UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

             Quarterly Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                  For the quarterly period ended June 30, 2007

                                       or

               Transition Report Under 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.
                (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)

                                 (865) 690-6900
                          (Issuer's telephone number)

         Indicate  by check  mark  whether  the  issuer  (1) filed  all  reports
required to be filed by Section 13 or 15(d) of the  Exchange Act during the past
12 months (or for such shorter  period that the  registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]

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

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

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

         As of August  13,  2007,  the issuer  had  20,152,993  shares of common
stock, par value $.0001 per share, issued and outstanding.


<PAGE>


                               NATIONAL COAL CORP.

                               INDEX TO FORM 10-Q

                                                                            PAGE

PART I   FINANCIAL INFORMATION................................................3

Item 1.  Financial Statements.................................................3

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.................................20

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........36

Item 4.  Controls and Procedures.............................................36

PART II  OTHER INFORMATION...................................................37

Item 1.  Legal Proceedings...................................................37

Item 1A. Risk Factors........................................................38

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.........39

Item 4.  Submission of Matters to a Vote of Security Holders.................40

Item 6.  Exhibits............................................................41


                                       2
<PAGE>


                          PART I: FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
                               NATIONAL COAL CORP.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                   (UNAUDITED)
<CAPTION>

                                                                                JUNE 30,      DECEMBER 31,
                                                                                  2007            2006
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
ASSETS
Current assets
   Cash and cash equivalents ..............................................   $  5,499,314    $  2,180,885
   Accounts receivable ....................................................      1,709,610       3,712,779
   Inventory ..............................................................      3,680,341       2,221,742
   Prepaid and other current assets .......................................        624,270         867,247
                                                                              ------------    ------------
     Total current assets .................................................     11,513,535       8,982,653

   Assets held for sale ...................................................           --           640,649
   Property, plant, equipment and mine development, net ...................     51,350,917      55,837,627
   Deferred financing costs ...............................................      2,835,573       2,856,534
   Restricted cash ........................................................     17,604,884      17,246,751
   Other non-current assets ...............................................        861,849         427,516
                                                                              ------------    ------------
     Total assets .........................................................   $ 84,166,758    $ 85,991,730
                                                                              ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
   Current maturities of long-term debt ...................................   $  3,235,822    $  4,720,671
   Current installments of obligations under capital leases ...............        194,855         351,668
   Current portion of asset retirement obligations ........................      1,214,517       1,378,967
   Accounts payable and accrued expenses ..................................      8,105,043      11,981,495
                                                                              ------------    ------------
     Total current liabilities ............................................     12,750,237      18,432,801

   Long-term debt, less current maturities, net of discount ...............     63,840,860      62,093,134
   Obligations under capital leases, less current installments ............        120,309         321,071
   Asset retirement obligations, less current portion .....................      6,094,528       5,835,927
   Deferred revenue .......................................................        883,808       1,032,426
   Other non-current liabilities ..........................................        344,770         199,430
                                                                              ------------    ------------
     Total liabilities ....................................................     84,034,512      87,914,789
                                                                              ------------    ------------

Commitments and contingencies (Note 13)

Stockholders' equity (deficit)
   Series A convertible preferred stock, $.0001 par value; 8% coupon; 1,611
     shares authorized; 503.88 and 782.54 shares issued and outstanding at
     June 30, 2007 and December 31, 2006, respectively ....................           --              --
   Common stock, $.0001 per value; 80 million shares authorized; 20,152,998
     and 16,340,744 shares issued and outstanding at June 30, 2007 and
     December 31, 2006, respectively ......................................          2,015           1,634
   Additional paid-in capital .............................................     57,628,991      42,049,703
   Accumulated deficit ....................................................    (57,498,760)    (43,974,396)
                                                                              ------------    ------------
     Total stockholders' equity (deficit) .................................        132,246      (1,923,059)
                                                                              ------------    ------------
     Total liabilities and stockholders' equity (deficit) .................   $ 84,166,758    $ 85,991,730
                                                                              ============    ============
</TABLE>

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


                                       3
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                               ----------------------------    ----------------------------
                                                   2007            2006            2007            2006
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>
Revenues
  Coal sales ...............................   $ 18,729,218    $ 23,877,070    $ 37,543,116    $ 44,114,840
  Other revenues ...........................        153,227         248,085         374,275         479,047
                                               ------------    ------------    ------------    ------------
   Total revenues ..........................     18,882,445      24,125,155      37,917,391      44,593,887
                                               ------------    ------------    ------------    ------------

Expenses
  Cost of sales ............................     18,309,912      21,487,485      35,903,825      42,218,201
  Depreciation, depletion, amortization
    and accretion ..........................      3,664,058       4,081,510       7,292,655       7,913,746
  General and administrative ...............      1,575,011       2,101,327       3,653,908       4,158,035
                                               ------------    ------------    ------------    ------------
   Total operating expenses ................     23,548,981      27,670,322      46,850,388      54,289,982
                                               ------------    ------------    ------------    ------------

Operating loss .............................     (4,666,536)     (3,545,167)     (8,932,997)     (9,696,095)
                                               ------------    ------------    ------------    ------------

Other income (expense)
  Interest expense .........................     (2,216,205)     (1,859,189)     (4,320,553)     (3,728,033)
  Other income (expense), net ..............        343,002         506,774         752,293         847,652
                                               ------------    ------------    ------------    ------------
   Total other income (expense) ............     (1,873,203)     (1,352,415)     (3,568,260)     (2,880,381)
                                               ------------    ------------    ------------    ------------

Net loss ...................................   $ (6,539,739)   $ (4,897,582)   $(12,501,257)   $(12,576,476)

Preferred stock dividend ...................        (91,968)       (122,287)       (299,843)       (362,886)

Preferred stock deemed dividend ............     (1,023,106)           --        (1,023,106)           --
                                               ------------    ------------    ------------    ------------


Net loss attributable to common shareholders   $ (7,654,813)   $ (5,019,869)   $(13,824,206)   $(12,939,362)
                                               ============    ============    ============    ============
Basic net loss per common share ............   $      (0.38)   $      (0.34)          (0.74)   $      (0.90)
                                               ============    ============    ============    ============
Diluted net loss per common share ..........   $      (0.38)   $      (0.34)   $      (0.74)   $      (0.90)
                                               ============    ============    ============    ============
Weighted average common shares .............     19,970,054      14,881,841      18,763,215      14,318,894
                                               ============    ============    ============    ============
</TABLE>

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


                                       4
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                                                   SIX MONTHS ENDED MARCH 31,
                                                                                  ----------------------------
                                                                                      2007            2006
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
Cash Flows from Operating Activities
  Net loss ....................................................................   $(12,501,257)   $(12,576,476)
  Adjustments to reconcile net loss to net cash (used in) provided by
     operating activities:
     Depreciation, depletion, amortization and accretion ......................      7,292,655       7,913,746
     Amortization of deferred financing costs .................................        322,428         286,516
     Amortization of notes discount ...........................................        329,378         291,888
     Gain on disposal of assets ...............................................       (168,661)       (192,848)
     Loss (gain) on extinguishment of debt ....................................         50,720        (269,608)
     Settlement of asset retirement obligations ...............................       (335,802)       (626,551)
     Non-cash compensation:
       Stock option expense ...................................................        475,139         703,940
       Related party option expense ...........................................        434,493            --
     Changes in operating assets and liabilities:
       Decrease in accounts receivable ........................................      2,003,169         354,027
       Increase in inventory ..................................................     (1,458,600)       (928,186)
       Decrease (increase) in prepaid and other current assets ................        242,976        (343,878)
       Decrease in other non-current assets ...................................         58,386            --
       (Decrease) increase in accounts payable and accrued expenses ...........     (3,808,204)      5,902,570
       Decrease in deferred revenue ...........................................       (148,618)        (43,220)
       Increase  in other non-current liabilities .............................        145,340          44,704
                                                                                  ------------    ------------
         Net cash flows (used in) provided by operating activities ............     (7,066,458)        516,624
                                                                                  ------------    ------------

Cash Flows from Investing Activities
  Capital expenditures ........................................................     (1,945,518)    (18,564,506)
  Acquisition deposit .........................................................       (250,000)           --
  Proceeds from sale of equipment .............................................        878,074         871,330
  Increase in restricted cash .................................................       (358,133)     (8,199,903)
  Increase in prepaid royalties ...............................................       (492,719)           --
                                                                                  ------------    ------------
     Net cash flows used in investing activities ..............................     (2,168,296)    (25,893,079)
                                                                                  ------------    ------------

Cash Flows from Financing Activities
  Proceeds from issuance of common stock ......................................     13,950,000         897,018
  Proceeds from exercise of options and warrants ..............................           --         1,420,122
  Proceeds from issuance of notes payable .....................................        441,077       3,362,316
  Proceeds from borrowings on Term Loan Credit Facility .......................      2,000,000            --
  Repayments on notes payable .................................................     (2,757,915)     (1,923,584)
  Repayments of capital leases ................................................       (657,195)     (2,196,544)
  Payments for deferred financing costs .......................................        (51,467)        (80,931)
  Dividends paid ..............................................................       (371,317)        (66,995)
                                                                                  ------------    ------------
     Net cash flows provided by financing activities ..........................     12,553,183       1,411,402
                                                                                  ------------    ------------

NET INCREASE (DECREASE) IN CASH ...............................................      3,318,429     (23,965,053)
Cash and cash equivalents at beginning of period ..............................      2,180,885      25,434,988
                                                                                  ------------    ------------
Cash and cash equivalents at end of period ....................................   $  5,499,314    $  1,469,935
                                                                                  ============    ============
</TABLE>


                                       5
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)
<CAPTION>
                                                                                   SIX MONTHS ENDED MARCH 31,
                                                                                  ----------------------------
                                                                                      2007            2006
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
Supplemental disclosures
  Interest paid in cash .......................................................   $  3,311,194    $  2,908,114
   Non-cash investing and financing transactions:
      Preferred stock dividends converted to common stock .....................         81,370          63,717
      Preferred stock effective dividends .....................................      1,023,106            --
      Equipment acquired via installment purchase obligations and notes payable        250,338            --
      Equipment acquired via capital leases ...................................        248,900            --
</TABLE>

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


                                       6
<PAGE>


                               NATIONAL COAL CORP.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The  unaudited  condensed  consolidated  financial  statements  do  not
include footnotes and certain financial  information normally presented annually
under accounting  principles  generally accepted in the United States of America
and should,  therefore,  be read in  conjunction  with the Annual Report on Form
10-K of National  Coal Corp.  (the  "Company")  for the year ended  December 31,
2006. The accompanying  unaudited condensed  consolidated  financial  statements
reflect all  adjustments  of a normal  recurring  nature that, in the opinion of
management,  are considered  necessary for a fair  presentation of the financial
position,  results  of  operations,  and cash flows for the  periods  presented.
Accounting  measurements at interim dates inherently involve greater reliance on
estimates  than at  year-end.  The results of  operations  for the three and six
month periods ended June 30, 2007 are not necessarily indicative of results that
can be expected for the fiscal year.

