EXHIBIT 10.4


                               SECURITY AGREEMENT

         THIS SECURITY  AGREEMENT  ("SECURITY  AGREEMENT"),  is made and entered
into as of March 8, 2005, by and between National Coal Corporation,  a Tennessee
corporation ("BORROWER") and a wholly-owned subsidiary of National Coal Corp., a
Florida corporation ("PARENT"), Borrower being herein referred to as "GRANTOR"),
in  favor  of  Crestview  Capital  Master,  LLC,  a  limited  liability  company
("CRESTVIEW"),  as agent (in such capacity,  "AGENT") for itself and the holders
party to the Purchase  Agreements referred to below (Agent and the holders party
to  the  Purchase  Agreements  and  their  respective   successors,   endorsees,
transferees and assigns, collectively "HOLDERS").

                              W I T N E S S E T H:

         WHEREAS,  pursuant to a Note and  Warrant  Purchase  Agreement  between
Borrower,  Parent  and a Holder  (as the same may from time to time be  amended,
modified,  or supplemented,  each a "PURCHASE  AGREEMENT" and collectively,  the
"PURCHASE AGREEMENTS"), each Holder has agreed to make a loan (collectively, the
"SENIOR NOTE LOANS") to Borrower; and

         WHEREAS,  each  Holder is willing  to make a Senior  Note Loan but only
upon the condition, among others, that Grantor shall have executed and delivered
this Security Agreement to Agent for the ratable benefit of the Holders.

         NOW,  THEREFORE,  in  consideration  of the  premises and of the mutual
covenants  herein contained and for other good and valuable  consideration,  the
receipt of which is hereby acknowledged, the parties hereto agree as follows:

         1.       DEFINED TERMS. Unless otherwise defined herein,  terms defined
in the Purchase Agreements are used herein as therein defined, and the following
terms shall have the following  meanings (such meanings being equally applicable
to both the singular and plural forms of the terms defined):

          "CHATTEL  PAPER"  shall  mean any  "chattel  paper,"  as such  term is
defined in section 9102(a)(11) of the UCC, comprising any of the Collateral.

         "COLLATERAL"  shall have the meaning assigned to such term in SECTION 2
of this Security Agreement.

         "DOCUMENTS"  shall  mean any  "documents,"  as such term is  defined in
section 9102(a)(30) of the UCC, comprising any of the Collateral.

         "EQUIPMENT"  shall  mean any  "equipment,"  as such term is  defined in
section 9102(a)(33) of the UCC, comprising any of the Collateral.

         "HEREBY," "HEREIN,"  "HEREOF,"  "HEREUNDER" and words of similar import
refer to this Security Agreement as a whole (including,  without limitation, any
schedules hereto) and not merely to the specific section,  paragraph,  or clause
in which the respective word appears.


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         "INSTRUMENTS"  shall mean any  "instrument," as such term is defined in
section  9102(a)(47) of the UCC,  comprising any of the  Collateral,  other than
instruments  that  constitute,  or  are a  part  of a  group  of  writings  that
constitute, Chattel Paper.

         "LIENS" shall mean, with respect to any asset,  (a) any mortgage,  deed
of trust, lien, pledge, hypothecation,  encumbrance, charge or security interest
in, on or of such  asset,  (b) the  interest  of a vendor or a lessor  under any
conditional sale agreement,  capital lease or title retention  agreement (or any
financing  lease having  substantially  the same  economic  effect as any of the
foregoing)  relating  to such  asset,  and (c) in the  case of  securities,  any
purchase  option,  call or similar  right of a third party with  respect to such
securities.

         "NOTES"  means the Senior  Secured  Promissory  Notes,  evidencing  the
Senior  Note  Loans in the  original  aggregate  principal  amount not to exceed
$5,137,726,  issued by  Grantor to the  Holders  under the  Purchase  Agreements
entered  into  contemporaneously  with  this  Agreement  or  subsequent  to  the
execution  of this  Agreement  with  respect to Senior Note Loans made after the
date of this Agreement.

         "PERMITTED  LIENS"  shall mean (i) Liens for taxes not yet  delinquent,
(ii) Liens  imposed by law and incurred in the  ordinary  course of business for
obligations not yet due to carriers, warehousemen,  laborers, materialmen, (iii)
Liens in respect of pledges or  deposits  under  workers'  compensation  laws or
similar legislation.

         "PROCEEDS"  shall  mean  "proceeds"  as such term is defined in section
9102(a)(64) of the UCC.

