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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]      Annual Report Under Section 13 or 15(d) of the Securities  Exchange Act
         of 1934

                   For the fiscal year ended December 31, 2004

[_]      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 Small Business Issuer 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)

                                 (865) 690-6900
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                      NONE

         Securities registered under Section 12(g) of the Exchange Act:

                    COMMON STOCK, PAR VALUE $.0001 PER SHARE

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 [_]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
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-KSB
of any amendment to this Form 10-KSB. [_]

         Issuer's  Revenues  for the fiscal  year ended  December  31, 2004 were
$16,998,912.

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates  computed by reference to the average bid and asked price
of such common equity, as of March 29, 2005, was $26,758,271.

         As of March 29, 2005, the issuer had 13,676,820 shares of common stock,
par value $.0001 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

         Transitional  Small Business  Disclosure Format (check one):
                             Yes [_]      No [X]

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<PAGE>


                               NATIONAL COAL CORP.
                              INDEX TO FORM 10-KSB

PART I                                                                      PAGE

Item 1.       Description of Business......................................... 3

Item 2.       Description of Property.........................................20

Item 3.       Legal Proceedings...............................................20

Item 4.       Submission of Matters to a Vote of Security Holders.............20


PART II

Item 5.       Market for Common Equity and Related Stockholder Matters........21

Item 6.       Management's Discussion and Analysis or Plan of Operation.......23

Item 7.       Financial Statements

              Report of Independent Registered Public Accounting Firm.........44

              Consolidated Balance Sheet......................................45

              Consolidated Statements of Operations...........................46

              Consolidated Statements of Cash Flows...........................47

              Consolidated Statement of Changes in Stockholders' Equity.......48

              Notes to Consolidated Financial Statements......................49

Item 8.       Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure.....................................67

Item 8A.      Controls and Procedures.........................................67

Item 8B       Other Information...............................................67


PART III

Item 9.       Directors, Executive Officers, Promoters and Control Persons;
                 Compliance With Section 16(a) of the Exchange Act............68

Item 10.      Executive Compensation..........................................71

Item 11.      Security Ownership of Certain Beneficial Owners and Management
                 and Related Stockholder Matters..............................76

Item 12.      Certain Relationships and Related Transactions..................80

Item 13.      Exhibits........................................................84

Item 14.      Principal Accountant Fees and Services..........................87


         Except as otherwise  indicated,  information  in this Annual  Report on
Form 10-KSB  reflects a 1-for-4  reverse  stock split of our common  stock which
took effect at the close of business on January 12, 2005.


                                       1
<PAGE>


                                     PART I

         This report, including the sections entitled "Cautionary Statements and
Risk Factors,"  "Management's  Discussion and Analysis or Plan of Operation" and
"Description of 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 execute our growth strategies;

         o        general economic conditions; and

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


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ITEM 1.  DESCRIPTION OF BUSINESS

                               CORPORATE OVERVIEW

         National Coal Corp. engages  principally in the business of mining coal
in Eastern Tennessee and Southeastern  Kentucky.  We own the coal mineral rights
to  approximately   sixty-five   thousand   (65,000)  acres  and  lease  another
approximate twelve thousand one hundred (12,100) acres in Tennessee, and own the
coal mineral rights to  approximately  eleven  thousand  seven hundred  (11,700)
acres and lease another approximate eighteen thousand two hundred (18,200) acres
in  Kentucky.  We  commenced  mining  coal in July 2003  from a surface  mine in
Tennessee.  At December 31, 2004, we were  extracting  coal from four deep mines
and one surface mine.

         We  engage  in  coal  production  by  locating,  assembling,   leasing,
assessing,  permitting and developing coal  properties in Eastern  Tennessee and
Southeastern  Kentucky.  After obtaining permits from the U.S. Department of the
Interior,  Office of Surface Mining ("OSM") and posting  reclamation  bonds,  we
mine our properties for the extraction of coal minerals,  and then sell the coal
on a per ton  basis at  previously  negotiated  rates,  primarily  to state  run
utility  companies.  The reclamation bonds typically take the form of letters of
credit or direct cash  deposits  with OSM. At December 31, 2004, we had $257,500
on  deposit  with OSM,  had  approximately  $4.27  million of cash  invested  in
certificates of deposit,  against which  irrevocable  bank letters of credit are
written in favor of OSM and had  posted a $700,000  letter of credit in favor of
OSM secured by our executive office building.

         We  typically  sell our coal for a  specified  tonnage  amount and at a
negotiated  price pursuant to short-term and long term contracts.  We also price
coal sales on a one-day or one-shipment  tonnage  amount.  The price per ton for
these types of sales typically fluctuates in direct correlation to the price per
ton of coal quoted on the New York Mercantile Exchange, referred to as the "spot
price." We intend to  continue  to reduce the price  volatility  for our coal by
entering  long-term  supply  contracts  (contracts  in excess of one year) for a
majority of our coal  production,  which generally will provide us a fixed price
for our coal over the term of the  contract.  We will  continue  to use the spot
market to sell surplus coal produced above our long-term contract commitments.

         We also sell coal that we purchase from third party coal producers on a
case by case basis. We only enter into these transactions when the price per ton
paid to these third party  producers  is below the price per ton at which we are
able to sell the coal,  usually from short term  contracts.  Additionally,  when
capacity is available,  we charge third party coal producers a negotiated  price
per ton for their use of our  load-out  facility  located  in Turley,  TN.  This
load-out  facility allows easy, direct access to load previously mined coal onto
rail cars for  shipment  to their  customers.  We do not expect the sale of coal
purchased  from third  party  producers  or the  rental to third  parties of our
load-out facility to represent a material portion of our future business.

         During  calendar  2004, we made  significant  advancements  towards the
realization of our long term business  strategy by growing our mining operations
through both acquisitions and organic growth. We funded this growth primarily by
closing  multiple  debt and equity  financing  transactions.  As a result of our
growth, we had more substantial  mining operations as compared to calendar 2003,
and as such were able to sign a number of long term  contracts with both utility
and industrial customers. Our 2004 highlights include:

         ACQUISITIONS:  We acquired the following assets:

         o        In April  2004,  we  acquired  from U.S.  Coal,  Inc.,  mining
                  permits,  a wash plant, a rail load-out  facility,  and mining
                  equipment for an aggregate purchase price of $4.2 million plus
                  the assumption of certain liabilities;

         o        In May 2004, we acquired land from Cumberland  Timber Company,
                  LLC for an  aggregate  purchase  price of $631,000  payable in
                  cash and stock;


                                       3
<PAGE>


         o        In  October   2004,   we  acquired   from  Robert  Clear  Coal
                  Corporation, mining assets including mining permits, a crusher
                  and tipple,  and mining  equipment  for an aggregate  purchase
                  price  of  $5.5  million  plus  the   assumption   of  certain
                  liabilities  and the obligation to replace $3.9 million of the
                  seller's reclamation bonds; and

         o        In November  2004, we acquired from  Appalachian  Fuels,  LLC,
                  mining permits,  a wash plant, a rail load-out  facility,  and
                  mining  equipment  for an  aggregate  purchase  price of $12.5
                  million plus the  assumption  of certain  liabilities  and the
                  obligation to replace $6.5 million of the seller's reclamation
                  bonds.

         FINANCING  ACTIVITIES:  We raised the following  proceeds from debt and
equity financings:

         o        In February  2004,  we raised gross  proceeds of $2.75 million
                  from the sale of 1,250,000 shares of common stock;

         o        In April  and May  2004,  we  raised  gross  proceeds  of $7.5
                  million from the sale of debentures  and common stock purchase
                  warrants;

         o        In July 2004, we borrowed $663,300 from a bank;

         o        In  August  2004,   we  issued  $16.0   million  of  Series  A
                  convertible preferred stock and common stock purchase warrants
                  for gross  proceeds of $11.3  million in cash proceeds and the
                  cancellation of $4.7 million of the debentures issued in April
                  and May 2004;

         o        In August 2004, we raised gross  proceeds of $3.0 million from
                  the sale of  debentures  convertible  into  Series A preferred
                  stock;

         o        In November  2004, we obtained a $21.0 million  senior secured
                  credit  facility,  pursuant to which we  immediately  borrowed
                  gross proceeds of $15.0 million; and

         o        In December  2004,  we raised  gross  proceeds of $3.6 million
                  from the sale of  additional  Series A  convertible  preferred
                  stock and common stock purchase  warrants upon the exercise of
                  additional   purchase   rights  granted  in  our  August  2004
                  financing.

         LONG-TERM  CONTRACTS.  During 2004, we signed six supply contracts with
terms of at least one year with 3 utility and 3 industrial  customers,  pursuant
to which we have committed to sell 984,000,  660,000,  600,000, and 120,000 tons
of coal during calendar years 2005 through 2008, respectively.

         The coal industry has been highly  competitive with very low margins in
the past several years.  Recently,  the surge in prices for natural gas has made
coal more  competitive  with that  alternative  energy  source which has enabled
coal-fired  power  plants,   using  the  latest  clean  air  compliant  scrubber
technology,  to be price  competitive with natural  gas-fired plants. We believe
this  has  and  will  continue  to  cause  increased  demand  for  coal  for the
foreseeable  future,  resulting in higher  prices and  improved  margins for our
product.  However, the price of coal is volatile, and there can be no assurances
that the  price of coal  will not drop  below  current  levels.  To  reduce  our
exposure to  fluctuations  in the price of coal, we intend to maintain long term
contracts with respect to a majority of our coal production.

         We estimate that our cost of commencing mining operations at a new mine
is approximately $500,000 to $750,000,  including the cost of reclamation bonds.
Presently we do not generate  sufficient  cash from  operations to fund new mine
development and our expansion into new mines therefore depends on our ability to
raise the required funds through debt or equity offerings. If we are not able to
raise  additional  financing or if such financing is not available on acceptable
terms,  we  may be  unable  to  expand  our  mining  operations  beyond  current
production levels.

         Our  historical  operations  prior to April 30, 2003  reflect  only the
operations of National Coal Corporation, a Tennessee corporation. Prior to April
30, 2003, National Coal Corp., a Florida corporation


                                       4
<PAGE>


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 Corp.
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 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,  accordingly,  are no longer in the  exploration  stage. As a result of the
reorganization  of the group and the commencement of operating  activities,  our
results for the eleven months from inception  (January 30, 2003) to December 31,
2003 are not comparable to those for the twelve months ended December 31, 2004.

COAL INDUSTRY BACKGROUND

         Coal is one of the world's  most  abundant,  efficient  and  affordable
natural  resources,  and is  used  primarily  as  fuel  for  the  generation  of
electricity.  According  to the  Energy  Information  Administration,  or EIA, a
division  of the  Department  of  Energy,  greater  than 51% of all  electricity
consumed in the United States in 2003 was generated using coal.

         As the table below indicates,  coal fueled more electricity  production
in the United States in recent years than all other fuel sources combined.

ELECTRICITY FUEL SOURCES (BASED ON NET GENERATION):

                    1990         1995          2001         2002         2003
                 ----------   ----------    ---------    ---------    ---------

Coal.............     52.5%        51.0%        50.9%        50.2%        51.3%
Nuclear..........     19.0         20.1         20.6         20.2         19.8
Hydro............      9.6          9.3          5.8          6.8          7.1
Natural Gas......     12.3         14.8         17.1         17.9         16.3
Other............      6.6          4.8          5.6          4.9          5.5
                 ----------   ----------    ---------    ---------    ---------
    Total........    100.0%       100.0%       100.0%       100.0%       100.0%
                 ==========   ==========    =========    =========    =========
----------
Source: Department of Energy's Energy Information  Administration Monthly Energy
Review, June 2004.

         The United  States is the second  largest  coal  producer in the world,
exceeded only by China.  Other leading coal producers include  Australia,  India
and South Africa.  The United States has the largest coal reserves in the world,
with an  estimated  250 years of supply  based on current  usage  rates.  United
States coal  reserves are more  plentiful  than United States oil or natural gas
reserves,  with coal  representing  more than 85% of the  nation's  fossil  fuel
reserves.

         United States coal  production  has nearly  doubled  during the past 30
years.  Based on statistics  reported by EIA, in 2003,  total United States coal
production  was estimated to be 1.07 billion tons.  Approximately  67% of United
States coal is produced by surface  mining  methods,  while the remaining 33% is
produced by underground mining methods.

         The United  States  coal  industry  operates  under a highly  developed
regulatory regime that governs all mining and mine safety activities,  including
land  reclamation,  which requires mined lands to be restored in accordance with
plans submitted by us and approved by OSM.

     COAL MARKETS

         The EIA expects domestic  consumption of coal by electric generators to
grow at an annual rate of 1.4% per year from 2001 through  2025,  predicated  on
natural gas price assumptions of $2.88 per million British Thermal Unit, or Btu,
in 2005 and $3.30 in 2010. Demand from domestic electric generators accounts for
more than 92% of domestic  coal  consumption.  The EIA projects  annual coal use
growth by electric generators of nearly 400 million tons by 2025.


                                       5
<PAGE>


     U.S. COAL CONSUMPTION BY SECTOR

         Coal  is the  primary  resource  used  in the  United  States  for  the
generation of  electricity.  It is also used by steel companies to make products
with furnaces, by industrial users for heat and power generation,  and a variety
of manufacturing and processing  facilities such as paper mills, chemical plants
and cement manufacturers.  The breakdown of coal consumption by major sector for
2003 and 2002 is as follows:

U.S. COAL PRODUCTION BY MAJOR SECTOR (IN MILLION TONS):

                                    2003                      2002
                          -----------------------    ----------------------
                                          % OF                      % OF
                             TONS         TOTAL        TONS         TOTAL
                          ----------   ----------    ---------    ---------

Electric power plants....     1004.3         91.7%       977.5         91.2%
Industrial plants........       86.2          7.9%        84.4          8.4%
Residential/Commercial...        4.2          0.4%         4.4          0.4%
                          ----------   ----------    ---------    ---------
    Total................    1,094.7        100.0%     1,006.4        100.0%
                          ==========   ==========    =========    =========
----------
Source:  Department of Energy's Energy Information  Administration,  Annual Coal
Report 2003.

     SOURCES OF COAL DEMAND GROWTH

         In the aggregate,  coal-fueled  plants currently utilize  approximately
70% of their capacity,  although the optimal sustainable capacity utilization is
estimated  at 85% for a typical  plant,  and most plants can run at higher rates
for short  periods.  An increase from 70% capacity  utilization  to 85% capacity
utilization  would translate into  approximately  200 million tons of additional
annual coal consumption.

         In addition to  expected  greater  utilization  of existing  plants,  a
number of new coal-fueled  generating plants have been announced in recent years
to meet the United State's needs for  inexpensive  base-load  energy  generating
capacity.

     REGIONAL COAL MARKETS

         Coal is mined from  coalfields  throughout the United States,  with the
major  production  centers  located in the Powder River Basin,  Central/Southern
Appalachia,  Northern  Appalachia,  the  Illinois  Basin  and in  other  western
coalfields.  The breakdown of historical and projected coal production by supply
region is as follows:

         U.S. COAL PRODUCTION BY SUPPLY REGION (IN MILLION TONS):

                                     HISTORICAL              PROJECTED
                                   -------------   -----------------------------
                                    2001    2003    2005    2010    2015    2020
                                   -----   -----   -----   -----   -----   -----

Powder River Basin .............     408     400     410     509     563     632
Central/Southern Appalachia ....     290     250     272     286     286     280
Northern Appalachia ............     143     125     131     124     120     128
Illinois Basin .................      95      88     103     102     104     107
Other Western US ...............     194     206     200     200     205     204
Other ..........................       9       2       9       9       8       8
                                   -----   -----   -----   -----   -----   -----
    Total ......................   1,139   1,071   1,125   1,230   1,286   1,359
                                   =====   =====   =====   =====   =====   =====
----------
Source: Energy Information Administration, Annual Energy Outlook 2004.

     We operate in the Central/Southern  Appalachia region. The Central/Southern
Appalachia region contains coalfields in eastern Kentucky,  Tennessee,  Alabama,
southwestern  Virginia,  and central and southern West  Virginia.  Production in
Central/Southern Appalachia has decreased from approximately 305 million tons in
1996 to approximately 250 million tons in 2003. Production declined in all major


                                       6
<PAGE>


sections of Central/Southern Appalachia except for southern West Virginia, which
has grown due to the expansion of more  economically  attractive  surface mines.
The region has experienced  significant  consolidation in the past several years
due  to  modest  demand  growth  and  strong   competition  from  western  coal.
Central/Southern Appalachian operators market approximately 67% of their coal to
electric   generators,   principally   in  the   southeastern   United   States.
Central/Southern Appalachia producers also sell extensively in the export market
and to industrial  customers.  The coal of  Central/Southern  Appalachia  has an
average  heat  content  of 12,500  Btu per pound and  generally  has low  sulfur
content.

     COAL CHARACTERISTICS

         There are four types of coal: lignite,  sub-bituminous,  bituminous and
anthracite.  Each has  characteristics  that make it more or less  suitable  for
different  end  uses.  In  general,  coal  of  all  geological   composition  is
characterized  by end  use as  either  "steam  coal"  or  "metallurgical  coal,"
sometimes known as "met coal." Steam coal is used by electricity  generators and
by industrial  facilities to produce steam,  electricity or both.  Metallurgical
coal is refined into coking coal, which is used in the production of steel. Heat
value and sulfur content, the two most important coal characteristics, determine
the  best  end  use  of  particular   types  of  coal.  Our  coal  is  generally
characterized as steam coal.

         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 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 in this document, 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 this document "low
sulfur"  is  referred  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 per
million Btu. The strict emissions  standards of 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 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 because electric generating plants 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.  Moisture  content in coal, as sold, can
range from approximately 5% to 30% of the coal's weight.

         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.


                                       7
<PAGE>


     COAL MINING TECHNIQUES

         Coal mining operations commonly use four distinct techniques to extract
coal from the ground,  and one relatively new  technique.  The most  appropriate
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;
consequently,    technological   improvements   have   resulted   in   increased
productivity.  The four most common mining  techniques  are  continuous  mining,
longwall mining,  truck-and-shovel  mining,  and dragline mining,  and the newer
technique is highwall  mining.  We use  continuous  mining and  truck-and-shovel
mining techniques and, subject to our ability to acquire adequate financing,  we
anticipate implementing highwall mining within the next six months.

         CONTINUOUS MINING. Continuous mining is an underground mining method in
which   main   airways   and   transportation    entries   are   developed   and
remote-controlled mining equipment,  referred to as "continuous miners", extract
coal from "rooms," leaving "pillars" to support the roof. Shuttle cars transport
coal from the face to a conveyor belt for transport to the surface.  This method
is often used to mine  smaller coal blocks or thin seams,  and seam  recovery is
typically  approximately 50%.  Productivity for continuous mining averages 25 to
50 tons per miner shift.

         TRUCK-AND-SHOVEL MINING. Truck-and-shovel mining is an open-cast method
that uses large electric-powered shovels to remove overburden,  which is used to
backfill  pits  after  coal  removal.  Shovels  load  coal  in haul  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 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 to thirty to
80 tons per miner shift in Eastern regions of the United States.

         HIGHWALL MINING.  Highwall mining is a method of coal mining 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 miner
to an open-air installation for stockpiling and transport.  This process forms a
series  of  parallel,  unsupported  drives.  It is vital  that the coal  pillars
remaining  between  adjacent  drives are capable of  supporting  the  overburden
structure.

         It is  generally  easier to mine coal seams that are thick and  located
close  to the  surface  than  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 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 protrudes more deeply into the
earth,  requiring  removal  of  more  material  over  the  seam,  known  as  the
"overburden."  For  example,  many seams of coal in the  Midwest are five 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
fifty feet below the surface.

         Once the raw coal is mined,  it is often  crushed,  sized and washed in
preparation plants where the 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.

     TECHNOLOGY

         Coal mining  technology is continually  evolving and  improving,  among
other things,  underground mining systems and larger earth-moving  equipment for
surface  mines,  as well as highwall  mining  equipment.  For example,  longwall
mining  technology has increased the average  recovery of coal from large blocks
of underground  coal from 50% to 70%. At larger surface mines,  haul trucks have
capacities of 240 to 400 tons,  which is nearly  double the maximum  capacity of
the largest haul trucks used a decade


                                       8
<PAGE>


ago. This increase in capacity,  along with larger  shovels and  draglines,  has
increased overall mine productivity.

     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 delivered cost per million
Btu.

         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 labor
costs than surface mining  including costs for labor benefits and healthcare and
high capital  costs,  including  modern  mining  equipment and  construction  of
extensive ventilation systems.

         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, sulfur,
ash and moisture  content.  Met coal has higher carbon and lower ash content and
is usually  priced $4 to $10 per ton higher than steam coal produced in the same
regions.  Higher  prices are paid for special  coking  coal with low  volatility
characteristics.

         TRANSPORTATION  COSTS. Coal used for domestic  consumption is generally
sold  freight  on  board,  or FOB,  at the mine,  as  described  above,  and the
purchaser  normally bears the transportation  costs.  Export coal,  however,  is
usually  sold at the  loading  port,  and coal  producers  are  responsible  for
shipment  to the  export  coal-loading  facility  and the  buyer  pays the ocean
freight.

         Most electric generators arrange long-term shipping contracts with rail
or barge companies to assure stable  delivered  costs.  Transportation  can be a
large  component of the buyer'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.
According  to the  National  Mining  Association,  railroads  account for nearly
two-thirds of total United States coal shipments.  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. Most
coal mines are served by a single  rail  company,  but much of the Powder  River
Basin is served by two competing rail carriers.

     DEREGULATION OF THE ELECTRICITY GENERATION INDUSTRY

         Congress enacted the Energy Policy Act of 1992 to stimulate competition
in electricity  markets by giving wholesale suppliers access to the transmission
lines of United States electricity generators. In April 1996, the Federal Energy
Regulatory   Commission  ("FERC")  issued  the  first  of  a  series  of  orders
establishing  rules  providing  for  open  access  to  electricity  transmission
systems.  The  federal  government  is  currently  exploring a number of options
concerning utility deregulation. Some individual states are also proceeding with
their own deregulation initiatives.

         The pace of deregulation differs  significantly from state to state. As
of  September  2003,  seventeen  states and the  District of Columbia had either
enacted  legislation  leading to the  deregulation of the electricity  market or
issued a regulatory  order to implement retail access that would allow customers
to  choose  their  own  supplier  of   generation.   Five  states  have  delayed
restructuring  and  twenty  seven are not  actively  pursuing  deregulation.  In
California,  where  supply  and demand  imbalances  created  electricity  supply
shortages, the California Public Utilities Commission suspended deregulation.

         A possible  consequence of  deregulation  is downward  pressure on fuel
prices.  However,  because of coal's cost advantage and because some coal-fueled
generating facilities are underutilized in the


                                        9
<PAGE>


current  regulated  electricity  market,  we believe that additional coal demand
would  arise as  electricity  markets  are  deregulated  if the  most  efficient
coal-fueled power plants are operated at greater capacity.

OUR OPERATIONS

         We currently  are mining coal from one surface mine and four deep mines
in Eastern  Tennessee  and  Southeastern  Kentucky.  At March 1,  2005,  we were
attempting to secure permits for four surface mines and seven deep mines to open
additional  mines on our properties.  The following  table provides  operational
information for calendar 2004 about our active mines at December 31, 2004:

                                                  2004 TONS            DATE
                                              ------------------    ESTABLISHED
MINE DESCRIPTION              LOCATION        PRODUCED   SHIPPED    OR ACQUIRED
----------------------   -------------------  --------  --------   -------------

Surface mine TN #7 ...   Elk Valley, TN         26,300    25,600   October 2004
Deep mine TN #1 ......   Devonia, TN            25,700    24,900   August 2004
Deep mine TN #9 ......   Smokey Junction, TN   131,000   128,200   April 2004
Deep mine TN #11 .....   Smokey Junction, TN    12,200     9,200   November 2004
Deep mine KY #1 ......   Straight Creek, KY     15,100    14,300   November 2004
                                              --------  --------
     Total ...........                         210,300   202,200
                                              ========  ========

         SURFACE MINE TN #7: In late October 2004, we acquired from Robert Clear
Coal  Corporation  permits  and mining  rights to surface  mine #7 pursuant to a
lease agreement on  approximately  7,000 acres of land located in the Elk Valley
area of Eastern Tennessee,  and commenced  extracting coal soon thereafter.  The
mining rights  included TN permit #3154 which was  originally  permitted for the
removal of  approximately  7.1 million  tons of coal from a surface mine at this
location.  We estimate that at December 31, 2004,  there was  approximately  6.0
million tons of coal remaining to be mined pursuant to the permit. Coal produced
from this location is typically trucked directly to one of our customers without
any  processing  (i.e.  the coal is not first sent to a wash  facility  prior to
delivery to a customer).

         DEEP MINE TN #1: In August  2004,  we began mining  operations  at deep
mine TN #1 pursuant to a lease  agreement with Lexington Coal, LLC. Deep mine TN
#1 is on part of The New River  Tract - 65,000  acres  purchased  in the  second
calendar  quarter 2003 (SEE "AREA OF INTEREST"  BELOW) - and the lease agreement
with Lexington Coal was part of the original agreement when we purchased The New
River Tract.  The mine is located near  Devonia,  TN. We are mining  pursuant to
permit #3026 which was  originally  permitted  for the removal of  approximately
800,000 tons of coal from this deep mine. We estimate that at December 31, 2004,
there was  approximately  774,000 tons of coal remaining to be mined pursuant to
the permit.  Coal produced  from this location is typically  trucked to our wash
plant in Smoky  Junction,  TN and then trucked to our tipple facility in Turley,
TN where the coal is either trucked directly to one of our customers or sent via
rail. The Turley tipple,  which is adjacent to a portion of the Norfolk Southern
rail line,  and the Smoky  Junction wash plant,  were assets  acquired from U.S.
Coal, Inc.

         DEEP MINE TN #9: In mid April 2004, we acquired from U.S.  Coal,  Inc.,
mining rights to deep mine TN #9 which is located near Smoky  Junction,  TN, and
immediately  commenced  extracting coal. The mining rights included permit #3151
which was permitted for the removal of  approximately  400,000 tons of coal from
this deep mine. We estimate that at December 31, 2004,  there was  approximately
269,000 tons of coal remaining to be mined pursuant to the permit. Coal produced
from this location is typically  processed at our wash plant in Smoky  Junction,
TN and then  trucked to our  tipple  facility  in  Turley,  TN where the coal is
either trucked directly to one of our customers or sent via rail.