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

         At June  30,  2007,  the  Company  had cash  and  cash  equivalents  of
approximately  $5.5 million and negative working capital of  approximately  $1.2
million.  Net cash flows used in  operations  for the six months then ended were
approximately $7.1 million of which $5.4 million and $1.7 million related to the
first and second quarters,  respectively,  highlighting improvement in operating
efficiency and sales  effectiveness.  However, the Company's operations have not
generated  positive  cash flow and the ability to do so during the  remainder of
2007 is dependent upon  generating  spot sales at prices  averaging at least $45
per ton and additional improvements to operating efficiency.

         At June 30, 2007, the Company had stockholders'  equity of $132,246 and
had incurred net losses of $6.5 million and $12.5 million,  excluding  preferred
stock  dividends,  for the three and six months  then ended,  respectively.  The
Company  expects to continue  incurring net losses into the  foreseeable  future
resulting in a stockholders' deficit.

         The Company  invested  $2.4 million in equipment  and mine  development
during  the six  months  ended  June  30,  2007.  The  Company  intends  to make
additional  capital  expenditures of approximately $5.0 million during the third
quarter of 2007 to redeploy its second  highwall miner in Kentucky and add a new
mining truck to its equipment fleet in addition to routine capital  expenditures
estimated at $100,000 per month. Redeployment of the highwall miner will require
a full spread of surface mining equipment,  which will cost  approximately  $3.3
million to be financed through installment purchase obligations.

         The  Company's  operating  plan for the remainder of 2007 includes cash
receipts  adequate to cover all commitments  excluding the capital  expenditures
mentioned above.  However,  the plan relies on as present  uncommitted  sales of
approximately  130,000 tons at a minimum sales price of $45.00 per ton, adequate
production  to  meet  commitments,   and  continued  improvements  in  operating
performance.   If  the  Company  is  unable  to  execute  its   operating   plan
successfully,  it will not be able to meet its liquidity  requirements  and will
need  to  raise  additional  cash  or  discontinue  operations  at  some  of its
facilities.
 There  are no  assurances  that  efforts  to  raise  additional  cash  would be
successful or that  discontinued  operations would generate  adequate savings to
meet the Company's commitments.


                                       7
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

2.       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 the  provisions  of FIN No. 48 on January 1, 2007
with no impact to retained  earnings.  The Company has determined that it has no
uncertain tax positions.

         Due to the existence of net operating loss ("NOL")  carryforwards,  the
Company  has not  currently  accrued  interest  on any of its  unrecognized  tax
benefits.  If the accrual of  interest or  penalties  becomes  appropriate,  the
Company will record an accrual in its income tax provision.

         The  Company's  Federal and state income tax returns for the years 2003
(inception)  and beyond remain subject to  examination  by the Internal  Revenue
service and various state taxing authorities.

         In September  2006, the FASB issued  Statement of Financial  Accounting
Standards No. 157, FAIR VALUE  MEASUREMENTS  ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about  fair  value  measurements.   SFAS  157  applies  under  other  accounting
pronouncements  that  require  or permit  fair value  measurements.  SFAS 157 is
effective  prospectively  for fiscal years beginning after November 15, 2007 and
interim  periods  within  that  fiscal  year.  The  Company  does not expect the
adoption  of SFAS 157 to have a material  impact on its  financial  position  or
results of operations.

3.       INVENTORY

         Inventory consisted of the following:

                                             JUNE 30, 2007     DECEMBER 31, 2006
                                           -----------------   -----------------
Raw Coal ...............................   $         473,455   $         866,379
Saleable Coal ..........................           3,019,132           1,148,331
Tires ..................................             187,754             207,032
                                           -----------------   -----------------
 Inventory .............................   $       3,680,341   $       2,221,742
                                           =================   =================


                                       8
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

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

         Property, plant, equipment and mine development is as follows:

<TABLE>
<CAPTION>
                                                              JUNE 30,      DECEMBER 31,
                                                                2007            2006
                                                            ------------    ------------
<S>                                                         <C>             <C>
Furniture and office equipment ..........................   $    417,955    $    345,554
Mining equipment and vehicles ...........................     50,920,524      48,864,201
Land and buildings ......................................      6,678,684       6,674,027
Mineral rights ..........................................     11,911,309      11,911,309
Mine development ........................................     10,640,303      10,003,328
Construction in progress ................................        190,932         854,399
                                                            ------------    ------------
  Total property, plant, equipment and mine development .     80,759,707      78,652,818
Less accumulated depreciation, depletion and amortization    (29,408,790)    (22,815,191)
                                                            ------------    ------------
  Property, plant, equipment and mine development, net ..   $ 51,350,917    $ 55,837,627
                                                            ============    ============
</TABLE>

         Mining equipment includes  approximately $493,000 and $869,000 of gross
assets  under   capital   leases  at  June  30,  2007  and  December  31,  2006,
respectively.

         Depreciation  expense for the three months ended June 30, 2007 and 2006
was  approximately  $3,015,000  and  $3,673,000,  respectively,  and for the six
months ended June 30, 2007 and 2006 was approximately $6,083,000 and $7,157,000,
respectively.

         The net  book  value of  assets  held for  sale at  December  31,  2006
approximated the fair value and is disclosed separately on the balance sheet. In
January 2007, these assets were sold for a gain of approximately $4,000.

5.       OTHER NON-CURRENT ASSETS

         Other non-current assets are as follows:

                                                       JUNE 30,         DEC. 31,
                                                         2007             2006
                                                       --------         --------
Prepaid royalties ............................         $823,424         $330,705
Notes receivable .............................           38,425           96,811
                                                       --------         --------
Total other non-current assets ...............         $861,849         $427,516
                                                       ========         ========


                                       9
<PAGE>


                              NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

6.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses are as follows:

                                                      JUNE 30,         DEC. 31,
                                                        2007            2006
                                                     -----------     ----------
Accounts payable ...............................     $ 6,259,513     $ 9,944,033
Accrued payroll and related taxes ..............         306,982         189,753
Accrued interest ...............................         333,556         379,581
Accrued insurance premiums .....................         330,844         310,726
Accrued dividends ..............................         480,232         548,480
Royalty obligations ............................         384,741         464,987
Accrued federal, state and local taxes .........           9,175         143,935
                                                     -----------     -----------
Total accounts payable and accrued expenses ....     $ 8,105,043     $11,981,495
                                                     ===========     ===========

7.       DEBT AND FINANCING ARRANGEMENTS

         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 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  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 for 2007 and 2008 including:  EBITDA, consolidated
leverage,  and  consolidated  interest  coverage.  As a result of the March 2007
amendment,  the applicable margin on the credit facility  increased by 1.0%. The
applicable  margin was the rate which was added to the  Eurodollar  Rate or Base
Rate to determine the full interest rate on the facility.

         At June 30,  2007,  the  Company  was not in  compliance  with  certain
financial  covenants  under the credit  facility,  including  those  relating to
EBITDA, consolidated leverage, and consolidated interest coverage, and on August
15, 2007,  Guggenheim  agreed to a further  amendment  of the credit  agreement.
Pursuant  to  the  August  2007  amendment,   Guggenheim  waived  the  Company's
non-compliance with the financial covenants for the quarter ended June 30, 2007,
and the parties agreed to:


                                       10
<PAGE>


                              NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

7.       DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

         o        Change the maturity date under the credit agreement from March
                  2010 to December 31, 2008;

         o        Change the interest rate payable on all  outstanding  loans to
                  12% per annum;

         o        Provide for a payment to  Guggenheim of a fee of $100,000 upon
                  execution  of  the  amendment,  and  fees  equal  to 5% of all
                  amounts outstanding under the credit agreement at December 31,
                  2007  and 10% of all  amounts  outstanding  under  the  credit
                  agreement at June 30, 2008;

         o        Reset the EBITDA financial covenant,  defined in the agreement
                  as  consolidated  net income  plus 1) income tax  expense,  2)
                  consolidated  interest expense including  amortization of debt
                  discount  and  debt  issuance  costs,   3)  depreciation   and
                  amortization   expense,  4)  any  extraordinary,   unusual  or
                  non-recurring  expenses or losses,  and 5) any other  non-cash
                  charges  minus  1)  interest  income,  2)  any  extraordinary,
                  unusual  or  non-recurring  income  or gains  and 3) any other
                  non-cash income,  and eliminate the consolidated  leverage and
                  consolidated interest coverage covenants; and

         o        Eliminate any  prepayment  penalties,  and provide the Company
                  with  greater  ability to incur  additional  indebtedness  and
                  capital lease obligations.

         Management  of  the  Company  believes  that  the  Company  will  be in
compliance with the terms of the credit  agreement and its covenants,  as reset,
for the subsequent twelve month period and as such has reflected this obligation
as long-term on the condensed  consolidated  balance sheet at June 30, 2007. The
Company is in the process of determining the proper  accounting under EITF 96-19
DEBTOR'S  ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF DEBT  INSTRUMENTS for the
related  unamortized  deferred financing fees of approximately  $355,000 and the
fees paid in August 2007 of $100,000.

         INSTALLMENT PURCHASE OBLIGATIONS

         In  January  2007 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.


                                       11
<PAGE>


                              NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

7.       DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

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

                                                    JUNE 30,        DECEMBER 31,
                                                      2007             2006
                                                  ------------     ------------
10.5% Senior Secured Notes, due 2010 .........    $ 55,000,000     $ 55,000,000
Term Loan Credit Facility ....................      10,000,000        8,000,000
Bank note (prime + 1%), due 2007 .............         247,445          637,374
Installment purchase obligations, due 2008 ...       1,266,129        2,825,209
Installment purchase obligations, due 2009 ...       2,548,734        3,200,286
Installment purchase obligations, due 2010 ...         626,457             --
Equipment notes (7.83%-9.28%, due 2009) ......         172,017          125,382
Equipment note (4.48%, due 2009) .............         180,365          234,721
Other ........................................           4,836           89,512
Less unamortized discounts ...................      (2,969,301)      (3,298,679)
                                                  ------------     ------------
                                                    67,076,682       66,813,805
Less current portion of long-term debt .......      (3,235,822)      (4,720,671)
                                                  ------------     ------------
Long-term debt ...............................    $ 63,840,860     $ 62,093,134
                                                  ============     ============

8.       LEASES

         The  Company   leases   mining  and  certain  other   equipment   under
noncancelable  lease agreements with terms up to five years.  Rental expense for
equipment under operating lease  agreements with initial lease terms of one year
or greater was  approximately  $539,000  and $37,000 for the three  months ended
June 30, 2007 and 2006,  and  approximately  $1,109,000 and $182,000 for the six
months ended June 30, 2007 and 2006, respectively.

         During the first  quarter of 2007,  the Company  entered into a capital
lease agreement of $248,900 with an equipment supplier for mining equipment with
a comparable value. The lease is for a period of thirty-two months.