         "PURCHASE  AGREEMENT" shall mean a Note and Warrant Purchase  Agreement
between  Grantor,  Parent  and a Holder  (as the  same may from  time to time be
amended, modified, or supplemented),  pursuant to which Holder has made a Senior
Note   Loan  to   Grantor,   which   Purchase   Agreement   was   entered   into
contemporaneously with this Security Agreement or subsequent to the execution of
this Security Agreement with respect to Senior Note Loans made after the date of
this Security Agreement.

         "SECURED OBLIGATIONS" shall mean (i) all of the unpaid principal amount
of, and accrued interest on, the Notes; (ii) all fees and costs owing by Grantor
under  the  Purchase  Agreements  to Agent or any  Holder;  and  (iii) all other
indebtedness,  liabilities  and  obligations  of such  Grantor  to  Agent or any
Holder,  whether now existing or hereafter incurred,  created under, arising out
of, or in connection  with the Purchase  Agreements,  the Notes or this Security
Agreement.

         "SECURITY  AGREEMENT" shall mean this Security  Agreement,  as the same
may from time to time be amended,  modified,  or supplemented and shall refer to
this  Security  Agreement  as in  effect  on the  date  such  reference  becomes
operative.

         "SENIOR  NOTE  LOANS"  shall  mean  loans to  Grantor  in the  original
aggregate  principal  amount not to exceed  $5,000,000,  which loans are made to
Grantor pursuant to the Purchase Agreements.

         "UCC" shall mean the Uniform Commercial Code as the same may, from time
to time, be in effect in the State of Tennessee; PROVIDED, HOWEVER, in the event
that, by reason of


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mandatory  provisions  of  law,  any or all of  the  attachment,  perfection  or
priority of Agent's and any  Holder's  security  interest in any  Collateral  is
governed by the Uniform  Commercial  Code as in effect in a  jurisdiction  other
than the State of  Tennessee,  the term "UCC" shall mean the Uniform  Commercial
Code as in effect in such other  jurisdiction  for  purposes  of the  provisions
hereof relating to such attachment,  perfection, or priority and for purposes of
definitions related to such provisions.

         2.       GRANT OF SECURITY INTEREST AND PLEDGE.

                  (a)      As  collateral  security  for the prompt and complete
payment and performance when due (whether at stated  maturity,  by acceleration,
or otherwise) of all the Secured Obligations and to induce Agent and each Holder
to enter  into the  Purchase  Agreement  and to make the  Senior  Note  Loans in
accordance with the terms thereof, Grantor hereby assigns,  conveys,  mortgages,
pledges,  hypothecates,  and  transfers  to Agent  for the  ratable  benefit  of
Holders,  and  hereby  grants to Agent for the  ratable  benefit of  Holders,  a
security  interest  in, all of Grantor's  right,  title and interest in, to, and
under the  following  (all of which being  hereinafter  collectively  called the
"COLLATERAL"):

                           (i)      That certain Highwall Miner  manufactured by
Superior Highwall Miners, NV, with an office at Beckley,  West Virginia,  Serial
No.  SHM-37-V/800  together  with  a  SHM  Low-profile  cutterhead,  a  1500  kW
generator, a 50kW generator, a generator handling vehicle, five spare pushbeams,
and a container with shelving and spare parts for the foregoing; and

                           (ii)     all  Documents,  Chattel  Paper and Proceeds
representing the foregoing and all manufacturer's  warranties on, accessions to,
substitutions, and replacements for, and rents, profits, and products of each of
the foregoing.

         3.       RIGHTS  OF AGENT  AND  HOLDERS;  LIMITATIONS  ON  AGENT'S  AND
HOLDERS' OBLIGATIONS.

                  (a)      It is  expressly  agreed by  Grantor  that,  anything
herein to the contrary  notwithstanding,  Grantor  shall observe and perform all
the  conditions  and  obligations  to be observed and  performed by it under any
contract to which it may be a party and Grantor  shall perform all of its duties
and obligations thereunder, all in accordance with and pursuant to the terms and
provisions  of each such  contract.  Neither Agent nor any Holder shall have any
obligation  or liability  under any contract by reason of or arising out of this
Security  Agreement or the  granting to Agent or Holders of a security  interest
therein or the  receipt by Agent or any Holder of any  payment  relating  to any
contract pursuant hereto, nor shall Agent or Holders be required or obligated in
any  manner to perform or fulfill  any of the  obligations  of Grantor  under or
pursuant to any contract,  or to make any payment,  or to make any inquiry as to
the nature or the  sufficiency of any payment  received by it or the sufficiency
of any  performance  by any party under any contract,  or to present or file any
claim,  or to take any  action to  collect or  enforce  any  performance  or the
payment of any amounts  which may have been assigned to it or to which it may be
entitled at any time or times.


