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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2007

[_]      Transition  Report  Pursuant  to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934

  For the transition period from __________________ to ______________________.

                         Commission file number 0-26509

                               NATIONAL COAL CORP.

             (Exact name of registrant as specified in its charter)

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

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

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


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

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

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

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

                                      NONE

         Indicate  by check  mark if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act.

                               Yes [_]   No[X]

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

                               Yes [_]   No[X]

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

                               Yes [X]   No[_]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [_]

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

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

         Accelerated Filer [_]          Smaller Reporting Company [_]

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

                               Yes [_]   No[X]

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  of the  registrant  as of June 30,  2007,  based on the
closing  price of the common  stock as reported by The NASDAQ  Global  Market on
such date, was approximately $50,748,000.

         As of April 8, 2008, the issuer had 28,819,931  shares of common stock,
par value $.0001 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the issuer's Proxy Statement for its 2008 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report.

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<PAGE>


                               NATIONAL COAL CORP.
                               INDEX TO FORM 10-K

PART I                                                                      PAGE
------                                                                      ----

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

Item 1A.     Risk Factors.................................................    15

Item 1B.     Unresolved Staff Comments....................................    28

Item 2.      Properties...................................................    28

Item 3.      Legal Proceedings............................................    32

Item 4.      Submission of Matters to a Vote of Security Holders..........    32


PART II

Item 5.      Market for Registrant's Common Equity, Related Stockholder
             Matters and Issuer Purchases of Equity Securities............    33

Item 6.      Selected Financial Data......................................    36

Item 7.      Management's Discussion and Analysis of Financial Condition
             and Results of Operations....................................    37

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk...    59

Item 8.      Financial Statements and Supplementary Data..................    61

Item 9.      Changes in and Disagreements With Accountants on Accounting
             and Financial Disclosure.....................................   104

Item 9A(T).  Controls and Procedures......................................   104

Item 9B      Other Information............................................   105


PART III

Item 10.     Directors, Executive Officers, and Corporate Governance......   106

Item 11.     Executive Compensation.......................................   106

Item 12.     Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters...................   106

Item 13.     Certain Relationships and Related Transactions, and
             Director Independence........................................   106

Item 14.     Principal Accounting Fees and Services.......................   106


PART IV

Item 15.     Exhibits, Financial Statement Schedules......................   107


<PAGE>


                                     PART I

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

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

         o        the worldwide demand for coal;

         o        the price of coal;

         o        the supply of coal and other competitive factors;

         o        the costs to mine and transport coal;

         o        the ability to obtain new mining permits;

         o        the costs of reclamation of previously mined properties;

         o        the risks of expanding coal production;

         o        industry competition;

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

         o        general economic conditions; and

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

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


                                       1
<PAGE>


ITEM 1.  BUSINESS.

CORPORATE OVERVIEW

         We mine, process and sell high quality bituminous steam coal from mines
located in East  Tennessee  and North  Alabama  and,  until March 31,  2008,  in
Southeast Kentucky. We own the coal mineral rights to approximately 65,000 acres
of land and lease the rights to approximately  42,000 additional acres including
the rights to approximately 27,000 acres at our operations in Southeast Kentucky
which were sold on March 31,  2008.  We recently  expanded  our  operation  into
Alabama through the acquisition of Mann Steel Products,  Inc. As of December 31,
2007, our active mining  complexes  included two underground  mines, six surface
mines, and two highwall mines. In addition, we have four preparation plants, two
active and two inactive, and four unit train loading facilities,  two active and
two  inactive,  served  by the  CSX and  Norfolk  Southern  railroads.  We are a
minority joint venture partner in a barge loading  facility on the Warrior River
in North  Alabama.  We hold permits  that allow us to open or re-open  seven new
mines close to our current  operations.  As of December 31, 2007,  we controlled
approximately 37.4 million estimated recoverable tons of coal reserves including
8.7 million  tons at our  operations  in Southeast  Kentucky  which were sold on
March 31, 2008.  During the year ended  December 31,  2007,  we generated  total
revenues  of $92.8  million,  a net loss of $25.8  million,  an  EBITDA  loss of
$823,000 and sold approximately  1,763,000 tons of coal.  Approximately  304,000
tons of coal sold came from our operations in Southeast Kentucky which were sold
on March  31,  2008.  Our  goal is to  acquire  additional  mines  and  increase
production from existing reserves as market conditions allow.

         Our revenues have resulted  primarily from the sale of coal to electric
utility  companies  in the  Southeastern  United  States.  According to the U.S.
Department of Energy, Energy Information  Administration  ("EIA"), the long-term
outlook for coal demand is favorable,  as domestic  electricity  consumption  is
expected to grow at an average  annual rate of 1.1% per year  through  2030 with
48% to 49% of that growth provided by coal.  International  coal  consumption is
expected to grow by 2.6% through 2015.  During the year ended December 31, 2007,
approximately  84% of our  revenue  was  generated  from coal sales to  electric
utility companies in the Southeastern  United States. Our largest customers were
South Carolina Public Service Authority (Santee Cooper), Duke Power, and Georgia
Power representing approximately 24%, 23% and 18% of our revenues, respectively.

         In the year ended December 31, 2007,  our mines produced  approximately
1,352,000 tons of coal including approximately 319,000 tons at our operations in
Southeast  Kentucky,  and we purchased  approximately  421,000 tons of coal from
other producers.  Our Alabama  operations  produced  approximately  195,000 tons
between October 19, 2007 when acquired and December 31, 2007.  Approximately 45%
of our  production  for 2007  was  produced  at  underground  mines  and 55% was
produced at our surface and highwall mine operations.  We sell a majority of our
coal pursuant to long-term  contracts.  We plan to pursue  additional  contracts
when pricing is favorable.

ACQUISITION OF MANN STEEL PRODUCTS, INC.

         On  October  19,  2007 we  consummated  the  acquisition  of Mann Steel
pursuant to a purchase agreement entered into on June 18, 2007. After applying a
working  capital  adjustment,  we acquired Mann Steel for an aggregate  purchase
price of $58.7 million. Following the acquisition,  our subsidiary National Coal
of Alabama,  Inc. ("NCA") operates three surface mines in Northwest Alabama:  L.
Massey,  Poplar  Springs and Hickory Grove North,  which  produce,  on an annual
basis  approximately  one million tons of coal. NCA controls  approximately  5.9
million tons of leased  reserves  which contain heat content  between 11,000 and
14,400 Btu's and sulfur between 0.7% and 3.0%.  Currently,  there are two active
mining permits which are available for  additional  mining and one new permit in
process.  NCA sells its coal to utilities and certain large industrial companies
primarily located in Alabama.


                                       2
<PAGE>


BUSINESS STRATEGY

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

         INCREASE  PRODUCTION  AND  DEVELOP  RESERVES.  We plan to  expand  coal
production as market  conditions allow. We hold permits allowing us to open five
new mines and  re-open  two  additional  mines on our  properties.  We also have
applied for permits to open four  additional  mines.  At December 31,  2007,  we
controlled  approximately 37.4 million estimated recoverable tons, including 8.7
million tons at our Straight Creek operations which were sold on March 31, 2007,
and  we  believe  that  we  have  substantial  unproven  deposits  which  can be
developed.

         IMPROVE  PRODUCTION  EFFICIENCIES.  We plan to  continue to improve our
operating   efficiencies   through  greater   economies  of  scale  and  capital
improvements.  As we expand our production capabilities, we plan to increasingly
leverage our fixed cost  infrastructure and reduce our per ton production costs.
In order to achieve new  efficiencies,  we spent  approximately  $9.5 million in
2006 to modernize our Baldwin preparation plant and rail load-out facility,  and
$531,000 and  $115,000 in 2006 and 2007,  respectively,  to modernize  our Smoky
Junction  preparation  plant  that  will  enable us to  reduce  cost and  expand
processing  capacity  in the  southern  portion of our  Tennessee  reserves.  In
February  2006, we purchased a forty-two  mile railroad line that will enable us
to  transport  coal from the Baldwin  facility  and further  reduce our internal
transportation costs from this area.

         CONTINUE TO DEVELOP STRONG CUSTOMER  RELATIONSHIPS.  Since we commenced
operations  in July  2003,  we have  worked  hard to  develop a  reputation  for
reliability,  consistent quality and customer service.  We intend to continue to
develop strong  relationships  with our existing  customers and new customers in
order to enhance our market position and secure favorable  long-term  contracts.
Currently,  a  significant  portion  of our  2008  planned  production  has been
committed, primarily to existing customers.

         CONTINUE  TO ACQUIRE  CONTIGUOUS  RESERVES.  Our mining  properties  in
Tennessee were located in close proximity to one another and were well served by
adjacent railroad and interstate  highway access. We believe that  opportunities
may exist to acquire nearby reserves to further leverage our railroad access and
preparation  plant  facilities.   Our  Alabama  mining  properties  are  located
approximately 300 miles from our corporate headquarters in Knoxville, Tennessee,
and are well served by proximate highway, railroad or barge access.  Significant
additional  mineral  leasing  activity  was on-going at the time we acquired our
Alabama  mining  operations,  which  we  will  complete,  and  we  believe  that
opportunities  exist to  secure  additional  leased  reserves  in excess of this
existing activity.

HISTORY

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


                                       3
<PAGE>


MINING OPERATIONS

         As of December 31, 2007,  we were mining coal from five surface  mines,
two underground mines and two highwall mines.

<TABLE>
<CAPTION>
                                                                                                                    YEAR
                                                                2007         2006         2005       PERMITTED     OPENED
                                      MINING                 PRODUCTION   PRODUCTION   PRODUCTION     RESERVES       OR
   MINE NAME         LOCATION         METHOD      STATUS       (000'S)      (000'S)      (000'S)      (000'S)     ACQUIRED
   ---------         --------         ------      ------       -------      -------      -------      -------     --------
<S>              <C>                 <C>         <C>               <C>          <C>          <C>          <C>       <C>
         TENNESSEE MINES
Mine #1          New River Tract        UG        Closed               0            0           19             0    2004
Mine #2          New River Tract        UG        Closed               0            0            0             0    2003
Mine #3          New River Tract     Surface      Active              83           29            0         1,909    2006
Mine #3 HWM      New River Tract       HWM        Active             107           26            0         1,792    2006
Mine #7          Ketchen Lease       Surface      Active             285          300          268         3,440    2004
Mine #9          New River Tract        UG        Closed               0            0           35             0    2004
Mine #11         TVA Lease              UG        Active             359          371          327           656    2004
Mine #14         TVA Lease              UG       Not Open              4            0            0             0
Mine #17         New River Tract        UG         Idle                0           26            0         5,758    2006
                                                             ----------------------------------------------------
TOTAL TENNESSEE MINES                                                838          752          649        13,555

         KENTUCKY MINES (SOLD MARCH 31, 2008)
Mine KY#1        Straight Creek         UG        Active             248          228          206         1,497    2004
Mine KY#2        Straight Creek         UG         Idle                0           60           74           248    2005
Mine KY#3        Straight Creek        HWM        Closed               0           33          163             0    2005
Mine KY#4        Straight Creek      Surface      Closed               0           57           28             0    2005
Mine KY#6        Straight Creek        HWM         Idle                6          199            0           542    2006
Mine KY#10       Straight Creek        HWM        Active              65            0            0           180    2007
                                                             -------------------------------------- -------------
TOTAL KENTUCKY MINES                                                 319          577          471         2,467

         ALABAMA MINES
L Massey            Marion Co.       Surface      Active              79            0            0           584    2004*
Poplar Springs      Winston Co.      Surface      Active              59            0            0         1,931    2005*
Hickory Grove       Winston Co.      Surface      Active              57            0            0            19    2006*
                                                             ----------------------------------------------------
TOTAL ALABAMA MINES                                                  195            0            0         2,534
                                                             ----------------------------------------------------
ALL MINES                                                          1,352        1,329        1,120        18,556
                                                             ====================================================
</TABLE>

UG = Underground
HWM = Highwall Miner

* Date opened shown.  Alabama mines were  acquired  10-19-07.  Production is for
period 10-20-07 to 12-31-07.


                                       4
<PAGE>


TENNESSEE MINES

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

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

         BALDWIN  FACILITY.  The Baldwin  Facility,  including the purchase of a
42-mile short line  railroad,  was  refurbished at a cost of $9.5 million during
2006 for the purpose of providing  processing and loading  facilities to support
at least six separate mines in the adjacent area. The Baldwin  Facility  resides
on the New River Tract,  a 65,000 acre parcel of owned coal mineral  rights.  In
December  2006 and January 2007,  due to declining  coal prices and growing coal
stockpiles at utility  companies,  we put our plans for the  development  of the
Baldwin mining area on hold until such time as coal demand and pricing  supports
the effort.

KENTUCKY MINES

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

         STRAIGHT CREEK.  During 2007, all of our mining in Kentucky occurred on
this  tract of  leased  and owned  mineral  rights in  Harlan,  Bell and  Leslie
counties.  All coal was processed at the Brittain preparation plant which has an
estimated annual processing  capacity of 1.8 million tons per year. All coal was
loaded onto trains at the Viall rail  loading  facility  which is located on the
CSX railroad.  We completely mined two separate  permitted areas during 2006 and
idled  two  mines in  Kentucky  due to high cost in the case of mine KY#2 and in
anticipation  of additional  permit  approvals in the case of mine KY#6. We sold
the Straight  Creek  operation on March 31, 2008 for $11 million in cash and the
release of $3.6 million in reclamation liabilities and $2.7 million of equipment
related debt.

         PINE MOUNTAIN.  On November 13, 2007, we received  $2,000,000  from the
sale of certain  real  property  and mineral  leases at Pine  Mountain,  an idle
mining complex located in Kentucky,  and an additional  $1,000,000 from the sale
to the same  purchaser  of an option  entitling  it to  purchase  for $10.00 our
remaining properties at Pine Mountain.  We did not mine the Pine Mountain tracts
during the time that we controlled the property.

ALABAMA MINES

         We acquired our Alabama  operations  through the acquisition of 100% of
the common stock of Mann Steel on October 19, 2007. We have five mining areas in
Alabama,  defined by geographic  location of mineral and surface  leases.  These
areas have access to a preparation  plant and to customers  via truck,  rail and
barge loading facilities.

         L. MASSEY.  Currently,  our largest  mining  operation in Alabama is L.
Massey West which  produced  410,249  tons during 2007 of which 78,719 tons were
produced during the  post-acquisition  period of October 20 through December 31,
2007.  L.  Massey  West  utilized  a dragline  supplemented  by  bulldozers  and
wheel-loaders to mine the coal. The dragline  equipment was moved from L. Massey
West to the  contiguous L. Massey South during the fourth  quarter of 2007.  All
coal is  loaded  onto  trucks  and  transported  directly  to the  customer,  to
third-party  rail loadouts or to a barge loadout,  which is operated by Powhatan
Dock, LLC, a 49% owned investment of NCA.


                                       5
<PAGE>


         POPLAR  SPRINGS.  Poplar  Springs  surface mine  produced  313,729 tons
during  2007 of which  58,704  tons were  produced  during the  post-acquisition
period.  Poplar Springs utilizes an excavator,  bulldozers and  wheel-loaders to
extract  coal.  All coal is loaded  onto  trucks  and  transported  directly  to
customers, to third-party rail loadouts or to the Powhatan barge loadout. Poplar
Springs North is a contiguous, controlled and permitted property to which the L.
Massey dragline and supporting equipment will move in 2008.

         HICKORY GROVE.  Hickory Grove surface mine produced 240,929 tons during
2007 of which  56,612 tons were  produced  during the  post-acquisition  period.
Hickory Grove utilizes an excavator, bulldozers and wheel-loaders to extract the
coal. All coal is loaded onto trucks and transported  directly to customers,  to
third-party rail loadouts or to the Powhatan barge loadout.

PERMITTED NON-OPERATING MINES

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

TRANSPORTATION

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

         Our Alabama  operations are also within a few miles of major interstate
highways,  which provide  access for trucking  transport of our coal. All of the
mining  operations are within  economical  proximity to either  third-party rail
loadouts  utilized by certain  customers or the Powhatan barge loadout facility.
Powhatan started operations in December 2007 and began coal shipments in January
2008.

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

EMPLOYEES

         At December 31, 2007, we had 343 full-time employees, of which 282 were
engaged in direct mining or processing operations, 16 in mining supervision,  26
in other operating capacities, and 19 in executive management,  sales, legal and
general  administration.  Fifteen employees  included in the above worked at our
operations in  Southeastern  Kentucky which were sold in March 2008. None of our
employees  are covered by a  collective  bargaining  agreement.  We consider our
relationship  with our  employees  to be  favorable.  We utilize the services of
independent consultants as needed. The miners and supervisors were based in East
Tennessee,  Southeast Kentucky,  and North Alabama. The Chief Executive Officer,
Chief Operating Officer,  Chief Financial Officer and General Counsel were based
in Knoxville,  Tennessee.  Third party  contractors  mining coal at our mines in
Kentucky and Tennessee  employed an additional  approximately  100 employees for
mining and hauling services during 2007.

MARKETING AND SALES

         Our marketing and sales efforts are performed by employees, consultants
and  independent  coal  brokers.  Our sales  efforts  primarily  are  focused on
increasing our customer base of electric utilities in the Southeastern region of
the United States. We also target industrial customers.


                                       6
<PAGE>


         During  the  year  ended  December  31,  2007,  we  sold  approximately
1,763,000  tons of coal at an  average  price of $52.15  per ton,  resulting  in
approximately $92.0 million in coal sales. Our top three customers, all electric
utilities,  represented  approximately  65% of the volume relating to these coal
sales.

CUSTOMERS

         During the twelve  months ended  December 31, 2007, we generated all of
our coal sales revenue from twenty-three customers, seven of which were electric
utilities (84%),  fifteen of which were industrial companies (13%) and one was a
coal reseller (3%).  Most of our coal sales are derived from contracts of twelve
months  or longer  and open  purchase  order  arrangements  with  long  standing
customers.  Some of our  contracts  contain  price-reopener  and fuel  surcharge
provisions  which  allow  adjustments  to the price we receive for our coal when
certain  market  conditions are met. We intend to expand the number of customers
we serve as our coal  production  increases,  and enter into long term contracts
for  our  coal  production  when  pricing  is  favorable.  The  following  table
summarizes,  as of December 31, 2007,  the tons of coal that we are committed to
deliver  during the  calendar  years 2008 through  2012 from our  Tennessee  and
Alabama  operations  at prices  determined  under  existing  contracts  and open
purchase order arrangements:

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

2008..................         2,334,596             $62.25       $145,333,099
2009..................         2,004,798              65.98        132,276,050
2010..................           930,000              67.63         62,892,000
2011..................           480,000              72.90         34,992,000
2012..................           360,000              72.90         26,244,000
                            -------------    ---------------    ---------------
    Total.............         6,109,394             $65.76       $401,737,149
                            =============    ===============    ===============

COMPETITION

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

COAL MINING TECHNIQUES

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

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

                                       7
<PAGE>


         Surface mining uses either draglines, large electric-powered shovels or
front-end loaders  ("loaders") to remove the earth or overburden that covers the
coal. The overburden is loaded onto large off-road trucks, and the overburden is
used to reclaim the mine site after coal  removal.  Loaders  load coal into coal
trucks  for  transportation  to the  preparation  plant or rail  load-out.  Seam
recovery using the surface mining method is typically 90%.  Productivity depends
on size of  equipment,  geological  composition  and the ratio of  overburden to
coal.  Productivity varies between 250 to 400 tons per miner shift in the Powder
River Basin where the overburden ratio is  approximately  four to one, versus 30
to 80 tons per miner shift in Central  Appalachia  where the overburden ratio is
approximately twenty to one.

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

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

COAL CHARACTERISTICS

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

         SULFUR CONTENT. Sulfur content can vary from seam to seam and sometimes
within each seam. Coal combustion  produces sulfur dioxide,  the amount of which
varies depending on the chemical  composition and the concentration of sulfur in
the coal. Low sulfur coal has a variety of definitions,  and in using this term,
we refer to coal with sulfur content of 2.0% or less by weight.  Compliance coal
refers to coal with a sulfur  content of less than 1.2 pounds of sulfur  dioxide
per  million  Btu.  The  strict  emissions  standards  of the Clean Air Act have
increased  demand for low sulfur coal. We expect  continued  high demand for low
sulfur coal as electric generators meet the current Phase II requirements of the
Clean Air Act (1.2 pounds or less of sulfur dioxide per million Btu).

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

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

         Moisture  content of coal varies by the type of coal,  the region where
it is mined and the location of coal within a seam.  In general,  high  moisture
content  decreases the heat value and increases the weight of the coal,  thereby
making it more expensive to transport with less combustion efficiency.  Moisture


                                       8
<PAGE>


content in coal, as sold, can range from  approximately  5% to 30% of the coal's
weight.  Generally,  the moisture content of coal from Central Appalachia ranges
from 5% to 9%.

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

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

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

COAL PRICES

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

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

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

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

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


                                       9
<PAGE>


of the Powder River Basin is served by two competing rail  carriers.  Coal mines
in  Central  and  Southern  Appalachia   generally  are  served  by  either  the
Norfolk-Southern or the CSX rail lines.

REGULATORY MATTERS

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

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

         Two bills have been introduced in the Tennessee  Legislature that could
have an adverse effect on our ability to mine coal  profitability  in Tennessee.
One of the bills  proposes to increase  the  severance  tax payable to the State
from $0.20 per ton to 4.5% of the gross sales price. The second bill proposes to
prohibit  any coal  mining  that would alter or disturb any ridge line above two
thousand  (2,000) feet in elevation.  A number of our seams of coal in the State
of Tennessee are above two thousand (2,000) feet in elevation.  Accordingly,  if
the Bill were to pass the Legislature,  our ability to economically recover coal
from those seems may be negatively affected.

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

     MINE SAFETY AND HEALTH

         Stringent  health  and  safety  standards  have  been in  effect  since
Congress  enacted the Coal Mine Health and Safety Act of 1969.  The Federal Mine
Safety and Health Act of 1977  significantly  expanded the enforcement of safety
and health  standards and imposed safety and health  standards on all aspects of
mining operations.

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


                                       10
<PAGE>


     ENVIRONMENTAL LAWS

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

     SURFACE MINING CONTROL AND RECLAMATION ACT

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

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

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

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

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

     CLEAN AIR ACT

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


                                       11
<PAGE>


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

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

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

         o        reducing electricity generating levels; or

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

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

     CLEAN WATER ACT

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

     RESOURCE CONSERVATION AND RECOVERY ACT

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

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


                                       12
<PAGE>


anticipated  that  regulation  of coal  combustion  waste will have any material
effect on the amount of coal used by electricity generators.

     FEDERAL AND STATE SUPERFUND STATUTES

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

     GLOBAL CLIMATE CHANGE

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

PERMITTING

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

         We must obtain permits from  applicable  state  regulatory  authorities
before we begin to mine  reserves.  The  mining  permit  application  process is
initiated by collecting  baseline data to adequately  characterize  the pre-mine
environmental  condition  of the  permit  area.  This work  includes  surveys of
cultural  resources,  soils,  vegetation,  wildlife,  assessment  of surface and
ground water  hydrology,  climatology and wetlands.  In conducting this work, we
collect  geologic data to define and model the soil and rock structures and coal
that will be mined.  We develop mine and  reclamation  plans by  utilizing  this
geologic data and incorporating elements of the environmental data. The mine and
reclamation  plans  incorporate the provisions of the Surface Mining Control and
Reclamation  Act of 1977 (the  "SMCRA"),  state  programs and the  complementary
environmental  programs  that impact coal  mining.  Also  included in the permit
application are documents defining ownership and agreements  pertaining to coal,
minerals,  oil and gas, water rights, rights of way, and surface land along with
documents required of the Office of Surface Mining's Applicant Violator System.


                                       13
<PAGE>


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

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

GLOSSARY OF TERMS

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

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

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

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

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

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

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

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

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

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

         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


                                       14
<PAGE>


combustion gases, scrubbers require about 6% to 7% of a power plant's electrical
output and thousands of gallons of water to operate.

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

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

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

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

ITEM 1A. RISK FACTORS.

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

                          RISKS RELATED TO OUR BUSINESS

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

         We  have,  and  will  continue  to have  substantial  indebtedness.  At
December 31, 2007, we had  approximately  $125 million  principal value of total
senior debt. Our high level of indebtedness  could have important  consequences,
including the following:

         o        reducing our ability to obtain additional financing;

         o        reducing our cash flow;

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

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

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

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

         We may be able to incur  substantial  amounts of additional debt in the
future.  Although  the terms of the 10.5%  Notes due 2010 and 12% Notes due 2012
may limit our ability to incur  additional  debt, such terms do not and will not
prohibit us from incurring  substantial  amounts of additional debt for specific
purposes or under certain circumstances. The incurrence of additional debt could
adversely impact our ability to service payments on senior debt.


                                       15
<PAGE>


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

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

WE MAY NOT BE ABLE TO  GENERATE  THE AMOUNT OF CASH NEEDED TO PAY  INTEREST  AND
PRINCIPAL  AMOUNTS  ON OUR  DEBT.  WE ARE  LIMITED  IN OUR  ABILITY  TO USE CASH
GENERATED AT NATIONAL COAL OF ALABAMA IN OUR OTHER OPERATIONS.

         We rely  primarily on our ability to generate cash to service our debt.
If we do not generate sufficient cash flows to meet our debt service and working
capital requirements, we may need to seek additional financing. If we are unable
to obtain  financing on terms that are  acceptable  to us, we could be forced to
sell our assets or those of our subsidiaries to make up for any shortfall in our
payment  obligations under unfavorable  circumstances.  The 10.5% Notes due 2010
and the 12% Notes due 2012 limit our  ability to sell  assets and also  restrict
the use of the proceeds from any such sale. Therefore,  even if forced to do so,
we may not be able to sell assets quickly  enough or for  sufficient  amounts to
enable us to meet our debt obligations.

         National  Coal  of  Alabama,  Inc.  is  restricted  in its  ability  to
distribute cash to our other consolidated  companies for use in their operations
under the terms of our 12% Notes due 2012. On an annual basis,  National Coal of
Alabama can  distribute  cash for use in our other  operations  only if it meets
certain EBITDA-based operating requirements for the immediately preceding fiscal
year. Additionally, our subsidiary,  National Coal Corporation, has entered into
a  management  services  agreement  with  National  Coal of Alabama,  Inc.  that
compensates  National Coal Corporation for services that it provides to National
Coal of Alabama,  and a tax sharing  agreement  that  requires  National Coal of
Alabama to make payments to us in respect of its tax liability. For fiscal 2008,
we anticipate National Coal of Alabama's  operations to provide limited cash for
use in our other  operations.  As a result of these  provisions and  agreements,
there is no assurance  that cash  generated by National  Coal of Alabama will be
available  for use in our  other  operations  if those  operations  continue  to
experience negative cash flow.

WE MAY BE UNABLE TO COMPLY WITH  RESTRICTIONS  IMPOSED BY OUR CREDIT  FACILITIES
AND OTHER FINANCING ARRANGEMENTS.

         The agreements governing our outstanding senior debt impose a number of
restrictions  on us. For  example,  the terms of our credit  facilities  contain
financial and other  covenants that create  limitations on our ability to effect
acquisitions  or  dispositions,  incur  additional  debt and may  require  us to
maintain  various  financial  ratios and comply  with  various  other  financial
covenants.  Our  ability to comply  with these  restrictions  may be affected by
events  beyond our  control  and,  as a result,  we may be unable to comply with
these restrictions.  A failure to comply with these restrictions could adversely
affect our ability to borrow under our credit  facilities  or result in an event
of default under these agreements.  In the event of a default, our lenders could
terminate  their  commitments to us and declare all amounts  borrowed,  together
with accrued  interest and fees,  immediately  due and payable.  If this were to
occur, we might not be able to pay these amounts,  or we might be forced to seek
an amendment to our financing  arrangements  which could make the terms of these
arrangements more onerous for us.

         In the first,  second  and third  quarters  of 2007,  we failed to meet
certain  financial  covenants  required under our term loan credit facility with
Guggenheim  Corporate Funding,  LLC, which is now terminated.  In each instance,
waivers of covenant  failures and  modifications of loan terms in order to bring
financial  covenants better in line with  capabilities  were obtained,  however,
penalties  were incurred  including an increase in rates from LIBOR plus 3.5% to
12% fixed and $100,000 in fees,  plus the need to refinance the loan in order to
obtain relief from the continuing  difficulty with financial  covenants.  In the
refinancing  transaction,  we  incurred  $323,000  in legal  costs plus a fee of
approximately $1,112,000 paid through the issuance of a stock purchase warrant.


                                       16
<PAGE>


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

         We estimate that as of December 31, 2007, we control approximately 37.4
million tons of proven and probable  reserves that are recoverable at this time.
We base our reserve  estimates  on  engineering,  economic and  geological  data
assembled and analyzed by our staff and an independent  mining engineering firm.
Our estimates of our proven and probable reserves and our recoverable  reserves,
as well as the Btu or sulfur  content of our  reserves  are  revised and updated
periodically to reflect the resolution of  uncertainties  and  assumptions,  the
production of coal from the reserves and new drilling or other data received.

         There are numerous  uncertainties inherent in estimating quantities and
qualities  of and costs to mine  recoverable  reserves,  including  many factors
beyond our control.  Estimates of economically recoverable coal reserves and net
cash flows necessarily depend upon a number of variable factors and assumptions,
all of which may vary considerably from actual results such as:

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

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

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

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

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

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

         Our  recoverable  reserves will decline as we produce coal. We have not
yet applied for the permits required or developed the mines necessary to use all
of the coal deposits under our mineral rights.  Furthermore,  we may not be able
to  mine  all  of our  coal  deposits  as  efficiently  as we do at our  current
operations.   Our  future  success   depends  upon  our  conducting   successful
exploration  and  development  activities  and acquiring  properties  containing
economically  recoverable  coal  deposits.  In addition,  we must also  generate
enough capital,  either through our operations or through outside financing,  to


                                       17
<PAGE>


mine these additional  reserves.  Our current strategy  includes  increasing our
coal reserves through acquisitions of other mineral rights, leases, or producing
properties and continuing to use our existing properties. Our ability to further
expand our  operations  may be  dependent  on our  ability to obtain  sufficient
working  capital,  either  through  cash flows  generated  from  operations,  or
financing  activities,  or both.  Mining coal in Central  Appalachia can present
special  difficulties.  Characteristics  of the land and  permitting  process in
Central Appalachia, where all of our mines are located, may adversely affect our
mining  operations,  our costs and the ability of our  customers to use the coal
that we  mine.  The  geological  characteristics  of  Central  Appalachian  coal
reserves, such as depth of overburden and coal seam thickness, make them complex
and costly to mine. As mines become  depleted,  replacement  reserves may not be
available  when required or, if available,  may not be capable of being mined at
costs comparable to those characteristic of the depleting mines. In addition, as
compared to mines in the Powder River  Basin,  permitting,  licensing  and other
environmental and regulatory  requirements are more costly and time-consuming to
satisfy.  These factors could materially  adversely affect our mining operations
and costs, and our customers' abilities to use the coal we mine.