9.       ASSET RETIREMENT OBLIGATIONS

         The  following  table  describes  the  changes to the  Company's  asset
retirement obligations:

Obligation at December 31, 2006 ..........................          $ 7,214,894
Accretion expense ........................................              429,953
Obligations settled ......................................             (335,802)
                                                                    -----------
Obligation at June 30, 2007 ..............................            7,309,045
Current portion ..........................................           (1,214,517)
                                                                    -----------
Long-term liability at June 30, 2007 .....................          $ 6,094,528
                                                                    ===========


                                       12
<PAGE>


                              NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

10.      STOCKHOLDERS' EQUITY (DEFICIT)

         During  the six months  ended  June 30,  2006,  152,500  warrants  were
exercised with gross proceeds  totaling  $1,006,500.  No warrants were exercised
during the six months ended June 30, 2007.

         During the six months  ended June 30, 2007 and 2006,  holders of 278.66
and  542.01  shares of Series A  cumulative  convertible  preferred  stock  with
liquidation   preferences   totaling  $4,179,894  and  $8,130,156  plus  accrued
dividends  of $81,370 and  $63,717,  converted  their  shares  into  801,886 and
1,364,166 shares of common stock,  respectively.  The holders of 174.7 shares of
the Series A cumulative  convertible  preferred stock  converted  during the six
months ended June 30, 2007 were  provided  with an  inducement to convert in the
form of an  additional  73,169  shares of common stock with an aggregate  market
value of  $376,824.  The  holders  of 24.0  shares  of the  Series A  cumulative
convertible  preferred stock converted during the six months ended June 30, 2007
were provided with a $47,485 cash inducement to convert.  The combined  $424,309
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.

         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  No.  98-5,  ACCOUNTING  FOR  CONVERTIBLE  SECURITIES  WITH
BENEFICIAL  CONVERSION  FEATURES OR CONTINGENTLY  ADJUSTABLE  CONVERSION 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  in the second
quarter of 2007.

         During the six months ended June 30, 2006,  the Company  issued 150,010
shares of common stock and received gross proceeds of $413,622 upon the exercise
of stock  options by employees or former  employees.  There were no stock option
exercises during the six months ended June 30, 2007.

         Net  loss  is  equal  to  total  comprehensive  loss  for  all  periods
presented.


                                       13
<PAGE>


                              NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

11.      EARNINGS (LOSS) PER SHARE

         Basic earnings or loss per share are computed by dividing net income or
loss by the weighted  average  number of common  shares  outstanding  during the
year.  Diluted  earnings  or loss per  share  are  computed  similarly  to basic
earnings or loss 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 or
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  three  months  ended  June 30,  2007 and 2006,  1,717,890  and
3,943,734 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.  For the six
months  ended  June 30,  2007 and  2006,  1,685,293  and  4,474,398  potentially
dilutive shares of the Company from warrants,  convertible  preferred stock, and
stock  options  were not included in the  computation  of diluted loss per share
because to do so would be anti-dilutive.

         The  computations for basic and diluted earnings or loss per share from
continuing operations are as follows:

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED JUNE 30,      SIX MONTHS ENDED JUNE 30,
                                         ----------------------------    ----------------------------
                                             2007            2006            2007            2006
                                         ------------    ------------    ------------    ------------
<S>                                      <C>             <C>             <C>             <C>
Numerator:
Net loss .............................   $ (6,539,739)   $ (4,897,582)   $(12,501,257)   $(12,576,476)
Preferred dividends ..................        (91,968)       (122,287)       (299,843)       (362,886)
Preferred stock deemed dividends .....     (1,023,106)           --        (1,023,106)           --
                                         ------------    ------------    ------------    ------------
Numerator for basic and diluted ......   $ (7,654,813)   $ (5,019,869)   $(13,824,206)   $(12,939,362)
                                         ============    ============    ============    ============
Denominator:
Weighted average shares - basic ......     19,970,054      14,881,841      18,763,215      14,318,894
Effect of warrants ...................           --           152,694            --           201,347
Effect of convertible preferred shares      1,511,640       2,351,175       1,511,640       2,813,387
Effect of stock options ..............        206,250       1,439,865         173,653       1,459,664
                                         ------------    ------------    ------------    ------------
Adj. weighted average shares - diluted     21,687,944      18,825,575      20,448,508      18,793,292
                                         ============    ============    ============    ============
Net loss per share - basic ...........   $      (0.38)   $      (0.34)   $      (0.74)   $      (0.90)
                                         ============    ============    ============    ============
Net loss per share - diluted .........   $      (0.38)   $      (0.34)   $      (0.74)   $      (0.90)
                                         ============    ============    ============    ============
</TABLE>


                                       14
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

12.      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 and July
2007.  Under the terms of the Plan,  stock  options may be granted to  officers,
directors,  employees,  and others. At June 30, 2007, 2,750,000 shares of common
stock were  authorized for issuance under the Plan which number was increased to
4,450,000 in July 2007. 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 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 three  months  ended  June 30,  2007 and 2006,  the  Company
recognized  $240,264  and  $355,082  of  compensation  expense  related to stock
options,  respectively.  During the six months ended June 30, 2007 and 2006, the
Company  recognized  $475,139 and $703,940 of  compensation  expense  related to
stock options, respectively.

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

<TABLE>
<CAPTION>
                                          THREE MONTHS                SIX MONTHS
                                         ENDED JUNE 30,              ENDED JUNE 30,
                                    -----------------------    ------------------------
                                       2007         2006          2007          2006
                                    ----------   ----------    ----------    ----------
<S>                                                   <C>           <C>           <C>
Expected term (years) ...........            *         6.25          6.25          6.25
Risk-free interest rates ........            *         4.85%         4.69%         4.63%
Expected dividend yield .........            *          0.0%          0.0%          0.0%
Expected volatility .............            *        50.31%        53.07%        50.43%
</TABLE>

*        No options were granted during the three months ended June 30, 2007.

         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.  No options were granted during the three months ended June 30, 2007. The
weighted-average grant-date fair value of options issued during the three months
ended June 30, 2006 was $4.44.  The  weighted-average  grant-date  fair value of
options  issued  during the six months  ended June 30, 2007 and 2006 were $2.63,
and $4.12,  respectively.  The total intrinsic value of options exercised during
the three months ended June 30, 2006 was $204,348.  The total intrinsic value of
options exercised during the six months ended June 30, 2006 was $666,563.  There
were no options  exercised  during the three or six month  period ended June 30,
2007.


                                       15
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

12.      STOCK-BASED COMPENSATION PLANS (CONTINUED)

         The  following  table  summarizes  activity  under the Plan for the six
months ended June 30, 2007:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                                 WEIGHTED         REMAINING          AGGREGATE
                                                OPTIONS          AVERAGE         CONTRACTUAL      INTRINSIC VALUE
                                              OUTSTANDING     EXERCISE PRICE    TERM (IN YEARS)       ($000)
                                            ---------------   ---------------   ---------------   ---------------
<S>                                               <C>         <C>                          <C>    <C>
Outstanding at December 31, 2006 ........         1,323,625   $          6.90              8.81              --
Granted .................................           100,000              4.65              --                --
Exercised ...............................              --                --                --                --
Forfeited ...............................               500              6.60              --                --
Expirations .............................              --                --                --                --
                                            ---------------   ---------------   ---------------   ---------------
Outstanding at June 30, 2007 ............         1,423,125   $          6.74              8.41   $       241,625
                                            ===============
Vested or expected to vest at June 30,
  2007A .................................         1,272,518   $          6.68              8.36   $       228,451
                                            ===============
Exercisable .............................           415,939   $          5.51              7.50   $       153,750
                                            ===============
</TABLE>

         As of June  30,  2007,  there  was  $2,073,207  of  total  unrecognized
compensation  cost related to non-vested  stock options  granted under the Plan.
That cost is expected to be  recognized  over a weighted  average  period of 2.6
years.  The total fair value of shares vested during the three months ended June
30, 2007 and 2006 was $611,174 and $2,762,529, respectively.

         During the first  quarter of 2007,  the Board of Directors  agreed to a
modification of stock option agreements as they apply to independent  directors.
Previously,  at such  time as an  independent  director  ceased  to serve on the
Board, his vested options outstanding at that time were exercisable for a period
of 90 days. Currently, this survival period has been extended to 18 months.

         In March 2007, the  then-Chairman  of the Company's Board of Directors,
who is also the former President and CEO, sold to the current  President and CEO
for $10 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
six months ended June 30, 2007.


                                       16
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

12.      STOCK-BASED COMPENSATION PLANS (CONTINUED)

         At the July 23, 2007 Annual Meeting of Shareholders of the Company, the
Company's  shareholders  approved an amendment to the Plan increasing the number
of shares  authorized  for issuance  under the Plan from 2,750,000 to 4,450,000.
The Company intends to include those shares on a Registration  Statement on Form
S-8 to be filed with the SEC as soon as is practicable.

13.      COMMITMENTS AND CONTINGENCIES

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

         Some of the same  plaintiffs  filed a similar  action in U.S.  District
Court based on  essentially  the same facts alleging NEPA  violations  regarding
OSM's approval of an application for a revision of the same permit.  The Company
and the OSM have filed  Motions for Summary  Judgment  based upon the outcome of
the prior case above referenced. An unfavorable outcome of this action would not
involve direct monetary  damages;  however  significant  financial  losses could
result from curtailed mining  operations.  In July 2007, the U.S. District Court
entered an Order of Judgment granting the Motions for Summary Judgement filed by
the OSM and the Company and denying the Motion for Summary Judgment filed by the
plaintiffs.

         During  2005,  the  Company  was  audited  by  its  previous   workers'
compensation insurance provider which contends that an additional  approximately
$1.4 million in premiums is owed for the year ended April 15,  2005.  The matter
primarily  involves the  application  of premium  rates to employees  performing
certain  job  functions.  In January  2006,  the  Company  paid  $427,000 to the
previous  insurance  provider.  Currently,  the matter has not been resolved and
both parties have pursued  legal action in the United States  District  Court of
the Eastern District of Tennessee.  While management believes legal reserves are
sufficient for this matter, it is possible that the actual outcome of the matter
could vary  significantly  from this amount. The Company made an offer to settle
in March 2007 which was  accepted  and  subsequently  rejected by the  insurance
company.  The Company  filed a Motion  with the Court to enforce the  settlement
accepted by the insurance company. The Court granted the Motion in August 2007.

         In March 2006, the Company was named as defendant in a complaint  filed
in the United States District Court for the Eastern  District of Kentucky by the
sublessee of certain coal mining rights concurrent with the Company's operations
in Kentucky.  The Company was the  sublessee of the right to mine coal using the
underground  method  on  the  property  in  question,  as the  result  of a 2004
acquisition.  The  complainant  claimed that it possessed  the right to mine the
coal at this property  through the surface  mining method and that by mining the
coal by the highwall mining method,  the Company committed either an intentional
or  negligent  trespass.  The  complainant  sought  damages in the range of $1.2
million to $2.8  million,  which it estimated  to be the range of gross  profits


                                       17
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

13.      COMMITMENTS AND CONTINGENCIES

from the revenues of the coal mined.  Management  acknowledged  that the Company
mined the coal in question,  but  contended  that by using the  highwall  mining
method,  the  Company  mined the coal  pursuant  to the Lease by an  underground
mining method and therefore committed no trespass. As an additional defense, the
Company filed a  third-party  complaint  against a  consultant,  who advised the
Company  that it had the right to mine the coal.  This  counterclaim  could have
allowed the Company to recover a portion of any amounts  lost,  if the  original
complainant  had been  successful.  A  settlement  in the amount of $100,000 was
reached with the opposing  party and  documented for entry by Order of the Court
in February 2007. The Final Order of the Court  terminating the case was entered
and payment was made in June 2007.

