**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-Q**




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




For
      the
      quarterly period ended September 30, 2006




or




o
            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 incorporation or organization)
            
            (I.R.S.
                Employer 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) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes
x No
o


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 o
            Accelerated
                filer o
            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 o No
      x




As
      of
      November 9, 2006, the issuer had 16,329,858 shares of common stock, par value
      $.0001 per share, issued and outstanding.












**NATIONAL
      COAL CORP.**





**INDEX
      TO FORM 10-Q**


**Page****PART
                  I**
              **FINANCIAL
                  INFORMATION**
              3Item
                  1.
              Financial
                  Statements
              3Condensed
                  Consolidated Balance Sheets (unaudited) as of September 30, 2006
                  and
                  December 31, 2005
              3Condensed
                  Consolidated Statements of Operations (unaudited) for the three
                  months and
                  the nine months ended September 30, 2006 and September 30,
                  2005
              4Condensed
                  Consolidated Statements of Cash Flows (unaudited) for the nine
                  months
                  ended September 30, 2006 and September 30, 2005
              5Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              19Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              41Item
                  4.
              Controls
                  and Procedures
              41**PART
                  II**
              **OTHER
                  INFORMATION**
              43Item
                  1.
              Legal
                  Proceedings
              43Item
                  1A.
              Risk
                  Factors
              43Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              44Item
                  6.
              Exhibits
              44




2


**PART
      I: FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements**




**NATIONAL
      COAL CORP.**


**CONDENSED
      CONSOLIDATED** **BALANCE
      SHEETS**


**(unaudited)**




**September
                30,**
              **2006**
            
            **December
                31,**
              **2005*****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            1,790,553
            
            $
            25,434,988Accounts
                receivable
            
            
            3,450,955
            
            
            2,929,735Inventory
            
            
            2,213,545
            
            
            360,614Other
                current assets
            
            
            845,290
            
            
            274,591Total
                current assets
            
            
            8,300,343
            
            
            28,999,928Assets
                held for sale
            
            
            703,726
            
            
            —Property,
                plant, equipment and mine development, net
            
            
            57,916,106
            
            
            50,901,681Deferred
                financing costs
            
            
            2,657,649
            
            
            2,958,666Restricted
                cash
            
            
            17,050,915
            
            
            7,323,023Other
                non-current assets
            
            
            460,669
            
            
            224,120Total
                Assets
            
            $
            87,089,408
            
            $
            90,407,418**Liabilities
                and Stockholders’ Equity**Current
                liabilitiesCurrent
                maturities of long-term debt
            
            $
            4,709,945
            
            $
            3,319,175Current
                installments of obligations under capital leases
            
            
            341,083
            
            
            958,907Accounts
                payable and accrued expenses
            
            
            13,721,883
            
            
            6,390,626Total
                current liabilities
            
            
            18,772,911
            
            
            10,668,708Long-term
                debt, less current maturities, net of discount
            
            
            55,040,233
            
            
            54,541,225Obligations
                under capital leases, excluding current installments
            
            
            413,058
            
            
            1,196,143Asset
                retirement obligations
            
            
            6,924,435
            
            
            7,228,232Deferred
                revenue
            
            
            958,409
            
            
            150,000Other
                non-current liabilities
            
            
            124,260
            
            
            6,776Total
                liabilities
            
            
            82,233,306
            
            
            73,791,084Commitments
                and contingencies (Note 11)Stockholders’
                equitySeries
                A convertible preferred stock, $.0001 par value; 8% coupon; 1,611
                shares
                authorized; 791.21 and 1,333.22 shares issued and outstanding at
                September
                30, 2006 and December 31, 2005, respectively
            
            
            —
            
            
            —Common
                stock, $.0001 par value; 80 million shares authorized;15,995,396
                and 13,977,217 shares issued and outstanding at September 30, 2006
                and
                December 31, 2005, respectively
            
            
            1,600
            
            
            1,398Additional
                paid-in capital
            
            
            41,311,209
            
            
            37,168,122Accumulated
                deficit
            
            
            (36,456,707
            )
            
            (20,553,186
            )Total
                stockholders’ equity
            
            
            4,856,102
            
            
            16,616,334Total
                Liabilities and Stockholders’ Equity
            
            $
            87,089,408
            
            $
            90,407,418




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




*Amounts
      at December 31, 2005 have been derived from audited financial
      statements.




3


**NATIONAL
      COAL CORP.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(unaudited)**




**Three
                Months**
              **Ended
                September 30,**
            
            **Nine
                Months**
              **Ended
                September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**RevenuesCoal
                sales
            
            $
            21,068,684
            
            $
            18,159,270
            
            $
            64,448,256
            
            $
            46,754,319Other
                revenues
            
            
            45,061
            
            
            115,430
            
            
            524,109
            
            
            115,430Total
                revenues
            
            
            21,113,745
            
            
            18,274,700
            
            
            64,972,365
            
            
            46,869,749ExpensesCost
                of sales
            
            
            15,735,132
            
            
            13,031,078
            
            
            57,218,065
            
            
            35,898,144Depreciation,
                depletion, amortizationand
                accretion
            
            
            3,812,736
            
            
            3,208,522
            
            
            11,726,482
            
            
            7,166,450General
                and administrative
            
            
            3,173,000
            
            
            1,697,249
            
            
            7,331,035
            
            
            5,195,067Total
                operating expenses
            
            
            22,720,868
            
            
            17,936,849
            
            
            76,275,582
            
            
            48,259,661Operating
                (loss) income
            
            
            (1,607,123
            )
            