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

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

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

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

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

         We  typically  sell our coal for a  specified  per ton  amount and at a
negotiated  price pursuant to both short-term  contracts and contracts of twelve
months or greater.  For the year ended  December 31, 2007,  89.6% of the coal we
produced was sold under contracts of twelve months or greater. Price adjustment,
"price reopener" and other similar provisions in long-term supply agreements may
reduce  the  protection  from  short-term  coal price  volatility  traditionally
provided  by such  contracts.  Any  adjustment  or  renegotiation  leading  to a


                                       18
<PAGE>


significantly  lower contract price would result in decreased revenues and lower
our gross margins.  Coal supply  agreements also typically contain force majeure
provisions  allowing temporary  suspension of performance by us or our customers
during the  duration of  specified  events  beyond the  control of the  affected
party. Most of our coal supply  agreements  contain  provisions  requiring us to
deliver coal meeting quality thresholds for certain characteristics such as Btu,
sulfur content,  ash content,  hardness and ash fusion  temperature.  Failure to
meet these  specifications  could result in economic penalties,  including price
adjustments,  the rejection of deliveries or, in the extreme, termination of the
contracts.  Consequently,  due to the risks  mentioned  above  with  respect  to
long-term supply agreements,  we may not achieve the revenue or profit we expect
to achieve  from these sales  commitments.  In  addition,  we may not be able to
successfully convert these sales commitments into long-term supply agreements.

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

         We are exposed to swings in the demand for coal, which has an impact on
the prices for our coal.  The demand for coal products and,  thus, the financial
condition and results of operations of companies in the coal industry, including
us, are generally  affected by  macroeconomic  fluctuations in the world economy
and the domestic and international demand for energy. In recent years, the price
of coal has dropped  significantly  from historically high levels.  Any material
decrease  in  demand  for coal  could  have a  material  adverse  effect  on our
operations and profitability.

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

         For the year ended December 31, 2007, we derived  approximately  65% of
our coal  revenues from sales to our three  largest  customers.  At December 31,
2007, we had coal supply  agreements with these customers that expire at various
times through 2012. When these  agreements  expire,  we may not be successful at
renegotiating them and these customers may not continue to purchase coal from us
pursuant to long-term  coal supply  agreements.  If a number of these  customers
were to  significantly  reduce  their  purchases  of coal from us, or if we were
unable to sell coal to them on terms as  favorable  to us as the terms under our
current  agreements,  our financial  condition  and results of operations  could
suffer materially.

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.

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

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

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

         o        the demand for electricity;

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

         o        domestic and foreign governmental regulations and taxes; o air
                  emission standards for coal-fired power plants;

         o        regulatory, administrative and court decisions;

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

         o        the effect of worldwide energy conservation measures.


                                       19
<PAGE>


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

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

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

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

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

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 their  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.

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

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

         o competition  from energy  sources other than coal; o coal quality;  o
         efficiency  in extracting  and  transporting  coal;  and o proximity to
         customers.

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


                                       20
<PAGE>


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 year ended December 31, 2007 were  approximately
$92.0  million.  There is no  assurance  that we can  achieve  greater  sales or
generate  profitable  sales.  We expect  that many  other 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 KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.

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

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

         Our mining operations are subject to conditions beyond our control that
can delay coal deliveries or increase the cost of mining at particular mines for
varying lengths of time. These conditions include weather and natural disasters,
unexpected maintenance problems, key equipment failures, variations in coal seam
thickness, variations in the amount of rock and soil overlying the coal deposit,
variations  in rock and other  natural  materials  and  variations  in  geologic
conditions.  Any of these  factors  could  increase  the cost of  operating  our
business, which would lower or eliminate our margins.

INCREASES IN THE PRICE OF STEEL,  DIESEL FUEL OR RUBBER  TIRES COULD  NEGATIVELY
AFFECT OUR OPERATING COSTS.

         Our coal mining  operations use  significant  amounts of steel,  diesel
fuel and rubber tires. The costs of roof bolts we use in our underground  mining
operations  depend on the price of scrap metal. We also use significant  amounts
of diesel  fuel and tires for the  trucks  and  other  heavy  machinery  we use,
particularly at our six active surface mining  operations.  A worldwide increase
in mining,  construction  and military  activities  has caused a shortage of the
large  rubber  tires  we use in our  mining  operations.  While  we  have  taken


                                       21
<PAGE>


initiatives  aimed at extending the useful lives of our rubber tires,  we may be
unable to obtain a  sufficient  quantity  of  rubber  tires in the  future or at
prices which are favorable to us. If the prices of steel, diesel fuel and rubber
tires increase,  our operating costs could be negatively affected.  In addition,
if we are unable to procure  rubber  tires,  our coal mining  operations  may be
disrupted or we could experience a delay or halt of production.

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

         Efficient coal mining using modern  techniques  and equipment  requires
skilled laborers,  preferably with at least a year of experience and proficiency
in  multiple   mining  tasks.   In  order  to  support  our  planned   expansion
opportunities,  we intend to sponsor both  in-house and  vocational  coal mining
programs at the local level in order to train additional  skilled  laborers.  In
the event the  shortage  of  experienced  labor  continues  or worsens or we are
unable to train the  necessary  amount of skilled  laborers,  there  could be an
adverse  impact on our labor  productivity  and costs and our  ability to expand
production and therefore have a material adverse effect on our earnings.

DISRUPTIONS  IN THE  QUANTITIES OF COAL PRODUCED BY OUR CONTRACT MINE  OPERATORS
COULD  IMPAIR OUR  ABILITY TO FILL  CUSTOMER  ORDERS OR INCREASE  OUR  OPERATING
COSTS.

         We use  independent  contractors  to mine coal at certain of our mining
operations,  including our operations in Tennessee and, until March 31, 2008, at
our  operations  in   Southeastern   Kentucky.   Operational   difficulties   at
contractor-operated mines, changes in demand for contract miners from other coal
producers  and other factors  beyond our control could affect the  availability,
pricing, and quality of coal produced for us by contractors.  Disruptions in the
quantities of coal produced for us by our contract mine  operators  could impair
our  ability to fill our  customer  orders or require us to  purchase  coal from
other  sources  in order to  satisfy  those  orders.  If we are unable to fill a
customer  order or if we are  required  to purchase  coal from other  sources in
order to satisfy a customer  order,  we could lose  existing  customers  and our
operating costs could increase.

WE MAY BE UNABLE TO REALIZE  THE  BENEFITS WE EXPECT TO OCCUR AS A RESULT OF THE
ACQUISITION OF MANN STEEL PRODUCTS OR OTHER ACQUISITIONS THAT WE MAY UNDERTAKE.

         We continually  seek to expand our operations and coal reserves through
acquisitions of other businesses and assets,  including leasehold interests.  On
October 19, 2007, we acquired  100% of the common stock of Mann Steel  Products,
Inc.  (now National Coal of Alabama,  Inc.) for  approximately  $58.7 million in
cash. Certain risks, including those listed below, could cause us not to realize
the benefits we expect to occur as a result of this acquisition:

         o        uncertainties in assessing the value, risks, profitability and
                  liabilities (including  environmental  liabilities) associated
                  with certain businesses or assets;

         o        the potential loss of key customers,  management and employees
                  of an acquired business;

         o        the  possibility   that  operating  and  financial   synergies
                  expected to result from an acquisition do not develop;

         o        problems arising from the integration of an acquired business;
                  and

         o        unanticipated   changes  in  business,   industry  or  general
                  economic conditions that affect the assumptions underlying the
                  rationale for the acquisition.


                                       22
<PAGE>


               RISKS RELATED TO ENVIRONMENTAL AND OTHER REGULATION

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

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

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

         Two bills have been introduced in the Tennessee  Legislature that could
have an adverse effect on our ability to mine coal  profitability  in Tennessee.
One of the bills  proposes to increase  the  severance  tax payable to the State
from $0.20 per ton to 4.5% of the gross sales price. The second bill proposes to
prohibit  any coal  mining  that would alter or disturb any ridge line above two
thousand  (2,000) feet in elevation.  A number of our seams of coal in the State
of Tennessee are above two thousand (2,000) feet in elevation.  Accordingly,  if
the Bill were to pass the Legislature,  our ability to economically recover coal
from those seems may be negatively affected.

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, 2007,  $257,500 was on deposit with


                                       23
<PAGE>


the U.S.  Department of the Interior's  Office of Surface Mining (the "OSM") for
reclamation  bonds  related  to our  Patterson  Mountain  mining  operations  in
Alabama. In addition, we had approximately $21,144,000 of cash invested in money
market funds and certificates of deposit, against which irrevocable bank letters
of credit or surety  bonds are written in favor of OSM  (Tennessee  operations),
the Kentucky  Department of Natural  Resources,  or the Alabama  Surface  Mining
Commission, and have posted a $700,000 letter of credit secured by our executive
office building in favor of OSM.  Reclamation bonds are typically renewable on a
yearly  basis if they are not posted  with cash.  Our  failure to  maintain,  or
inability  to  acquire,  bonds that are  required by state and federal law would
have a material  adverse  effect on us. That failure could result from a variety
of factors including the following:

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

         o        restrictions on the availability of collateral for current and
                  future  third-party  bond issuers under the terms of our 10.5%
                  Notes due 2010 or 12% Notes due 2012; and

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

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

         Our business is affected by general economic  conditions,  fluctuations
in consumer confidence and spending, and market liquidity,  which can decline as
a result of numerous factors outside of our control,  such as terrorist  attacks
and acts of war. Our business  also may be affected by  environmental  activists
who  engage in  activities  intended  to disrupt  our  business  operations.  In
particular, environmental activists have conducted protests outside the homes of
certain of our  executives,  including our former Chief  Executive  Officer.  We
spent  approximately  $431,000 and $875,000  during the years ended December 31,
2007 and 2006,  respectively,  on security  measures.  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  FAILURE TO OBTAIN AND RENEW  PERMITS  NECESSARY  FOR OUR MINING  OPERATIONS
COULD NEGATIVELY AFFECT OUR BUSINESS.

      Mining companies must obtain numerous permits that regulate  environmental
and health and safety matters in connection with coal mining,  including permits
issued by various federal and state agencies and regulatory  bodies.  We believe
that we have  obtained the necessary  permits to mine our developed  reserves at
our mining complexes.  However, as we commence mining our undeveloped  reserves,
we will need to apply for and obtain the required permits.  The permitting rules
are  complex  and  change  frequently,  making our  ability  to comply  with the
applicable requirements more difficult or even impossible. In addition,  private
individuals  and the  public at large  have  certain  rights to  comment  on and
otherwise engage in the permitting  process,  including through  intervention in
the courts.  Accordingly,  the permits we need for our mining operations may not
be issued, or, if issued, may not be issued in a timely fashion. The permits may
also involve  requirements  that may be changed or interpreted in a manner which
restricts our ability to conduct our mining  operations or to do so  profitably.
An inability to conduct our mining  operations  pursuant to  applicable  permits
would reduce our production, cash flow and profitability.

THE  CHARACTERISTICS OF COAL MAY MAKE IT DIFFICULT FOR COAL USERS TO COMPLY WITH
VARIOUS ENVIRONMENTAL STANDARDS RELATED TO COAL COMBUSTION OR UTILIZATION.  AS A
RESULT,  COAL USERS MAY SWITCH TO OTHER FUELS,  WHICH COULD AFFECT THE VOLUME OF
OUR SALES AND THE PRICE OF OUR PRODUCTS.


                                       24
<PAGE>


      Coal contains  impurities,  including but not limited to sulfur,  mercury,
chlorine,  carbon and other  elements or  compounds,  many of which are released
into  the air  when  coal  is  burned.  Stricter  environmental  regulations  of
emissions from  coal-fueled  power plants could increase the costs of using coal
thereby  reducing  demand for coal as a fuel  source and the volume and price of
our coal sales.  Stricter  regulations  could make coal a less  attractive  fuel
alternative in the planning and building of power plants in the future.

      Proposed  reductions in emissions of mercury,  sulfur  dioxides,  nitrogen
oxides,  particulate  matter or greenhouse gases may require the installation of
costly  emission  control  technology or the  implementation  of other measures,
including  trading of emission  allowances  and  switching to other  fuels.  For
example,  in order to meet the federal  Clean Air Act limits for sulfur  dioxide
emissions  from power  plants,  coal users may need to  install  scrubbers,  use
sulfur dioxide emission allowances (some of which they may purchase), blend high
sulfur coal with low-sulfur coal or switch to other fuels. Reductions in mercury
emissions  required by certain  states will likely  require some power plants to
install new  equipment,  at  substantial  cost, or discourage the use of certain
coals containing higher levels of mercury.  Recent and new proposals calling for
reductions  in  emissions  of carbon  dioxide and other  greenhouse  gases could
significantly  increase the cost of operating existing  coal-fueled power plants
and could inhibit  construction  of new  coal-fueled  power plants.  Existing or
proposed  legislation  focusing  on  emissions  enacted by the United  States or
individual  states could make coal a less  attractive  fuel  alternative for our
customers  and could  impose a tax or fee on the  producer  of the coal.  If our
customers  decrease  the  volume  of coal  they  purchase  from us or  switch to
alternative  fuels as a result of existing or future  environmental  regulations
aimed at reducing  emissions,  our  operations  and  financial  results could be
adversely impacted.

IF THE  ASSUMPTIONS  UNDERLYING  OUR ESTIMATES OF  RECLAMATION  AND MINE CLOSURE
OBLIGATIONS ARE INACCURATE, OUR COSTS COULD BE GREATER THAN ANTICIPATED.

      SMCRA establishes  operational,  reclamation and closure standards for all
aspects of surface  mining,  as well as most aspects of underground  mining.  We
base our  estimates  of  reclamation  and mine  closure  liabilities  on  permit
requirements and our engineering  expertise related to these  requirements.  Our
management and engineers periodically review these estimates.  The estimates can
change  significantly  if actual costs vary from  assumptions or if governmental
regulations change  significantly.  Statement of Financial  Accounting Standards
No.  143,  ACCOUNTING  FOR ASSET  RETIREMENT  OBLIGATIONS,  which we refer to as
Statement No. 143,  requires us to record these  obligations  as  liabilities at
fair value. In estimating fair value, we considered the estimated  current costs
of reclamation  and mine closure and applied  inflation  rates and a third-party
profit, as required by Statement No. 143. The third-party  profit is an estimate
of the  approximate  markup  that  would  be  charged  by  contractors  for work
performed  on our  behalf.  If  actual  costs  differ  from our  estimates,  our
profitability could be negatively affected.

OUR  OPERATIONS  MAY IMPACT  THE  ENVIRONMENT  OR CAUSE  EXPOSURE  TO  HAZARDOUS
SUBSTANCES, AND OUR PROPERTIES MAY HAVE ENVIRONMENTAL CONTAMINATION, WHICH COULD
RESULT IN MATERIAL LIABILITIES TO US.

      Our  operations  currently  use hazardous  materials and generate  limited
quantities  of hazardous  wastes from time to time.  We could become  subject to
claims for toxic torts,  natural  resource  damages and other damages as well as
for the  investigation  and clean up of soil,  surface water,  groundwater,  and
other media. Such claims may arise, for example, out of conditions at sites that
we currently  own or operate,  as well as at sites that we  previously  owned or
operated,  or may  acquire.  Our  liability  for such  claims  may be joint  and
several,  so that we may be held  responsible  for more  than  our  share of the
contamination or other damages, or even for the entire share.

      We maintain  extensive  coal  refuse  areas and slurry  impoundments  at a
number of our mining  complexes.  Such  areas and  impoundments  are  subject to
extensive  regulation.  Slurry  impoundments have been known to fail,  releasing
large  volumes  of coal  slurry  into the  surrounding  environment.  Structural
failure of an impoundment can result in extensive  damage to the environment and
natural resources, such as bodies of water that the coal slurry reaches, as well
as liability for related personal injuries and property damages, and injuries to


                                       25
<PAGE>


wildlife.  Some of our  impoundments  overlie mined out areas,  which can pose a
heightened risk of failure and of damages arising out of failure.  If one of our
impoundments  were to fail,  we could be subject to  substantial  claims for the
resulting  environmental  contamination and associated liability, as well as for
fines and penalties.

      Drainage  flowing from or caused by mining  activities  can be acidic with
elevated  levels of  dissolved  metals,  a  condition  referred to as "acid mine
drainage," which we refer to as AMD. The treating of AMD can be costly. Although
we do not currently face material costs associated with AMD, it is possible that
we could incur significant costs in the future.

      These and other similar unforeseen impacts that our operations may have on
the  environment,  as  well as  exposures  to  hazardous  substances  or  wastes
associated with our operations, could result in costs and liabilities that could
materially and adversely affect us.


                                       26
<PAGE>


                        RISKS RELATED TO OUR COMMON STOCK

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

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

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

         Factors that may influence our quarterly operating results include:

         o        the worldwide demand for coal;

         o        the price of coal;

         o        the supply of coal and other competitive factors;

         o        the costs to mine and transport coal;

         o        the ability to obtain new mining permits;

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

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

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

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

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

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

         o        interest rates;

         o        changes in accounting principles;

         o        sales of common stock by existing security holders;

         o        announcements of key developments by our competitors; and

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

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.


                                       27
<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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

         None.

ITEM 2.  PROPERTIES.

         Our  executive  offices  are  located  at 8915  George  Williams  Road,
Knoxville,  Tennessee  37923;  the  telephone  number is (865)  690-6900 and the
facsimile number is (865) 691-9982. We own our corporate office space. The bases
of operations for our mining  activities  are located in Anderson,  Campbell and
Scott Counties,  Tennessee, and Walker, Winston, Marion, Fayette, and Tuscaloosa
Counties,  Alabama  and,  until  March 31,  2008,  in Bell,  Harlan  and  Leslie
Counties,   Kentucky.  We  lease  office  space  in  Jacksboro,   Tennessee  and
Birmingham,  Alabama. We also lease storage space in East Tennessee to house our
maps and other  geological  data. We have pledged our corporate  office space as
collateral  to secure a bank  letter of credit  issued in favor of the OSM for a
portion of one of our reclamation bonds. Additionally,  we have granted security
interests to our lenders as follows: our 10.5% Notes due 2010 lenders in all our
owned and leased  mining  properties  in  Tennessee;  and our 12% Notes due 2012
lenders in all our owned and leased mining properties in Alabama. These lenders'
security interests are mutually exclusive.

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

         We decide on a case by case basis whether to obtain a title review from
a licensed  attorney  prior to purchasing or leasing  property.  In  determining
whether to conduct a title review,  we will consider  information  we have about
the  particular  property,  including,  for example,  personal  knowledge of our
employees or consultants, or historical information from the previous owners, or
information  obtained from  surrounding  property  owners.  We have not obtained
title insurance in connection with acquisitions of coal reserves,  and generally
will not do so in future  acquisitions.  However,  we do have title insurance on
our Tennessee  properties obtained in conjunction with the issuance of our 10.5%
Notes due 2010. We had a title  examination  made of the New River Tract when we
purchased it from Cumberland Timber Company, LLC.

         We did not perform title reviews on our newly acquired National Coal of
Alabama properties.


                                       28
<PAGE>


GEOLOGY

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

COAL RESERVES

         "Reserves" are defined by the U.S. Securities and Exchange Commission's
("SEC")  Industry  Guide 7 as that part of a  mineral  deposit,  which  could be
economically  and  legally  extracted  or  produced  at the time of the  reserve
determination.  "Recoverable"  reserves are defined as coal that is economically
recoverable  using  existing  equipment and methods under federal and state laws
currently in effect.  Some of our reserves are  classified  as proven  reserves.
"Proven (Measured) Reserves" are defined by the SEC Industry Guide 7 as reserves
for which (a)  quantity  is  computed  from  dimensions  revealed  in  outcrops,
trenches,  workings or drill holes;  grade and/or  quality are computed from the
results of detailed  sampling,  and (b) the sites for  inspection,  sampling and
measurement are spaced so closely and the geologic  character is so well defined
that size,  shape,  depth and mineral content of reserves are  well-established.
Information  about our  reserves  consists of  estimates  based on  engineering,
economic and geological  data assembled and analyzed by our internal  engineers,
as well as studies prepared by certified professional geologists based upon data
provided by us.  "Probable  (Indicated)  Reserves" for which  quantity and grade
and/or  quality are computed  from  information  similar to that used for proven
(measured) reserves, but the sites for inspection, sampling, and measurement are
farther apart or are otherwise less adequately  spaced. The degree of assurance,
although  lower  than that for Proven  (Measured)  Reserves,  is high  enough to
assume continuity  between points of observation.  Reserve estimates are updated
periodically using geologic data taken from drill holes, adjacent mine workings,
outcrop  prospect  openings and other  sources.  Coal  tonnages are  categorized
according to coal quality, seam thickness,  mineability and location relative to
existing mines and infrastructure.

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

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

         We currently  estimate that at December 31, 2007,  37.4 million tons of
our proven and probable in-place reserves are recoverable  including 8.7 million
tons at our properties in Southeastern Kentucky which we sold on March 31, 2008.
This  estimate  takes into  account  various  factors that affect our ability to
recover our  reserves,  including  but not limited to current coal  prices;  the
mining methods that may be used to extract particular  reserves;  geological and
mining  conditions;  historical  production  from  similar  areas  with  similar
conditions;  the  assumed  effects  of  regulations  and  taxes by  governmental
agencies; assumptions governing future prices; future operating, development and
reclamation costs; and mining technology improvements.


                                       29
<PAGE>


         Our  reserve  estimates  are based on  geological  data  assembled  and
analyzed  by our staff of  engineers.  Reserve  estimates  will be  periodically
updated to reflect  past coal  production,  new drilling  information  and other
geologic or mining  data.  Acquisitions  or sales of coal  properties  will also
change our reserves. On October 19, 2007, we acquired Mann Steel which added 6.2
million tons of recoverable coal to our reserves at that time. Changes in mining
methods or  technology  may increase or decrease  the recovery  basis for a coal
seam.  Our  reserve  estimates  are  subject  to change  as a result of  various
factors, including the acquisition,  divestiture or depletion of reserves or the
future analysis of known or existing data. We engage third parties  periodically
to review or audit our reserve  estimates.  The most recent third party audit of
certain of our reserves was  conducted in 2007 by Marshall  Miller & Associates,
Inc.    (Marshall   Miller)   and   separately,    in   Alabama,    by   another
nationally-recognized  independent  engineering  firm.  Future  estimates of our
reserves, including estimates prepared by engineering firms, could be materially
different from current estimates.  There are numerous  uncertainties inherent in
estimating  quantities  and qualities of  recoverable  reserves,  including many
factors beyond our control.

         In addition,  we believe that we have  unproven  deposits that have not
yet been classified as reserves.  Unproven deposits are coal-bearing bodies that
have not been sufficiently sampled and analyzed in trenches, outcrops, drilling,
and underground  workings to assume continuity between sample points.  This coal
does not  qualify  as a  commercially  viable  coal  reserve  as  defined by SEC
standards  until a final  comprehensive  evaluation  based on unit cost per ton,
recoverability,   and  other  material  factors  concludes  legal  and  economic
feasibility.  Unproven coal deposits may be classified as such by either limited
property control or geologic  limitations,  or both. These unproven deposits are
located  immediately  adjacent to our known  reserves.  There has been  previous
mining  activity  on or near  some of  these  sites,  but we have  not yet  done
adequate drilling or other exploration  necessary to properly define these areas
as reserves.

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


                                       30
<PAGE>


         The following table provides proven and probable,  recoverable  reserve
data assigned to specific tracts and coal seams as of December 31, 2007:

<TABLE>
<CAPTION>
      LOCATION                      COAL SEAM          CONTROL     ACRES       RECOVERABLE      QUALITY:       QUALITY:
                                                                                RESERVES          BTU         SULFUR (%)
                                                                           (millions of tons)
<S>                           <C>                      <C>        <C>                  <C>       <C>             <C>
TENNESSEE RESERVES:
NEW RIVER TRACT                                         OWNED     65,000
(Anderson, Campbell and           Big Mary Seam                    1,553                4.3      13,583          2.51
Scott County)
                                Beech Grove Seam                     502                1.1      12,734          1.79
                                 Lower Dean Seam                     683                1.8      13,737          1.28
                                  Windrock Seam                    1,033                2.6      13,631          1.30


                                 Lower Dean Thru                      55                0.2      13,519          1.25
                                    Windrock
                                   Peewee Seam                       655                1.4      13,627          0.93
                                  Jellico Seam                     2,524                5.8      13,960          3.63
                                Peewee Rider Seam                    241                0.6      13,976          0.87
KETCHEN TRACT                                          LEASED      7,000
(Campbell County)                 Red Ash Seam                       182                0.5      13,836          1.01


                                  Windrock Seam                      449                1.2      13,846          1.65
                                   Splint Seam                       728                1.4      14,128          2.45
                              Walnut Mountain Seam                   170                0.3      13,942          1.20
                                   Peewee Seam                        42                0.1      10,836          5.17
TVA TRACT                                              LEASED      4,400
(Campbell and Scott County)       Red Ash Seam                       384                0.7      14,143          1.57
                              Walnut Mountain Seam                   242                0.8      14,092          1.25
OTHER                                                              1,400
                                                                ----------------------------
TENNESSEE SUBTOTAL                                                77,800               22.8
                                                                ----------------------------

KENTUCKY RESERVES (SOLD
MARCH 31, 2008):
STRAIGHT CREEK TRACT                                   LEASED     27,350
(Bell, Harlan, and Leslie           Hazard 4                       1,077                2.1      14,429          0.95
County)
                                    Hazard 8                       1,372                3.5      13,662          1.22
                                    Hazard 9                         431                1.0      13,713          1.31
                                 Hazard 10 - 12                      638                2.1      12,475          1.22



                                                                ----------------------------
KENTUCKY SUBTOTALS                                                27,350                8.7
                                                                ----------------------------
</TABLE>


                                       31
<PAGE>


<TABLE>
<CAPTION>
      LOCATION                    COAL SEAM           CONTROL       ACRES       RECOVERABLE     QUALITY:       QUALITY:
                                                                                 RESERVES         BTU         SULFUR (%)
<S>                         <C>                       <C>        <C>                   <C>       <C>             <C>
ALABAMA RESERVES:
L MASSEY TRACT                                        LEASED         399
(Marion and Fayette              Blue Creek                          153                0.2      11,905          1.40
Counties)                          Jagger                            246                0.4      11,693          2.60
DAVIS CREEK TRACT                                     LEASED         851
(Tuscaloosa County)               Brookwood                          261                0.9      12,241          2.02
                                   Carter                            539                1.5      14,036          0.37
                            Clements A (split avg)                   498                0.6      13,620          2.34
                                 Clements B                          162                0.1      12,197          5.24
                                 Clements C                          689                0.6      14,202          2.78
POPLAR SPRINGS TRACTS                                 LEASED         900
(Walker and Winston              Black Creek                         900                1.6      13,479          1.16
Counties)
OTHER                                                 LEASED           8
                                                                ----------------------------
ALABAMA SUBTOTALS                                                  2,158                5.9
                                                                ----------------------------
PROPERTY TOTALS                                                  107,308               37.4
                                                                ============================
</TABLE>

Note:  Quality  is  provided  on a "washed,  dry  basis"  based on an average of
samples taken and reported by independent third party engineering firms.


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

ITEM 3.  LEGAL PROCEEDINGS.

         We  are  made  a  party  to  legal  actions,  claims,  arbitration  and
administrative proceedings from time to time in the ordinary course of business.
Management is not aware of any pending or threatened proceedings that might have
a  material  impact  on our cash  flows,  results  of  operations  or  financial
condition.

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

         None.


                                       32
<PAGE>


                                     PART II

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

COMMON STOCK

         Our common stock is listed on the NASDAQ Global  Market,  trading under
the symbol "NCOC".

         The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock from January 1, 2006 through  December 31,
2007.  The following  quotations  reflect  inter-dealer  prices,  without retail
mark-up, mark-down or commission, and may not represent actual transactions.

                                                          HIGH           LOW
                                                          ----           ---

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

         YEAR ENDED DECEMBER 31, 2007
              First Quarter......................      $   5.72       $  4.48
              Second Quarter.....................          5.32          4.45
              Third Quarter......................          4.80          2.37
              Fourth Quarter.....................          5.75          2.55


         On March 31,  2008,  the  closing  sales  price of our common  stock as
reported on the NASDAQ Global Market was $5.24 per share.  As of March 31, 2008,
there were approximately 128 holders of record of our common stock.

DIVIDENDS

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

         Historically  we have made  semi-annual  cash dividend  payments to the
holders of our Series A cumulative  convertible  preferred  stock on June 30 and
December 31. The dividend rate of our Series A cumulative  convertible preferred
stock  increased  from 5% to 8% on  September  1,  2006.  During  the year ended
December  31,  2007,  we  accrued  dividends  to the  holders  of our  Series  A
cumulative  convertible  preferred  stock  in  the  aggregate  of  approximately
$399,000.  We paid  approximately  $362,886 in  dividends  to the holders of our
Series A cumulative  convertible preferred stock in June and July 2006, $413,567
in February  2007,  and issued  $159,152 in common  shares in lieu of  preferred
dividends as a result of the  conversion of shares of preferred  stock to common
stock.  At December  31, 2007,  there were  accrued but unpaid  dividends on our
Series A cumulative  convertible  preferred  stock of  $114,216.  The holders of
342.10 shares of the Series A cumulative  convertible  preferred stock converted
during the year ended  December 31, 2007 were  provided  with an  inducement  to
convert  in the form of an  additional  431,257  shares of common  stock with an
aggregate market value of $1,368,029. The holders of 24.0 shares of the Series A
cumulative  convertible preferred stock converted during the year ended December
31, 2007 were provided with a $53,988 cash inducement to convert. The holders of
223.11  shares of the  Series A  cumulative  convertible  preferred  stock  with
liquidation preferences totaling $3,346,650 were provided with a $1,648,168 cash
inducement  to convert  within  sixty days of  payment  of the  inducement.  The


                                       33
<PAGE>


holders  used the  proceeds  of the payment to  purchase  558,701  shares of our
common stock at $2.95 per share. The same holders converted all 223.11 shares of
our the Series A cumulative  convertible  preferred stock plus accrued dividends
of $131,712  into 600,753  shares of our common  stock on January 15, 2008.  The
combined $3,070,185 value of these inducements was recorded as a deemed dividend
to reflect the excess of the fair value of the common  stock over the fair value
of the Series A preferred stock exchanged.  This treatment is in accordance with
the Financial  Accounting  Standards Board's Emerging Issues Task Force Abstract
D-42 "The Effect of the  Calculation of Earnings per Share for the Redemption or
Induced  Conversion of Preferred  Stock",  which  requires  that if  convertible
preferred  stock is  converted  to other  securities  pursuant to an  inducement
offer,  we should record the excess of (1) the fair value of all  securities and
other  consideration  transferred  to the holders of the  convertible  preferred
stock over (2) the fair value of  securities  issuable  pursuant to the original
conversion  terms as an increase to net loss to arrive at net loss  attributable
to common shareholders.