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

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

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

14.      RELATED PARTY TRANSACTIONS

         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 for a total price
of $930,000. The sale was completed on March 1, 2007.

         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 six months ended June 30, 2007.


                                       18
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
                                   (Unaudited)

15.      ACQUISITIONS

         On June 18, 2007,  the Company  entered into a Purchase  Agreement with
Mann Steel Products,  Inc., Frank C. Mann, II and William T. Mann  (Collectively
the  "Sellers"),  pursuant  to which,  subject  to the  satisfaction  of certain
conditions, all of the issued and outstanding stock of Mann Steel Products would
be  acquired  along  with  all of  its  corporate  assets,  other  than  certain
equipment, for an aggregate purchase price of $55,000,000. The purchase price is
subject to adjustment  based on Mann Steel's  working  capital at the end of the
business day immediately prior to the closing.

         The  consummation  of the  acquisition is  conditioned  on, among other
customary  requirements,   the  approval  of  the  Purchase  Agreement  and  the
transactions and ancillary  documents  contemplated  thereunder by the Company's
board  of  directors,  the  Company's  satisfaction  with the  results  of a due
diligence  investigation of Mann Steel,  the  satisfaction of potential  lenders
with the results of their due diligence  investigation of Mann Steel, receipt of
certain audited and reviewed financial  statements of Mann Steel, and Mann Steel
having obtained all consents and approvals necessary for the consummation of the
acquisition.  The  Company  has a certain  period of time  following  receipt of
certain audited and reviewed financial statements of Mann Steel to terminate the
agreement,  and if not  terminated,  the  approval  of the  Company's  board  of
directors,  the  Company's  satisfaction  with the results of its due  diligence
investigation,  and the  satisfaction  of lenders  with the results of their due
diligence   investigation  shall  no  longer  be  conditions  to  the  Company's
obligation to consummate  the  acquisition.  The process of selecting  potential
lenders  has  not  been  completed  and,   depending  upon  proposed  terms  and
conditions, may have a significant impact on the acquisition.

         The parties have agreed to bear their own expenses in  connection  with
the acquisition. In the event that a party terminates the Purchase Agreement for
the other  party's  failure to perform their  covenants or a material  breach of
their  representations  and  warranties,  and  prior  to  such  termination  the
terminating  party has satisfied the  conditions  precedent to the other party's
obligation  to  consummate  the  acquisition,  the  non-terminating  party shall
reimburse  the  terminating  party  for the  actual  amount  of its  reasonable,
documented expenses up to a maximum of $250,000.

         Pursuant to the terms of the Purchase Agreement,  the Company deposited
$250,000 into an escrow  account as an earnest money  deposit.  In the event the
Sellers  terminate the Purchase  Agreement for the Company's  failure to perform
its covenants or a material breach of its  representations  and warranties,  the
Sellers  shall be entitled to receive the earnest  money  deposit as  liquidated
damages.

16.      EVENTS SUBSEQUENT TO JUNE 30, 2007

         Between July 1, 2007 and August 13, 2007,  holders of 4.0 shares of our
Series A  convertible  preferred  stock with  liquidation  preferences  totaling
approximately $60,000 and no unpaid dividends converted their shares into 10,363
shares of our common stock.

         On July 9, 2007,  the  Company  received  PHASE I release of one of its
reclamation bonds relating to mining permits at its former Mine # 3 and Mine # 4
in Kentucky.  This release,  in the amount of $807,400,  reduces restricted cash
during the three months ended  September 30, 2007 in the form of certificates of
deposit  supporting bank letters of credit which will  subsequently be available
to support additional mining permits.

         At the July 23, 2007 Annual Meeting of Shareholders of the Company, the
Company's  shareholders  approved an amendment to the Company's 2004 Option Plan
increasing  the number of shares  authorized  for  issuance  under the Plan from
2,750,000 to 4,450,000.  The Company intends to include those additional  shares
on a  Registration  Statement on Form S-8 to be filed with the SEC as soon as is
practicable.


                                       19
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The  information  contained in this Form 10-Q is intended to update the
information  contained  in our  Annual  Report on Form  10-K for the year  ended
December 31, 2006 and presumes  that readers have access to, and will have read,
the "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and other  information  contained in such Form 10-K.  The following
discussion  and  analysis  also  should  be read  together  with  our  condensed
consolidated  financial  statements and the notes to the condensed  consolidated
financial statements included elsewhere in this Form 10-Q.

         This report,  including this section entitled "Management's  Discussion
and  Analysis  of  Financial  Condition  and Results of  Operation"  may contain
"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;

         o        whether we consummate the  acquisition of Mann Steel Products,
                  Inc.,  and the terms on which we raise the  financing for such
                  acquisition; and

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


                                       20
<PAGE>


         Forward-looking  statements speak only as of the date of this quarterly
report. You should not put undue reliance on any forward-looking statements. The
Company strongly encourages investors to carefully read the factors described in
the Company's Annual Report on Form 10-K for the year ended December 31, 2006 in
the section  entitled  "Risk  Factors" for a  description  of certain risks that
could,   among  other  things,   cause  actual  results  to  differ  from  these
forward-looking  statements. The Company assumes no responsibility to update the
forward-looking statements contained in this quarterly report on Form 10-Q.

OVERVIEW

         We mine, process and sell high quality bituminous steam coal from mines
located in East  Tennessee and  Southeastern  Kentucky.  We own the coal mineral
rights  to  approximately   74,600  acres  of  land  and  lease  the  rights  to
approximately   40,900   additional  acres.  We  have  expanded  our  operations
considerably  since commencing  operations at a single surface mine in Tennessee
in July 2003. As of June 30, 2007, our mining complexes included two underground
mines,  two surface  mines,  and one highwall  mine.  In addition,  we have four
preparation  plants,  two active and two  inactive,  and two unit train  loading
facilities,  both active,  and one  twenty-four  hour loadout which is inactive,
served by the CSX and Norfolk  Southern ("NS")  railroads.  We hold permits that
allow us to open seven new mines close to our current operations. As of June 30,
2007, we  controlled  approximately  35.7 million  estimated  recoverable  tons.
During the six months  ended June 30,  2007,  we  generated  total  revenues  of
approximately $37.9 million,  net loss of approximately $12.5 million and EBITDA
loss (See EBITDA NOTE below) of $1.6 million and sold approximately 740,000 tons
of coal. Our goal is to acquire  additional  mines and increase  production from
existing  reserves  as market  conditions  allow.  We are  optimistic  about the
long-term future of coal. Investments in reserves,  infrastructure,  permitting,
and people  made over the last three years mean that we are  positioned  to take
advantage of a strong market when coal prices rebound as we believe they will.

         Our revenues have resulted  primarily from the sale of coal to electric
utility  companies  in the  Southeastern  United  States.  According to the U.S.
Department of Energy, Energy Information  Administration  ("EIA"), the long-term
outlook  for coal  demand  in the  Southeast  is  favorable,  as coal  generated
electricity in our region is expected to grow at a rate of 2.5% per year. During
the six months  ended June 30,  2007,  approximately  81.8% 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  25.0%, 24.5% and 19.5% of our revenues,  respectively.  We sell a
majority of our coal  pursuant  to  long-term  contracts.  We  regularly  pursue
additional long-term contracts at favorable prices.

         EBITDA NOTE:

         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.  Adjusted EBITDA is defined as
         EBITDA plus  stock-based  compensation  expense.  We present EBITDA and
         Adjusted EBITDA to enhance understanding of our operating  performance.
         We use EBITDA and  Adjusted  EBITDA as a criteria  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 and Adjusted  EBITDA are  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 and Adjusted EBITDA to monitor and
         evaluate our business operations.  However,  EBITDA and Adjusted EBITDA
         are  not  measurements  of  financial   performance   under  accounting
         principles  generally accepted in the United States of America ("GAAP")


                                       21
<PAGE>


         and may not be comparable to other  similarly  titled measures of other
         companies.  EBITDA and  Adjusted  EBITDA  should not be  considered  as
         alternatives  to cash flows from  operating  activities,  determined in
         accordance  with GAAP,  as  indicators  of cash  flows.  The  following
         reconciles our net loss to EBITDA and Adjusted EBITDA:

<TABLE>
<CAPTION>
                                         Three Months Ended June 30,      Six Months Ended June 30,
                                         ----------------------------    ----------------------------
                                            2007             2006            2007            2006
                                         ------------    ------------    ------------    ------------
<S>                                      <C>             <C>             <C>             <C>
Net loss .............................   $ (6,539,739)   $ (4,897,582)   $(12,501,257)   $(12,576,476)

Other (income) expense, net ..........       (343,002)       (506,774)       (752,293)       (847,652)

Interest expense .....................      2,216,205       1,859,189       4,320,553       3,728,033

Depreciation, depletion, amortization,
and accretion ........................      3,664,059       4,081,510       7,292,655       7,913,746
                                         ------------    ------------    ------------    ------------
EBITDA ...............................   $ (1,002,477)   $    536,343    $ (1,640,342)   $ (1,782,349)

Stock based compensation expense(1) ..        240,264         355,092         909,632         703,940
                                         ------------    ------------    ------------    ------------

Adjusted EBITDA ......................   $   (762,213)   $    891,435    $   (730,710)   $ (1,078,409)
                                         ============    ============    ============    ============
</TABLE>

(1)      Includes $434,493 attributable to options sold to the President and CEO
         during the first quarter of 2007 by the Chairman of the Company's Board
         of Directors who is also the former President and CEO.


MANN STEEL PRODUCTS ACQUISITION

         On June 18, 2007, we entered into a Purchase  Agreement with Mann Steel
Products,  Inc.,  Frank C.  Mann,  II and  William  T.  Mann  (collectively  the
"Sellers"),  pursuant to which we will acquire,  subject to the  satisfaction of
certain  conditions,  all of the  issued  and  outstanding  stock of Mann  Steel
Products along with all of its corporate assets,  other than certain  equipment,
for an aggregate purchase price of $55,000,000. The purchase price is subject to
adjustment  based on Mann Steel's working capital at the end of the business day
immediately prior to the closing.

