments in accordance  with
Statement of Financial Accounting Standards No. 123(R) on January 1, 2006.


                                                          /S/ ERNST & YOUNG LLP

Richmond, Virginia
March 30, 2007


                                       51
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors
National Coal Corp.
Knoxville, Tennessee


We have  audited the  consolidated  balance  sheet of National  Coal Corp.  (the
"Company",  a Florida  corporation)  as of December  31,  2005,  and the related
consolidated  statements of operations,  cash flows and changes in stockholders'
equity  for the  years  ended  December  31,  2005  and  2004.  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.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of National Coal
Corp. at December 31, 2005, and the  consolidated  results of its operations and
its cash flows for the years ended  December  31, 2005 and 2004,  in  conformity
with accounting principles generally accepted in the United States of America.


                                      /S/ GORDON, HUGHES & BANKS, LLP

Greenwood Village, Colorado
February 17, 2006


                                       52
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                        DECEMBER 31,
                                                                               ----------------------------
                                                                                   2006            2005
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
ASSETS
Current assets
   Cash and cash equivalents ...............................................   $  2,180,885    $ 25,434,988
   Accounts receivable .....................................................      3,712,779       2,929,735
   Inventory ...............................................................      2,221,742         418,114
   Prepaid and other current assets ........................................        867,247         217,091
                                                                               ------------    ------------
     Total current assets ..................................................      8,982,653      28,999,928

Assets held for sale .......................................................        640,649            --
Property, plant, equipment and mine development, net .......................     55,837,627      50,901,681
Deferred financing costs ...................................................      2,856,534       2,958,666
Restricted cash ............................................................     17,246,751       7,323,023
Other noncurrent assets ....................................................        427,516         224,120
                                                                               ------------    ------------
     Total assets ..........................................................   $ 85,991,730    $ 90,407,418
                                                                               ============    ============

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
   Current maturities of long-term debt ....................................   $  4,720,671    $  3,319,175
   Current installments of obligations under capital leases ................        351,668         958,907
   Current portion of asset retirement obligations .........................      1,378,967            --
   Accounts payable and accrued expenses ...................................     11,981,495       6,390,626
                                                                               ------------    ------------
     Total current liabilities .............................................     18,432,801      10,668,708

   Long-term debt, less current maturities, net of discount ................     62,093,134      54,541,225
   Obligations under capital leases, excluding current installments ........        321,071       1,196,143
   Asset retirement obligations, excluding current portion .................      5,835,927       7,228,232
   Deferred revenue ........................................................      1,032,426         150,000
   Other noncurrent liabilities ............................................        199,430           6,776
                                                                               ------------    ------------
     Total liabilities .....................................................     87,914,789      73,791,084
                                                                               ------------    ------------
   Commitments and contingencies

Stockholders' (deficit) equity
   Series A cumulative convertible preferred stock, $0.0001 par value; 1,611
     shares authorized; 782.54 and 1,333.44 shares issued and outstanding at
     December 31, 2006 and 2005, respectively ..............................           --              --
   Common stock, $0.0001 par value, 80 million shares authorized; 16,340,744
     and 13,977,217 shares issued and outstanding at December 31, 2006 and
     2005, respectively ....................................................          1,634           1,398
   Additional paid-in-capital ..............................................     42,049,703      37,168,122
   Accumulated deficit .....................................................    (43,974,396)    (20,553,186)
                                                                               ------------    ------------
     Total stockholders' (deficit) equity ..................................     (1,923,059)     16,616,334
                                                                               ------------    ------------
     Total liabilities and stockholders' (deficit) equity ..................   $ 85,991,730    $ 90,407,418
                                                                               ============    ============
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       53
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                                       Year Ended December 31,
                                                          -----------------------------------------------
                                                               2006             2005             2004
                                                          -------------    -------------    -------------
<S>                                                       <C>              <C>              <C>
Revenues
   Coal sales .........................................   $  86,830,095    $  65,258,071    $  16,871,346
   Other revenues .....................................         686,992          614,563          127,567
                                                          -------------    -------------    -------------
     Total revenues ...................................      87,517,087       65,872,634       16,998,913
                                                          -------------    -------------    -------------

Expenses
   Cost of sales (exclusive of items shown separately)       79,354,327       51,115,116       16,322,632
   Depreciation, depletion, amortization, and accretion      15,362,829       10,107,723        2,473,369
    General and administrative ........................       9,257,241        7,213,346        5,242,437
                                                          -------------    -------------    -------------
     Total operating expenses .........................     103,974,397       68,436,185       24,038,438
                                                          -------------    -------------    -------------

Operating loss ........................................     (16,457,310)      (2,563,551)      (7,039,525)
                                                          -------------    -------------    -------------

Other income (expense)
   Interest expense ...................................      (7,475,824)      (3,966,715)      (3,348,922)
   Interest income ....................................         791,852          129,200             --
   Other income (expense), net ........................        (279,928)        (390,105)         (40,683)
                                                          -------------    -------------    -------------
     Total other income (expense) .....................      (6,963,900)      (4,227,620)      (3,389,605)
                                                          -------------    -------------    -------------

Net loss ..............................................     (23,421,210)      (6,791,171)     (10,429,130)

Preferred stock dividend ..............................      (1,029,933)      (1,124,650)     (18,893,509)
                                                          -------------    -------------    -------------

Net loss attributable to common shareholders ..........   $ (24,451,143)   $  (7,915,821)   $ (29,322,639)
                                                          =============    =============    =============

Basic net loss per common share .......................   $       (1.59)   $       (0.58)   $       (2.60)
                                                          =============    =============    =============

Diluted net loss per common share .....................   $       (1.59)   $       (0.58)   $       (2.60)
                                                          =============    =============    =============

Weighted average common shares ........................      15,346,799       13,712,813       11,261,800
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       54
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------
                                                                          2006            2005            2004
                                                                      ------------    ------------    ------------
<S>                                                                   <C>             <C>             <C>
Cash Flows from Operating Activities
Net loss ..........................................................   $(23,421,210)   $ (6,791,171)   $(10,429,130)
Adjustments to reconcile net loss to net cash (used in) provided by
 operating activities
   Depreciation, depletion, accretion and amortization ............     15,362,829      10,107,723       2,261,379
   Amortization of deferred financing costs .......................        606,858         380,571            --
   Amortization of notes discount .................................        607,524            --              --
   (Gain) loss on disposal of assets ..............................         (1,346)         29,991            --
   Gain on settlement of asset retirement obligations .............        (60,425)           --              --
   Loss on extinguishment of debt .................................          1,187          58,380            --
   Beneficial conversion feature recorded as interest expense .....           --              --         1,700,000
   Issuance of stock/warrants in lieu of payment ..................           --              --           440,647
   Stock option expense ...........................................      2,235,224         812,733         903,375
   Changes in operating assets and liabilities:
     Increase in accounts receivable ..............................       (783,044)       (838,037)     (1,899,407)
     Increase in inventory ........................................     (1,803,628)       (153,241)       (119,010)
     Increase (decrease) in prepaid and other .....................       (746,967)        367,024        (233,502)
     Increase in accounts payable and accrued expenses ............      5,058,209       2,259,030       3,299,551
     Increase (decrease) in deferred revenue ......................          6,900         150,000        (179,050)
     Increase in other liabilities ................................        192,654           6,776            --
     Settlement of asset retirement obligations ...................     (1,090,004)       (349,950)        (87,090)
                                                                      ------------    ------------    ------------
      Net cash flows (used in) provided by operating activities ...     (3,835,239)      6,039,829      (4,342,237)
                                                                      ------------    ------------    ------------

Cash Flows from Investing Activities
   Capital expenditures ...........................................    (24,747,790)    (17,806,274)    (28,600,061)
   Proceeds from sales of equipment ...............................      8,414,560       1,265,410            --
   Increase in restricted cash ....................................     (9,923,728)     (2,748,398)     (4,317,125)
   Increase in prepaid royalties ..................................       (106,585)       (184,000)       (548,500)
                                                                      ------------    ------------    ------------
     Net cash flows used in investing activities ..................    (26,363,543)    (19,473,262)    (33,465,686)
                                                                      ------------    ------------    ------------

Cash Flows from Financing Activities
   Proceeds from issuance of stock ................................        897,018              98      16,616,317
   Proceeds from exercise of warrants and options .................      2,657,622         792,779       1,109,001
   Proceeds from issuance of notes ................................      2,623,285      70,322,343      26,242,894
   Proceeds from borrowings from Term Loan Credit Facility ........      8,000,000            --              --
   Repayments of notes payable ....................................     (4,039,764)    (23,388,017)     (3,255,301)
   Repayments of capital leases ...................................     (2,325,870)     (4,765,540)       (735,657)
   Payments for deferred financing costs ..........................       (504,726)     (3,339,237)     (1,025,424)
   Dividends paid .................................................       (362,886)     (1,057,678)       (281,117)
   Payment of related party debt ..................................           --              --          (560,000)
                                                                      ------------    ------------    ------------
     Net cash flows provided by financing activities ..............      6,944,679      38,564,748      38,110,713
                                                                      ------------    ------------    ------------

NET (DECREASE) INCREASE IN CASH ...................................    (23,254,103)     25,131,315         302,790
Cash and Cash Equivalents at Beginning of Period ..................     25,434,988         303,673             883
                                                                      ------------    ------------    ------------
Cash and Cash Equivalents at End of Period ........................   $  2,180,885    $ 25,434,988    $    303,673
                                                                      ============    ============    ============
</TABLE>


                                       55
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED


<CAPTION>

<S>                                                      <C>            <C>             <C>
Supplemental Cash Flow Information
   Cash paid during the period for interest ..........   $  6,123,336   $  2,825,233    $  1,190,735
Non-cash investing and financing:
   Issuance of stock for goods and services ..........   $       --     $       --      $    577,573
   Conversion of debt ................................           --             --        12,983,216
   Preferred stock dividends converted to common stock         56,570         18,198            --
   Equipment acquired via capital lease ..............        833,827      2,729,366            --
   Equipment acquired via installment purchase
      obligations and notes payable ..................      1,758,404           --              --
   Asset retirement obligations acquired, incurred,
      and recosted ...................................        661,027           --              --
   Common shares issued in lieu of dividend for
      dividend adjustment ............................         65,316           --              --
   Beneficial conversion feature .....................           --           66,972      18,612,392
   Constructive dividends ............................           --          (66,972)    (18,612,392)
   Issuance of warrants
                                                                 --        4,258,548          48,760
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       56
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY


<CAPTION>
                                            Preferred Stock                  Common Stock
                                      ----------------------------   ---------------------------
                                         Shares          Amount         Shares         Amount
                                      ------------    ------------   ------------   ------------
<S>                                       <C>         <C>              <C>          <C>
Balance, January 1, 2004 ..........           --      $       --        9,253,956   $        926

Conversion of notes payable and
accrued interest ..................           --              --        1,769,897            177
Private placement of common stock .           --              --        1,250,000            125
Issuance for accrued officer salary           --              --           41,958              4
Issuance to acquire land ..........           --              --           75,000              7
Exercise of warrants ..............           --              --          867,200             48
Sale of preferred stock ...........         995.00            --             --             --
Conversion of debt ................         515.00            --             --             --
Preferred stock issuance costs ....           --              --             --             --
Conversion of preferred stock .....         (53.33)           --          133,333             13
Employee option expense ...........           --              --             --             --
Issuance of warrants for services .           --              --             --             --
Beneficial conversion debt discount           --              --             --             --
Beneficial conversion features ....           --              --             --             --
Contructive dividends .............           --              --             --             --
Preferred stock dividends .........           --              --             --             --
Net loss ..........................           --              --             --             --
                                      ------------    ------------   ------------   ------------
Balance, December 31, 2004                1,456.67            --       13,391,344          1,300

Exercise of warrants ..............          16.21            --             --             --
Conversion of preferred stock .....        (139.44)           --          349,429             75
Conversion of preferred dividends .           --              --            2,204           --
Beneficial conversion feature .....           --              --             --             --
Constructive dividend .............           --              --             --             --
Preferred stock dividends .........           --              --             --             --
Exercise of employee options ......           --              --          234,240             23
Employee option expense ...........           --              --             --             --
Issuance of warrants ..............           --              --             --             --
Net loss ..........................           --              --             --             --
                                      ------------    ------------   ------------   ------------
Balance, December 31, 2005 ........       1,333.44            --       13,977,217          1,398