         DEEP MINE TN #11: In mid April 2004, we acquired from U.S. Coal,  Inc.,
mining  rights to deep mine TN #11 pursuant to a lease  agreement  U.S. Coal had
with the Tennessee Valley Authority ("TVA") and located near Smoky Junction, TN.
We commenced  extracting  coal in mid November 2004. The mining rights  included
permit #TN-018 which was originally  permitted for the removal of  approximately
2.6 million tons of coal from this deep mine.  We estimate  that at December 31,
2004,  there was  approximately  2.59 million tons of coal remaining to be mined
pursuant to the permit. Coal produced


                                       10
<PAGE>


from this location is typically trucked to our wash plant in Smoky Junction,  TN
and then trucked to our tipple  facility in Turley,  TN where the coal is either
trucked directly to one of our customers or sent via rail.

         DEEP MINE KY #1: In late November  2004,  we acquired from  Appalachian
Fuels,  LLC,  mining  rights and permits on  approximately  31,000 acres of land
located on the  Straight  Creek and Pine  Mountain  properties  in  Southeastern
Kentucky,  and  commenced  operating  on deep mine KY #1 at the  Straight  Creek
location soon  thereafter.  The mining rights  included KY permit #8480233 which
was originally  permitted for the removal of  approximately  3.9 million tons of
coal from two deep mines at the Straight  Creek  location.  We estimate  that at
December 31, 2004, there was approximately 3.0 million tons of coal remaining to
be mined  pursuant to the permit.  Coal produced from this location is typically
sent via rail from the Viall  tipple  which is adjacent to parts of the CSX rail
line  directly to one of our customers  after first being  processed at a nearby
wash plant.  Both the Viall  tipple and nearby  wash plant were assets  acquired
from Appalachian Fuels.

         In September 2004, we ceased mining operations at our surface mine TN #
2 located  in  Devonia,  TN.  This was our first  mine at which we began  mining
operations in July 2003.

     AREAS OF INTEREST

         We own the coal mineral  rights to  approximately  sixty-five  thousand
(65,000)  acres  and lease  another  approximate  twelve  thousand  one  hundred
(12,100) acres in Anderson,  Campbell and Scott Counties, Eastern Tennessee, and
own the coal mineral  rights to  approximately  eleven  thousand  seven  hundred
(11,700)  acres and lease  another  approximate  eighteen  thousand  two hundred
(18,200) acres in Bell, Harlan and Leslie Counties in Southeastern Kentucky. The
Tennessee  property  we own is  sometimes  referred  to as the New  River  Tract
mineral rights assemblage,  which had previously been mined by Tennessee Mining,
Inc., and is located  approximately  twenty-five  miles  northwest of Knoxville,
Tennessee.  Portions of the mineral  rights extend into  Anderson,  Campbell and
Scott Counties, Tennessee. The property we lease from the TVA is adjacent to the
New River Tract and covers  areas on both Cross  Mountain  and Adkins  Mountain,
which extends into Anderson,  Campbell and Scott  Counties,  Tennessee.  We also
lease  property from Lexington  Coal,  LLC which is located in Anderson  County,
Tennessee. The mineral rights we acquired from Robert Clear Coal Corporation are
located  in the Elk Valley  area of Eastern  Tennessee.  The  mineral  rights we
acquired  from  Appalachian  Fuels,  LLC are  located  in Bell,  Clay and Harlan
Counties, Kentucky.

         The  following  chart  lists  our  active  permitted  mines,   inactive
permitted  mines, the total tonnage allowed to be mined pursuant to the approved
permits issued by OSM, and the estimated permitted tons remaining to be mined at
December 31, 2004:


                                       11
<PAGE>


                                                         TOTAL        REMAINING
                                          PERMIT       PERMITTED      PERMITTED
        MINE DESCRIPTION:                 NUMBER          TONS           TONS
        -----------------               ----------     ----------     ----------
ACTIVE MINES:
Surface mine TN #7 ...................        3154      7,151,000      6,000,000
Deep mine TN #1 ......................        3026        800,000        774,000
Deep mine KY #1 & #2 .................     8480233      3,900,000      3,000,000
Deep mine TN #9 ......................        3151        400,000        269,000
Deep mine TN #11 .....................      TN-018      2,600,000      2,588,000
                                                       ----------     ----------
    Sub Total ........................                 14,851,000     12,631,000
                                                       ----------     ----------

PERMITTED BUT INACTIVE MINES:
Surface mine TN #3 ...................        3138        930,000        930,000
Surface mine TN #4 ...................        3140      2,600,000      2,600,000
Deep mine TN #12 .....................        3153        500,000        500,000
Deep mine TN #10 .....................      TN-016      1,250,000      1,250,000
                                                       ----------     ----------
     Sub Total .......................                  4,350,000      4,350,000
                                                       ----------     ----------

     Total ...........................                 19,201,000     16,981,000
                                                       ==========     ==========


     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, TN rail load-out facility is immediately adjacent to a portion
of the Norfolk  Southern rail system,  and our Straight  Creek, KY rail load-out
facility is immediately adjacent to a portion of the CSX rail system.

     GEOLOGY

         Known coal bearing strata on the New River Tract property  include coal
beds from the Crab Orchard and Crooked Fork groups,  and the Slatestone,  Indian
Bluff,  Graves  Gap,  Red Oak  Mountain,  Vowell  Mountain  and  Cross  Mountain
formations.  Only coal seams from the Blue Gem coal, located near the top of the
Slatestone  formation  upwards,  occur on the New River Tract. Core drilling has
indicated  the  existence  of coal as low as the Wilder  coals at the top of the
Gizzard  Group.  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 six 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 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.

         Known coal bearing  strata on the  Straight  Creek,  Kentucky  property
include coal beds in the Hazard 4A and  Copeland  seams (on Pine  Mountain)  and
Hazard 8 seam (on Straight Creek Mountain).  Unlike the New River Tract, we have
not had an internal report prepared by outside  professional  geologists for our
Straight Creek  property.  We do however intend to engage an outside firm within
the next twelve months to prepare such information.

     RAILROAD LOADING AND WASHPLANT FACILITIES

         We  currently  have two  active  railroad  loading  facilities;  one in
Turley,  Tennessee,  and one in  Straight  Creek,  Kentucky,  and  one  inactive
railroad  loading facility in Smoky Junction,  Tennessee.  We also have railroad
facilities  located at Devonia,  Tennessee,  where  Tennessee  Mining,  Inc. was
active  until the spring of 1998.  The Devonia  location is  currently  idle and
requires capital  improvements to become  operational.  A washplant  facility is
located at all four of the above  railroad  facilities.  The washplants in Smoky
Junction and Straight Creek are fully functional,  and the washplants in Devonia
and Turley are in


                                       12
<PAGE>


need of  capital  improvements  to become  operational.  We  intend,  subject to
availability  of funds,  to  improve  the rail and  washplant  facilities  where
necessary to serve our production needs.

     RESERVES

         We do  not  disclose  coal  "reserves"  in  our  financial  statements.
"Reserves,"  to be so  classified,  must (i) be based upon  reasonably  accurate
scientific data and professional analysis, (ii) be recoverable (economically and
physically),  (iii) have a permitted  and  operating  mine  facility at the coal
location,  and (iv) be subject to current  sales.  We have not  satisfied all of
these  requirements  with  respect to our coal  mineral  rights.  To record coal
reserves,  in  addition  to the other  requirements,  we would  have to engage a
geologist to render a professional  report indicating the recoverable tonnage on
the portions of our property which are being actively mined.

PERMITTING

         Mining  companies  must obtain  numerous  permits  that  impose  strict
regulations on various  environmental and safety matters in connection with coal
mining.  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  incorporate the provisions of the Surface Mining Control and
Reclamation Act of 1977 (the "SMCRA"),  the 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 and
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 before it can be approved. Some SMCRA mine permits can
take over a year to prepare,  depending on the size and  complexity  of the mine
and often take six months to sometimes two years to receive approval. Regulatory
authorities  have  considerable  discretion in the timing of the permit issuance
and the public has rights 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 permits (except availability of cash for bond deposits). It is our policy
to ensure that our operations are in full  compliance  with the  requirements of
the SMCRA and the state laws and regulations governing mine reclamation.

OUR STRATEGY

         Our strategy  primarily  is to grow our business by expanding  our coal
producing  capabilities  by  acquiring  additional  active  mines and  obtaining
permits  to open new  mines on our  existing  properties.  We  intend  to submit
approximately four to six new permit applications each year to open new mines on
our properties,  which we intend to fund from operations, and acquire additional
mines and related  properties  on a case by case basis,  which we intend to fund
from the sale of debt  and/or  equity  securities.  Additionally,  we  intend to
obtain  greater price  certainty for our coal by entering into  long-term  sales


                                       13
<PAGE>


contracts,  which we define as  contracts  with an  initial  term of one year or
greater, for approximately 75% of our coal production.

MARKETING AND SALES

         Our marketing  and sales  efforts are based in the corporate  office in
Knoxville,  TN and  are  led by our  Vice  President  of  Sales,  who  has  over
twenty-five  years of sales  experience in the coal industry.  Our sales efforts
primarily  are focused on  increasing  our customer  base of state-run  electric
utilities primarily in the Southeastern region of the United States. We are also
targeting  industrial  customers.  We do not export any of our coal,  and do not
anticipate exporting any of our production for the foreseeable future.

         During the year ended  December 31, 2004,  we sold over 356,000 tons of
coal,  134,000 tons of which were sold in the fourth quarter at an average price
of nearly  $47.50 per ton,  resulting  in  approximately  $16.9  million in coal
sales.   Our  top  two   customers,   both  state-run   utilities,   represented
approximately 55% of these coal sales.

CUSTOMERS

         During the twelve  months ended  December 31, 2004, we generated all of
our coal sales  revenue  from  fourteen  customers,  six of which were  electric
utilities,  six of which were industrial  companies,  and two of which were coal
resellers.  All of our sales in 2003 and 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 were  derived from  long-term  contracts.  We
intend  to  expand  the  number  of  customers  we serve as our coal  production
increases,  and to enter into long term contracts for  approximately  75% of our
coal  production to obtain greater price certainty for our coal. At December 31,
2004,  we  had  six  contracts  of one  year  or  longer.  The  following  table
summarizes,  as of December 31, 2004,  the tons of coal that we are committed to
deliver at prices determined under existing  long-term  contracts,  which prices
are  subject to change  under the terms of our  contracts,  during the  calendar
years 2005 through 2008:

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

2005 .................................        984,000   $   55.47   $ 54,581,900
2006 .................................        660,000   $   53.86   $ 35,550,000
2007 .................................        600,000   $   53.40   $ 32,040,000
2008 .................................        120,000   $   51.00   $  6,120,000
                                         ------------   ---------   ------------
    Total ............................      2,364,000   $   54.27   $128,291,900
                                         ============   =========   ============

COMPETITION

         The  coal  industry  is  intensely  competitive.   There  are  numerous
producers  in the coal  producing  regions in which we operate.  We compete with
several  major and a number of smaller coal  producers  in the  Central/Southern
Appalachia  area.  We  also  compete  with  producers  of  other  fuels  used in
electricity  generation,   including  nuclear,  natural  gas  and  hydroelectric
producers.  We compete with other coal  producers  and  producers of other fuels
based on a  delivered  cost  per  heating  value  unit  basis.  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.

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 after mining has been completed,  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


                                       14
<PAGE>


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
our industry.

         In  addition,  the  industry  is 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 in the  industry.  The  majority of any such
violations  result  from  natural  causes,  such as heavy  rainfall  or  diverse
temperature  conditions,  that cause the physical changes to the land surface or
water levels then 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 the enforcement of safety
and health  standards and imposed safety and health  standards on all aspects of
mining operations.

         Most of the states,  including  the states of Tennessee and Kentucky in
which we operate,  have state 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
United States competitors are subject to the same degree of regulation.

     ENVIRONMENTAL LAWS

         We are  subject to various  federal,  state and  foreign  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  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 deep 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, the
state becomes the regulatory authority, as in Kentucky where we operate.


                                       15
<PAGE>


         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.  Since that date, a fee is assessed each
year  to  cover  the  expected   health  care   benefit   costs  of  the  orphan
beneficiaries. We are current on all Abandoned Mine Land Fund payments.

         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 Clean Air Act, the 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  10  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.

         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.


                                       16
<PAGE>


         RESOURCE CONSERVATION AND RECOVERY ACT

         The Resource Conservation and Recovery Act ("RCRA"),  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. 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.


                                       17
<PAGE>


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).

         CLEAN AIR ACT  AMENDMENTS.  A  comprehensive  set of  amendments to the
federal law  governing the nation's air quality  adopted in 1990.  The Clean Air
Act was originally passed in 1970 to address  significant air pollution problems
in our cities.  The 1990 amendments  broadened and strengthened the original law
to address specific problems such as acid deposition,  urban smog, hazardous air
pollutants and stratospheric ozone depletion.

         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 in a continuous operation.

         DEEP MINE.  An underground coal mine.

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

         HIGHWALL MINING.  Highwall mining is a method of coal mining 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 miner
to an open-air installation for stockpiling and transport.  This process forms a
series of parallel, unsupported drives.

         METALLURGICAL  COAL.  Various grades of coal suitable for carbonization
to make coke for steel manufacture.  Also known as "met" coal, it possesses four
important  qualities:  volatility,  which  affects  coke  yield;  the  level  of
impurities,  which  affects  coke  quality;  composition,   which  affects  coke
strength; and basic characteristics, which affect coke oven safety. Met coal has
a particularly high Btu, but low ash content.

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

         OVERBURDEN RATIO/STRIPPING RATIO. The amount of overburden that must be
removed compared to a given quantity of coal. It is commonly  expressed in cubic
yards per ton of coal or as a ratio  comparing the  thickness of the  overburden
with the thickness of the coal bed.

         PILLAR. An area of coal left to support the overlying strata in a mine.
Pillars are sometimes left permanently to support surface structures.

         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.


                                       18
<PAGE>


Reclamation  operations are usually  underway  before the mining of a particular
site is completed.  Reclamation  is closely  regulated by both state and federal
law.

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

         ROOF.  A  stratum  of rock or other  mineral  above a coal  seam or the
overhead surface of an underground coal working place. Same as "back" or "top."

         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. Room-and-pillar mining is done either by conventional or
continuous mining.

         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.

         SULFUR CONTENT.  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 1.0% or less sulfur.

         SURFACE  MINE.  A coal mine in which the coal lies near the surface and
can be  extracted by removing  the  covering  layer of soil (see  "Overburden").
About 60% of total United States coal production comes from surface mines.

         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.

         TRUCK-AND-SHOVEL  MINING. A form of mining where large shovels are used
to remove overburden,  which is used to backfill pits after the coal is removed.
Smaller shovels load coal in haul trucks for  transportation  to the preparation
plant or rail loading facility.

         UNDERGROUND MINE. Also known as a "deep" mine.  Usually located several
hundred feet below the earth's  surface,  an underground  mine's coal is removed
mechanically  and  transferred  by shuttle car or conveyor to the surface.  Most
underground  mines are  located  east of the  Mississippi  River and account for
about 40% of annual United States coal production.


                                       19
<PAGE>


EMPLOYEES

         At December 31, 2004, we had 159 full-time employees, of which 136 were
engaged in direct mining operations, seven in mining supervision, and sixteen 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  currently  utilize the
services of one independent  consultant in research.  The miners and supervisors
are based in Eastern Tennessee; the Chief Executive  Officer/President,  and the
General  Counsel  are based in  Knoxville,  Tennessee;  and the Chief  Financial
Officer is based in Knoxville, but lives outside of Los Angeles, California.

ITEM 2.  DESCRIPTION OF PROPERTY

         Our  executive  offices  are  located  at 8915  George  Williams  Road,
Knoxville,  TN 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 Eastern  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 secured lender a security interest in
all our owned and leased mining properties.

ITEM 3.  LEGAL PROCEEDINGS

         We are not involved in any legal proceedings that require disclosure in
this report.

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

         On or about October 27, 2004,  the  following  actions were approved by
written consent of shareholders who  collectively  held a majority of the voting
power of our capital stock, and by shareholders who collectively  held more than
75% of the voting power of our Series A Cumulative Convertible Preferred Stock.

         1.       A 1-for-4  reverse  stock split of our issued and  outstanding
                  common stock;

         2.       An amendment to the 2004  National  Coal Corp.  Option Plan to
                  increase  the number of  authorized  shares from  1,500,000 to
                  2,750,000; and

         3.       Amendments to our Articles of Incorporation to provide that:

                  o        any action  required or  permitted to be taken at any
                           annual or  special  meeting  of  shareholders  may be
                           taken  only upon the vote of the  shareholders  at an
                           annual or  special  meeting,  and may not be taken by
                           written consent of the shareholders; and

                  o        the Board of Directors of National Coal shall consist
                           of not less than one (1) nor more than  fifteen  (15)
                           members,  the exact  number of  directors to be fixed
                           from  time to  time by  resolution  of the  Board  of
                           Directors.

         As of October 27, 2004, the shareholders  submitted their consents with
respect to 6,473,638 shares of our outstanding common stock and 808.67 shares of
our outstanding Series A preferred stock,  representing  approximately  61.8% of
our total  issued and  outstanding  voting  stock.  On  December  20,  2004,  we
delivered an  Information  Statement  on Schedule  14C to all of our  registered
shareholders  as of October 27, 2004. The actions  approved by our  shareholders
became effective on January 12, 2005.


                                       20
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

         Our common stock is quoted 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 bid  information  for the common stock, as
determined from sporadic quotations on the  Over-the-Counter  Bulletin Board, as
well as the total  number of shares of common  stock  traded  during the periods
indicated.  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, after the periods presented.  The following quotations reflect
inter-dealer prices,  without retail mark-up,  mark-down or commission,  and may
not represent actual transactions.

                                                   HIGH        LOW       VOLUME
                                                ---------    --------    -------
YEAR ENDED DECEMBER 31, 2003
     First Quarter ......................       $    2.40    $   2.40          0
     Second Quarter .....................            2.40        2.40          0
     Third Quarter ......................            2.40        1.80     36,200
     Fourth Quarter .....................            2.04        0.88     25,000

YEAR ENDED DECEMBER 31, 2004
     First Quarter ......................       $    5.60    $   0.88     72,579
     Second Quarter .....................            5.80        3.60    155,483
     Third Quarter ......................           12.60        5.00    119,944
     Fourth Quarter .....................           16.00        8.20    281,000

         On March 18,  2005,  the  closing  sales  price of our common  stock as
reported  on the  Over-The-Counter  Bulletin  Board was $6.15 per  share.  As of
January 31, 2005,  there were  approximately  154  shareholders of record of our
common stock.

         We have submitted an  application to The Nasdaq Stock Market,  Inc. for
our common stock to be quoted on the NASDAQ SmallCap Market.  We anticipate that
NASDAQ will make a decision on our application  shortly  following our filing of
this report.

DIVIDENDS

         We have never paid  dividends on our common stock.  We intend to retain
any future earnings for use in our business.  We are restricted from making cash
dividend  payments  on our  common  stock  under  the  terms of our  Series A 5%
convertible  preferred stock and senior secured credit facility. We are required
to make  semi-annual  cash  dividend  payments  to  holders  of our  Series A 5%
convertible preferred stock on June 30 and December 31. On December 31, 2004, we
paid  approximately  $281,000  in  dividends  to the  holders  of our  Series  A
convertible preferred stock.

RECENT SALES OF UNREGISTERED SECURITIES

         In October 2004, we issued  399,312 shares of our common stock upon the
exercise of warrants  originally issued by National Coal Corporation and assumed
by National  Coal Corp. in April 2003,  for proceeds to us of $887,488.  Each of
the investors in these  transactions  represented to us that the investor was an
"accredited  investor"  within the meaning of Rule 501 of Regulation D under the
Securities  Act of 1933, and that such investor was receiving the securities for
investment and not in connection with a distribution  thereof.  The issuance and
sales of these securities was exempt from the registration and


                                       21
<PAGE>


prospectus delivery  requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act as transactions not involving any public offering.

         In October 2004 Crestview  Capital Master,  LLC exercised its right and
converted  $2,694,902 of convertible  notes into 1,347,451 of our common shares.
The issuance of these securities was exempt from the  registration  requirements
of the  Securities  Act pursuant to Section  3(a)(9) of the Securities Act as an
exchange by the issuer with its existing security holders where no commission or
other remuneration is paid for soliciting such exchange.

         In August and  September  2004 we issued  395,396  shares of our common
stock upon the exercise of warrants issued in our April-May 2004 financings. All
of the warrants were  exercised on a cashless basis with the exception of 25,000
shares for which we were paid  $100,001.  During  the  April-May  financings  we
raised in separate  transactions  gross  proceeds of $7.5 million  pursuant to a
series of separate  private  placement  financings of senior secured  promissory
notes that were due to mature in April and May 2005 and  three-year  warrants to
purchase up to an aggregate of 625,000 shares of our common stock at an exercise
price of $4.00 per  share.  This  indebtedness  was repaid in full in August and
September  2004. Each of the investors in the April-May  financing  transactions
represented  to us that the investor  was an  "accredited  investor"  within the
meaning of Rule 501 of Regulation D under the  Securities  Act of 1933, and that
such investor was receiving the  securities for investment and not in connection
with a  distribution  thereof.  The issuance and sales of these  securities  was
exempt  from  the  registration  and  prospectus  delivery  requirements  of the
Securities Act pursuant to Section 4(2) of the  Securities  Act as  transactions
not involving any public offering.


                                       22
<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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, 2003 and 2004.  Except for
historical  information,  the matters discussed in this Management's  Discussion
and Analysis or Plan of Operation are  forward-looking  statements  that involve
risks and uncertainties and are based upon judgments  concerning various factors
that are beyond our control.

OVERVIEW

         National Coal Corp. engages  principally in the business of mining coal
in Eastern Tennessee and Southeastern  Kentucky.  We own the coal mineral rights
to  approximately   sixty-five   thousand   (65,000)  acres  and  lease  another
approximate twelve thousand one hundred (12,100) acres in Tennessee, and own the
coal mineral rights to  approximately  eleven  thousand  seven hundred  (11,700)
acres and lease another approximate eighteen thousand two hundred (18,200) acres
in  Kentucky.  We  commenced  mining  coal in July 2003  from a surface  mine in
Tennessee.  At December 31, 2004, we were  extracting  coal from four deep mines
and one surface mine.

         During  calendar  2004, we made  significant  advancements  towards the
realization of our long term business  strategy by growing our mining operations
through both acquisitions and organic growth. We funded this growth primarily by
closing  multiple  debt and equity  financing  transactions.  As a result of our
growth, we had more substantial  mining operations as compared to calendar 2003,
and as such were able to sign a number of long term  contracts with both utility
and industrial customers. Our 2004 highlights include:

         ACQUISITIONS:  We acquired the following assets:

         o        In April  2004,  we  acquired  from U.S.  Coal,  Inc.,  mining
                  permits,  a wash plant, a rail load-out  facility,  and mining
                  equipment for an aggregate purchase price of $4.2 million plus
                  the assumption of certain liabilities;

         o        In May 2004, we acquired land from Cumberland  Timber Company,
                  LLC for an  aggregate  purchase  price of $631,000  payable in
                  cash and stock;

         o        In  October   2004,   we  acquired   from  Robert  Clear  Coal
                  Corporation, mining assets including mining permits, a crusher
                  and tipple,  and mining  equipment  for an aggregate  purchase
                  price  of  $5.5  million  plus  the   assumption   of  certain
                  liabilities  and the obligation to replace $3.9 million of the
                  seller's reclamation bonds; and

         o        In November  2004, we acquired  from  Appalachian  Fuels,  LLC
                  mining permits,  a wash plant, a rail load-out  facility,  and
                  mining  equipment  for an  aggregate  purchase  price of $12.5
                  million plus the  assumption  of certain  liabilities  and the
                  obligation to replace $6.5 million of the seller's reclamation
                  bonds.

         FINANCING  ACTIVITIES:  We raised the following  proceeds from debt and
equity financings:

         o        In February  2004,  we raised gross  proceeds of $2.75 million
                  from the sale of 1,250,000 shares of common stock;

         o        In April  and May  2004,  we  raised  gross  proceeds  of $7.5
                  million from the sale of debentures  and common stock purchase
                  warrants;

         o        In July 2004, we borrowed $663,300 from a bank;


                                       23
<PAGE>


         o        In  August  2004,   we  issued  $16.0   million  of  Series  A
                  convertible preferred stock and common stock purchase warrants
                  for gross  proceeds of $11.3  million in cash proceeds and the
                  cancellation of $4.7 million of the debentures issued in April
                  and May 2004;

         o        In August 2004, we raised gross  proceeds of $3.0 million from
                  the sale of  debentures  convertible  into  Series A preferred
                  stock;

         o        In November  2004, we obtained a $21.0 million  senior secured
                  credit  facility,  pursuant to which we  immediately  borrowed
                  gross proceeds of $15.0 million; and

         o        In December  2004,  we raised  gross  proceeds of $3.6 million
                  from the sale of  additional  Series A  convertible  preferred
                  stock and common stock purchase  warrants upon the exercise of
                  additional   purchase   rights  granted  in  our  August  2004
                  financing.

         LONG-TERM  CONTRACTS.  During 2004, we signed six supply contracts with
terms of at least one year with 3 utility and 3 industrial  customers,  pursuant
to which we have committed to sell 984,000, 660,000, 600,000 and 120,000 tons of
coal during calendar years 2005 through 2008, respectively.

         Our  historical  operations  prior to April 30, 2003  reflect  only the
operations of National Coal Corporation, a Tennessee corporation. 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 Corp.  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
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, accordingly, are
no longer in the  exploration  stage. As a result of the  reorganization  of the
group and the commencement of operating  activities,  our results for the eleven
months from inception (January 30, 2003) to December 31, 2003 are not comparable
to those for the twelve months ended December 31, 2004.

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. The preparation of these 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,
reclamation liability, asset impairment, valuation of 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. Our use of estimates, however, is limited, as we have
adequate time to process and record actual results from operations.

         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.  We believe the following
accounting policies affect our more significant  judgments and estimates used in
preparation of our consolidated financial statements.


                                       24
<PAGE>


         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.

         MINED  COAL.  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. We recognize revenue from sales
made pursuant to these contracts at the time of delivery.

         COAL ROYALTIES. We recognize coal royalty revenues on the basis of tons
of coal mined by our lessees.  During 2004, we had one source of royalty revenue
pursuant  to  our  agreement  with  Jenco  Capital  Corporation  ("Jenco").   We
recognized the final remaining royalties pursuant to our agreement with Jenco in
the second  calendar  quarter of 2004 and do not  anticipate  any future royalty
transactions for the foreseeable future.