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                  (b)      If   required   by  Agent  at  any  time  during  the
continuation  of any  Default  or Event of  Default,  any  Proceeds,  when first
collected by Grantor,  received on account of any Collateral,  shall be promptly
deposited  by  Grantor  in  precisely  the form  received  (with  all  necessary
endorsements)  in a  special  bank  account  to be  maintained  by Agent for the
ratable  benefit  of  Holders  subject to  withdrawal  by Agent for the  ratable
benefit of Holders only, as hereinafter provided, and until so turned over shall
be deemed to be held in trust by  Grantor  for and as Agent's  property  for the
ratable  benefit of Holders and shall not be  commingled  with  Grantor's  other
funds or  properties.  Such  Proceeds,  when  deposited,  shall  continue  to be
collateral  security for all of the Secured Obligations and shall not constitute
payment thereof until applied as hereinafter provided.  Agent shall apply all or
a part of the funds on deposit in said  special  account to the  principal of or
interest on or both in respect of any of the Secured  Obligations  in accordance
with the  provisions  of SECTION  8(D)  hereof and any part of such funds  which
Agent elects not so to apply and deems not required as  collateral  security for
the  Secured  Obligations  shall  be paid  over  from  time to time by  Agent to
Grantor. If a Default or an Event of Default has occurred and is continuing,  at
the request of Agent Grantor  shall deliver to Agent for the ratable  benefit of
Holders all original and other documents  evidencing,  and relating to, the sale
and  delivery of such  Inventory  or the  performance  of labor or service  that
created such  Accounts,  including,  without  limitation,  all original  orders,
invoices, and shipping receipts; and, prior to the occurrence of a Default or an
Event of Default  Grantor  shall  deliver  photocopies  thereof to Agent for the
ratable benefit of Holders at the Agent's request.

         4.       REPRESENTATIONS AND WARRANTIES.  Grantor hereby represents and
warrants that:

                  (a)      Except for the security interest granted to Agent for
the ratable  benefit of Holders  pursuant to this  Security  Agreement and other
Permitted  Liens,  Grantor is the sole owner of each item of the  Collateral  in
which it  purports  to grant a  security  interest  hereunder,  having  good and
marketable  title  thereto,  free  and  clear  of any  and  all  Liens.  Holders
acknowledge the existence of a blanket lien on all assets of Grantor in favor of
D.B. Zwirn Special  Opportunities Fund, L.P., without Holders agreeing to assign
any priority to such lien.

                  (b)      No effective security agreement, financing statement,
equivalent security or lien instrument,  or continuation  statement covering all
or any part of the  Collateral  is on file or of  record in any  public  office,
except  such as may have been filed by Grantor in favor of Agent for the ratable
benefit of Holders  pursuant  to this  Security  Agreement  or such as relate to
other Permitted Liens.

                  (c)      Upon  appropriate  financing  statements  having been
filed in the jurisdictions listed on SCHEDULE II hereto, this Security Agreement
is  effective  to create a valid and  continuing  priority  lien on and priority
perfected  security  interest in the Collateral with respect to which a security
interest may be  perfected by filing  pursuant to the UCC, in favor of Agent for
the ratable benefit of Holders, prior to all other Liens except Permitted Liens,
and is enforceable as such as against  creditors of and purchasers  from Grantor
(other than  purchasers of Inventory in the ordinary  course of business) and as
against any purchaser of real property where any of the Equipment is located and
any present or future creditor obtaining a Lien on such real property.


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                  (d)      Grantor's  principal  place of business and the place
where its records  concerning  the  Collateral  are kept and the location of the
Collateral  are set forth on SCHEDULE  III hereto,  and Grantor  will not change
such  principal  place of business or remove such records or change the location
of the  Collateral  unless it has taken such action as is necessary to cause the
security  interest of Agent for the ratable benefit of Holders in the Collateral
to continue to be perfected in  accordance  with the  provisions of SECTION 4(C)
hereof.  Grantor  will not change its  principal  place of business or the place
where its records  concerning  the Collateral are kept or change the location of
the Collateral without giving fifteen (15) days' prior written notice thereof to
Agent.

         5.       COVENANTS.  Grantor covenants and agrees with Agent and Holder
that from and after the date of this  Security  Agreement  and until the Secured
Obligations are fully satisfied:

                  (a)      FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS. Grantor
shall pay any and all UCC filing fees  required by the states of  Tennessee  and
Florida which are required to be paid to file a UCC-1 financing statement. Agent
agrees not to require a filing in Florida unless required to perfect its lien in
the  Collateral on the written  advice of counsel.  Upon the written  request of
Agent,  and at the sole  expense of  Grantor,  Grantor  will  promptly  and duly
execute and deliver any and all such further  instruments and documents and take
such further  action as Agent may  reasonably  deem desirable to obtain the full
benefits of this Security Agreement and of the rights and powers herein granted,
including,  without  limitation,  the filing of any  financing  or  continuation
statements  under  the UCC with  respect  to the Liens  and  security  interests
granted hereby, transferring Collateral to the Agent's possession (if a security
interest in such Collateral can be perfected only by possession) for the ratable
benefit  of  Holders,  placing  the  interest  of  Agent  as  lienholder  on the
certificate of title of any vehicle  comprising any of the  Collateral.  Grantor
also  hereby  authorizes  Agent  to file  any  such  financing  or  continuation
statement without the signature of Grantor to the extent permitted by applicable
law.