Exercise of warrants ..............           --              --          152,500             15
Conversion of preferred stock .....        (550.90)           --        1,376,701            138
Conversion of preferred dividends .           --              --            9,427              1
Common shares issued for dividend
adjustment ........................           --              --           10,886              1
Preferred stock dividends .........           --              --             --             --
Exercise of employee options ......           --              --          712,510             71
Employee option expense ...........           --              --             --             --
Common stock issued for cash ......           --              --          101,503             10
Net loss ..........................           --              --             --             --
                                      ------------    ------------   ------------   ------------
Balance, December 31, 2006 ........         782.54    $       --       16,340,744   $      1,634
                                      ============    ============   ============   ============


<CAPTION>
                                       Additional
                                        Paid-in        Accumulated
                                        Capital          Deficit          Total
                                      ------------    ------------    ------------
<S>                                   <C>             <C>             <C>
Balance, January 1, 2004 ..........   $    404,990    $ (3,332,885)   $ (2,926,969)

Conversion of notes payable and
accrued interest ..................      3,558,039            --         3,558,216
Private placement of common stock .      2,749,875            --         2,750,000
Issuance for accrued officer salary        226,569            --           226,573
Issuance to acquire land ..........        350,993            --           351,000
Exercise of warrants ..............      1,108,953            --         1,109,001
Sale of preferred stock ...........     14,925,000            --        14,925,000
Conversion of debt ................      7,725,000            --         7,725,000
Preferred stock issuance costs ....     (1,058,683)           --        (1,058,683)
Conversion of preferred stock .....            (13)           --              --
Employee option expense ...........        903,375            --           903,375
Issuance of warrants for services .         48,760            --            48,760
Beneficial conversion debt discount      1,700,000            --         1,700,000
Beneficial conversion features ....     18,612,392            --        18,612,392
Contructive dividends .............    (18,612,392)           --       (18,612,392)
Preferred stock dividends .........       (281,117)           --          (281,117)
Net loss ..........................           --       (10,429,130)    (10,429,130)
                                      ------------    ------------    ------------
Balance, December 31, 2004              32,361,741     (13,762,015)     18,601,026

Exercise of warrants ..............        243,600            --           243,600
Conversion of preferred stock .....            (75)           --              --
Conversion of preferred dividends .         18,198            --            18,198
Beneficial conversion feature .....         66,972            --            66,972
Constructive dividend .............        (66,972)           --           (66,972)
Preferred stock dividends .........     (1,057,678)           --        (1,057,678)
Exercise of employee options ......        531,055            --           531,078
Employee option expense ...........        812,733            --           812,733
Issuance of warrants ..............      4,258,548            --         4,258,548
Net loss ..........................           --        (6,791,171)     (6,791,171)
                                      ------------    ------------    ------------
Balance, December 31, 2005 ........     37,168,122     (20,553,186)     16,616,334

Exercise of warrants ..............      1,006,486            --         1,006,501
Conversion of preferred stock .....           (138)           --              --
Conversion of preferred dividends .         56,569            --            56,570
Common shares issued for dividend
adjustment ........................         65,315            --            65,316
Preferred stock dividends .........     (1,029,933)           --        (1,029,933)
Exercise of employee options ......      1,651,050            --         1,651,121
Employee option expense ...........      2,235,224            --         2,235,224
Common stock issued for cash ......        897,008            --           897,018
Net loss ..........................           --       (23,421,210)    (23,421,210)
                                      ------------    ------------    ------------
Balance, December 31, 2006 ........   $ 42,049,703    $(43,974,396)   $ (1,923,059)
                                      ============    ============    ============
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       57
<PAGE>


                               NATIONAL COAL CORP.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.       BUSINESS OVERVIEW

         National Coal Corp. (the "Company") principally engages in the business
of mining high quality  bituminous steam coal in East Tennessee and Southeastern
Kentucky.  Its customers are electric  utilities and industrial  concerns in the
surrounding states.

         The Company owns the coal mineral rights to approximately  seventy-four
thousand  six  hundred   (74,600)  acres  of  land  and  leases  the  rights  to
approximately  forty  thousand nine hundred  (40,900)  additional  acres.  As of
December 31, 2006,  active mining complexes  include two underground  mines, two
surface mines,  and two highwall mines.  Active support  facilities  include two
preparation plants and two train loading facilities.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The accompanying  financial  statements reflect the Company's financial
position and results of operations on a  consolidated  basis.  All  intercompany
transactions and balances have been eliminated in consolidation.

USE OF ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management  to make  estimates,  judgments,  and  assumptions  that  affect  the
reported amounts and related disclosures of assets,  liabilities,  revenues, and
expenses at the date of the financial statements and for the periods then ended.
On an on-going basis,  management  evaluates the estimates used, including those
related to workers' compensation, reclamation and mine closure obligations, coal
reserve  values,  income  taxes,  and  contingencies.  Estimates  are  based  on
historical  experience,  actuarial  estimates,  current conditions,  and various
other   assumptions  that  management   believes  to  be  reasonable  under  the
circumstances. Actual results may differ from these estimates.

RECLASSIFICATIONS

         Certain amounts from the prior consolidated  financial  statements have
been reclassified to conform to the 2006  presentation.  These consist primarily
of the  reclassification  of certain deposits from other  non-current  assets to
restricted  cash  totaling  $697,756 and the  reclassification  of certain other
current  assets to inventory of $57,500.  The balance  sheets and  statements of
cash flows presented reflect these changes.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents are stated at cost. Cash equivalents  consist
of  highly  liquid  investments  with  maturities  of three  months or less when
acquired.


                                       58
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ACCOUNTS RECEIVABLE

         Trade accounts  receivable  are recorded at the invoiced  amount and do
not bear interest.  Customers are primarily utility companies.  As a result, the
Company has not  experienced any instances of non-payment and does not currently
maintain an  allowance  for  doubtful  accounts.  Management  monitors  customer
balances  and  will  record  an  allowance  if  trade  account  balances  become
potentially uncollectible.

INVENTORY

         Inventory  includes  mined coal  available  for delivery to  customers,
mined  coal which has not yet been  processed  through a wash  plant,  purchased
coal, and tires.  Mined coal inventory is valued at the lower of average cost or
net realizable value. Mined coal inventory costs include labor, fuel,  equipment
costs,  and  operating  overhead.  Mined coal is  classified as inventory at the
point it is  extracted.  Tires  are  classified  as  inventory  when  purchased.
Purchased coal inventory is valued at the lower of cost or net realizable value.

PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

         Property and equipment are stated at cost. Maintenance and repairs that
do not improve  efficiency  or extend  economic  life are  expensed as incurred.
Plant and  equipment are  depreciated  using the  straight-line  method over the
estimated  useful  lives of assets  which  generally  range from seven to thirty
years for  building  and plant and one to five years for  equipment.  On sale or
retirement, asset cost and related accumulated depreciation are removed from the
accounts and any related gain or loss is reflected in income.

         Leasing is used for certain  capital  additions  when  considered  cost
effective  relative to other  capital  sources.  All leases with an initial term
greater than one year are accounted for under Statement of Financial  Accounting
Standards  (SFAS)  13,  ACCOUNTING  FOR  LEASES  (SFAS  13).  These  leases  are
classified  as either  capital or operating  as  appropriate.  Leased  equipment
meeting the capital lease  criteria of SFAS 13 are  capitalized  and the present
value of the  related  lease  minimum  payments  are  recorded  as a  liability.
Amortization  of  capitalized  leased  assets is computed  on the  straight-line
method over the shorter of the estimated useful life or the initial lease term.

         Reserves  and mine  development  costs are  recorded at cost or at fair
value in the case of  acquired  businesses.  The  Company's  coal  reserves  are
controlled either through direct ownership or through leasing arrangements which
generally  last  until the  recoverable  reserves  are  depleted.  Depletion  of
reserves  and  amortization  of mine  development  costs is  computed  using the
units-of-production method over the estimated recoverable tons. Costs related to
locating  coal  deposits and  determining  the  extractive  feasibility  of such
deposits are expensed as incurred.

         Exclusive  of  the  approximately   $55,838,000  of  property,   plant,
equipment  and  mine  development,  net  we  had  as of  December  31,  2006  is
approximately  $641,000 of mining equipment  classified as assets held for sale.
This  equipment was sold in January 2007 for a small gain.  Assets with carrying
amounts of $4,655,628 were temporarily idled at December 31, 2006

         The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. If impairment indicators are present and the future undiscounted
cash flows are less than the carrying value of the assets,  the carrying  values
are reduced to the estimated fair value.


                                       59
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED FINANCING COSTS

         The Company had deferred  financing  costs of $2,856,534 and $2,958,666
at December 31, 2006 and 2005, respectively.  Deferred financing costs represent
capitalized  expenses  associated with the issuance of debt.  Deferred financing
costs are amortized by the interest method over the life of the associated debt.
The Company recorded approximately $607,000 and $381,000 of amortization related
to deferred financing costs in 2006 and 2005, respectively.

RESTRICTED CASH

         Restricted   cash  at  December  31,  2006   represents   approximately
$14,439,000 in certificates of deposit supporting  irrevocable letters of credit
written  in favor of the U.S.  Department  of the  Interior,  Office of  Surface
Mining (the "OSM") for reclamation  bonds,  approximately  $1,289,000 on deposit
for collateral to an operating lease, approximately $257,000 on deposit directly
with the OSM,  $780,000  on deposit  with the  Company's  workers'  compensation
administrator,  and approximately  $482,000 in utility and performance bonds and
deposits.   Restricted  cash  at  December  31,  2005  represents  approximately
$6,143,000 in certificates of deposit supporting  irrevocable  letters of credit
written in favor of the OSM for  reclamation  bonds,  approximately  $257,000 on
deposit directly with the OSM, $696,000 on deposit for worker's compensation and
approximately $227,000 in utility and performance bonds and deposits.

PREPAID MINING ROYALTIES

         Certain  coal  leases  require  minimum or advance  payments  which are
deferred  and  charged to cost of sales as coal is  extracted.  The  Company had
prepaid  royalties of approximately  $331,000 and $208,000 at December 31, 2006,
and 2005, respectively, included in other non-current assets.

RECLAMATION AND ASSET RETIREMENT OBLIGATIONS

         The  Surface  Mining  Control and  Reclamation  Act of 1977 and similar
state  statutes  require  mine  properties  to be  restored in  accordance  with
specified standards.  Statement of Financial Accounting Standards No. 143 ("SFAS
No. 143") requires  recognition of an asset  retirement  obligation  ("ARO") for
eventual  reclamation  of  disturbed  acreage  remaining  after  mining has been
completed.  The Company  records its reclamation  obligations  based upon permit
requirements as determined by the OSM. A liability is recorded for the estimated
future cost that a third party would incur to perform the  required  reclamation
and mine closure discounted at the Company's  credit-adjusted  risk-free rate. A
corresponding increase in the asset carrying value of coal and mineral rights is
also recorded. The ARO asset is amortized on the units-of-production method over
the  estimated  recoverable  reserves  and the ARO  liability is accreted to the
expected reclamation date at the Company's credit-adjusted risk-free rate. These
expenses are included in depreciation, depletion, amortization, and accretion in
the operating expenses section of the income statement.

STOCK-BASED COMPENSATION

         The Company's 2004 Option Plan (the "Plan") was authorized by the Board
of Directors of the Company in March 2004,  and amended in January  2005.  Under
the terms of the Plan,  stock  options  may be granted to  officers,  directors,
employees,  and others.  At December 31, 2006,  2,750,000 shares of common stock
were  authorized  for  issuance  under the Plan.  Shares  subject to awards that
expire  unexercised  or are  otherwise  terminated,  again become  available for
awards.  Upon exercise,  stock is issued from unissued or treasury  shares.  The
grant price of an option under the Plan generally may not be


                                       60
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

less than the fair market  value of the common  stock  subject to such option on
the date of grant.  Options  have a  maximum  life of ten years and vest 25% per
year over a four year period.

         Prior to  January  1,  2006,  the  Company  accounted  for  stock-based
compensation  under  Statement  of  Financial   Accounting  Standards  No.  123,
ACCOUNTING FOR  STOCK-BASED  COMPENSATION  ("SFAS 123"). As permitted under this
standard,  compensation  cost was  recognized  using the intrinsic  value method
described in Accounting  Principles  Board Opinion No. 25,  ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES ("APB 25"). APB 25 does not require any compensation expense
to be recorded in the consolidated financial statements if the exercise price of
the award was equal to or more than the market price on the date of the grant.