         ACCOUNTS  RECEIVABLE.  Accounts  receivable balances are evaluated on a
continual   basis  and   allowances,   if  any,  are  provided  for  potentially
uncollectible  accounts based on management's  estimate of the collectibility of
customer accounts. If the financial condition of a customer were to deteriorate,
resulting  in an  impairment  of its  ability to make  payments,  an  additional
allowance  may be  required.  Allowance  adjustments,  if any,  are  charged  to
operations  in the period in which the facts  that give rise to the  adjustments
become known. To date, we have not had any customer whose payment was considered
past  due,   and  as  such,   have  not   recorded  any  reserves  for  doubtful
collectibility.

         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
deep 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 Statement of Financial Accounting Standards, or SFAS, No.
143,  "Accounting For Asset Retirement  Obligations".  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 the Office of
Surface Mining when we post a predetermined amount of reclamation bonds prior to
commencing  mining  operations.  The Office of  Surface  Mining's  estimates  of
disturbed  acreage are  determined  based on approved  mining  plans and related
engineering data. Cost estimates are based upon estimates  approved by OSM based
on  historical  costs.  In  accordance  with SFAS No. 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.

         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.  At
December 31, 2004, we had recorded asset  retirement  obligation  liabilities of
approximately  $2.3  million.  While the precise  amount of these  future  costs
cannot be determined with  certainty,  as of December 31, 2004, we estimate that
the  aggregate  undiscounted  cost of final mine closure is  approximately  $5.2
million.

         STOCK-BASED COMPENSATION. We account for stock-based compensation using
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES".  Under APB No. 25,  compensation  expense is recognized for stock
options  with an exercise  price that is less than the market price on the grant
date of the option.  For stock  options  granted  employees  or  directors  with
exercise  prices at or above the market value of the stock on the grant date, we
have adopted the Financial Accounting  Standards Board ("FASB")  disclosure-only
provisions of Statement of Financial  Accounting  Standards No. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"). Except for the


                                       25
<PAGE>


issuance of 1,237,500  options  granted to directors and officers in March 2004,
we have not recorded any compensation costs for these types of option grants.

         BENEFICIAL   CONVERSION   FEATURE  OF  DEBT  AND  PREFERRED  STOCK.  In
accordance with Emerging Issues Task Force No. 98-5, "ACCOUNTING FOR CONVERTIBLE
SECURITIES  WITH  BENEFICIAL  CONVERSION  FEATURES  OR  CONTINGENTLY  ADJUSTABLE
CONVERSION  RATIOS," and No.  00-27,  "APPLICATION  OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE  INSTRUMENTS," we recognize the value of conversion  rights attached
to  convertible  debt and equity  instruments.  These rights give the instrument
holder the  immediate  ability to convert debt or  preferred  equity into common
stock at a price per share  that is less than the  trading  price of the  common
stock to the public.  The  beneficial  value is  calculated  based on the market
price of the stock at the commitment  date in excess of the  conversion  rate of
the debt and related  accruing  interest or preferred stock and is recorded as a
discount to the related debt or constructive dividend to preferred  stockholders
and an addition to additional  paid-in  capital.  The debt discount is amortized
and  recorded as  interest  expense  over the  remaining  outstanding  period of
related debt.

         RESERVES.   We  do  not  disclose  coal  "reserves"  in  our  financial
statements.  "Reserves," to be so classified,  must (i) be based upon reasonably
accurate  scientific  data  and  professional  analysis,   (ii)  be  recoverable
(economically  and  physically),  (iii)  have a  permitted  and  operating  mine
facility at the coal location, and (iv) be subject to current sales. We have not
satisfied all of these  requirements with respect to our coal mineral rights. To
record coal reserves,  in addition to the other  requirements,  we would have to
engage a geologist to render a professional  report  indicating the  recoverable
tonnage on the portions of our property  which are permitted and being  actively
mined.

RECENT ACCOUNTING PRONOUNCEMENTS

         See Note #2 to Notes to  Consolidated  Financial  Statements for a full
description  of  recent  accounting   pronouncements  including  the  respective
expected  dates of adoption and effects on results of  operations  and financial
condition.

RESULTS OF OPERATIONS

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

                                               ELEVEN MONTHS       TWELVE MONTHS
                                                   ENDED               ENDED
                                                DECEMBER 31,        DECEMBER 31,
                                                    2003                2004
                                               -------------       -------------

Revenues...................................         100   %             100   %
                                               -------------       -------------
Operating expenses:
   Cost of sales and selling expenses .....         139.2                94.0
   General and administrative .............         157.2                30.8
   Exploration costs ......................           6.7                 2.0
   Depreciation and depletion .............          21.0                12.8
   Amortization ...........................          30.8                 1.8
                                               -------------       -------------
     Total operating expenses .............         354.9               141.4
                                               -------------       -------------
Loss from operations ......................        (254.9)              (41.4)
                                               -------------       -------------
Other income (expense):
   Other income (expense), net ............           6.3                (0.2)
   Financing fees .........................           --                 (2.7)
   Interest expense .......................         (31.3)              (17.0)
                                               -------------       -------------
Net loss ..................................        (279.9)%             (61.4)%
                                               =============       =============


                                       26
<PAGE>


REVENUES

                                          ELEVEN            TWELVE
                                          MONTHS            MONTHS
                                          ENDED             ENDED
                                       DECEMBER 31,      DECEMBER 31,    PERCENT
                                           2003              2004         CHANGE
                                       -----------       -----------     -------
Coal sales .....................       $ 1,012,520       $16,871,346        *
Royalties receipts .............           178,123           103,403     (72.3%)
Other revenue ..................              --              24,163        --
                                       -----------       -----------
   Total revenues ..............       $ 1,190,643       $16,998,912        *
----------
* Not meaningful

         We commenced  mining coal in July 2003,  and therefore had limited coal
sales during the eleven  months ended  December  31,  2003.  As such,  it is not
meaningful to compare  sales  between the eleven months ended  December 31, 2003
and the twelve  months ended  December 31, 2004.  During the twelve months ended
December 31, 2004, we generated  all of our coal sales from fourteen  customers,
six of  which  were  electric  utilities  (73.1%  of  sales,  with  our  top two
representing 54.6% of total coal sales), six of which were industrial  companies
(26.3% of sales), and two of which were coal resellers. All of our sales in 2003
and 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 were
derived from long-term contracts. We intend to expand the number of customers we
serve, as our coal production  increases,  and to enter into long term contracts
for  approximately  75% of our coal production to obtain greater price certainty
for our coal.  At December 31, 2004, we had six contracts of one year or longer,
pursuant to which we estimate delivering an aggregate of 984,000 tons of coal in
calendar  2005.  The royalty  receipts for the eleven months ended  December 31,
2003 and for the twelve  months  ended  December 31, 2004 were the result of the
recognition of deferred revenue relating to our sale in August 2003 for $250,000
of royalty rights  relating to coal mined on the Smoky  Mountain  portion of our
New  River  Tract  property.  We will not  recognize  any more  royalty  revenue
pursuant to this transaction. Other revenue for the twelve months ended December
31, 2004 was the result of tippling fees charged to third party  operators which
leased one of our tipple  facilities.  We do not  anticipate  any future royalty
revenues  and do not  anticipate  any  meaningful  revenues to be derived in the
foreseeable future from third party use of our tipple facilities.

         OPERATING EXPENSES

         COST OF SALES AND SELLING EXPENSES

                                             ELEVEN          TWELVE
                                             MONTHS          MONTHS
                                             ENDED           ENDED
                                          DECEMBER 31,    DECEMBER 31,   PERCENT
                                              2003            2004        CHANGE
                                          -----------     -----------    -------
Cost of sales and selling expenses ..     $ 1,657,570     $15,978,686       *
----------
* Not meaningful

         There were no cost of sales and  selling  expenses  prior to the second
quarter  2003.  For the twelve  month period  ended  December  31,  2004,  these
expenses  consisted  primarily of salary,  benefits,  worker's  compensation and
other  compensation  costs directly  attributable to the employment of miners of
approximately $4.33 million,  and direct costs paid to third party vendors whose
goods  and  services  were  directly  used  in the  process  of  producing  coal
inventory,  which  included  coal  purchases  of  approximately  $2.31  million,
$477,000 paid to a contract  mining  entity,  equipment  leases and  maintenance
expenses  of  $1.13  million,  blasting  expenses  of  $448,000,  fuel  costs of
$878,000,  parts and supplies of $1.40 million,  hauling costs of $1.50 million,
and royalties and taxes of approximately  $911,000.  The gross profit margin for
calendar  2004 was  approximately  5% which is  generally  below  the  operating
margins  of our  competitors.  This  below  average  operating  margin is mainly
attributable  to the ramp up  phase of our  mining  operations  as we went  from
operating  one mine in 2003 to operating  six mines in 2004. We expect our gross
profit  margins to improve  and be more in line with  industry  averages  during
2005.


                                       27
<PAGE>


         For the eleven months ended  December 31, 2003, our total cost of sales
and  selling  expenses  consisted  primarily  of  salary,   benefits  and  other
compensation  costs  directly  attributable  to  the  employment  of  miners  of
approximately $441,000, direct costs paid to third party vendors whose goods and
services were directly used in the process of producing  coal  inventory,  which
included  equipment leases and maintenance  expenses of approximately  $470,000,
blasting  expenses of $159,000,  fuel costs of  $191,000,  parts and supplies of
$227,000,  hauling costs of $66,000,  and  royalties and taxes of  approximately
$96,000.

         GENERAL AND ADMINISTRATIVE EXPENSES

                                             ELEVEN          TWELVE
                                             MONTHS          MONTHS
                                             ENDED           ENDED
                                          DECEMBER 31,    DECEMBER 31,   PERCENT
                                              2003            2004        CHANGE
                                          -----------     -----------    -------
General and administrative expenses..     $ 1,871,414     $ 5,242,437      180%

         General and administrative  expenses primarily include salary, benefits
and related expenses; executive,  financial, and accounting consulting expenses;
legal and outside audit professional fees;  insurance  expenses;  and travel and
travel related expenses. The increase in general and administrative  expenses in
the twelve  month period  ended  December 31, 2004  compared to the eleven month
period  ended  December  31, 2003 is  primarily  attributable  to an increase in
salaries,  benefits  and  related  expenses  of $2.08  million,  an  increase of
$903,000 related to the non-cash  recognition of compensation expense related to
the  issuance  of options  with  strike  prices  below  market,  an  increase in
insurance fees of $866,000  partially offset by a decrease in consulting fees of
$456,000.  This occurred as we  transitioned  from our initial  start-up  phase,
which  began  in  the  calendar  third  quarter  2003,   during  which  we  used
consultants, to on-going operations conducted by employees in 2004.

         EXPLORATION COSTS

                                             ELEVEN          TWELVE
                                             MONTHS          MONTHS
                                             ENDED           ENDED
                                          DECEMBER 31,    DECEMBER 31,   PERCENT
                                              2003            2004        CHANGE
                                          -----------     -----------    -------
Exploration costs....................     $    80,367     $   343,946      328%

         For the twelve  month  period  ended  December  31,  2004,  we incurred
exploration  and  development  costs of $343,946  for fees paid to  professional
geological and  exploration  experts related to the development of mines located
on our  properties.  For the eleven  months  ended  December  31,  2003,  we had
exploration and development expenses of $80,367. We expect our exploration costs
to increase in 2005 as we increase  the number of permits  submitted  to OSM for
approval, as well as conduct further exploration on existing mines. We do expect
however that our  exploration  costs as a percentage  of sales will  decrease in
2005 and beyond.

         DEPRECIATION AND DEPLETION EXPENSE

                                             ELEVEN          TWELVE
                                             MONTHS          MONTHS
                                             ENDED           ENDED
                                          DECEMBER 31,    DECEMBER 31,   PERCENT
                                              2003            2004        CHANGE
                                          -----------     -----------    -------
Depreciation and depletion expense...     $   250,527     $ 2,175,133      768%

         The increase in depreciation and depletion  expense in the twelve month
period  ended  December  31, 2004  compared  to the eleven  month  period  ended
December 31, 2003 is primarily  attributable  to the acquisition of fixed assets
which  resulted in an increase of  approximately  $1.28 million in  depreciation
expenses,  an  increase of $504,000 in  adjustments  and  revisions  from annual
re-costing  of our asset  retirement  obligations  as well as an increase in the
recognition of estimated depletion expenses of


                                       28
<PAGE>


$115,000.  Given that the coal mining business is capital  intensive,  we expect
our  depreciation  expenses to  increase  in 2005 and beyond as we increase  our
capital  expenditures  for  mining  and other  equipment  needed  to expand  our
business.

         AMORTIZATION EXPENSE

                                             ELEVEN          TWELVE
                                             MONTHS          MONTHS
                                             ENDED           ENDED
                                          DECEMBER 31,    DECEMBER 31,   PERCENT
                                              2003            2004        CHANGE
                                          -----------     -----------    -------
Amortization expense.................     $   366,628     $   298,236      (19%)

         We record  amortization  expense for previously  capitalized  financing
fees related to the  issuance of debt  securities.  These  expenses are recorded
using the interest method over the life of the securities. If the securities are
repaid or are converted prior to maturity,  the remaining unamortized balance is
immediately recognized. We also record amortization expense for mine development
costs. For the twelve month period ended December 31, 2004, we recorded $288,531
related to financing fees,  including  $212,000 of fees paid in conjunction with
the  August  2004  convertible   debentures,   and  $9,705  attributed  to  mine
development  costs.  For the eleven month period  ended  December 31, 2003,  the
entire  $366,628  amortization  expense was for  financing  fees  related to the
issuance of debt securities in March 2003. At December 31, 2004, we had $782,500
of unamortized  financing fees which will be amortized using the interest method
over 23 months,  and  approximately  $338,900 of  unamortized  mine  development
costs,  which  is  recorded  as part of Coal  and  Mineral  Rights  and  will be
amortized on a straight line basis over 45 months.

         OTHER INCOME (EXPENSE)

                                        ELEVEN         TWELVE
                                        MONTHS         MONTHS
                                        ENDED          ENDED
                                     DECEMBER 31,   DECEMBER 31,     PERCENT
                                         2003           2004          CHANGE
                                     -----------    -----------    -----------
Other income (expense), net ......   $    75,437    $   (40,682)       (154%)
Financing fees ...................          --         (458,187)         --
Interest expense .................      (372,458)    (2,890,735)        676%
                                     -----------    -----------    -----------
   Total other income (expense) ..      (297,021)   $(3,389,604)      1,041%

         The increase in other income (expense), net, in the twelve month period
ended  December 31, 2004 compared to the eleven month period ended  December 31,
2003  is  primarily   attributable  to  an  increase  in  interest   expense  of
approximately  $2,518,000  related to  $1,700,000 of interest  expense  recorded
pursuant to the beneficial  conversion  feature of the $3.0 million  convertible
debentures  issued in August 2004, and added  borrowings for asset  acquisitions
made during  calendar  2004, an increase of finance fees of $458,000  related to
the April  debt  offering  and fees paid for a second  amendment  to our  senior
credit facility, and an increase in property taxes of approximately $33,000.

RELATED PARTY TRANSACTIONS

         See "Certain  Relationships  and Related Party  Transactions"  included
elsewhere in this report for a full description of transactions to which we were
or will be a party, in which the amount involved exceeds  $60,000,  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

         As  of  December  31,  2004,  we  had  cash  and  cash  equivalents  of
approximately $352,000. As of December 31, 2004, we had negative working capital
of approximately $4.0 million. We expect a


                                       29
<PAGE>


significant  use of cash  during  fiscal  2005 as we continue to expand our coal
mining  operations.  We  anticipate  that our current cash reserves plus cash we
expect  to  generate  from  operations  will  not  be  sufficient  to  fund  our
operational  expenditures  for the first six months of 2005, yet we expect to be
cash flow positive from  operations  commencing in the third quarter of 2005. We
anticipate the need to acquire additional assets and/or mining  operations,  and
may be required to raise additional funds by issuing  additional  equity or debt
securities,  the amount  and  timing of which  will  depend in large part on our
spending  program.  In November  2004, we entered into a senior  secured  credit
facility  and  borrowed  $15 million to  facilitate  our purchase of assets from
Appalachian  Fuels,  LLC. We borrowed an additional $1.4 million in January 2005
pursuant to this senior secured credit  facility for the deposit on and purchase
of a $5.5 million high wall miner, and borrowed an additional $5.14 million in a
separate  transaction to complete the purchase of the high wall miner equipment.
We may borrow an additional $4.6 million,  as our senior secured credit facility
allows for a maximum of $21 million to be borrowed.

         If  additional   funds  are  raised  through  the  issuance  of  equity
securities, the current stockholders may experience dilution. Furthermore, there
can be no assurance that additional  financings will be available when needed or
that  if  available,  such  financings  will  include  terms  favorable  to  our
stockholders.  If such  financings  are not  available  when required or are not
available on acceptable  terms,  we may be unable to take  advantage of business
opportunities  or respond to  competitive  pressures,  any of which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

     CASH FLOWS

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and sales of equity and debt  securities.
For the twelve months ended  December 31, 2004, we had a net increase in cash of
approximately  $351,000.  Cash flows from  operating,  financing  and  investing
activities  for the eleven months ended  December 31, 2003 and the twelve months
ended December 31, 2004 are summarized in the following table:

                                                 ELEVEN MONTHS     TWELVE MONTHS
                                                     ENDED             ENDED
                                                  DECEMBER 31,      DECEMBER 31,
ACTIVITY                                              2003              2004
--------------------------------------------     ------------      ------------

Operating activities .......................     $ (1,541,409)     $ (4,342,237)
Investing activities: ......................       (1,990,879)      (33,417,661)
Financing activities .......................        3,533,171        38,110,713
                                                 ------------      ------------
   Net increase (decrease) in cash .........     $        883      $    350,815
                                                 ============      ============

         OPERATING ACTIVITIES

         The net  cash  used in  operating  activities  of  approximately  $4.34
million  during the twelve  months  ended  December 31, 2004 was  primarily  the
result  of the  net  loss of  approximately  $10.43  million  and  increases  in
receivables of approximately $1.90 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 the
Company's 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.


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<PAGE>


         The net  cash  used in  operating  activities  of  approximately  $1.54
million  during the eleven  months  ended  December 31, 2003 was  primarily  the
result  of the  net  loss  of  approximately  $3.33  million  and  increases  in
receivables  of  approximately  $19,000,  inventory of  approximately  $146,000,
deferred   revenue  of   approximately   $179,000   and  prepaid  and  other  of
approximately $15,000 as we increased coal production during the year, partially
offset  by  an  increase  in  accounts   payable  and  accrued   liabilities  of
approximately $829,000 and non-cash expenses of approximately $962,000, of which
$191,000 was non-cash compensation to a related party, and $153,500 was non-cash
compensation expense for the issuance of common stock for services.

         INVESTING ACTIVITIES

         The approximately  $33.42 million of cash used in investing  activities
during the twelve  months  ended  December  31,  2004 was due  primarily  to the
purchase of  approximately  $17.71  million of  property,  plant and  equipment,
$10.89  million  for the  purchase  of coal and mineral  assets,  $4.27  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.  To  the  extent  that  we  make  additional  asset
acquisitions  in 2005 similar to our investing  activities in 2004, we will need
to raise  additional cash from outside  sources.  If additional funds are raised
through  the  issuance  of  equity  securities,  the  current  stockholders  may
experience  dilution.  Furthermore,  there can be no assurance  that  additional
financings  will be available when needed or that if available,  such financings
will include terms  favorable to our  stockholders.  If such  financings are not
available  when  required or are not available on  acceptable  terms,  we may be
unable to take  advantage of business  opportunities  or respond to  competitive
pressures,  any of which could have a material  adverse  effect on our business,
financial condition and results of operations.

         For the eleven  months ended  December 31, 2003,  $1.99 million of cash
used in  investing  activities  resulted  primarily  from $1.31  million for the
acquisition of coal and mineral  rights,  $448,000 for the acquisition of mining
equipment  offset by the  receipt of  $23,000  from the sale of  equipment,  and
$257,500 paid to OSM for reclamation bonds used for surface mine TN #2.

         FINANCING ACTIVITIES

         The net cash provided by financing  activities of approximately  $38.11
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
convertible  preferred  stock net of $1.0 million in fees,  offset  primarily by
$3.05 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.  The net cash provided by financing
activities  of  approximately  $3.53  million  during  the eleven  months  ended
December 31, 2003 was primarily the result of $3.25 million raised from sales of
debt from outside parties net of approximately $412,000 financing fees, $560,000
from  related  party  debt,  and  $287,500  from the sale of equity  securities,
partially  offset by payments  of  approximately  $543,600 on notes  payable and
capital  leases.  As previously  stated,  to the extent that we make  additional
asset acquisitions in 2005 similar to our investing  activities in 2004, we will
need to raise additional cash from the sale of equity or debt securities,  which
financings  may not be available on acceptable  terms,  if at all, and which may
dilute existing stockholders.

         ISSUANCE OF STOCK UPON THE CONVERSION OF NOTES PAYABLE

         During 2003, we raised gross proceeds of $198,000  pursuant to a series
of private  placements of unsecured  promissory notes to four unrelated parties.
Each of the  notes  had an  interest  rate of 10% per annum and was due in March
2004.  In November  2003,  these note  holders  agreed to extend the term of the
notes to November 2004 in  consideration  of the issuance to them of warrants to
purchase an aggregate of 41,250  shares of our common  stock.  In January  2004,
these four unrelated parties  converted their entire then outstanding  principal
and accrued  interest  into shares of our common stock at a conversion


                                       31
<PAGE>


price of $2.20 per share. We issued 92,099 shares of common stock, 90,000 shares
of which were issued in repayment  of  principal  and 2,099 shares of which were
issued in repayment of accrued interest.

         SALE OF COMMON STOCK

         In February  2004,  we sold an  aggregate  of  1,250,000  shares of our
common stock in a private  placement at a price per share of $2.20.  We received
net proceeds of $2,750,000.  Crestview Capital Master, LLC, an entity controlled
by Crestview  Capital Funds,  purchased  650,000  shares,  and other  accredited
investors purchased the remaining 600,000 shares.

         SALES OF SENIOR SECURED PROMISSORY NOTES AND WARRANTS

         In  April  and May  2004,  we sold  one-year  promissory  notes  in the
aggregate  principal amount of $7.5 million and three-year  warrants to purchase
up to an aggregate of 625,000 shares of our common stock at an exercise price of
$4.00 per  share.  We sold  these  securities  to  institutional  investors  and
individual  accredited  investors,  with the largest  investor  being  Crestview
Capital Master,  LLC, for an aggregate purchase price to us of $7.5 million.  In
August 2004,  certain  holders of this debt agreed to cancel  $4.725  million of
principle in exchange for Series A preferred  stock (see below).  Also in August
2004, we repaid $2.775 million from the proceeds raised pursuant to the issuance
of our Series A convertible preferred stock and retired the debt.

         SALES OF PREFERRED STOCK AND WARRANTS

         On August 31,  2004,  we sold  $16,030,000  of Series A 5%  convertible
preferred stock and common stock purchase warrants in separate private placement
transactions.  We issued a total of  1,068.67  shares  of  Series A  convertible
preferred stock, at $15,000 per share,  for cash  consideration of approximately
$11.3  million  and  cancellation  of  $4.725  million  of  our  senior  secured
promissory notes. Dividends on the preferred stock initially accrue at a rate of
five percent (5%) per annum and shall be  cumulative  from the date of issuance.
Until  paid,  the  right to  receive  dividends  on the  preferred  stock  shall
accumulate  and shall be payable,  in cash,  on June 30 and  December 31 of each
year,  commencing  on  December  31,  2004.  Each share of Series A  convertible
preferred stock is convertible  into 2,500 shares of our common stock.  For each
share of Series A convertible  preferred  stock,  the investors also were issued
two-year  warrants  to  purchase  up to 500  shares  of our  common  stock at an
exercise price of $8.40 per share.  On December 31, 2004, we paid  approximately
$281,000 in  dividends to the holders of our Series A 5%  convertible  preferred
stock.

         On August 31, 2004, the closing price of our common stock on the NASDAQ
Over-the-Counter Bulletin Board was $9.40. Since this closing price exceeded the
$6.00  conversion  price of the Series A preferred stock, and exceeded the $8.40
exercise price for the warrants, we recognized non-cash  constructive  dividends
of  approximately  $10.76 million  pursuant to the calculation of the beneficial
conversion  value for both the issuance of the preferred  stock and the attached
warrants with conversion  prices below the market price of the common stock. The
beneficial   conversion   value  of  the  warrants  was  calculated   using  the
Black-Scholes pricing model. During the fourth calendar quarter of 2004, several
Series A convertible preferred  stockholders exercised their additional purchase
right options,  which resulted in the recognition of an additional $7.87 million
of non-cash constructive dividends pursuant to the calculation of the beneficial
conversion value for both the issuance of the additional preferred stock and the
attached  warrants with  conversion  prices below the market price of the common
stock.  The  combined  one-time,  non-cash  constructive  dividends to preferred
stockholders in 2004 for beneficial  conversion  features totaled  approximately
$18.6 million.

         In December  2004,  we  consummated  the sale of an  additional  241.33
shares of our Series A  convertible  preferred  stock and  warrants  to purchase
482,660 shares of our common stock, which securities were sold upon the exercise
of  additional   purchase  rights  granted  in  August  2004  to  investors  who
participated  in our  private  placements  of the Series A  preferred  stock and
warrants and convertible


                                       32
<PAGE>


promissory  notes.  We received  gross proceeds of  approximately  $3,620,000 in
connection with the sale of these securities.

         SALES OF CONVERTIBLE PROMISSORY NOTES

         On August 31, 2004,  we issued  $3,000,000  of  convertible  promissory
notes to Crestview Capital Master LLC, an entity controlled by Crestview Capital
Funds and SDS  Capital  Group  SPC,  Ltd.  Prior to  maturity,  the  convertible
promissory  notes  may be  converted  into  units  consisting  of our  Series  A
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  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, both Crestview
and SDS exercised their rights and converted their  respective  promissory notes
into units of our Series A convertible preferred stock and common stock purchase
warrants.