                                       34
<PAGE>


PERFORMANCE GRAPH

         The following  performance  graph compares the yearly percentage change
in the cumulative total shareholder  return on the common stock of National Coal
Corp. to the cumulative  shareholder  return for the same period of a peer group
and the Russell 2000 Stock Index.  The peer group is comprised of National  Coal
Corp.,  CONSOL  Energy,  Arch Coal,  Inc.,  and Peabody  Energy Corp.  The graph
assumes that the value of the investment in National Coal Corp. common stock and
each index was $100 at May 30, 2004.  The graph also assumes that all  dividends
were reinvested and that the investments were held through December 31, 2007.

         The material in this section is not  "soliciting  material," and is not
deemed "filed" with the SEC and is not to be  incorporated by reference into any
of our filings under the  Securities  Act of 1933,  as amended,  or the Exchange
Act.

                          [PERFORMANCE GRAPH OMITTED]


<TABLE>
<CAPTION>
                                        MAY 30,     DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                         2004           2004           2005           2006           2007
                                     ------------   ------------   ------------   ------------   ------------
<S>                                         <C>            <C>            <C>            <C>           <C>
National Coal Corp. ..............          100.0          289.5          151.3          131.6         121.93

Peer Group .......................          100.0          151.8          269.7          241.8         425.44

Russell 2000 Stock Index .........          100.0          121.0          126.5          149.8         147.41
</TABLE>


                                       35
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA.


<TABLE>
<CAPTION>
                                                                                                              ELEVEN MONTHS
                                                                TWELVE MONTHS ENDED DECEMBER 31,                  ENDED
                                               ------------------------------------------------------------    DECEMBER 31,
                                                   2007            2006            2005            2004            2003
                                               ------------    ------------    ------------    ------------    ------------
CONSOLIDATED STATEMENT OF INCOME DATA:            (In thousands, except per share, per ton and number of employee amounts)
<S>                                            <C>      <C>    <C>             <C>             <C>             <C>
Coal sales .................................   $    91, 943    $     86,830    $     65,258    $     16,871    $      1,013
Total revenue ..............................   $     92,780    $     87,517    $     65,873    $     16,999    $      1,191
Operating loss .............................   $    (17,349)   $    (16,457)   $     (2,564)   $     (7,040)   $     (3,036)
Net loss ...................................   $    (25,764)   $    (23,421)   $     (6,791)   $    (10,429)   $     (3,333)
Net loss attributable to common shareholders
   per share - basic .......................   $      (1.46)   $      (1.59)   $      (0.58)   $      (2.60)   $      (0.36)
Net loss attributable to common shareholders
   per share - diluted .....................   $      (1.46)   $      (1.59)   $      (0.58)   $      (2.60)   $      (0.36)
Preferred dividends per share ..............   $      (0.02)   $      (0.07)   $      (0.08)   $      (0.02)           --

CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ..................   $     (6,141)   $     (9,450)   $     18,331    $     (3,921)   $     (5,511)
Restricted cash(1) .........................   $     29,115    $     17,247    $      7,323    $      4,527    $        258
Property, plant and equipment(2) ...........   $    108,881    $     55,838    $     50,902    $     35,909    $      2,346
Total assets ...............................   $    169,255    $     85,992    $     90,407    $     44,551    $      2,831
Long-term debt(3) ..........................   $    130,035    $     67,487    $     60,015    $     19,724    $      4,682
Total liabilities ..........................   $    159,739    $     87,915    $     73,791    $     25,949    $      5,757
Shareholders' equity (deficit) .............   $      9,515    $     (1,923)   $     16,616    $     18,601    $     (2,927)

OTHER DATA:
EBITDA(4) ..................................   $       (823)   $     (1,094)   $      7,545    $     (4,566)   $     (2,419)
Tons of coal sold ..........................          1,763           1,643           1,216             357              11
Average cash cost per produced ton sold(5) .   $      56.69    $      56.30    $      44.29    $      53.89    $      89.28
Coal revenue per ton sold ..................   $      52.15    $      52.86    $      56.67    $      47.32    $      25.05
Capital expenditures, net ..................   $     10,895    $     18,925    $     19,853    $     22,527    $      1,224
Number of employees ........................            343             279             244             133              25
</TABLE>

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

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

(3)      Includes obligations under capital leases.

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


                                       36
<PAGE>


<TABLE>
<CAPTION>
                                                        TWELVE MONTHS ENDED                      ELEVEN MONTHS
                                                            DECEMBER 31,                             ENDED
                                  -----------------------------------------------------------     DECEMBER 31,
                                      2007            2006            2005            2004            2003
                                  ------------    ------------    ------------    ------------    ------------
<S>                               <C>             <C>             <C>             <C>             <C>
Net loss ......................   $    (25,764)   $    (23,421)   $     (6,791)   $    (10,429)   $     (3,333)
Other (income) expense, net ...         (1,052)            280             261              41             (75)
Interest expense ..............         10,765           7,476           3,967           3,349             372
Interest income ...............         (1,298)           (792)           (129)           (129)           --
Depreciation, depletion,
     accretion and amortization         16,526          15,363          10,108           2,473             617
                                  ------------    ------------    ------------    ------------    ------------
EBITDA ........................   $       (823)   $     (1,094)   $      7,545    $     (4,566)   $     (2,419)
                                  ============    ============    ============    ============    ============
</TABLE>


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


<TABLE>
<CAPTION>
                                                     TWELVE MONTHS ENDED                      ELEVEN MONTHS
                                                         DECEMBER 31,                             ENDED
                                  ---------------------------------------------------------   DECEMBER 31,
                                      2007           2006           2005           2004           2003
                                  ------------   ------------   ------------   ------------   ------------
<S>                               <C>            <C>            <C>            <C>            <C>
Total operating expenses ......   $    110,129   $    103,974   $     68,436   $     24,038   $     68,436
Less: Cost of purchased coal ..         17,012         15,584          4,446          2,351          4,446
Less: Depreciation, depletion,
     accretion and amortization         16,526         15,363         10,108          2,473         10,108
                                  ------------   ------------   ------------   ------------   ------------
AVERAGE CASH COST .............   $     76,591   $     73,027   $     53,882   $     19,214   $     53,882
                                  ============   ============   ============   ============   ============
PER TON .......................   $      56.69   $      56.30   $      44.29   $      53.89   $      44.29
                                  ============   ============   ============   ============   ============
</TABLE>


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

         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, 2007,  2006 and 2005.  Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion  and Analysis of  Financial  Condition  and Results of Operation  are
forward-looking  statements that involve risks and  uncertainties  and are based
upon judgments concerning various factors that are beyond our control.

         We mine, process and sell high quality bituminous steam coal from mines
located in East  Tennessee,  Northwestern  Alabama and, until March 31, 2008, in
Southeastern  Kentucky.  We own the coal mineral rights to approximately  65,000
acres of land and lease the rights to approximately  42,000 additional acres. We
have  expanded our  operations  considerably  since  commencing  operations at a
single  surface  mine in Tennessee  in July 2003.  As of December 31, 2007,  our
active mining complexes  included two underground  mines, six surface mines, and
two highwall mines. In addition, we have four preparation plants, two active and
two  inactive,  and four unit train  loading  facilities,  three  active and one
inactive, served by the CSX and Norfolk Southern railroads. We hold permits that
allow us to open or re-open seven new mines close to our current operations.  As
of December  31,  2007,  we  controlled  approximately  37.4  million  estimated
recoverable  tons of coal reserves  including 8.7 million tons at our operations
in Southeast Kentucky,  which were sold on March 31, 2008. During the year ended
December 31, 2007, we generated  total revenues of $92.8 million,  a net loss of
$25.8 million,  an EBITDA (a  reconciliation of non-GAAP figures is presented in
footnote  4 of Item 6.  Selected  Financial  Data)  loss of  $823,000,  and sold
approximately 1,763,000 tons of coal.


                                       37
<PAGE>


         In October 2007, we acquired Mann Steel  Products,  Inc.,  now National
Coal of Alabama, a one million ton per year producer with mines located in North
Alabama for approximately $58.7 million. National Coal of Alabama operates three
surface mines  extracting high quality coal on leases  encompassing  5.9 million
tons of reserves at December 31, 2007. We believe there are additional  unproven
reserves  among the  company's  controlled or permitted  properties.  We plan to
continue  expansion  through  acquisition,  as  possible,  and to increase  mine
production, both as market conditions allow.

         The  majority  of our  revenues  have  come  from  the  sale of coal we
produce.  We have  also  sold  coal  that we  purchase  from  third  party  coal
producers, both on a contract and a case by case basis. Additionally, we charged
third party coal producers a negotiated  price per ton for coal loading services
at our Straight  Creek,  Kentucky  loading  facility until its sale on March 31,
2008.

         Our revenues  depend  largely on the price at which we are able to sell
our coal. Coal prices decreased between 2005 and 2007.  Decreases in coal prices
are primarily due to the supply and demand  balance of coal in the market,  both
domestic and  imported,  as well as the price and  availability  of  alternative
fuels for electricity  generation.  Continued low prices could adversely  affect
our revenues and our ability to generate  cash flows in the future.  As a result
of supply having exceeded demand during 2006 and 2007, which resulted in reduced
coal prices, we idled certain operations.

         Our  sales  agreements  require  our  customers  to buy coal from us at
prices  averaging  over $60 per ton,  subject to  customary  quality  adjustment
provisions.  Certain of our  contracts  provide for  adjustment of coal purchase
prices based on market conditions. We plan to capitalize on emerging upswings in
the  pricing  environment  by pursuing  long-term  contracts  when  economically
acceptable to us. In the interim,  any uncommitted coal produced will be sold on
the spot market for an economically acceptable price.

         In recent years, we have expanded our production capacity.  In February
2006, we purchased a 42-mile short line  railroad for  approximately  $2 million
which  connects our owned reserves to the  Norfolk-Southern  Railroad at Oneida,
Tennessee. We spent an additional $0.5 million to refurbish the line and make it
operational.  We also acquired the Baldwin  preparation  plant and rail load-out
facility in 2005 in return for the assumption of certain reclamation liabilities
and spent $7.0  million  during  2006 to  refurbish  and  modernize  the Baldwin
Preparation plant and rail load-out facility. These investments will provide the
capability to efficiently process and transport our coal produced from our owned
reserves  to  market.  In  addition,  we  spent  $375,000  and $4.1  million  on
developing new mining operations in Tennessee and Kentucky during 2007 and 2006,
respectively.  The capital expenditures on mines, processing, and transportation
should help us lower our operating  costs.  Also, the  expenditures  made on our
transportation  infrastructure should help reduce delivery cost to our Southeast
U.S. utility customers. When economically advantageous, we intend to utilize our
increased  production  capacity by increasing  our  production.  Over the longer
term, we plan to permit and develop  additional  production  capability from our
current reserve base.

         On November 13, 2007 we received  $2,000,000 from the sale of idle real
property  and  mineral  leases at Pine  Mountain  located  in  Kentucky,  and an
additional $1,000,000 from the sale to the same purchaser of an option entitling
it to purchase for $10.00  additional  properties at Pine Mountain.  The sale of
the  real  property  and  mineral  leases  resulted  in a gain of  approximately
$745,000.

         On March 31,  2008,  sold the real and  personal  property  assets that
comprised  our active  Straight  Creek mining  operations in Kentucky to Xinergy
Corp. for  $11,000,000  in cash.  Xinergy Corp. was founded and is controlled by
Jon Nix,  who is a founder,  significant  stockholder,  and former  officer  and
director of National  Coal. In addition to our receipt of the purchase price for
the assets,  the transaction  also resulted in the return to us of approximately
$7,400,000 in cash that we previously  pledged to secure  reclamation  bonds and
other liabilities associated with the Straight Creek operation,  and relieved us
of  approximately   $3,600,000  in  reclamation  liabilities  and  approximately
$2,700,000  of  equipment  related  debt  which  were  assumed by Xinergy in the
transaction. The sale resulted in a small gain.


                                       38
<PAGE>


         We used a portion of the sale proceeds to repay the $10,000,000  senior
secured  credit  agreement  we  entered  into in  October  2006 with  Guggenheim
Corporate Funding,  LLC, as administrative  agent, which indebtedness  otherwise
would have matured in December 2008.

         Our financial  results from operations  depend heavily upon the cost of
producing  coal.  Our  primary  expenses  are wages and  benefits,  repairs  and
maintenance  expenditures,   diesel  fuel  purchases,  blasting  supplies,  coal
transportation  costs,  cost of purchased  coal,  freight and handling costs and
taxes incurred in selling coal. We expect that our exploration  costs,  totaling
$378,000 in 2007, in the next few years will be relatively  significant but that
our  exploration  costs will  decline as a percentage  of  revenues.  Because of
rising fuel costs, our transportation costs have increased significantly.  Given
that the coal mining business is capital  intensive,  we expect our depreciation
expenses  to increase in the future we  increase  our capital  expenditures  for
mining and other equipment needed to expand our business.

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

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

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

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

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

         Leasing is used for certain  capital  additions  when  considered  cost
effective  relative to other  capital  sources.  All leases with an initial term
greater than one year are accounted for under Statement of Financial  Accounting
Standards,  or SFAS, 13,  ACCOUNTING FOR LEASES.  These leases are classified as


                                       39
<PAGE>


either capital or operating as appropriate. Leased equipment meeting the capital
lease  criteria of SFAS 13 is  capitalized  and the present value of the related
minimum lease payments is recorded as a liability.  Amortization  of capitalized
leased  assets is computed on the  straight-line  method over the shorter of the
estimated useful life or the initial lease term.

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

         Exclusive  of the  approximately  $55.8  million  of  property,  plant,
equipment  and  mine  development,  net we  had  as of  December  31,  2006  was
approximately  $0.6 million of mining  equipment  classified  as assets held for
sale.  This  equipment  was sold in  January  2007 for a small  gain.  We had no
property,  plant,  equipment and mine, net development classified as assets held
for sale at December 31, 2007.

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

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

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

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


                                       40
<PAGE>


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

RECENT ACCOUNTING PRONOUNCEMENTS

         In June  2006,  the FASB  issued  Interpretation  No.  48  ("FIN  48"),
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT
NO. 109. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to  be  taken  in  a  tax  return.   It  also  provides   guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosure  and  transition.  FIN 48 is  effective  for  fiscal  years
beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007.

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

         In February  2007,  the FASB issued  Statement of Financial  Accounting
Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL  LIABILITIES -- INCLUDING
AN AMENDMENT OF FASB STATEMENT NO. 115 ("Statement No. 159").  Statement No. 159
permits  entities to choose to measure many  financial  instruments  and certain
other items at fair value.  The objective is to improve  financial  reporting by
providing  entities  with the  opportunity  to mitigate  volatility  in reported
earnings caused by measuring related assets and liabilities  differently without
having to apply  complex  hedge  accounting  provisions.  Statement  No.  159 is
effective  prospectively  for fiscal years beginning after November 15, 2007. We
do not expect  adoption of  Statement  No. 159 to have a material  impact on our
financial position or results of operations.

         In December  2007,  the FASB issued  Statement of Financial  Accounting
Standards No. 141R, BUSINESS  COMBINATIONS ("SFAS 141R") which becomes effective
for  acquisitions  occurring  on or after  the  beginning  of the  first  annual
reporting  period beginning on or after December 15, 2008. SFAS 141R establishes
principles and  requirements  for determining  how an enterprise  recognizes and
measures the fair value of certain assets and liabilities acquired in a business
combination,  including non-controlling interests, contingent consideration, and
certain  acquired  contingencies.  SFAS 141R also  requires  acquisition-related
transaction expenses and restructuring costs be expensed as incurred rather than
capitalized as a component of the business combination. We expect that SFAS 141R
could  have an  impact  on  accounting  for any  businesses  acquired  after the
effective date of this pronouncement.

         In  December  2007,  the FASB  issued  SFAS No.  160,  "Non-controlling
Interests  in  Consolidated  Financial  Statements-An  Amendment  of ARB No. 51"
("SFAS 160").  SFAS 160 establishes  accounting and reporting  standards for the
non-controlling  interest in a  subsidiary  (previously  referred to as minority
interests).  SFAS 160 would have an impact on the presentation and disclosure of


                                       41
<PAGE>


the non-controlling interests of any non wholly-owned businesses acquired in the
future. SFAS 160 will be effective for fiscal years beginning after December 15,
2008;  earlier  adoption  is  prohibited.  We are  still  analyzing  SFAS 160 to
determine the impact of adoption.

RESULTS OF OPERATIONS

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

                                                       TWELVE MONTHS
                                                     ENDED DECEMBER 31
                                            ----------------------------------
                                              2007         2006         2005
                                            --------     --------     --------

Revenues ................................      100.0%       100.0%       100.0%
                                            --------     --------     --------
Operating expenses:
   Cost of sales ........................       93.3         90.6         77.6
   Depreciation, depletion amortization,
      and accretion .. ..................       17.8         17.6         15.3
   General and administrative ...........        7.6         10.6         11.0
                                            --------     --------     --------
     Total operating expenses ...........      118.7        118.8        103.9
                                            --------     --------     --------
Operating loss ..........................      (18.7)       (18.8)        (3.9)
Other income (expense):
   Interest expense .....................      (11.6)        (8.6)        (6.0)
   Interest income ......................        1.4          0.9          0.2
   Other income (expense), net ..........        1.1         (0.3)        (0.6)
                                            --------     --------     --------
Net loss ................................      (27.8)%      (26.8)%      (10.3)%
                                            ========     ========     ========

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006

         In October 2007, we acquired Mann Steel Products,  Inc. and changed its
name to National Coal of Alabama  ("NCA").  We have included in our consolidated
financial statements the sales and costs attributable to NCA for the period from
October 20 through  December 31, 2007 which  activity has a direct effect on the
percent  change in statement of operations  captions for the year ended December
31,  2007.  Prior to  acquiring  NCA,  our  National  Coal  Corporation  ("NCC")
subsidiary operated our Tennessee and Kentucky mining operations.

     PRODUCTION
                                                  TWELVE MONTHS
                                               ENDED DECEMBER 31,
                                             ---------------------    PERCENT
                                                2007        2006      CHANGE
                                             ---------   ---------   ---------

Surface mines ............................     562,215     386,156        45.6%
Highwall mines ...........................     178,033     258,555       (31.1%)
Underground mines ........................     610,663     684,358       (10.8%)
                                             ---------   ---------   ---------
Total tons produced ......................   1,350,911   1,329,069         1.6%
Coal purchased ...........................     420,923     378,942        11.1%
                                             ---------   ---------   ---------
Total tons available .....................   1,771,834   1,708,011         3.7%
                                             =========   =========   =========
Contract tons ............................     426,110     602,823       (29.3%)


                                       42
<PAGE>


     REVENUES
                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2007          2006        CHANGE
                                       -----------   -----------   -----------

Coal sales .........................   $91,942,750   $86,830,095           5.9%
Tons Sold ..........................     1,763,026     1,642,575           7.3%
Average price per ton sold .........   $     52.15   $     52.86          (1.3%)


         For the twelve  months  ended  December 31,  2007,  our  revenues  were
derived from coal sales to twenty-three customers,  seven of which were electric
utilities,  fifteen of which were  industrial  customers  and one of which was a
coal reseller.  Our three largest  customers  represented  65% of our total coal
sales.

         In 2006 and 2007,  coal  prices in  Central  Appalachia  declined  as a
result of mild weather in the  Southeast,  before  showing signs of  significant
increases in late 2007 and early 2008.

         National Coal of Alabama, our newly acquired  subsidiary,  sold 204,740
tons of coal sales from  October 20, 2007  through  December 31, 2007 at a total
price of  $12,904,229  included in the above and represents the increase in coal
sales and total revenue before considering  decreases in Tennessee and Kentucky.
Coal sales attributable to our Tennessee and Kentucky operations are as follows:

                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2007          2006        CHANGE
                                       -----------   -----------   -----------

Coal sales .........................   $79,038,521   $86,830,095          (8.9%)
Tons sold ..........................     1,558,286     1,642,575          (5.1%)
Average price per ton sold .........   $     50.72   $     52.86          (4.0%)

         The approximately  $7.8 million decline in revenue from coal sales from
our  Tennessee  and Kentucky  operations  in 2007 was partially the result of an
84,289 ton decline in shipments as existing sales  agreements  expired and sales
opportunities at attractive prices were unavailable, in conjunction with a $2.14
per ton decline in average  sales  price as a result of a softening  coal market
over the late 2006 and early to mid-2007 period.  Two years of unseasonably mild
weather  resulted in  decreased  demand for coal  reducing  prices  during those
periods.

         The  increase in other  revenues of  $150,287 is  primarily  due to the
increase  in  receipt of  loading  fees of  $124,000  from a coal  company  with
property located adjacent to our Straight Creek,  Kentucky operations which were
sold on March 31, 2008.

     OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                    TWELVE MONTHS
                                                  ENDED DECEMBER 31,
                                            ---------------------------      PERCENT
                                                2007           2006          CHANGE
                                            ------------   ------------   ------------
<S>                                         <C>            <C>                   <C>
Cost of sales ...........................   $ 86,566,454   $ 79,354,327            9.1%
General and administrative expenses .....      7,036,524      9,257,241          (24.0%)
Depreciation, depletion, accretion
   and amortization expense .............     16,525,583     15,362,829            7.6%
                                            ------------   ------------
Total operating expenses ................   $110,128,561   $103,974,397            5.9%
                                            ============   ============
</TABLE>


                                       43
<PAGE>


         COST OF SALES


                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2007          2006        CHANGE
                                       -----------   -----------   -----------

Cost of sales ......................   $86,566,454   $79,354,327           9.1%
Tons sold ..........................     1,763,026     1,642,575           7.3%
Average cost per ton sold ..........   $     49.10   $     48.31           1.6%


         Cost of sales  consisted  primarily  of  salary,  benefits,  and  other
compensation costs paid directly to miners, and direct costs paid to third party
vendors  whose goods and services were directly used in the process of producing
coal  inventory.   Third  party  vendor  costs  include   equipment  leases  and
maintenance  costs,  blasting  costs,  fuel  costs,  parts  and  supplies,  coal
purchases, and transportation costs.

         NCA incurred  $9,501,700 cost of sales from October 20 through December
31,  2007 which  increased  consolidated  cost of sales.  At our  Tennessee  and
Kentucky operation,  we experienced a $2.3 million decrease in cost of sales, or
2.9% when compared to 2006.  On a per ton basis,  cost of sales at our Tennessee
and Kentucky operation increased $1.14 or 2.3% when compared to 2006.

         During 2007,  our Tennessee and Kentucky  operations  produced  172,192
fewer tons than in 2006  relying  instead on  increased  purchases  of coal from
third  parties.  As a  result,  overall  production  costs at  these  operations
decreased  $2.3  million,  offset  by a $0.8  million  increase  in the  cost of
purchased  coal. We experienced  significant  increases in the prices we pay for
the products and services we use in our operations  such as diesel fuel,  tires,
blasting services, roof bolts, health insurance, workers' compensation costs and
the per ton fees we pay to contract miners. However, by placing less reliance on
contract miners and producing more tons on owned reserves in the New River Tract
which do not result in royalty  payments to lessors we were able to minimize the
effect of the  increases on our per ton cost of sales to only $0.09  excluding a
$1.05 per ton increase in the cost of sales effect of purchased coal.

         GENERAL AND ADMINISTRATIVE EXPENSES

                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2007          2006        CHANGE
                                       -----------   -----------   -----------

General and administrative expenses    $ 7,036,524   $ 9,257,241         (24.0%)
Tons sold ..........................     1,763,026     1,642,575           7.3%
Average cost per ton sold ..........   $      3.99   $      5.64         (29.2%)


         General and administrative  expenses  primarily include  non-operations
salary,   benefits  and  related  expenses;   consulting  expenses;   legal  and
professional fees; insurance expenses; and travel and travel related expenses.

         NCA  reflected  incremental  general and  administrative  expenses from
October 20 through  December 31, 2007 of $66,592.  At our Tennessee and Kentucky
operations, we experienced a $2.3 million decrease in general and administrative
expenses  or 24.7%  when  compared  to 2006.  On a per ton  basis,  general  and
administrative  expenses at our Tennessee and Kentucky  operations  decreased by
$1.16,  or  20.6%when  compared  to 2006.  General and  administrative  expenses
decreased  during the period due to targeted  efforts to reduce cost General and
administrative  labor decreased  approximately $1.1 million primarily due to the
accelerated vesting of stock options in 2006 and a 3.6% decline in base wages at
the


                                       44
<PAGE>


corporate  level.  Other  significant  reductions  were made in  consulting  and
professional services ($318,000),  facilities and security ($226,000), insurance
costs ($203,000), and travel ($102,000).

         DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION EXPENSE

                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2007          2006        CHANGE
                                       -----------   -----------   -----------

Depreciation, depletion, accretion
   and amortization expense ........   $16,525,583   $15,362,829           7.6%
Tons sold ..........................     1,763,026     1,642,575           7.3%
Average cost per ton sold ..........   $      9.37   $      9.35           0.2%

         NCA  reflected  depreciation,  depletion,  accretion  and  amortization
expenses  from  October 20  through  December  31,  2007 of  $1,864,430.  At our
Tennessee  and  Kentucky  operations,  we  experienced  a $702,000  decrease  in
depreciation,  depletion,  accretion  and  amortization  expenses  or 4.6%  when
compared to 2006.  On a per ton basis,  depreciation,  depletion,  accretion and
amortization  expenses  increased by $0.06, or approximately 1% when compared to
2006 due to the  decline  in tons sold.  The  decrease  in expense is  primarily
attributable to the late 2006  sale-leaseback of a highwall miner and to certain
equipment  still in service which was fully  depreciated  during 2007.  This was
offset by capital expenditures of approximately $10.9 million in 2007.

         OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                                    TWELVE MONTHS
                                                  ENDED DECEMBER 31,
                                            ---------------------------      PERCENT
                                                2007           2006          CHANGE
                                            ------------   ------------   ------------
<S>                                         <C>            <C>                   <C>

Interest expense and financing fees ...     $(10,765,285)  $ (7,475,824)          44.0%
Interest income .......................        1,297,744        791,852           63.9%
Other income (expense), net ...........        1,051,711       (279,928)         475.7%
                                            ------------   ------------
   Total other income (expense) .......     $ (8,415,830)  $ (6,963,900)          20.8%
                                            ============   ============
</TABLE>


         NCA interest  expense for the period of October 20 through December 31,
2007 is $1,774,898  incurred on the 12% Notes due 2012.  National Coal Corp. and
NCC,  excluding NCA,  incurred  interest  expense of $8,990,387,  an increase of
$1,514,563  or 20.3% when  compared  to the  interest  expense  incurred  by the
companies in 2006.  The increase for the period is primarily  attributable  to a
full year of interest on the Term Loan Credit  Facility  versus  approximately 3
months  in  2006  and  the  increase  in  rates  on  that  facility  due to loan
modifications  during the year. Rates on the Term Loan Credit Facility increased
from  approximately 9% in the first quarter,  to approximately 10% in the second
quarter to 12% beginning in August 2007.

         NCA interest  income for the period of October 20 through  December 31,
2007 was $118,286  earned on bank balances and  restricted  cash in money market
funds  securing  reclamation  bonds.   Excluding  NCA,  we  earned  interest  of
$1,179,458,  an increase of $387,606 or 48.9% when compared to 2006, as a result
of increased average balances.

         NCA had no other income  (expense) during the  post-acquisition  period
except for the 49% equity  interest  in the net loss of Powhatan  Dock,  LLC, an
equity method investee, totaling $41,077.


                                       45
<PAGE>


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

     PRODUCTION
                                              TWELVE MONTHS
                                            ENDED DECEMBER 31,
                                       -------------------------     PERCENT
                                           2006          2005        CHANGE
                                       -----------   -----------   -----------

Surface mines ......................       386,156       295,774          30.6%
Highwall mines .....................       258,555       163,241          58.4%
Underground mines ..................       684,358       661,766           3.4%
                                       -----------   -----------   -----------
Total tons produced ................     1,329,069     1,120,781          18.6%
Coal purchased .....................       378,942       107,477         252.6%
                                       -----------   -----------   -----------
Total tons available ...............     1,708,011     1,228,258          39.1%
                                       ===========   ===========   ===========
Contract tons ......................       602,823       443,692          35.9%


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

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


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

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

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


                                       46
<PAGE>


     OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                   TWELVE MONTHS
                                                 ENDED DECEMBER 31,
                                            ---------------------------     PERCENT
                                               2006           2005          CHANGE
                                            ------------   ------------   ------------
<S>                                         <C>            <C>                    <C>

Cost of sales ...........................   $ 79,354,327   $ 51,115,116           55.2%
General and administrative expenses .....      9,257,241      7,213,346           28.3%
Depreciation, depletion, accretion
   and amortization expense .............     15,362,829     10,107,723           52.0%
                                            ------------   ------------
Total operating expenses ................   $103,974,397   $ 68,436,185           51.9%
                                            ============   ============
</TABLE>


         COST OF SALES

         The  increase in cost of sales in the year ended  December  31, 2006 as
compared to the year ended December 31, 2005 was primarily due to a 39% increase
in mined and purchased coal.

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

         GENERAL AND ADMINISTRATIVE EXPENSES

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

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

         DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION EXPENSE

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


                                       47
<PAGE>


         OTHER INCOME (EXPENSE)

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

Interest expense and financing fees   $(7,475,824)   $(3,966,715)         88.4%
Interest income ...................       791,852        129,200         512.9%
Other income (expense), net .......      (279,928)      (390,105)        (28.2)%
                                      -----------    -----------
                                      $(6,963,900)   $(4,227,620)         64.7%
                                      ===========    ===========


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

RELATED TRANSACTIONS

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

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2007, we had cash and cash equivalents of approximately
$9.9 million,  negative working capital of approximately $5.0 million,  and cash
flows used in operations of approximately  $8.1 million for the year then ended.
Our operations  have not generated  positive cash flows and the ability to do so
during  2008 is not  assured.  In order to fund  general  operating  and working
capital  needs during 2007 and into 2008,  we raised  funds  through the sale of
three million shares of common stock at February 28, 2007 at $4.65 per share for
a total of $13.95 million and two million shares of common stock at December 28,
2007 at an average  price of $4.005 per share for a total of $8.01  million.  We
also sold 3.9  million  shares of common  stock on  October  19,  2007 for $11.6
million which was used in the acquisition of Mann Steel Products, Inc.

         At December 31, 2007, we had  shareholders'  equity of $9.4 million and
incurred net losses of $25.8 million  (excluding  preferred stock dividends) for
the year then ended.  We expect  that we will  continue to incur net losses into
the foreseeable future which will decrease our shareholders' equity and may lead
to an  eventual  shareholders'  deficit.  We  were  in a  shareholders'  deficit
position at December 31, 2006 and again at September 30, 2007.

         We invested $10.8 million in equipment and mine development  during the
year ended December 31, 2007 including $5.3 million  purchased through equipment
financing  arrangements.  We intend to make approximately $16 million of capital
expenditures  during 2008 to expand  operations and an additional  approximately
$1.2 million to maintain  existing assets.  There are no assurances that we will
be able to obtain financing for our planned capital expenditures.