         Effective  January 1, 2006, the Company adopted  Statement of Financial
Accounting  Standards No. 123,  SHARE-BASED  PAYMENT  ("SFAS  123(R)") using the
modified-prospective  transition  method.  SFAS 123(R)  requires all share-based
payments  to  employees,  including  grants of  employee  stock  options,  to be
recognized as  compensation  expense in the  consolidated  financial  statements
based on their fair values.  Under the  modified-prospective  transition method,
the Company  recognizes  compensation  expense for the  unvested  portion of all
share-based payments granted on or prior to December 31, 2005 over the remaining
service period based on the grant date fair value  estimated in accordance  with
SFAS  123(R)  and  recognizes  compensation  cost for all  share-based  payments
granted on or  subsequent  to January 1, 2006 over the service  period  based on
grant date fair value estimated in accordance with SFAS 123(R).  As permitted by
SFAS  123(R),  prior  periods were not restated to reflect the impact of the new
accounting standard.

         As a result of adopting  SFAS 123(R) on January 1, 2006,  the Company's
net loss for the year ended December 31, 2006 is $999,091  higher than if it had
continued  to  account  for  share-based  compensation  under APB 25.  Basic and
diluted  loss per  share  are  each  $(0.07)  greater  than if the  Company  had
continued to account for share-based compensation under APB 25.


                                       61
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         If the  Company had adopted  the fair value  method of  accounting  for
stock-based  compensation in 2005 and 2004,  compensation costs which would have
been recognized and pro forma net loss and loss per share for the periods ending
December 31 would have been as follows:

                                                     2005              2004
                                                --------------    --------------
Net loss attributable to common shareholders,
as reported .................................  $   (7,915,821)   $  (29,322,638)
   Add: Stock-based compensation expense
   recognized under the intrinsic method ....         812,733           903,000
   Deduct: Total stock-based compensation
   expense for stock options determined
   under the Black-Scholes option pricing
   model ....................................      (1,564,371)       (1,283,927)
                                               --------------    --------------
Pro forma net loss ..........................  $   (8,667,459)   $  (29,703,565)
                                               ==============    ==============

Loss per share:
Basic - as reported .........................  $        (0.58)   $        (2.60)
Basic - pro forma ...........................  $        (0.63)   $        (2.64)
Diluted - as reported .......................  $        (0.58)   $        (2.60)
Diluted - pro forma .........................  $        (0.63)   $        (2.64)


WORKERS' COMPENSATION

         The Company provides for income  replacement and medical  treatment for
work  related  injury and  occupational  disease  resulting  from coal  workers'
pneumoconiosis  (Black  Lung  Disease),  as  required  by federal and state law,
through insurance  policies with high deductibles.  Loss funding  provisions for
deductibles  are based on  determinations  by  independent  actuaries  or claims
administrators.

REVENUE RECOGNITION

         The Company  recognizes  revenue when title or risk of loss pass to the
common  carrier or  customer.  This  generally  occurs  when coal is loaded onto
trains or trucks at one of our loading  facilities.  In most cases,  the Company
negotiates a specific sales contract with each customer, which specifies a fixed
price  per ton,  premiums  and  penalties  for  quality  variances,  a  delivery
schedule,  and payment  terms.  Contracts  range in  duration  from one to three
years.

         Revenue  is also  earned  from  charging  TIPPLING  fees to other  coal
producers to use the Company's loading facilities in Kentucky and from royalties
based on coal mined by lessees.


                                       62
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FREIGHT REVENUE AND COSTS

         Shipping and handling costs paid to  third-party  carriers and invoiced
to coal customers are included in cost of sales and coal sales, respectively.

INCOME TAXES

         The Company  recognizes  deferred  tax assets and  liabilities  for the
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases in accordance  with FASB Statement of Financial  Accounting
Standards  No. 109,  "Accounting  for Income  Taxes".  A valuation  allowance is
provided  when it is more likely than not that some portion or all of a deferred
tax asset will not be realized.  The ultimate realization of deferred tax assets
depends on the  generation of future  taxable  income during the period in which
related  temporary  differences  become  deductible.  Management  considers  the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax  planning  strategies  in  this  assessment.  Deferred  tax  assets  and
liabilities  are  measured  using the  enacted  tax rates  expected  to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date of such change.

RECENT ACCOUNTING PRONOUNCEMENTS

         In March 2005, the Financial Accounting Standards Board ("FASB") issued
Interpretation  No. 47 ("FIN 47"),  ACCOUNTING FOR CONDITIONAL  ASSET RETIREMENT
OBLIGATIONS, which clarifies that an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation when incurred if
the  liability's  fair value can be reasonably  estimated.  A conditional  asset
retirement  obligation  is  defined  as a  legal  obligation  to  perform  asset
retirement  activity  in which the  timing  and (or)  method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity.  FIN 47 is  effective no later than the end of fiscal years ending after
December 15, 2005.  The Company's  adoption of FIN 47 did not result in a change
to current practice.

         At its March 30, 2005 meeting,  the FASB ratified the consensus reached
by the Emerging  Issues Task Force  ("EITF") in Issue No. 04-6,  ACCOUNTING  FOR
STRIPPING COSTS INCURRED  DURING  PRODUCTION IN THE MINING  INDUSTRY.  Issue No.
04-6  requires  that the costs of removing  overburden  and waste  materials  to
access mineral deposits during the production phase of a mine, commonly referred
to as STRIPPING COSTS, be included in the costs of the inventory produced.  EITF
Issue No.  04-6 is  effective  for the  first  fiscal  period  in  fiscal  years
beginning  after December 15, 2005, with early adoption  permitted.  The Company
adopted  the EITF  effective  January 1, 2006.  Adoption of this EITF has had no
material impact on its financial statements.

         In  May  2005,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 154,  ACCOUNTING CHANGES AND ERROR  CORRECTIONS,  A REPLACEMENT OF
APB OPINION NO. 20 AND FASB STATEMENT NO. 3, which changes the  requirements for
the  accounting  for and  reporting of a change in  accounting  principle.  This
statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine the  period-specific  effects or the cumulative effect of change. When
it is  impracticable to determine the  period-specific  effects of an accounting
change  on one or  more  individual  prior  periods  presented,  this  Statement
requires that the new accounting  principle be applied to the balances of assets
and   liabilities  as  of  the  beginning  of  the  earliest  period  for  which
retrospective  application is practicable and that a corresponding adjustment be
made to


                                       63
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the opening  balance of  retained  earnings  for that  period  rather than being
reported in the income statement.  The Company believes this statement will have
no impact on its financial statements.

         In June  2006,  the FASB  issued  Interpretation  No.  48  ("FIN  48"),
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT
NO. 109. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to  be  taken  in  a  tax  return.   It  also  provides   guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosure  and  transition.  FIN 48 is  effective  for  fiscal  years
beginning  after  December 15,  2006.  The Company is  currently  assessing  the
potential impact of the  interpretation on its financial position and results of
operations.

         In September  2006, the FASB issued  Statement of Financial  Accounting
Standards No. 157, FAIR VALUE  MEASUREMENTS  ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about  fair  value  measurements.   SFAS  157  applies  under  other  accounting
pronouncements  that  require  or permit  fair value  measurements.  SFAS 157 is
effective  prospectively  for fiscal years beginning after November 15, 2007 and
interim periods within that fiscal year. The Company is still analyzing SFAS 157
to determine the impact of adoption

3.       INVENTORY

         Inventory at December 31 is as follows:

                                              2006              2005
                                           ----------        ----------
         Coal .....................        $2,014,710        $  360,614
         Tires ....................           207,032            57,500
                                           ----------        ----------
            Inventory .............        $2,221,742        $  418,114
                                           ==========        ==========


                                       64
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4.       PROPERTY, PLANT, EQUIPMENT, MINE DEVELOPMENT AND ASSETS HELD-FOR-SALE

         Property,  plant,  equipment and mine  development at December 31 is as
follows:

                                                   2006            2005
                                               ------------    ------------
         Furniture and office equipment ....   $    345,554    $    220,663
         Mining equipment and vehicles .....     48,864,201      35,781,704
         Land and buildings ................      6,674,027       6,721,858
         Mineral rights ....................     11,911,309      12,046,106
         Mine development ..................     10,003,328       6,265,447
         Construction in progress ..........        854,399         728,286
                                               ------------    ------------
            Total property, plant, equipment
               and mine development ........     78,652,818      61,764,064
         Less accumulated depreciation,
            depletion and amortization .....    (22,815,191)    (10,862,383)
                                               ------------    ------------
            Property, plant, equipment and
               mine development, net .......   $ 55,837,627    $ 50,901,681
                                               ============    ============


         Mining  equipment  includes  approximately  $869,000 and  $2,325,000 of
gross assets under capital leases at December 31, 2006 and 2005, respectively.

         Depreciation  expense,  which  includes  amortization  of assets  under
capital leases, was approximately  $13,888,816,  $9,009,054,  and $1,518,362 for
the years ended  December  31, 2006,  2005,  and 2004,  respectively.  Depletion
expense related to mineral rights and amortization of mine development costs was
$997,949,  $750,998,  and $708,413 for the years ended December 31, 2006,  2005,
and 2004, respectively.

         The Company  periodically  reviews the  estimated  useful  lives of its
fixed assets.  During the second quarter of 2005, this review indicated that the
estimated  useful lives for certain asset  categories  were  generally less than
those employed in calculating  depreciation  expense.  As a result,  the Company
revised the estimated  useful lives of mining equipment as of April 1, 2005. Had
this  revision  been made as of January 1, 2005,  the effect  would have been to
increase depreciation expense by an additional  approximately $1,612,000 for the
year ended December 31, 2005.

         During the three  months ended March 31,  2006,  the Company  adopted a
plan to sell existing  transportation  and mining  equipment to various  outside
contractors.  In September 2006, the Company  completed sales of the majority of
this equipment to various outside parties, including two contractors who perform
hauling  services for the Company.  The  equipment  sold had a net book value of
$919,549 and the sales  resulted in a net loss of $22,550,  which is included in
other income (expense), net in the consolidated statement of operations. The net
book  value  of the  remaining  assets  held  for  sale  at  December  31,  2006
approximates the fair value and is disclosed separately on the balance sheet. In
January 2007, these assets were sold at a small gain.

         On  September  18,  2006  the  Company  entered  into a  sale-leaseback
transaction with First National Capital Corporation's  assignee,  GATX Financial
Corporation,  involving  the Company's  highwall  miner  initially  purchased in
February  2006.  The Company  sold the  highwall  miner for  approximately  $6.4
million and recorded a deferred  gain of  approximately  $875,000  which will be
recognized over the forty-two month term of the operating  lease. The lease is a
"net" lease and requires  that the Company  maintain and insure the equipment as
well as pay rental  payments of $166,568 per month. As a condition of the lease,
the Company  provided two standby letters of credit totaling  $1,288,883 in lieu
of security deposits which are 100%  collateralized  with cash on deposit at two
financial institutions.

         At  maturity,  the Company has the option of  purchasing  the  highwall
miner or extending  the lease for an additional  twelve month term,  both at the
then fair market value, or allowing the lease to expire, at


                                       65
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4.       PROPERTY,  PLANT, EQUIPMENT,  MINE DEVELOPMENT AND ASSETS HELD-FOR-SALE
         (CONTINUED)

which time the Company would be responsible for the expense of transporting  the
highwall miner to a lessor  designated  location within the  Continental  United
States.

         Buildings  include  capitalized  interest  of  $252,867  and  $0  as of
December 31, 2006 and 2005, respectively.