         On August 31, 2004, the closing price of our common stock on the NASDAQ
Over-the-Counter Bulletin Board was $9.40. Since this closing price exceeded the
$6.00  conversion  price of the convertible  promissory  notes, and exceeded the
$8.40 exercise price for the warrants to be issued upon conversion of the notes,
we calculated a debt  discount of  approximately  $1.70 million  pursuant to the
calculation of the beneficial conversion value for both the issuance of the debt
below  market  prices,  and we  recognized  approximately  $220,000  of interest
expense of this debt  discount for the quarter  ended  September  30, 2004.  The
$1.70 million  beneficial  conversion value for the debt was calculated based on
the number of common shares  issuable upon  conversion of the Series A preferred
stock issuable upon conversion of the principal  amount of the debt,  multiplied
by the  difference  between the  conversion  price and the market  price for the
common stock, or $3.40 and was to be amortized on a straight line basis over the
nine-month  term of the notes.  Since the $3.0  million  debt was  converted  in
December  2004,  we recognized  the remaining  $1.58 million of debt discount as
interest expense in the fourth calendar quarter of 2004.

         BANK LOAN

         In July 2004,  we borrowed  approximately  $663,300  from Sevier County
Bank in  Sevierville,  TN with a 24-month  term and an  interest  rate of 7.25%.
Proceeds from the loan were used to purchase mining and other vehicles. Payments
are made monthly,  and at December 31, 2004, the principal  remaining balance of
the loan was approximately $532,900.

         SENIOR SECURED CREDIT FACILITY

         On  November  26,  2004,  our  Tennessee   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  company  and  our  subsidiary,  NC  Transportation,  Inc.,  guaranteed  the
obligations of National Coal Corporation under the credit agreement.  The credit
agreement  provides  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
rate of  interest  per annum  publicly  announced  from time to time by JPMorgan
Chase as its prime rate in effect at its principal office in New York City, plus
5.75%.  The obligations  under the credit agreement are secured by substantially
all of our assets and those of our subsidiaries.

         Amounts  borrowed  under the Credit  Agreement  are  payable in monthly
installments  of amounts  equal to 50% of our Free Cash Flow (as  defined in the
credit agreement) and become  immediately due and payable on their maturity date
of November 26, 2006. Under this facility,  we are subject to numerous financial
covenants, including that:


                                       33
<PAGE>


         o        we maintain a specified  minimum  EBITDA (as defined in credit
                  agreement)  for  specified  periods  ending  on each  calendar
                  quarter during the term of the credit agreement;

         o        we do not  exceed  a  specified  ratio of debt to  EBITDA  for
                  specified  periods ending on each calendar  quarter during the
                  term of the credit agreement;

         o        we  maintain a specified  minimum  ratio of EBITDA to interest
                  expense for specified  periods ending on each calendar quarter
                  during the term of the credit agreement;

         o        we maintain a specified  minimum fixed charge  coverage  ratio
                  for specified  periods ending on each calendar  quarter during
                  the term of the credit agreement;

         o        we meet minimum monthly sales requirements;

         o        our general and administrative costs on an annualized basis as
                  of specified  periods  ending on each calendar  quarter during
                  the term of the credit  agreement  do not  exceed a  specified
                  percentage of our coal sales for each such period; and

         o        we will  not  make  any  capital  expenditures  except  in the
                  ordinary course of business in accordance with past practices.

         At December  31, 2004,  we were not in  compliance  with our  financial
covenants related to EBITDA or our minimum monthly sales  requirements under the
credit agreement. On March 29, 2005, we amended our credit agreement,  effective
as of  December  31,  2004,  at a cost of  $120,000,  to  revise  our  financial
covenants  related to EBITDA and minimum monthly sales  requirements to bring us
back into compliance. The new financial covenants with D. B. Zwirn are effective
for  the  term  of the  credit  agreement  and  are  based  on our  projections.

OFF-BALANCE SHEET ARRANGEMENTS

         At  December  31,  2004  and  December  31,  2003,  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,
2004 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

                                     PAYMENTS DUE BY PERIOD
                  --------------------------------------------------------------
                               LESS THAN 1      1-3          3-5        AFTER
                     TOTAL        YEAR         YEARS        YEARS      5 YEARS
----------------- -----------  -----------  -----------  ----------  -----------
Notes payable ... $15,532,908  $   329,511  $15,203,397  $     --    $      --
Operating leases.     260,200      160,200      100,000        --           --
Capital leases ..   4,191,200    2,419,300    1,771,900        --           --
Employment
  obligations....   2,246,750    1,649,000      597,750        --           --
                  -----------  -----------  -----------  ----------  -----------
  Total
    contractual
    obligations.. $22,231,058  $ 4,558,011  $17,673,047  $     --    $      --
                  ===========  ===========  ===========  ==========  ===========


                                       34
<PAGE>


         In November 2004,  pursuant to our signed asset purchase agreement with
Appalachian  Fuels,  LLC, we agreed to replace $6.5 million of their reclamation
bonds on the Straight Creek, KY mining operations upon the transfer to us all of
the mining permits listed in the asset purchase agreement.  To date, Appalachian
Fuels has not fulfilled  this  obligation and has indicated that there are three
permits which are still to be transferred.  They have indicated to us that final
transfer  may  take a  number  of  months.  None  of the  mining  permits  to be
transferred to us are for mines which are in current production and as such lack
of transfer does not impact our current or planned operations.

         Our notes payable at December 31, 2004 consisted of the following:

                                                                  AMOUNT DUE AT
                                                                  DECEMBER 31,
PROMISSORY NOTES                                                      2004
---------------------------------------------------------------   ------------
Senior  credit  facility  dated  November 26, 2004;
   interest  rate of Prime + 5.75%,  payable
   monthly,  with principle reductions also
   payable monthly based on 50% of Free Cash Flow (as
   defined in the credit facility) ............................   $15,000,000
Bank loan dated July 29, 2004; interest rate of
   7.25%, payable monthly .....................................       532,908
                                                                  -----------
           TOTAL ..............................................   $15,532,908
---------------------------------------------------------------   -----------

         We rent mining equipment  pursuant to operating lease  agreements,  and
made lease payments  totaling  $516,600  during the twelve months ended December
31, 2004.

         In  September  2004,  we  purchased  an office  building in  Knoxville,
Tennessee for $690,000,  which is the new location of our corporate  operations.
The building has been pledged to satisfy certain OSM bonding requirements.

         In April and October 2004,  Crestview Capital Master,  LLC converted an
aggregate of approximately $3.19 million of two convertible notes into 1,597,451
shares of our common stock.

         In December 2004, we repaid  Crestview  Capital  Master,  LLC for notes
payable  they  held  in  the   principal   amounts  of  $75,000  and   $195,314,
respectively.

         In December 2004,  Crestview Capital Master,  LLC and SDS Capital Group
SPC, Ltd.  converted  $3,000,000 of convertible notes payable into 200 shares of
Series A  convertible  preferred  stock and  warrants  to purchase up to 100,000
shares of common stock.

         In  December  2004,  we paid  dividends  to the holders of our Series A
convertible  preferred  stock  in the  aggregate  of  $281,117  pursuant  to the
securities  purchase  agreement wherein we are required to make semi-annual cash
dividend payments on June 30 and December 31.

         Subsequent   to  December   31,   2004,   we  borrowed  an   additional
approximately  $5.14  million  to  purchase  mining  equipment.  The  note has a
maturity of August 10, 2005, is secured by the mining equipment  purchased,  and
has a rate of interest of eighteen  percent (18%) per annum  calculated from the
61st day until maturity.  We paid an origination fee of  approximately  $200,000
upon the  execution of the loan  documents.  The lenders were also issued 5-year
common stock  purchase  warrants to purchase up to 140,000  shares of our common
stock at an exercise price per share of $8.50.  Crestview  Capital  Master,  LLC
participated in this transaction.


                                       35
<PAGE>


CAUTIONARY STATEMENTS AND 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

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.

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 calendar 2004 were approximately  $16.9 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.

THE LOSS OF, OR CONFLICTS WITH, 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,  as well as our  consultants,  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. There is no assurance that we will be able to retain these personnel,
and it may be  time  consuming  and  costly  to  recruit  qualified  replacement
personnel.

         Certain conflicts of interest may exist between our officers, directors
and us.  Although  management's  time is  devoted to our  business,  some of our
officers and directors have other business  interests to which they devote their
attention, and they may be expected to continue to do so. As a result, conflicts
of interest may arise that can be resolved  only through the exercise of prudent
judgment  consistent with such officers' and directors'  fiduciary duties to us.
We may,  from time to time,  find that the  inability of our directors and other
officers to devote their complete  attention to our business  results in a delay
in progress toward implementing our business plan, and detrimentally affects our
business.


                                       36
<PAGE>


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 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.

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.

RISKS INHERENT TO MINING 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 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.

THE  GOVERNMENT  EXTENSIVELY  REGULATES  OUR 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,  significant  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


                                       37
<PAGE>


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 93% of 1990 levels over a five-year budget 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 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 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.

OUR FUTURE SUCCESS DEPENDS UPON OUR ABILITY TO CONTINUE ACQUIRING AND DEVELOPING
COAL RESERVES THAT ARE ECONOMICALLY RECOVERABLE.

         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  profitably  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. 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.
Additionally,  the federal government limits the amount of federal land that may
be leased by any company to 150,000 acres  nationwide.  As of December 31, 2004,
we leased no acres from the federal  government.  The limit could  restrict  our
ability to lease significant federal lands.

         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. Our
mining operations are conducted on mineral rights owned and/or leased by us., If
defects in title or boundaries are found to exist after we commence mining,  our
right to mine may be materially  adversely  affected.  In addition,  in order to
develop our coal deposits,  we must receive  various  governmental  permits.  We
cannot predict whether we will continue to receive the permits  necessary for us
to operate profitably in the future.

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


                                       38
<PAGE>


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, 2004,  $257,500 was on deposit with
OSM for reclamation bonds related to our Patterson  Mountain mining  operations.
In  addition,   we  have  approximately   $4.27  million  of  cash  invested  in
certificates of deposit,  against which an irrevocable  bank letter of credit is
written in favor of OSM and have posted a $700,000  letter of credit  secured by
our executive office building favor of OSM for the reclamation  bonds related to
our mine #7, mine #9, and mine #1 operations and other mining  permits  acquired
from U.S. Coal, Inc. 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 credit facility; and

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

TERRORIST  ATTACKS AND THREATS,  ESCALATION OF MILITARY  ACTIVITY IN RESPONSE TO
SUCH  ATTACKS  OR ACTS OF WAR MAY  NEGATIVELY  AFFECT  OUR  BUSINESS,  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

         Terrorist  attacks and  threats,  escalation  of  military  activity in
response  to such  attacks or acts of war 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.  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.

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  on  the
Over-the-Counter  Bulletin  Board,  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.


                                       39
<PAGE>


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.

THE SALE OF OUR  COMMON  STOCK ON THE  OVER-THE-COUNTER  BULLETIN  BOARD AND THE
POTENTIAL  DESIGNATION  OF OUR COMMON STOCK AS A "PENNY  STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.

         Our securities,  as traded on the Over-the-Counter Bulletin Board, will
be subject to Securities and Exchange Commission rules that impose special sales
practice  requirements upon  broker-dealers  who sell such securities to persons
other than established  customers or accredited  investors.  For purposes of the
rule, the phrase  "accredited  investors" means, in general terms,  institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual  income that exceeds  $200,000 (or that,  when
combined with a spouse's income, exceeds $300,000).  For transactions covered by
the rule, the broker-dealer  must make a special  suitability  determination for
the purchaser and receive the purchaser's  written  agreement to the transaction
prior  to  the  sale.   Consequently,   the  rule  may  affect  the  ability  of
broker-dealers  to sell our  securities  and  also may  affect  the  ability  of
purchasers to sell their securities in any market that might develop therefore.

         In  addition,  the  Securities  and Exchange  Commission  has adopted a
number of rules to regulate  "penny  stock." Such rules  include  Rules  3a51-1,
15g-1,  15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities
and Exchange Act of 1934,  as amended.  Because our  securities  may  constitute
"penny stock"  within the meaning of the rules,  the rules would apply to us and
to our  securities.  The rules may  further  affect the ability of owners of our
common stock to sell our securities in any market that might develop for them.

         Shareholders should be aware that, according to Securities and Exchange
Commission,  the  market  for penny  stocks has  suffered  in recent  years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the  security  by one or a few  broker-dealers  that are  often  related  to the
promoter or issuer; (ii) manipulation of prices through prearranged  matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices   involving   high-pressure   sales  tactics  and  unrealistic   price
projections  by  inexperienced  sales persons;  (iv)  excessive and  undisclosed
bid-ask  differentials  and  markups  by  selling  broker-dealers;  and  (v) the
wholesale dumping of the same securities by promoters and  broker-dealers  after
prices have been  manipulated to a desired level,  resulting in investor losses.
Our  management  is aware of the abuses that have occurred  historically  in the
penny stock market. Although we do not expect to be in a position to dictate the
behavior  of the market or of  broker-dealers  who  participate  in the  market,
management  will strive within the confines of practical  limitations to prevent
the described patterns from being established with respect to our securities.

WE DO NOT FORESEE PAYING DIVIDENDS IN THE NEAR FUTURE.

         We have not paid  dividends on our common  stock and do not  anticipate
paying such dividends in the foreseeable  future.  We are restricted from making
cash  dividend  payments  on our  common  stock  under the terms of our Series A
convertible preferred stock.

OUR  ISSUANCE  OF  FURTHER  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,


                                       40
<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

         o        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.

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.


                                       41
<PAGE>


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  February  17,  2005,  our  officers  and  directors  and  their
affiliates  owned  approximately  35.3% 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,  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.


                                       42
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----
AUDITED FINANCIAL STATEMENTS:

   Report of Independent Registered Public Accounting Firm..................  44

   Consolidated Balance Sheet at December 31, 2004..........................  45

   Consolidated Statement of Operations for the Eleven Months
      Ended December 31, 2003 and the Twelve Months Ended
      December 31, 2004.....................................................  46

   Consolidated Statement of Cash Flows for the Eleven Months
      Ended December 31, 2003 and the Twelve Months Ended
      December 31, 2004.....................................................  47

   Consolidated Statement of Changes in Stockholders' Equity from
      Inception (January 30, 2003) to December 31, 2004.....................  48

   Notes to the Consolidated Financial Statements...........................  49


                                       43
<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.  as of
December 31, 2004, and the related consolidated  statements of operations,  cash
flows and changes in stockholders' equity for the year then ended and the eleven
month period from its inception  (January 30, 2003) to December 31, 2003.  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 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 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, 2004, and the  consolidated  results of its operations and
its cash  flows for the year then  ended and the eleven  month  period  from its
inception  to December  31,  2003,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


/s/ GORDON, HUGHES & BANKS, LLP
-------------------------------
Greenwood Village, Colorado
February  11,  2005,  except  as to the last
   four  paragraphs  of NOTE #9,  which date
   is March 29, 2005.


                                       44
<PAGE>


                               NATIONAL COAL CORP.
                           CONSOLIDATED BALANCE SHEET

                                                                    DECEMBER 31,
                                                                       2004
                                                                   -------------
ASSETS
CURRENT ASSETS
   Cash and cash equivalents ..................................    $    351,698
   Accounts receivable ........................................       1,903,734
   Inventory ..................................................         264,873
   Prepaid and other ..........................................         263,699
                                                                   ------------
     TOTAL CURRENT ASSETS .....................................       2,784,004
                                                                   ------------

PROPERTY, PLANT AND EQUIPMENT
   Land .......................................................         774,290
   Mining equipment ...........................................      13,703,820
   Computer equipment and software ............................          81,474
   Vehicles and mobile equipment ..............................       3,231,267
   Buildings ..................................................       5,875,995
   Office equipment and furniture .............................          42,517
                                                                   ------------
                                                                     23,709,363
Less:  accumulated depreciation ...............................      (1,716,467)
                                                                   ------------
   TOTAL PROPERTY, PLANT AND EQUIPMENT, NET ...................      21,992,896
                                                                   ------------

Coal and mineral rights, net of $131,214 accumulated
   amortization and depletion .................................      13,916,013
Certificates of deposit and reclamation bond ..................       4,526,600
Loan acquisition costs, net of $30,924 accumulated
   amortization ...............................................         782,500
Prepaid royalty ...............................................         392,500
Deposits ......................................................         156,000
                                                                   ------------
   TOTAL ASSETS ...............................................    $ 44,550,513
                                                                   ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable and accrued expenses ......................    $  3,859,327
   Short term portion of capital lease obligations ............       2,350,566
   Accrued payroll and payroll taxes payable ..................         272,269
   Current portion of bank loans - vehicles ...................         329,511
                                                                   ------------
     TOTAL CURRENT LIABILITIES ................................       6,811,673

   Senior credit facility .....................................      15,000,000
   Long term portion of capital lease obligations .............       1,840,658
   Long term portion of bank loans - vehicles .................         203,397
   Long term portion of asset retirement obligations ..........       2,093,759
                                                                   ------------
     TOTAL LIABILITIES ........................................      25,949,487
                                                                   ------------

STOCKHOLDERS' EQUITY
   Series A convertible preferred stock,
     par value; 5% coupon; 1,611 shares
     authorized; 1,456.67 shares issued and outstanding .......            --
   Common stock, $.0001 per value; 80 million shares
     authorized; 13,391,344 shares issued and outstanding .....           1,300
   Additional paid-in capital .................................      32,361,741
   Accumulated deficit ........................................     (13,762,015)
                                                                   ------------
     TOTAL STOCKHOLDERS' EQUITY ...............................      18,601,026
                                                                   ------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...............    $ 44,550,513
                                                                   ------------

                 See Notes to Consolidated Financial Statements.


                                       45
<PAGE>


                               NATIONAL COAL CORP.

                      CONSOLIDATED STATEMENT OF OPERATIONS

                                                   ELEVEN MONTHS   TWELVE MONTHS
                                                       ENDED           ENDED
                                                    DECEMBER 31,    DECEMBER 31,
                                                       2003            2004
                                                   ------------    ------------

REVENUES
  Coal sales ...................................   $  1,012,520    $ 16,871,346
  Royalty receipts .............................        178,123         103,403
  Other revenue ................................           --            24,163
                                                   ------------    ------------
   TOTAL REVENUE ...............................      1,190,643      16,998,912
                                                   ------------    ------------

EXPENSES
  Cost of sales and selling expenses ...........      1,657,570      15,978,686
  General and administrative ...................      1,871,414       5,242,437
  Exploration costs ............................         80,367         343,946
  Depreciation and depletion ...................        250,527       2,175,133
  Amortization .................................        366,628         298,236
                                                   ------------    ------------

   TOTAL OPERATING EXPENSES ....................      4,226,506      24,038,438
                                                   ------------    ------------

LOSS FROM OPERATIONS ...........................     (3,035,863)     (7,039,526)
                                                   ------------    ------------

OTHER INCOME (EXPENSE)
  Other income (expense), net ..................         75,437         (40,682)
  Financing fees ...............................           --          (458,187)
  Interest expense .............................       (372,459)     (2,890,735)
                                                   ------------    ------------
   TOTAL OTHER INCOME (EXPENSE) ................       (297,022)     (3,389,604)
                                                   ------------    ------------

NET (LOSS) .....................................     (3,332,885)    (10,429,130)

PREFERRED STOCK DIVIDEND .......................           --       (18,893,509)
                                                   ------------    ------------

NET (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS .   $ (3,332,885)   $(29,322,639)
                                                   ============    ============

BASIC AND DILUTED
NET (LOSS) PER COMMON SHARE ....................   $      (0.36)   $      (2.60)
                                                   ============    ============

WEIGHTED AVERAGE
COMMON SHARES ..................................      9,137,630      11,261,800
                                                   ============    ============

                 See Notes to Consolidated Financial Statements.


                                       46
<PAGE>


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

<CAPTION>
                                                               ELEVEN MONTHS   TWELVE MONTHS
                                                                   ENDED           ENDED
                                                               DECEMBER 31,    DECEMBER 31,
                                                                   2003           2004
                                                               ------------    ------------
<S>                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) ...............................................   $ (3,332,885)   $(10,429,130)
  Adjustments to reconcile net (loss) to net cash
  provided by operating activities
     Depreciation, depletion and accretion .................        250,527       1,963,143
     Amortization ..........................................        366,628         298,236
     Beneficial conversion feature of debt recorded as
       interest expense ....................................           --         1,700,000
     Issuance of common stock in lieu of interest payments .           --           165,314
     Issuance of warrants for services .....................           --            48,760
     Non-cash compensation:
       Non-cash compensation to related party ..............        191,000            --
       Common stock issued in payment of accrued salary ....           --           226,573
       Stock option expense ................................           --           903,375
       Common stock issued for outside services ............        153,500            --
     Changes in operating assets and liabilities:
       Receivables .........................................        (19,327)     (1,899,407)
       Inventory ...........................................       (145,863)       (119,010)
       Prepaid and other ...................................        (15,197)       (233,502)
       Accounts payable and accrued liabilities ............        831,158       3,299,551
       Deferred revenue ....................................        179,050        (179,050)
       Asset retirement  obligations .......................           --           (87,090)
                                                               ------------    ------------
         Net cash flows (used in) operating activities .....     (1,541,409)     (4,342,237)
                                                               ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Property, plant and equipment purchased ..................       (425,462)    (17,708,242)
  Acquisition of coal and mineral rights ...................     (1,307,917)    (10,891,819)
  Certificates of deposit and reclamation bond .............       (257,500)     (4,269,100)
  Prepaid royalty ..........................................           --          (392,500)
  Deposits .................................................           --          (156,000)
                                                               ------------    ------------
     Net cash flows (used in) investing activities .........     (1,990,879)    (33,417,661)
                                                               ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of common and preferred stock .        287,500      16,616,317
  Proceeds from exercise of warrants .......................           --         1,109,001
  Proceeds from issuance of notes payable ..................      3,662,591      25,500,000
  Loan acquisition costs ...................................       (412,235)     (1,025,424)
  Payments on notes payable ................................       (226,500)     (3,045,314)
  Proceeds from / (payment) of related party debt ..........        560,000        (560,000)
  Proceeds from bank loans .................................           --           742,894
  Payments on bank loans ...................................           --          (209,987)
  Payments on capital leases ...............................       (317,112)       (735,657)
  Dividend payments to preferred stockholders ..............           --          (281,117)
  Repurchase and cancellation of common stock ..............        (21,073)           --
                                                               ------------    ------------
     Net cash flows provided by financing activities .......      3,533,171      38,110,713
                                                               ------------    ------------

NET INCREASE IN CASH .......................................            883         350,815
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD ..............           --               883
                                                               ------------    ------------
CASH AND CASH EQUIVALENTS END OF PERIOD ....................   $        883    $    351,698
                                                               ============    ============

SUPPLEMENTAL DISCLOSURES
  Interest paid in cash ....................................   $    270,862    $  1,190,735
   Non-cash investing and financing transactions:
       Conversion of notes payable to preferred stock ......           --         7,725,000
       Conversion of notes payable to common stock .........           --         3,392,902
       Equipment acquired with capital lease obligations ...        775,916       4,468,077
       Stock issued in partial payment of land .............           --           351,000
       Constructive dividend attributable to preferred
         shareholders ......................................           --        18,612,392
       Asset retirement obligations resulting from
         acquisitions of mining properties .................         57,312       1,790,179
       Assumption of promissory notes from Strata Coal, LLC:
         Charged to operations .............................        191,000            --
         Partial payment of mining equipment ...............         23,000            --
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       47
<TABLE>
                               NATIONAL COAL CORP.
                      CONSOLIDATED STATEMENT OF CHANGES IN
                              STOCKHOLDERS' EQUITY

<CAPTION>
                                    PREFERRED STOCK               COMMON STOCK          ADDITIONAL
                                ------------------------   ------------------------      PAID-IN       ACCUMULATED
                                  SHARES        AMOUNT       SHARES        AMOUNT        CAPITAL        DEFICIT          TOTAL
                                ----------    ----------   ----------    ----------    -----------    ------------    ------------
<S>                               <C>         <C>          <C>           <C>           <C>            <C>             <C>
INCEPTION, JANUARY 30, 2003          --      $     --            --      $     --      $      --      $       --      $       --
Reorganization April 2003:
   Net liabilities of the
     Company ...............         --            --         471,844            47        177,176        (191,235)        (14,012)
   Issuance of shares to NCC
     (TN) shareholders for
     cash ($17,500) and
     services ($153,500) ...         --            --       8,549,975           855        (21,090)        191,235         171,000
Sale of stock for cash .....         --            --         337,500            34        269,966            --           270,000
Repurchase and cancellation          --            --        (105,363)          (10)       (21,062)           --           (21,072)
Net (loss) .................         --            --            --            --             --        (3,332,885)     (3,332,885)
                                ----------    ----------   ----------    ----------    -----------    ------------    ------------
BALANCE, DECEMBER 31, 2003 .                       --       9,253,956           926        404,990      (3,332,885)     (2,926,969)

Conversion of notes payable
   and $4,422 of accrued
   interest ................         --            --          92,099             9        202,611            --           202,620
Private placement of common
   stock ...................         --            --       1,250,000           125      2,749,875            --         2,750,000
Issuance for accrued officer
   salary ..................         --            --          41,958             4        226,569            --           226,573
Conversion of accrued
   interest ................         --            --          80,347             8        160,685            --           160,693
Conversion of Crestview
   notes payable ...........         --            --       1,597,451           160      3,194,743            --         3,194,903
Issuance to acquire land ...         --            --          75,000             7        350,993            --           351,000
Cash exercise of warrants ..         --            --         478,061            48      1,108,953            --         1,109,001
Cashless exercise of
   warrants ................         --            --         389,139          --             --              --              --
Sale of preferred stock ....        995.00         --            --            --       14,925,000            --        14,925,000
Conversion of bridge loan ..        315.00         --            --            --        4,725,000            --         4,725,000
Preferred stock issuance
   costs ...................         --            --            --            --       (1,058,683)           --        (1,058,683)
Conversion of promissory
   notes ...................        200.00         --            --            --        3,000,000            --         3,000,000
Conversion of preferred
   stock ...................        (53.33)        --         133,333            13            (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
Preferred stock constructive
   dividend ................         --            --            --            --       18,612,392)           --       (18,612,392)
Dividends paid on preferred
   stock ...................         --            --            --            --         (281,117)           --          (281,117)
Net (loss) .................         --            --            --            --             --       (10,429,130)    (10,429,130)
                                ----------    ----------   ----------    ----------    -----------    ------------    ------------
BALANCE, DECEMBER 31, 2004 .      1,456.67    $     --     13,391,344    $    1,300    $32,361,741    $(13,762,015)   $ 18,601,026
                                ==========    ==========   ==========    ==========    ===========    ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       48
<PAGE>


                               NATIONAL COAL CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       BUSINESS OVERVIEW

         National Coal Corp.  (the  "Company")  was  incorporated  in Florida on
August 10, 1995. The Company engages  principally in the business of mining coal
in Eastern  Tennessee  and  Southeastern  Kentucky.  Its customers are primarily
state operated electric  utilities and industrial  concerns in the immediate and
surrounding states.