                                       48
<PAGE>


         Our operating plan for 2008 includes cash receipts from sales committed
under contracts or open purchase order arrangements with long time customers and
the release of  restricted  cash from the March 31,  2008 sale of our  Southeast
Kentucky properties adequate to cover all planned commitments. In early 2008, we
successfully renegotiated an existing coal supply agreement which resulted in an
increase in the selling price per ton, pending final approval.  In addition,  we
are  presently  in  discussions  with other  customers  on existing  coal supply
agreements,  and we intend to pursue  other  opportunities  as they arise during
2008. However,  if we are unable to execute our operating plan successfully,  we
may not be able to meet  our  liquidity  requirements  and  will  need to  raise
additional cash or discontinue operations at some of our facilities. On April 2,
2008, we repaid our $10 million credit  agreement with a portion of the proceeds
from the March 31,  2008 sale of our  Straight  Creek  properties.  We intend to
pursue a $10  million  revolver  type  credit  facility  in the second  calendar
quarter of 2008 to provide  additional  working capital as needed.  There are no
assurances  that efforts to raise  additional  cash would be  successful or that
discontinued operations would generate adequate savings to meet our obligations.

ACQUISITION OF MANN STEEL PRODUCTS, INC.

         On October 19, 2007, we acquired all of the  outstanding  stock of Mann
Steel Products for an aggregate  purchase  price of  $55,000,000  in cash,  paid
primarily  to the  sellers  except for  $7,406,745  which was  retained to repay
certain indebtedness of Mann Steel that existed at closing.  Mann Steel became a
wholly-owned  subsidiary  of NCC Corp.  and changed its name to National Coal of
Alabama,  Inc. The Purchase  Agreement  required a working capital adjustment to
the purchase price within 30 days after closing.  The working capital adjustment
required that a determination be made by the Seller's  accounting firm as to the
value of working capital,  or current assets minus current  liabilities,  at the
closing  date,  and that the purchase  price be increased to the extent  working
capital  exceeded zero, or decreased to the extent working capital was less than
zero.  As a result of this  provision,  NCA paid  $3,281,313  to the  sellers on
December 19, 2007.  Total cash  consideration  was  $58,660,706  which  includes
acquisition costs of $379,393.

         We funded the acquisition  through the combination of two transactions:
a) a sale of  3,866,968  shares of National  Coal Corp.  common  stock at $3 per
share for a total  consideration  of $11,600,904  and b) the issuance of the 12%
Notes due 2012 in a principal amount of $60 million, for a total of $71,600,904.
Amounts were also used within NCA to post collateral for reclamation  bonds, pay
fees and costs and for general corporate purposes.

         National  Coal  of  Alabama,  Inc.  is  restricted  in its  ability  to
distribute cash to our other consolidated  companies for use in their operations
under the terms of our 12% Notes due 2012. On an annual basis,  National Coal of
Alabama can  distribute  cash for use in our other  operations  only if it meets
certain EBITDA-based operating requirements for the immediately preceding fiscal
year. Additionally, our subsidiary,  National Coal Corporation, has entered into
a  management  services  agreement  with  National  Coal of Alabama,  Inc.  that
compensates  National Coal Corporation for services that it provides to National
Coal of Alabama,  and a tax sharing  agreement  that  requires  National Coal of
Alabama to make payments to us in respect of its tax liability. For fiscal 2008,
we anticipate National Coal of Alabama's  operations to provide limited cash for
use in our other operations.

SALE OF KENTUCKY PROPERTIES

         On November 13, 2007 National Coal Corporation received $2,000,000 from
the sale of certain real property and mineral leases at Pine  Mountain,  an idle
mining complex located in Kentucky,  and an additional  $1,000,000 from the sale
to  the  same  purchaser  of an  option  entitling  it to  purchase  for  $10.00
additional  properties at Pine  Mountain.  The sale of certain real property and
mineral leases resulted in a gain of approximately $745,000.


                                       49
<PAGE>


         On  March  31,  2008,  our  wholly-owned   subsidiary,   National  Coal
Corporation,  completed the sale of the real and personal  property  assets that
comprised  our  Straight  Creek  mining  operations  in Bell,  Leslie and Harlan
Counties,  Kentucky to Xinergy Corp. for  $11,000,000 in cash in accordance with
the terms and conditions of a purchase  agreement entered into among the parties
on February 8, 2008.  In addition to our receipt of the  purchase  price for the
assets,  the  transaction  also  resulted  in the return to us of  approximately
$7,400,000 in cash that we previously  pledged to secure  reclamation  bonds and
other liabilities associated with the Straight Creek operation,  and relieved us
of  approximately   $3,600,000  in  reclamation  liabilities  and  approximately
$2,700,000  of  equipment  related  debt  which  were  assumed by Xinergy in the
transaction. The sale resulted in an immaterial gain.

         We used a portion of the sale proceeds to repay the $10,000,000  senior
secured  credit  agreement  we  entered  into in  October  2006 with  Guggenheim
Corporate Funding,  LLC, as administrative  agent, which indebtedness  otherwise
would have matured in December 2008.

         Xinergy  Corp.  was  founded  and is  controlled  by Jon Nix,  who is a
founder,  significant  stockholder,  and former officer and director of National
Coal.  Mr. Nix served as a director of National  Coal Corp.  from  January  2003
until July  2007,  and as our  Chairman  of the Board from March 2004 until July
2007.  Mr. Nix also served as our  President  and Chief  Executive  Officer from
January 2003 until August 2006. He is married to the stepdaughter of our General
Counsel,  Charles Kite. As of April 7, 2008,  based on reports Mr. Nix has filed
with  the  Securities  and  Exchange  Commission,  Mr.  Nix  beneficially  owned
3,616,138  shares of our common  stock,  representing  approximately  14% of our
outstanding common stock as of such date.

DEBT REDUCTION

         On February 22, 2008, we entered into a letter agreement with Neuberger
Berman, LLC, in its capacity as the representative of certain of its clients who
hold 10.5%  Notes due 2010.  Pursuant  to the  exchange  agreement  we agreed to
exchange a minimum of $2.0  million and a maximum of $10.0  million in principal
amount of the  holders'  notes for  shares of our  common  stock.  The number of
shares of common stock to be  delivered  to the holders  upon an exchange  would
equal (x) the principal  amount of each respective Note exchanged  multiplied by
0.82, plus the accrued but unpaid  interest,  divided by (y) $4.85,  which price
represents a 5.0%  discount to the closing price of our common stock on February
19, 2008, the day we reached agreement with the holders of the notes.

         On February 28, 2008, the  representative  elected to exchange notes in
the aggregate  principal  amount of $3 million plus accrued  interest thereon of
$63,875,  for 520,387  shares of our common  stock,  and the exchange  agreement
thereafter expired on March 22, 2008.


                                       50
<PAGE>


DEBT OBLIGATIONS

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

                                                  DECEMBER 31,     DECEMBER 31,
                                                      2007             2006
                                                 -------------    -------------
12.0% Senior Secured Notes, due 2012 .........   $  60,000,000    $        --
10.5% Senior Secured Notes, due 2010 .........      55,000,000       55,000,000
Term Loan Credit Facility ....................      10,000,000        8,000,000
Overriding Royalty Interest Obligation, net ..       9,177,273             --
Bank note (prime + 1%), due 2007 .............            --            637,374
Installment purchase obligations, due 2010 ...       4,540,801             --
Installment purchase obligations, due 2009 ...       1,906,271        3,200,286
Installment purchase obligations, due 2008 ...         182,463        2,825,209
Equipment notes (8.39%-9.28%, due 2009-2011) .          85,146          125,382
Equipment note (4.48%, due 2009) .............         124,781          234,721
Other ........................................          51,817           89,512
Less unamortized discounts ...................     (11,264,974)      (3,298,679)
                                                 -------------    -------------
                                                   129,803,578       66,813,805
Less current portion of long-term debt .......     (15,453,230)      (4,720,671
                                                 -------------    -------------
Long-term debt ...............................   $ 114,350,348    $  62,093,134
                                                 =============    =============


         12% NOTES PAYABLE DUE IN 2012

         On October  19,  2007,  our newly  acquired,  wholly-owned  subsidiary,
National Coal of Alabama,  Inc.  (formerly Mann Steel Products,  Inc.) completed
$60 million in private  placements  through the issuance of 12.0% Senior Secured
Notes (the "12% Notes due 2012") to TCW Energy Fund XIV,  L.P.,  TCW Energy Fund
XIV-A,  L.P. and TCW Energy Fund XIV (Cayman),  L.P. pursuant to a Note Purchase
Agreement  dated October 19, 2007,  among National Coal of Alabama,  the Holders
and TCW Asset Management Company (TAMCO). The 12% Notes due 2012 have a maturity
date of October  19,  2012 and accrue  interest at the rate of 12% per annum due
quarterly.  In lieu of paying  interest  due on the 12% Notes  due  2012on  each
quarterly  payment date in full in cash,  National  Coal of Alabama may elect to
pay a portion of such  interest  in cash equal to the amount of  interest  which
would be owing on such  quarterly  payment date if the interest rate had been 9%
per annum,  and to borrow the remaining  portion from the holders in the form of
additional  loans made through the increase of the principal  amounts of the 12%
Notes due 2012.

         On each  quarterly  payment  date from and  after  March  2008,  NCA is
required to make a principal  payment in respect of the 12% Notes due 2012 in an
aggregate amount equal to the adjusted net cash flow for the applicable quarter,
provided  that in no event shall  National Coal of Alabama be required to make a
payment that results in its having cash and cash  equivalents  (exclusive of any
cash and cash  equivalents  that have been pledged to secure  other  obligations
permitted  under  the note  purchase  agreement  or that  otherwise  constitutes
"restricted  cash"  permitted  under the note  purchase  agreement) of less than
$2,000,000.  National  Coal of Alabama  is also  required  to repay  outstanding
amounts upon the sale of collateral approved by the Holders of a majority of the
aggregate  unpaid  principal  amount  under  the 12% Notes due 2012 and upon the
receipt of certain casualty insurance  proceeds.  In addition,  National Coal of
Alabama  will be required  to pay a  "make-whole"  amount or incur a  prepayment
premium  in the event  that it  prepays  the 12%  Notes due 2012  prior to their
stated maturity.

         Pursuant  to the  terms  of the note  purchase  agreement  and  related
security and pledge  agreements,  National Coal of Alabama granted the Holders a
security  interest in all of its assets to secure  repayment of the  obligations


                                       51
<PAGE>


arising  under  the  note  purchase  agreement  and  related   agreements,   and
established  a debt service  reserve  account equal to six months of interest on
the then outstanding  aggregate principal amount of the Notes. The 12% Notes due
2012 are not guaranteed by National Coal Corp., National Coal Corporation or its
subsidiaries.

         As additional  consideration  to the holders,  National Coal of Alabama
conveyed to the holders an Overriding  Royalty Interest with respect to all coal
mined by  National  Coal of Alabama  in the State of  Alabama.  Pursuant  to the
Conveyance of Overriding Royalty Interest, dated October 19, 2007, National Coal
of Alabama  agreed to pay the holders of the  interest a royalty on 18.5 million
tons of coal mined and sold by National  Coal of Alabama,  in an amount equal to
(i)  $2.00  per  ton of  coal  mined  and  sold  while  the  obligations  remain
outstanding under the Note Purchase Agreement, and (ii) an amount equal to 1% of
the gross sales price of coal mined and sold after  repayment of the obligations
under the Note Purchase Agreement.  The present value of the expected cash flows
associated  with the  Overriding  Royalty  Interest,  estimated  at  $8,865,000,
reflecting a discount  rate of 17.6%,  has been recorded as a liability and as a
discount to the 12% Notes due 2012. The current portion of cash flows associated
with the Overriding  Royalty Interest is recorded as the greater of the required
annual  minimum of $2.0 million or the planned  production  at the $2.00 per ton
rate. The current estimated portion of the Overriding  Royalty Interest was $2.4
million at December 31, 2007.

         National Coal of Alabama used the proceeds  from the debt  financing to
make a distribution to NCC Corp., its sole  shareholder,  to enable NCC Corp. to
pay the purchase price to the sellers of Mann Steel,  to repay  indebtedness  of
National Coal of Alabama existing on the closing date of the debt financing,  to
pay closing expenses,  costs and fees, to cash  collateralize  reclamation bonds
issued by Indemnity  National Insurance Company for the account of National Coal
of Alabama,  to fund the debt service  reserve  account and to pay other amounts
permitted under the note purchase agreement.  National Coal of Alabama also paid
to TAMCO a commitment  fee of $900,000,  which is equal to 1.5% of the aggregate
commitments  of $60 million under the note  purchase.  We also paid fees of $1.1
million and 175,000  shares of our common  stock to a broker who  assisted  with
this transaction.

         Each  of  NCC  Corp.   and  National  Coal  of  Alabama,   Inc.  is  an
"unrestricted  subsidiary" within the meaning of our 10.5% Notes due 2010, which
means that: (i) these unrestricted subsidiaries cannot have any indebtedness for
which  National  Coal Corp.  or any of its other  subsidiaries  is  directly  or
indirectly liable, or which National Coal Corp. or any of its other subsidiaries
guarantees  or  otherwise  provides  credit  support;  (ii)  these  unrestricted
subsidiaries cannot be party to any agreement with National Coal Corp. or any of
its  other  subsidiaries  unless  the  terms of any such  agreement  are no less
favorable  to National  Coal Corp.  or such other  subsidiaries  than those that
might be obtained at the time from  persons  who are not our  affiliates;  (iii)
none of National  Coal Corp.  or its other  subsidiaries  can have any direct or
indirect  obligation  to  subscribe  for  additional  equity  interests  of  the
unrestricted subsidiaries or maintain or preserve the unrestricted subsidiaries'
financial  condition or cause them to achieve any specified  levels of operating
results.

         National  Coal  of  Alabama,  Inc.  is  restricted  in its  ability  to
distribute cash to our other consolidated  companies for use in their operations
under the terms of our 12% Notes due 2012. On an annual basis,  National Coal of
Alabama can  distribute  cash for use in our other  operations  only if it meets
certain EBITDA-based operating requirements for the immediately preceding fiscal
year. Additionally, our subsidiary,  National Coal Corporation, has entered into
a  management  services  agreement  with  National  Coal of Alabama,  Inc.  that
compensates  National Coal Corporation for services that it provides to National
Coal of Alabama,  and a tax sharing  agreement  that  requires  National Coal of
Alabama to make payments to us in respect of its tax liability. For fiscal 2008,
we anticipate National Coal of Alabama's  operations to provide limited cash for
use in our other operations.

         TERM LOAN CREDIT FACILITY

         On  October  12,  2006,  our  wholly-owned  subsidiary,  National  Coal
Corporation,  entered  into  a Term  Loan  Credit  Facility  that  provides  for
borrowings  of $10.0  million with  Guggenheim  Corporate  Funding,  LLC to fund
general  operating and working capital needs (the "Term Loan Credit  Facility").
We  borrowed  $8.0  million  in  2006,  and $2.0  million  in  March  2007.  Our
obligations  under the credit  facility are secured by a first  priority  senior
lien on substantially all of our assets.


                                       52
<PAGE>


         Initially,  the credit  agreement  provided  that all amounts under the
facility  would be due and  payable in March 2010 and would bear  interest  at a
rate equal to, at the our option, the Eurodollar Rate plus 3.5% or the Base Rate
(which  approximates  the prime rate) plus 2.5%.  The term loan credit  facility
also  contained  financial  covenants and default  provisions  including that we
maintain  minimum  levels of EBITDA and  liquidity,  maintain  minimum  interest
coverage ratios,  not exceed maximum leverage ratios,  and that it limit certain
future   categories  of  transactions  such  as  the  incurrence  of  additional
indebtedness and the sale of assets.

         In March  2007,  Guggenheim  agreed to amend the credit  agreement  and
reset the financial covenants, as a result of which the applicable margin on the
credit  facility  was  increased  by  1.0%.  At June  30,  2007,  we were not in
compliance with certain  financial  covenants under the credit  agreement and on
August 15, 2007,  Guggenheim  agreed to a further  amendment under which (1) the
maturity  date was changed to  December  31,  2008,  (2) the  interest  rate was
changed to 12%, (3) fees equal to 5% of all balances outstanding at December 31,
2007 and 10% of all amounts  outstanding at June 30, 2008 were provided for, (4)
the EBITDA  financial  covenant was reset,  and (5)  prepayment  penalties  were
eliminated.

         On October 19, 2007, the lenders party to the credit agreement assigned
to  Steelhead  Offshore  Capital,  LP, Big Bend 38  Investments,  L.P.,  and J-K
Navigator Fund,  L.P., our  outstanding  obligations to repay funds loaned to us
pursuant  to  the  credit  agreement  in  the  aggregate   principal  amount  of
$10,000,000  and, to the extent  permitted to be assigned under  applicable law,
all claims,  suits,  causes of action and any other right of the lenders against
any person arising under or in connection with the credit agreement.  Guggenheim
remained as Administrative Agent under the credit agreement.

         On October 19, 2007, the parties to the credit agreement entered into a
Waiver  and  Amendment  No. 3 to the  credit  agreement,  pursuant  to which the
parties  agreed to waive and amend certain  provisions of the credit  agreement.
Pursuant to the waiver and amendment,  Guggenheim and each lender waived certain
fees related to amounts  outstanding under the term loan facility as of December
31, 2007, our compliance with certain minimum  consolidated  EBITDA requirements
for the fiscal quarters ending September 30, 2007 and December 31, 2007, and the
registration  and  processing  fee due to Guggenheim  solely with respect to the
assignment and acceptance of our outstanding  obligations to Steelhead  Offshore
Capital,  LP, Big Bend 38  Investments,  L.P., and J-K Navigator  Fund, L.P. The
waiver and amendment also amended  various  restrictive  covenants in the credit
agreement,  including  covenants to permit us to consummate  the  acquisition of
Mann Steel  Products,  Inc. and incur the debt  financing for such  acquisition.
Fees equal to 10% of all amounts  outstanding under the credit agreement at June
30, 2008,  provided for in the second amendment dated August 15, 2007, remain in
place.  We did not accrued any amounts  relative to these fees as management did
not believe it is  probable  that we will be required to pay the fees due to its
belief that the term loan credit agreement would be refinanced prior to June 30,
2008.

         On October 19, 2007,  the parties to the credit  agreement also entered
into a letter  agreement  pursuant to which we agreed,  at our  election  and as
compensation  for the waiver and amendment  and  assignment  agreements,  (i) to
issue  warrants on or before  June 30, 2008 to purchase up to 750,000  shares of
our common  stock at an  exercise  price of $3.00 per share with a term  through
December 31, 2011 or (ii) make a cash  payment on or before  October 17, 2008 in
an amount  equal to the  Black-Scholes  value of a  warrant,  exercisable  on or
before  December  31, 2011,  for up to 750,000  shares of our common stock at an
exercise price of $3.00 per share, obtained using the "OV" function on Bloomberg
Financial  Markets and reflecting the  calculation  assumptions set forth in the
lender fee letter, to Steelhead  Offshore  Capital,  LP, Big Bend 38 Investments
L.P., and J-K Navigator Fund, L.P. We elected to issue the refinance fee warrant
pursuant  to the lender fee letter and, on December  31,  2007,  entered  into a
warrant agreement with the parties to the letter agreement.  The shares issuable
upon  exercise  of these  warrants  have  registration  rights  similar to those
provided in the Registration  Rights  Agreement  entered into in connection with
the  October 19, 2007 equity  financing  (see Note 11,  STOCKHOLDERS'  (DEFICIT)
EQUITY).  Legal  expenses  totaling  approximately  $323,000  were  expensed  as
incurred and the value of the warrant was capitalized as deferred financing fees
to be amortized over the remaining life of the loan using the effective interest
method.


                                       53
<PAGE>


         On November 16, 2007, the lenders party to the credit agreement entered
into a waiver  under  which the  EBITDA  financial  covenant  was waived for the
fiscal quarters ending March 31, 2008 and June 30, 2008.

         On March 31, 2008, we repaid the $10 million  credit  agreement  with a
portion of the proceeds from the sale of our Straight Creek properties.

              10.5% SENIOR SECURED NOTES DUE 2010

         On December  29, 2005,  we issued  $55,000,000  in aggregate  principal
amount of 10.5% Senior  Secured  Notes due 2010 (the "10.5% Notes due 2010") and
55,000 warrants to purchase a total of 1,732,632 shares of our common stock. The
10.5% Notes due 2010 and warrants  were sold in units  consisting  of one $1,000
principal  amount note and one  warrant,  which  entitled the holder to purchase
31.5024  shares of our  common  stock at an  exercise  price of $8.50 per share,
subject to adjustment.  The warrants are subject to mandatory  conversion if the
price of our common stock  remains above $12.75 for more than twenty days out of
a thirty-day  period. The units were sold in a private placement exempt from the
registration  requirements  under the  Securities  Act of 1933,  as amended (the
"Securities  Act").  The 10.5%  Notes  due 2010 are  fully  and  unconditionally
guaranteed  by our  wholly-owned  subsidiaries,  National Coal  Corporation,  NC
Railroad, Inc. and NC Transportation,  Inc. and were offered and sold within the
United  States only to qualified  institutional  buyers in reliance on Rule 144A
under the Securities Act.

         The 10.5% Notes due 2010 were  issued  pursuant  to an  indenture  with
Wells Fargo Bank National Association,  as trustee.  Interest on the 10.5% Notes
due 2010 accrues from the date of issuance or the most recent  interest  payment
date, and is payable in cash semi-annually in arrears on June 15th and September
15th of each year,  commencing on June 15, 2006. The warrants are exercisable on
or after  December 29, 2006 and the  warrants  will expire on December 15, 2010.
All  of  the  securities  in  this  offering  were  initially  purchased  by the
underwriter.

         The 10.5%  Notes due 2010 and the related  guarantees  are secured by a
lien on  substantially  all of our  and the  guarantors'  property  and  assets,
including a pledge of 100% of the capital stock or other equity interests of our
domestic  subsidiaries.  The 10.5% Notes due 2010 will  mature on  December  15,
2010.  The 10.5% Notes due 2010 are  subordinated  to our $10 million  Term Loan
Credit  Facility with  Guggenheim  Corporate  Funding,  LLC, which holds a first
priority  secured  lien senior to the 10.5% Notes due 2010,  and ranks senior to
our existing and future subordinated debt.

         Before  December  15,  2008,  we may, at any time or from time to time,
redeem up to 35% of the aggregate  principal  amount of the 10.5% Notes due 2010
with the net proceeds of a public or private equity  offering at 110.500% of the
principal  amount of the  10.5%  Notes due 2010,  plus any  accrued  and  unpaid
interest, if at least 65% of the aggregate principal amount of the notes remains
outstanding  after such  redemption and the redemption  occurs within 90 days of
the date of the closing of such equity offering.  In addition,  up to 35% of the
10.5% Notes due 2010 are redeemable,  at our option, in whole or in part, at any
time up to December 15, 2008 at a redemption  price of 110.500%.  The  remaining
65% of the 10.5% Notes due 2010 are redeemable, at our option, in whole or part,
on or after December 15, 2008, in each case at the redemption  prices  described
in the table below.  All  redemptions  prices are in addition to any accrued and
unpaid interest to the date of the redemption.

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


                                       54
<PAGE>


         The indenture  governing  the 10.5% Notes due 2010,  among other things
and  subject to certain  exceptions,  limits our  ability and the ability of our
subsidiaries to:

         o        incur or guarantee additional  indebtedness or issue preferred
                  stock;

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

         o        make investments;

         o        issue or sell capital stock of restricted subsidiaries;

         o        engage in transactions with affiliates;

         o        grant or assume liens; or

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

         Our failure to make required  payments of interest and principal and to
comply with other  covenants may result in the  acceleration of the principal of
the 10.5% Notes due 2010.

         We agreed, pursuant to a registration rights agreement with the initial
purchaser,  to use our commercially  reasonable efforts to (a) register with the
SEC a new issue of notes having substantially identical terms as the 10.5% Notes
due 2010 in order to  exchange  freely  tradable  notes for the 10.5%  Notes due
2010,  and (b) file a shelf  registration  statement  with the SEC  covering the
resale of the warrants and shares of our common stock  issuable upon exercise of
the  warrants,  and to use our  commercially  reasonable  efforts  to cause that
resale registration statement to be declared effective within 240 days after the
sale date. We filed registration statements subject to our obligations under the
registration rights agreement on May 15, 2006. Both registration statements were
declared  effective on July 28, 2006,  and we issued $51.0  million in principal
amount of freely  tradable  notes in exchange for the same  principal  amount of
10.5% Notes due 2010.

         We immediately used approximately  $22.1 million of the proceeds of the
10.5% Notes due 2010 offering to repay  existing  indebtedness.  During the year
ended  December  31,  2007,  we used  approximately  $2.0  million to purchase a
forty-two mile rail line in Tennessee,  approximately $8.3 million as collateral
to support  reclamation  bonds,  and $19.7 million to purchase other  equipment,
refurbish a preparation plant and rail load-out, and to use as working capital.

         On February 22, 2008, we entered into a letter agreement with Neuberger
Berman, LLC, in its capacity as the representative of certain of its clients who
hold 10.5%  Notes due 2010.  Pursuant  to the  exchange  agreement  we agreed to
exchange a minimum of $2.0  million and a maximum of $10.0  million in principal
amount of the  holders'  notes for  shares of our  common  stock.  The number of
shares of common stock to be  delivered  to the holders  upon an exchange  would
equal (x) the principal  amount of each respective Note exchanged  multiplied by
0.82, plus the accrued but unpaid  interest,  divided by (y) $4.85,  which price
represents a 5.0% discount to the closing price our common stock on February 19,
2008, the day we reached agreement with the holders of the notes.

         On February 28, 2008, the  representative  elected to exchange notes in
the aggregate  principal  amount of $3 million plus accrued  interest thereon of
$63,875,  for 520,387  shares of our common  stock,  and the exchange  agreement
thereafter expired on March 22, 2008.

              EQUIPMENT NOTES

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


                                       55
<PAGE>


              INSTALLMENT PURCHASE OBLIGATIONS AND SALE-LEASEBACK

         In April,  August and September  2006, we entered into new  installment
sale  contracts with an equipment  manufacturer  pursuant to which we refinanced
equipment with an aggregate principal value of approximately $4,176,000 formerly
acquired under various capital leases.  These installment sale contracts require
payments  over  periods  ranging  from 30 to 36 months at fixed  interest  rates
ranging  from  7.03% to  8.10%.  The  obligations  under  the  installment  sale
contracts are secured by the equipment purchased.

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

         In January and  February  2007,  we entered into new  installment  sale
contracts  with an  equipment  manufacturer  pursuant  to  which  we  refinanced
equipment with an aggregate  principal value of approximately  $719,000 formerly
acquired under various capital leases.  These installment sale contracts require
payments over 36 months at fixed interest rates ranging from 5.29% to 8.75%. The
obligations  under the  installment  sale contracts are secured by the equipment
purchased.

         In August 2007, we entered into new  installment  sale  contracts  with
equipment  manufacturers  pursuant  to  which  we  acquired  equipment  with  an
aggregate  principal value of approximately  $4,889,000.  These installment sale
contracts  require payments over 36 to 60 months at fixed interest rates ranging
from 5.97% to 7.99%.  The obligations  under the installment  sale contracts are
secured by the equipment purchased.

         Approximately  $2,700,000  of  equipment  related  debt was  assumed by
Xinergy Corp. on March 31, 2008, as a result of the sale of our Straight  Creek,
Kentucky properties.

              CASH FLOWS

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and sales of debt and equity  securities.
For the twelve months ended  December 31, 2007, we had a net increase in cash of
approximately $7.7 million.  Cash flows from operating,  financing and investing
activities  for the twelve months ended  December 31, 2007,  2006,  and 2005 are
summarized in the following table:

ACTIVITY                                       TWELVE MONTHS ENDED DECEMBER 31,
                                             ----------------------------------
                                               2007         2006         2005
                                             --------     --------     --------
                                                   (Amounts in thousands)
Operating activities ....................    $ (8,140)    $ (3,835)    $  6,040
Investing activities ....................     (70,786)     (26,364)     (19,473)
Financing activities ....................      86,599        6,945       38,565
                                             --------     --------     --------
   Net increase (decrease) in cash ......    $  7,673     $(23,254)    $ 25,131
                                             ========     ========     ========


         OPERATING ACTIVITIES

         Net cash flows used in operating  activities increased by approximately
$4.3 million to  approximately  $8.1  million.  The increase was  primarily  the
result of a $2.3 million  increase in net loss over 2006, plus increases in both
inventory and accounts  receivable  balances  following our  acquisition of Mann


                                       56
<PAGE>


Steel Products, Inc. on October 19, 2007 net of gains on the sale of idle assets
including  certain of our mineral  properties  at Pine  Mountain,  Kentucky  and
increases in depreciation, depletion, amortization, and accretion.

         The  decrease  in  net  cash   provided  by  operating   activities  of
approximately  $9.4 million to $3.8 million used in operating  activities during
the year ended  December 31, 2006 was primarily the result of an increase in net
loss, net of  depreciation,  depletion,  amortization and accretion and non-cash
stock option expense,  of $9.9 million.  The increase was primarily due to lower
contract prices,  increased  purchases of coal due in part to the highwall miner
damage during the year, and the termination of a financially favorable agreement
with a subcontractor  for the management of our Kentucky  properties,  partially
offset by increased  non-cash  stock option  expenses of $1.4 million over prior
year due to the adoption of SFAS123(R)  and the  accelerated  vesting of certain
executive options.  Offsetting the overall decrease in cash flow from operations
is a greater increase in accounts payable of $3.6 million primarily attributable
to the  refurbishment  of our Baldwin  preparation  plant and load-out  facility
which  has  taken  place in 2006  and  increased  interest  due to  higher  debt
balances.  These and other expansion  activities have also resulted in a greater
increase in  inventory of $1.7 million in current year and $1.1 million of asset
retirement obligation settlements, both of which decreased cash from operations.
Approximately  $1.93 million of expense  related to the March 2006 damage to our
highwall  miner was reflected as cash used in operations in the first and second
quarters  of 2006 and was offset by an  insurance  settlement  of  approximately
$1.87 million received in September 2007.

         The net cash  provided by operating  activities of  approximately  $6.0
million  during the twelve  months  ended  December 31, 2005 was  primarily  the
result of a declining net loss.  When the impact of depreciation is removed from
the net loss,  there is an improvement  of $11.3  million.  The reduction of net
loss is due to a significant  increase in coal sales and resulting  improvements
in the percentage of cost of sales and general and administrative expenses.

         INVESTING ACTIVITIES

         Cash used in investing  activities  increased $44.4 million in the year
ended December 31, 2007 over 2006 to  approximately  $70.8 million  primarily as
the result of the acquisition of Mann Steel  Products,  Inc. on October 19, 2007
for  approximately  $58.3  million and $10.2 million  investment in  reclamation
bonds and other  restricted  cash  necessary to expand our operations net of the
reduced  capital  expenditures  necessary  as a result  of  significant  capital
improvements made in 2006 and 2005.

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

         Cash used in investing  activities for the twelve months ended December
31, 2005 of $19.5 million was primarily related to capital expenditures of $16.5
million and an increase in cash collateral supporting  reclamation bonds of $2.8
million.