5.       OTHER NONCURRENT ASSETS

         Other noncurrent assets at December 31 are as follows:

                                                    2006         2005
                                                  --------     --------

         Prepaid royalties ..................     $330,705     $224,120
         Notes receivable ...................       96,811         --
                                                  --------     --------
         Total other noncurrent assets ......     $427,516     $224,120
                                                  ========     ========


6.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses at December 31 are as follows:

                                                         2006            2005
                                                     -----------     -----------
Accounts payable ...............................     $ 9,944,033     $ 4,409,005
Accrued payroll and related taxes ..............         189,753         383,642
Accrued interest ...............................         379,581          47,466
Accrued insurance premiums .....................         310,726         789,810
Accrued dividends ..............................         548,480            --
Royalty obligations ............................         464,987         204,433
Accrued federal, state and local taxes .........         143,935         556,270
                                                     -----------     -----------
Total accounts payable and accrued expenses ....     $11,981,495     $ 6,390,626
                                                     ===========     ===========

7.       DEBT AND FINANCING ARRANGEMENTS

              NOTE PAYABLE

In January 2005, the Company  signed an agreement  committing the Company to the
purchase  of a  highwall  miner  for a total  purchase  price  of  approximately
$5,500,000,  and paid a $500,000  deposit  toward that purchase  commitment.  In
March 2005, the Company borrowed  approximately  $5,140,000  pursuant to certain
note and warrant  purchase  agreements and completed the purchase of this mining
equipment.  The  Company  issued  notes in the  aggregate  principal  amount  of
approximately  $5,140,000  to  three  purchasers,  including  Crestview  Capital
Master, LLC ("CCM,  LLC"). CCM, LLC is a related party to the Company due to the
significant number of shares it holds in the Company.  The notes had an original
maturity date of August 10, 2005, later extended to March 10, 2006, were secured
by the highwall


                                       66
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7.       DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

miner,  and had an interest rate of eighteen  percent (18%) which began accruing
from May 10, 2005. The Company paid an origination fee of approximately $200,000
upon the execution of the loan document.  The note  purchasers  were also issued
five-year common stock purchase warrants to purchase up to 140,000 shares of the
Company's  common stock at an exercise price per share of $8.50.  The notes were
repaid on December 29, 2005 with an additional 3% late payment penalty.

              EQUIPMENT NOTES

         In November 2005, the Company  purchased mining equipment to be used in
the Company's Kentucky  operations from two former contract mining companies for
approximately  $1,775,000.  The Company  financed the purchase  with a $400,000,
four month, non-interest bearing note payable to one of the mining companies and
a $1,300,000,  twenty-four month bank note at the prime rate plus 1%. Both notes
are secured by the  purchased  equipment.  The $400,000 note was repaid early in
January 2006 at a $20,000 discount.

         In February and March 2006, the Company  purchased service vehicles and
mining equipment for approximately  $478,000. The Company financed the purchases
with interest-bearing  notes ranging in term from thirty-six to sixty months and
with  interest  rates  ranging from  approximately  4.5% to 9.3%.  All notes are
secured by the purchased equipment.

              10.5% SENIOR SECURED NOTES DUE 2010

         On December 29, 2005,  the Company issued $55.0 million of 10.5% Senior
Secured  Notes and  Warrants  to  purchase  a total of  1,732,632  shares of the
Company's  common stock.  The issue  consisted of 55,000  units,  with each unit
comprised of one $1,000  principal  amount note due 2010 and one warrant,  which
entitles the holder to purchase  31.5024 shares of the Company's common stock at
an exercise price of $8.50 per share,  subject to  adjustment.  The warrants are
subject to  mandatory  conversion  if the price of the  Company's  common  stock
remains above $12.75 for more than nineteen days out of a consecutive thirty day
trading  period.  The warrants will be exercisable at any time on or after their
first  anniversary  date and will expire on December 15, 2010. Net proceeds from
this sale  were  approximately  $52.1  million.  The  Company  immediately  used
approximately  $22.1  million of the  proceeds to repay  existing  indebtedness.
During 2006, the Company used approximately $2.0 million to purchase a forty-two
mile rail line in Tennessee, approximately $8.3 million as collateral to support
reclamation  bonds,  and $19.7 million to purchase  other  equipment,  refurbish
preparation facilities and rail load-outs, and provide working capital.

         The indenture  allows the Company to incur a Term Loan Credit  Facility
in the amount of $10.0 million,  but limits further  indebtedness unless certain
fixed charge coverage  ratios are maintained on a pro forma basis.  Please refer
to the Term Loan Credit  Facility  note below for a  discussion  of our entrance
into such a credit  facility.  The fixed charge coverage ratio is defined as the
ratio of net income (loss) plus (i) fixed charges, (ii) depreciation,  depletion
and amortization, (iii) taxes, (iv) extraordinary losses, and (v) other non-cash
income  and  expenses  to  fixed  charges  defined  to  include  25% of  capital
expenditures  made by the  Company  and its  subsidiaries.  To incur  additional
indebtedness,  the Company must maintain a fixed charge coverage ratio of 2.0 to
1 for the first year of the Notes,  2.25 to 1 for the second year,  and 2.5 to 1
for the remaining term of the Notes.  The indenture  also  restricts  payment of
dividends on the Company's  common  stock.  Notes issued under the indenture are
guaranteed  fully and  unconditionally  as well as jointly and  severally by the
Company,  which  has no  independent  assets  or  operations,  and  each  of its
wholly-owned subsidiaries.


                                       67
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7.       DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

         In connection with the December 29, 2005 issuance of notes, the Company
entered  into a separate  registration  rights  agreement  with the  purchasers.
Pursuant to the separate  registration  rights agreement,  the Company agreed to
file an exchange  offer  registration  statement  registering  the resale by the
purchasers of all of the notes and attached  warrants.  Pursuant to the separate
registration  rights  agreement,  the Company filed two registration  statements
with the  Securities  and Exchange  Commission in May 2006,  which were declared
effective on July 28, 2006.  On September  5, 2006,  the Company  exchanged  $51
million of the total $55 million  10.5% Senior  Secured Notes for $51 million in
new Notes,  dated  August 31,  2006,  which are  registered  for resale with the
Securities and Exchange Commission. The new Notes are issued under substantially
the same terms as the old Notes.

         TERM LOAN CREDIT FACILITY

         On October 12, 2006, the Company's  wholly-owned  subsidiary,  National
Coal  Corporation,  entered into a Term Loan Credit  Facility  that provides for
borrowings of up to $10.0 million with Guggenheim Corporate Funding, LLC to fund
general  operating and working capital needs. The Company  immediately  borrowed
$5.0 at closing,  $3.0 million in December 2006, and $2.0 million  subsequent to
year-end.

         Under this credit facility,  the Company's obligations are secured by a
priority  senior lien on  substantially  all of the assets of the  Company.  All
amounts under the credit  facility  become due and payable in March 2010 and the
interest  under this facility is payable at a rate equal to, at our option,  the
Eurodollar Rate plus 3.5% or the Base Rate (which  approximates  the prime rate)
plus 2.5%.  The term loan  credit  facility  contains  financial  covenants  and
default provisions  including that the Company maintain minimum levels of EBITDA
and liquidity,  maintain  minimum interest  coverage ratios,  not exceed maximum
leverage  ratios,  and that it limit certain future  categories of  transactions
such as the  incurrence  of  additional  indebtedness  and the  sale of  assets.
Subsequent to year-end,  the Company  renegotiated  the  financial  covenants in
exchange for assuming a 1.0%  increase in the  previously  agreed-upon  interest
rate.

         INSTALLMENT PURCHASE OBLIGATIONS

         In August 2005, the Company's  wholly-owned  subsidiary,  National Coal
Corporation,   entered  into   installment  sale  contracts  with  an  equipment
manufacturer,   effective  in  July  2005,   pursuant  to  which  National  Coal
Corporation  purchased and financed or refinanced  certain equipment used in its
coal mining operations.  Pursuant to the installment sale contracts, the Company
financed or refinanced  approximately $7.3 million in equipment at rates ranging
from 5.22% to 7.65%.

         The total  $6,717,650  aggregate  principal  balance of these contracts
included   refinancing   obligations   previously   under   capital   leases  of
approximately  $2,937,000  at September  30, 2005  representing  gross assets of
approximately  $4,372,000.  This  resulted  in  the  recognition  of a  gain  on
extinguishment of debt of approximately  $328,000.  The remaining  $3,781,000 is
related to the purchase of new  equipment as well as  equipment  formerly  under
operating  leases.  The installment  sale contracts  require monthly payments of
principal and interest through January 14, 2008.

         In April 2006, the Company entered into new installment  sale contracts
with  an  equipment  manufacturer  pursuant  to  which  the  Company  refinanced
equipment with an aggregate principal value of approximately $2,729,000 formerly
acquired under various capital leases resulting in a loss on  extinguishment  of
debt of approximately $10,000. These installment sale contracts require payments
over


                                       68
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7.       DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

36 months at fixed interest rates ranging from 7.03% to 7.50%.  The  obligations
under the installment sale contracts are secured by the equipment purchased.  In
August 2006 and September 2006, the Company  entered into new  installment  sale
contracts  with  an  equipment   manufacturer  pursuant  to  which  the  Company
refinanced   equipment  with  an  aggregate  principal  value  of  approximately
$1,447,000.  These  installment  sale  contracts  require  payments over periods
ranging  from 30 to 36 months at fixed  interest  rates  ranging  from  7.42% to
8.10%.  The obligations  under the installment sale contracts are secured by the
equipment purchased.

         The  following  table  summarizes  long-term  debt  obligations  of the
Company, excluding capital leases:

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2006            2005
                                                   ------------    ------------
10.5% Senior Secured Notes, due 2010 ...........   $ 55,000,000    $ 55,000,000
Term Loan Credit Facility ......................      8,000,000            --
Bank note (prime + 1%), due 2007 ...............        637,374       1,200,018
Installment purchase obligations, due 2009 .....      3,200,286            --
Installment purchase obligations, due 2008 .....      2,825,209       5,270,611
Equipment note (non-interest bearing), due 2006            --           280,000
Equipment notes (8.39%-9.28%, due 2009-2011) ...        125,382            --
Equipment note (4.48%, due 2009) ...............        234,721            --
Other ..........................................         89,512          19,931
Less unamortized discounts .....................     (3,298,679)     (3,910,160)
                                                   ------------    ------------
                                                     66,813,805      57,860,400
Less current portion of long-term debt .........     (4,720,671)     (3,319,175)
                                                   ------------    ------------
Long-term debt .................................   $ 62,093,134    $ 54,541,225
                                                   ============    ============


         Maturities  of  long-term  debt for the next five years and  thereafter
follow:


         Fiscal year
         2007 .......................................     $  4,720,769
         2008 .......................................        1,780,604
         2009 .......................................          590,371
         2010 .......................................       63,016,417
         2011 .......................................            4,323
         Thereafter .................................             --
                                                          ------------
                                                            70,112,484
         Less unamortized discounts .................       (3,298,679)
                                                          ------------
                                                            66,813,805
         Less current portion of long-term debt .....       (4,720,671)
                                                          ------------
         Long-term debt .............................     $ 62,093,134
                                                          ============


                                       69
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

8.       LEASES

         The  Company   leases   mining  and  certain  other   equipment   under
noncancelable  lease agreements with terms up to five years.  Rental expense for
equipment under operating lease  agreements with initial lease terms of one year
or greater was approximately $1,011,323,  $1,212,696, and $516,000 for the years
ended December 31, 2006, 2005, and 2004, respectively.

         During the first  quarter of 2006,  the Company  entered into a capital
lease agreement of $265,300 with an equipment supplier for mining equipment with
a comparable value. The lease is for a period of twenty-four months and provides
for a bargain purchase option at the end of the lease term.

         During the third  quarter of 2006,  the Company  entered into a capital
lease agreement of $625,000 with an equipment supplier for mining equipment with
a comparable value. The lease is for a period of twenty-six months.

         Future  minimum lease  payments for  noncancelable  leases with initial
terms of one year or greater in effect at December 31, 2006 are as follows:

                                                        Capital       Operating
                                                         Leases         Leases
                                                       ----------     ----------

2007 ..............................................    $  414,897     $2,090,226
2008 ..............................................       337,806      1,998,813
2009 ..............................................          --        1,998,813
2010 ..............................................          --          427,524
2011 ..............................................          --             --
Thereafter ........................................          --             --
                                                       ----------     ----------

Total minimum lease payments ......................       752,703     $6,515,376
                                                                      ==========

Imputed interest ..................................       (79,964)
                                                       ----------

Present value of minimum capital lease payments ...       672,739
Current portion ...................................      (351,668)
                                                       ----------
Long-term obligations .............................    $  321,071
                                                       ==========


                                       70
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

9.       ASSET RETIREMENT OBLIGATIONS

         The  following  table  describes  the  changes to the  Company's  asset
retirement obligations for the years ended December 31:


                                                        2006            2005
                                                    -----------     -----------
Obligation at January 1 ........................    $ 7,228,232     $ 2,305,749
Accretion expense ..............................        476,064         347,671
Obligations acquired and incurred ..............        250,427       4,379,108
Adjustments from annual recosting ..............        350,175         490,424
Obligations settled ............................     (1,090,004)       (294,720)
                                                    -----------     -----------
Obligation at December 31 ......................      7,214,894       7,228,232
Current portion included in accrued expenses ...     (1,378,967)           --
                                                    -----------     -----------
 ong-term liability ............................    $ 5,835,927     $ 7,228,232
                                                    ===========     ===========

         The above  table has been  adjusted  to  reflect  the  correct  opening
balance and activity for 2005.