         The  consummation  of the  acquisition is  conditioned  on, among other
customary  requirements,   the  approval  of  the  Purchase  Agreement  and  the
transactions  and ancillary  documents  contemplated  thereunder by our board of
directors,  our satisfaction with the results of our due diligence investigation
of Mann Steel,  the  satisfaction  of our potential  lenders with the results of
their due diligence  investigation of Mann Steel, our receipt of certain audited
and reviewed financial  statements of Mann Steel, and Mann Steel having obtained
all consents and approvals necessary for the consummation of the acquisition. We
have a certain period of time following  receipt of certain audited and reviewed
financial statements of Mann Steel to terminate the agreement, and if we do not,
the approval of our board of directors, our satisfaction with the results of our
due  diligence  investigation,  and the  satisfaction  of our  lenders  with the
results of their due  diligence  investigation  shall no longer be conditions to
our obligation to consummate the acquisition. The process of selecting potential
lenders  has  not  been  completed  and,   depending  upon  proposed  terms  and
conditions, may have a significant impact on the acquisition.


                                       22
<PAGE>


         The parties have agreed to bear their own expenses in  connection  with
the acquisition. In the event that a party terminates the Purchase Agreement for
the other  party's  failure to perform their  covenants or a material  breach of
their  representations  and  warranties,  and  prior  to  such  termination  the
terminating  party has satisfied the  conditions  precedent to the other party's
obligation  to  consummate  the  acquisition,  the  non-terminating  party shall
reimburse  the  terminating  party  for the  actual  amount  of its  reasonable,
documented expenses up to a maximum of $250,000.

         Pursuant to the terms of the Purchase Agreement,  we deposited $250,000
into an escrow  account as an earnest  money  deposit.  In the event the Sellers
terminate  the Purchase  Agreement for our failure to perform our covenants or a
material  breach of our  representations  and  warranties,  the Sellers shall be
entitled to receive the earnest money deposit as liquidated damages.

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 have  determined that FIN 48 will have no
material impact on our financial position and results of operations.

         We  adopted  the  provisions  of FIN No. 48 on  January 1, 2007 with no
impact to retained  earnings.  We have  determined that we have no uncertain tax
positions.

         Due to the existence of net operating  loss ("NOL")  carryforwards,  we
have not currently accrued interest on any of our unrecognized tax benefits.  If
the accrual of  interest or  penalties  becomes  appropriate,  we will record an
accrual in our income tax provision.

         Our Federal and state income tax returns for the years 2003 (inception)
and beyond remain  subject to examination  by the Internal  Revenue  service and
various state taxing authorities.

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


                                       23
<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                             Three Months Ended         Six Months Ended
                                                   June 30,                  June 30,
                                            ---------------------     ---------------------
                                              2007         2006         2007         2006
                                            --------     --------     --------     --------
<S>                                            <C>          <C>          <C>          <C>
Revenues ................................      100.0%       100.0%       100.0%       100.0%
                                                                      --------     --------
Operating expenses:
    Cost of sales .......................       97.0         89.1         94.7         94.7
    Depreciation, depletion, amortization
       and accretion ....................       19.4         16.9         19.2         17.7
    General and administrative ..........        8.3          8.7          9.6          9.3
                                            --------     --------     --------     --------
    Total operating expenses ............      124.7        114.7        123.6        121.7
                                            --------     --------     --------     --------
Loss from operations ....................      (24.7)       (14.7)       (23.6)       (21.7)
Other income (expense):
    Interest expense ....................      (11.7)        (7.7)       (11.4)        (8.4)
    Other income (expense), net .........        1.8          2.1          2.0          1.9
                                            --------     --------     --------     --------
 Net loss ...............................      (34.6)       (20.3)       (33.0)       (28.2)
                                            ========     ========     ========     ========
</TABLE>

COMPARISON  OF THREE  MONTHS ENDED JUNE 30, 2007 AND THREE MONTHS ENDED JUNE 30,
2006

         PRODUCTION

         In the three  months ended June 30, 2007 and 2006,  our mines  produced
243,703 and 364,362 tons of coal, respectively, as follows:



                                                THREE MONTHS ENDED JUNE 30,
                                         --------------------------------------
                                           2007       %         2006       %
                                         -------   -------    -------   -------

Surface mines ........................    81,321      23.0%   110,002      24.2%
Highwall mines .......................    34,938       9.9%    69,908      15.4%
Underground mines ....................   127,444      36.1%   184,452      40.6%
                                         -------   -------    -------   -------
Total tons produced ..................   243,703      69.0%   364,362      80.2%
Coal purchased .......................   109,466      31.0%    89,856      19.8%
                                         -------              -------
Total tons available .................   353,169     100.0%   454,218     100.0%
                                         =======              =======
Tons produced by contract miners
included in the above ................    81,370      23.0%   192,434      42.4%


                                       24
<PAGE>


         REVENUES

         For the three months ended June 30, 2007,  approximately  78.6% of coal
sales were made to four utilities and one industrial  customers  under contracts
with original terms of twelve months or longer. The remaining coal sales for the
six month period were made under short term contracts or purchase  orders.  Tons
sold and the associated revenue for the two three month periods were as follows:

                                      Three Months
                                     Ended June 30,        Increase (decrease)
                               -------------------------   -------------------
                                  2007          2006           $            %
                               -----------   -----------   -----------    ----
Coal sales ..................  $18,729,218   $23,877,070   $(5,147,852)   (21.6)
Tons sold ...................      372,341       455,548       (83,207)   (18.3)
Average  price per ton sold .  $     50.30   $     52.41   $     (2.11)   (4.0)

         The decrease in revenue from coal sales for the three months ended June
30,  2007 as  compared to the same period in 2006 was the result of a decline in
sales volume due to the  completion of existing  sales  contracts in combination
with a $2.11  decline  in the  average  sales  price  per ton.  Other  revenues,
consisting  primarily of fees  charged to another  coal  producer for use of our
train loading  facilities,  represented  approximately  0.8% of total  revenues,
slightly lower than the prior period at 1.0%.

         OPERATING EXPENSES

              COST OF SALES

<TABLE>
<CAPTION>
                                      Three Months
                                      Ended June 30,            Increase (decrease)
                                -------------------------   --------------------------
                                   2007          2006            $              %
                                -----------   -----------   -----------    -----------
<S>                             <C>           <C>           <C>                  <C>
Cost of sales ...............   $18,309,912   $21,487,485   $(3,177,573)         (14.8)
Tons sold ...................       372,341       455,548       (83,207)         (18.3)
Average cost per ton sold ...   $     49.18   $     47.17   $      2.01            4.3
</TABLE>

         Total cost of sales  declined  14.8% during the three months ended June
30,  2007 as  compared to the same three  month  period in 2006  primarily  as a
result of the 18.3% reduction in volume of coal sold during the period. However,
the average cost per ton sold  increased  $2.01 or 4.3% as both  production  and
sales volume  declined  relative to many costs that are fixed in the short term.
Cost of sales as a percentage  of total  revenues  increased  from 89.1% for the
three months ended June 30, 2006 to 97.0% for the same period in 2007.  Notably,
cost of sales includes a 265.8%,  or approximately  $240,000,  increase in costs
associated  with idle  facilities  as the result of idling  one of our  highwall
miners, our newly renovated Baldwin facility, and our Mine # 17 at the beginning
of 2007 due to an  insufficiency  of existing sales  contracts.  Royalty expense
declined  54.6%,  or  approximately  $645,000,  because we mined  20.3% of total
production  on owned  reserves in our New River Tract in  Tennessee  whereas all
coal mined in the same  period in 2006 was on leased  reserves.  Labor and labor
related  expenses  declined  by  approximately  1.5% as a  result  of  decreased
production.


                                       25
<PAGE>


              DEPRECIATION, DEPLETION, AMORTIZATION, AND ACCRETION EXPENSE

<TABLE>
<CAPTION>
                                        Three Months
                                        Ended June 30,         Increase (decrease)
                                   -----------------------   ------------------------
                                      2007         2006          $              %
                                   ----------   ----------   ----------    ----------
<S>                                <C>          <C>          <C>                <C>
Depreciation, depletion,
  amortization & accretion ....    $3,664,058   $4,081,510   $ (417,452)        (10.2)
Tons sold .....................       372,341      455,548      (83,207)        (18.3)
Average cost per ton sold .....    $     9.84   $     8.96   $     0.88           9.8
</TABLE>

         The  10.2%  decline  in  depreciation,   depletion,  amortization,  and
accretion  expense for the three  months  ended June 30, 2007 as compared to the
comparable  period in 2006, is attributable  primarily to the  sale-leaseback of
one of our  highwall  miners  in  September  2006  and  the  idling  of  certain
facilities.  The cost associated with this highwall miner is currently reflected
as operating lease expense in cost of sales.  Accretion expense  associated with
asset retirement obligations and depletion expense increased approximately 73.6%
as the result of opening  new mines on owned  reserves in the New River Tract in
Tennessee.

              GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                        Three Months
                                        Ended June 30,         Increase (decrease)
                                   -----------------------   ------------------------
                                      2007         2006          $              %
                                   ----------   ----------   ----------    ----------
<S>                                <C>          <C>          <C>                <C>
General & administrative .......   $1,575,011   $2,101,327   $ (526,316)        (25.1)
Tons sold ......................      372,341      455,548      (83,207)        (18.3)
Average cost per ton sold ......   $     4.23   $     4.62   $    (0.39)         (8.4)
</TABLE>

         The 25.1% decrease in general and administrative expenses for the three
months ended June 30, 2007 as compared to the same period in the  previous  year
is primarily  attributable to a reduction in corporate  positions resulting in a
17.5%, or approximately $135,000,  reduction in salaries and related expenses in
addition  to a  35.2%,  or  approximately  $115,000,  reduction  in  stock-based
compensation  expense.  Significant decreases were also realized in security and
travel.

              OTHER INCOME (EXPENSE)

         The 19.2% increase in interest  expense for the three months ended June
30, 2007 as compared to the same three month period in 2006 is as follows:

<TABLE>
<CAPTION>
                                       Three Months
                                       Ended June 30,         Increase (decrease)
                                  -----------------------   ------------------------
                                     2007         2006          $              %
                                  ----------   ----------   ----------    ----------
<S>                               <C>          <C>          <C>               <C>
10.5% Senior Secured Notes ....   $1,769,397   $1,733,097   $   36,300           2.1
Term Loan Credit Facility .....      281,035         --        281,035          --
Installment obligations & notes       22,611       35,849      (13,238)        (36.9)
Capital lease obligations .....      109,927       89,189       20,738          23.3
Other .........................       33,235        1,054       32,181        3053.2
                                  ----------   ----------   ----------    ----------
  Total interest expense ......   $2,216,205   $1,859,189   $  357,016          19.2
                                  ==========   ==========    ==========
</TABLE>


                                       26
<PAGE>


         Interest income increased 84.1% to  approximately  $310,000 in the 2007
period as a result  of  increased  average  cash  balances  while  other  income
declined  90.3% to  approximately  $33,000.  Other  income  in the  2006  period
included a gain on the refinancing of mining equipment.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 AND SIX MONTHS ENDED JUNE 30, 2006

         PRODUCTION

         In the six months  ended  June 30,  2007 and 2006,  our mines  produced
544,506 and 682,972 tons of coal, respectively, as follows:



                                                 SIX MONTHS ENDED JUNE 30,
                                         --------------------------------------
                                           2007       %         2006       %
                                         -------   -------    -------   -------