         FINANCING ACTIVITIES

         Cash flows provided by financing  activities were $86.6 million for the
year ended  December 31, 2007, an increase of $79.6 million over 2006.  Proceeds
from the issuance of 9,066,968 shares of our common stock,  including  3,866,968
shares issued in conjunction  with our acquisition of Mann Steel Products,  Inc.
on October 19,  2007,  resulted in cash flows of $34.1  million.  An  additional
$60.0  million was raised from the October 19, 2007  issuance of our 12.0% Notes
due 2012 in conjunction  with our acquisition of Mann Steel Products and $2.0 in
borrowings for working capital were obtained from our term loan credit facility.
Approximately  $1.70  million was paid to the holders of our Series A cumulative
convertible  preferred  stock to induce them to convert  their shares to common.
The holders subsequently used approximately $1.65 million of the inducement paid
to purchase 558,701 additional shares of our common stock.


                                       57
<PAGE>


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

         The net cash provided by financing  activities of  approximately  $38.6
million  during the twelve  months  ended  December 31, 2005 was  primarily  the
result of $55.0  million  raised from the  issuance of our 10.5% Notes due 2010,
offset by the  repayment of $22.1 million  including our previous  Senior Credit
Facility and certain other notes and leases.  Additionally,  approximately  $5.1
million was through the issuance of a note payable.

OFF-BALANCE SHEET ARRANGEMENTS

         At December 31, 2007, 2006, and 2005, 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,  except as noted  below,  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.

         We have one  investment  in common  stock in which the  investee is not
consolidated. At December 31, 2007, we, through our subsidiary, National Coal of
Alabama, held an investment totaling  approximately  $114,800 representing a 49%
interest in Powhatan Dock,  LLC,  which operates a barge loadout in Alabama.  We
account for this investment using the equity method.

CONTRACTUAL OBLIGATIONS

         The following  summarizes our  contractual  obligations at December 31,
2007 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

<TABLE>
<CAPTION>
                                                      PAYMENTS DUE BY PERIOD
                            ------------------------------------------------------------------------
                                            LESS THAN 1        1-3            3-5           AFTER
                                TOTAL          YEAR           YEARS          YEARS         5 YEARS
                            ------------   ------------   ------------   ------------   ------------
<S>                         <C>            <C>            <C>            <C>            <C>
Long-term debt (including
   interest) ............   $180,591,620   $ 22,253,230   $ 76,289,326   $ 75,928,724   $  6,120,340
Operating leases ........      4,517,019      2,004,871      2,510,633          1,515           --
Capital leases ..........        282,806        183,806         99,000           --             --
                            ------------   ------------   ------------   ------------   ------------
   Total contractual
      obligations .......   $185,391,445   $ 24,441,907   $ 78,898,959   $ 75,930,239   $  6,120,340
                            ============   ============   ============   ============   ============
</TABLE>


         We rent mining equipment  pursuant to operating lease  agreements,  and
made lease  payments  totaling  approximately  $4,517,019  during the year ended
December 31, 2007.

         For the year ended  December  31,  2007,  we accrued  dividends  to the
holders of our Series A cumulative  convertible preferred stock in the aggregate
of approximately $399,000, $159,152 of which we paid as common shares in lieu of
preferred  dividends as a result  conversion of preferred shares to common stock
and a covenant  failure.  Historically  we have made  semi-annual  cash dividend
payments to the holder of the Series A preferred  stock on June 30 and  December
31. Dividends accrued on our Series A cumulative  convertible preferred stock of
$362,886 were paid in June and July 2006 and $413,567 was paid in February 2007.
At December  31, 2007,  there were accrued but unpaid  dividends on our Series A
cumulative  convertible  preferred  stock of $114,216.  The dividend rate of our
Series A preferred stock increased from 5% to 8% on September 1, 2006. We intend
to make  dividend  payments  going forward as long as (1) no default of our debt
covenants has  occurred,  (2) we will be in pro-forma  compliance  with our debt
agreements,  and (3) the available  credit and cash  equivalents  we have is not
less than $1.5 million.


                                       58
<PAGE>


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

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

     INTEREST RATE RISKS

         Our interest  expense is  sensitive to changes in the general  level of
interest rates in the U.S. At December 31, 2007, we had $129.8 million aggregate
principal amount of debt under fixed rate instruments and no debt under variable
rate instruments. At December 31, 2006, we had $61.5 million aggregate principal
amount of debt  under  fixed  rate  instruments  and $8.6  million of debt under
variable rate  instruments,  with our Term Loan Credit Facility making up 93% of
the variable rate instruments and equipment financing making up 7%.

     COMMODITY RISKS

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

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

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

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


                                       59
<PAGE>


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

     FOREIGN CURRENCY

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


                                       60
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Reports of Independent Registered Public Accounting Firms................     62

Consolidated Balance Sheets at December 31, 2007 and 2006................     64

Consolidated Statements of Operations for the Years Ended
   December 31, 2007, 2006, and 2005.....................................     65

Consolidated Statements of Cash Flows for the Years Ended
   December 31, 2007, 2006, and 2005.....................................     66

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
   for the Years Ended December 31, 2007, 2006, and 2005.................     68

Notes to the Consolidated Financial Statements...........................     69


                                       61
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of
National Coal Corp.

We have audited the  consolidated  balance  sheets of National  Coal Corp.  (the
"Company")  as of  December  31,  2007  and 2006  and the  related  consolidated
statements of operations,  stockholders' equity (deficit) and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  The  financial  statements  of the
Company  for the year ended  December  31, 2005 were  audited by other  auditors
whose report dated February 17, 2006  expressed an unqualified  opinion on those
statements.

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.  We were not engaged to perform an
audit of the Company's  internal  control over financial  reporting.  Our audits
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such opinion. An audit includes examining,  on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2007 and 2006 financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
National Coal Corp. at December 31, 2007 and 2006, and the consolidated  results
of its  operations  and its cash flows for the years then ended,  in  conformity
with U.S. generally accepted accounting principles.

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
changed its method of accounting for income tax contingencies in accordance with
Financial  Accounting  Standards Board Interpretation No. 48 on January 1, 2007,
and the Company  changed its method of accounting  for  share-based  payments in
accordance  with  Statement  of Financial  Accounting  Standards  No.  123(R) on
January 1, 2006.

                                      /S/ ERNST & YOUNG LLP

Nashville, Tennessee
April 14, 2008


                                       62
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

We have  audited  the  consolidated  statements  of  operations,  cash flows and
changes in stockholders' equity of National Coal Corp. (the "Company", a Florida
corporation)  for the year ended December 31, 2005.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  results of its operations and its cash
flows for the years ended  December  31, 2005,  in  conformity  with  accounting
principles generally accepted in the United States of America.


                                        /S/ GORDON, HUGHES & BANKS, LLP

Greenwood Village, Colorado
February 17, 2006


                                       63
<PAGE>


<TABLE>
                             NATIONAL COAL CORP.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                        DECEMBER 31,
                                                                               ------------------------------
                                                                                    2007             2006
                                                                               -------------    -------------
<S>                                                                            <C>              <C>
ASSETS
Current assets
   Cash and cash equivalents ...............................................   $   9,854,351    $   2,180,885
   Accounts receivable .....................................................       8,787,046        3,712,779
   Inventory ...............................................................       2,946,101        2,221,742
   Prepaid and other current assets ........................................       1,951,827          867,247
                                                                               -------------    -------------
     Total current assets ..................................................      23,539,325        8,982,653

Assets held for sale .......................................................            --            640,649
Property, plant, equipment and mine development, net .......................     108,880,599       55,837,627
Deferred financing costs ...................................................       6,669,703        2,856,534
Restricted cash ............................................................      29,115,383       17,246,751
Other noncurrent assets ....................................................       1,049,991          427,516
                                                                               -------------    -------------
     Total assets ..........................................................   $ 169,255,001    $  85,991,730
                                                                               =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
   Current maturities of long-term debt ....................................   $  15,453,230    $   4,720,671
   Current installments of obligations under capital leases ................         157,062          351,668
   Current portion of asset retirement obligations .........................       1,310,344        1,378,967
   Accounts payable and accrued expenses ...................................      12,759,593       11,981,495
                                                                               -------------    -------------
     Total current liabilities .............................................      29,680,229       18,432,801

   Long-term debt, less current maturities, net of discount ................     114,350,348       62,093,134
   Obligations under capital leases, excluding current installments ........          74,688          321,071
   Asset retirement obligations, excluding current portion .................       8,954,343        5,835,927
   Deferred revenue ........................................................       1,553,806        1,032,426
   Other noncurrent liabilities ............................................       5,126,231          199,430
                                                                               -------------    -------------
     Total liabilities .....................................................     159,739,645       87,914,789
                                                                               -------------    -------------
   Commitments and contingencies

Stockholders' equity (deficit)
   Series A cumulative convertible preferred stock, $0.0001 par value; 1,611
     shares authorized; 356.44 and 782.54 shares issued and outstanding at
     December 31, 2007 and 2006, respectively ..............................            --               --
   Common stock, $0.0001 par value, 80 million shares authorized; 27,698,792
     and 16,340,744 shares issued and outstanding at December 31, 2007 and
     2006, respectively ....................................................           2,770            1,634
   Additional paid-in-capital ..............................................      83,309,703       42,049,703
   Accumulated deficit .....................................................     (73,797,117)     (43,974,396)
                                                                               -------------    -------------
     Total stockholders' equity (deficit) ..................................       9,515,356       (1,923,059)
                                                                               -------------    -------------
     Total liabilities and stockholders' equity (deficit) ..................   $ 169,255,001    $  85,991,730
                                                                               =============    =============
</TABLE>


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


                                       64
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------
                                                              2007              2006             2005
                                                          -------------    -------------    -------------
<S>                                                       <C>              <C>              <C>
Revenues
   Coal sales .........................................   $  91,942,750    $  86,830,095    $  65,258,071
   Other revenues .....................................         837,278          686,992          614,563
                                                          -------------    -------------    -------------
      Total revenues ..................................      92,780,028       87,517,087       65,872,634
                                                          -------------    -------------    -------------

Expenses
   Cost of sales (exclusive of items shown separately)       86,566,454       79,354,327       51,115,116
   Depreciation, depletion, amortization, and accretion      16,525,583       15,362,829       10,107,723
   General and administrative .........................       7,036,524        9,257,241        7,213,346
                                                          -------------    -------------    -------------
      Total operating expenses ........................     110,128,561      103,974,397       68,436,185
                                                          -------------    -------------    -------------

Operating loss ........................................     (17,348,533)     (16,457,310)      (2,563,551)
                                                          -------------    -------------    -------------

Other income (expense)
   Interest expense ...................................     (10,765,285)      (7,475,824)      (3,966,715)
   Interest income ....................................       1,297,744          791,852          129,200
   Other income (expense), net ........................       1,051,711         (279,928)        (390,105)
                                                          -------------    -------------    -------------
      Total other income (expense) ....................      (8,415,830)      (6,963,900)      (4,227,620)
                                                          -------------    -------------    -------------

Net loss ..............................................     (25,764,363)     (23,421,210)      (6,791,171)

Preferred stock dividend ..............................        (398,891)      (1,029,933)      (1,124,650)

Preferred stock deemed dividend .......................      (4,058,358)            --               --
                                                          -------------    -------------    -------------

Net loss attributable to common shareholders ..........   $ (30,221,612)   $ (24,451,143)   $  (7,915,821)
                                                          =============    =============    =============

Basic net loss per common share .......................   $       (1.46)   $       (1.59)   $       (0.58)
                                                          =============    =============    =============

Diluted net loss per common share .....................   $       (1.46)   $       (1.59)   $       (0.58)
                                                          =============    =============    =============

Weighted average common shares ........................      20,680,015       15,346,799       13,712,813
</TABLE>


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


                                       65
<PAGE>


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

<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------
                                                                          2007            2006             2005
                                                                      ------------    ------------    ------------
<S>                                                                   <C>             <C>             <C>
Cash Flows from Operating Activities
Net loss ..........................................................   $(25,764,363)   $(23,421,210)   $ (6,791,171)
Adjustments to reconcile net loss to net cash (used in) provided by
 operating activities
   Depreciation, depletion, accretion and amortization ............     16,525,583      15,362,829      10,107,723
   Amortization of deferred financing costs .......................      1,002,214         606,858         380,571
   Amortization of notes discount .................................        840,393         607,524            --
   (Gain) loss on disposal of assets ..............................     (1,122,541)         (1,346)         29,991
   Gain on settlement of asset retirement obligations .............           --           (60,425)           --
   Loss on extinguishment of debt .................................         50,719           1,187          58,380
   Loss from joint venture ........................................         41,977            --              --
Non-cash compensation
   Stock options expense ..........................................      1,002,503       2,235,224         812,733
   Related party stock option expense .............................        434,493            --              --
   Issuance of stock in lieu of payment for services ..............        531,500            --              --
Changes in operating assets and liabilities, net of acquisition:
   Decrease (increase) in accounts receivable .....................      2,376,910        (783,044)       (838,037)
   Increase in inventory ..........................................       (687,674)     (1,803,628)       (153,241)
   Increase (decrease) in prepaid and other .......................       (637,466)       (746,967)        367,024
   (Decrease) increase in accounts payable and accrued expenses ...     (2,835,804)      5,058,209       2,259,030
   Increase in deferred revenue ...................................        521,379           6,900         150,000
   Decrease in other assets .......................................         67,671            --              --
   Increase in other liabilities ..................................         55,338         192,654           6,776
   Settlement of asset retirement obligations .....................       (542,545)     (1,090,004)       (349,950)
                                                                      ------------    ------------    ------------
     Net cash flows (used in) provided by operating activities ....     (8,139,713)     (3,835,239)     (6,039,829)
                                                                      ------------    ------------    ------------

Cash Flows from Investing Activities
   Acquisition, net of cash acquired ..............................    (58,644,617)           --              --
   Investment in joint venture ....................................       (156,800)           --              --
   Capital expenditures ...........................................     (4,359,850)    (24,747,790)    (17,806,274)
   Proceeds from sales of equipment and mine development, net .....      2,550,935       8,414,560       1,265,410
   Increase in restricted cash ....................................    (10,169,032)     (9,923,728)     (2,748,398)
   Increase in prepaid royalties ..................................         (6,164)       (106,585)       (184,000)
                                                                      ------------    ------------    ------------
     Net cash flows used in investing activities ..................    (70,785,528)    (26,363,543)    (19,473,262)
                                                                      ------------    ------------    ------------

Cash Flows from Financing Activities
   Proceeds from issuance of stock ................................     35,798,647         897,018              98
   Proceeds from exercise of warrants and options .................           --         2,657,622         792,779
   Proceeds from issuance of notes ................................     60,441,077       2,623,285      70,322,343
   Proceeds from borrowings from Term Loan Credit Facility ........      2,000,000       8,000,000            --
   Repayments of notes payable ....................................     (5,518,091)     (4,039,764)    (23,388,017)
   Repayments of capital leases ...................................       (740,608)     (2,325,870)     (4,765,540)
   Payments for deferred financing costs ..........................     (3,440,707)       (504,726)     (3,339,237)
   Dividends paid .................................................       (239,458)       (362,886)     (1,057,678)
   Payment of cash to induce conversion of preferred stock ........     (1,702,153)           --              --
                                                                      ------------    ------------    ------------
     Net cash flows provided by financing activities ..............     86,598,707       6,944,679      38,564,748
                                                                      ------------    ------------    ------------

NET (DECREASE) INCREASE IN CASH ...................................      7,673,466     (23,254,103)     25,131,315
Cash and Cash Equivalents at Beginning of Year ....................      2,180,885      25,434,988         303,673
                                                                      ------------    ------------    ------------
Cash and Cash Equivalents at End of Year ..........................   $  9,854,351    $  2,180,885    $ 25,434,988
                                                                      ============    ============    ============
</TABLE>


                                       66
<PAGE>


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

<S>                                                                   <C>             <C>             <C>
Supplemental Cash Flow Information
   Cash paid during the period for interest .......................   $  9,381,725    $  6,123,336    $  2,825,233
Non-cash investing and financing:
   Preferred stock dividends converted to common stock ............        162,004          56,570          18,198
   Equipment acquired via capital lease ...........................        248,900         833,827       2,729,366
   Equipment acquired via installment purchase obligations and
     notes payable ................................................      4,914,339       1,758,404            --
   Asset retirement obligations acquired, incurred, and recosted ..         44,080         661,027            --
   Common shares issued in lieu of dividend for dividend adjustment           --            65,316            --
   Beneficial conversion feature ..................................        988,173            --            66,972
   Constructive dividends .........................................      1,368,031            --           (66,972)
   Issuance of warrants ...........................................      1,374,676            --         4,258,548
</TABLE>


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


                                       67
<PAGE>


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


<CAPTION>
                                      Preferred Stock               Common Stock          Additional
                               ---------------------------    -------------------------    Paid-in      Accumulated
                                  Shares         Amount         Shares        Amount       Capital        Deficit          Total
                               ------------   ------------   ------------  ------------  ------------   ------------   ------------
<S>                                <C>        <C>              <C>         <C>           <C>            <C>            <C>
Balance, January 1, 2005 ....      1,456.67   $       --       13,391,344  $      1,300  $ 32,361,741   $(13,762,015)  $ 18,601,026

Exercise of warrants ........         16.21           --             --            --         243,600           --          243,600
Conversion of preferred
   stock ....................       (139.44)          --          349,429            75           (75)          --             --
Conversion of preferred
   dividends ................          --             --            2,204          --          18,198           --           18,198
Beneficial conversion
   feature ..................          --             --             --            --          66,972           --           66,972
Constructive dividend .......          --             --             --            --         (66,972)          --          (66,972)
Preferred stock dividends ...          --             --             --            --      (1,057,678)          --       (1,057,678)
Exercise of employee
   options ..................          --             --          234,240            23       531,055           --          531,078
Employee option expense .....          --             --             --            --         812,733           --          812,733
Issuance of warrants ........          --             --             --            --       4,258,548           --        4,258,548
Net loss ....................          --             --             --            --            --       (6,791,171)    (6,791,171)
                               ------------   ------------   ------------  ------------  ------------   ------------   ------------
Balance, December 31, 2005 ..      1,333.44   $       --       13,977,217  $      1,398  $ 37,168,122   $(20,553,186)  $ 16,616,334

Exercise of warrants ........          --             --          152,500            15     1,006,486           --        1,006,501
Conversion of preferred
   stock ....................       (550.90)          --        1,376,701           138          (138)          --             --
Conversion of preferred
   dividends ................          --             --            9,427             1        56,569           --           56,570
Common shares issued for
   dividend adjustment ......          --             --           10,886             1        65,315           --           65,316
Preferred stock dividends ...          --             --             --            --      (1,029,933)          --       (1,029,933)
Exercise of employee
   options ..................          --             --          712,510            71     1,651,050           --        1,651,121
Employee option expense .....          --             --             --            --       2,235,224           --        2,235,224
Common stock issued for
   cash .....................          --             --          101,503            10       897,008           --          897,018
Net loss ....................          --             --             --            --            --      (23,421,210)   (23,421,210)
                               ------------   ------------   ------------  ------------  ------------   ------------   ------------
Balance, December 31, 2006 ..        782.54   $       --       16,340,744  $      1,634  $ 42,049,703   $(43,974,396)  $ (1,923,059)

Issuance of warrants ........          --             --             --            --       1,374,676           --        1,374,676
Conversion of preferred
   stock ....................       (426.10)          --        1,096,634           110          (110)          --             --
Conversion of preferred
   dividends ................          --             --           27,487             3       162,001           --          162,004
Common shares issued as
   inducement ...............          --             --          431,258            44     1,367,987     (1,368,031)          --
Cash inducement for
   preferred conversion .....          --             --             --            --            --       (1,702,154)    (1,702,154)
Beneficial contingent
   conversion ...............          --             --             --            --         988,173       (988,173)          --
Common stock issued for
   services .................          --             --          177,000            18       531,482           --          531,500
Preferred stock dividends ...          --             --             --            --        (398,891)          --         (398,891)
Employee option expense .....          --             --             --            --       1,436,996           --        1,436,996
Common stock issued for
   cash .....................          --             --        9,625,669           961    35,797,686           --       35,798,647
Net loss ....................          --             --             --            --            --      (25,764,363)   (25,764,363)
                               ------------   ------------   ------------  ------------  ------------   ------------   ------------
Balance, December 31, 2007 ..        356.44   $       --       27,698,792  $      2,770  $ 83,309,703   $(73,797,117)  $  9,515,356
                               ============   ============   ============  ============  ============   ============   ============
</TABLE>


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


                                       68
<PAGE>


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

1.       BUSINESS OVERVIEW

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

         The Company owns the coal mineral rights to  approximately  sixty-seven
thousand  three  hundred  (65,000)  acres  of land  and  leases  the  rights  to
approximately   forty-five  thousand  four  hundred  (42,000)  additional  acres
including the rights to approximately  27,000 acres at the Company's  operations
in  Southeast  Kentucky  which were sold on March 31,  2008.  As of December 31,
2007, active mining complexes include two underground  mines, six surface mines,
and two highwall mines. Active support facilities include two preparation plants
and two train loading facilities.

         At December  31,  2007,  the Company had cash and cash  equivalents  of
approximately  $9.9 million,  negative  working  capital of  approximately  $6.1
million, and cash flows used in operations of approximately $8.1 million for the
year then  ended.  Operations  have not  generated  positive  cash flows and the
ability to do so during 2008 is not assured.  In order to fund general operating
and working  capital needs during 2007 and into 2008,  the Company  raised funds
through the sale of three million shares of common stock at February 28, 2007 at
$4.65 per share for a total of $13.95 million, 200,000 shares of common stock at
October  19,  2007 at $3.00 per share for a total of  $600,000,  and two million
shares of common  stock at December  28, 2007 at an average  price of $4.005 per
share for a total of $8.01 million.  The Company also sold 3.9 million shares of
common  stock on  October  19,  2007 for  $11.6  million  which  was used in the
acquisition of Mann Steel Products, Inc.

         At December  31,  2007,  the Company had  shareholders'  equity of $9.5
million and  incurred net losses of $25.8  million  (excluding  preferred  stock
dividends)  for the year then ended.  Management  expects  that the Company will
continue to incur net losses into the  foreseeable  future  which will  decrease
shareholders'  equity and may lead to an  eventual  shareholders'  deficit.  The
Company was in a shareholders'  deficit  position at December 31, 2006 and again
at September 30, 2007.

         The Company  invested  $10.8 million in equipment and mine  development
during the year ended December 31, 2007 including $5.2 million purchased through
equipment financing arrangements and capital leases.  Management intends to make
approximately  $16  million  of  capital  expenditures  during  2008  to  expand
operations  and an additional  approximately  $1.2 million to maintain  existing
assets.  There  are no  assurances  that  the  Company  will be  able to  obtain
financing for planned capital expenditures.

         The Company's operating plan for 2008 includes cash receipts from sales
committed  under  contracts or open purchase order  arrangements  with long time
customers and the release of restricted cash from the March 31, 2008 sale of our
Southeast  Kentucky  properties  adequate to cover all planned  commitments.  In
early  2008,  management  successfully  renegotiated  an  existing  coal  supply
agreement  resulting  in an  increased  selling  price  per ton,  pending  final
approval.  Management is presently in discussions  with other customers on other
coal supply  agreements and intends to pursue other  opportunities as they arise
during 2008.  However,  if the Company is unable to execute its  operating  plan
successfully,  it may not be able to meet its  liquidity  requirements  and will
need to raise additional cash or discontinue  operations at some facilities.  On
March 31,  2008,  the Company  repaid its $10 million  credit  agreement  with a
portion  of the  proceeds  from  the  sale  of its  Straight  Creek  properties.
Management  intends to pursue a $10 million revolver type credit facility in the
second calendar quarter of 2008 to provide additional working capital as needed.
There are no


                                       69
<PAGE>


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

assurances  that efforts to raise  additional  cash would be  successful or that
discontinued operations would generate adequate savings to meet obligations.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

         The accompanying consolidated financial statements include the accounts
of National Coal Corp. and those of its two wholly-owned operating subsidiaries,
National  Coal  Corporation  and NCC  Corp.  and their  respective  wholly-owned
subsidiaries, NC Railroad, Inc. and National Coal of Alabama, Inc. NCC Corp. was
created and National Coal of Alabama,  formerly Mann Steel  Products,  Inc., was
acquired on October 19, 2007 and thus,  only  operations  and cash flows for the
period  from  October  20  through  December  31,  2007  are  reflected  in  the
consolidated  financial statements.  All intercompany  transactions and balances
have been eliminated in consolidation. Investments in business entities in which
National  Coal Corp.  and its  subsidiaries  do not have  control,  but have the
ability to exercise  significant  influence  over the  operating  and  financial
policies, are accounted for under the equity method.

         National   Coal  Corp.   and  National  Coal   Corporation   fully  and
unconditionally  guarantee  the 10.5% Notes due 2010 and the  Guggenheim  Credit
Facility, however, they do not guarantee the 12% Notes due 2012 held by National
Coal of Alabama,  Inc. National Coal of Alabama, Inc. and its direct parent, NCC
Corp., fully and unconditionally guarantee the 12% Notes due 2012, however, they
do not guarantee the 10.5% Notes due 2010 or the Guggenheim Credit Facility. See
further discussion in Note 8, DEBT AND FINANCING ARRANGEMENTS.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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

INVENTORY

         Inventory  includes  mined coal  available  for delivery to  customers,
mined  coal which has not yet been  processed  through a wash  plant,  purchased
coal, and tires. Mined coal inventory is valued at the


                                       70
<PAGE>


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

lower of  average  cost or net  realizable  value.  Mined coal  inventory  costs
include labor,  fuel,  equipment  costs, and operating  overhead.  Mined coal is
classified  as inventory at the point it is extracted.  Tires are  classified as
inventory  when  purchased.  Purchased  coal inventory is valued at the lower of
cost or net realizable value.

PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

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

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

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

         During the second quarter of 2007, the Company adopted a new accounting
policy  requiring the  capitalization  of the cost of building  ponds as part of
mine  development  cost.  This new  policy  resulted  in the  capitalization  of
approximately $670,000 of costs associated with the construction of ponds during
2007. Pond construction costs in 2006 and 2005 were not material.

         Exclusive  of  the  approximately   $55,838,000  of  property,   plant,
equipment  and  mine  development,  net  we  had  as of  December  31,  2006  is
approximately  $641,000 of mining equipment  classified as assets held for sale.
This  equipment was sold in January 2007 for a small gain.  Assets with carrying
amounts of approximately $10,012,000 were temporarily idle at December 31, 2007.

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

DEFERRED FINANCING COSTS

         The Company had deferred  financing  costs of $6,669,703 and $2,856,534
at December 31, 2007 and 2006, respectively.  Deferred financing costs represent
capitalized  expenses  associated with the issuance of debt.  Deferred financing
costs are amortized by the interest method over the life of the associated debt.
The Company  recorded  approximately  $1,002,000  and  $607,000 of  amortization
related to deferred financing costs in 2007 and 2006, respectively.


                                       71
<PAGE>


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

         The Company expects to amortize deferred  financing costs over the next
five years as follows:

                           YEAR                AMORTIZATION
                           ----                ------------

                           2008                $  2,401,402
                           2009                   1,232,940
                           2010                   1,353,195
                           2011                     865,568
                           2012                     816,598
                                               ------------
                                               $  6,669,703
                                               ============

RESTRICTED CASH

Restricted  cash,  including  accrued  interest  thereon,  at December 31, is as
follows:

                                                         2007           2006
                                                     -----------     -----------
Cash collateral securing an
  operating lease ..............................     $ 1,363,562     $ 1,288,883
12% senior notes debt service reserve ..........       3,600,000            --
Cash on deposit with the Office of
  Surface Mining of the U.S. Department
  of the Interior (the "OSM") ..................         257,500         257,500
Certificates of deposit and money
  market accounts securing letters of
  credit and surety bonds in favor of
  the OSM and state mining commissions .........      21,143,784      14,438,529
Cash on deposit with Company's workers
  compensation administrator ...................         631,588         779,559
Employee escrow ................................       1,533,733            --
Utility deposits and performance bonds .........         585,216         482,280
                                                     -----------     -----------
Restricted Cash ................................     $29,115,383     $17,246,751
                                                     ===========     ===========


INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

         The Company has one investment in common stock in which the investee is
not  consolidated.  At December 31, 2007, the Company,  through its  subsidiary,
National Coal of Alabama,  held an investment  totaling  approximately  $115,000
representing a 49% interest in Powhatan Dock, LLC which operates a barge loadout
in Alabama. The Company accounts for its investment in Powhatan using the equity
method.

PREPAID MINING ROYALTIES

         Certain  coal  leases  require  minimum or advance  payments  which are
deferred  and  charged to cost of sales as coal is  extracted.  The  Company had
prepaid  royalties of approximately  $935,000 and $331,000 at December 31, 2007,
and 2006, respectively, included in other non-current assets.

RECLAMATION AND ASSET RETIREMENT OBLIGATIONS

         The  Surface  Mining  Control and  Reclamation  Act of 1977 and similar
state  statutes  require  mine  properties  to be  restored in  accordance  with
specified standards.  Statement of Financial Accounting Standards No. 143 ("SFAS
No. 143") requires  recognition of an asset  retirement  obligation  ("ARO") for
eventual  reclamation  of  disturbed  acreage  remaining  after  mining has been
completed. The Company


                                       72
<PAGE>


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

records its reclamation obligations based upon permit requirements as determined
by the OSM. A liability is recorded for the  estimated  future cost that a third
party  would  incur  to  perform  the  required  reclamation  and  mine  closure
discounted  at the Company's  credit-adjusted  risk-free  rate. A  corresponding
increase  in the  asset  carrying  value  of coal  and  mineral  rights  is also
recorded. The ARO asset is amortized on the units-of-production  method over the
estimated recoverable reserves and the ARO liability is accreted to the expected
reclamation date at the Company's credit-adjusted risk-free rate. These expenses
are included in  depreciation,  depletion,  amortization,  and  accretion in the
operating expenses section of the income statement.

STOCK-BASED COMPENSATION

         The Company's 2004 Option Plan (the "Plan") was authorized by the Board
of Directors of the Company in March 2004,  and amended in January  2005.  Under
the terms of the Plan,  stock  options  may be granted to  officers,  directors,
employees,  and others.  At December 31, 2007,  4,450,000 shares of common stock
were  authorized  for  issuance  under the Plan.  Shares  subject to awards that
expire  unexercised  or are  otherwise  terminated,  again become  available for
awards.  Upon exercise,  stock is issued from unissued or treasury  shares.  The
grant price of an option under the Plan  generally may not be less than the fair
market  value of the common  stock  subject to such option on the date of grant.
Options have a maximum life of ten years and generally  vest 25% per year over a
four year period.