         Historical  operations  of the Company  prior to April 30, 2003 reflect
only the operations of National Coal  Corporation,  a  privately-held  Tennessee
corporation.  On April 30, 2003,  the Company  consummated a  reorganization  in
which all of the outstanding shares of National Coal Corporation, were exchanged
for  8,549,975  shares of common  stock.  From its inception on January 30, 2003
through June 30, 2003,  National Coal  Corporation was in the exploration  stage
with no  operating  revenue.  During  the third  quarter  of 2003,  the  Company
commenced  coal  mining  operations  and,  accordingly,  was  no  longer  in the
exploration  stage. As a result of the  reorganization  and the  commencement of
operating activities,  the results for the eleven months from inception (January
30, 2003) to December 31, 2003 are not comparable to those for the twelve months
ended December 31, 2004.

         The Company owns the coal mineral  rights to  approximately  sixty-five
thousand  (65,000)  acres and leases  another  approximate  twelve  thousand one
hundred  (12,100)  acres in  Tennessee,  and owns the  coal  mineral  rights  to
approximately  eleven  thousand seven hundred  (11,700) acres and leases another
approximate  eighteen  thousand  two hundred  (18,200)  acres in  Kentucky.  The
Company commenced mining coal in July 2003 from a surface mine in Tennessee.  At
December  31,  2004,  the  Company  was  extracting  coal from four deep  mines,
commonly  referred  to as "mine TN #9" and  "mine TN #11" near  Smoky  Junction,
Tennessee, "mine KY #1" on the Straight Creek property in Southeastern Kentucky,
and "mine TN #1" near Devonia,  Tennessee, and a surface mine, commonly referred
to as "mine TN #7",  in the Elk Valley  area of Eastern  Tennessee.  The Company
commenced mining coal from mine TN #9 in April 2004 upon its purchase of mineral
rights  from  U.S.  Coal,  Inc.,  mine TN #1 in  August  2004 and mine TN #11 in
November 2004 pursuant to lease rights  purchased from  Lexington  Coal, LLC and
U.S.  Coal  respectively,  mine TN #7 in October  2004  pursuant to lease rights
purchased  from Robert Clear Coal  Corporation,  and mine KY #1 in November 2004
upon its purchase of mineral rights from Appalachian Fuels, LLC.

         The Company is seeking  additional  funding and believes that this will
result in improved operating results.  There can be no assurance,  however, that
the Company will be able to secure additional  funding,  or that if such funding
is  available,  whether  the  terms or  conditions  would be  acceptable  to the
Company.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The  accompanying  financial  statements  include  the  accounts of the
Company and its wholly-owned subsidiaries, National Coal Corporation (Tennessee)
and NC Transportation, Inc. All intercompany transactions and balances have been
eliminated in consolidation.

USE OF ESTIMATES

         The  preparation of financial  statements in conformity  with generally
accepted accounting  principles in the United States requires management to make
estimates and assumptions that materially



                                       49
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


affect the amounts reported in the financial  statements and accompanying notes.
Actual results could materially differ from those estimates.

REVENUE RECOGNITION

         Under SEC Staff Accounting Bulletin No. 104, "Revenue Recognition," the
Company  recognizes  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.

         MINED COAL. In the case of coal mined and sold, the Company  negotiates
a specific sales  contract with each customer,  which includes a fixed price per
ton, a delivery schedule,  and terms for payment. The Company recognizes revenue
from sales made pursuant to these contracts at the time of delivery.

         COAL ROYALTIES.  The Company  recognizes  coal royalty  revenues on the
basis of tons of coal mined by a lessee. During 2004, the Company had one source
of royalty revenue pursuant to its agreement with Jenco Capital  Corporation,  a
related  party  (SEE NOTE  #7).  The  Company  recognized  the  final  remaining
royalties  pursuant to its agreement  with Jenco in 2004 and does not anticipate
any future royalty transactions in the foreseeable future.

         ACCOUNTS  RECEIVABLE.   Unless  cash  is  paid  in  advance,   accounts
receivable   are   recorded  as  revenue  is  earned  and  are   evaluated   for
collectibility on a continual basis. Allowances,  if necessary, are provided for
potentially  uncollectible  accounts  based  on  management's  estimate  of  the
collectibility of customer  accounts.  If the financial  condition of a customer
were to deteriorate, resulting in an impairment of its ability to make payments,
an additional  allowance  may be required.  Allowance  adjustments,  if any, are
charged  to  operations  in the  period in which the facts that give rise to the
adjustments  become known.  To date,  the Company has not had any customer whose
payment was considered  past due, and as such, has not recorded any reserves for
doubtful collectibility.

COST OF MINING OPERATIONS AND SELLING EXPENSES

         Cost of mining  operations and selling expenses  consists  primarily of
direct  compensation and benefits costs for miners, as well as direct costs such
as  equipment  leases  and  maintenance,  payments  to  third  parties  for coal
purchases,  parts and supplies,  blasting, fuel, parts, hauling costs, royalties
and taxes, and commissions paid to third party brokers.

EXPLORATION COSTS

         Costs related to locating coal  deposits and  determining  the economic
mineability of such deposits are expensed as incurred.

RESERVES

         The  Company  does  not  disclose  coal  "reserves"  in  its  financial
statements.  "Reserves," to be so classified,  must (i) be based upon reasonably
accurate  scientific  data  and  professional  analysis,   (ii)  be  recoverable
(economically  and  physically),  (iii)  have a  permitted  and  operating  mine
facility at the coal location, and (iv) be subject to current sales. The Company
has not  satisfied  all of these  requirements  with respect to its coal mineral
rights.  To record coal  reserves,  in addition to the other  requirements,  the
Company  would  have to  engage a  geologist  to  render a  professional  report
indicating  the  recoverable  tonnage on the portions of our property  which are
permitted and being actively mined.


                                       50
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


RECLAMATION AND ASSET RETIREMENT OBLIGATIONS

         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 deep 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
Statement of Financial Accounting  Standards,  or SFAS, No. 143, "ACCOUNTING FOR
ASSET RETIREMENT  OBLIGATIONS".  The Company records its reclamation obligations
on a  mine-by-mine  basis based upon current permit  requirements  and estimated
reclamation  obligations for such mines as determined by the U.S.  Department of
the Interior,  Office of Surface Mining ("OSM") when a  predetermined  amount of
reclamation  bonds are posted prior to commencing mining  operations.  The OSM's
estimates of disturbed acreage are determined based on approved mining plans and
related  engineering  data. Cost estimates are based upon estimates  approved by
OSM based on  historical  costs.  In  accordance  with SFAS No. 143, the Company
determines the fair value of its asset  retirement  obligation  ("ARO)") using a
discounted  cash flow  methodology  based on a  discount  rate  related  to U.S.
treasury bonds with maturities similar to the expected life of a mine,  adjusted
for the Company's credit standing.

         On at least an annual basis, the Company reviews its entire reclamation
liability and makes  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.  At December 31, 2004,  the Company had  recorded  asset  retirement
obligation  liabilities of approximately $2.3 million.  While the precise amount
of these future costs cannot be determined  with  certainty,  as of December 31,
2004, the Company  estimates that the aggregate  undiscounted cost of final mine
closure is approximately $5.2 million.

         SFAS No. 143 requires  recognition of expenses for eventual reclamation
of disturbed  acreage  remaining after mining  production has been completed.  A
liability  is recorded  for the present  value of  reclamation  and mine closing
costs with a  corresponding  increase  in the asset  carrying  value of coal and
mineral rights at the time a mine is permitted and commences operations. The ARO
asset is amortized  proportionate  to the estimated  total tonnage mined and the
ARO liability is accreted to its present  value based on the projected  spending
date. (SEE NOTE #8).

STOCK-BASED COMPENSATION

         The Company  accounts for  stock-based  compensation  using  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "ACCOUNTING  FOR STOCK  ISSUED TO
EMPLOYEES".  Under APB No.  25,  compensation  expense is  recognized  for stock
options  with an exercise  price that is less than the market price on the grant
date of the option.  For stock  options  granted  employees  or  directors  with
exercise prices at or above the market value of the stock on the grant date, the
Company  has  adopted  the  Financial   Accounting   Standards   Board  ("FASB")
disclosure-only  provisions of Statement of Financial  Accounting  Standards No.
123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"), and accordingly
has not recorded any compensation costs for these types of option grants. Except
for the issuance of 1,237,500 options granted to directors and officers in March
2004,  the Company has not  recorded any  compensation  costs for these types of
option grants.

         As of  December  31,  2004 and  since  inception,  the  Company  issued
1,448,750  employee  stock  options to  employees  and  directors,  and incurred
approximately $903,000 of non-cash compensation


                                       51
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


expense in accordance  with APB No. 25 for  1,237,500 of these  options  granted
during 2004 with exercise  prices below market prices (SEE NOTE #6).  There were
no options issued in 2003.

         If the Company had used the fair value based method of  accounting  for
its stock option plan, as prescribed  by SFAS No. 123,  additional  compensation
expenses   included  in  the  net  (loss)  for  2004  would  have  increased  by
$(5,646,461)  and $(0.50) per common  share,  resulting  in a 2004 pro forma net
loss attributable to common shareholders of $(34,969,100) and $(3.11) per share.

         For  purposes of  calculating  fair value under SFAS No. 123,  the fair
value  of each  option  grant  is  estimated  on the  date of  grant  using  the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions:  no dividend  yield,  expected  volatility rate of between 112% and
133%; risk free interest rate of 3.25%; and average lives of 4 years.

BENEFICIAL CONVERSION FEATURE OF DEBT AND PREFERRED STOCK

         In accordance with Emerging Issues Task Force No. 98-5, "ACCOUNTING FOR
CONVERTIBLE  SECURITIES  WITH  BENEFICIAL  CONVERSION  FEATURES OR  CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS," and No. 00-27,  "APPLICATION OF ISSUE NO. 98-5 TO
CERTAIN CONVERTIBLE INSTRUMENTS," the Company recognizes the value of conversion
rights  of  convertible  debt and  equity  instruments.  These  rights  give the
instrument holder the immediate ability to convert debt or preferred equity into
common  stock at a price per share  that is less than the  trading  price of the
common stock to the public. The beneficial  conversion value is calculated based
on the  market  price  of the  stock at the  commitment  date in  excess  of the
conversion rate of the debt and related accruing interest or preferred stock and
is  recorded  as a discount  to the  related  debt or  constructive  dividend to
preferred  stockholders and an addition to Additional Paid-in Capital.  The debt
discount  is  amortized  and  recorded as interest  expense  over the  remaining
outstanding period of related debt.

         During 2004, the Company recorded  beneficial  conversion debt discount
and preferred stock constructive dividends of $1,700,000 and $18,612,392,
respectively.

COMPREHENSIVE INCOME

         There are no adjustments  necessary to the net loss as presented in the
accompanying   statement  of  operations  to  derive   comprehensive  income  in
accordance with Statement of Financial  Standards  ("SFAS") No. 130,  "REPORTING
COMPREHENSIVE INCOME."

SEGMENT REPORTING

         In June 1997, SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED  INFORMATION,"  was issued.  Operating  segments,  as defined in the
pronouncement,  are components of an enterprise  about which separate  financial
information  is available  and that are  evaluated  regularly by  management  in
deciding how to allocate  resources and assess  performance.  During the periods
presented, the Company had one operating segment, coal mining.

CASH AND CASH EQUIVALENTS

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


                                       52
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


MARKETABLE SECURITIES

         The  Company  has  adopted  SFAS  No.  115,   "ACCOUNTING  FOR  CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES," in accounting for securities. During
2003, the Company completely  liquidated its investment portfolio and recognized
a net gain on sales of marketable  securities totaling $73,825.  The Company did
not own any marketable securities during 2004.

INVENTORY

         Inventory  consists  of  extracted  coal  that  is both  available  for
delivery to customers, as well as extracted coal which has been removed from the
ground but not yet processed  through a wash plant.  Coal inventory is valued at
the lower of average cost or market.  Coal  inventory  costs  include  labor and
benefits, and all expenditures directly related to the removal of coal.

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Expenditures for significant
renewals  and   improvements   that  extend  estimated  lives  are  capitalized.
Replacements  costs,  and maintenance and repairs which do not improve or extend
the life of the respective asset, are expensed as incurred.  The Company removes
the cost and the related  accumulated  depreciation from the accounts for assets
sold or retired,  and the resulting  gains or losses are included in the results
of operations.

         Leased property and equipment  meeting certain  criteria is capitalized
and the present value of the related lease payments is recorded as a liability.

         During  2004,  the  Company  acquired  two coal  processing  facilities
costing a total of  approximately  $872,000  that were idle as of  December  31,
2004.  Depreciation  expense on these assets was recorded  during 2004 since the
Company expects that their idle status is a temporary condition.

         Depreciation  is  provided  using  the  straight-line  method  over the
estimated  useful  lives or lease life of the assets,  ranging up to five years.
Depreciation  expense recorded for 2003 and 2004 was approximately  $250,000 and
$1.52 million respectively.

COAL AND MINERAL RIGHTS

         Significant  expenditures  incurred to acquire coal and mineral  rights
are capitalized at cost. These costs represent the investment in mineral rights,
including  capitalized  mine  development  costs,  which are costs  incurred  in
preparation  of opening a mine.  Depletion  and  amortization  is computed on an
actual tonnage mined basis calculated to amortize costs fully based on estimated
total tonnage to be mined.

LOAN ACQUISITION

         Loan acquisition  costs related to notes payable are amortized over the
life of the debt using the interest method.

ASSET IMPAIRMENT

         If facts  and  circumstances  suggest  that a  long-lived  asset may be
impaired,  the carrying  value is reviewed.  If this review  indicates  that the
value of the asset will not be recoverable, as determined based


                                       53
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


on projected  undiscounted  cash flows  related to the asset over its  remaining
life,  then the  carrying  value of the asset is reduced to its  estimated  fair
value based on discounted cash flows.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts for cash,  accounts  receivable,  accounts payable
and accrued  liabilities  approximate  fair value because of their  immediate or
short-term  maturities.  The fair value of notes payable approximates fair value
because of the market rate of interest on the debt.

INCOME TAXES

         Deferred  income taxes are based on temporary  differences  between the
financial  statement  and tax basis of assets and  liabilities  existing at each
balance  sheet date using  enacted  tax rates for years  during  which taxes are
expected to be paid or recovered.

NET LOSS PER COMMON SHARE

         The Company  computes and presents  loss per share in  accordance  with
SFAS No. 128, "EARNINGS PER SHARE".  Basic earnings per share are computed based
upon the weighted average number of common shares outstanding during the period.
Warrants, options, convertible debt and convertible preferred stock representing
common shares of 2,038,014 and  6,095,415 for 2003 and 2004  respectively,  were
excluded from the average number of common shares outstanding in the calculation
because the effect of inclusion would be anti-dilutive.

         All per share amounts reflect the retroactive  effect of the April 2003
merger and the 1 for 4 reverse stock split which occurred on January 12, 2005.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

         SFAS No. 105,  "DISCLOSURE OF INFORMATION  ABOUT FINANCIAL  INSTRUMENTS
WITH  OFF-BALANCE-SHEET  RISK AND FINANCIAL  INSTRUMENTS WITH  CONCENTRATIONS OF
CREDIT RISK" requires  disclosure of significant  concentrations  of credit risk
regardless of the degree of such risk.

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations of credit risk consist primarily of cash and 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.

         The  Company  maintains  the  majority  of  its  cash  deposits  in  an
international  and a local bank.  The  deposits  are  guaranteed  by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2004, the
Company's combined cash balance at these banks exceeded the FDIC insurance limit
by approximately $1.5 million.

         During the twelve months ended December 31, 2004,  the Company  derived
revenue from fourteen customers,  six of which were electric  utilities,  six of
which  were  industrial  companies,  and two of which were coal  resellers.  The
Company derived revenue in excess of ten-percent  (10%) of total coal sales from
major customers as follows:


                                       54
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


                                                         CUSTOMER
                                          A        B        C       D      E
                                        -----    -----    -----   -----  -----
         Year ended December 31:
           2004   ..............         28%      27%      16%      *       *
           2003   ..............         27%       *        *      52%     15%
                                         * Less than 10%.

         At December  31,  2004,  the Company had six  contracts  of one year or
longer.  The following  table  summarizes,  as of December 31, 2004, the tons of
coal that the  Company  is  committed  to  deliver  at prices  determined  under
existing long-term contracts, which prices are subject to change pursuant to the
terms of the contracts, during the calendar years 2005 through 2008:

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

2005 .....................           984,000         $   55.47      $ 54,581,900
2006 .....................           660,000         $   53.86      $ 35,550,000
2007 .....................           600,000         $   53.40      $ 32,040,000
2008 .....................           120,000         $   51.00      $  6,120,000
                                   ---------         ---------      ------------
    Total ................         2,364,000         $   54.27      $128,291,900
                                   =========         =========      ============

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2004, the Financial  Accounting  Standards  Board, or FASB,
issued SFAS No. 123R "SHARE-BASED PAYMENT," a revision to FASB No. 123. SFAS No.
123R replaces existing  requirements  under SFAS No. 123 and APB Opinion No. 25,
and  requires  public  companies  to  recognize  the cost of  employee  services
received in exchange for equity instruments,  based on the grant-date fair value
of those instruments,  with limited  exceptions.  SFAS No. 123R also affects the
pattern in which  compensation  cost is recognized,  the accounting for employee
share purchase  plans,  and the accounting for income tax effects of share-based
payment transactions. For small-business filers, SFAS No. 123R will be effective
for interim periods  beginning after December 15, 2005. The Company is currently
determining  what  impact the  proposed  statement  would have on its results of
operations and financial position.

         The  FASB  has  proposed  FASB  Staff  Position  No.  SFAS  No.  109 a,
"APPLICATION OF FASB STATEMENT NO. 109, ACCOUNTING FOR INCOME TAXES, FOR THE TAX
DEDUCTION PROVIDED TO U.S. BASED MANUFACTURERS BY THE AMERICAN JOBS CREATION ACT
OF 2004." On October 22,  2004,  the  AMERICAN  JOBS  CREATION  ACT OF 2004 (the
"ACT") was signed into law by the  President.  This Act  includes tax relief for
domestic  manufacturers by providing a tax deduction up to 9 percent (when fully
phased-in) of the lesser of (a)  "qualified  production  activities  income," as
defined  in the  Act,  or (b)  taxable  income  (after  the  deduction  for  the
utilization of any net operating loss carry forwards).  As a result of this Act,
an issue has arisen as to whether this  deduction  should be accounted  for as a
special  deduction or a tax rate reduction  under  Statement 109. The FASB staff
believes that the domestic manufacturing deduction's characteristics are similar
to special deductions because the domestic  manufacturing  deduction is based on
the future  performance  of specific  activities,  including the level of wages.
Accordingly,  the FASB staff believes that the deduction  provided for under the
Act should be accounted for as a special  deduction in accordance with Statement
109 and not as a tax rate  reduction.  This provision of the Act is not expected
to have an impact on the Company's financial statements.


                                       55
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         In November 2004, the FASB issued FASB Statement No. 151, which revised
ARB No.43,  relating  to  inventory  costs.  This  revision  is to  clarify  the
accounting  for abnormal  amounts of idle facility  expense,  freight,  handling
costs and wasted material  (spoilage).  This Statement requires that these items
be  recognized as a current  period  charge  regardless of whether they meet the
criterion  specified  in ARB  43.  In  addition,  this  Statement  requires  the
allocation of fixed production  overheads to the costs of conversion be based on
normal  capacity of the production  facilities.  This Statement is effective for
financial  statements for fiscal years  beginning  after June 15, 2005.  Earlier
application  is permitted  for  inventory  costs  incurred  during  fiscal years
beginning  after the date this  Statement is issued.  Management  believes  this
Statement  will have no impact on the  financial  statements of the Company once
adopted.

         In December  2004, the FASB issued FASB Statement No. 152, which amends
FASB  Statement No. 66,  Accounting  for Sales of Real Estate,  to reference the
financial  accounting  and  reporting  guidance  for  real  estate  time-sharing
transactions  that is provided in AICPA  Statement  of  Position  ("SOP")  04-2,
ACCOUNTING FOR REAL ESTATE TIME-SHARING TRANSACTIONS. This Statement also amends
FASB Statement No. 67,  ACCOUNTING  FOR COSTS AND INITIAL  RENTAL  OPERATIONS OF
REAL ESTATE PROJECTS,  to state that the guidance for (a) incidental  operations
and (b)  costs  incurred  to  sell  real  estate  projects  does  not  apply  to
real-estate time-sharing  transactions.  The accounting for those operations and
costs is subject to the guidance in SOP 04-2.  This  Statement is effective  for
financial statements for fiscal years beginning after June 15, 2005.  Management
believes this Statement  will have no impact on the financial  statements of the
Company once adopted.

         In  December  2004,  the FASB  issued  FASB  Statement  No.  153.  This
Statement  addresses the  measurement  of exchanges of nonmonetary  assets.  The
guidance in APB Opinion No. 29,  ACCOUNTING  FOR  NONMONETARY  TRANSACTIONS,  is
based on the principle that  exchanges of nonmonetary  assets should be measured
based on the fair value of the assets  exchanged.  The guidance in that Opinion,
however,  included certain  exceptions to that principle.  This Statement amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a result of the exchange.  This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges  incurred during fiscal
years beginning after the date of this Statement is issued.  Management believes
this  Statement  will have no impact on the financial  statements of the Company
once adopted.

3.       LEASE COMMITMENTS

         During the fourth  calendar  quarter of 2004, the Company  entered into
multiple  capital  lease  agreements  with a local  reseller for various  mining
equipment  with  a  combined  estimated  fair  value  of  $4.47  million,  which
approximates the present value of the minimum lease payments.  Payments are made
monthly  pursuant  to the lease  agreements  and  amortization  is  included  in
depreciation expense.

         Additionally,  the Company  rents other  mining  equipment  pursuant to
operating  lease  agreements,  and made lease  payments  totaling  approximately
$307,500 and $516,600 during 2003 and 2004.

         A summary of future minimum payments under  non-cancelable  capital and
operating lease agreements as of December 31, 2004 follows:


                                       56
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


                                        CAPITAL       OPERATING
YEAR ENDING DECEMBER 31,                 LEASES         LEASES         TOTAL
                                      -----------    -----------    -----------
2005                                  $ 2,749,200    $   163,200    $ 2,912,400
2006                                    1,989,200        110,000      2,099,200
2007                                      162,600          --           162,600
                                      -----------    -----------    -----------

  Total minimum lease payments ....     4,901,000        273,200      5,174,200
  Less imputed interest ...........      (709,800)         --          (709,800)
                                      -----------    -----------    -----------

PV of minimum lease payments ......     4,191,200    $   273,200    $ 4,464,400
                                                     ===========    ===========
Current maturities ................    (2,350,600)
                                      -----------
Long term maturities ..............   $ 1,840,600
                                      ===========

4.       NOTES PAYABLE

              SALE OF SENIOR SECURED PROMISSORY NOTES AND WARRANTS

         In April and May 2004,  the Company sold one-year  promissory  notes in
the  aggregate  principal  amount of $7.5  million  and  three-year  warrants to
purchase up to an aggregate of 625,000 shares of its common stock at an exercise
price of $4.00 per share.  The Company sold these  securities  to  institutional
investors and individual accredited  investors,  with the largest investor being
Crestview Capital Master, LLC, for an aggregate purchase price to the Company of
$7.5  million.  In August  2004,  certain  holders of this debt agreed to cancel
$4.725  million of principle in exchange for Series A preferred  stock,  and the
Company repaid the remaining $2.775 million from the proceeds raised pursuant to
the issuance of additional  shares of Series A convertible  preferred stock (SEE
NOTE #6) and retired the debt.

              SALE OF CONVERTIBLE PROMISSORY NOTES

         On August 31,  2004,  the  Company  issued  $3,000,000  of  convertible
promissory  notes to  Crestview  Capital  Master  LLC, an entity  controlled  by
Crestview  Capital Funds and SDS Capital Group SPC, Ltd. Prior to maturity,  the
convertible  promissory  notes may be  converted  into units  consisting  of the
Company's  Series A  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 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,  both  Crestview  and SDS  exercised  their  rights  and  converted  their
respective  promissory  notes into units of the Series A  convertible  preferred
stock and common stock purchase warrants (SEE NOTE #6).

         On August 31, 2004, the closing price of the Company's  common stock on
the NASDAQ  Over-the-Counter  Bulletin Board exceeded the $6.00 per share common
stock  conversion  price  of the  promissory  notes.  Accordingly,  the  Company
recorded a beneficial  conversion debt discount of $1.7 million for the issuance
of the debt below fair value and commenced amortization over the nine-month term
of the notes.  The  amortization  of the debt  discount  is recorded as interest
expense. When the $3.0 million debt was converted to preferred stock in December
2004, the Company amortized the remaining discount,  thus recognizing a total of
$1.7 million of non-cash interest expense during 2004.

              SENIOR SECURED CREDIT FACILITY

         On November 26, 2004, the Company's Tennessee subsidiary, National Coal
Corporation,  in  connection  with its  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.


                                       57
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The  Company  and  its  subsidiary,  NC  Transportation,  Inc.,  a  wholly-owned
subsidiary of the Tennessee corporation,  guaranteed the obligations of National
Coal Corporation under the credit agreement.  The credit agreement  provides for
an initial credit  facility of $15 million with a subsequent  additional  credit
facility not to exceed $6 million. The Company exercised its 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.  The Company
borrowed an additional  $1.4 million in January 2005 to fund its  acquisition of
mining  equipment.  Borrowings  under the credit  agreement bear interest at the
rate of  interest  per annum  publicly  announced  from time to time by JPMorgan
Chase as its prime rate in effect at its principal office in New York City, plus
5.75%.  The obligations  under the credit agreement are secured by substantially
all of the Company's assets and those of the Company's subsidiaries.