Surface mines ........................   182,622      23.3%   201,113      22.9%
Highwall mines .......................    69,746       8.9%   101,368      11.5%
Underground mines ....................   292,138      37.3%   380,491      43.3%
                                         -------   -------    -------   -------
Total tons produced ..................   544,506      69.5%   682,972      77.7%
Coal purchased .......................   238,938      30.5%   196,071      22.3%
                                         -------              -------
Total tons available .................   783,444     100.0%   879,043     100.0%
                                         =======              =======
Tons produced by contract miners
included in the above ................   184,294      23.5%   331,933      37.8%


         REVENUES

         For the six months  ended June 30,  2007,  approximately  93.2% of coal
sales were made to four utilities and two industrial  customers  under contracts
with original terms of twelve months or longer. The remaining coal sales for the
six month period were made under short term contracts or purchase  orders.  Tons
sold and the associated revenue for the two six month periods were as follows:

<TABLE>
<CAPTION>
                                Six Months Ended June 30,       Increase (decrease)
                                -------------------------   --------------------------
                                   2007          2006            $              %
                                -----------   -----------   -----------    -----------
<S>                             <C>           <C>           <C>                  <C>
Coal sales ..................   $37,543,116   $44,114,840   $(6,571,724)         (14.9)
Tons sold ...................       740,672       827,738       (87,066)         (10.5)
Average  price per ton sold .   $     50.69   $     53.30   $     (2.61)          (4.9)
</TABLE>

         The  decrease in revenue  from coal sales for the six months ended June
30,  2007 as  compared to the same period in 2006 was the result of a decline in
sales volume due to the  completion of existing  sales  contracts in combination
with a $2.61  decline  in the  average  sales  price  per ton.  Other  revenues,
consisting  primarily of fees  charged to another  coal  producer for use of our
train loading  facilities,  represented  approximately  1.0% of total  revenues,
consistent with the prior period.


                                       27
<PAGE>


         OPERATING EXPENSES

              COST OF SALES

<TABLE>
<CAPTION>
                                Six Months Ended June 30,       Increase (decrease)
                                -------------------------   --------------------------
                                   2007          2006            $              %
                                -----------   -----------   -----------    -----------
<S>                             <C>           <C>           <C>                  <C>
Cost of sales ...............   $35,903,825   $42,218,201   $(6,314,376)         (14.9)
Tons sold ...................       740,672       827,738       (87,066)         (10.5)
Average cost per ton sold ...   $     48.47   $     51.00   $     (2.53)          (5.0)
</TABLE>

         Total  cost of sales  declined  14.9% or $2.53 per ton  during  the six
months  ended June 30, 2007 as  compared  to the same six month  period in 2006.
Cost of sales  expressed as a percentage of total revenues was flat at 94.7% for
both periods.  However,  cost of sales for the first six months of 2006 includes
approximately  $1.9 million of expenses  experienced  as the result of damage to
one of our highwall miners caused by a March 2006 rock collapse.  These expenses
were recovered from insurance proceeds, net of a small deductible,  in September
2006.   Excluding  the  effect  of  these   repairs,   cost  of  sales  declined
approximately  $3,679,000  or 9.3% for the six  months  ended  June 30,  2007 as
compared to the same period in 2006  resulting in an  effective  increase in the
average cost per ton sold of approximately $0.65 or 1.4%.

         The  primary  reason  for the  decrease  in total  cost of sales is the
decline in the volume of coal sold during the period.  Notable  fluctuations  in
cost of sales include labor costs which increased 2.7% or approximately $160,000
as the  result of an  increase  in  professional  operations  staff  and  higher
insurance costs. Costs associated with idle facilities  increased  approximately
$1.3 million, an eleven-fold increase,  primarily as the result of idling one of
our highwall miners and our newly renovated Baldwin facility at the beginning of
2007. Royalty expense declined 55.1% or approximately $1.3 million as the result
of a temporary  reduction in the royalty rate at one of our mines and because of
mining 21.1% of total  production  for the 2007 period on owned  reserves in our
New River Tract in  Tennessee  whereas all coal was mined on leased  reserves in
the same six month period in 2006.

              DEPRECIATION, DEPLETION, AMORTIZATION, AND ACCRETION EXPENSE

<TABLE>
<CAPTION>
                                   Six Months Ended June 30,       Increase (decrease)
                                   -------------------------   --------------------------
                                      2007          2006            $              %
                                   -----------   -----------   -----------    -----------
<S>                                <C>           <C>           <C>                  <C>
Depreciation, depletion,
  amortization & accretion .....   $ 7,292,655   $ 7,913,746   $  (621,091)          (7.8)
Tons sold ......................       740,672       827,738       (87,066)         (10.5)
Average cost per ton sold ......   $      9.85   $      9.56   $      0.29            3.0
</TABLE>

         The 7.8% decline in depreciation, depletion, amortization and accretion
expense for the six months  ended June 30,  2007 as  compared to the  comparable
period in 2006, is attributable  primarily to the  sale-leaseback  of one of our
highwall miners in September 2006 and the idling of certain facilities. The cost
associated  with this highwall miner is currently  reflected as operating  lease
expense in cost of sales.  Accretion  expense  associated with asset  retirement
obligations and depletion expense increased approximately $392,000, or 53.0%, as
the  result of opening  new mines on owned  reserves  in the New River  Tract in
Tennessee.


                                       28
<PAGE>


              GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                   Six Months Ended June 30,       Increase (decrease)
                                   -------------------------   --------------------------
                                      2007          2006            $              %
                                   -----------   -----------   -----------    -----------
<S>                                <C>           <C>           <C>                  <C>
General & administrative .......   $ 3,653,908   $ 4,158,035   $  (504,127)         (12.1)
Tons sold ......................       740,672       827,738       (87,066)         (10.5)
Average cost per ton sold ......   $      4.93   $      5.02   $     (0.09)          (1.8)
</TABLE>

         The 12.1% decrease in general and  administrative  expenses for the six
months ended June 30, 2007 as compared to the same period in the  previous  year
is primarily  attributable to a reduction in corporate  positions resulting in a
21.6%  reduction in salaries and related  expenses,  net of a 27.5%  increase in
stock-based  compensation  including the sale of 400,000 options by the Chairman
of  the  Board  of  Directors  to the  President  and  CEO,  which  resulted  in
stock-based  compensation  expense  of  approximately  $434,000  in March  2007.
Significant  decreases  totaling  approximately  $329,000  were also realized in
professional fees, security, and travel.

              OTHER INCOME (EXPENSE)

         The 15.9%  increase in interest  expense for the six months  ended June
30, 2007 as compared to the same six month period in 2006 is as follows:

<TABLE>
<CAPTION>
                                   Six Months Ended June 30,       Increase (decrease)
                                   -------------------------   --------------------------
                                      2007          2006            $              %
                                   -----------   -----------   -----------    -----------
<S>                                <C>           <C>           <C>                  <C>
10.5% Senior Secured Notes .....   $ 3,513,683   $ 3,442,172   $    71,511            2.1
Term Loan Credit Facility ......       501,928          --     $   501,928           --
Installment obligations & notes         47,831        65,081       (17,250)         (26.5)
Capital lease obligations ......       218,682       182,468        36,214           19.8
Other ..........................        38,429        38,312           117            0.3
                                   -----------   -----------   -----------    -----------
  Total interest expense .......   $ 4,320,553   $ 3,728,033   $   592,520           15.9
</TABLE>

         Interest income increased 58.1% to  approximately  $609,000 in the 2007
period as a result  of  increased  average  cash  balances  while  other  income
declined  69.0% to  approximately  $143,000.  Other  income  in the 2006  period
included a gain on the sale of equipment of a transportation subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2007,  we had cash and cash  equivalents  of  approximately
$5.5 million and negative  working capital of  approximately  $1.2 million.  Net
cash flows used in operations  for the six months then ended were  approximately
$7.1  million of which $5.4  million and $1.7  million  related to the first and
second quarters, respectively,  highlighting improvement in operating efficiency
and sales  effectiveness.  However, our operations do not generate positive cash
flow and the ability to do so during the  remainder  of 2007 is  dependent  upon
generating  spot sales at prices  averaging at least $45 per ton and  additional
improvements to operating efficiency.

         At June 30,  2007,  we had  stockholders'  equity of  $132,246  and had
incurred net losses of $6.5 million and $12.5 million, excluding preferred stock


                                       29
<PAGE>


dividends, for the three and six months then ended,  respectively.  We expect to
continue  to  incur  net  losses  into the  foreseeable  future  resulting  in a
stockholders' deficit.

         We invested $2.4 million in equipment and mine  development  during the
six  months  ended  June  30,  2007.  We  intend  to  make  additional   capital
expenditures of  approximately  $5.0 million during the third quarter of 2007 to
redeploy our second highwall miner in Kentucky and add a new mining truck to our
equipment  fleet in  addition  to  routine  capital  expenditures  estimated  at
$100,000  per month.  Redeployment  of the  highwall  miner will  require a full
spread of surface mining equipment,  which will cost  approximately $3.3 million
to be financed through installment purchase obligations.

         Our operating plan for the remainder of 2007 includes  generating  cash
receipts  that are  adequate  to cover all  commitments  excluding  the  capital
expenditures mentioned above. However, our plan relies on at present uncommitted
sales of approximately  130,000 tons at a minimum sales price of $45.00 per ton,
adequate production to meet commitments, and continued improvements in operating
performance.  If we are unable to execute our operating  plan  successfully,  we
will not be able to meet our  liquidity  requirements  and we will need to raise
additional cash or discontinue  operations at some of our facilities.  There are
no assurances  that our efforts to raise  additional cash would be successful or
that  discontinued  operations  would  generate  adequate  savings  to meet  our
commitments.

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

                                                    JUNE 30,       DECEMBER 31,
                                                      2007             2006
                                                  ------------     ------------
10.5% Senior Secured Notes, due 2010 .........    $ 55,000,000     $ 55,000,000
Term Loan Credit Facility ....................      10,000,000        8,000,000
Bank note (prime + 1%), due 2007 .............         247,445          637,374
Installment purchase obligations, due 2008 ...       1,266,129        2,825,209
Installment purchase obligations, due 2009 ...       2,548,734        3,200,286
Installment purchase obligations, due 2010 ...         626,457             --
Equipment notes (7.83%-9.28%, due 2009) ......         172,017          125,382
Equipment note (4.48%, due 2009) .............         180,365          234,721
Other ........................................           4,836           89,512
Less unamortized discounts ...................      (2,969,301)      (3,298,679)
                                                  ------------     ------------
                                                    67,076,682       66,813,805
Less current portion of long-term debt .......      (3,235,822)      (4,720,671)
                                                  ------------     ------------
Long-term debt ...............................    $ 63,840,860     $ 62,093,134
                                                  ============     ============

              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 in order to
fund general  operating and working  capital needs.  We borrowed $8.0 million in
2006 and the remaining  $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.

         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 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


                                       30
<PAGE>


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 we 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 for 2007 and 2008 including:  EBITDA, consolidated
leverage,  and  consolidated  interest  coverage.  As a result of the March 2007
amendment,  the applicable margin on the credit facility  increased by 1.0%. The
applicable  margin was the rate which was added to the  Eurodollar  Rate or Base
Rate to determine the full interest rate on the facility.