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

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


                                       73
<PAGE>


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

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

                                                                      2005
                                                                  -------------
Net loss attributable to common
  shareholders, as reported .............................         $  (7,915,821)
Add: Stock-based compensation
  expense recognized under the
  intrinsic method ......................................               812,733
Deduct: Total stock-based
  compensation expense for stock
  options determined under the
  Black-Scholes option pricing model ....................            (1,564,371)
                                                                  -------------
Pro forma net loss ......................................         $  (8,667,459)
                                                                  =============
Loss per share:
Basic - as reported .....................................         $       (0.58)
Basic - pro forma .......................................         $       (0.63)
Diluted - as reported ...................................         $       (0.58)
Diluted - pro forma .....................................         $       (0.63)

WORKERS' COMPENSATION

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

REVENUE RECOGNITION

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

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

FREIGHT REVENUE AND COSTS

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

INCOME TAXES

         The Company  recognizes  deferred  tax assets and  liabilities  for the
future tax consequences


                                       74
<PAGE>


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

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

COMPREHENSIVE LOSS

         The  Company's  comprehensive  losses  as  defined  by  SFAS  No.  130,
REPORTING COMPREHENSIVE INCOME, are the same as the net losses reported.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June  2006,  the FASB  issued  Interpretation  No.  48  ("FIN  48"),
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT
NO. 109. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to  be  taken  in  a  tax  return.   It  also  provides   guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosure  and  transition.  FIN 48 is  effective  for  fiscal  years
beginning after December 15, 2006. The Company adopted FIN 48 effective  January
1, 2007.  Adoption  has not had a  material  impact on the  Company's  financial
position and results of operations.

         In September  2006, the FASB issued  Statement of Financial  Accounting
Standards No. 157, FAIR VALUE  MEASUREMENTS  ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about  fair  value  measurements.   SFAS  157  applies  under  other  accounting
pronouncements  that  require  or permit  fair value  measurements.  SFAS 157 is
effective  prospectively  for fiscal years beginning after November 15, 2007 and
interim  periods within that fiscal year. In February 2008, the FASB issued FASB
Staff Position FAS 157-2,  EFFECTIVE DATE OF FASB STATEMENT NO. 157, referred to
as FSP 157-2.  FSP 157-2 delays the effective  date of SFAS 157 for one year for
all  nonfinancial  assets and  nonfinancial  liabilities  that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
Company is still analyzing SFAS 157 to determine the impact of adoption.

      In  February  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL  LIABILITIES -- INCLUDING
AN AMENDMENT OF FASB STATEMENT NO. 115 ("Statement No. 159").  Statement No. 159
permits  entities to choose to measure many  financial  instruments  and certain
other items at fair value.  The objective is to improve  financial  reporting by
providing  entities  with the  opportunity  to mitigate  volatility  in reported
earnings caused by measuring related assets and liabilities  differently without
having to apply  complex  hedge  accounting  provisions.  Statement  No.  159 is
effective  prospectively for fiscal years beginning after November 15, 2007. The
Company does not expect  adoption of Statement No. 159 to have a material impact
on the Company's financial position or results of operations.

         In December  2007,  the FASB issued  Statement of Financial  Accounting
Standards No. 141R, BUSINESS  COMBINATIONS ("SFAS 141R") which becomes effective
December  15,  2008.  SFAS 141R  establishes  principles  and  requirements  for
determining how an enterprise  recognizes and measures the fair value of certain
assets  and   liabilities   acquired  in  a  business   combination,   including
non-controlling  interests,  contingent  consideration,   and  certain  acquired
contingencies.  SFAS 141R also requires acquisition-related transaction expenses
and  restructuring  costs be expensed as incurred  rather than  capitalized as a
component of the business combination.  The Company expects that SFAS 141R could
have an impact on accounting  for any  businesses  acquired  after the effective
date of this pronouncement..


                                       75
<PAGE>


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

         In  December  2007,  the FASB  issued  SFAS No.  160,  "Non-controlling
Interests  in  Consolidated  Financial  Statements-An  Amendment  of ARB No. 51"
("SFAS 160").  SFAS 160 establishes  accounting and reporting  standards for the
non-controlling  interest in a  subsidiary  (previously  referred to as minority
interests).  SFAS 160 would have an impact on the presentation and disclosure of
the non-controlling interests of any non wholly-owned businesses acquired in the
future. SFAS 160 will be effective for fiscal years beginning after December 15,
2008; earlier adoption is prohibited. The Company is still analyzing SFAS 160 to
determine the impact of adoption.

3.       ACQUISITION OF MANN STEEL PRODUCTS, INC.

         On June 18, 2007, the Company entered into a certain Purchase Agreement
(the "Purchase Agreement") with Mann Steel Products,  Inc. ("Mann Steel"), Frank
C. Mann, II and William T. Mann (collectively the "Sellers"),  pursuant to which
the Company  agreed to purchase from the Sellers all of the  outstanding  equity
interests of Mann Steel for a purchase  price of $55  million.  Mann Steel mines
coal from surface mines on several properties in the State of Alabama.

         The Purchase  Agreement was amended on two occasions.  The Amendment to
the  Purchase  Agreement  dated August 22, 2007 (the "First  Amendment"),  among
other things,  postponed  (I) until August 27, 2007 the date on which  obtaining
the  approval  of the  Company's  board of  directors  for the  acquisition  and
completion of a due diligence  review of Mann Steel would cease to be conditions
to the Company's obligations to consummate the transaction, (ii) until September
10, 2007 the date on which  completion  of lenders' due  diligence  review would
cease  to  be a  condition  to  the  Company's  obligations  to  consummate  the
transaction,  and (iii) until  October 15, 2007 the date on which  either  party
could  terminate  the  Purchase  Agreement in the event that the closing had not
occurred prior to that date.

         The  Purchase  Agreement  was  further  amended  on October  15,  2007.
Pursuant to the  Assignment  and Second  Amendment  dated  October 15, 2007 (the
"Assignment and Second Amendment"),  the Company assigned all of it's rights and
obligations  under the  Purchase  Agreement  and all related  agreements  to NCC
Corp., an Alabama corporation and the Company's  wholly-owned  subsidiary formed
specifically  to acquire Mann Steel.  The Assignment  and Second  Amendment also
amended the Purchase Agreement to provide for the deduction from the $55,000,000
purchase  price of (i)  $1,900,000 to be placed in escrow for payment to certain
key  employees  of Mann Steel and (ii) the total  amount on the closing  date of
Mann Steel's  indebtedness to certain parties.  In addition,  the Assignment and
Second Amendment postponed until October 17, 2007 the date on which either party
could  terminate  the  Purchase  Agreement in the event that the closing had not
occurred prior to that date.

         On  October  19,  2007,   NCC  Corp.   consummated   the   transactions
contemplated under the Purchase Agreement. At the closing NCC Corp. acquired all
of the  outstanding  stock of Mann  Steel  for an  aggregate  purchase  price of
$55,000,000  less (i)  $1,900,000  placed in escrow for  payment to certain  key
employees of Mann Steel (or otherwise returned to sellers),  and (ii) $7,406,745
for  repayment  of certain  indebtedness  of Mann Steel that existed at closing.
Mann Steel became a wholly-owned subsidiary of NCC Corp. and changed its name to
National Coal of Alabama, Inc.

         The Purchase  Agreement  required a working  capital  adjustment to the
purchase  price after closing (the "Working  Capital  Adjustment").  The Working
Capital  Adjustment  required  that a  determination  be  made  by the  Seller's
accounting  firm as to the value of working  capital,  or current  assets  minus
current  liabilities,  at the  closing  date,  and  that the  purchase  price be
increased  to the extent  working  capital  exceeded  zero,  or decreased to the
extent working  capital was less than zero. As a result of this  provision,  NCA
paid  $3,281,313 to the Sellers on December 19, 2007.  Total cash  consideration
was $58,660,706 which includes acquisition costs of $379,393.


                                       76
<PAGE>


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

         On October 19, 2007, the Company completed  approximately $11.6 million
in private  placements  through the issuance of  3,866,968  shares of our common
stock  at a per  share  price  of  $3.00.  See  Note  11,  STOCKHOLDERS'  EQUITY
(DEFICIT). The Company used the proceeds of the private placements to capitalize
NCC Corp.  which was then used to pay a  portion  of the  purchase  price to the
Sellers of Mann Steel.

         On October 19, 2007, the Company  capitalized NCC Corp. in part through
the issuance of a warrant dated October 19, 2007 to purchase  250,000  shares of
our common  stock at a per share price of $4.00 and a term  expiring on December
31, 2010. See Note 11, STOCKHOLDERS' EQUITY (DEFICIT).

         On  October  19,  2007,  the  Company's  newly  acquired,  wholly-owned
subsidiary,  National Coal of Alabama, Inc. (formerly Mann Steel Products, Inc.)
completed  $60  million in private  placements  through  the  issuance of Senior
Secured  Notes.  See Note 8, DEBT AND FINANCING  ARRANGEMENTS.  National Coal of
Alabama used the proceeds from the Debt Financing to make a distribution  to NCC
Corp.,  its sole  shareholder,  to enable NCC Corp. to pay the purchase price to
the Sellers of Mann Steel,  to repay  indebtedness  of National  Coal of Alabama
existing on the closing date of the acquisition,  to provide for costs and fees,
other cash needs of National  Coal of Alabama and for  general  working  capital
purposes.

         The following  table  summarizes the final  purchase  price  allocation
based on the fair values of the assets acquired and  liabilities  assumed at the
date of acquisition:

DESCRIPTION                                                            AMOUNT
-----------                                                        ------------

Cash .....................................................         $     16,089
Restricted cash ..........................................            1,900,000
Accounts receivable ......................................            7,451,177
Inventory ................................................               36,684
Other current assets .....................................              447,115
Property, plant and equipment ............................           21,646,622
Mineral properties, leases and permits ...................           38,002,443
Other long-term assets ...................................              748,760
Accounts payable .........................................           (3,616,470)
Reclamation obligations ..................................           (2,720,249)
Deferred tax liability, net ..............................           (3,351,465)
Other liabilities ........................................           (1,900,000)
                                                                   ------------
Total fair value of assets acquired and
  liabilities assumed ....................................         $ 58,660,706
                                                                   ============


         Cash, restricted cash, accounts receivable, other current assets, other
long-term  assets,  and  accounts  payable  were stated at  historical  carrying
values.  Given the  short-term  nature of these assets and  liabilities,  it was
determined  that  these  historical  carrying  values  approximate  fair  value.
Deferred income taxes have been provided in the Consolidated Balance Sheet based
on the  Company's  estimated  tax versus book basis of the assets  acquired  and
liabilities  assumed,  as adjusted to estimated fair values.  Inventory,  mining
equipment,  leased mineral rights,  and asset  retirement  obligations have been
recorded  at  estimated  fair  value  based  on work  performed  by  independent
valuation  specialists as of the date of the acquisition.  Certain judgments and
estimates by the Company  regarding future cash flows from individual mine sites
and other  plans were  integral to the  valuations  performed  by the  valuation
specialists.

         The  allocation of the purchase  price to the fair values of the assets
acquired and liabilities  assumed of Mann Steel resulted in negative goodwill of
$6,600,938.  In accordance with Statement of Financial  Accounting Standards No.
141, ACCOUNTING FOR BUSINESS COMBINATIONS,  the excess goodwill was allocated as
a pro rate reduction of the amounts  assigned to the assets  acquired  excluding
financial


                                       77
<PAGE>


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

assets,  deferred  taxes and all other  current  assets.  This  resulted  in the
following allocation of excess goodwill:

DESCRIPTION                                                            AMOUNT
                                                                    -----------
Mining Equipment ..........................................         $(2,395,478)
Mineral properties, leases and permits ....................          (4,205,460)
                                                                    -----------

Excess goodwill ...........................................         $(6,600,938)
                                                                    ===========


         From  October  19 through  April 9, 2008,  the  Company  evaluated  the
purchase price  allocation and recorded  purchase  accounting  adjustments  that
increased  the fair value of total assets  acquired and  liabilities  assumed by
$3,281,313 primarily due to the settlement of the Working Capital Adjustment for
that amount. The Company will continue to evaluate the purchase price allocation
as  information  becomes  available and record  adjustments to the fair value of
assets  acquired and  liabilities  assumed as required by Statement of Financial
Accounting  Standards No. 141.  Finalization  of the purchase  price  allocation
could impact amounts allocated to amortizable assets and, thereby, impact future
earnings.

         The following  summarized  unaudited  consolidated pro forma results of
operations, assuming the Mann Steel acquisition occurred on January 1, 2006, are
as follows (in $000's):

                                                          2007           2006
                                                       ---------      ---------
Revenues .........................................     $ 146,573      $ 142,741
Operating loss ...................................        (9,797)        (2,490)
Net loss .........................................       (18,434)       (12,364)
Net loss available to common stockholders ........       (22,891)       (12,364)
Basic earnings per share .........................     $   (1.11)     $   (1.56)
Diluted earnings per share .......................     $   (1.11)     $   (1.56)

4.       INVENTORY

         Inventory at December 31 is as follows:

                                                   2007                  2006
                                                ----------            ----------
Coal ...............................            $2,830,926            $2,014,710
Tires ..............................               115,175               207,032
                                                ----------            ----------
   Inventory .......................            $2,946,101            $2,221,742
                                                ==========            ==========


                                       78
<PAGE>


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

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

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

                                                     2007             2006
                                                 -------------    -------------
Furniture and office equipment ...............   $     468,178    $     345,554
Mining equipment and vehicles ................      77,625,779       48,864,201
Land and buildings ...........................       6,764,479        6,674,027
Mineral rights ...............................      48,487,494       11,911,309
Mine development .............................      12,955,114       10,003,328
Construction in progress .....................       1,268,512          854,399
                                                 -------------    -------------
Total property, plant, equipment
  and mine development .......................     147,569,556       78,652,818
Less accumulated depreciation,
  depletion and amortization .................     (38,688,957)     (22,815,191)
                                                 -------------    -------------
Property, plant, equipment and mine
  development, net ...........................   $ 108,880,599    $  55,837,627
                                                 =============    =============


         Mining equipment includes  approximately $593,000 and $869,000 of gross
assets under capital leases at December 31, 2007 and 2006, respectively.

         Buildings  include  interest  of $252,867  capitalized  during the year
ended December 31, 2006. No construction interest was capitalized in 2007.

         Depreciation  expense,  which  includes  amortization  of assets  under
capital leases, was approximately $12,788,128,  $13,889,816,  and $9,009,054 for
the years ended  December  31, 2007,  2006,  and 2005,  respectively.  Depletion
expense related to mineral rights and amortization of mine development costs was
$2,509,230,  $997,949, and $750,998 for the years ended December 31, 2007, 2006,
and 2005, respectively.

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

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

         At  maturity,  the Company has the option of  purchasing  the  highwall
miner or extending  the lease for an additional  twelve month term,  both at the
then fair  market  value,  or  allowing  the lease to expire,  at which time the
Company would be responsible for the expense of transporting  the highwall miner
to a lessor designated location within the Continental United States.


                                       79
<PAGE>


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

         On November 12, 2007, the Company  received $2 million from the sale of
certain  real  property  and  mineral  leases at Pine  Mountain,  an idle mining
complex  located in Kentucky,  and an additional $1 million from the sale to the
same  purchaser of an option  entitling it to purchase for $10.00 the remaining,
additional  properties  at  Pine  Mountain.  The  Company  recognized  a gain of
approximately $745,000 on the sale.

         On March 31, 2008, the Company's wholly-owned subsidiary, National Coal
Corporation,  completed the sale of the real and personal  property  assets that
comprise  our  Straight  Creek  mining  operations  in Bell,  Leslie  and Harlan
Counties,  Kentucky to Xinergy  Corp.  ("Xinergy")  for  $11,000,000  in cash in
accordance  with the terms and conditions of a Purchase  Agreement  entered into
among the parties on February 8, 2008 (the "Purchase Agreement"). In addition to
the receipt of the purchase price for the assets,  the transaction also resulted
in the return of approximately $7,400,000 in cash that was previously pledged to
secure  reclamation  bonds and other  liabilities  associated  with the Straight
Creek  operation,  and  relieved  the  Company of  approximately  $3,600,000  in
reclamation liabilities,  and approximately $2,700,000 of equipment related debt
which were assumed by Xinergy in the transaction.

         The  Company  used  a  portion  of  the  sale  proceeds  to  repay  the
$10,000,000  senior secured credit  agreement  entered into in October 2006 with
Guggenheim Corporate Funding,  LLC, as administrative  agent, which indebtedness
otherwise would have matured in December 2008.

         Xinergy  Corp.  was  founded  and is  controlled  by Jon Nix,  who is a
founder,  significant  stockholder,  and former officer and director of National
Coal.  Mr. Nix served as a director of National  Coal Corp.  from  January  2003
until July 2007,  and as  Chairman of the Board from March 2004 until July 2007.
Mr. Nix also served as the Company's  President and Chief Executive Officer from
January  2003  until  August  2006.  He is married  to the  stepdaughter  of the
Company's  General Counsel,  Charles Kite. As of April 2, 2008, based on reports
Mr.  Nix has  filed  with  the  Securities  and  Exchange  Commission,  Mr.  Nix
beneficially owned 3,626,138 shares of the Company's common stock,  representing
approximately 14% of the outstanding common stock as of such date.

         The major  categories  of assets and  liabilities  associated  with the
Straight Creek mining  property are recorded on the balance sheet as of December
31, 2007 as follows:

BALANCE SHEET CAPTION                                                 AMOUNT
-------------------------------------------------------------      ------------
Inventory ...................................................      $    642,733
Property, Plant, Equipment and Mineral rights, net ..........        17,010,089
Restricted Cash (to be retained by Company) .................         6,097,244
Installment Sales Contracts .................................        (2,786,959)
Reclamation Obligations .....................................        (3,428,724)


         Xinergy  Corp.  was founded and is  controlled  by Jon E. Nix, who is a
founder,  significant  stockholder,  and  former  officer  and  director  of the
Company.


                                       80
<PAGE>


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

6.       OTHER NONCURRENT ASSETS

         Other noncurrent assets at December 31 are as follows:

                                                       2007              2006
                                                    ----------        ----------
Prepaid royalties ..........................        $  935,168        $  330,705
Notes receivable ...........................              --              96,811
Investment in joint venture ................           114,823              --
                                                    ----------        ----------
Total other noncurrent assets ..............        $1,049,991        $  427,516
                                                    ==========        ==========


7.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                                         2007           2006
                                                      -----------    -----------
Accounts payable .................................    $10,579,615    $ 9,944,033
Accrued payroll and related taxes ................        528,868        189,753
Accrued interest .................................        326,979        379,581
Accrued insurance premiums .......................        229,229        310,726
Accrued dividends ................................        114,216        548,480
Royalty obligations ..............................        774,887        464,987
Accrued federal, state and local taxes ...........        205,799        143,935
                                                      -----------    -----------
 Total accounts payable and accrued expenses .....    $12,759,593    $11,981,495
                                                      ===========    ===========


8.       DEBT AND FINANCING ARRANGEMENTS

              EQUIPMENT NOTES

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

              10.5% SENIOR SECURED NOTES DUE 2010

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


                                       81
<PAGE>


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

reclamation  bonds,  and $19.7 million to purchase  other  equipment,  refurbish
preparation facilities and rail load-outs, and provide working capital.

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

         In connection with the December 29, 2005 issuance of notes, the Company
entered  into a separate  registration  rights  agreement  with the  purchasers.
Pursuant to the separate  registration  rights agreement,  the Company agreed to
file an exchange  offer  registration  statement  registering  the resale by the
purchasers of all of the notes and attached  warrants.  Pursuant to the separate
registration  rights  agreement,  the Company filed two registration  statements
with the  Securities  and Exchange  Commission in May 2006,  which were declared
effective on July 28, 2006.  On September  5, 2006,  the Company  exchanged  $51
million of the total $55 million  10.5%  Senior  Secured  Notes due 2010 for $51
million in new Notes,  dated August 31, 2006,  which are  registered  for resale
with the  Securities  and  Exchange  Commission.  The new Notes are issued under
substantially the same terms as the old Notes.

         On February 22, 2008, the Company entered into a letter  agreement with
Neuberger Berman,  LLC, in its capacity as the  representative of certain of its
clients who hold 10.5% Notes due 2010.  Pursuant to the exchange  agreement  the
Company  agreed to  exchange  a minimum of $2.0  million  and a maximum of $10.0
million in principal  amount of the holders'  notes for shares of the  Company's
common  stock.  The  number of shares of  common  stock to be  delivered  to the
holders upon an exchange would equal (x) the principal amount of each respective
Note exchanged multiplied by 0.82, plus the accrued but unpaid interest, divided
by (y) $4.85,  which price  represents a 5.0%  discount to the closing price the
Company's  common  stock on  February  19,  2008,  the day the  Company  reached
agreement with the holders of the notes.

         On February 28, 2008, the  representative  elected to exchange notes in
the aggregate  principal  amount of $3 million plus accrued  interest thereon of
$63,875,  for 520,387  shares of the Company's  common  stock,  and the exchange
agreement thereafter expired on March 22, 2008.

         TERM LOAN CREDIT FACILITY

         On October 12, 2006, the Company's  wholly-owned  subsidiary,  National
Coal  Corporation,  entered into a Term Loan Credit  Facility  that provides for
borrowings  of $10.0  million with  Guggenheim  Corporate  Funding,  LLC to fund
general  operating and working capital needs (the "Term Loan Credit  Facility").
The Company  borrowed  $8.0 million in 2006 and $2.0 million in March 2007.  The
Company's  obligations under the credit facility are secured by a first priority
senior lien on substantially all of the Company's assets.

         Initially,  the credit  agreement  provided  that all amounts under the
facility  would be due and  payable in March 2010 and would bear  interest  at a
rate equal to, at the Company's option, the Eurodollar


                                       82
<PAGE>


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

Rate plus 3.5% or the Base Rate (which  approximates  the prime rate) plus 2.5%.
The term loan credit  facility also  contained  financial  covenants and default
provisions  including  that the Company  maintain  minimum  levels of EBITDA and
liquidity,  maintain  minimum  interest  coverage  ratios,  not  exceed  maximum
leverage  ratios,  and that it limit certain future  categories of  transactions
such as the incurrence of additional indebtedness and the sale of assets.

         In March  2007,  Guggenheim  agreed to amend the credit  agreement  and
reset the financial covenants, as a result of which the applicable margin on the
credit  facility was increased by 1.0%. At June 30, 2007, the Company was not in
compliance with certain  financial  covenants under the credit  agreement and on
August 15, 2007,  Guggenheim  agreed to a further  amendment under which (1) the
maturity  date was changed to  December  31,  2008,  (2) the  interest  rate was
changed to 12%, (3) fees equal to 5% of all balances outstanding at December 31,
2007 and 10% of all amounts  outstanding at June 30, 2008 were provided for, (4)
the EBITDA  financial  covenant was reset,  and (5)  prepayment  penalties  were
eliminated.

         On October 19, 2007, the lenders party to the credit agreement assigned
to  Steelhead  Offshore  Capital,  LP, Big Bend 38  Investments,  L.P.,  and J-K
Navigator  Fund,  L.P.,  the Company's  outstanding  obligations  to repay funds
loaned  to  the  Company  pursuant  to the  credit  agreement  in the  aggregate
principal  amount of  $10,000,000  and, to the extent  permitted  to be assigned
under applicable law, all claims, suits, causes of action and any other right of
the lenders  against any person  arising under or in connection  with the credit
agreement.   Guggenheim  remained  as  Administrative  Agent  under  the  credit
agreement.

         On October 19, 2007, the parties to the credit agreement entered into a
Waiver and Amendment No. 3 (the "Waiver and Amendment") to the credit agreement,
pursuant to which the parties  agreed to waive and amend  certain  provisions of
the credit agreement. Pursuant to the Waiver and Amendment,  Guggenheim and each
lender waived  certain fees related to amounts  outstanding  under the term loan
facility as of December 31, 2007, the Company's  compliance with certain minimum
consolidated  EBITDA  requirements  for the fiscal quarters ending September 30,
2007 and December 31,  2007,  and the  registration  and  processing  fee due to
Guggenheim solely with respect to the assignment and acceptance of the Company's
outstanding   obligations  to  Steelhead  Offshore  Capital,  LP,  Big  Bend  38
Investments,  L.P., and J-K Navigator  Fund,  L.P. The Waiver and Amendment also
amended  various  restrictive  covenants  in  the  credit  agreement,  including
covenants  to permit the Company to  consummate  the  acquisition  of Mann Steel
Products, Inc. and incur the debt financing for such acquisition.  Fees equal to
10% of all amounts  outstanding  under the credit  agreement  at June 30,  2008,
provided for in the second amendment dated August 15, 2007, remain in place. The
Company did not accrued any amounts relative to these fees as management did not
believe it probable  that the  Company  would be required to pay the fees due to
its belief that the term loan credit agreement would be refinanced prior to June
30, 2008.

         On October 19, 2007,  the parties to the credit  agreement also entered
into a letter agreement (the "Lender Fee Letter")  pursuant to which the Company
agreed,  at its election and as  compensation  for the Waiver and  Amendment and
assignment  agreements,  (i) to issue warrants (the "Refinance Fee Warrants") on
or before June 30, 2008 to purchase up to 750,000 shares of the Company's common
stock at an exercise  price of $3.00 per share with a term through  December 31,
2011 or (ii) make a cash  payment  on or before  October  17,  2008 in an amount
equal to the Black-Scholes value of a warrant, exercisable on or before December
31, 2011, for up to 750,000 shares of the Company's  common stock at an exercise
price of  $3.00  per  share,  obtained  using  the "OV"  function  on  Bloomberg
Financial  Markets and reflecting the  calculation  assumptions set forth in the
Lender Fee Letter, to Steelhead  Offshore  Capital,  LP, Big Bend 38 Investments
L.P.,  and J-K  Navigator  Fund,  L.P. In the event that the Company  issues the
Refinance Fee Warrant, the shares issuable upon exercise of these warrants shall
have  registration  rights similar to those provided in the Registration  Rights
Agreement entered into in connection with the October 19, 2007


                                       83
<PAGE>


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

equity financing (see Note 11, STOCKHOLDERS' EQUITY (DEFICIT). Fees and expenses
totaling  approximately  $323,000 were expensed as incurred and the value of the
warrant was  capitalized  as deferred  financing  fees to be amortized  over the
remaining life of the loan using the effective interest method.

         The Company elected to issue the Refinance Fee Warrant  pursuant to the
Lender Fee Letter and, on December 31, 2007, entered into Warrant Agreement with
the parties to the letter agreement.

         On November 16, 2007, the lenders party to the credit agreement entered
into a Waiver  under  which the  EBITDA  financial  covenant  was waived for the
fiscal  quarters  ending March 31, 2008 and June 30, 2008. On April 2, 2008, the
Company repaid the $10 million  credit  agreement with a portion of the proceeds
from the sale of its Straight Creek properties.

         INSTALLMENT PURCHASE OBLIGATIONS

         In April,  August and  September  2006,  the Company  entered  into new
installment sale contracts with an equipment  manufacturer pursuant to refinance
equipment with an aggregate principal value of approximately $4,176,000 formerly
acquired under various capital leases.  These installment sale contracts require
payments  over  periods  ranging  from 30 to 36 months at fixed  interest  rates
ranging  from  7.03% to  8.10%.  The  obligations  under  the  installment  sale
contracts are secured by the equipment purchased.

         In January and February 2007, the Company  entered into new installment
sale  contracts  with an  equipment  manufacturer  pursuant to which the Company
refinanced equipment with an aggregate principal value of approximately $719,000
formerly acquired under various capital leases. These installment sale contracts
require  payments over 36 months at fixed  interest  rates ranging from 5.29% to
8.75%.  The obligations  under the installment sale contracts are secured by the
equipment purchased.

         In August 2007, the Company entered into new installment sale contracts
with equipment  manufacturers  pursuant to which the Company acquired  equipment
with an aggregate principal value of approximately $4,889,000. These installment
sale  contracts  require  payments over 36 to 60 months at fixed  interest rates
ranging  from  5.97% to  7.99%.  The  obligations  under  the  installment  sale
contracts are secured by the equipment purchased.

         Approximately  $2,700,000  of  installment  purchase  obligations  were
assumed  By  Xinergy,  Corp.  on March  31,  2008 as a result of the sale of the
Company's Straight Creek, Kentucky properties.

         12% NOTES PAYABLE DUE IN 2012

         On October  19,  2007,  our newly  acquired,  wholly-owned  subsidiary,
National Coal of Alabama,  Inc.  (formerly Mann Steel Products,  Inc.) completed
$60 million in private placements (the "Debt Financing") through the issuance of
Senior  Secured  Notes (the "12% Notes due 2012") to TCW Energy Fund XIV,  L.P.,
TCW Energy Fund XIV-A, L.P. and TCW Energy Fund XIV (Cayman), L.P. pursuant to a
Note Purchase  Agreement dated October 19, 2007, among National Coal of Alabama,
the Holders and TCW Asset Management Company  ("TAMCO").  The 12% Notes due 2012
have a maturity date of October 19, 2012 and accrue  interest at the rate of 12%
per annum due  quarterly.  In lieu of paying  interest  due on the 12% Notes due
2012on each quarterly payment date in full in cash, National Coal of Alabama may
elect to pay a portion of such  interest in cash equal to the amount of interest
which would be owing on such  quarterly  payment date if the  interest  rate had
been 9% per annum,  and to borrow the remaining  portion from the Holders in the
form of additional  loans made through the increase of the principal  amounts of
the 12% Notes due 2012.

         On each quarterly payment date from and after March 2008, National Coal
of Alabama is required  to make a principal  payment in respect of the 12% Notes
due 2012 in an  aggregate  amount  equal to the  adjusted  net cash flow for the
applicable quarter (as specified in the note purchase agreement),  provided that
in no event shall  National  Coal of Alabama be required to make a payment  that
results in its


                                       84
<PAGE>


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

having cash and cash  equivalents  (exclusive  of any cash and cash  equivalents
that have been  pledged to secure  other  obligations  permitted  under the note
purchase  agreement or that otherwise  constitutes  "restricted  cash" permitted
under the Note  Purchase  Agreement) of less than  $2,000,000.  National Coal of
Alabama  is  also  required  to  repay  outstanding  amounts  upon  the  sale of
collateral  approved  by the  Holders  of a  majority  of the  aggregate  unpaid
principal  amount  under the 12% Notes due  2012and  upon the receipt of certain
casualty  insurance  proceeds.  In  addition,  National  Coal of Alabama will be
required to pay a "make-whole" amount or incur a prepayment premium in the event
that it prepays the Notes prior to their stated maturity.

         Pursuant  to the  terms  of the note  purchase  agreement  and  related
security and pledge  agreements,  all dated  October 19, 2007,  National Coal of
Alabama granted the holders a security  interest in all of the company's  assets
to secure repayment of the obligations arising under the note purchase agreement
and related agreements,  and established a debt service reserve account equal to
six months of interest on the then outstanding aggregate principal amount of the
Notes.  The 12%  Notes  due 2012 are not  guaranteed  by  National  Coal  Corp.,
National Coal Corporation or its subsidiaries.

         As additional  consideration  to the holders,  National Coal of Alabama
conveyed to the Holders an Overriding  Royalty Interest with respect to all coal
mined by  National  Coal of Alabama  in the State of  Alabama.  Pursuant  to the
Conveyance of Overriding Royalty Interest, dated October 19, 2007, National Coal
of Alabama  agreed to pay the holders of the  interest a royalty on 18.5 million
tons of coal mined and sold by National  Coal of Alabama,  in an amount equal to
(i)  $2.00  per  ton of  coal  mined  and  sold  while  the  obligations  remain
outstanding under the note purchase agreement, and (ii) an amount equal to 1% of
the gross sales price of coal mined and sold after  repayment of the obligations
under the Note Purchase Agreement.  The present value of the expected cash flows
associated  with the  Overriding  Royalty  Interest,  estimated  at  $8,865,000,
reflecting a discount  rate of 17.6%,  has been recorded as a liability and as a
discount to the 12% Notes due 2012. The current portion of cash flows associated
with the Overriding  Royalty Interest is recorded as the greater of the required
annual  minimum of $2.0 million or the planned  production  at the $2.00 per ton
rate. The current estimated portion of the Overriding  Royalty Interest was $2.4
million at December 31, 2007.