         Amounts  borrowed  under the credit  agreement  are  payable in monthly
installments of amounts equal to 50% of the Company's Free Cash Flow (as defined
in the  credit  agreement)  and  become  immediately  due and  payable  on their
maturity date of November 26, 2006. Under this facility,  the Company is subject
to numerous financial covenants, including that:

         o        it maintains a specified minimum earnings before income taxes,
                  depreciation and amortization  ("EBITDA," as defined in credit
                  agreement)  for  specified  periods  ending  on each  calendar
                  quarter during the term of the credit agreement;

         o        it does not  exceed a  specified  ratio of debt to EBITDA  for
                  specified  periods ending on each calendar  quarter during the
                  term of the credit agreement;

         o        it maintains a specified  minimum  ratio of EBITDA to interest
                  expense for specified  periods ending on each calendar quarter
                  during the term of the credit agreement;

         o        it maintains a specified  minimum fixed charge  coverage ratio
                  for specified  periods ending on each calendar  quarter during
                  the term of the credit agreement;

         o        it meets minimum monthly sales requirements;

         o        its general and administrative costs on an annualized basis as
                  of specified  periods  ending on each calendar  quarter during
                  the term of the credit  agreement  does not exceed a specified
                  percentage of its coal sales for each such period; and

         o        it will  not  make  any  capital  expenditures  except  in the
                  ordinary course of business in accordance with past practices.

         These financial covenants have subsequently been amended (SEE NOTE #9).

              BANK LOAN

         In July 2004, the Company borrowed  approximately  $663,300 from Sevier
County Bank in  Sevierville,  TN with a 24-month  term and an  interest  rate of
7.25%.  Proceeds from the loan were used to purchase  mining and other vehicles.
Payments are made monthly,  and at December 31, 2004,  the  principal  remaining
balance of the loan was approximately $532,900.

         The following table summarizes  future  maturities of  interest-bearing
debt obligations of the Company,  not including  capital leases, at December 31,
2004:


                                       58
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


<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>
Senior secured credit facility   $15,000,000   $      --     $15,000,000   $       --   $       --
Bank loan ....................       532,908       329,511       203,397           --           --
                                 -----------   -----------   -----------   ------------ ------------
     Total debt obligations ..   $15,532,908   $   329,511   $15,203,397   $       --   $       --
                                 ===========   ===========   ===========   ============ ============
</TABLE>

5.       INCOME TAXES

         At  December  31,  2004,  the Company  had a net  operating  loss carry
forward of approximately  $9.6 million that may be offset against future taxable
income.  These  carry  forwards  are subject to review by the  Internal  Revenue
Service and begin to expire in 2023.

         The Company  has fully  reserved  the  approximately  $3.8  million tax
benefit of the operating loss carry forward by a valuation allowance of the same
amount  because the  likelihood  of  realization  of the tax  benefit  cannot be
determined. There was an increase of approximately $2.6 million in 2004.

         Temporary  differences  between the time of reporting certain items for
financial  statement and tax reporting purposes consists primarily of beneficial
conversion  feature interest expense,  stock-based  compensation,  depreciation,
depletion and accrued reclamation expenses.

6.       EQUITY TRANSACTIONS

ISSUANCE OF STOCK UPON THE CONVERSION OF NOTES PAYABLE AND ACCRUED INTEREST

         During 2003, the Company raised gross proceeds of $198,000  pursuant to
a series of private  placements of unsecured  promissory notes to four unrelated
parties.  Each of the notes had an interest rate of 10% per annum and was due in
March 2004. In November  2003,  these note holders agreed to extend the terms of
the notes to November 2004 in  consideration of the issuance to them of warrants
to purchase an  aggregate  of 41,250  shares of our common stock at a conversion
price of $2.20  per  share.  In  January  2004,  these  four  unrelated  parties
exercised the warrants by converting their entire then outstanding principal and
accrued  interest into shares of common stock.  The Company issued 92,099 shares
of common  stock,  90,000 shares of which were issued in repayment of principal,
and 2,099 shares of which were issued in repayment of accrued interest.

         In February 2004,  Crestview Capital Master,  LLC, an entity controlled
by Crestview  Capital  Funds,  purchased four  outstanding  notes payable of the
Company from an unrelated party in the aggregate principal amount of $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 to  modify  certain
provisions.  These  notes bear  interest  at an annual  rate of 12%.  Two of the
notes, in the aggregate  principal  amount of  approximately  $3.2 million,  are
convertible into our 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 allow Crestview to purchase up to 399,312 shares
of our common stock at a price of $2.20 per share, and expire on March 25, 2005.
Two of the notes payable in the  aggregate  principal  amount of $270,314,  were
paid in full in December 2004. With respect to the convertible notes:

         o        In March 2004, the Company issued  Crestview  80,347 shares of
                  common stock upon conversion of $160,693 of accrued interest;


                                       59
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         o        In April 2004, the Company issued Crestview  250,000 shares of
                  common stock upon conversion of $500,000 of principal; and

         o        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.

ISSUANCE OF STOCK FOR CASH

     PRIVATE PLACEMENTS OF COMMON STOCK

         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 January and February 2003, a total of 874,997 shares of common stock
were sold to individuals for $17,500 ($0.04 per share). In June and July 2003, a
total of 337,500 shares were sold to investors for $270,000 ($0.80 per share).

     AUGUST 2004 PRIVATE PLACEMENTS OF CONVERTIBLE PREFERRED STOCK

         On  August  31,  2004,  the  Company  sold   $16,030,000  of  Series  A
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  convertible   preferred   stock,  at  $15,000  per  share,  for  cash
consideration  of $11.305  million  and  cancellation  of $4.725  million of its
senior  secured  promissory  notes  issued in April and May 2004.  Each share of
Series A convertible  preferred stock is convertible into 2,500 shares of common
stock.  For each share of Series A 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.

     CONVERTIBLE DEBT FINANCING

         On August 31,  2004,  the  Company  issued  $3,000,000  of  convertible
promissory  notes (SEE NOTE #4). Prior to maturity,  the convertible  promissory
notes  may be  converted  into  units  consisting  of our  Series A  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 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
Series A  convertible  preferred  stock and  warrants  to purchase up to 100,000
shares of common stock.

     PREFERRED STOCK AND WARRANT PURCHASE RIGHTS

         Investors  who  paid  cash   consideration   in  either  the  Series  A
convertible  preferred  stock  financing  or  convertible  debt  financing  also
received  the  right  to  purchase  additional  units of  Series  A  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  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 ninety days  following  January 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


                                       60
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


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.

     REGISTRATION RIGHTS AGREEMENT

         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  registrant rights agreements,  the Company
agreed to file a registration  statement registering the resale by the investors
of all of the shares of common  stock  issuable  upon  conversion  of  preferred
shares and  exercise  of  warrants,  including  preferred  shares  and  warrants
issuable upon conversion of the convertible promissory notes and exercise of the
purchase rights. The Company agreed to keep the registration statement effective
until the  earlier of the date on which all of the common  shares have been sold
and the date that all the common shares may be sold by the investors pursuant to
Rule 144(k) under the  Securities  Act of 1933. If the Company does not register
these shares for resale  within 150 days of the closing  date of the  financing,
the  Company  must  pay  each of the  investors  a fee of 2.0% of the per  share
purchase  price paid by such investor for each  preferred  share,  and following
such date, a fee of 1.0% of the per share  purchase  price paid by such investor
for each  preferred  share for each month  that the  shares are not  registered.
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.  Accordingly,  no  additional  percentage  fees  were  paid  to any of the
investors of the August 2004 financing.

ISSUANCE OF STOCK PURSUANT TO THE EXERCISE OF WARRANTS

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

ISSUANCE OF STOCK FOR LAND

         In May 2004, the Company purchased from Cumberland Timber Company, LLC,
1,738 acres of land in Eastern 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.

ISSUANCE OF STOCK FOR SERVICES

         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.

         In  January  2003,  a total of  7,674,978  shares of common  stock were
granted to the four founding  officer/directors of the Company for services. The
stock was valued at $153,500 ($0.04 per share) based on stock  transactions  for
cash with unrelated individuals (see above).


                                       61
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


ISSUANCE OF STOCK PURSUANT TO 2003 REVERSE MERGER

         On March 28, 2003,  National Coal Corporation  (Tennessee) entered into
an Agreement and Plan of  Reorganization  to acquire 8.55 million  shares of the
Company's  common  stock  for all of  National  Coal  Corporation  (Tennessee)'s
outstanding  common  stock.  The  shares  were  exchanged  on  April  30,  2003.
Immediately  after  the  transaction,   the  former  National  Coal  Corporation
(Tennessee)  shareholders  owned  approximately  94.8% of the  Company's  common
stock.

         The  reorganization  was recorded as a  recapitalization  effected by a
reverse  merger  wherein the Company was treated as the acquiree for  accounting
purposes,  even  though  it was the legal  acquirer.  Since  the  Company  was a
non-operating entity with limited business activity, goodwill was not recorded.

ISSUANCE OF STOCK OPTIONS

         In March 2004, the Company adopted and made effective an employee stock
option plan (the "2004 Option  Plan") which was amended in January 2005. A total
of  2,750,000  shares of common  stock  have been  reserved  for  issuance  upon
exercise of awards granted under the 2004 Option Plan,  and in general,  granted
options vest over a four-year  period.  The 2004 Options Plan is administered by
the full board of  directors,  will  terminate  in March 2014 and allows for the
issuance of both  incentive  stock options that qualify under Section 422 of the
Internal  Revenue Code and  nonqualified  stock options to employees,  officers,
directors,  consultants,  independent contractors and advisors of the Company or
any parent or subsidiary of the Company  provided the  consultants,  independent
contractors  and advisors  render  services not in connection with the offer and
sale of securities in a capital-raising  transaction. Any shares of common stock
subject to an award, which for any reason expires or terminates unexercised, are
again available for issuance under the 2004 Option Plan.

         During  2004,  the Company  granted a total of  1,448,750  nonqualified
stock  options  to  purchase  shares of common  stock to  certain  employees  at
exercise prices ranging from $2.20 to $5.60 per share.

         Information  regarding the Company's  employee  stock option plan is as
follows for the year ended December 31, 2004:

                                                                  WEIGHTED
                                                                  AVERAGE
                                          COMMON SHARES            PRICE
                                         --------------        ------------
Options outstanding at January 1..                   --                  --
Granted...........................            1,448,750               $2.65
Exercised.........................                   --                  --
Canceled..........................                   --                  --
                                         --------------        ------------
Options outstanding at
   December 31, 2004..............            1,448,750               $2.65
                                         ==============        ============
Options available for grant at
   December 31,  2004.....                    1,301,250
                                         ==============

         On January 1, 2005, 25%, or 362,188,  of the issued options were deemed
vested. In addition, as of December 31, 2004, there were outstanding warrants to
purchase  1,004,998  shares of common  stock for an average  per share  price of
$7.95.


                                       62
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


OTHER

         In June  2003,  105,363  shares  of the  Company's  common  stock  were
re-purchased for $21,073 and cancelled.

7.       RELATED PARTY TRANSACTIONS

         On July 1, 2003, the Company sold mineral royalty rights for coal mined
on the Patterson Mountain portion of its New River Tract property for $75,156 to
Jenco Capital  Corporation  ("Jenco"),  an entity owned by the  Company's  Chief
Executive  Officer and  President.  The Company was obligated to pay Jenco $2.00
per mined ton on the  property.  During 2003 and 2004,  the  Company  paid Jenco
$59,572 and $15,584, respectively, in accordance with the agreement. The Company
has no further obligation to Jenco pursuant to this royalty agreement.

         On August 1, 2003,  the Company  sold its  interest in mineral  royalty
rights that it received from U.S. Coal,  Inc. for coal mined on a section of the
Smokey Mountain portion of its New River Tract property.  The Company sold these
royalty rights for $250,000 to Jenco. The Company recorded the proceeds from the
sale as deferred revenue and recognized  revenue each month based on U.S. Coal's
production.  During 2003 and 2004, the Company  recognized the royalty  revenue,
$146,597 and $103,403,  respectively, and as of December 31, 2004 had no further
obligation pursuant to this agreement.

         These transactions were completed with Jenco, a related party,  because
(i) the Company needed a prompt capital infusion to ramp up its coal production,
(ii) Jenco had available cash for the  transaction,  (iii) the Company could not
have developed another  independent source for the capital without  considerable
time delay due to lack of a  production  history,  and (iv) the  Company  had no
knowledge  of  any  outside  sources  for  such  capital  at  the  time  of  the
transactions.  The  Company  believes  that  given the time  delay to search for
capital and the cost of lost opportunity,  the terms of these  transactions were
acceptable  because it afforded the Company  immediate  liquidity  for operating
purposes.

         On June 30,  2003,  the  Company  assigned  a  ten-year,  $0.25 per ton
royalty interest on all the coal sold from its New River Tract property, to both
the then  Chairman  of the Board and its  current  Chief  Executive  Officer and
President.  The agreement provided that in the event any mineral properties were
sold prior to the end of the ten-year period, the obligation would be settled by
paying 12 1/2% of the sales  price to each  individual.  Pursuant to the sale of
mineral  property rights to Jenco in July and August 2003, the Company paid both
the Chairman of the Board and Chief  Executive  Officer and President 12 1/2% of
the sales price,  for an aggregate  payment of $81,289.  In February  2004,  the
Chairman of the Board and Chief  Executive  Officer and President each agreed to
permanently  cancel  all  future  royalty  payments  pursuant  to  this  royalty
agreement.

         In 2003,  the Company  acquired  mining  equipment  and  certain  other
intangible  mining rights and  information  from Strata Coal, LLC ("Strata") for
$47,000 ($7,000 cash and a non-interest  bearing promissory note) and assumption
of promissory notes payable to unrelated parties totaling $174,000.  The Company
also  assumed  $14,875  of  Strata's  accounts  payable.  Strata is owned by the
Chairman of the Board and the  CEO/President  of the  Company.  Since the Strata
transaction  involved related parties,  primarily for intangible  consideration,
the $205,875 purchase price (exclusive of the mining equipment subsequently sold
-see below),  was expensed in 2003.  Subsequent to March 31, 2003 the promissory
notes  (totaling  $214,000) were paid and on June 11, 2003 the mining  equipment
was sold to Jenco for $30,000.


                                       63
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         In March  2003,  the  Company  paid the  Chairman  of the Board and the
CEO/President $150,000 each for corporate organization and promotion activities.

         In October 2003, the Company loaned its current Chief Financial Officer
$15,000 with an annual  interest  rate of 3 1/2% and a maturity of 1 year.  This
loan was made to this  individual  before he became the Company's  full time CFO
and before he was an officer of the Company.  In February 2004,  this loan, plus
accrued interest, was paid in full.

         During 203 and 2004,  the  Company  paid the law firm of Kite,  Bowen &
Associates,  PA, $45,000 and $10,000,  respectively,  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 from August
2003 through  January 2004, and borrowed  $105,000 from the President and 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 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 Chief Financial Officer and its Operations Manager
such that each individual is entitled to additional  monthly  compensation in an
amount  equal to five  cents  ($0.05)  per ton of coal sold each month from coal
mined from all of the Company's owned and leased properties.

         During 2004, the Company paid RS Holdings, Inc., an entity owned by the
Company's  Operations  Manager,  a total of $6,000 as  rental  payments  for the
storage of maps and other mining documents.

8.       ASSET RETIREMENT OBLIGATIONS

         Since commencing mining  activities,  the Company has received numerous
permits,  has deposited $257,500 in cash with OSM, and has provided bank letters
of credit for $4.97 million for  reclamation  bonding with OSM. These letters of
credit are  secured by  certificates  of deposit  totaling  $4.27  million and a
$700,000 pledge of the Company's corporate headquarters.

         The  following  table  describes  the  changes to the  Company's  asset
retirement obligations for 2003 and 2004:


                                       64
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


                                                          2003          2004
                                                      -----------   -----------
Balance at beginning of period ....................   $      --     $    64,359
Accretion expense .................................         7,047        34,604
Additions resulting from property additions .......        57,312     1,790,179
Adjustments and revisions from annual re-costing ..          --         503,697
Obligations settled ...............................          --         (87,090)
                                                      -----------   -----------
Balance at December 31 ............................   $    64,359   $ 2,305,749
Current portion included in accrued expenses ......          --        (211,990)
                                                      -----------   -----------
Long-term liability ...............................   $    64,359   $ 2,093,759
                                                      ===========   ===========

9.       EVENTS SUBSEQUENT TO DECEMBER 31, 2004

REVERSE STOCK SPLIT

         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  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.

ADDITIONAL BORROWINGS PURSUANT TO SENIOR CREDIT FACILITY

         On January 12, 2005,  the Company  borrowed an additional  $1.4 million
under and pursuant to the terms and  conditions  of a Credit  Agreement  entered
into with D. B. Zwirn Special Opportunities Fund, L.P. on November 26, 2004 (SEE
NOTE #4).

REGISTRATION STATEMENT ON FORM SB-2 DECLARED EFFECTIVE

         On  January  28,  2005,  the  Company's   previous  filed  Registration
Statement  on  Form  SB-2,  as  amended,  was  declared  effective  by the  SEC,
registering  17,587,730  shares  of  common  stock  for  resale  by the  selling
shareholders.  The registered shares include shares which may be issued pursuant
to the conversion of Series A convertible preferred stock and the exercise stock
purchase warrants.

ADDITIONAL BORROWINGS; PURCHASE OF MINING EQUIPMENT

         In January 2005, the Company signed an agreement committing the Company
to the purchase of a high wall miner for a total purchase price of approximately
$5.5 million,  and paid a $500,000 deposit toward that purchase  commitment.  In
March 2005, the Company borrowed an additional  approximately  $5.14 million and
completed  the  purchase  of this  piece  of  mining  equipment.  The note has a
maturity of August 10, 2005,  is secured by the high wall miner,  and has a rate
of interest of eighteen  percent  (18%) per annum  calculated  from the 61st day
until maturity.  The Company paid an origination fee of  approximately  $200,000
upon the  execution of the loan  documents.  The lenders were also issued 5-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.  Crestview Capital Master,
LLC participated in this transaction.

RESIGNATION AND APPOINTMENT OF AN OFFICER AND A DIRECTOR

         On February 8, 2005,  Farrald G. Belote,  Jr.  resigned his position as
director  of the  Company  and was  replaced  on  February  16, 2005 by Scott H.
Filstrup.


                                       65
<PAGE>


                               NATIONAL COAL CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         On March 10, 2005 the Company  announced that effective  April 1, 2005,
Robert Chmiel will resign his positions as Chief Financial Officer and director,
and be replaced by Mark Oldham in both capacities.

REVISED  SENIOR  CREDIT  FACILITY  COVENANTS  AND WAIVER FOR  NON-COMPLIANCE  OF
COVENANTS

         At  December  31,  2004,  the Company  was not in  compliance  with its
financial  covenants related to EBITDA or its minimum monthly sales requirements
under the Company's  credit  agreement with D. B. Zwirn.  On March 29, 2005, the
Company  amended its credit  agreement,  effective as of December 31, 2004, at a
cost of  $120,000,  to revise  its  financial  covenants  related  to EBITDA and
minimum monthly sales  requirements  to bring the Company back into  compliance.
The new financial  covenants  with D. B. Zwirn are effective for the term of the
credit agreement and are based on the Company's projections.


                                       66
<PAGE>


ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURES

         Members of the  company's  management,  including  our Chief  Executive
Officer and President, Jon Nix, and Chief Financial Officer, Robert Chmiel, 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,  2004,  the end of the  period  covered  by this  report.  Based  upon  that
evaluation,  Messrs.  Nix and Chmiel concluded that our disclosure  controls and
procedures are effective.

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, 2004 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

ITEM 8B. OTHER INFORMATION

         None


                                       67
<PAGE>


                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The  following  table sets forth the name,  age and position of each of
our executive officers and directors as of March 21, 2005.

     NAME                   AGE       POSITION HELD
     ----                   ---       -------------

Jon Nix (1)                 35        President and Chief Executive Officer and
                                          Chairman of the Board of Directors
Robert Chmiel               44        Chief Financial Officer and Director
Charles Kite (1)            60        General Counsel
Scott Filstrup              62        Director
Jeanne Bowen Nix (1)        34        Secretary, Treasurer and Associate Counsel
William R. Snodgrass        41        Operations Manager
Joseph A. Davis Jr.         57        Vice President, Sales

----------
(1)      Jon Nix and Jeanne Bowen Nix are married.  Charles Kite is Jeanne Bowen
         Nix's stepfather.

         JON NIX, one of our  founders,  has served as our  President  and Chief
Executive Officer and as a director since January 2003 and Chairman of the Board
since  March  2004.  Mr. Nix has over eight years  experience  in the  financial
industry. He is the founder of Jenco Capital Corporation, a Tennessee consulting
and holding corporation. He is also a co-founder of Medicine Arm-In-Arm, Inc., a
nonprofit  children's  charity that provides medical services to underprivileged
children around the world.  Mr. Nix holds a Bachelor of Arts degree in Economics
from the University of Tennessee.

         ROBERT CHMIEL has served as our Chief Financial Officer since September
2003 and as a director  since March 2004.  From December 2000 to April 2003, Mr.
Chmiel  served  as Chief  Financial  Officer  and  Chief  Operating  Officer  of
Brilliant Digital Entertainment,  Inc. (OTCBB: BDEI), a publicly-traded  digital
content  distribution  firm,  where he  managed  five  separate  debt and equity
financings.  Previously,  from  1999 to 2000,  he was the  President  and  Chief
Operating Officer and co-founder of Phase2Media, Inc., a privately-held Internet
advertising  sales and  marketing  firm.  In 1998,  Mr.  Chmiel  served as Chief
Financial Officer of  BarnesandNoble.com  (formally  NASDAQ:  BNBN) prior to the
company's initial public offering. From 1995 to 1998, Mr. Chmiel was employed at
the  Walt  Disney  Company,  where  he  served  as  Vice  President,  Finance  &
Operations,  for the original team that launched Disney's online operations. Mr.
Chmiel earned his MBA from the Wharton  School of Business at the  University of
Pennsylvania  in 1987 and his BA in Economics from the College of the Holy Cross
in 1982.

         SCOTT  FILSTRUP has served as a Director  since  February 16, 2005. Mr.
Filstrup  is  president  of  The  Consultants  Limited  of  Tulsa,  Oklahoma,  a
professional services firm offering strategic planning and management consulting
services to business  organizations and entrepreneurs  including creation of new
businesses and products.  Prior to The Consultants  Limited,  Mr. Filstrup was a
director for strategic planning of MAPCO, Inc., an energy company.  Before that,
he held various  executive  and  management  positions in planning and marketing
with The Williams  Companies,  an energy firm  operating in Tulsa,  and Monsanto
Company of St. Louis,  MO. He has also held additional CEO and board of director
positions with many emerging energy and technology  firms  throughout the United
States.  Mr.  Filstrup  is  a  member  of  multiple  professional  organizations
including George W. Bush's  Presidential  Business Commission and is currently a
board member of various healthcare, medical and technology firms in Oklahoma and
Illinois.


                                       68
<PAGE>


         CHARLES  KITE has served as our  General  Counsel  since May 2004,  and
served as a director from  February  2003 until May 2004.  Prior to becoming our
General  Counsel,  Mr. Kite, an attorney since 1973,  was our outside  corporate
counsel,  and since 1985 has had a general  practice in the East  Tennessee  law
firm of Kite,  Bowen &  Associates,  P.A.  where he  specialized  in  commercial
business representation, tax representation and litigation, estate planning, and
probate matters. He graduated from Carson Newman College in 1967 with a Bachelor
of Arts degree,  and received his Juris Doctorate  degree from the University of
Tennessee in 1973.

         JEANNE  BOWEN  NIX has  served as our  Secretary  and  Treasurer  since
January 2003 and as Associate  Counsel since May 2004.  Ms. Bowen Nix has held a
license to practice law in the State of Tennessee  since 1997.  From 1997 to May
2004, Ms. Bowen Nix was a junior partner in the East Tennessee law firm of Kite,
Bowen & Associates,  P.A. where she  specialized  in general  corporate and real
estate matters.  She graduated cum laude from the University of Tennessee in May
of 1993 with a Bachelor  of Arts degree in  Psychology  and  received  her Juris
Doctorate degree from Louisiana State University Law School in May of 1997.

         WILLIAM R.  SNODGRASS has served as our  Operations  Manager since July
2003. Mr. Snodgrass also served as a consultant to us from February 2003 to July
2003.  Prior to joining  us, Mr.  Snodgrass  served as  superintendent  and area
manager for Tennessee Mining, Inc., a subsidiary of Addington Enterprises, Inc.,
one of the largest coal  companies  in the nation,  a position he held from 1994
until February 2003. Mr. Snodgrass has extensive  knowledge and expertise in the
coal mining  industry and has been involved in numerous  mining  projects in the
Kentucky and Tennessee areas.

         JOSEPH A. DAVIS JR. has served as our Vice President, Sales since April
2004. Prior to joining us, Mr. Davis served as Senior Vice President,  Sales and
Marketing,  and a Director for Pen Coal Corporation.  During his twenty years at
Pen Coal  Corporation,  he was responsible for domestic and  international  coal
sales and  transportation.  Mr.  Davis  earned his  Bachelor of Arts degree from
Western Kentucky University in political science and history.

COMMITTEES OF THE BOARD OF DIRECTORS

         Our board does not have any committees,  including an audit  committee.
The functions  customarily  delegated to an audit committee are performed by our
full board of  directors.  As we do not maintain an audit  committee,  we do not
have an audit committee  "financial expert" within the meaning of Item 401(e) of
Regulation S-B.

         We intend to establish an audit committee,  compensation committee, and
nominating  and corporate  governance  committee  following the expansion of our
board  to  include  at least  three  directors  who are  independent  under  the
applicable rules of the SEC and NASDAQ.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Securities  Exchange Act of 1934 requires that our
executive officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, file reports of ownership and changes
in ownership with the SEC. Executive  officers,  directors and  greater-than-ten
percent  stockholders  are  required by SEC  regulations  to furnish us with all
Section  16(a) forms they file.  Based solely on our review of the copies of the
forms received by us and written  representations from certain reporting persons
that they have complied with the relevant filing requirements,  we believe that,
during  the  year  ended  December  31,  2004,  all of our  executive  officers,
directors and greater-than-ten  percent  stockholders  complied with all Section
16(a) filing requirements,  except for the following:  (i) Initial Statements of
Beneficial Ownership of Securities on Form 3, were filed late by Scott Filstrup,
William Snodgrass, Joseph Davis and Crestview Capital Master, LLC; (ii) four (4)
Statements of Changes


                                       69
<PAGE>


in Beneficial Ownership on Form 4, reporting eleven (11) separate  transactions,
were filed late by Jon Nix;  (iii) three (3) Statements of Changes in Beneficial
Ownership on Form 4, reporting ten (10) separate  transactions,  were filed late
by Jeanne Bowen Nix; (iv) two (2) Statements of Changes in Beneficial  Ownership
on Form 4,  reporting  thirteen (13) separate  transactions,  were filed late by
each of Farrald  Belote  and Arlene  Belote;  and (v) one  Annual  Statement  of
Changes  in  Beneficial   Ownership  on  Form  5,  reporting  two  (2)  separate
transactions  that were not timely  filed on Form 4, was filed by Jenco  Capital
Corporation.