10.      STOCKHOLDERS' (DEFICIT) EQUITY

         In February 2004,  Crestview Capital Master,  LLC, an entity controlled
by Crestview  Capital Funds,  purchased four of the Company's  outstanding notes
payable  from  an  unrelated  party  in  the  aggregate   principal   amount  of
approximately $3,465,200. Concurrent with its purchase of these notes, Crestview
agreed to  extend  the  maturity  date on all four  notes to March 25,  2005 and
modified certain provisions. Two of the notes, in the aggregate principal amount
of approximately $3.2 million,  were convertible into the Company's common stock
at a price of $2.00 per share.  Crestview also  purchased  common stock purchase
warrants  from the original  debt holder  which  warrants had been issued by the
Company as additional  consideration  for the  convertible  notes.  The warrants
allowed Crestview to purchase up to 399,312 shares of the Company's common stock
at a price of $2.20 per share, and expired on March 25, 2005. In March 2004, the
Company  issued  Crestview  80,347  shares of common  stock upon  conversion  of
$160,693 of accrued  interest.  In April  2004,  the  Company  issued  Crestview
250,000  shares of common stock upon  conversion  of $500,000 of  principal.  In
October 2004, the Company issued Crestview 1,347,451 shares of common stock upon
conversion  of  the  remaining   $2,694,903  of  principal  of  the  convertible
debentures.  The  remaining  two  notes in the  aggregate  principal  amount  of
$270,314, were paid in full in December 2004.

         In February 2004, the Company sold an aggregate of 1,250,000  shares of
its  common  stock in a private  placement  at a price of $2.20 per share to one
institutional investor and three accredited investors.

         In March 2004, a total of 41,958 shares of common stock were granted to
the then Chairman of the Board in lieu of cash  compensation  for services.  The
stock was valued at $226,573 or $5.40 per share,  which was the closing price of
the Company's common stock on the date the stock was granted.


                                       71
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

10.      STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)

         In May 2004, the Company purchased from Cumberland Timber Company, LLC,
1,738 acres of land in East  Tennessee for a total  purchase  price of $631,000,
which  consisted of $280,000 cash and 75,000 shares of common stock.  The 75,000
shares were valued at a price per share of $4.68, which was the closing price of
the  Company's  common  stock  on May 14,  2004,  the date of  closing  for this
transaction.

         In August  2004,  the Company sold  $16,030,000  of Series A cumulative
convertible  preferred  stock and common  stock  purchase  warrants  in separate
private placement transactions. The Company issued a total of 1,068.67 shares of
Series A cumulative  convertible preferred stock, at $15,000 per share, for cash
consideration of  approximately  $11.3 million and cancellation of approximately
$4.7  million of its senior  secured  promissory  notes  issued in April and May
2004.  Each  share  of  Series  A  cumulative  convertible  preferred  stock  is
convertible  into  2,500  shares of  common  stock.  For each  share of Series A
cumulative  convertible preferred stock, the investors also were issued two-year
warrants to purchase  500 shares of common  stock at an exercise  price of $8.40
per share.

         On August 31,  2004,  the  Company  issued  $3,000,000  of  convertible
promissory notes (see Note 6). The convertible promissory notes may be converted
prior to maturity into units  consisting of our Series A cumulative  convertible
preferred  stock and common  stock  purchase  warrants at a price of $15,000 per
unit.  Each  unit  consists  of one  share of  Series A  cumulative  convertible
preferred  stock and  two-year  warrants  to purchase up to 500 shares of common
stock at an exercise price of $8.40 per share.  In December 2004, the holders of
the convertible  promissory  notes  converted the $3,000,000  principle into 200
shares of Series A  cumulative  convertible  preferred  stock  and  warrants  to
purchase up to 100,000 shares of common stock.

         Investors who paid cash consideration in either the Series A cumulative
convertible  preferred  stock  financing  or  convertible  debt  financing  also
received  the  right  to  purchase  additional  units  of  Series  A  cumulative
convertible  preferred stock and common stock purchase  warrants.  Each of these
investors can purchase,  at a price of $15,000 per unit, up to a number of units
with an aggregate  purchase price equal to 33.33% of the amount  invested in the
initial  financing.  Each unit  consists  of one  share of  Series A  cumulative
convertible  preferred stock and two-year  warrants to purchase up to 500 shares
of common stock at an exercise  price of $8.40 per share.  The  purchase  rights
must be  exercised  no later than April 28,  2005.  The  holders of  convertible
promissory  notes may  exercise  this  additional  purchase  right  only if they
convert their  promissory  note in full. In December  2004,  the Company  issued
241.33  shares  of its  Series A  cumulative  convertible  preferred  stock  and
warrants to purchase  482,660  shares of its common  stock upon the  exercise by
certain holders of these purchase rights. The Company received gross proceeds of
approximately $3,620,000 in connection with the sale of these securities.

         In connection  with the August 31, 2004 private  placement  financings,
the Company  entered  into  separate  registration  rights  agreements  with the
investors.  Pursuant to the separate registration rights agreements, the Company
filed  a Form  SB-2 on  November  1,  2004  with  the  Securities  and  Exchange
Commission, and such registration statement was declared effective by the SEC on
January 28, 2005 registering 17,587,730 shares of common stock for resale by the
selling shareholders.

         During 2004,  the Company  issued an aggregate of 867,200 shares of its
common stock upon the exercise of warrants,  of which 389,139 shares were issued
pursuant to cashless exercises and 478,061 shares were issued for cash of $1.109
million.

         At the close of business on January 12,  2005,  the Company  affected a
1-for-4 reverse split of its issued and  outstanding  common stock as previously
approved on October 12, 2004 by its board of


                                       72
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

10.      STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)

directors  and  stockholders.   All  share  and  per  share  amounts  have  been
retroactively  restated  for all periods  presented to reflect the effect of the
reverse split.

         On May 6, 2005,  the Company  filed with the  Securities  and  Exchange
Commission,  a  post  effective  amendment  #1  to  Form  SB-2  on  a  Form  S-3
registration  statement  to  register  the  resale by the  selling  stockholders
identified therein, of an aggregate of 17,188,996 shares of the Company's common
stock  which was then  outstanding  or which  could be  acquired  by the selling
stockholders  from the  Company  upon the  conversion  or  exercise  of options,
warrants, and Series A cumulative convertible preferred stock. The amendment was
declared  effective by the United States  Securities and Exchange  Commission on
May 12, 2005.

         On December 29, 2005, the Company issued 55,000  Warrants to purchase a
total of 1,732,632  shares of the Company's common stock in conjunction with the
issue of  $55,000,000  of 10.5% Senior  Secured  Notes.  The issue  consisted of
55,000 units which will entitle the holder to purchase 31.5024 shares of Company
common stock at an exercise price of $8.50 per share, subject to adjustment. The
warrants  are  subject to  mandatory  conversion  if the price of the  Company's
common stock remains  above $12.50 for more than thirty days.  The Warrants will
be  exercisable  at any time on or after their first  anniversary  date and will
expire on December 15, 2010.

         During  the year  ended  December  31,  2006 and  2005,  152,500  and 0
warrants  were  exercised  with  gross  proceeds  totaling  $1,006,501  and  $0,
respectively.  At December 31, 2006,  warrants entitling the holders to purchase
1,872,632  shares of common  stock at an exercise  price of $8.50 per share were
outstanding.  The warrants are subject to mandatory  conversion  if the price of
the Company's common stock remains above $12.50 for more than thirty days.

         During the year ended December 31, 2006 and 2005, holders of 550.90 and
139.44  shares  of  Series  A  cumulative   convertible   preferred  stock  with
liquidation   preferences   totaling  $8,260,206  and  $2,091,600  plus  accrued
dividends of $65,439 and $18,198,  converted  their  shares into  1,386,128  and
351,633 shares of common stock, respectively.

         During the year ended  December 31, 2006 and 2005,  the Company  issued
712,510  and  234,240  shares of common  stock and  received  gross  proceeds of
$1,651,122  and $531,078  respectively,  upon the  exercise of stock  options by
employees or former employees. Additionally, 101,503 shares of common stock were
issued during the year ended  December 31, 2006 for gross  proceeds of $897,018,
including 100,000 shares purchased by the Company's new Chief Executive Officer.

         In October 2006, the Company determined that it had not complied with a
preferred stock purchase agreement  provision which resulted in the accrual of a
dividend  adjustment  of $198,220.  Therefore,  the Company has  reflected  this
accrual  as a  one-time  adjustment  to  shareholders'  equity  during the third
quarter of 2006 as it was not material to previous periods.  In November 2006, a
majority of the preferred  shareholders  voted to eliminate the provision  which
gave rise to this accrual. The Company also issued 10,886 shares of common stock
in lieu of dividends as a result of the dividend adjustment.

11.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  following  methods  and  assumptions  were used by the  Company in
estimating its fair value disclosures for financial  instruments at December 31,
2006, and 2005, respectively:

         CASH AND ACCOUNTS  RECEIVABLE:  The carrying amount  approximates  fair
         value because of the short maturity of these instruments.


                                       73
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

11.      FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         DEBT: The fair value of the Company's long-term debt is estimated based
         on the quoted  market  prices for  similar  issues or on the  estimated
         current  rate of  incremental  borrowing  available  to the Company for
         similar  liabilities.  At December 31, 2005 the  carrying  value of the
         Company's.

         10.5% Senior  Secured Notes  approximated  fair value because the Notes
were issued on December 29, 2005.

         The estimated  fair values of the Company's  financial  instruments  at
December 31 are as follows:

<TABLE>
<CAPTION>
                                          2006                        2005
                               -------------------------   -------------------------
                                Carrying        Fair        Carrying        Fair
                                 Amount         Value        Amount         Value
                               -----------   -----------   -----------   -----------
<S>                            <C>           <C>           <C>           <C>
Financial assets
   Cash and cash equivalents   $ 2,180,885   $ 2,180,885   $25,434,988   $25,434,988
   Accounts receivable .....     3,712,779     3,712,779     2,929,735     2,929,735
   Restricted cash .........    17,246,751    17,246,751     7,323,023     7,323,023

Financial liabilites
   Long-term debt ..........   $66,813,805   $61,313,805   $57,860,400   $57,478,632
</TABLE>

12.      CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations of credit risk consist primarily of accounts receivable. Accounts
receivable  are from brokers or purchasers  of the  Company's  coal with payment
terms that  typically  do not exceed 20 days.  The  Company  routinely  performs
credit  evaluations  of customers  purchasing on account and generally  does not
require collateral.

         During the period ended December 31, 2006, the Company  derived revenue
from thirteen customers,  four of which were electric utilities,  eight of which
were  industrial  companies  and one of which was a coal  reseller.  The Company
derived  revenue in excess of  ten-percent  (10%) of total coal sales from major
customers as follows:

                                                     Customer
                                    -------------------------------------------
                                       A          B           C           D
                                    --------    -------    --------    --------
Period ended December 31:
2006 ..........................       25%        32%         18%          *
2005 ..........................       35%        26%          *          10%
2004 ..........................       28%        27%          *          16%
* Less than 10%


                                       74
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

13.      INCOME TAXES

         At December 31, 2006,  the Company had federal and state net  operating
loss ("NOL")  carryforwards  of $33.5 million that will begin to expire in 2024.
The use of  deferred  tax assets  including  federal  net  operating  losses and
credits are limited to future taxable  earnings.  Based on the required analysis
of future taxable income under the provisions of SFAS 109,  management  believes
that there is not sufficient  evidence at December 31, 2006  indicating that the
results of operations will generate sufficient taxable income to realize the net
deferred tax asset in years beyond 2007. As a result, a valuation  allowance has
been  provided for the entire net deferred  tax asset  related to future  years,
including loss and credit carryforwards.