         National Coal of Alabama used the proceeds  from the debt  financing to
make a distribution to NCC Corp., its sole  shareholder,  to enable NCC Corp. to
pay the purchase price to the Sellers of Mann Steel,  to repay  indebtedness  of
National Coal of Alabama existing on the closing date of the Debt Financing,  to
pay closing expenses,  costs and fees, to cash  collateralize  reclamation bonds
issued by Indemnity  National Insurance Company for the account of National Coal
of Alabama,  to fund the debt service  reserve  account and to pay other amounts
permitted under the note purchase agreement.  National Coal of Alabama also paid
to TAMCO a commitment  fee of $900,000,  which is equal to 1.5% of the aggregate
commitments of $60 million under the note  purchase.  The Company also paid fees
of $1.1 million and 175,000 shares of the Company's common stock to a broker who
assisted with this transaction.

         Each  of  NCC  Corp.   and  National  Coal  of  Alabama,   Inc.  is  an
"unrestricted  subsidiary"  within the  meaning of the  Company's  10.5%  Senior
Secured Notes due 2010,  which means that: (i) these  unrestricted  subsidiaries
cannot have any  indebtedness  for which National Coal Corp. or any of its other
subsidiaries is directly or indirectly  liable,  or which National Coal Corp. or
any of its other  subsidiaries  guarantees or otherwise provides credit support;
(ii)  these  unrestricted  subsidiaries  cannot be party to any  agreement  with
National  Coal Corp.  or any of its other  subsidiaries  unless the terms of any
such  agreement  are no less  favorable  to  National  Coal Corp.  or such other
subsidiaries  than those that might be obtained at the time from persons who are
not the  Company's  affiliates;  (iii) none of National  Coal Corp. or its other
subsidiaries  can have any  direct  or  indirect  obligation  to  subscribe  for
additional  equity  interests of the  unrestricted  subsidiaries  or maintain or
preserve the  unrestricted  subsidiaries'  financial  condition or cause them to
achieve any specified levels of operating results.

         National  Coal  of  Alabama,  Inc.  is  restricted  in its  ability  to
distribute cash to its other consolidated  companies for use in their operations
under the terms of the TCW credit facility. On an


                                       85
<PAGE>


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

annual basis,  National Coal of Alabama can distribute  cash to the Company only
if it meets certain  EBITDA based  operating  requirements  for the  immediately
preceding fiscal year.  Additionally,  the Company's  subsidiary,  National Coal
Corporation, has entered into a management services agreement with National Coal
of Alabama,  Inc. that  compensates  the National Coal  Corporation for services
that it provides to National Coal of Alabama,  and a tax sharing  agreement that
requires  National  Coal  of  Alabama  to  pay  to the  Company  75% of its  tax
liability.  In fiscal 2008, however,  the Company  anticipates  National Coal of
Alabama's operations to provide limited cash for use in its other operations.

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

                                                  DECEMBER 31,     DECEMBER 31,
                                                     2007             2006
                                                 -------------    -------------
Term Loan Credit Facility, due 2008 ..........   $  10,000,000    $   8,000,000
10.5% Senior Secured Notes, due 2010 .........      55,000,000       55,000,000
12.0% Senior Secured Notes, due 2012 .........      60,000,000             --
Overriding Royalty Interest obligation,
  due 2023 ...................................       9,177,273             --
Bank note (prime + 1%), due 2007 .............            --            637,374
Installment purchase obligations, due 2010 ...       4,540,801             --
Installment purchase obligations, due 2009 ...       1,906,271        3,200,286
Installment purchase obligations, due 2008 ...         182,463        2,825,209
Equipment notes (8.39%-9.28%, due 2009-2011) .          85,146          125,382
Equipment note (4.48%, due 2009) .............         124,781          234,721
Other ........................................          51,817           89,512
Less unamortized discounts ...................     (11,264,974)      (3,298,679)
                                                 -------------    -------------
                                                   129,803,578       66,813,805
Less current portion of long-term debt .......     (15,453,230)      (4,720,671)
                                                 -------------    -------------
Long-term debt ...............................   $ 114,350,348    $  62,093,134
                                                 =============    =============


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

Fiscal year
  2008 ..................................................         $  15,453,230
  2009 ..................................................             4,296,103
  2010 ..................................................            58,393,222
  2011 ..................................................             2,516,164
  2012 ..................................................            60,409,833
Thereafter ..............................................                  --
                                                                  -------------
                                                                    141,068,552
Less unamortized discounts ..............................           (11,264,974)
                                                                  -------------
                                                                    129,803,578
Less current portion of long-term debt ..................           (15,453,230)
                                                                  -------------
Long-term debt ..........................................         $ 114,350,348
                                                                  =============


                                       86
<PAGE>


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

9.       LEASES

         The  Company   leases   mining  and  certain  other   equipment   under
noncancelable  lease agreements with terms up to five years.  Rental expense for
equipment under operating lease  agreements with initial lease terms of one year
or greater was  approximately  $2,102,694,  $1,011,323,  and  $1,212,696 for the
years ended December 31, 2007, 2006, and 2005, respectively.

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

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

         Future  minimum lease  payments for  noncancelable  leases with initial
terms of one year or greater in effect at December 31, 2007 are as follows:

                                                         Capital      Operating
                                                          Leases        Leases
                                                        ----------    ----------
 2008 ...............................................   $  183,806    $2,004,871
 2009 ...............................................       99,000     2,004,871
 2010 ...............................................         --         505,762
 2011 ...............................................         --           1,515
 2012 ...............................................         --            --
 Thereafter .........................................         --            --
                                                        ----------    ----------
 Total minimum lease payments .......................      282,806    $4,517,019
                                                                      ==========
 Imputed interest ...................................      (51,056)
                                                        ----------
 Present value of minimum capital lease payments ....      231,750
 Current portion ....................................     (157,062)
                                                        ----------
 Long-term obligations ..............................   $   74,688
                                                        ==========


                                       87
<PAGE>


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

10.      ASSET RETIREMENT OBLIGATIONS

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

                                                       2007            2006
                                                   ------------    ------------
Obligation at January 1 ........................   $  7,214,894    $  7,228,232
Accretion expense ..............................        911,911         476,064
Obligations acquired and incurred ..............      3,250,887         250,427
Adjustments from annual recosting ..............       (574,719)        350,175
Obligations settled ............................       (538,286)     (1,090,004)
                                                   ------------    ------------
Obligation at December 31 ......................     10,264,687       7,214,894
Current portion included in accrued expenses ...     (1,310,344)     (1,378,967)
                                                   ------------    ------------
Long-term liability ............................   $  8,954,343    $  5,835,927
                                                   ============    ============


11.      STOCKHOLDERS' EQUITY (DEFICIT)

         SERIES A CUMULATIVE, CONVERTIBLE PREFERRED STOCK

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

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

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


                                       88
<PAGE>


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

of approximately $3,620,000 in connection with the sale of these securities.  On
December 31, 2007, 133.33 shares of preferred stock were still outstanding.

         During the year ended December 31, 2007 and 2006, holders of 426.10 and
550.90  shares  of  Series  A  cumulative   convertible   preferred  stock  with
liquidation   preferences   totaling  $6,391,500  and  $8,260,206  plus  accrued
dividends of $159,152 and $65,439,  converted  their shares into  1,555,378  and
1,386,128 shares of common stock, respectively.  The holders of 342.10 shares of
the Series A cumulative  convertible  preferred stock converted  during the year
ended  December 31, 2007 were provided with an inducement to convert in the form
of an additional  431,257 shares of common stock with an aggregate  market value
of $1,368,031. The holders of 24.0 shares of the Series A cumulative convertible
preferred stock converted  during the year ended December 31, 2007 were provided
with a $53,988 cash  inducement to convert.  The holders of 223.11 shares of the
Company's  Series A  cumulative  convertible  preferred  stock with  liquidation
preferences  totaling $3,346,650 were provided with a $1,648,168 cash inducement
to convert within sixty days of payment of the inducement.  The holders used the
proceeds of the payment to purchase 558,701 shares of the Company's common stock
at $2.95 per share. The same holders converted all 223.11 shares of the Series A
cumulative  convertible  preferred stock plus accrued dividends of $131,712 into
600,753  shares of the Company's  common stock on January 15, 2008. The combined
$3,070,185  value of these  inducements  was  recorded  as a deemed  dividend to
reflect the excess of the fair value of the common  stock over the fair value of
the Series A preferred stock  exchanged.  This treatment is necessary under EITF
Topic D-42 which  requires that if convertible  preferred  stock is converted to
other securities  pursuant to an inducement offer, the Company should record the
excess  of  (1)  the  fair  value  of all  securities  and  other  consideration
transferred to the holders of the convertible  preferred stock over (2) the fair
value of securities  issuable  pursuant to the original  conversion  terms as an
increase to net loss to arrive at net loss attributable to common shareholders.

         In October 2006, the Company determined that it had not complied with a
preferred stock purchase agreement  provision which resulted in the accrual of a
dividend  adjustment  of $198,220.  Therefore,  the Company has  reflected  this
accrual  as a  one-time  adjustment  to  shareholders'  equity  during the third
quarter of 2006 as it was not material to previous periods.  In November 2006, a
majority of the preferred  shareholders  voted to eliminate the provision  which
gave rise to this accrual. The Company also issued 10,886 shares of common stock
in lieu of  dividends  as a  result  of the  dividend  adjustment.  All of these
accrued dividends except for $33,560 have been paid in full.

         NATIONAL COAL CORP. COMMON STOCK

         During the year ended  December 31, 2006,  the Company  issued  712,510
shares of common  stock and  received  gross  proceeds  of  $1,651,122  upon the
exercise of stock  options by employees or former  employees.  No stock  options
were exercised  during 2007.  Additionally,  101,503 shares of common stock were
issued during the year ended  December 31, 2006 for gross  proceeds of $897,018,
including  100,000 shares  purchased by the Company's  then-new Chief  Executive
Officer.

         On February  28,  2007,  the  Company  signed  definitive  subscription
agreements to sell three million  shares of its common stock at the February 28,
2007  closing  consolidated  bid price of $4.65 per share.  Daniel  Roling,  the
company's   President  and  CEO,   purchased   200,000  of  these  shares.   Two
institutional  investors  purchased  2,800,000  shares and the proceeds from the
sale were $13,950,000. The Company filed a registration statement on Form S-3 to
register the shares on April 27, 2007.  The statement was made effective on June
21, 2007. The issuance of additional  shares by the Company resulted in a change
in the rate at which the  Company's  Series A cumulative  convertible  preferred
stock is converted to common stock from 2,500 common  shares per share of Series
A cumulative  convertible  preferred  stock prior to the issuance to 2,590 after
the issuance.  EITF Issue No. 98-5,  ACCOUNTING FOR CONVERTIBLE  SECURITIES WITH
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION


                                       89
<PAGE>


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

RATIOS,  requires that when convertible securities include conversion terms that
change  upon  the  occurrence  of a  future  event,  any  contingent  beneficial
conversion  feature should be measured at the commitment date but not recognized
until the contingency is resolved. Management determined that the impact of this
reduction of retained  earnings and  equivalent  increase of additional  paid-in
capital is not material to the Company's  consolidated  financial  statements in
the prior  interim  period.  Therefore,  the  $598,797  value of the  beneficial
conversion  feature was  recorded as a deemed  dividend  and is  reflected as an
increase to net loss to arrive at net loss attributable to common  shareholders.
An additional  4,066,968 and 2,000,000 shares of the Company's common stock were
issued on October 19, 2007 and December 27, 2007, respectively,  and 250,000 and
750,000 warrants to purchase shares of the Company's common stock were issued on
October 19, 2007 and December 31, 2007, respectively, all of which resulted in a
change  in the rate at which  the  Company's  Series  A  cumulative  convertible
preferred  stock is converted to common stock from 2,590 common shares per share
of Series A  cumulative  convertible  preferred  stock prior to the  issuance to
2,899 after the  issuance.  The  $389,376  value of this  beneficial  conversion
feature was recorded as a deemed dividend and is reflected as an increase to net
loss to arrive at net loss attributable to common shareholders

         On October 19, 2007, the Company completed  approximately $11.6 million
in private  placements  through the issuance of  3,866,968  shares of our common
stock at a per share price of $3.00 (the "Equity  Financing").  The Company sold
these  securities  to the  following  investors  (the  "Investors")  pursuant to
Subscription  Agreements  entered into on October 17, 2007:  Steelhead  Offshore
Capital,  LP, J-K Navigator Fund, L.P., Jayvee & Co., GF Aurum Offshore Partners
LTD, GF Aurum Partners LTD,  Geologic  Resource Fund LP, Geologic Resource Fund,
Ltd.,  Drawbridge  Global Macro  Master Fund Ltd.,  William T. Mann and Frank C.
Mann,  II.  The net  proceeds  received  in the  Equity  Financing  were used to
capitalize NCC Corp.

         In  connection  with the Equity  Financing,  on October 19,  2007,  the
Company also entered into a Registration Rights Agreement dated October 17, 2007
with the Investors  and NCC Corp.,  pursuant to which,  among other things,  the
Company agreed to provide certain  registration  rights under the Securities Act
of 1933, as amended (the "Securities Act"), and applicable state securities laws
for the shares or the  Company's  common stock sold in the Equity  Financing and
issuable under a warrant to purchase the Company's common stock initially issued
to NCC Corp. to capitalize NCC Corp. The Registration  Rights Agreement provides
that if (i) the  Company  does not file a  registration  statement  on or before
April 15, 2008,  (ii) a registration  statement is not declared  effective on or
prior to July 31, 2008, or (iii) after its  effective  date sales cannot be made
pursuant to the registration  statement for any reason other than as excepted in
the Registration  Rights  Agreement,  then the Company must pay to each Investor
and NCC Corp. (or any assignee thereof) for each calendar month during which any
of the  foregoing  events  continues,  an amount in cash as  partial  liquidated
damages equal to $0.03 for each share of common stock held by such Investors or,
in the case of NCC Corp.,  1% of the  product  obtained by  multiplying  (a) the
market value of a share of common stock (less the per share exercise price under
the  warrant)  as of the first  trading  day of each  month by (b) the number of
shares for which NCC Corp.'s warrant is exercisable,  except where the per share
exercise  price  exceeds  the  market  value on the  first  trading  day of each
applicable month.

         On October  19,  2007,  Daniel  Roling,  the CEO and  President  of the
Company,  purchased  200,000 shares of the Company's  common stock at a price of
$3.00 from shares authorized under the 2004 Stock Option Plan.

         On December  27,  2007,  the Company  completed  $8,010,000  in private
placements through the issuance of 2,000,000 shares of common stock at per share
prices of $3.91 (with  respect to 1,000,000  shares) and $4.10 (with  respect to
1,000,000 shares), representing a 15% discount to the closing sales price of the
Company's  common  stock on the date of the  agreement  in principal to sell the
shares to the


                                       90
<PAGE>


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

applicable  investor (the "December Equity  Financing").  The Company sold these
securities pursuant to Subscription  Agreements entered into on (i) December 20,
2007,  with DG Aurum  Offshore  Partners LTD, GF Aurum  Partners  LTD,  Geologic
Resource Fund LP,  Geologic  Resource Fund,  Ltd.,  and Drawbridge  Global Macro
Master Fund Ltd.  (the "GR Fund  Investors",  and (ii)  December 27, 2007,  with
Centaurus  Energy  Master  Fund,  LP  ("Centaurus").  The  Company  used the net
proceeds  received in the  December  Equity  Financing  for working  capital and
general corporate purposes.

         In connection with the Equity Financing,  the Company also entered into
a  Registration  Rights  Agreement,  dated  December 27, 2007,  with  Centaurus,
pursuant to which, among other things, it agreed to provide certain registration
rights under the Securities Act of 1933, as amended (the "SECURITIES  ACT"), and
applicable  state  securities laws for the shares of the Company's  common stock
sold to Centaurus in the Equity  Financing.  The  Registration  Rights Agreement
provides  that if (i) the Company does not file a  registration  statement on or
before April 15, 2008, (ii) a registration  statement is not declared  effective
on or prior to July 31, 2008, or (iii) after its effective  date sales cannot be
made  pursuant  to the  registration  statement  for any  reason  other  than as
excepted in the  Registration  Rights  Agreement,  then the Company  must pay to
Centaurus (or any assignee  thereof) for each calendar month during which any of
the foregoing events continues,  an amount in cash as partial liquidated damages
equal to $0.041 for each share of common  stock  acquired  by  Centaurus  in the
Equity Financing.

         The GR Fund  Investors  already are  parties to a certain  Registration
Rights  Agreement,  dated  October 17, 2007,  between the  Company,  the GR Fund
Investors,  and certain  other holders of equity  securities  that acquired such
securities from the Company in October 2007 (the "EXISTING  REGISTRATION  RIGHTS
AGREEMENT").  In connection with the Equity  Financing,  the Company agreed with
the GR Fund  Investors,  to include  the shares  acquired  by them in the Equity
Financing in the  registration  statement to be filed under the  Securities  Act
pursuant to the Existing  Registration Rights Agreement,  and to otherwise treat
such  shares as  "registrable  securities"  within the  meaning of the  Existing
Registration  Rights  Agreement.  The  Existing  Registration  Rights  Agreement
provides  that if (i) the Company does not file a  registration  statement on or
before April 15, 2008, (ii) a registration  statement is not declared  effective
on or prior to July 31, 2008, or (iii) after its effective  date sales cannot be
made  pursuant  to the  registration  statement  for any  reason  other  than as
excepted in the Existing  Registration  Rights Agreement,  then the Company must
pay to the GR Fund  Investors (or any assignee  thereof) for each calendar month
during which any of the foregoing events continues, an amount in cash as partial
liquidated  damages  equal to $0.039 for each share of common stock  acquired by
the GR Fund Investors in the Equity Financing.

         OUTSTANDING STOCK PURCHASE WARRANTS

         At December  31,  2007,  the  following  warrants  for the  purchase of
National Coal Corp. common stock were outstanding:

<TABLE>
<CAPTION>
                                    CURRENT
                       NUMBER OF     STRIKE         EARLIEST
TITLE                   SHARES       PRICE*      EXERCISE DATE      EXPIRATION DATE
--------------------   ---------   ---------   -----------------   -----------------
<S>                    <C>         <C>         <C>                 <C>
Crestview Warrants .     396,620   $    3.00   March 10, 2005      March 10, 2010
Bond Warrants ......   1,732,632   $    8.50   December 29, 2006   December 15, 2010
Alabama Warrant ....     250,000   $    4.00   October 19, 2007    December 31, 2010
Refinance Fee
  Warrants .........     750,000   $    3.00   December 31, 2007   December 31, 2011
</TABLE>
*        Crestview  Warrants have been adjusted per  anti-dilution  provision in
         warrant agreement

         During  the  year  ended  December  31,  2006,  152,500  warrants  were
exercised with gross proceeds  totaling  $1,006,501.  No warrants were exercised
during the year ended December 31, 2007. The


                                       91
<PAGE>


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

Crestview warrants and the Bond warrants are subject to mandatory  conversion if
the price of the  Company's  common  stock  remains  above  $12.50 for more than
thirty days.

         In March 2005,  the Company  borrowed  approximately  $5,140,000  which
included five-year common stock purchase warrants (the "Crestview  Warrants") to
purchase up to 140,000 shares of the Company's common stock at an exercise price
per share of $8.50 by issuing  notes to three  purchasers,  including  Crestview
Capital  Master,  LLC, which is a significant  shareholder  of the Company.  The
Crestview  Warrants are subject to price and share  adjustment on: a) a weighted
average  basis when the Company  issues  common stock at a price below $6.60 per
share or b) a full  adjustment  basis when the Company issues warrants below the
current  strike  price.  Based  upon the  December  31,  2007  warrant  issuance
discussed  below,  the warrants  have  adjusted to 396,620  shares at a price of
$3.00 per share. The notes were repaid on December 28, 2005.

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

         On  October  19,  2007,  as  part  of  capitalizing  its  newly  formed
subsidiary, NCC Corp., the Company issued warrants to purchase 250,000 shares of
National  Coal  corp.  common  stock at a per  share  price of $4.00  and a term
expiring on December 31, 2010 (the "Alabama  Warrant").  NCC Corp. assigned this
warrant to National Coal of Alabama, Inc., which further assigned the warrant to
the holders of 12% Notes Payable due 2012. The Company has committed to register
the shares  underlying  this security in conjunction  with  registration  rights
provided to investors in the October 19 sale of 4,066,968 shares of common stock
discussed above.  These warrants were valued at $263,067 using the Black-Scholes
Option  Pricing  Model and  recorded in the equity  section of the  Consolidated
Balance Sheet.

         On December 31, 2007,  the Company  issued the Refinance Fee Warrant to
three  parties  which  provides  the right to purchase  up to 750,000  shares of
National Coal common stock at a price per share of $3 through December 31, 2011.
See Note 8 DEBT AND FINANCING ARRANGEMENTS.

12.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  following  methods  and  assumptions  were used by the  Company in
estimating its fair value disclosures for financial  instruments at December 31,
2007, and 2006, respectively:

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

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


                                       92
<PAGE>


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

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

<TABLE>
<CAPTION>
                                           2007                          2006
                               ---------------------------   ---------------------------
                                 Carrying                      Carrying
                                  Amount       Fair Value       Amount       Fair Value
                               ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>
Financial Assets
   Cash and cash equivalents   $  9,854,351   $  9,854,351   $  2,180,885   $  2,180,885
   Accounts receivable .....      8,649,985      8,649,985      3,712,779      3,712,779
   Restricted cash .........     29,146,293     29,146,293     17,246,751     17,246,751

Financial liabilities
   Long-term debt ..........    129,803,578    127,603,578     66,813,805     61,313,805
</TABLE>

13.      CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

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

         During the period ended December 31, 2007, the Company  derived revenue
from twenty-three customers, seven of which were electric utilities,  fifteen of
which  were  industrial  companies  and one of which  was a coal  reseller.  The
Company derived revenue in excess of ten-percent  (10%) of total coal sales from
major customers as follows:

                                                           Customer
                                               --------------------------------
                                                 A        B        C        D
                                               -----    -----    -----    -----
Period ended December 31:
2007 ......................................      18%      24%      23%       *
2006 ......................................      25%      32%      18%       *
2005 ......................................      35%      26%       *       10%

* Less than 10%

14.      INCOME TAXES

         At December 31, 2007,  the Company had federal and state net  operating
loss ("NOL")  carryforwards  of $55.3 million that will begin to expire in 2024.
The use of  deferred  tax assets  including  federal  net  operating  losses and
credits are limited to future taxable  earnings.  Based on the required analysis
of future taxable income under the provisions of SFAS 109,  management  believes
that there is not sufficient  evidence at December 31, 2007  indicating that the
results of operations will generate sufficient taxable income to realize the net
deferred tax asset in years beyond 2007. As a result, a valuation  allowance has
been  provided for the entire net deferred  tax asset  related to future  years,
including loss and credit carryforwards.


                                       93
<PAGE>


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

         The valuation  allowance was $8,005,863 and $14,785,860 at December 31,
2007 and 2006, respectively.  The valuation allowance decreased by $6,779,997 in
2007 and increased by $8,413,451  in 2006.  The net deferred  income taxes as of
December 31 include  the  following  amounts of  deferred  income tax assets and
liabilities:

                                                       2007            2006
                                                   ------------    ------------
Deferred tax assets - current
   Inventory reserve ...........................   $     77,675    $     70,128
   Intangibles (tax basis difference) ..........         58,230          89,614
                                                   ------------    ------------
     Total deferred tax assets - current .......        135,905         159,742
                                                   ------------    ------------
Deferred tax assets - noncurrent:
   Net operating loss carryforwards ............     21,141,630      12,843,594
   Fixed assets (tax basis difference) .........           --         1,866,181
   Intangibles (tax basis difference) ..........           --            80,661
   Deferred royalties ..........................           --            87,481
   Charitable contribution carryforwards .......         56,326          44,973
   Debt (tax basis difference) .................        289,018            --
   Equity method investment basis ..............         15,767            --
                                                   ------------    ------------
     Total deferred tax assets - noncurrent ....     21,502,741      14,902,890
                                                   ------------    ------------
Total gross deferred tax assets ................     21,638,646      15,062,632

Deferred tax liabilities - current .............       (152,352)         (7,125)

Deferred tax liabilities - noncurrent:
   Fixed assets (tax basis difference) .........     (1,703,305)           --
   Reclamation expenditures ....................       (461,901)       (289,647)
   Mineral properties (tax basis difference) ...    (14,101,079)           --
   Stock option expense ........................       (565,611)           --
                                                   ------------    ------------
      Total deferred tax liabilities -
        noncurrent .............................    (16,831,896)       (289,647)
                                                   ------------    ------------
Total gross deferred tax liabilities ...........    (16,984,248)       (296,772)
                                                   ------------    ------------
Valuation allowance ............................     (8,005,863)    (14,785,860)
                                                   ------------    ------------
Net deferred tax liabilities ...................   $ (3,351,465)   $       --
                                                   ============    ============


                                       94
<PAGE>


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

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

                                       2007            2006            2005
                                   ------------    ------------    ------------
Federal income tax benefit .....   $ (8,759,883)   $ (7,963,211)   $ (2,308,998)
State income tax benefit .......     (1,105,292)       (767,103)       (291,341)
Permanent differences ..........         51,399         316,863          57,935
Change in valuation allowance ..      9,813,836       8,413,451       2,542,404
                                   ------------    ------------    ------------
Total income tax expense on
  continuing operations ........   $       --      $       --      $       --
                                   ============    ============    ============


         The  valuation  allowance  decreased  $16,593,833  as a  result  of the
acquisition of Mann Steel Products,  Inc. (see Note 3,  ACQUISITION) as a result
of significant writeups of fixed assets and mineral properties to fair value.

         As a result of  implementing  FIN 48,  effective  January 1, 2007,  the
Company  did not have any  unrecognized  tax  benefits  or  liabilities,  or any
associated  amounts for interest and penalties.  As such, there was no effect on
its  financial  condition or results of  operations as of and for the year ended
December 31, 2007.

         The  Company  has no material  unrecognized  tax  benefits or any known
material tax contingencies at December 31, 2007.

         The Company files income tax returns in the U.S.  federal  jurisdiction
and various state jurisdictions.  With few exceptions,  the Company is no longer
subject to U.S. federal  examinations or state and local income tax examinations
by tax authorities for years before 2003.

15.      EARNINGS PER SHARE

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

         For the years  ended  December  31,  2007,  2006,  and  2005,  189,117,
3,866,360,  and  6,024,642  potentially  dilutive  shares  of the  Company  from
warrants, convertible preferred stock and stock options were not included in the
computation of diluted loss per share because to do so would be anti-dilutive.


                                       95
<PAGE>


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

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

<TABLE>
<CAPTION>
                                                 2007            2006            2005
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Numerator:
Net loss .................................   $(25,764,363)   $(23,421,210)   $ (6,791,171)
Preferred stock dividends ................       (398,891)     (1,029,933)     (1,124,650)
Preferred stock deemed dividend ..........     (4,058,358)           --              --
                                             ------------    ------------    ------------
Numerator for basic and diluted ..........   $(30,221,612)   $(24,451,143)   $ (7,915,821)
                                             ============    ============    ============

Denominator:
Weighted average shares - basic ..........     20,680,015      15,346,799      13,712,813
Effect of warrants .......................         52,055         118,329       1,122,399
Effect of convertible preferred shares ...           --         2,399,731       3,528,233
Effect of stock options ..................        137,062       1,348,300       1,374,010
                                             ------------    ------------    ------------
Adjusted weighted average shares - diluted     20,869,132      19,213,159      19,737,455
                                             ============    ============    ============

Net income loss per share - basic ........   $      (1.46)   $      (1.59)   $      (0.58)

Net income loss per share - diluted ......   $      (1.46)   $      (1.59)   $      (0.58)
</TABLE>

16.      STOCK-BASED COMPENSATION PLANS

         The Company's 2004 Option Plan (the "Plan") was authorized by the Board
of Directors of the Company in March 2004,  and amended in January  2005.  Under
the terms of the Plan,  stock  options  may be granted to  officers,  directors,
employees,  and others.  At December 31, 2007,  4,450,000 shares of common stock
were  authorized  for  issuance  under the Plan.  Shares  subject to awards that
expire  unexercised  or are  otherwise  terminated,  again become  available for
awards.  Upon exercise,  stock is issued from unissued or treasury  shares.  The
grant price of an option under the Plan  generally may not be less than the fair
market  value of the common  stock  subject to such option on the date of grant.
Options  have a maximum life of ten years and vest 25% per year over a four year
period.

         During  the year  ended  December  31,  2007,  the  Company  recognized
$1,436,996 of compensation expense related to stock options,  including $434,493
related  to the March 2007 sale of a fully  vested  option to  purchase  400,000
shares of National Coal Corp.  common stock at an exercise price of $7 per share
by the then-Chairman of the Company's Board of Directors, who is also the former
President and CEO, to the current President and CEO for $10.

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


                                       96
<PAGE>


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

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

                                           Year Ended December 31,
                             --------------------------------------------------
                                  2007              2006              2005
                             --------------    --------------    --------------
Expected term (years) ......           6.25              6.25              6.25
Risk-free interest rates ...  3.61% - 4.69%     4.36% - 5.19%     3.79% - 4.55%
Expected dividend yield ....            0.0%              0.0%              0.0%
Expected volatility ........  50.2% - 53.1%     50.3% - 54.0%     47.6% - 48.0%
 Weighted-average
    volatility .............           51.2%             52.2%             47.8%


         The risk-free  interest rate is based on the U.S. Treasury rate for the
expected life at the time of grant, volatility is based on the average long-term
implied  volatilities  of peer  companies as the  Company's  trading  history is
limited,  and the expected term is  determined  using the  SIMPLIFIED  method as
accepted under Securities and Exchange  Commission Staff Accounting Bulletin No.
107  assuming a ten-year  original  contract  term and graded  vesting over four
years. The  weighted-average  grant-date fair value of options issued during the
years ended  December 31, 2007,  2006,  and 2005 were $1.92,  $3.16,  and $3.41,
respectively.  The total intrinsic value of options  exercised  during the years
ended December 31, 2006 and 2005 was $2,450,313 and $1,104,780, respectively.