         At June 30, 2007,  we were not in  compliance  with  certain  financial
covenants  under the  credit  facility,  including  those  relating  to  EBITDA,
consolidated  leverage,  and consolidated  interest coverage,  and on August 15,
2007, Guggenheim agreed to a further amendment of the credit agreement. Pursuant
to the August 2007  amendment,  Guggenheim  waived our  non-compliance  with the
financial  covenants for the quarter ended June 30, 2007, and the parties agreed
to:

         o        Change the maturity date under the credit agreement from March
                  2010 to December 31, 2008;

         o        Change the interest rate payable on all  outstanding  loans to
                  12% per annum;

         o        Provide for a payment to  Guggenheim of a fee of $100,000 upon
                  execution  of  the  amendment,  and  fees  equal  to 5% of all
                  amounts outstanding under the credit agreement at December 31,
                  2007  and 10% of all  amounts  outstanding  under  the  credit
                  agreement at June 30, 2008;

         o        Provide for a payment to  Guggenheim of a fee of $100,000 upon
                  execution  of  the  amendment,  and  fees  equal  to 5% of all
                  amounts outstanding under the credit agreement at December 31,
                  2007  and 10% of all  amounts  outstanding  under  the  credit
                  agreement at June 30, 2008;

         o        Reset the EBITDA financial covenant,  defined in the agreement
                  as  consolidated  net income  plus 1) income tax  expense,  2)
                  consolidated  interest expense including  amortization of debt
                  discount  and  debt  issuance  costs,   3)  depreciation   and
                  amortization   expense,  4)  any  extraordinary,   unusual  or
                  non-recurring  expenses or losses,  and 5) any other  non-cash
                  charges  minus  1)  interest  income,  2)  any  extraordinary,
                  unusual  or  non-recurring  income  or gains  and 3) any other
                  non-cash income,  and eliminate the consolidated  leverage and
                  consolidated interest coverage covenants; and

         o        Eliminate any  prepayment  penalties,  and provide the Company
                  with  greater  ability to incur  additional  indebtedness  and
                  capital lease obligations.

         Management  of  the  Company  believes  that  the  Company  will  be in
compliance with the terms of the credit  agreement and its covenants,  as reset,
for the subsequent twelve month period and as such has reflected this obligation
as long-term on the condensed  consolidated  balance sheet at June 30, 2007. The
Company is in the process of determining the proper  accounting under EITF 96-19
DEBTOR'S  ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF DEBT  INSTRUMENTS for the
related  unamortized  deferred financing fees of approximately  $355,000 and the
fees paid in August 2007 of $100,000.

              10.5% SENIOR SECURED NOTES DUE 2010

         On December  29, 2005,  we issued  $55,000,000  in aggregate  principal
amount of 10.5% Senior Secured Notes due 2010 (the "Senior  Secured  Notes") and
55,000 warrants to purchase a total of 1,732,632  shares of the Company's common
stock (the "Warrants"). The Senior Secured Notes and Warrants were sold in Units
(the "Units")  consisting of one $1,000  principal  amount Note and one Warrant,
which entitled the holder to purchase  31.5024 shares of Company common stock at
an exercise price of $8.50 per share,  subject to  adjustment.  The warrants are
subject to  mandatory  conversion  if the price of the  Company's  common  stock
remains  above  $12.75 for twenty or more 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 Senior
Secured  Notes  are  fully  and   unconditionally   guaranteed  by  all  of  our
wholly-owned  subsidiaries  and were  offered and sold within the United  States
only to  qualified  institutional  buyers in  reliance  on Rule  144A  under the
Securities Act.


                                       31
<PAGE>


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

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

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

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

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

         o        incur or guarantee additional  indebtedness or issue preferred
                  stock;

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

         o        make investments;

         o        issue or sell capital stock of restricted subsidiaries;

         o        engage  in  transactions  with  affiliates;

         o        grant or assume liens; or

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

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

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


                                       32
<PAGE>


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

         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 six  months  ended  June  30,  2007,  we had a net  increase  in cash of
approximately $3.3 million.  Cash flows from operating,  financing and investing
activities for the six months ended June 30, 2007 and 2006 are summarized in the
following table:

                                                    SIX MONTHS ENDED JUNE 30,
                                                 -------------------------------
ACTIVITY                                             2007              2006
                                                 ------------      ------------
Operating activities .......................     $ (7,066,458)     $    516,624
Investing activities .......................       (2,168,296)      (25,893,079)
Financing activities .......................       12,553,183         1,411,402
                                                 ------------      ------------
    Net increase (decrease) in cash ........     $  3,318,429      $(23,965,053)
                                                 ============      ============

         OPERATING ACTIVITIES

         The increase in net cash used in operating  activities of approximately
$7.6  million to $7.1  million  during the six  months  ended June 30,  2007 was
primarily due to a $1.4 million increase in inventory and a $3.8 million decline
in  accounts  payable  and accrued  liabilities,  as compared to a $5.9  million
increase in accounts payable and accrued  liabilities  during the same period in
2006.

         INVESTING ACTIVITIES

         Cash used in investing activities of $2.2 million was primarily related
to the  acquisition of mining  equipment,  required  prepayment of royalties and
increases in restricted cash in support of reclamation  obligations and workers'
compensation liabilities. Additionally, we placed $250,000 in escrow relating to
a potential acquisition.

         FINANCING ACTIVITIES

         The net cash provided by financing  activities of  approximately  $12.6
million  during the six months ended June 30, 2007 was  primarily  the result of
the  issuance  of  3,000,000  shares of  common  stock  for  $13,950,000  and an
additional  $2.0  million  borrowed on our Term Loan Credit  Facility net of the
repayment of notes and capital lease balances.


                                       33
<PAGE>


         CONTRACTUAL OBLIGATIONS

         The following  summarizes our contractual  obligations at June 30, 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 ........   $ 92,479,746   $  9,884,970   $ 24,686,214   $ 57,908,562   $      --
   interest)
Operating leases .................      5,424,556      1,998,813      3,425,743           --            --
Capital leases ...................        419,754        252,254        167,500           --            --
Coal purchase contracts ..........      6,984,711      6,984,711           --             --            --
                                     ------------   ------------   ------------   ------------   ------------
     Total contractual obligations   $105,308,767   $ 19,120,748   $ 28,279,457   $ 57,908,562   $      --
                                     ============   ============   ============   ============   ============
</TABLE>

         The table excludes the  contingent  payments of $500,000 and $1,000,000
which would be due on December 31, 2007 and June 30, 2008, respectively,  if the
debt is still outstanding on each of those dates.

         We rent mining equipment  pursuant to operating lease  agreements,  and
made lease  payments  totaling  approximately  $1,109,000  during the six months
ended June 30, 2007.

         For the six months  ended June 30,  2007,  we accrued  dividends to the
holders of our Series A cumulative  convertible preferred stock in the aggregate
of approximately  $155,000.  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
$371,317  related to 2006 were paid in February  2007.  At June 30, 2007,  there
were  accrued  but  unpaid  dividends  on our  Series A  cumulative  convertible
preferred stock of $480,232 including deemed dividends of $47,485 as a result of
induced  conversion of 24.0 shares.  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.

         SALES COMMITMENTS

         At June 30, 2007, we had the following contractual  commitments to ship
coal at fixed prices subject to annual adjustment:

                                                                       DOLLAR
CALENDAR YEAR                              TONS       AVG. $/ TON       VALUE
                                       -----------    -----------    -----------
2007 remaining ....................        692,000    $     51.26    $35,473,850
2008 ..............................        210,000          52.49     11,022,000
2009 ..............................        197,500          51.16     10,104,500
2010 ..............................        137,879          49.00      6,756,071
                                       -----------    -----------    -----------
    Total .........................      1,237,379    $     51.20    $63,356,421
                                       ===========    ===========    ===========

         We typically  sell our coal at a  negotiated  price per ton pursuant to
contracts of twelve  months or greater.  For the six months ended June 30, 2007,
92.4% of coal tons sold was under  contracts of twelve months or greater.  Price
adjustment,  "price  reopener"  and other  similar  provisions in certain of our
contracts  may reduce  the  protection  from  short-term  coal price  volatility
traditionally  provided by such  contracts.  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


                                       34
<PAGE>


ash fusion temperature. Variations from these specifications typically result in
economic penalties or premiums, including in extreme situations the rejection of
deliveries,  which could  result in higher or lower  revenues  than those in the
table above.

         ACQUISITIONS

         We regularly  seek out and evaluate the potential  acquisition  of coal
mining and related  assets that we feel would be accretive to our business.  Any
acquisition  opportunities we pursue could  materially  affect our liquidity and
capital  resources  and may require us to incur  indebtedness,  seek  additional
equity  capital,  or  both.  There  can be no  assurance  that  such  additional
indebtedness  and/or equity capital will be available on terms acceptable to us,
if at all.

         In June  2007,  we entered  into a stock  purchase  agreement  with the
stockholders of Mann Steel  Products,  Inc. to acquire 100% of the stock of that
company for $55 million.  The  acquisition  of Mann Steel,  which operates three
surface mining  facilities in Alabama,  is subject to the obtaining of financing
and  approval  of the  transaction  by our Board of  Directors.  We will need to
finance  the  proposed  acquisition  of Mann  Steel  using  both debt and equity
financing.  There are no assurances that our efforts to raise financing for this
transaction will be successful.

OFF-BALANCE SHEET ARRANGEMENTS

         At June 30, 2007, we did not have any relationships with unconsolidated
entities  or  financial  partnerships,  such as  entities  often  referred to as
structured finance,  variable interest or special purpose entities,  which would
have  been  established  for  the  purpose  of  facilitating  off-balance  sheet
arrangements or other contractually narrow or limited purposes.  As such, we are
not exposed to any financing,  liquidity, market or credit risk that could arise
if we had engaged in such relationships.

         We use bank letters of credit to secure our obligations for post-mining
reclamation and other obligations.  At June 30, 2007, we had $15,020,000 million
of letters of credit outstanding  supporting  post-mining  reclamation bonds and
$1,282,770  of letters of credit  supporting  an  operating  lease of a highwall
miner.  With the exception of $700,000  secured by our  Knoxville,  TN corporate
headquarters building,  these bank letters of credit are secured by certificates
of deposit at two local banks reflected as restricted cash on our balance sheet.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

         Accounting  measurements  at interim dates  inherently  involve greater
reliance on  estimates  than those made at  year-end.  The results for the three
months  ended  June 30,  2007 are not  necessarily  indicative  of results to be
expected  for the full year.  Please  refer to the  section  entitled  "Critical
Accounting  Policies,  Judgments and Estimates" included in Item 7. Management's
Discussion  and Analysis of Financial  Condition and Results of Operation of our
Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion
of our critical accounting policies, judgments and estimates. There have been no
material changes to the previously reported information  concerning our Critical
Accounting Policies, Judgments and Estimates.