         The valuation  allowance was $14,785,860 and $6,369,398 at December 31,
2006 and 2005, respectively. The valuation allowance increased by $8,413,451 and
$2,542,404 in 2006 and 2005,  respectively.  The net deferred income taxes as of
December 31 include  the  following  amounts of  deferred  income tax assets and
liabilities:


                                                       2006            2005
Deferred tax assets - current: .................   ------------    ------------
   Inventory reserve ...........................   $     70,128    $     27,847
   Intangibles (tax basis difference) ..........         89,614         235,923
                                                   ------------    ------------
      Total deferred tax assets - current ......        159,742         263,770
                                                   ------------    ------------
Deferred tax assets - noncurrent:
   Net operating loss carryforwards ............     12,823,594       5,392,048
   Fixed assets (tax basis difference) .........      1,886,181         468,736
   Intangibles (tax basis difference) ..........         80,661          57,435
   Deferred royalties ..........................         87,481         170,274
   Charitable contribution carryforwards .......         44,973          44,973
                                                   ------------    ------------
      Total deferred tax assets - noncurrent ...     14,922,890       6,133,466
                                                   ------------    ------------
Total gross deferred tax assets ................     15,082,632       6,397,236
Deferred tax liabilities .......................       (296,772)        (27,838)
Valuation allowance ............................    (14,785,860)     (6,369,398)
                                                   ------------    ------------
Net deferred tax assets ........................   $       --      $       --
                                                   ============    ============


         The  Company's  deferred  income taxes relate  principally  to deferred
revenue,  deferred  compensation  and federal and state net  operating  loss and
credit  carryforwards.  The  provision  for income taxes differs from the amount
computed by applying the statutory  federal income tax rate to income before the
provision for income taxes.  The sources and tax effects of the  differences are
as follows:


                                          2006           2005           2004
                                      -----------    -----------    -----------

Federal and state income tax
   benefit at US statutory rates ..   $(8,730,314)   $(2,600,339)   $(3,993,314)
Permanent differences .............       316,863         57,935      1,481,411
Change in valuation allowance .....     8,413,451      2,542,404      2,511,903
                                      -----------    -----------    -----------
Total income tax expense on
   continuing operations ..........   $      --      $      --      $      --
                                      ===========    ===========    ===========


                                       75
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

14.      EARNINGS PER SHARE

         Basic earnings or loss per share are computed by dividing net income by
the  weighted  average  number of common  shares  outstanding  during  the year.
Diluted  earnings per share are computed  similarly to basic  earnings per share
except that they  reflect the  potential  dilution  that could occur if dilutive
securities  or other  obligations  to  issue  common  stock  were  exercised  or
converted  into  common  stock.  Diluted  earnings  or loss per  share  includes
dilutive common stock equivalents,  using the treasury stock method, and assumes
that the potentially  dilutive  instruments  were converted into common stock at
the beginning of the year or upon issuance.  Stock options with exercise  prices
greater than the average  fair market  price for a period,  which are defined as
anti-dilutive,  are not  included  in the  diluted  earnings  (loss)  per  share
calculations  because  of their  anti-dilutive  effect.  In  periods  of losses,
diluted  loss per share is computed on the same basis as basic loss per share as
the inclusion of any other potential shares outstanding would be anti-dilutive.

         For the years ended  December  31,  2006,  2005,  and 2004,  3,866,360,
6,024,642  and  2,105,554  potentially  dilutive  shares  of  the  Company  from
warrants, convertible preferred stock and stock options were not included in the
computation of diluted loss per share because to do so would be anti-dilutive.

         The  computations  for basic and diluted loss per share from continuing
operations for the period ending December 31 are as follows:

<TABLE>
<CAPTION>
                                                 2006            2005            2004
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Numerator:
Net loss .................................   $(23,421,210)   $ (6,791,171)   $(10,429,129)
Preferred dividends ......................     (1,029,933)     (1,124,650)    (18,893,509)
                                             ------------    ------------    ------------
Numerator for basic and diluted ..........   $(24,451,143)   $ (7,915,821)   $(29,322,638)
                                             ============    ============    ============

Denominator:
Weighted average shares - basic ..........     15,346,799      13,712,813      11,261,800
   Effect of warrants ....................        118,329       1,122,399         267,751
   Effect of convertible preferred shares       2,399,731       3,528,233         780,663
   Effect of stock options ...............      1,348,300       1,374,010       1,057,140
                                             ------------    ------------    ------------
Adjusted weighted average shares - diluted     19,213,159      19,737,455      13,367,354
                                             ============    ============    ============

Net income loss per share - basic ........   $      (1.59)   $      (0.58)   $      (2.60)

Net income loss per share - diluted ......   $      (1.59)   $      (0.58)   $      (2.60)
</TABLE>


15.      STOCK-BASED COMPENSATION PLANS

         The Company's 2004 Option Plan (the "Plan") was authorized by the Board
of Directors of the Company in March 2004,  and amended in January  2005.  Under
the terms of the Plan,  stock  options  may be granted to  officers,  directors,
employees,  and others.  At December 31, 2006,  2,750,000 shares of common stock
were  authorized  for  issuance  under the Plan.  Shares  subject to awards that
expire  unexercised  or are  otherwise  terminated,  again become  available for
awards.  Upon exercise,  stock is issued from unissued or treasury  shares.  The
grant price of an option under the Plan  generally may not be less than the fair
market  value of the common  stock  subject to such option on the date of grant.
Options  have a maximum life of ten years and vest 25% per year over a four year
period.


                                       76
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

15.      STOCK-BASED COMPENSATION PLANS (CONTINUED)

         During  the year  ended  December  31,  2006,  the  Company  recognized
$2,235,224 of compensation expense related to stock options,  including $941,961
related to the accelerated vesting of 400,000 options granted to the former CEO,
the former  General  Counsel and Secretary (who is also the spouse of the former
CEO),  and the former COO in prior years.  The former CEO continues as Chairman.
During the years ended December 31, 2005 and 2004, Company  recognized  $812,733
and $903,375 of compensation expense related to stock options, respectively.

         The fair value of each  option was  estimated  on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:

                                          Year Ended December 31,
                               ---------------------------------------------
                                    2006            2005           2004
                               -------------   -------------   -------------
Expected term (years)                   6.25            6.25             4.0
Risk-free interest rates       4.36% - 5.19%   3.79% - 4.55%   3.23% - 4.37%
Expected dividend yield                 0.0%            0.0%            0.0%
Expected volatility            50.3% - 54.0%   47.6% - 48.0%   48.4% - 48.7%
Weighted-average
  volatility                           52.2%           47.8%           48.6%


         The risk-free  interest rate is based on the U.S. Treasury rate for the
expected life at the time of grant, volatility is based on the average long-term
implied  volatilities  of peer  companies as the  Company's  trading  history is
limited,  and the expected term is  determined  using the  SIMPLIFIED  method as
accepted under Securities and Exchange  Commission Staff Accounting Bulletin No.
107  assuming a ten-year  original  contract  term and graded  vesting over four
years. The  weighted-average  grant-date fair value of options issued during the
years ended  December 31, 2006,  2005,  and 2004 were $3.16,  $3.41,  and $3.54,
respectively.  The total intrinsic value of options  exercised  during the years
ended December 31, 2006, and 2005 was $2,450,313 and  $1,104,780,  respectively.
No options were eligible for exercise in 2004.


                                       77
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

15.      STOCK-BASED COMPENSATION PLANS (CONTINUED)

         The following  table  summarizes  activity  under the Plan for the year
ended December 31, 2006:

<TABLE>
<CAPTION>
                                                                                   WEIGHTED
                                                                                   AVERAGE
                                                                                   REMAINING
                                         OPTIONS         WEIGHTED AVERAGE         CONTRACTUAL      AGGREGATE INTRINSIC
                                       OUTSTANDING        EXERCISE PRICE        TERM (IN YEARS)        VALUE ($000)
                                     ---------------    -------------------    ----------------    -------------------
<S>                                        <C>                 <C>                   <C>                <C>
Outstanding at December 31, 2005           1,532,385           $4.08                 8.75
Granted                                      641,500           $8.28
Exercised                                   (712,510)          $2.32
Forfeited                                   (107,750)          $7.15
Expirations                                  (30,000)          $6.93
                                     ---------------    -------------------    ----------------    -------------------
Outstanding at December 31, 2006           1,323,625           $6.90                 8.81               $505,825
                                     ===============
Vested or expected to vest at
   December 31, 2006                       1,153,747           $6.85                 8.78               $456,030

                                     ===============
Exercisable                                  229,750           $5.40                 7.90               $186,325
                                     ===============
</TABLE>


         As of December 31, 2006,  there was  $2,312,137  of total  unrecognized
compensation  cost related to non-vested  stock options  granted under the Plan.
That cost is expected to be  recognized  over a weighted  average  period of 2.7
years. The total fair value of shares vested during the years ended December 31,
2006, 2005, and 2004, was $2,762,529, $1,821,514, and $0, respectively.

         Subsequent to year-end, the Board of Directors agreed to a modification
of stock option agreements as they apply to independent directors.  At such time
as an  independent  director  ceases to serve on the Board,  his vested  options
outstanding at that time may be exercised for a period of 90 days. This survival
period has been  extended to 18 months.  According to the  requirements  of SFAS
123(R),   this  constitutes  a  modification  of  existing  awards  requiring  a
re-measurement  of those  awards  which will  require the  Company to  recognize
additional expense related to vested options in the first quarter of 2007.

16.      COMMITMENTS AND CONTINGENCIES

         In October  2004,  the Company  succeeded to a permit for a coal mining
operation in Campbell County, Tennessee and in so doing became the real party in
interest  in  a  pending  civil  action  filed  by  a  group  of   environmental
organizations  in the United States  District Court for the Eastern  District of
Tennessee.  Plaintiffs  alleged that issuance of the original  permit was flawed
because the Office of Surface  mining  ("OSM"),  the federal agency which issued
the permit, had not complied with the requirements of the National Environmental
Policy Act  ("NEPA")  and asked  that the  permit be  revoked by the Court.  The
District Court dismissed the plaintiffs' action and the plaintiffs  subsequently
appealed to the U.S. SixthCircuit Court. The dismissal of this action was upheld
by final Order of the Sixth Circuit Court entered on January 3, 2007.

         The same plaintiffs filed a similar action in U.S. District Court based
on essentially the same facts alleging NEPA violations  regarding OSM's approval
of an application for a revision of the same permit.



                                       78
<PAGE>


                               NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

16.      COMMITMENTS AND CONTINGENCIES (CONTINUED)

         An unfavorable outcome of this action would not involve direct monetary
damages; however significant financial losses could result from curtailed mining
operations.  Management believes that the U. S. District Court will dismiss this
action based upon the prior ruling in the similar case by the U.S. Sixth Circuit
Court.

         During  2005,  the  Company  was  audited  by  its  previous   workers'
compensation insurance provider which contends that an additional  approximately
$1.4 million in premiums is owed for the year ended April 15,  2005.  The matter
primarily  involves the  application  of premium  rates to employees  performing
certain  job  functions.  In January  2006,  the  Company  paid  $427,000 to the
previous  insurance  provider.  Currently,  the matter has not been resolved and
both parties have pursued  legal action in the United States  District  Court of
the Eastern District of Tennessee.  While management believes legal reserves are
sufficient for this matter, it is possible that the actual outcome of the matter
could vary  significantly  from this amount.  Management will continue to review
the amount of the  accrual and any  adjustment  required to increase or decrease
the  accrual  based on  development  of the  matter  will be made in the  period
determined.

         In March 2006, the Company was named as defendant in a complaint  filed
in the United States District Court for the Eastern  District of Kentucky by the
sublessee of certain coal mining rights concurrent with the Company's operations
in  Kentucky.  The Company is the  sublessee of the right to mine coal using the
underground  method  on  the  property  in  question,  as the  result  of a 2004
acquisition. The complainant claims that it possesses the right to mine the coal
at this property  through the surface  mining method and that by mining the coal
by the highwall mining method,  the Company  committed  either an intentional or
negligent  trespass.  The complainant seeks damages in the range of $1.2 million
to $2.8  million,  which it estimates to be the range of gross  profits from the
revenues of the coal mined.  Management  acknowledges that the Company mined the
coal in question,  but contends that by using the highwall  mining  method,  the
Company mined the coal pursuant to the Lease by an underground mining method and
therefore committed no trespass. As an additional defense, the Company has filed
a third-party  complaint  against a consultant,  who advised the Company that it
had the right to mine the coal.  This  counterclaim  could  allow the Company to
recover  a  portion  of  any  amounts  lost,  if  the  original  complainant  is
successful.  A settlement was reached with the opposing party and documented for
entry by Order of the Court in February 2007.