CODE OF ETHICS

         We have adopted a Code of Ethics applicable to all of our Board members
and to all of our  employees,  including our Chief  Executive  Officer and Chief
Financial Officer.  The Code of Ethics constitutes a "code of ethics" as defined
by applicable SEC rules and a "code of conduct" as defined by applicable  NASDAQ
rules.  The Code of Ethics has been publicly filed with the SEC as an exhibit to
our Annual Report on Form 10-KSB for fiscal 2004. You may also request a copy of
the Code of Ethics by writing or calling us at:

         National Coal Corp.
         Attn:  Investor Relations
         8915 George Williams Road
         Knoxville, TN 37923
         (865) 690-6900

         Any waiver of the Code of Ethics pertaining to a member of our Board or
one of our  executive  officers  will be disclosed in a report on Form 8-K filed
with the SEC.


                                       70
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth,  as to the Chief Executive  Officer and
as to each of the other four most highly  compensated  executive  officers whose
compensation  exceeded  $100,000  during  the  last  fiscal  year,   information
concerning  all  compensation  paid for services to us in all capacities for our
fiscal year which  commenced on January 30, 2003  (inception) and ended December
31,  2003,  and  for  our  fiscal  year  which  ended  December  31,  2004.  The
compensation  table excludes other  compensation  in the form of perquisites and
other  personal  benefits  that  constituted  less than 10% of the total  annual
salary and bonus for the executive officer during the applicable fiscal year.

<TABLE>
<CAPTION>
                                                                              LONG-TERM
                                                                             COMPENSATION
                                                 ANNUAL COMPENSATION            AWARDS
                                         ----------------------------------   ----------
                                                                               NUMBER OF
                            FISCAL YEAR                                       SECURITIES
NAME AND                       ENDED                           OTHER ANNUAL   UNDERLYING
PRINCIPAL POSITION          DECEMBER 31,  SALARY     BONUS     COMPENSATION     OPTIONS
                            -----------  --------   --------   ------------   ----------
<S>                            <C>       <C>        <C>        <C>              <C>
Jon Nix .................      2004      $298,077   $111,934       --           625,000
   President and Chief ..      2003      $161,538   $150,000       --              --
   Executive Officer

Robert Chmiel (1) .......      2004      $232,385   $ 74,684       --           375,000
   Chief Financial ......      2003      $ 47,753       --         --              --
   Officer

Charles Kite (2) ........      2004      $ 97,500   $ 28,000       --           125,000
   General Counsel ......      2003          --         --         --              --

Jeanne Bowen Nix ........      2004      $107,231   $ 36,000       --           125,000
   Secretary, Treasurer .      2003      $ 64,615       --         --              --
   and Associate Counsel

William R. Snodgrass (3)       2004      $116,192   $ 16,898   $ 30,675 (4)      50,000
   Operations Manager ...      2003      $ 29,915   $ 15,800   $ 35,900 (5)        --

----------
<FN>
(1)      Mr.  Chmiel's  employment  as  Chief  Financial  Officer  commenced  in
         September 2003.
(2)      Mr. Kite's employment as General Counsel commenced in May 2004.
(3)      Mr. Snodgrass' employment as Operations Manager commenced in July 2003.
         Mr.  Snodgrass  served as a consultant to us from February 2003 to July
         2003.
(4)      Represents the value of a year-end bonus gift given to Mr. Snodgrass.
(5)      Represents  consulting fees paid to Mr. Snodgrass for services rendered
         from February 2003 to July 2003, before he became our employee.
</FN>
</TABLE>


                                       71
<PAGE>


OPTION GRANTS IN 2004

         The following table presents information  regarding stock option grants
during 2004 to the executive  officers named in the summary table below. None of
these individuals exercised options during 2004.

                         Number of       Percent of
                        Securities      Total Options
                        Underlying       Granted To       Exercise
                          Options       Employees In      or Base     Expiration
NAME                    Granted (1)    Fiscal Year(2)     Price (3)      Date
                        -----------    --------------     ---------   ---------
Jon Nix...............     625,000         44.1%           $2.20       3/25/14
Robert Chmiel.........     375,000         26.5%           $2.20       3/25/14
Charles Kite..........      25,000          1.8%           $2.20       3/25/14
                           100,000          7.1%           $5.40       5/03/14
Jeanne Bowen Nix......     125,000          8.8%           $2.20       3/25/14
William R. Snodgrass..      50,000          3.5%           $2.20       3/25/14

----------
(1)  All of these options were granted under our 2004 Option Plan,  vest in four
     equal annual  installments  of 25% each  commencing on January 1, 2005, and
     have a term of 10 years.
(2)  Options covering an aggregate of 1,417,500 shares were granted to employees
     during fiscal 2004.
(3)  The exercise price and tax withholding  obligations related to exercise may
     be paid by delivery of already owned shares, subject to certain conditions.

OPTION VALUES AT DECEMBER 31, 2004

         None  of the  executive  officers  named  in the  summary  table  above
exercised options during 2004. The following table presents the number of shares
of our common stock subject to exercisable and unexercisable  stock options held
as of December 31, 2004.  Also presented are values of  "in-the-money"  options,
which  represent  the positive  difference  between the  exercise  price of each
outstanding stock option and $13.20 per share,  which is the last reported sales
price of our common stock on the OTC Bulletin Board on December 31, 2004.

<TABLE>
<CAPTION>
                               Number of Securities             Value of Unexercised
                              Underlying Unexercised           In-the-Money Options at
                           Options at December 31, 2004           December 31, 2004
                           ----------------------------     ----------------------------
NAME                       Exercisable    Unexercisable     Exercisable    Unexercisable
                           -----------    -------------     -----------    -------------
<S>                           <C>            <C>               <C>           <C>
Jon Nix.................      --             625,000           --            $6,875,000
Robert Chmiel...........      --             375,000           --            $4,125,000
Charles Kite............      --             125,000           --            $1,055,000
Jeanne Bowen Nix........      --             125,000           --            $1,375,000
William R. Snodgrass....      --              50,000           --              $550,000
</TABLE>

DIRECTOR COMPENSATION

         In the past,  our outside  directors did not receive cash  compensation
for their services,  but were reimbursed for their reasonable  expenses incurred
on our behalf or in attending  meetings.  Inside board members have not received
any  compensation  for their services and we intend to change that position.  We
are currently revising our compensation plan and intend to pay outside directors
a fee for  being a board  member as well as fees for  chairing  and  sitting  on
committees of the board, such as an audit committee and a compensation committee
once we formally  establish  each of these.  In March 2004,  we granted  each of
Farrald Belote and Charles Kite, our two non-employee directors at that time, an
option to purchase  25,000  shares of our common  stock at an exercise  price of
$2.20 per share. These options were


                                       72
<PAGE>


granted under our 2004 Option Plan. Mr. Kite subsequently became employed as our
General  Counsel in May 2004 and Mr. Belote resigned his position as director in
February 2005.

EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL AGREEMENTS

         Other than William  Snodgrass,  each of the executive officers named in
the summary  compensation  table not only serves as an officer of National Coal,
but also as an officer of our wholly-owned subsidiary National Coal Corporation.
Mr. Snodgrass is an executive officer of National Coal Corporation only. Each of
the named executive  officers is party to an employment  agreement with National
Coal Corporation.

     JON E. NIX

         In July 2004, our wholly-owned  subsidiary,  National Coal Corporation,
entered  into an  employment  agreement  with Mr.  Nix, as  President  and Chief
Executive  Officer,  which  agreement  was  subsequently  amended  and  restated
effective  as of October 1, 2004.  Under his  employment  agreement,  Mr. Nix is
entitled to an initial salary of $408,000 per year and a cash bonus in an amount
to be determined in good faith by the Board of National Coal  Corporation  on an
annual or quarterly  basis, as approved by the Board.  As further  compensation,
Mr. Nix also is  entitled  to monthly  compensation  in an amount  equal to five
cents ($.05) per ton of coal (calculated upon "clean" tonnage sold as opposed to
"raw" tonnage mined) sold by National Coal  Corporation each month that is mined
from all of its owned and leased properties.  Annual increases in Mr. Nix's base
salary are determined in good faith by the Board at the beginning of each fiscal
year. The initial term of Mr. Nix's employment is two years,  which term will be
automatically renewed for successive two-year terms unless the Board of National
Coal  Corporation  provides Mr. Nix written  notice of non-renewal no later than
120 days prior to the expiration of the then-current term.

         Pursuant to Mr. Nix's employment  agreement,  National Coal Corporation
maintains key man life  insurance for Mr. Nix. Any proceeds of this policy would
be distributed 50% to National Coal Corporation and 50% to Mr. Nix's heirs.

     JEANNE BOWEN NIX

         In April 2003, our wholly-owned subsidiary,  National Coal Corporation,
entered into an employment agreement with Mrs. Bowen Nix as  Secretary/Treasurer
and General  Counsel,  which  agreement  was  subsequently  amended and restated
effective as of September 16, 2004. Under her employment  agreement,  Mrs. Bowen
Nix is entitled to an initial  salary of $144,000  per year,  and an annual cash
bonus in an amount to be  determined in good faith by the Board of National Coal
Corporation, which amount may not exceed 50% of Mrs. Bowen Nix's base salary for
such year.  Annual  increases in Mrs.  Bowen Nix's base salary are determined in
good faith by the Board at the  beginning of each fiscal year.  The initial term
of Mrs. Bowen Nix's  employment is two years,  which term will be  automatically
renewed  for  successive  two-year  terms  unless  the  Board of  National  Coal
Corporation  provides Mrs. Bowen Nix written notice of non-renewal no later than
120 days prior to the expiration of the then-current term. In January 2005, Mrs.
Bowen Nix agreed to restructure her contract, reducing her salary to $57,600 per
year.

         Mrs. Bowen Nix resigned as General  Counsel in May 2004 upon the hiring
of  Mr.  Kite  as  General  Counsel.   Ms.  Bowen  Nix  continues  to  serve  as
Secretary/Treasurer and Associate Counsel.


                                       73
<PAGE>


     CHARLES W. KITE

         In May 2004, our wholly-owned  subsidiary,  National Coal  Corporation,
entered into an employment  agreement  with Mr. Kite as General  Counsel,  which
agreement was  subsequently  amended and restated  effective as of September 16,
2004. Under his employment agreement,  Mr. Kite is entitled to an initial salary
of $180,000 per year,  and an annual cash bonus in an amount to be determined in
good faith by the Board of National Coal  Corporation.  Annual  increases in Mr.
Kite's base salary are determined in good faith by the Board at the beginning of
each fiscal year. The initial term of Mr. Kite's employment is two years,  which
term will be  automatically  renewed for  successive  two-year  terms unless the
Board  of  National  Coal  Corporation  provides  Mr.  Kite  written  notice  of
non-renewal no later than 120 days prior to the  expiration of the  then-current
term.

         Under his  employment  agreement,  Mr. Kite was granted an  immediately
exercisable option to purchase 100,000 shares of our common stock at an exercise
price of $2.20 per share  under the terms and  conditions  set forth in the 2004
National Coal Corp.  Option Plan.  Pursuant to the 2004 option plan,  Mr. Kite's
options vest ratably over a four-year period beginning January 1, 2005.

     ROBERT CHMIEL

         In July 2004, our wholly-owned  subsidiary,  National Coal Corporation,
entered into an employment agreement with Mr. Chmiel as Chief Financial Officer,
which agreement was subsequently amended and restated effective as of October 1,
2004. Under his employment agreement, Mr. Chmiel is entitled to a base salary of
$240,000  per year,  and an annual cash bonus in an amount to be  determined  in
good faith by the Board of National Coal  Corporation.  Annual  increases in Mr.
Chmiel's base salary are  determined in good faith by the Board at the beginning
of each new fiscal year. As further compensation, Mr. Chmiel also is entitled to
monthly  compensation  in an amount  equal to five cents  ($.05) per ton of coal
(calculated upon "clean" tonnage sold as opposed to "raw" tonnage mined) sold by
National  Coal  Corporation  each  month that is mined from all of its owned and
leased  properties.  The initial term of Mr.  Chmiel's  employment is two years,
which term will be  automatically  renewed for successive  two-year terms unless
the Board of National Coal  Corporation  provides Mr. Chmiel  written  notice of
non-renewal no later than 120 days prior to the  expiration of the  then-current
term.

         Pursuant  to  Mr.   Chmiel's   employment   agreement,   National  Coal
Corporation  maintains key man life  insurance for Mr.  Chmiel.  Any proceeds of
this policy would be distributed 50% to National Coal Corporation and 50% to Mr.
Chmiel's heirs.

     WILLIAM R. SNODGRASS

         In  October   2004,   our   wholly-owned   subsidiary,   National  Coal
Corporation,  entered  into an  amended  employment  agreement  with  William R.
Snodgrass  as  Operations  Manager of Mining  Operations.  Under his  employment
agreement,  Mr.  Snodgrass is entitled to an initial salary of $120,000 per year
and an annual  cash  bonus in an amount to be  determined  in good  faith by the
Board of  National  Coal  Corporation.  After  two years of  employment,  annual
increases in Mr.  Snodgrass's  base salary are  determined  in good faith by the
Board at the beginning of each fiscal year. The initial term of Mr.  Snodgrass's
employment is two years, which term will be automatically renewed for successive
two-year  terms  unless the Board of  National  Coal  Corporation  provides  Mr.
Snodgrass  written  notice of  non-renewal  no later  than 120 days prior to the
expiration of the then-current term.

     TERMINATION AND SEVERANCE UNDER THE EMPLOYMENT AGREEMENTS

         Pursuant to their employment agreements,  the employment of each of the
executive officers may be terminated in any of the following manners:


                                       74
<PAGE>


         o        by the employee's death;

         o        by the Board,  if due to  physical  or mental  disability  the
                  employee is unable to  adequately  perform his or her material
                  duties  on a  full-time  basis  for a  period  of four  months
                  (whether  consecutive  or not)  within any  twelve  (12) month
                  period;

         o        by a  majority  vote of the  Board,  if,  after  notice to the
                  employee and advice of independent  legal  counsel,  the Board
                  determines  that the employee has engaged in misconduct by (i)
                  habitually  and  continuously  being  unavailable  to  act  or
                  respond on our behalf;  (ii) engaging in willful misconduct or
                  fraud,  (iii) being convicted of a felony,  (iv) willfully and
                  continuously  materially  failing to  observe  or perform  the
                  duties of his or her  employment;  (v)  willfully  acting in a
                  manner  materially  adverse  to our  best  interests,  or (vi)
                  willfully or habitually neglecting the faithful performance of
                  his or her duties;

         o        by  either  party  in the  event of a change  in  control  (as
                  defined  in  each  employment   agreement)  of  National  Coal
                  Corporation  (a  "Change  of  Control"),  or  upon  any  other
                  material change in the financial condition or ownership of us;

         o        by  the  employee  if  there  is  a  material  change  in  the
                  employee's function, authority, duties, title, compensation or
                  responsibilities, without the employee's consent;

         o        by the employee if substantial  differences of opinion between
                  such  employee  and the  Board or the  shareholders,  or other
                  circumstances should arise that such employee,  in good faith,
                  no longer feels that he or she can function effectively in his
                  or her employment; or

         o        by the  employee  if there is a  significant  increase  in the
                  amount of travel  required  for the employee to perform his or
                  job, without such employee's consent; or

         o        by the employee  upon our material  failure to comply with any
                  of the provisions of the subject employment agreement;

         o        by the  employee,  if the Board  requests  any other matter or
                  circumstances  made with the  intent  of, or having the result
                  of,  hindering  such employee in his or her duties or creating
                  and  incentive  for the employee to exercise his or her rights
                  to terminate his or her employment.

         Mr. Chmiel  resides in California.  Pursuant to California  law, we and
Mr.  Chmiel may  terminate  Mr.  Chmiel's  employment  agreement for any reason.
Effective  March 31,  2005,  Mr.  Chmiel  agreed to (i) an  aggregate  severance
payment of $145,000,  and (ii) the retention of 225,000 of previously issued but
unvested stock options as  consideration  for the cancellation of his employment
agreement.

         If the  employment of any of the Executive  Officers is terminated  for
"Good Reason" (i.e. any of the last six reasons  listed above),  or we terminate
the employee for reasons other than  misconduct,  upon execution of a release of
claims in the form attached to the subject  employment  agreement (except in the
case of  termination  due to death of the  employee),  he or she is  entitled to
receive an amount  equal to his or her base  salary for a period of twenty  four
months after termination (unless his or her termination is within 12 months of a
Change in Control) (the  "Severance  Period"),  insurance  coverage for the same
period,  and a  prorated  cash  bonus  payment  for the year in which his or her
employment is terminated. In addition, during such period, such employee's stock
options shall  continue to vest in accordance  with the terms of the  employee's
stock  option  agreement  for a period  of up to forty  eight  months,  and such
employee may exercise his or her vested options for a period commencing with the
date of termination and expiring one hundred and twenty (120) days following the
end of the Severance Period. If any of the


                                       75
<PAGE>


Executive Officers voluntarily  terminates his or her employment with us without
"Good Reason," upon execution of a release of claims in the form attached to the
subject  employment  agreement,  he or she is entitled to insurance coverage for
one (1) month and may only  exercise  any vested  but  exercised  stock  options
within one hundred twenty (120) days of the effective date of termination.

     CHANGE IN CONTROL

         In  the  event  of  a  Change  in  Control,   the  Board  must  make  a
determination,  within  six (6)  months of the  effective  date of the Change in
Control, to either terminate any particular  executive  officer's  employment or
continue his or her employment.

         If the  employment of any of the Executive  Officers is terminated  for
any reason other than misconduct within twelve months of a Change in Control, he
or she is  entitled  to receive an amount  equal to his or her base salary for a
total of  thirty-six  (36) months after  termination  (the  "Extended  Severance
Period"),  insurance  coverage  for the same period,  and a prorated  cash bonus
payment for the year in which such employment is terminated. In addition, during
any Extended  Severance Period,  such employee's stock options shall continue to
vest in accordance with the terms of the employee's stock option agreement for a
period of up to forty eight  months,  and such  employee may exercise his or her
vested options for a period commencing with the date of termination and expiring
one hundred and twenty (120) days  following  the end of the Extended  Severance
Period.

ITEM 11. SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT  AND
         RELATED STOCKHOLDER MATTERS

         The following  table  presents  information  regarding  the  beneficial
ownership of our common stock as of February 23, 2005 by:

         o        each  of  the  executive   officers   listed  in  the  summary
                  compensation table;

         o        each of our directors;

         o        all of our directors and executive officers as a group; and

         o        each  shareholder  known by us to be the  beneficial  owner of
                  more than 5% of our common stock.

         Beneficial  ownership is determined in accordance with the rules of the
SEC  and  generally   includes  voting  or  investment  power  with  respect  to
securities.  Unless otherwise indicated below, to our knowledge, the persons and
entities  named in the table  have sole  voting and sole  investment  power with
respect to all shares  beneficially  owned,  subject to community  property laws
where applicable. Shares of our common stock subject to options from the Company
that are currently exercisable or exercisable within 60 days of January 13, 2005
are deemed to be outstanding and to be beneficially  owned by the person holding
the options for the purpose of computing the percentage ownership of that person
but are not treated as  outstanding  for the purpose of computing the percentage
ownership of any other person.

         Pursuant  to the  terms of  Series A  convertible  preferred  stock and
warrants held by certain of the 5% or more  shareholders,  the maximum number of
shares  that may be acquired by any such  shareholder  upon any  exercise of its
warrant or conversion of its preferred shares is limited to the extent necessary
to ensure that,  following such  exercise,  the total number of shares of common
stock then beneficially owned by such selling shareholder and its affiliates and
any other persons whose beneficial ownership of common stock would be aggregated
with the selling  shareholder for purposes of Section 13(d) of the Exchange Act,
does not exceed 4.99% or, in the case of Crestview Capital Master LLC, 9.99%, of
the


                                       76
<PAGE>


total number of issued and outstanding  shares of common stock then outstanding.
The shares of common stock and percentage  ownership listed in this table do not
reflect these  contractual  limitations  on a  shareholder's  ability to acquire
common  shares  upon  exercise  of its warrant or  conversion  of its  preferred
shares.

         The information  presented in this table is based on 13,391,344  shares
of  our  common  stock  outstanding  on  February  13,  2005.  Unless  otherwise
indicated, the address of each of the executive officers and directors and 5% or
more  shareholders  named below is c/o National Coal Corp., 8915 George Williams
Road, Knoxville, TN 37923.

                                                  NUMBER OF         PERCENTAGE
                                                    SHARES              OF
                                                 BENEFICIALLY         SHARES
NAME OF BENEFICIAL OWNER                            OWNED           OUTSTANDING
------------------------------------------       ------------       -----------

EXECUTIVE OFFICERS AND DIRECTORS:
Jon Nix (1)...............................        6,011,138             44.9%
   Director, President and
      Chief Executive Officer
Rob Chmiel (2)............................          118,750               *
   Director and Chief
      Financial Officer
Charles Kite (3)..........................          181,250              1.4
   General Counsel
Jeanne Bowen Nix (4)......................          181,250              1.4
   Secretary, Treasurer
      and Associate Counsel
Scott Filstrup............................           25,000               *
   Director
William R. Snodgrass (5)..................           12,500               *
   Operations Manager
Joseph A. Davis Jr. (6)...................            6,250               *
   Vice President
Directors and officers as a group
   (7 persons) (7)........................        6,354,888             47.5

5% SHAREHOLDERS:
Big Bend XII Investments, LP (8)..........          691,772              5.2
   Attn: Janice Hudson
   3401 Armstrong Avenue
   Dallas, Texas 75205
Crestview Capital Master LLC (9)..........        3,637,463             27.2
   95 Revere Drive, Suite A
   Northbrook, Illinois 60062
Stewart & Jennifer Flink (10).............        3,699,730             27.6
   Crestview Capital Master LLC
   95 Revere Drive, Suite A
   Northbrook, Illinois 60062
Jenco Capital Corporation (11)............        2,161,138             16.1


                                       77
<PAGE>


                                                  NUMBER OF         PERCENTAGE
                                                    SHARES              OF
                                                 BENEFICIALLY         SHARES
NAME OF BENEFICIAL OWNER                            OWNED           OUTSTANDING
------------------------------------------       ------------       -----------

Nancy Hoyt Revocable Trust (12)...........        3,829,440             28.6
   Crestview Capital Master LLC
   95 Revere Drive, Suite A
   Northbrook, Illinois 60062
North Sound Legacy International Ltd. (13)        1,390,497             10.4
   53 Forest Avenue, Suite 202
   Old Greenwich, CT 06870
Gerald J. Rubin (14)......................          671,219              5.0
   1 Helen of Troy Plz.
   El Paso, Texas 79912
SDS Capital Group SPC, Ltd. (15)..........          729,190              5.4
   53 Forest Avenue
   2nd Floor
   Old Greenwich, CT 06870
----------
*    Less than 1%

(1)  Consists of (i) 3,412,500 shares of common stock,  (ii) 2,161,138 shares of
     common  stock  held by Jenco  Capital  Corporation  over  which Mr. Nix has
     voting and investment  power,  (iii) 100,000 shares of common stock held by
     Perdase Holdings,  Inc. over which Mr. Nix has voting and investment power,
     (iv) 181,250 shares of common stock beneficially owned by Mr. Nix's spouse,
     Jeanne  Bowen Nix,  and (v) 156,250  shares of common  stock  reserved  for
     issuance upon exercise of stock options which  currently are exercisable or
     will become exercisable within 60 days.

(2)  Consists of (i) 25,000  shares of common  stock,  and (ii) 93,750 shares of
     common stock  reserved for issuance  upon  exercise of stock  options which
     currently are exercisable or will become exercisable within 60 days.

(3)  Consists of (i) 150,000  shares of common stock,  and (ii) 31,250 shares of
     common stock  reserved for issuance  upon  exercise of stock  options which
     currently are exercisable or will become exercisable within 60 days.

(4)  Consists of (i) 150,000  shares of common stock,  and (ii) 31,250 shares of
     common stock  reserved for issuance  upon  exercise of stock  options which
     currently are exercisable or will become  exercisable  within 60 days. Does
     not include  5,879,888  shares of common  stock  beneficially  owned by Ms.
     Nix's spouse, Jon Nix.

(5)  Consists  of 12,500  shares of common  stock  reserved  for  issuance  upon
     exercise of stock options which  currently are  exercisable  or will become
     exercisable within 60 days.

(6)  Consists  of 6,250  shares of  common  stock  reserved  for  issuance  upon
     exercise of stock options which  currently are  exercisable  or will become
     exercisable within 60 days.

(7)  Consists of (i) 6,023,638  shares of common stock,  and (ii) 331,250 shares
     of common stock  reserved for issuance upon exercise of stock options which
     currently are exercisable or will become exercisable within 60 days.

(8)  Consists of (i) 158,461  shares of common  stock,  (ii)  399,991  shares of
     common  stock that may be acquired  from us upon  exercise of warrants  and
     conversion of convertible  preferred equity  securities,  and (iii) 133,320
     shares of common  stock that may be acquired  upon the exercise of warrants
     and  conversion of  convertible  preferred  equity  securities  that may be
     acquired from us upon the exercise of purchase rights.

(9)  Consists of (i) 2,968,135  shares of common stock,  and (ii) 669,328 shares
     of common stock that may be acquired from us upon  exercise of  outstanding
     warrants  and  conversion  of  outstanding   convertible  preferred  equity
     securities.

(10) Consists of (i) 17,107 shares of common stock, (ii) 24,991 shares of common
     stock that may be acquired from us upon exercise of warrants and conversion
     of convertible  preferred equity securities,  and (iii) 3,637,463 shares of
     common  stock  beneficially  owned by  Crestview  Capital  Master,  LLC and
     Crestview  Capital  Partners,  LLC over which  Stewart Flink has voting and
     investment power.

(11) Jon Nix exercises  voting and investment  authority over the shares held by
     this shareholder.