         The following  table  summarizes  activity  under the Plan for the year
ended December 31, 2007:

<TABLE>
<CAPTION>
                                                                                 WEIGHTED
                                                                 WEIGHTED        AVERAGE
                                                                 AVERAGE         REMAINING         AGGREGATE
                                               OPTIONS           EXERCISE       CONTRACTUAL        INTRINSIC
                                             OUTSTANDING          PRICE        TERM (IN YEARS)       VALUE
                                            --------------    --------------   --------------   --------------
<S>                                              <C>          <C>                        <C>    <C>
Outstanding at December 31, 2006 ........        1,323,625    $         6.90             8.81          505,825
Granted .................................          390,000    $         3.53             --               --
Exercised ...............................             --      $         --               --               --
Forfeited ...............................         (145,500)   $         5.19             --               --
Expirations .............................           (2,500)   $         6.95             --               --
                                            --------------    --------------   --------------   --------------
Outstanding at December 31, 2007 ........        1,565,625    $         6.22             8.19   $    1,053,320
                                            ==============
Vested or expected to vest at December
   31, 2007 .............................        1,405,163    $         6.18             7.77   $      474,819
                                            ==============
Exercisable .............................          611,564    $         5.99             7.61   $      359,458
                                            ==============
</TABLE>

         As of December 31, 2007,  there was  $1,706,932  of total  unrecognized
compensation  cost related to non-vested  stock options  granted under the Plan.
That cost is expected to be recognized over a


                                       97
<PAGE>


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

weighted  average  period of 2.3 years.  The total  fair value of shares  vested
during the years ended  December  31,  2007,  2006,  and 2005,  was  $1,143,942,
$2,762,529, and $1,821,514, respectively.

17.      COMMITMENTS AND CONTINGENCIES

         The Company is made a party to legal actions,  claims,  arbitration and
administrative proceedings from time to time in the ordinary course of business.
Management is not aware of any pending or threatened proceedings that might have
a  material  impact  on its cash  flows,  results  of  operations  or  financial
condition.

18.      RELATED PARTY TRANSACTIONS

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

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

         On June 5, 2006 the Company sold 100,000  shares of National Coal Corp.
common stock to Daniel  Roling,  the  Company's  President  and CEO, for a total
price of $888,000.

         On February 28, 2007, the Company sold an additional  200,000 shares to
Daniel Roling for a total price of $930,000.

         In March 2007, the  then-Chairman  of the Company's Board of Directors,
who is also the former President and CEO and a significant shareholder,  sold to
the current  President  and CEO for $10.00 the fully  vested  option to purchase
400,000  shares of  National  Coal Corp.  common  stock at $7.00 per share until
December  31,  2008.  The   transaction   resulted  in  $434,493  of  additional
compensation expense to the Company in the year ended December 31, 2007.

         On October 19,  2007,  Jon Nix,  the former  Chairman of the  Company's
Board of Directors,  who is also the former  President and CEO and a significant
shareholder,  received a commission of $100,000 related to the completion of the
acquisition of Mann Steel Products, Inc.

         On October  19,  2007,  Daniel  Roling,  the CEO and  President  of the
Company,  purchased  200,000 shares of the Company's  common stock at a price of
$3.00 per share from common stock authorized under the 2004 Stock Option Plan.


                                       98
<PAGE>


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

         On March 31, 2008, the Company's wholly-owned subsidiary, National Coal
Corporation,  completed the sale of the real and personal  property  assets that
comprised  its  Straight  Creek  mining  operations  in Bell,  Leslie and Harlan
Counties,  Kentucky to Xinergy  Corp.  ("Xinergy")  for  $11,000,000  in cash in
accordance  with the terms and conditions of a Purchase  Agreement  entered into
among the parties on February 8, 2008 (the "Purchase Agreement"). In addition to
the receipt of the purchase price for the assets,  the transaction also resulted
in the return of approximately $7,400,000 in cash that was previously pledged to
secure  reclamation  bonds and other  liabilities  associated  with the Straight
Creek  operation,  and  relieved  the  Company of  approximately  $3,600,000  in
reclamation  liabilities and approximately  $2,700,000 of equipment related debt
which were assumed by Xinergy in the transaction.

         Xinergy  Corp.  was  founded  and is  controlled  by Jon Nix,  who is a
founder,  significant  stockholder,  and former officer and director of National
Coal.  Mr. Nix served as a director of National  Coal Corp.  from  January  2003
until July 2007,  and as  Chairman of the Board from March 2004 until July 2007.
Mr. Nix also served as President and Chief  Executive  Officer from January 2003
until August 2006. He is married to the  stepdaughter  of the Company's  General
Counsel,  Charles Kite. As of April 2, 2008,  based on reports Mr. Nix has filed
with  the  Securities  and  Exchange  Commission,  Mr.  Nix  beneficially  owned
3,626,138 shares of the Company's common stock,  representing  approximately 14%
of its outstanding common stock as of such date.

19.      SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR INFORMATION

         National Coal of Alabama,  Inc. and its parent company,  NCC Corp. (the
"Alabama Companies"),  have been designated as "unrestricted  subsidiaries" with
regard  to the 10.5%  Senior  Secured  Notes  due 2010 and the Term Loan  Credit
Facility,  which  designation  exempts  them from being  guarantors  under those
facilities.  Further,  the Alabama  Companies do not guarantee any debt in which
either  National  Coal Corp.  or  National  Coal  Corporation  is the  borrower.
Conversely,  National Coal Corp., National Coal Corporation and its subsidiaries
(the "Tennessee Companies") have been excluded as guarantors under the 12% Notes
Payable due 2012.


                                       99
<PAGE>


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

         The following condensed  consolidating financial information sets forth
the  financial  position as of December 31, 2007 and results of  operations  and
cash flows for the year ended December 31, 2007 of the National Coal Corp. (NCC)
and National Coal of Alabama, Inc. (NCA). NCA was acquired on October 19, 2007.

<TABLE>
               SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
                                DECEMBER 31, 2007
<CAPTION>
                                                NCC               NCA         ELIMINATIONS     CONSOLIDATED
                                            -------------    -------------    -------------    -------------
<S>                                         <C>              <C>              <C>              <C>
Cash and cash equivalents ...............   $   8,823,016    $   1,031,335    $        --      $   9,854,351
Accounts receivable .....................       2,402,256        6,384,790             --          8,787,046
Inventory ...............................       2,155,603          790,498             --          2,946,101
Prepaid and other current assets ........         239,381        1,712,446             --          1,951,827
                                            -------------    -------------    -------------    -------------
   Total current assets .................      13,620,256        9,919,069             --         23,539,325
                                            -------------    -------------    -------------    -------------
Property, plant, equipment and
   mine development, net ................      50,828,149       58,052,450             --        108,880,599
Deferred financing costs ................       3,170,984        3,498,719             --          6,669,703
Restricted cash .........................      16,511,809       12,603,574             --         29,115,383
Other non-current assets ................      13,785,705          713,123      (13,448,837)       1,049,991
                                            -------------    -------------    -------------    -------------
   Total assets .........................   $  97,916,903    $  84,786,935    $ (13,448,837)   $ 169,255,001
                                            =============    =============    =============    =============
Accounts payable and accrued expenses ...   $   9,094,288    $   3,665,305             --      $  12,759,593
Current maturities of long-term debt ....      13,053,230        2,400,000             --         15,453,230
Current installments of capital
   lease obligations ....................         157,062             --               --            157,062
Current portion of asset retirement
   obligations ..........................       1,095,029          215,315             --          1,310,344
                                            -------------    -------------    -------------    -------------
   Total current liabilities ............      23,399,609        6,280,620             --         29,680,229
                                            -------------    -------------    -------------    -------------
Long-term debt, less current maturities .      56,219,120       58,131,228             --        114,350,348
Capital leases, less current installments          74,688           74,688
Asset retirement obligations, less
   current portion ......................       6,493,296        2,461,047             --          8,954,343
Other long-term liabilities .............       1,808,572        4,871,465             --          6,680,037
                                            -------------    -------------    -------------    -------------
   Total liabilities ....................      87,995,285       71,744,360             --        159,739,645
                                            -------------    -------------    -------------    -------------
Preferred stock .........................            --               --               --               --
Common stock ............................           2,770              104             (104)           2,770
Additional paid-in capital ..............      83,309,703       13,448,733      (13,448,733)      83,309,703
Retained earnings .......................     (73,390,855)        (406,262)            --        (73,797,117)
                                            -------------    -------------    -------------    -------------
   Total stockholders' equity ...........       9,921,618       13,042,575      (13,448,837)       9,515,356
                                            -------------    -------------    -------------    -------------
   Total liabilities and stockholders'
      equity ............................   $  97,916,903    $  84,786,935    $ (13,448,837)   $ 169,255,001
                                            =============    =============    =============    =============
</TABLE>


                                      100
<PAGE>


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

<TABLE>
          SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE PERIOD ENDED DECEMBER 31, 2007
<CAPTION>
                                         NCC             NCA          ELIMINATIONS     CONSOLIDATED
                                    -------------    -------------    -------------    -------------
<S>                                 <C>              <C>              <C>              <C>
Revenues
  Coal sales ....................   $  79,038,521    $  12,904,229    $        --      $  91,942,750
  Other revenues ................       1,079,213             --           (241,935)         837,278
                                    -------------    -------------    -------------    -------------
     Total revenues .............      80,117,734       12,904,229         (241,935)      92,780,028
                                    -------------    -------------    -------------    -------------

Expenses
  Cost of sales .................      77,064,753        9,501,701             --         86,566,454
  Depreciation, depletion,
     amortization & accretion ...      14,661,153        1,864,430             --         16,525,583
  General and administrative ....       6,969,932          308,527         (241,935)       7,036,524
                                    -------------    -------------    -------------    -------------
     Total operating expenses ...      98,695,838       11,674,658         (241,935)     110,128,561

                                    -------------    -------------    -------------    -------------
Operating income (loss) .........     (18,578,104)       1,229,571             --        (17,348,533)
                                    -------------    -------------    -------------    -------------

Other income (expense)
  Interest expense ..............      (8,990,387)      (1,774,898)            --        (10,765,285)
  Other income (expense), net ...       2,210,390          139,065             --          2,349,455
                                    -------------    -------------    -------------    -------------
     Total other income (expense)      (6,779,997)      (1,635,833)            --         (8,415,830)
                                    -------------    -------------    -------------    -------------

Net loss ........................   $ (25,358,101)   $    (406,262)   $        --      $ (25,764,363)
                                    =============    =============    =============    =============
</TABLE>


                                      101
<PAGE>


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

<TABLE>
          SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE PERIOD ENDED DECEMBER 31, 2007

<CAPTION>
                                                                NCC           NCA        ELIMINATIONS   CONSOLIDATED
                                                           ------------   ------------   ------------   ------------
<S>                                                        <C>            <C>            <C>            <C>

Cash Flows from Operating Activities:

        Net cash flows (used in) provided by operating
           activities ...................................  $ (8,847,046)  $    707,333   $       --     $ (8,139,713)

Cash Flows from Investing Activities:
  Acquisition, net of cash acquired .....................          --      (58,644,617)          --      (58,644,617)
  Investment in subsidiary ..............................   (13,185,771)    13,185,771           --             --
  Investment in joint venture ...........................          --         (156,800)          --         (156,000)
  Capital expenditures ..................................    (4,359,850)          --             --       (4,359,850)
  Proceeds from sale of equipment & mine development, net     2,375,935        175,000           --        2,550,935
  Decrease (increase) in restricted cash ................       734,942    (10,903,974)          --      (10,169,032)
  Increase in prepaid royalties .........................        (6,164)          --             --           (6,164)
                                                           ------------   ------------   ------------   ------------
     Net cash flows used in investing activities ........   (14,440,908)   (56,344,620)          --      (70,785,528)

Cash Flows from Financing Activities:
  Proceeds from issuance of stock .......................    35,798,647           --             --       35,798,647
  Proceeds from exercise of options and warrants ........          --             --             --             --
  Proceeds from issuance of notes .......................       441,077     60,000,000           --       60,441,077
  Proceeds from borrowings on Term Loan Credit Facility .     2,000,000           --             --        2,000,000
  Repayments of notes payable ...........................    (5,518,091)          --             --       (5,518,091)
  Repayments of capital leases ..........................      (740,608)          --             --         (740,608)
  Payments for deferred financing costs .................      (109,329)    (3,381,378)          --       (3,440,707)
  Dividends paid ........................................      (239,458)          --             --         (239,458)
  Payment of cash to induce conversion of preferred .....    (1,702,153)          --             --       (1,702,153)
                                                           ------------   ------------   ------------   ------------
     Net cash flows provided by financing activities ....    29,930,085     56,668,622           --       86,598,707

NET INCREASE IN CASH ....................................     6,642,131      1,031,335           --        7,673,466
Cash and cash equivalents at beginning of period ........     2,180,885           --             --        2,180,885
                                                           ------------   ------------   ------------   ------------
Cash and cash equivalents at end of period ..............  $  8,823,016   $  1,031,335           --     $  9,854,351
                                                           ============   ============   ============   ============


Supplemental Disclosures
  Interest paid in cash .................................  $  7,981,725   $  1,400,000           --     $  9,381,725
Non-cash investing and financing transactions
  Preferred stock dividends converted to common stock ...       162,004           --             --          162,004
  Equipment acquired via capital lease ..................       248,900           --             --          248,900
  Equipment acquired via installment purchase obligations     4,914,339           --             --        4,914,339
  Asset retirement obligations acquired, incurred, and ..        44,080           --             --           44,080
      recosted
  Beneficial conversion feature .........................       988,173           --             --          988,173
  Constructive dividends ................................     1,368,031           --             --        1,368,031
  Issuance of warrants ..................................     1,374,676           --             --        1,374,676
</TABLE>


                                      102
<PAGE>


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

20.      EVENTS SUBSEQUENT TO DECEMBER 31, 2007

         On March 31, 2008, the Company's wholly-owned subsidiary, National Coal
Corporation,  completed the sale of the real and personal  property  assets that
comprise  our  Straight  Creek  mining  operations  in Bell,  Leslie  and Harlan
Counties,  Kentucky to Xinergy  Corp.  ("Xinergy")  for  $11,000,000  in cash in
accordance  with the terms and conditions of a Purchase  Agreement  entered into
among the  parties on February 8, 2008 (the  "Purchase  Agreement").  Please see
Note 5, PROPERTY, PLANT, EQUIPMENT, MINE DEVELOPMENT AND ASSETS HELD-FOR-SALE.

         On February 28, 2008,  certain  holders of the  Company's  10.5% Senior
Secured Notes exchanged  $3,000,000 in notes for shares of the Company's  common
stock at an  exchange  rate of 82% of  principal  value plus  accrued but unpaid
dividends of $63,875 divided by $4.85.

21.      SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         Quarterly financial data for 2007 and 2006 is as follows:

<TABLE>
<CAPTION>
                                              Three Months Ended
                           ------------------------------------------------------------
                             March 31,       June 30,      September 30,   December 31,
                               2007            2007            2007            2007
                           ------------    ------------    ------------    ------------
<S>                        <C>             <C>             <C>             <C>
Total revenues .........   $ 19,034,945    $ 18,882,445    $ 20,857,295    $ 34,005,343
Operating loss .........     (4,266,461)     (4,666,536)     (5,364,612)     (3,050,924)
Net loss attributable to
 common shareholder ....     (6,169,393)     (7,654,813)     (7,837,398)     (8,560,008)
Loss per common share:
Basic ..................   $      (0.35)   $      (0.38)   $      (0.39)   $      (0.34)
Diluted ................   $      (0.35)   $      (0.38)   $      (0.39)   $      (0.34)
</TABLE>

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


                                      103
<PAGE>


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

         None

ITEM 9A(T).   CONTROLS AND PROCEDURES.

CONTROLS AND PROCEDURES

         Members of our management,  including our President and Chief Executive
Officer, Daniel A. Roling, and Chief Financial Officer,  Michael R. Castle, 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,  2007,  the end of the  period  covered  by this  report.  Based  upon  that
evaluation, Messrs. Roling and Castle concluded that our disclosure controls and
procedures were effective as of December 31, 2007.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Our management is responsible for establishing and maintaining adequate
internal  control over  financial  reporting as defined in Rules  13a-15(f)  and
15d-15(f)  under the Securities  Exchange Act of 1934, as amended.  Our internal
control over  financial  reporting is designed to provide  reasonable  assurance
regarding  the  reliability  of  financial  reporting  and  the  preparation  of
financial statements for external purposes in accordance with generally accepted
accounting  principles.  Our internal control over financial  reporting includes
those policies and procedures that:

         (i)      pertain to the  maintenance  of records  that,  in  reasonable
                  detail,  accurately  and fairly reflect the  transactions  and
                  dispositions of our assets;

         (ii)     provide reasonable assurance that transactions are recorded as
                  necessary to permit the preparation of financial statements in
                  accordance with U.S. generally accepted accounting principles,
                  and that our receipts and  expenditures are being made only in
                  accordance  with  authorizations  of management and directors;
                  and

         (iii)    provide reasonable  assurance  regarding  prevention or timely
                  detection of unauthorized  acquisition,  use or disposition of
                  our assets that could have a material  effect on our financial
                  statements.

         Because  of  inherent  limitation,   internal  control  over  financial
reporting may not prevent or detect misstatements.  In addition,  projections of
any  evaluation  of  effectiveness  to future  periods  are subject to risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         Our management  assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment,  we used
the  criteria  set forth by the  Committee of  sponsoring  Organizations  of the
Treadway Commission (COSO) in Internal  Control-Integrated  Framework.  Based on
our assessment and those criteria,  we have concluded that our internal  control
over financial reporting was effective as of December 31, 2007.

         This  annual  report  does not  include  an  attestation  report by our
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's report was not subject to attestation by our registered
public  accounting  firm  pursuant  to  temporary  rules of the  Securities  and
Exchange Commission that permit us to provide only our management report in this
annual report.


                                      104
<PAGE>


CHANGES IN 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, 2007 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

ITEM 9B. OTHER INFORMATION.

         None.


                                      105
<PAGE>


                                    PART III

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

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

ITEM 11. EXECUTIVE COMPENSATION.

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

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

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2008 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2007.

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

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

         The  information  required by this item is incorporated by reference to
National  Coal's Proxy  Statement for its 2008 Annual Meeting of Shareholders to
be filed with the SEC  within  120 days  after the end of the fiscal  year ended
December 31, 2007.


                                      106
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

         1.       CONSOLIDATED FINANCIAL STATEMENTS

                  See "Index to Consolidated  Financial  Statements" in Part II,
                  Item 8 of this Form 10-K.

         2.       FINANCIAL STATEMENT SCHEDULES

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

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

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

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


                                      107
<PAGE>


                                   SIGNATURES

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


                                   NATIONAL COAL CORP.

Date: April 15, 2008               /S/ MICHAEL R. CASTLE
                                   -------------------------------------------
                                   By:  Michael R. Castle
                                   Its: Chief Financial Officer
                                  (Principal Financial and Accounting Officer)


                                POWER OF ATTORNEY

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

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

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

/S/ DANIEL A. ROLING       Chief Executive Officer, President,    April 15, 2008
---------------------                 and Director
Daniel A. Roling             (Principal Executive Officer)


/S/ MICHAEL R. CASTLE            Chief Financial Officer          April 15, 2008
---------------------           (Principal Financial and
Michael R. Castle                 Accounting Officer)


/S/ KENNETH SCOTT                Chairman of the Board            April 15, 2008
---------------------
Kenneth Scott


/S/ ROBERT HEINLEIN                   Director                    April 15, 2008
---------------------
Robert Heinlein


/S/ GERALD MALYS                      Director                    April 15, 2008
---------------------
Gerald Malys


                                      108
<PAGE>


                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                              EXHIBIT TITLE
-------  -----------------------------------------------------------------------
2.1      Purchase  Agreement,  dated June 18, 2007,  by and among  National Coal
         Corp.,  Mann Steel  Products,  Inc.,  Frank C. Mann,  II and William T.
         Mann. (1)

2.2      Amendment to Purchase  Agreement,  dated August 22, 2007,  by and among
         National Coal Corp.,  Mann Steel Products,  Inc., Frank C. Mann, II and
         William T. Mann. (2)

2.3      Assignment and Second  Amendment,  dated October 15, 2007, by and among
         National Coal Corp.,  NCC Corp.,  Mann Steel Products,  Inc.,  Frank C.
         Mann, II and William T. Mann. (2)

2.4      Asset Purchase Agreement, dated February 8, 2008, between National Coal
         Corporation and Xinergy Corp. (3)

2.5      Letter   Agreement  from  Neuberger   Berman,   LLC  to  National  Coal
         Corporation  regarding  the Exchange of Notes for Common  Stock,  dated
         February 22, 2008. (4)

3.1      Articles of  Incorporation of National Coal Corp. dated August 8, 1995.
         (5)

3.1.1    Articles of Amendment to the Articles of Incorporation of National Coal
         Corp. dated August 10, 1995. (5)

3.1.2    Articles of Amendment to the Articles of Incorporation of National Coal
         Corp. dated January 4, 1996. (5)

3.1.3    Articles of Amendment to the Articles of Incorporation of National Coal
         Corp. dated July 17, 2003, filed August 4, 2003. (6)

3.1.4    Articles of Amendment to the Articles of Incorporation of National Coal
         Corp. dated August 27, 2004, filed August 31, 2004. (7)

3.1.5    Articles of Amendment to the Articles of Incorporation of National Coal
         Corp. dated January 10, 2005, filed January 12, 2005. (7)

3.2      Amended and Restated Bylaws of National Coal Corp. (7)

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

4.2      Indenture dated as of December 29, 2005 among National Coal Corp.,  its
         subsidiaries,  and WellsFargo Bank,  National  Association,  a national
         banking association, as trustee. (9)

4.3      Security Agreement dated as of December 29, 2005, by and among National
         Coal Corp.,  its  subsidiaries,  in favor of Wells Fargo Bank  National
         Association,  in its  capacity  as trustee  under the  Indenture  dated
         December 29, 2005. (9)

4.4      Debt Registration  Rights  Agreement,  dated as of December 29, 2005 by
         and between  National  Coal Corp.,  its  subsidiaries,  and Jefferies &
         Company, Inc. (9)

4.5      Equity Registration Rights Agreement,  dated as of December 29, 2005 by
         and between National Coal Corp. and Jefferies & Company, Inc. (9)

4.6      Warrant  Agreement dated as of December 29, 2005 between  National Coal
         Corp., and Wells Fargo Bank, National Association as warrant agent. (9)

4.7      Intellectual  Property Security Agreement dated as of December 29, 2005
         by and among National Coal Corp., its  subsidiaries,  in favor of Wells
         Fargo Bank, N.A. as collateral agent. (9)


                                      109
<PAGE>


EXHIBIT
NUMBER                              EXHIBIT TITLE
-------  -----------------------------------------------------------------------
4.8      Registration Rights Agreement, dated October 19, 2007, between National
         Coal Corp. and the Holders named therein. (2)

4.9      Warrant Agreement,  dated as of October 19, 2007, between National Coal
         Corp. and the Holders. (2)

4.10     Form of Subscription Agreement, dated February 28, 2007, by and between
         National Coal Corp. and the investors  identified on the signature page
         therein. (10)

4.11     Form of Registration Rights Agreement,  dated February 28, 2007, by and
         between  National  Coal  Corp.  and  the  investors  identified  on the
         signature page therein. (10)

4.12     Registration  Rights  Agreement,   dated  December  27,  2007,  between
         National Coal Corp. and Centaurus Energy Master Fund, LP. (11)

4.13     Warrant  Agreement,  dated  December 31, 2007,  between  National  Coal
         Corp., Steelhead Offshore Capital, LP, Big Bend 38 Investments L.P. and
         J-K Navigator Fund, L.P. (12)

10.1     Form of Indemnification Agreement of Registrant. (7)

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

10.3     Investor  Rights  Agreement by and between  National Coal Corp. and the
         Purchasers listed on Schedule I thereto, dated August 31, 2004. (7)

10.4     Amended  Employment  Agreement by and between National Coal Corporation
         and Jon E. Nix dated October 1, 2004. (7)*

10.4.1   Separation   Agreement   among  National  Coal  Corp.,   National  Coal
         Corporation and Jon E. Nix, dated September 11, 2006. (13)*

10.5     Employment  Agreement by and between  National Coal  Corporation and T.
         Michael Love, dated November 14, 2005. (9)*

10.5.1   Separation Agreement, dated as of November 28, 2007, between T. Michael
         Love and National Coal Corp. (14)*

10.5.2   Consulting Agreement, dated as of November 28, 2007, between T. Michael
         Love and National Coal Corp. (14)*

10.6     Employment  Agreement  by and between  National  Coal  Corporation  and
         Kenneth Hodak, dated September 20, 2005. (9)*

10.7     Amended  Employment  Agreement by and between National Coal Corporation
         and Charles W. Kite dated September 16, 2004. (7)*

10.8     Amended  Employment  Agreement by and between National Coal Corporation
         and Joseph A. Davis, Jr. dated September 16, 2004. (7)*

10.9     Amended  Employment  Agreement by and between National Coal Corporation
         and William R. Snodgrass dated October 1, 2004. (7)*

10.10    Form of Note and Warrant Purchase  Agreements by an among National Coal
         Corp., National Coal Corporation, and each of Crestview Capital Master,
         LLC, Big Bend Investments, L.P., and CCA (US) Fund I, L.P., dated March
         10, 2005,  including form of Secured Promissory Note and form of Common
         Stock Purchase Warrant attached as exhibits thereto. (15)

10.11    Form of Amendment Number One to Secured  Promissory Note by and between
         National Coal Corporation,  and each of Crestview Capital Master,  LLC,
         Big Bend Investments, L.P., and CCA (US) Fund I, L.P., dated August 10,
         11 and 12, 2005, respectively. (16)


                                      110
<PAGE>


EXHIBIT
NUMBER                              EXHIBIT TITLE
-------  -----------------------------------------------------------------------
10.12    Security  Agreement  by  and  between  National  Coal  Corporation  and
         Crestview Capital Master, LLC as agent for itself, Big Bend Investment,
         L.P. and CCA (US) Fund I, L.P., dated March 10, 2005. (15)

10.13    Continuing  and  Unconditional  Guaranty of National Coal Corp.,  dated
         March 10, 2005,  guaranteeing full payment and performance of the Notes
         issued by National Coal Corporation and the Security Agreement executed
         by National Coal Corporation  pursuant to the Note and Warrant Purchase
         Agreements dated March 10, 2005. (15)

10.14    Installment  Sale Contract by and between National Coal Corporation and
         Whayne Supply Company, effective July 1, 2005. (16)

10.15    Installment  Sale Contract by and between National Coal Corporation and
         Stowers  Machinery  Corporation  (twenty  vehicles),  effective July 1,
         2005. (16)

10.16    Installment  Sale Contract by and between National Coal Corporation and
         Stowers Machinery Corporation (three vehicles), effective July 1, 2005.
         (16)

10.17    Asset Purchase Agreement (Baldwin  Facility),  dated as of May 8, 2005,
         by and between National Coal Corporation and LCC Tennessee, LLC. (16)

10.18    Separation  Agreement  by and between  the  Company and Robert  Chmiel,
         dated March 21, 2005. (15)*

10.19    Separation  Agreement  between  National Coal Corp. and Mark A. Oldham,
         dated November 14, 2005. (9)*

10.20    Employment  Agreement,  dated May 25, 2006, by and among  National Coal
         Corporation, National Coal Corp., and Daniel A. Roling. (17)*

10.21    Credit  Agreement,  dated  October12,  2006, among National Coal Corp.,
         National  Coal  Corporation,  the  Lenders,  and  Guggenheim  Corporate
         Funding, LLC. (18)

10.22    Security  and  Guarantee  Agreement,  dated  October  12,  2006,  among
         National Coal Corporation, National Coal Corp., Subsidiary Grantors and
         Guggenheim Corporate Funding, LLC. (18)

10.23    Intercreditor  Agreement,  dated as of October 12, 2006, by and between
         Guggenheim  Corporate  Funding  LLC,  and Wells Fargo Bank,  N.A.,  and
         acknowledged and agreed to by National Coal Corporation,  National Coal
         Corp., and Guarantors. (18)

10.24    Form of  Subscription  Agreement  between  National Coal Corp.  and the
         Investors to be named therein. (2)

10.25    Note Purchase Agreement,  dated October 19, 2007, by and among National
         Coal of  Alabama,  Inc.,  TCW Energy  Fund XIV,  L.P.,  TCW Energy Fund
         XIV-A,  L.P.,  TCW  Energy  Fund  XIV  (Cayman),  L.P.,  and TCW  Asset
         Management Company as Administrative Agent. (2)

10.26    Security Agreement,  dated October 19, 2007, by and among National Coal
         of Alabama,  Inc., the Grantors named therein and TCW Asset  Management
         Company as Administrative Agent. (2)

10.27    Waiver and  Amendment No. 3, dated as of October 19, 2007 to the Credit
         Agreement,  dated as of October 12, 2006 (as previously amended), among
         National  Coal Corp.,  National  Coal  Corporation,  the Lenders  party
         thereto,  and  Guggenheim  Corporate  Funding,  LLC, as  administrative
         agent. (2)


                                      111
<PAGE>


EXHIBIT
NUMBER                              EXHIBIT TITLE
-------  -----------------------------------------------------------------------
10.28    Amendment,  dated as of March 30, 2007, to the Credit Agreement,  dated
         as of October  12,  2006,  among  National  Coal Corp.,  National  Coal
         Corporation,   the  Lenders  party  thereto  from  time  to  time,  and
         Guggenheim  Corporate  Funding,  LLC,  as  administrative  agent and as
         collateral agent for the Lenders. (19)

10.29    Waiver  dated as of  November  16, 2007 to the Credit  Agreement  among
         National Coal Corp.,  National Coal Corporation,  and the lenders party
         thereto. (20)

10.30    Employment  Offer  Letter,  dated  November 28, 2007,  between  Michael
         Castle and National Coal Corp. (14)*

10.31    Form of  Subscription  Agreement,  dated  December  20,  2007,  between
         National Coal Corp. and each of the GR Fund Investors. (11)

10.32    Subscription Agreement,  dated December 27, 2007, between National Coal
         Corp. and Centaurus Energy Master Fund, LP. (11)

14.1     National Coal Corp. Code of Ethical Conduct. (21)

21.1     Subsidiaries of National Coal Corp.

23.1     Consent of Gordon, Hughes & Banks, LLP.

23.2     Consent of Ernst & Young, LLP.

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

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

32.1     Certification of Principal  Executive  Officer and Principal  Financial
         Officer  pursuant to 18 U.S.C.  Section  1350,  as adopted  pursuant to
         Section 906 of the Sarbanes-Oxley Act of 2002.
-------------
* Indicates a management contract or compensatory plan.

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

(2)      Incorporated  by reference to our Current  Report on Form 8-K, filed on
         October 25, 2007.

(3)      Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         February 12, 2008.

(4)      Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         February 28, 2008.

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

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

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

(8)      Incorporated  by reference  to our Current  Report on Form 8-K filed on
         July 27, 2007.

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

(10)     Incorporated  by  reference to our  Registration  Statement on Form S-3
         (File No. 333-142403).

(11)     Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         December 28, 2007.

(12)     Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         January 3, 2008.

(13)     Incorporated  by  reference  to our Current  Report on Form 8-K,  dated
         September 11, 2006.

(14)     Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         December 3, 2007.

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

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


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<PAGE>


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

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

(19)     Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         April 3, 2007.

(20)     Incorporated  by  reference  to our Current  Report on Form 8-K,  filed
         November 21, 2007.

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


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