                  (b)      MAINTENANCE   OF  RECORDS.   Grantor  will  keep  and
maintain at its own cost and expense  satisfactory  and complete  records of the
Collateral.  If  requested  by Agent,  Grantor  will mark its books and  records
pertaining  to the  Collateral  to  evidence  this  Security  Agreement  and the
security  interests granted hereby.  The security interest of the Agent shall be
noted on the certificate of title of each vehicle  assigned as Collateral  under
this Security  Agreement.  For Agent's and Holder's  further  security,  Grantor
agrees that Agent and Holder  shall have a special  property  interest in all of
Grantor's  books  and  records  pertaining  to  the  Collateral  and,  upon  the
occurrence and during the  continuation of any Default or Event of Default,  and
upon request by Agent,  Grantor  shall  deliver and turn over any such books and
records to Agent for the ratable  benefit of Holders or to its  representatives.
Prior to the occurrence of a Default or an Event of Default and upon  reasonable
notice from Agent,  Grantor shall permit any  representative of Agent reasonable
access to inspect such books and records and will provide photocopies thereof to
Agent.

                  (c)      INDEMNIFICATION.  In any suit, proceeding,  or action
brought by Agent or any Holder, or against Agent or any Holder by a third party,
relating to or arising from any of the Collateral, Grantor will save, indemnify,
and keep Agent and each Holder  harmless from and against all expense,  loss, or
damage suffered by reason of any defense, setoff,  counterclaim,  recoupment, or
reduction of liability  whatsoever of the obligor  thereunder,  arising out of a
breach


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by Grantor of any obligation  thereunder or arising out of any other  agreement,
indebtedness, or liability at any time owing to, or in favor of, such obligor or
its successors  from Grantor,  and all such  obligations of Grantor shall be and
remain enforceable against and only against Grantor and shall not be enforceable
against Agent or any Holder.

                  (d)      COMPLIANCE  WITH LAWS.  Grantor will  comply,  in all
material  respects,  with all acts, rules,  regulations,  orders,  decrees,  and
directions of any  governmental  authority,  applicable to the Collateral or any
part thereof or to the operation of Grantor's business;  PROVIDED, HOWEVER, that
Grantor may contest any act,  regulation,  order,  decree,  or  direction in any
reasonable  manner that shall not in the reasonable  opinion of Agent  adversely
affect Agent's or any Holder's  rights  hereunder or adversely  affect the first
priority of its security interest in the Collateral.

                  (e)      LIMITATION ON LIENS ON  COLLATERAL.  Grantor will not
create,  permit, or suffer to exist, and will defend the Collateral  against and
take such other  action as is necessary  to remove,  any Lien on the  Collateral
except Permitted Liens, and will defend the right,  title, and interest of Agent
and Holders in and to any of Grantor's  rights under the Collateral  against the
claims and demands of all Persons whomsoever.

                  (f)      FURTHER IDENTIFICATION OF COLLATERAL. Grantor will if
so requested by Agent  furnish to Agent for the ratable  benefit of Holders,  as
often as Agent reasonably requests, statements and schedules further identifying
and  describing  the  Collateral  and such other reports in connection  with the
Collateral as Agent may reasonably request, all in reasonable detail.

                  (g)      MAINTENANCE  OF  EQUIPMENT.  Grantor  will  keep  and
maintain  the  Equipment  in  good  operating   condition   sufficient  for  the
continuation  of the business  conducted by Grantor on a basis  consistent  with
past  practices,  and Grantor will provide all  maintenance  and service and all
repairs necessary for such purpose.

                  (h)      CONTINUOUS  PERFECTION.  Grantor  will not change its
name,  identity,  or  corporate  structure  in any  manner  that  might make any
financing or  continuation  statement  filed in  connection  herewith  seriously
misleading  within the  meaning  of  section  9507 of the UCC (or any other then
applicable  provision of the UCC) unless Grantor shall have given Agent at least
fifteen (15) days' prior written  notice thereof and shall have taken all action
(or made arrangements to take such action substantially simultaneously with such
change  if it is  impossible  to take  such  action  in  advance)  necessary  or
reasonably  requested by Agent to amend such financing statement or continuation
statement so that it is not seriously misleading.