         In February  2006,  the Company  purchased a second  highwall miner for
approximately  $6,500,000,  which  was  immediately  placed  in  service  on the
Straight Creek tracts in  Southeastern  Kentucky.  In March 2006,  this highwall
miner was damaged by a rock  collapse,  which  resulted in  approximately  three
months of lost service. Repairs to the highwall miner have totaled approximately
$1,934,000  and were  recorded  as a cost of sales in the first two  quarters of
2006.  The initial  insurance  claim was denied,  and in April 2006,  management
threatened  legal action against the provider.  In September 2006, the insurance
provider agreed to the claim, and the Company received approximately $1,867,000,
which has been  recorded as a reduction of cost of sales in the third quarter of
2006. The Company was also in discussion with a second  insurance  provider on a
related claim  pertaining  to a front-end  loader that was destroyed in the same
March 2006 rock  collapse.  The Company has agreed to a settlement  and received
proceeds of approximately $155,000 during the first quarter of 2007.

         On April 12,  2006,  the Company was named as a defendant  in a suit by
Appalachian Fuels, LLC (the "Plaintiff"),  along with Calvary Coal Company, Inc.
("Calvary"),  a former independent contractor who was our Contract Miner for the
Kentucky  operations  during a portion of 2004 and 2005. The Plaintiff  seeks to
recover  approximately  $360,000,  funds  allegedly  supplied  to Calvary by the
Plaintiff prior to the time of our purchase of the Kentucky  operations from the
Plaintiff. The purchase agreement relating to the Kentucky operations allows for
the deduction of the funds in question from the payments to


                                       79
<PAGE>


                              NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

16.      COMMITMENTS AND CONTINGENCIES (CONTINUED)

Calvary only upon Calvary's written consent, which the Plaintiff did not obtain.
Because  the  required  written  consent was not  obtained,  the Company did not
deduct the funds in question and submit them to the  Plaintiff.  This matter was
dismissed by the Boyd County,  Kentucky  Circuit  Court in February 2007 and has
not been appealed.

         On September 1, 2006,  the  Tennessee  Department  of  Environment  and
Conservation ("TDEC") issued a STOP WORK ORDER (the "Order") with respect to the
operations  at  Mine # 7 in  Tennessee.  The  Order  alleged  that  the  Company
disturbed two unnamed  streams  outside of the permitted  mining area. The Order
sought the  reclamation  of the two streams and the  assessment  of penalties of
approximately  $173,000 if the various requirements sought by the Order were not
satisfied. The Company filed an appeal of the Order and in November 2006 came to
an agreement with TDEC, which requires  reclamation of the area in question with
no penalties to be assessed.

         The Company is made a party to other legal actions, claims, arbitration
and  administrative  proceedings  from  time to time in the  ordinary  course of
business.  Management  does not expect the  outcome  of these  other  pending or
threatened  proceedings to have a material impact on our cash flows,  results of
operations or financial condition.

17.      RELATED PARTY TRANSACTIONS

         During 2004, the Company paid the law firm of Kite, Bowen & Associates,
PA,  $10,000,  for  professional  services  rendered.  Mr. Kite was the managing
partner of Kite, Bowen & Associates,  PA, and previously served on the Company's
Board of  Directors.  In May 2004,  Mr.  Kite  joined the Company on a full time
basis as its General Counsel.

The Company borrowed an aggregate of $305,000 from Jenco Capital Corporation, an
investment  Company  controlled  by the former  President  and former CEO,  from
August  2003  through  January  2004,  and  borrowed  $105,000  from the  former
President and former CEO in December 2003. Each of these loans were evidenced by
a note payable  which  accrued  simple  interest at an annual rate of 8% and was
payable on demand.  These loans were paid in full during the first six months of
2004.

         In September  2004,  the Company  repaid a $150,000 note payable to the
former  Chairman.  During  2004 the  Company  paid a total of  $18,833  interest
pursuant to the note. This debt was outstanding since February 2003.

         In October  2004,  the Company  borrowed  $10,000 from its former Chief
Financial  Officer and $40,000 from its Operations  Manager,  which amounts were
repaid in December 2004.  These loans accrued simple  interest at an annual rate
of 8%.

         In October 2004, the Company  revised the  employment  contracts of its
Chief Executive  Officer,  its former Chief Financial Officer and its Operations
Manager  such  that  each   individual   was  entitled  to  additional   monthly
compensation  in an amount  equal to five cents  ($0.05) per ton of coal sold or
produced each month from coal mined from all of the  Company's  owned and leased
properties. This additional compensation ceased at the end of May 2006.


                                       80
<PAGE>


                              NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

17.      RELATED PARTY TRANSACTIONS (CONTINUED)

         In March 2005,  the Company  borrowed  approximately  $5,140,000 at 18%
interest,  accruing from May 2005, with five-year common stock purchase warrants
to purchase up to 140,000  shares of the  Company's  common stock at an exercise
price  per  share of  $8.50 by  issuing  notes  to three  purchasers,  including
Crestview  Capital  Master,  LLC,  which  is a  significant  shareholder  of the
Company.  The Company paid an origination fee of  approximately  $200,000 in the
form of an original issue discount upon the execution of the loan document.  The
notes were repaid on December 28, 2005 with an additional 3% fee.

         On June 5, 2006 the Company sold 100,00  shares to Daniel  Roling,  the
Company's  President  and CEO,  for a total price of  $888,000.  On February 28,
2007,  the  Company  signed  definitive  subscription  agreements  to sell three
million shares of its common stock at the February 28, 2007 closing consolidated
bid price of $4.65 per share.  Daniel Roling  purchased  200,000 of these shares
for a total price of $930,000.

18.      EVENTS SUBSEQUENT TO DECEMBER 31, 2006

         On February  28,  2007,  the  Company  signed  definitive  subscription
agreements to sell three million  shares of its common stock at the February 28,
2007  closing  consolidated  bid price of $4.65 per share.  Daniel  Roling,  the
Company's   President  and  CEO,   purchased   200,000  of  these  shares.   Two
institutional  investors  purchased  2,800,000  shares and the proceeds from the
sale were $13,950,000.  The Company has agreed to file a registration  statement
to register the shares as soon as  practicable,  but in any event, no later than
April 30, 2007.

         On March 1, 2007, the Company  promoted Bill Snodgrass,  for ten months
its Chief Operating  Officer (COO), to the newly created position of Senior Vice
President  of  Business   Development.   In  conjunction  with  Mr.  Snodgrass's
promotion, Ken Hodak, the Company's former COO, returned to the Company as COO.

         From January 1, 2007 through March 16, 2007,  holders of 80.0 shares of
our Series A cumulative convertible preferred stock with liquidation preferences
totaling $1,200,000 converted their shares into 200,000 shares of common stock.


                                       81
<PAGE>


                              NATIONAL COAL CORP.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

19.      SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         Quarterly financial data for 2006 and 2005 is as follows:

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                  --------------------------------------------------------------------
                                  March 31, 2006     June 30, 2006     September 30,     December 31,
                                    (Restated)        (Restated)      2006 (Restated)        2006
                                  --------------    --------------    --------------    --------------
<S>                               <C>               <C>               <C>               <C>
Total revenues ................   $   20,468,732    $   24,125,155    $   21,428,881    $   21,494,319
Operating loss ................       (6,150,928)       (3,545,168)       (1,607,123)       (5,154,091)
Net loss attributable to common
shareholders ..................       (7,919,493)       (5,019,870)       (3,704,151)       (7,807,629)
Loss per common share:
Basic .........................   $        (0.56)   $        (0.33)   $        (0.23)   $        (0.48)
Diluted .......................   $        (0.56)   $        (0.33)   $        (0.23)   $        (0.48)
</TABLE>

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                 --------------------------------------------------------------------
                                                                      September 30,     December 31,
                                 March 31, 2005     June 30, 2005         2005              2005
                                 --------------    --------------    --------------    --------------
<S>                               <C>               <C>               <C>               <C>
Total revenues ................   $   11,866,566    $   15,574,119    $   18,274,700    $   20,157,249
Operating (loss) income .......       (1,514,906)         (212,856)          337,851        (1,173,640)
Net loss attributable to common
shareholders ..................       (2,482,229)       (1,533,942)         (654,973)       (3,244,677)
Loss per common share:
Basic .........................   $        (0.18)   $        (0.11)   $        (0.05)   $        (0.24)
Diluted .......................   $        (0.18)   $        (0.11)   $        (0.05)   $        (0.24)
</TABLE>

         In November 2006, the Company determined that during the first, second,
and third  quarters of 2006,  shipping  and handling  costs paid to  third-party
carriers and invoiced to coal customers had not been properly  reflected as cost
of sales and coal sales,  respectively,  consistent  with  Emerging  Issues Task
Force Issue No. 00-10,  ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. The
impact  was to  understate  both  coal  sales  and cost of  sales  by  $445,174,
$290,093,  and  $315,136  for the first,  second,  and third  quarters  of 2006,
respectively.   Total  revenues  as  initially  reported  by  the  Company  were
$20,023,558,  $23,835,062,  and  $21,113,745  for the first,  second,  and third
quarters of 2006,  respectively.  Operating  loss and net loss  attributable  to
common shareholders were not impacted. The impact to 2005 was not material.

         The Company has also  determined  that total revenues for the first and
second  quarter  of  2005 as  presented  above  are  inconsistent  with  amounts
previously  reported in its 2006 first and second  quarter  filings on Form 10-Q
due to the Company's  failure to include  certain  reclassifications  previously
made for consistency of  presentation  in its 2005 Form 10-K.  Total revenues as
previously  reported by the Company were  $12,584,404  and  $16,010,644  for the
first and second quarters of 2005,  respectively.  As the overstatement of total
revenues for both quarters is offset by a commensurate  overstatement of cost of
sales,  operating loss and net loss attributable to common shareholders were not
impacted.

         In the fourth quarter of 2006, the Company determined that the weighted
average  shares used to  calculate  both the basic and  diluted  loss per common
share during the first and second quarters of 2006 was incorrect. Both basic and
diluted loss per common share as previously reported by the Company were $(0.57)
and $(0.34) for the first and second quarters of 2006, respectively.


                                       82
<PAGE>


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

         None

ITEM 9A.      CONTROLS AND PROCEDURES.

CONTROLS AND PROCEDURES

         Members of our management,  including our President and Chief Executive
Officer,  Daniel A. Roling, and Chief Financial  Officer,  T. Michael Love, have
evaluated  the  effectiveness  of our  disclosure  controls and  procedures,  as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15,  as of December
31,  2006,  the end of the  period  covered  by this  report.  Based  upon  that
evaluation,  Messrs.  Roling and Love concluded that our disclosure controls and
procedures were effective as of December 31, 2006.

INTERNAL CONTROL OVER FINANCIAL REPORTING

         There were no changes in our internal control over financial  reporting
or in other factors  identified in connection  with the  evaluation  required by
paragraph  (d) of Exchange Act Rules 13a-15 or 15d-15 that  occurred  during the
fourth quarter ended  December 31, 2006 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

ITEM 9B.      OTHER INFORMATION.

         None.


                                       83
<PAGE>


                                    PART III

ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2007 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2006.

ITEM 11.      EXECUTIVE COMPENSATION

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2007 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2006.

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

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2007 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2006.

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

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2007 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2006.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2007 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2006.


                                       84
<PAGE>


                                     PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)      The following documents are filed as part of this report:

         1.       CONSOLIDATED FINANCIAL STATEMENTS

                  Reports of Independent Registered Public Accounting Firms

                  Financial Statements
                      Consolidated Balance Sheets
                      Consolidated Statements of Operations
                      Consolidated Statements of Cash Flows
                      Consolidated Statements of Changes in Stockholder's
                         (Deficit) Equity
                      Notes to the consolidated financial statements

         2.       FINANCIAL STATEMENT SCHEDULES

                  All  financial  schedules  are not required  under the related
                  instructions,  or are  inapplicable  and  therefore  have been
                  omitted.