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<PAGE>


ITEM 3.  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, commodity prices, and foreign currency
exchange  rates.  There have been no material  changes to the  quantitative  and
qualitative  disclosures  included in Item 7A of the Company's  Annual Report on
Form 10-K for the year ended December 31, 2006.

ITEM 4.  CONTROLS AND PROCEDURES.

CONTROLS AND PROCEDURES

         Members of our management,  including our President and Chief Executive
Officer,  Daniel A. Roling, and Chief Financial  Officer,  T. Michael Love, have
evaluated  the  effectiveness  of our  disclosure  controls and  procedures,  as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15,  as of June 30,
2007, the end of the period covered by this report.  Based upon that evaluation,
Messrs.  Roling and Love concluded  that our disclosure  controls and procedures
were effective as of June 30, 2007.

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  March 31,  2007 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.


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<PAGE>


                           PART II: OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

         Some of the same  plaintiffs  filed a similar  action in U.S.  District
Court based on  essentially  the same facts alleging NEPA  violations  regarding
OSM's approval of an application for a revision of the same permit.  The Company
and the OSM have filed  Motions for Summary  Judgment  based upon the outcome of
the prior case above referenced. An unfavorable outcome of this action would not
involve direct monetary  damages;  however  significant  financial  losses could
result from curtailed mining  operations.  In July 2007, the U.S. District Court
entered an Order of Judgment granting the Motions for Summary Judgement filed by
the OSM and the Company and denying the Motion for Summary Judgment filed by the
plaintiffs.

         During  2005,  the  Company  was  audited  by  its  previous   workers'
compensation insurance provider which contends that an additional  approximately
$1.4 million in premiums is owed for the year ended April 15,  2005.  The matter
primarily  involves the  application  of premium  rates to employees  performing
certain  job  functions.  In January  2006,  the  Company  paid  $427,000 to the
previous  insurance  provider.  Currently,  the matter has not been resolved and
both parties have pursued  legal action in the United States  District  Court of
the Eastern District of Tennessee.  While management believes legal reserves are
sufficient for this matter, it is possible that the actual outcome of the matter
could vary  significantly  from this amount. The Company made an offer to settle
in March 2007 which was  accepted  and  subsequently  rejected by the  insurance
company.  The Company  filed a Motion  with the Court to enforce the  settlement
accepted by the insurance company. The Court granted the Motion in August 2007.

         In March 2006, the Company was named as defendant in a complaint  filed
in the United States District Court for the Eastern  District of Kentucky by the
sublessee of certain coal mining rights concurrent with the Company's operations
in Kentucky.  The Company was the  sublessee of the right to mine coal using the
underground  method  on  the  property  in  question,  as the  result  of a 2004
acquisition.  The  complainant  claimed that it possessed  the right to mine the
coal at this property  through the surface  mining method and that by mining the
coal by the highwall mining method,  the Company committed either an intentional
or  negligent  trespass.  The  complainant  sought  damages in the range of $1.2
million to $2.8  million,  which it estimated  to be the range of gross  profits
from the revenues of the coal mined.  Management  acknowledged  that the Company
mined the coal in question,  but  contended  that by using the  highwall  mining
method,  the  Company  mined the coal  pursuant  to the Lease by an  underground
mining method and therefore committed no trespass. As an additional defense, the
Company filed a  third-party  complaint  against a  consultant,  who advised the
Company  that it had the right to mine the coal.  This  counterclaim  could have
allowed the Company to recover a portion of any amounts  lost,  if the  original
complainant  had been  successful.  A  settlement  in the amount of $100,000 was
reached with the opposing  party and  documented for entry by Order of the Court
in February 2007. The Final Order of the Court  terminating the case was entered
and payment was made in June 2007.


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<PAGE>


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

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

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

ITEM 1A. RISK FACTORS.

         There have been no material  changes to the risk  factors  disclosed in
Item 1A "Risk Factors" in the Company's  Annual Report on Form 10-K for the year
ended December 31, 2006 with the following exception:

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

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

         In July 2007, Jon Nix, former President and CEO, and Scott Filstrup, an
independent  director  since 2005,  retired from our Board of Directors  and our
Board  was  reduced  in size  from  seven to five  members.  Kenneth  Scott,  an
independent director since 2005, was elected to the position of Chairman.


                                       38
<PAGE>


         FAILURE TO COMPLETE  THE  PENDING  ACQUISITION  OF MANN STEEL  PRODUCTS
COULD NEGATIVELY IMPACT OUR STOCK PRICE, FUTURE BUSINESS AND FINANCIAL RESULTS.

         If our acquisition of Mann Steel Products is not completed, our ongoing
businesses may be adversely  affected,  and we will be subject to several risks,
including:

         o        Being required, under certain circumstances under the purchase
                  agreement,  to forfeit the deposit of  $250,000  currently  in
                  escrow;

         o        Failure to pursue other  beneficial  opportunities as a result
                  of our management's focus on pursuing the acquisition, without
                  realizing  any of  the  benefits  of  having  consummated  the
                  acquisition; and

         o        Having the price of our common stock decline.

         WE MAY NOT BE ABLE TO OBTAIN  FINANCING FOR THE PENDING  ACQUISITION OF
MANN STEEL PRODUCTS ON TERMS THAT ARE FAVORABLE TO US, OR AT ALL.

         We will need to raise debt or equity financing or a combination  therof
to consummate the pending acquisition of Mann Steel Products. This financing may
not be available on terms  favorable to us, or at all. We are highly  leveraged,
which has important  consequences to investors,  as discussed  elsewhere in this
report.  The incurrence of additional  debt could compound the risks  associated
with being highly leveraged.  Additionally,  if we issue equity securities,  our
existing shareholders could suffer substantial dilution.

         IF WE  CONSUMMATE  THE  ACQUISITION  OF MANN  STEEL,  WE MAY  ENCOUNTER
PROBLEMS IN INTEGRATING THE TWO BUSINESSES,  WHICH MAY INCREASE THE COSTS OF THE
ACQUISITION  AND DISTRACT  MANAGEMENT'S  ATTENTION  FROM  OPERATING THE COMBINED
BUSINESS.

         The  integration  of Mann Steel with  National  Coal will  require  the
dedication of management resources,  which may temporarily distract management's
attention  from the  day-to-day  operations  of the two  companies and adversely
affect  our  operating  results.  Some of the  difficulties  we would  expect to
encounter include, among others, those related to:

         o        integrating   National  Coal's  and  Mann  Steel's  management
                  staffs;

         o        retaining Mann Steel's key management and technical personnel;
                  and

         o        coordinating   the  operation  of   geographically   separated
                  organizations with distinct cultures.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

         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 for a total price
of $930,000. The sale was completed on March 1, 2007.

         During the six months ended June 30, 2007,  holders of 278.66 shares of
our Series A convertible  preferred stock with liquidation  preferences totaling
approximately  $4,179,894  converted  their  shares into  812,253  shares of our
common  stock.  The holders of 198.6 shares of Series A  Cumulative  Convertible
Preferred  Stock  converted  during  the six  months  ended  June 30,  2007 were
provided  with an  inducement  to  convert in the form of an  additional  83,537
shares of common stock with an aggregate market value of approximately $425,000.
The issuance of these securities was exempt from the  registration  requirements


                                       39
<PAGE>


of the  Securities  Act pursuant to Section  3(a)(9) of the Securities Act as an
exchange by the issuer with its existing security holders where no commission or
other remuneration is paid for soliciting such exchange.

         From July 1, 2007 through August 13, 2007, holders of 4.0 shares of our
Series A  convertible  preferred  stock with  liquidation  preferences  totaling
$60,000 and no unpaid dividends converted their shares into 10,363 shares of our
common stock.  The issuance of these securities was exempt from the registration
requirements of the Securities Act pursuant to Section 3(a)(9) of the Securities
Act as an exchange by the issuer with its  existing  security  holders  where no
commission or other remuneration is paid for soliciting such exchange.

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

         On July 23, 2007, we held our 2007 Annual Meeting of  Shareholders.  At
the annual  meeting,  there were 21,444,577  shares entitled to vote,  including
20,077,012  shares of common  stock and  Series A  convertible  preferred  stock
convertible into 1,367,565 shares of common stock.  There were 18,240,887 shares
(85.1% of the shares  entitled to vote)  represented at the meeting in person or
by proxy,  including  17,312,286 shares of common stock and Series A convertible
preferred  stock  convertible  into  928,601  shares of common  stock.  The only
matters  submitted  to the  shareholders  at the  annual  meeting  were  (a) the
election of five  directors and (b) an amendment to the 2004 National Coal Corp.
Option Plan to increase the maximum number of shares of common stock that may be
issues  pursuant to awards  granted  under the plan from  2,750,000 to 4,450,000
shares.  Immediately prior to the meeting,  the Board of Directors was comprised
of Jon Nix, Daniel A. Roling,  T. Michael Love,  Kenneth Scott,  Scott Filstrup,
Gerald Malys,  and Robert  Heinlein.  The following  summarizes vote results for
those matters submitted to our shareholders for action at the annual meeting:

         1.       Proposal  to elect Kenneth Scott,  Daniel  Roling,  T. Michael
Love,  Gerald Malys,  and Robert Heinlein to serve as our directors for one year
and until their successors has been elected:

    DIRECTOR                         FOR                           WITHHELD
    --------                         ---                           --------

 Kenneth Scott                    18,103,337                       137,550
 Daniel Roling                    18,204,502                        36,385
T. Michael Love                   16,016,541                      2,224,346
  Gerald Malys                    18,204,337                        36,550
Robert Heinlein                   18,104,502                       136,385

         2.       Proposal  to amend 2004  National  Coal Corp.  Option  Plan to
increase  the  maximum  number  of shares  of  common  stock  that may be issues
pursuant to awards granted under the plan from 2,750,000 to 4,450,000 shares.

   FOR             AGAINST         ABSTAIN                BROKER NON-VOTES
----------         -------         -------                ----------------
11,434,572         653,111          4,112                     6,149,092


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<PAGE>


ITEM 6.  EXHIBITS

         THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

       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.

         10.1     Amended and Restated  2004  National  Coal Corp.  Option Plan.
                  Incorporated by reference to Exhibit 10.1 to Current Report on
                  Form 8-K filed on July 27, 2007.

         31.1     Certificate  of  Chief  Executive  Officer  pursuant  to  Rule
                  13a-14(a)  under the  Securities  and Exchange Act of 1934, as
                  amended.

         31.2     Certificate  of  Chief  Financial  Officer  pursuant  to  Rule
                  13a-14(a)  under the  Securities  and Exchange Act of 1934, as
                  amended.

         32.1     Certificate  of Chief  Executive  Officer and Chief  Financial
                  Officer  pursuant to Rule  13a-14(b)  under the Securities and
                  Exchange Act of 1934, as amended.


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<PAGE>


                                   SIGNATURES

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


                                    NATIONAL COAL CORP.

Date: August 20, 2007                   /S/ T. MICHAEL LOVE
                                        -------------------------------
                                    By:        T. Michael Love
                                    Its:       Chief Financial Officer
                                               (Principal Financial and
                                               Accounting Officer)


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