         6.       AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.

                  (a)      Grantor hereby  irrevocably  constitutes and appoints
Agent and any officer or agent thereof, with full power of substitution,  as its
true and lawful  attorney-in-fact  with full irrevocable  power and authority in
the place and stead of  Grantor  and in the name of  Grantor or in its own name,
from time to time in Agent's  discretion,  for the purpose of  carrying  out the
terms of this Security Agreement,  to take any and all appropriate action and to
execute and deliver any and all documents and instruments  that may be necessary
or desirable to accomplish the purposes of this Security  Agreement and, without
limiting the generality of the foregoing,


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hereby gives Agent the power and right, on behalf of Grantor,  without notice to
or assent by Grantor to do the following:

                           (i)      to ask, demand,  collect,  receive, and give
acquittances and receipts for any and all moneys due and to become due under any
Collateral  and to file any claim or to take any other action or  proceeding  in
any court of law or  equity or  otherwise  deemed  appropriate  by Agent for the
purpose of collecting any and all such moneys due under any Collateral  whenever
payable and to file any claim or to take any other action or  proceeding  in any
court of law or equity or otherwise deemed  appropriate by Agent for the purpose
of collecting any and all such moneys due under any Collateral whenever payable;

                           (ii)     to pay or discharge taxes,  Liens,  security
interests,  or other encumbrances  levied or placed on or threatened against the
Collateral,  to effect any repairs or any  insurance  called for by the terms of
this Security  Agreement and to pay all or any part of the premiums therefor and
the costs thereof; and

                           (iii)    (A) to  direct  any  party  liable  for  any
payment  under any of the  Collateral to make payment of any and all moneys due,
and to become  due  thereunder,  directly  to Agent for the  ratable  benefit of
Holders or as Agent shall direct;  (B) to receive payment of and receipt for any
and all moneys,  claims and other amounts due, and to become due at any time, in
respect  of or  arising  out of any  Collateral;  (C) to sign  and  indorse  any
invoices,  freight  or express  bills,  bills of  lading,  storage or  warehouse
receipts,  drafts against debtors,  assignments,  verifications,  and notices in
connection  with accounts and other  Documents  constituting  or relating to the
Collateral;  (D) to commence and prosecute any suits, actions, or proceedings at
law or in  equity  in  any  court  of  competent  jurisdiction  to  collect  the
Collateral  or any part thereof and to enforce any other right in respect of any
Collateral;  (E) to defend any suit,  action, or proceeding brought against such
Grantor with respect to any Collateral; (F) to settle, compromise, or adjust any
suit,  action, or proceeding  described above and, in connection  therewith,  to
give  such  discharges  or  releases  as  Agent  may deem  appropriate;  and (G)
generally to sell,  transfer,  pledge,  make any  agreement  with respect to, or
otherwise  deal with any of the  Collateral  as fully and  completely  as though
Agent were the absolute  owner thereof for all  purposes,  and to do, at Agent's
option and Grantor's  expense,  at any time, or from time to time,  all acts and
things that Agent  reasonably deems necessary to protect,  preserve,  or realize
upon the  Collateral  and Agent's and Holders' Lien therein,  in order to effect
the intent of this Security  Agreement,  all as fully and effectively as Grantor
might do.

                  (b)      Agent agrees  that,  except upon the  occurrence  and
during the  continuation of a Default or an Event of Default,  it shall forebear
from  exercising  the power of attorney  or any rights  granted to Agent for the
ratable benefit of Holders  pursuant to this SECTION 6. Grantor hereby ratifies,
to the extent  permitted by law, all that said  attorneys  shall  lawfully do or
cause to be done by virtue  hereof.  The power of attorney  granted  pursuant to
this  SECTION 6 is a power  coupled  with an interest  and shall be  irrevocable
until the Secured Obligations are indefeasibly paid in full.

                  (c)      The powers conferred on Agent for the ratable benefit
of Holders hereunder are solely to protect Agent's and Holders' interests in the
Collateral  and shall not impose any duty upon it to exercise  any such  powers.
Agent shall be accountable only for


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amounts that it actually receives as a result of the exercise of such powers and
neither it nor any of its  officers,  directors,  employees,  or agents shall be
responsible  to Grantor or Parent for any act or failure to act,  except for its
own gross negligence or willful misconduct.