         3.       EXHIBITS.  SEE ITEM 15(B) BELOW.

(b)      EXHIBITS.  We have  filed,  or  incorporated  into  this  Form  10-K by
         reference,  the exhibits listed on the  accompanying  Index to Exhibits
         immediately following the signature page of this Form 10-K.

(c)      FINANCIAL STATEMENT SCHEDULE. See Item 15(a) above.


                                       85
<PAGE>


                                   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.

                              NATIONAL COAL CORP.

Date: April 2, 2007                 /S/ T. MICHAEL LOVE
                              -------------------------------------------------
                              By:   T. Michael Love
                              Its:  Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                POWER OF ATTORNEY

         The undersigned directors and officers of National Coal Corp. do hereby
constitute and appoint Daniel Roling and T. Michael Love, and each of them, with
full  power  of  substitution  and  resubstitution,  as their  true  and  lawful
attorneys  and agents,  to do any and all acts and things in our name and behalf
in our  capacities  as  directors  and  officers  and to  execute  any  and  all
instruments  for us and in our names in the capacities  indicated  below,  which
said  attorney  and  agent,  may deem  necessary  or  advisable  to enable  said
corporation to comply with the  Securities  Exchange Act of 1934, as amended and
any  rules,   regulations  and  requirements  of  the  Securities  and  Exchange
Commission,  in  connection  with this  Annual  Report on Form  10-K,  including
specifically but without  limitation,  power and authority to sign for us or any
of us in our names in the  capacities  indicated  below,  any and all amendments
(including  post-effective  amendments)  hereto,  and we do  hereby  ratify  and
confirm all that said attorneys and agents, or either of them, shall 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.

             NAME                          TITLE                        DATE
             ----                          -----                        ----

    /S/ DANIEL A. ROLING         Chief Executive Officer,          April 2, 2007
---------------------------      President, and Director
      Daniel A. Roling           (Principal Executive Officer)


     /S/ T. MICHAEL LOVE         Chief Financial Officer and       April 2, 2007
---------------------------      Director (Principal Financial
       T. Michael Love           and Accounting Officer)

         /S/ JON NIX             Chairman of the Board             April 2, 2007
---------------------------
           Jon Nix

     /S/ SCOTT FILSTRUP          Director                          April 2, 2007
---------------------------
       Scott Filstrup

     /S/ ROBERT HEINLEIN         Director                          April 2, 2007
---------------------------
       Robert Heinlein

      /S/ GERALD MALYS           Director                          April 2, 2007
---------------------------
        Gerald Malys

        /S/ KEN SCOTT            Director                          April 2, 2007
---------------------------
          Ken Scott


                                       86
<PAGE>


                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                                    EXHIBIT TITLE
--------         ---------------------------------------------------------------

3.1              Articles of  Incorporation  of National Coal Corp. dated August
                 8, 1995. (1)

3.1.1            Articles  of  Amendment  to the  Articles of  Incorporation  of
                 National Coal Corp. dated August 10, 1995. (1)

3.1.2            Articles  of  Amendment  to the  Articles of  Incorporation  of
                 National Coal Corp. dated January 4, 1996. (1)

3.1.3            Articles  of  Amendment  to the  Articles of  Incorporation  of
                 National Coal Corp.  dated July 17, 2003, filed August 4, 2003.
                 (2)

3.1.4            Articles  of  Amendment  to the  Articles of  Incorporation  of
                 National  Coal Corp.  dated August 27,  2004,  filed August 31,
                 2004. (3)

3.1.5            Articles  of  Amendment  to the  Articles of  Incorporation  of
                 National Coal Corp.  dated January 10, 2005,  filed January 12,
                 2005. (3)

3.2              Amended and Restated Bylaws of National Coal Corp. (3)

4.1              Amended and Restated 2004 National Coal Corp. Option Plan. (3)*

4.2              Indenture  dated as of December  29, 2005 among  National  Coal
                 Corp.,  its  subsidiaries,   and  Wells  Fargo  Bank,  National
                 Association, a national banking association, as trustee. (4)

4.3              Security  Agreement dated as of December 29, 2005, by and among
                 National Coal Corp., its subsidiaries,  in favor of Wells Fargo
                 Bank National Association, in its capacity as trustee under the
                 Indenture dated December 29, 2005. (4)

4.4              Debt Registration  Rights  Agreement,  dated as of December 29,
                 2005 by and between National Coal Corp., its subsidiaries,  and
                 Jefferies & Company, Inc. (4)

4.5              Equity Registration Rights Agreement,  dated as of December 29,
                 2005  by and  between  National  Coal  Corp.  and  Jefferies  &
                 Company, Inc. (4)

4.6              Warrant  Agreement  dated  as  of  December  29,  2005  between
                 National Coal Corp., and Wells Fargo Bank, National Association
                 as warrant agent. (4)

4.7              Intellectual  Property Security  Agreement dated as of December
                 29, 2005 by and among National Coal Corp., its subsidiaries, in
                 favor of Wells Fargo Bank, N.A. as collateral agent. (4)

10.1             Form of Indemnification Agreement of Registrant. (3)

10.2             Preferred Stock and Warrant  Purchase  Agreement by and between
                 National  Coal  Corp.  and the  persons  listed on  Schedule  I
                 thereto,  with  respect  to  Registrant's  Series A  Cumulative
                 Convertible  Preferred  Stock and  Warrants to Purchase  Common
                 Stock dated August 31, 2004, including Form of Warrant. (3)

10.3             Investor  Rights  Agreement by and between  National Coal Corp.
                 and the Purchasers  listed on Schedule I thereto,  dated August
                 31, 2004. (3)

10.4             Amended  Employment  Agreement  by and  between  National  Coal
                 Corporation and Jon E. Nix dated October 1, 2004. (3)*


                                       87
<PAGE>


EXHIBIT
NUMBER                                    EXHIBIT TITLE
--------         ---------------------------------------------------------------

10.4.1           Separation  Agreement among National Coal Corp.,  National Coal
                 Corporation and Jon E. Nix, dated September 11, 2006. (8)*

10.5             Employment  Agreement by and between  National Coal Corporation
                 and T. Michael Love, dated November 14, 2005. (4)*

10.6             Employment  Agreement by and between  National Coal Corporation
                 and Kenneth Hodak, dated September 20, 2005. (4)*

10.7             Amended  Employment  Agreement  by and  between  National  Coal
                 Corporation and Charles W. Kite dated September 16, 2004. (3)*

10.8             Amended  Employment  Agreement  by and  between  National  Coal
                 Corporation and Joseph A. Davis,  Jr. dated September 16, 2004.
                 (3)*

10.9             Amended  Employment  Agreement  by and  between  National  Coal
                 Corporation  and William R.  Snodgrass  dated  October 1, 2004.
                 (3)*

10.10            Form  of Note  and  Warrant  Purchase  Agreements  by an  among
                 National  Coal Corp.,  National Coal  Corporation,  and each of
                 Crestview Capital Master, LLC, Big Bend Investments,  L.P., and
                 CCA (US) Fund I, L.P., dated March 10, 2005,  including form of
                 Secured  Promissory  Note and  form of  Common  Stock  Purchase
                 Warrant attached as exhibits thereto. (5)

10.11            Form of Amendment Number One to Secured  Promissory Note by and
                 between  National  Coal  Corporation,  and  each  of  Crestview
                 Capital Master,  LLC, Big Bend Investments,  L.P., and CCA (US)
                 Fund I, L.P.,  dated August 10, 11 and 12, 2005,  respectively.
                 (6)

10.12            Security Agreement by and between National Coal Corporation and
                 Crestview  Capital  Master,  LLC as agent for itself,  Big Bend
                 Investment,  L.P.  and CCA (US) Fund I, L.P.,  dated  March 10,
                 2005.  (5)  10.13  Continuing  and  Unconditional  Guaranty  of
                 National Coal Corp.,  dated March 10, 2005,  guaranteeing  full
                 payment and  performance  of the Notes issued by National  Coal
                 Corporation  and the  Security  Agreement  executed by National
                 Coal  Corporation  pursuant  to the Note and  Warrant  Purchase
                 Agreements dated March 10, 2005. (5)

10.14            Installment   Sale  Contract  by  and  between   National  Coal
                 Corporation and Whayne Supply Company,  effective July 1, 2005.
                 (6)

10.15            Installment   Sale  Contract  by  and  between   National  Coal
                 Corporation   and   Stowers   Machinery   Corporation   (twenty
                 vehicles), effective July 1, 2005. (6)

10.16            Installment   Sale  Contract  by  and  between   National  Coal
                 Corporation and Stowers Machinery Corporation (three vehicles),
                 effective July 1, 2005. (6)

10.17            Asset Purchase Agreement (Baldwin Facility), dated as of May 8,
                 2005,  by  and  between   National  Coal  Corporation  and  LCC
                 Tennessee, LLC. (6)

10.18            Separation  Agreement  by and  between  the  Company and Robert
                 Chmiel, dated March 21, 2005. (5)*

10.19            Separation  Agreement  between  National Coal Corp. and Mark A.
                 Oldham, dated November 14, 2005. (4)*

10.20            Employment Agreement, dated May 25, 2006, by and among National
                 Coal  Corporation,  National Coal Corp.,  and Daniel A. Roling.
                 (7)*


                                       88
<PAGE>


EXHIBIT
NUMBER                                    EXHIBIT TITLE
--------         ---------------------------------------------------------------

10.21            Credit  Agreement,  dated October12,  2006, among National Coal
                 Corp.,  National Coal Corporation,  the Lenders, and Guggenheim
                 Corporate Funding, LLC. (9)

10.22            Security and Guarantee Agreement, dated October 12, 2006, among
                 National  Coal  Corporation,  National  Coal Corp.,  Subsidiary
                 Grantors and Guggenheim Corporate Funding, LLC. (9)

10.23            Intercreditor  Agreement,  dated as of October 12, 2006, by and
                 between Guggenheim Corporate Funding LLC, and Wells Fargo Bank,
                 N.A.,  and   acknowledged   and  agreed  to  by  National  Coal
                 Corporation, National Coal Corp., and Guarantors. (9)

14.1             National Coal Corp. Code of Ethical Conduct. (10)

21.1             Subsidiaries of National Coal Corp. (3)

23.1             Consent of Gordon, Hughes & Banks, LLP.

23.2             Consent of Ernst & Young, LLP.

31.1             Certification  of  Principal   Executive  Officer  pursuant  to
                 Securities  Exchange  Act  Rules  13a-14(a)  and  15d-14(a)  as
                 adopted  pursuant to section 302 of the  Sarbanes-Oxley  Act of
                 2002.

31.2             Certification  of  Principal   Financial  Officer  pursuant  to
                 Securities  Exchange  Act  Rules  13a-14(a)  and  15d-14(a)  as
                 adopted  pursuant to section 302 of the  Sarbanes-Oxley  Act of
                 2002.

32.1             Certification  of  Principal  Executive  Officer and  Principal
                 Financial  Officer  pursuant  to 18  U.S.C.  Section  1350,  as
                 adopted  pursuant to Section 906 of the  Sarbanes-Oxley  Act of
                 2002.

99.1             Map showing the locations of National Coal's properties.

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* Indicates a management contract or compensatory plan.

(1)    Incorporated  by  reference to our  Registration  Statement on Form 10-SB
       filed June 25, 1999.

(2)    Incorporated by reference to our Current Report on Form 8-K, dated August
       7, 2003.

(3)    Incorporated  by  reference  to our  Registration  Statement on Form SB-2
       (File No. 333-120146).

(4)    Incorporated  by  reference  to our  Annual  Report  on Form 10-K for the
       fiscal year ended December 31, 2005.

(5)    Incorporated  by reference to our  Quarterly  Report on Form 10-Q for the
       quarterly period ended March 31, 2005.

(6)    Incorporated  by reference to our  Quarterly  Report on Form 10-Q for the
       quarterly period ended September 30, 2005.

(7)    Incorporated  by reference to our  Quarterly  Report on Form 10-Q for the
       quarterly period ended June 30, 2006.

(8)    Incorporated  by  reference  to our  Current  Report on Form  8-K,  dated
       September 11, 2006. (9) Incorporated by reference to our Quarterly Report
       on Form 10-Q for the quarterly period ended September 30, 2006.

(10)   Incorporated  by  reference  to our Annual  Report on Form 10-KSB for the
       fiscal year ended December 31, 2004.


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