(12) Consists  of (i) 66,808  shares of common  stock,  (ii)  105,000  shares of
     common  stock that may be acquired  from us upon  exercise of warrants  and
     conversion of convertible preferred equity securities,  and (iii) 3,637,463
     shares of common stock



                                       78
<PAGE>


     beneficially  owned by Crestview Capital Master,  LLC and Crestview Capital
     Partners,  LLC over which Robert Hoyt, Nancy Hoyt's husband, has voting and
     investment power. Nancy Hoyt exercises voting and investment authority over
     the shares held by this shareholder.

(13) Consists of (i) 318,507 shares of common stock,  and (ii) 1,071,990  shares
     of common stock that may be acquired  from us upon exercise of warrants and
     conversion of convertible preferred equity securities.

(14) Consists of (i) 649,219  shares of common stock,  and (ii) 22,000 shares of
     common  stock that may be acquired  from us upon  exercise of warrants  and
     conversion of convertible preferred equity securities.

(15) Consists of (i) 62,500 shares of common stock,  and (ii) 666,690  shares of
     common  stock that may be acquired  from us upon  exercise of warrants  and
     conversion of convertible preferred debt securities.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2004.

<TABLE>
<CAPTION>
                          NUMBER OF SECURITIES
                         ISSUED OR TO BE ISSUED    WEIGHTED-AVERAGE EXERCISE        NUMBER OF SECURITIES
                            UPON EXERCISE OF          PRICE OF OUTSTANDING         REMAINING AVAILABLE FOR
                          OUTSTANDING OPTIONS,       OPTIONS, WARRANTS AND      FUTURE ISSUANCE UNDER EQUITY
                           WARRANTS AND RIGHTS               RIGHTS                  COMPENSATION PLANS
                         ----------------------    -------------------------    ----------------------------
<S>                             <C>                          <C>                          <C>
Equity compensation
plans approved by
security holders                1,448,750                    $2.63                        1,301,250

Equity compensation
plans not approved by
security holders                 375,708                     $5.96                           --
                         ----------------------    -------------------------    ----------------------------
Total                           1,824,458                    $3.32                        1,301,250
</TABLE>

MATERIAL  FEATURES  OF  INDIVIDUAL  EQUITY  COMPENSATION  PLANS NOT  APPROVED BY
STOCKHOLDERS

         Burnham Hill  Partners,  a division of Pali Capital  Inc.,  and William
Blair & Company acted as placement agents in our August 2004 private  placements
of debt and equity  securities.  For their  services,  we issued to Burnham Hill
Partners and William Blair & Company  2-year  warrants to purchase up to 175,000
shares and 75,000 shares, respectively, of our common stock at an exercise price
of $6.60 per share.

         In July 2004, we issued 3-year  warrants to purchase up to 8,750 shares
of common stock,  with an exercise price per share of $4.72,  to Jim Steuer,  an
outside  consultant  as partial  consideration  for business  advisory  services
rendered to us during the third quarter 2004.

         Dillon Capital, Inc. acted as placement agent in our April and May 2004
private  placements of senior secured promissory notes and common stock purchase
warrants.  For their services, we issued to Dillon Capital, Inc. 3-year warrants
to purchase  up to 37,500  shares of our common  stock at an  exercise  price of
$4.00 per share.

         In April 2004, we issued 2-year  warrants to purchase  25,000 shares of
common stock, with an exercise price per share of $4.80, to Michael Littman, our
former attorney, as consideration for legal services.

         In April  2004,  we issued  2-year  warrants  to  purchase up to 12,500
shares of common  stock,  with an  exercise  price per share of $4.00,  to Stern
Capital, a financial consulting firm as consideration for consulting services.


                                       79
<PAGE>


         In March 2004,  we issued  41,958  shares of common stock to our former
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 our common
stock on the date the stock was issued.

         In May 2004,  we issued  75,000  shares of common  stock to  Cumberland
Timber Company, LLC as partial  consideration for the purchase of 1,738 acres of
land in Eastern  Tennessee  which was sold to us for a total  purchase  price of
$631,000. The 75,000 shares were issued at a price per share of $4.68, which was
the  closing  price of our stock on May 14,  2004,  the date of closing for this
transaction.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Other than the employment  arrangements  described  above in "Executive
Compensation"  and the  transactions  described  below,  since  January 30, 2003
(inception),   there  has  not  been,  nor  is  there  currently  proposed,  any
transaction  or series  of  similar  transactions  to which we were or will be a
party:

         o        in which the amount involved exceeds $60,000; and

         o        in which any  director,  executive  officer,  shareholder  who
                  beneficially owns 5% or more of our common stock or any member
                  of  their  immediate  family  had or  will  have a  direct  or
                  indirect material interest.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

         On February 26, 2003,  we acquired  mining  equipment and certain other
intangible  mining rights and information  from Strata Coal, LLC for $47,000 and
the  assumption  of $188,875 in  liabilities  consisting  of trade  payables and
promissory notes payable to unrelated parties.  Strata was owned by Jon Nix, our
President and Chief Executive Officer,  and Farrald Belote, Jr., an ex-director,
but is now  non-existent.  On June 11,  2003,  we sold the mining  equipment  we
acquired from Strata to Jenco  Capital  Corporation  for $30,000.  Mr. Nix is an
executive officer and controlling shareholder of Jenco.

         In February  2003,  we borrowed  $150,000  from a trust  controlled  by
Farrald  Belote,  Jr. This note accrues simple  interest at an annual rate of 8%
and was to mature in February  2005.  In August  2003,  we extended the maturity
date to February 20, 2008.  All principal  and unpaid  interest was paid in full
during the calendar third quarter 2003.

         On July 1, 2003, we sold to Jenco mineral royalty rights for coal mined
on the Patterson Mountain portion of the New River Tract assemblage for $75,156.
Pursuant  to this  agreement,  we pay Jenco  $2.00 per ton of coal  mined on the
property.  During the six months ended  December 31, 2003 and June 30, 2004,  we
paid Jenco $59,572 and $75,106, respectively, pursuant to this agreement.

         On August 1, 2003,  we sold to Jenco our  interest  in mineral  royalty
rights we received from U.S.  Coal,  Inc. for coal mined on the Smokey  Mountain
portion  of the New  River  Tract  assemblage  for  $250,000.  Pursuant  to this
agreement,  Jenco receives  royalty  payments from U. S. Coal,  Inc. for coal it
mines on the property.

         On  June  30,  2003,  we  assigned  to Jon Nix and  Farrald  Belote,  a
ten-year, $0.25 per ton royalty interest on all the coal sold from the New River
Tract assemblage.  Pursuant to this agreement, if we sell any mineral properties
on the New River Tract assemblage  prior to end of the ten-year period,  we must
settle the remaining royalty  obligation by paying 12 1/2% of the sales price to
each of Messrs. Nix and Belote. Pursuant to our sales of mineral property rights
to Jenco in July and August 2003,  we incurred an obligation to pay an aggregate
of $81,289 to Messrs.  Nix and Belote under this  agreement.  In February  2004,
Messrs. Nix and Belote each agreed to permanently cancel this agreement.


                                       80
<PAGE>


         We  borrowed  an  aggregate  of  $315,000  from Jenco from  August 2003
through  January 2004,  and we borrowed  $105,000 from Jon Nix in December 2003.
Each of these  loans  was  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.

         During 2003,  we paid the law firm of Kite,  Bowen &  Associates,  PA a
total of $45,000 for  professional  services  rendered to us.  Charles  Kite,  a
former  director  and our current  General  Counsel,  and Jeanne  Bowen Nix, our
Secretary and Treasurer and Assistant Counsel, were partners of this law firm.

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

TRANSACTIONS WITH 5% BENEFICIAL SHAREHOLDERS

     FEBRUARY 2004 PRIVATE PLACEMENT

         In February  2004,  we sold an  aggregate  of  1,250,000  shares of our
common stock in a private  placement,  at a price of $2.20 per share.  Crestview
Capital  Master,  LLC purchased  650,000 of the 1,250,000  shares,  Gerald Rubin
purchased  500,000 of the shares,  and two  additional  investors each purchased
50,000 of the shares.

     SENIOR SECURED DEBT FINANCING

         In April  and May  2004,  we  raised  in  separate  transactions  gross
proceeds of $7.5 million pursuant to a series of separate private  placements of
senior secured promissory notes that mature in April and May 2005 and three-year
warrants to purchase up to an aggregate of 625,000 shares of our common stock at
an exercise price of $4.00 per share.  The notes were secured by all of our coal
mining assets,  and had an interest rate of 12% for the first three months,  15%
for the second three months and 18% thereafter.  Interest was payable quarterly.
The senior secured  promissory notes were repaid in full in August and September
2004,  at which  time we issued  395,396  shares of our  common  stock  upon the
exercise of the warrants by the investors,  including  Crestview  Capital Master
LLC,  Stewart R. Flink, and Nancy Hoyt Revocable Trust. All of the warrants were
exercised on a cashless  basis with the  exception of 25,000 shares for which we
were paid $100,001.  Crestview  Capital Master LLC,  Stewart R. Flink, and Nancy
Hoyt Revocable  Trust received an aggregate of 81,879 shares of our common stock
in this transaction.

     AUGUST 2004 PRIVATE PLACEMENTS

         SERIES A CONVERTIBLE PREFERRED STOCK FINANCING

         On  August  31,  2004,  we sold  $16,030,000  of  Series A  convertible
preferred  stock  and  common  stock  purchase  warrants  in  private  placement
financings  in separate  transactions.  We issued a total of 1,068.67  shares of
Series  A  convertible   preferred   Stock,  at  $15,000  per  share,  for  cash
consideration of approximately  $11.3 million and cancellation of $4.725 million
of our senior  secured  promissory  notes.  Each  share of Series A  convertible
preferred stock is convertible into 2,500 shares of common stock. For each share
of Series A 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.  We sold these  securities in separate  transactions to the following
investors who are also 5% beneficial  holders of our common stock:  Big Bend XII
Investment,  LP, Crestview  Capital Master LLC; Stewart & Jennifer Flink;  Nancy
Hoyt Revocable Trust; North Sound Legacy International Ltd. and Gerald J. Rubin.


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<PAGE>


         Of these  investors,  Crestview  Capital Master LLC; Stewart & Jennifer
Flink;  and Nancy Hoyt Revocable  Trust were holders of our senior secured debt,
which debt was repaid from proceeds from the financing.

         CONVERTIBLE DEBT FINANCING

         On August 31, 2004,  we issued  $3,000,000  of  convertible  promissory
notes to Crestview  Capital  Master LLC and SDS Capital Group SPC, Ltd. Prior to
maturity,   the  convertible  promissory  notes  may  be  converted  into  units
consisting of our Series A 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 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 convertible
promissory notes bear interest at a rate of 8% per annum and have a term of nine
months.

         In December  2004,  Crestview  Capital Master LLC and SDS Capital Group
SPC, Ltd.  converted the  $3,000,000 of  convertible  promissory  notes into 200
shares of Series A  convertible  preferred  stock and warrants to purchase up to
100,000 shares of common stock.  Crestview Capital Master LLC received 33,330 of
such shares of Series A convertible  preferred stock and warrants to purchase up
to 16,650 shares of common stock.

         PREFERRED STOCK AND WARRANT PURCHASE RIGHTS

         Investors  who  paid  cash   consideration   in  either  the  Series  A
convertible  preferred  stock  financing  or  convertible  debt  financing  also
received  the  right  to  purchase  additional  units of  Series  A  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  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  ninety  days  following  the  effective  date  of the  registration
statement  of which this  prospectus  is a party.  The  holders  of  convertible
promissory  notes may  exercise  this  additional  purchase  right  only if they
convert their promissory note in full.

         In December  2004,  we issued 174.66 shares of our Series A convertible
preferred Stock and Warrants to purchase 87,330 shares of our Common Stock, upon
the exercise by certain  holders of purchase  rights received in our August 2004
Series A convertible  preferred Stock Financing.  Crestview  Capital Master LLC,
North  Sound  Legacy  International  Ltd.  and  Gerald  Rubin  received,  in the
aggregate,  128.33  shares  of our  Series A  convertible  preferred  stock  and
warrants to purchase  64,146  shares of our common stock upon their  exercise of
such purchase rights.

         Also in December 2004, we issued 66.67 shares of our Series A Preferred
Stock and Warrants to purchase  33,335  shares of our Common Stock upon exercise
by  certain  holders  of  purchase  rights  received  in our  August  2004  debt
financing.  Crestview  Capital  Master LLC received 11.11 shares of our Series A
convertible  preferred stock and warrants to purchase 5,555 shares of our common
stock upon its exercise of such purchase rights.

         SALE OF COMMON STOCK BY DIRECTOR

         Concurrently  with the  closing of the Series A  convertible  preferred
stock and  convertible  promissory note financings in August 2004, the investors
in those transactions also purchased a total of 1,345,069 shares of common stock
from Farrald  Belote,  a director of ours,  for total  proceeds to Mr. Belote of
$3,467,180.  The purchasers of convertible  preferred  stock acquired a total of
1,270,069


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<PAGE>


shares at price of $2.60 per share, and the purchasers of convertible promissory
notes acquired 75,000 shares at a price of $2.20 per share.

         REGISTRATION RIGHTS AGREEMENT

         In connection with the August 31, 2004 private placement financings, we
entered  into  separate  registration  rights  agreements  with  the  investors.
Pursuant  to the  separate  registrant  rights  agreements,  we agreed to file a
registration  statement  registering  the resale by the  investors of all of the
shares of common stock issuable upon conversion of preferred shares and exercise
of warrants, including preferred shares and warrants issuable upon conversion of
the convertible  promissory notes and exercise of the purchase rights. We agreed
to keep the  registration  statement  effective until the earlier of the date on
which all of the common  shares  have been sold and the date that all the common
shares may be sold by the investors pursuant to Rule 144(k) under the Securities
Act. Pursuant to the separate registration rights agreements,  we filed with the
SEC a  registration  statement  on Form of which  this  prospectus  is a part to
register for resale the shares of common stock identified above, and each of the
investors  in the  private  placement  financings  is  identified  as a  selling
shareholder in this prospectus.

         CRESTVIEW CAPITAL MASTER, LLC

         In February 2004,  Crestview Capital Master,  LLC, an entity controlled
by Crestview  Capital Funds,  purchased four outstanding  notes payable of ours,
from an  unrelated  party,  in the  aggregate  principal  amount of  $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 to  modify  certain
provisions.  These  notes bear  interest  at an annual  rate of 12%.  Two of the
notes, in the aggregate  principal  amount of  approximately  $3.2 million,  are
convertible into our 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 us as additional  consideration  for the convertible
notes.  The warrants  allow  Crestview  to purchase up to 399,312  shares of our
common stock at a price of $2.20 per share, and expire on March 25, 2005. Two of
the notes  payable  dated  September 25 and  September 30, 2003 in the aggregate
principal  amount of $270,314,  were paid in full in December 2004. With respect
to the convertible notes:

         o        On March 31,  2004,  we issued to Crestview  80,346  shares of
                  common stock upon conversion of $160,693 of accrued interest;

         o        In April 2004, we issued to Crestview 250,000 shares of common
                  stock upon conversion of $500,000 of principal;

         o        In October  2004, we issued to Crestview  1,347,451  shares of
                  common stock upon  conversion of the  remaining  $2,694,902 of
                  principal of the convertible debentures; and

         o        In October  2004,  we issued to  Crestview  399,312  shares of
                  common stock upon exercise of common stock purchase  warrants,
                  for a total proceeds to us of $878,487.50.

         In February  2004,  we sold an  aggregate  of  1,250,000  shares of our
common stock in a private  placement,  at a price of $2.20 per share.  Crestview
Capital Master, LLC purchased 650,000 of the 1,250,000 shares.

         Crestview Capital Master, LLC invested in our April and May 2004 senior
secured  debt  financings  and  acquired   $1,000,000  in  principal  amount  of
promissory  notes and  warrants  to  purchase  83,333  shares  of common  stock.
Additionally,  we paid Dillon Capital,  Inc., an affiliate of Crestview  Capital
Master,  LLC, a placement  agent fee of $285,000 and warrants to purchase 37,500
shares  of  common  stock  with  an  exercise   price  of  $4.00  per  share  as
consideration for services in this transaction.  This indebtedness was repaid in
full in August and September, 2004.


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<PAGE>


         Crestview Capital Master, LLC invested in one of our August 2004 Series
A convertible preferred stock and warrant financings, and acquired 150.67 shares
of Series A convertible  preferred  stock and warrants to purchase 75,335 shares
of common  stock,  for which  Crestview  paid  $1,260,000  in cash and cancelled
$1,000,000 in principal amount of indebtedness. Additionally, Crestview invested
in our August 2004 convertible  promissory note financing and acquired  $500,000
in principal amount of notes, which notes were subsequently converted into 33.33
shares of Series A  convertible  preferred  stock and warrants to purchase up to
16,665  shares of common  stock.  In  December  2004,  Crestview  exercised  the
additional  purchase  rights granted in the August 2004  financings and acquired
39.11  shares  of our  Series A  convertible  preferred  stock and  warrants  to
purchase  19,555  shares  of  our  common  stock  for  gross  proceeds  to us of
approximately $586,650.

ITEM 13.  EXHIBITS

         The following exhibits are filed herewith:

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

2.1            Agreement and Plan of  Reorganization  dated as of April 11, 2003
               among Southern Group  International,  Inc.,  National Coal Corp.,
               and certain subscribing shareholders of National Coal Corp. (1)

2.2            Share  Purchase  Agreement  dated as of  March  28,  2003  among,
               Surinder  Rametra,   Southern  Group  International,   Inc.,  and
               National Coal Corporation. (1)

3.1            Articles of  Incorporation of National Coal Corp. dated August 8,
               1995. (2)

3.1.1          Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               National Coal Corp. dated August 10, 1995. (2)

3.1.2          Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               National Coal Corp. dated January 4, 1996. (2)

3.1.3          Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               National  Coal Corp.  dated July 17, 2003,  filed August 4, 2003.
               (3)

3.1.4          Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               National Coal Corp. dated August 27, 2004, filed August 31, 2004.
               (8)

3.1.5          Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               National  Coal Corp.  dated  January 10, 2005,  filed January 12,
               2005. (8)

3.2            Amended and Restated Bylaws of National Coal Corp. (8)

4.1            Amended and Restated 2004 National Coal Corp. Option Plan. (8)*

10.1           Form of Indemnification Agreement of Registrant. (8)

10.2           Asset  Purchase  and Sale  Agreement  dated April 15, 2004 by and
               among U.S. Coal,  Inc., New River  Processing,  Inc. and National
               Coal Corporation. (5)

10.3           Asset Purchase Agreement by and between National Coal Corporation
               and Robert Clear Coal Corporation dated October 26, 2004. (8)

10.4           Coal Supply  Agreement by and between  National Coal  Corporation
               and East Kentucky Power  Cooperative,  Incorporated dated October
               6, 2004. Portions of this exhibit have been omitted pursuant to a
               request for confidential treatment and have been filed separately
               with the United States Securities and Exchange Commission. (7)


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<PAGE>


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

10.5           Purchase and Sale Agreement by and between  Appalachian Fuels LLC
               and National Coal Corporation dated November 26, 2004. (8)

10.6           Credit  Agreement by and between  National Coal  Corporation  and
               D.B.  Zwirn  Special  Opportunities  Fund,  L.P.  as lender,  and
               administrative agent for the lenders dated November 26, 2004. (8)

10.7           Mineral  Rights  Purchase  and  Sale  Agreement  by  and  between
               National Coal Corporation and The Brimstone Co. dated December 6,
               2004. (8)

10.8           Form of Note and  Warrant  Purchase  Agreements  dated  April 15,
               2004,  including  Form of  Secured  Promissory  Note  and Form of
               Common Stock Purchase Warrant attached as exhibits thereto. (5)

10.9           Security and Pledge  Agreement dated April 15, 2004, by and among
               National Coal Corp., National Coal Corporation and Stewart Flink,
               as agent for himself and the holders of secured promissory notes.
               (5)

10.10          Subordination  Agreement  dated April 15, 2004, made by Crestview
               Capital  Master,  LLC in favor of  Stewart  Flink,  as agent  for
               himself and the holders of secured promissory notes. (5)

10.11          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. (8)

10.12          Investor Rights  Agreement by and between National Coal Corp. and
               the  Purchasers  listed on Schedule I thereto,  dated  August 31,
               2004. (8)

10.13          Preferred  Stock and Warrant  Purchase  Agreement  by and between
               National  Coal  Corp.  and CD  Investment  Partners,  Ltd.,  with
               respect to Registrant's Series A Cumulative Convertible Preferred
               Stock and  Warrants to  Purchase  Common  Stock dated  August 31,
               2004. (8)

10.14          Warrant,  dated August 31, 2004, issued by National Coal Corp. to
               CD Investment Partners,  Ltd. pursuant to the Preferred Stock and
               Warrant Purchase Agreement by and between National Coal Corp .and
               CD Investment Partners, Ltd., with respect to Registrant's Series
               A Cumulative Convertible Preferred Stock and Warrants to Purchase
               Common Stock dated August 31, 2004. (8)

10.15          Investor Rights  Agreement by and between National Coal Corp. and
               CD Investment Partners, Ltd. dated August 31, 2004. (8)

10.16          Note Purchase  Agreement by and between  National Coal Corp.  and
               the  persons  listed on  Schedule  I  thereto,  with  respect  to
               Registrant's  8%  Convertible  Promissory  Notes dated August 31,
               2004,  including Form of 8% Convertible  Promissory Note and Form
               of Common Stock Purchase Warrant. (8)

10.17          Investor Rights  Agreement by and between National Coal Corp. and
               Crestview  Capital  Master,  LLC and SDS Capital  Group SPC, Ltd.
               dated August 31, 2004. (8)

10.18          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation and Jon E. Nix dated October 1, 2004. (8)*


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<PAGE>


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

10.19          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation and Robert Chmiel dated October 1, 2004. (8)*

10.20          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation and Charles W. Kite dated September 16, 2004. (8)*

10.21          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation  and Jeanne L.  Bowen-Nix  dated  September 16, 2004.
               (8)*

10.22          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation  and Joseph A. Davis,  Jr. dated  September 16, 2004.
               (8)*

10.23          Amended  Employment   Agreement  by  and  between  National  Coal
               Corporation and William R. Snodgrass dated October 1, 2004. (8)*

10.24          Convertible  Promissory Note issued by National Coal  Corporation
               to The Webb Group in the  amount of  $1,503,016.67,  as  amended,
               dated March 25, 2003. (6)

10.25          Convertible  Promissory Note issued by National Coal  Corporation
               to The Webb Group in the amount of $1,691,885.67  dated March 25,
               2003. (6)

10.26          Promissory Note issued by National Coal Corporation to Webb Group
               Financial  Services,  Inc. for $75,000 dated  September 25, 2003.
               (6)

10.27          Promissory Note issued by National Coal Corporation to Webb Group
               Financial  Services,  Inc. for  $195,314.30  dated  September 30,
               2003. (6)

10.28          Warrant to  purchase  751,500  shares of common  stock  issued by
               National Coal  Corporation  to Webb Financial  Group,  Inc. dated
               March 25, 2003. (6)

10.29          Warrant to  purchase  845,750  shares of common  stock  issued by
               National Coal  Corporation  to Webb Financial  Group,  Inc. dated
               March 25, 2003. (6)

10.30          Amendment to Warrant to purchase  751,500  shares of common stock
               issued by National Coal Corporation to Webb Financial Group, Inc.
               dated February 26, 2004. (6)

10.31          Warrant to  purchase  845,750  shares of common  stock  issued by
               National Coal  Corporation  to Webb Financial  Group,  Inc. dated
               February 26, 2004. (6)

14.1           National Coal Corp. Code of Ethical Conduct.

21.1           Subsidiaries of National Coal Corp. (8)

23.1           Consent of Gordon, Hughes & Banks, 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.

----------

(1)  Incorporated  by reference  to our Current  Report on Form 8-K (dated April
     22, 2003), filed April 29, 2003.

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

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


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<PAGE>


(4)  Incorporated  by  reference  to our  Quarterly  Report on Form 10-Q for the
     Quarterly Period ending June 30, 2004, filed August 13, 2004.

(5)  Incorporated  by reference  to our Current  Report on Form 8-K (dated April
     15, 2004), filed April 29, 2004.

(6)  Incorporated by reference to our Current Report on Form 8-K (dated March 1,
     2004), filed March 2, 2004.

(7)  Incorporated  by  reference  to our  Quarterly  Report on Form 10-Q for the
     Quarterly Period ending September 30, 2004, filed November 18, 2004.

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

* Indicates a management contract or compensatory plan.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Gordon,  Hughes & Banks,  LLP is our principal  independent  accounting
firm. All audit work was performed by the full time employees of Gordon,  Hughes
& Banks,  LLP.  Our board of  directors  does not have an audit  committee.  The
functions  customarily delegated to an audit committee are performed by our full
board of  directors.  Our board of directors  approves in advance,  all services
performed by Gordon,  Hughes & Banks, LLP. Our board of directors has considered
whether the provision of non-audit  services is compatible with  maintaining the
principal accountant's independence, and has approved such services.

     AUDIT FEES

         Fees for audit services totaled  approximately  $53,100 and $46,700 for
the years  ended  December  31,  2003 and  2004,  respectively,  including  fees
associated with the annual audit,  and reviews of our quarterly  reports on Form
10-QSB.

     AUDIT-RELATED FEES

         Fees for audit-related services totaled approximately $2,600 and $9,500
for the years  ended  December  31, 2003 and 2004,  respectively.  Audit-related
services  principally  include due  diligence in connection  with  acquisitions,
financing transactions, and accounting consultations.

     TAX FEES

         Fees were  incurred  totaling  approximately  $5,500  and $0 during the
years ended December 31, 2003 and 2004, respectively for tax services, including
for tax compliance, tax advice and tax planning.

     ALL OTHER FEES

         No other fees were  incurred  during the years ended  December 31, 2003
and 2004 for  services  provided  by  Gordon,  Hughes & Banks,  LLP,  except  as
described above.


                                       87
<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: March 30, 2005                       /S/ ROBERT CHMIEL
                                     -------------------------------------------
                                     By:   Robert Chmiel
                                     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 Jon Nix and Robert Chmiel,  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-KSB,  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/ JON NIX           President and Chief Executive          March 30, 2005
----------------------     Officer and Director
       Jon Nix             (Principal Executive Officer)

  /S/ ROBERT CHMIEL        Chief Financial Officer and Director   March 30, 2005
----------------------     (Principal Financial Officer)
    Robert Chmiel

 /S/ SCOTT FILSTRUP        Director                               March 30, 2005
----------------------
   Scott Filstrup


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