                  (d)      Grantor also  authorizes  Agent, at any time and from
time to time upon the occurrence and during the  continuation  of any Default or
Event of  Default,  (i) to  communicate  in its own name  with any  party to any
Contract  with regard to the  assignment  of the right,  title,  and interest of
Grantor in and under the Contracts  hereunder and other matters relating thereto
and (ii) to  execute,  in  connection  with the sale  provided  for in SECTION 8
hereof,  any  endorsements,  assignments,  or other instruments of conveyance or
transfer with respect to the Collateral.

         7.       PERFORMANCE  BY AGENT OF  GRANTOR'S  OBLIGATIONS.  If  Grantor
fails to  perform  or comply  with any of its  agreements  contained  herein and
Agent,  as provided for by the terms of this  Security  Agreement,  shall itself
perform or comply,  or otherwise  cause  performance  or  compliance,  with such
agreement,  the reasonable  expenses of Agent  incurred in connection  with such
performance  or compliance,  together with interest  thereon at the rate then in
effect in respect of the Senior Note Loans, shall be payable by Grantor to Agent
for the  ratable  benefit  of Holders  on demand  and shall  constitute  Secured
Obligations secured hereby.

         8.       REMEDIES, RIGHTS UPON DEFAULT.

                  (a)      If any Default or Event of Default shall occur and be
continuing,  the Agent shall,  at the request of Holders  holding  sixty percent
(60%) or more of the then outstanding Secured Obligations,  exercise in addition
to all other rights and remedies granted to it in this Security Agreement and in
any other  instrument  or  agreement  securing,  evidencing,  or relating to the
Secured  Obligations,  all rights and remedies of a secured party under the UCC.
Without limiting the generality of the foregoing,  Grantor expressly agrees that
in any such  event  Agent,  without  demand  of  performance  or  other  demand,
advertisement,  or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Grantor or any other person (all
and each of which demands,  advertisements,  and/or notices are hereby expressly
waived to the maximum extent permitted by the UCC and other applicable law), may
forthwith collect, receive, appropriate, and realize upon the Collateral, or any
part  thereof,  and/or may  forthwith  sell,  lease,  assign,  give an option or
options to purchase, or sell or otherwise dispose of and deliver such Collateral
(or contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales,  at any  exchange or broker's  board or at any of Agent's
offices or elsewhere  at such prices as it may deem best,  for cash or on credit
or for future delivery  without  assumption of any credit risk. Agent shall have
the right upon any such public sale or sales,  and, to the extent  permitted  by
law,  upon any such private sale or sales,  to purchase the whole or any part of
such Collateral so sold, free of any right or equity of redemption, which equity
of redemption  Grantor  hereby  releases.  Grantor  further  agrees,  at Agent's
request,  to assemble  the  Collateral  and make it available to Agent at places
that Agent shall reasonably select,  whether at Grantor's premises or elsewhere.
Agent shall apply the net proceeds of any such  collection,  recovery,  receipt,
appropriation, realization, or sale, as provided in SECTION 8(D) hereof, Grantor
remaining liable for any deficiency remaining unpaid after such application, and
only after so paying  over such net  proceeds  and after the payment by Agent of
any other amount required by any provision of law,  including section 9615(a)(3)
of the UCC,  need Agent  account for the  surplus,  if any,  to Grantor.  To the
maximum extent permitted by applicable law, Grantor


                                       8
<PAGE>


waives all claims, damages, and demands against Agent and Holders arising out of
the repossession,  retention, or sale of the Collateral except such as arise out
of the gross  negligence or willful  misconduct of Agent or any Holder.  Grantor
agrees  that  Agent need not give more than  twenty  (20)  days'  notice  (which
notification  shall be deemed  given when mailed or  delivered  on an  overnight
basis,  postage  prepaid,  addressed  to Grantor at its  address  referred to in
SECTION 12 hereof) of the time and place of any public sale or of the time after
which a  private  sale may  take  place  and  that  such  notice  is  reasonable
notification of such matters.  Grantor shall remain liable for any deficiency if
the proceeds of any sale or disposition of the  Collateral are  insufficient  to
pay all  amounts to which Agent and Holders  are  entitled,  Grantor  also being
liable for the fees of any  attorneys  employed  by Agent and Holders to collect
such deficiency.

                  (b)      Grantor  also  agrees  to pay all  costs of Agent and
Holders, including, without limitation,  reasonable attorneys' fees, incurred in
connection with the enforcement of any of its rights and remedies hereunder.

                  (c)      Grantor hereby waives presentment,  demand,  protest,
or any notice (to the maximum extent permitted by applicable law) of any kind in
connection with this Security Agreement or any Collateral.

                  (d)      The  Proceeds  of any  sale,  disposition,  or  other
realization upon all or any part of the Collateral shall be distributed by Agent
in the  following  order:  first to payment in full of the costs and expenses of
the Agent in  connection  with the  performance  of its  obligations  under this
Agreement,  second to payment of all the Secured  Obligations and then to pay to
the Grantor, or its representatives or as a court of competent  jurisdiction may
direct, any surplus then remaining from such Proceeds.

         9.       Intentionally Omitted.

         10.      APPOINTMENT OF AGENT; LIMITATION ON AGENT'S DUTY IN RESPECT OF
COLLATERAL.  Agent,  or any  successor  thereof,  has  been  appointed  as Agent
hereunder  by Holders  under,  and shall be  entitled  to the  benefits  of, the
Purchase Agreements. Agent shall be obligated and shall have the right hereunder
to make demands,  to give notices,  to exercise or refrain from  exercising  any
rights,  and  to  take  or  refrain  from  taking  action  (including,   without
limitation, the release or substitution of Collateral) solely in accordance with
this Security Agreement and the Purchase Agreements,  and Holders shall be bound
thereby. Agent shall not have any duty as to any Collateral in its possession or
control  or in the  possession  or  control of any agent or nominee of it or any
income thereon or as to the  preservation of rights against prior parties or any
other rights  pertaining  thereto,  except that Agent shall use reasonable  care
with  respect  to the  Collateral  in  its  possession  or  under  its  control.
Furthermore,  neither  Agent  nor any of its  officers,  directors,  agents,  or
employees  shall  be  liable  for any  action  taken or  omitted  by any of them
hereunder  or any  other  Transaction  Document  or in  connection  herewith  or
therewith,  unless caused by it or their gross negligence or willful misconduct.
Upon request of Grantor,  Agent shall  account for any moneys  received by it in
respect of any foreclosure on or disposition of the Collateral.

         11.      REINSTATEMENT.  This Security  Agreement  shall remain in full
force and effect and continue to be effective should any petition be filed by or
against  Grantor  for  liquidation  or  reorganization,  should  Grantor  become
insolvent or make an assignment for the benefit of


                                       9
<PAGE>


creditors,  or  should  a  receiver  or  trustee  be  appointed  for  all or any
significant part of Grantor's  assets,  and shall continue to be effective or be
reinstated,  as the case may be, if at any time payment and  performance  of the
Secured  Obligations,  or any part  thereof,  is,  pursuant to  applicable  law,
rescinded or reduced in amount, or must otherwise be restored or returned by any
obligee  of  the  Secured  Obligations,  whether  as  a  "voidable  preference",
"fraudulent conveyance", or otherwise, all as though such payment or performance
had not been  made.  In the event  that any  payment,  or any part  thereof,  is
rescinded,  reduced,  restored,  or returned,  the Secured  Obligations shall be
reinstated  and deemed  reduced  only by such amount paid and not so  rescinded,
reduced, restored, or returned.

         12.      NOTICES.  Except as otherwise provided herein,  whenever it is
provided  herein  that  any  notice,   demand,   request,   consent,   approval,
declaration,  or other communication shall or may be given to or served upon any
of the parties by any other  party,  or whenever  any of the parties  desires to
give or  serve  upon any  other  communication  with  respect  to this  Security
Agreement, each such notice, demand, request, consent, approval, declaration, or
other  communication shall be in writing and either shall be delivered in person
with  receipt  acknowledged  or sent by  registered  or certified  mail,  return
receipt requested,  postage prepaid,  or by telecopy,  and confirmed by telecopy
answerback addressed as follows:

                  (a)      If to Agent, at:

                           Crestview Capital Master, LLC
                           c/o Crestview Capital
                           95 Revere Drive, Suite A
                           Northbrook, IL  60062
                           Facsimile Number: (847) 559-5807

                           With copies to:
                           Feldman Weinstein LLP
                           420 Lexington Avenue, Suite 2620
                           New York, NY 10170
                           Attn: Joseph Smith
                           Facsimile Number: (212) 997-4242

                  (b)      If to  Grantor,  at its  principal  business  address
                           specified on SCHEDULE III hereto

                           With a copy to:

                           Stubbs Alderton & Markiles, LLP
                           15821 Ventura Boulevard, Suite 525
                           Encino, California 91436
                           Attn:  John McIlvery
                           Facsimile Number: (818) 474-8602

or at such  other  address  as may be  substituted  by  notice  given as  herein
provided.  The giving of any notice required  hereunder may be waived in writing
by the party entitled to receive such


                                       10
<PAGE>


notice. Every notice, demand, request, consent, approval,  declaration, or other
communication hereunder shall be deemed to have been duly given or served on the
date on which personally delivered, with receipt acknowledged,  telecopied,  and
confirmed  by telecopy  answerback,  or three (3)  Business  Days after the same
shall  have been  deposited  in the  United  States  mail.  Failure  or delay in
delivering  copies  of  any  notice,   demand,   request,   consent,   approval,
declaration,  or other  communication to the persons designated above to receive
copies  shall in no way  adversely  affect  the  effectiveness  of such  notice,
demand, request, consent, approval, declaration, or other communication.

         13.      SEVERABILITY.  Any provision of this Security  Agreement which
is  prohibited  or  unenforceable   in  any  jurisdiction   shall,  as  to  such
jurisdiction,   be   ineffective   to  the   extent  of  such   prohibition   or
unenforceability  without  invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

         14.      NO WAIVER;  CUMULATIVE REMEDIES.  Neither Agent nor any Holder
shall by any act, delay,  omission, or otherwise be deemed to have waived any of
its  rights  or  remedies  hereunder,  and no  waiver  shall be valid  unless in
writing,  signed by Agent,  and then only to the extent  therein  set  forth.  A
waiver by Agent of any right or remedy  hereunder on any one occasion  shall not
be construed as a bar to any right or remedy  which Agent would  otherwise  have
had on any future  occasion.  No failure to exercise nor any delay in exercising
on the part of Agent, any right, power, or privilege hereunder, shall operate as
a waiver thereof,  nor shall any single or partial exercise of any right,  power
or  privilege  hereunder  preclude any other or future  exercise  thereof or the
exercise  of any other  right,  power,  or  privilege.  The rights and  remedies
hereunder  provided are cumulative and may be exercised  singly or concurrently,
and are not  exclusive of any rights and remedies  provided by law.  None of the
terms or provisions of this Security Agreement may be waived, altered, modified,
or amended except by an instrument in writing, duly executed by Agent and, where
applicable by the Grantor.

         15.      SUCCESSORS AND ASSIGNS; GOVERNING LAW.

                  (a)      This  Security   Agreement  and  all  obligations  of
Grantor  hereunder  shall be binding upon the successors and assigns of Grantor,
and shall,  together with the rights and remedies of Agent  hereunder,  inure to
the  benefit  of  Agent,  Holders,  all  future  holders  of the Notes and their
respective  successors  and assigns.  No sales of  participations,  other sales,
assignments,  transfers,  or other  dispositions  of any agreement  governing or
instrument evidencing the Secured Obligations or any portion thereof or interest
therein  shall in any manner affect the security  interest  granted to Agent for
the ratable benefit of Holders, hereunder.

                  (b)      THIS SECURITY  AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TENNESSEE
WITHOUT REGARD TO THE PROVISIONS THEREOF RELATING TO CONFLICT OF LAWS.

         16.      Intentionally Omitted.


                                       11
<PAGE>


         17.      FURTHER  INDEMNIFICATION.  Grantor  agrees to pay, and to save
Agent and Holder  harmless  from,  any and all  liabilities  with respect to, or
resulting from any delay in paying, any and all excise,  sales, or other similar
taxes that may be payable or determined to be payable with respect to any of the
Collateral or in connection  with any of the  transactions  contemplated by this
Security Agreement.

         18.      WAIVER OF JURY  TRIAL.  Grantor  waives  all right to trial by
jury in any action or  proceeding  to  enforce or defend any rights or  remedies
hereunder,  or  under  the  Purchase  Agreements,  or  relating  to  each of the
foregoing.

         19.      SECTION TITLES.  The Section titles contained in this Security
Agreement  are and shall be without  substantive  meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.

         20.      COUNTERPARTS.  This Security  Agreement may be executed in any
number of counterparts, which shall, collectively and separately, constitute one
agreement.

                            [SIGNATURE PAGE FOLLOWS]


                                       12
<PAGE>


         IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be executed and  delivered  by its duly  authorized  officer on the
date first set forth above.

                                        NATIONAL COAL CORPORATION,
                                        a Tennessee corporation

                                        By:         /S/ JON E. NIX
                                                 -------------------------------

                                        Name:       JON E. NIX
                                                 -------------------------------

                                        Title:      CHIEF EXECUTIVE OFFICER



Accepted and acknowledged as Agent for the ratable benefit of Holders by:


       /S/ ROBERT HOYT
-----------------------------
Crestview Capital Master, LLC


                                       13
<PAGE>


                                   SCHEDULE I

                                 PERMITTED LIENS



                                      NONE

<PAGE>


                                   SCHEDULE II

                                     FILINGS

GRANTOR                           JURISDICTION                 FILING OFFICE
-------                           ------------                 -------------


National Coal Corporation           Tennessee                 Secretary of State





<PAGE>


                                  SCHEDULE III

                               LOCATION OF RECORDS
                             AND CERTAIN COLLATERAL



National Coal Corporation
319 Ebenezer Road
Knoxville, TN 37923