            337,851
            
            
            (11,303,217
            )
            
            (1,389,912
            )Other
                income (expense)Interest
                expense
            
            
            (1,673,464
            )
            
            (1,054,180
            )
            
            (5,401,498
            )
            
            (2,801,755
            )****Interest
                income
            
            
            168,622
            
            
            80,529
            
            
            553,818
            
            
            82,545Other
                income (expense), net
            
            
            (215,081
            )
            
            244,847
            
            
            247,376
            
            
            297,761Total
                other income (expense)
            
            
            (1,719,923
            )
            
            (728,804
            )
            
            (4,600,304
            )
            
            (2,421,449
            )Net
                loss
            
            
            (3,327,046
            )
            
            (390,953
            )
            
            (15,903,521
            )
            
            (3,811,361
            )Preferred
                stock dividend
            
            
            (377,105
            )
            
            (264,020
            )
            
            (739,991
            )
            
            (859,785
            )Net
                loss attributable to common shareholders
            
            $
            (3,704,151
            )
            $
            (654,973
            )
            $
            (16,643,512
            )
            $
            (4,671,146
            )Basic
                net loss per common share
            
            $
            (0.23
            )
            $
            (
                0.05
            )
            $
            (1.11
            )
            $
            (0.34
            )Diluted
                net loss per common share
            
            $
            (0.23
            )
            $
            (
                0.05
            )
            $
            (1.11
            )
            $
            (0.34
            )Weighted
                average common shares
            
            
            15,778,005
            
            
            13,804,791
            
            
            15,029,335
            
            
            13,671,490




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




4


**NATIONAL
      COAL CORP.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(unaudited)**




**Nine
                Months**
              **Ended
                September 30,****2006**
            
            **2005**Cash
                Flows from Operating ActivitiesNet
                loss
            
            $
            (15,903,521
            )
            $
            (3,811,361
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation,
                depletion, amortization and accretion
            
            
            11,726,482
            
            
            7,166,450Amortization
                of deferred financing costs
            
            
            432,778
            
            
            —Amortization
                of discount on long-term debt
            
            
            447,177
            
            
            —Loss
                on disposal of assets
            
            
            22,233
            
            
            406,304Gain
                on extinguishment of debt
            
            
            (269,608
            )
            
            —Stock
                option expense
            
            
            2,012,820
            
            
            672,568Changes
                in operating assets and liabilities:Increase
                in accounts receivable
            
            
            (521,220
            )
            
            (262,300
            )Increase
                in inventory
            
            
            (1,852,931
            )
            
            (230,166
            )(Increase)
                decrease in other assets
            
            
            (694,251
            )
            
            96,823Increase
                in accounts payable and accrued expenses
            
            
            6,969,973
            
            
            2,224,567Increase
                in deferred revenue
            
            
            808,409
            
            
            —Increase
                in other non-current liabilities
            
            
            117,483
            
            
            —Settlement
                of asset retirement obligations
            
            
            (937,925
            )
            
            —Net
                cash flows provided by operating activities
            
            
            2,357,899
            
            
            6,262,885Cash
                Flows from Investing ActivitiesCapital
                expenditures
            
            
            (23,565,659
            )
            
            (10,239,189
            )Proceeds
                from the sale of equipment
            
            
            7,362,829
            
            
            —(Increase)
                decrease in prepaid royalty
            
            
            (112,997
            )
            
            284,520Increase
                in restricted cash
            
            
            (9,727,892
            )
            
            (1,218,436
            )Net
                cash flows used in investing activities
            
            
            (26,043,719
            )
            
            (11,173,105
            )Cash
                Flows from Financing ActivitiesProceeds
                from issuance of common and preferred stock
            
            
            897,018
            
            
            261,798Proceeds
                from exercise of options and warrants
            
            
            1,970,122
            
            
            506,218Proceeds
                from issuance of long-term debt
            
            
            2,623,285
            
            
            7,083,083Payments
                on notes payable
            
            
            (856,055
            )
            
            (244,887
            )Payments
                on obligations under capital leases
            
            
            (1,961,032
            )
            
            (1,090,468
            )Payments
                on installment purchase obligations
            
            
            (2,079,921
            )
            
            (574,079
            )Payments
                for deferred financing costs
            
            
            (189,146
            )
            
            (56,000
            )Payments
                for preferred dividends
            
            
            (362,886
            )
            
            (533,769
            )Net
                cash flows provided by financing activities
            
            
            41,385
            
            
            5,351,896**Net
                (Decrease) Increase in Cash and cash equivalents**
            
            
            (23,644,435
            )
            
            441,676Cash
                and cash equivalents at beginning of period
            
            
            25,434,988
            
            
            351,698Cash
                and cash equivalents at end of period
            
            $
            1,790,553
            
            $
            793,374


5




Supplemental
                disclosuresInterest
                paid in cash
            
            $
            3,068,522
            
            $
            2,109,079Non-cash
                investing and financing transactions:Preferred
                stock dividends converted to common stock
            
            
            63,717
            
            
            18,198Equipment
                acquired via capital lease
            
            
            821,187
            
            
            —Equipment
                acquired via installment purchase obligations and notes
                payable
            
            
            1,751,336
            
            
            4,209,778Constructive
                dividend attributable to preferred shareholders
            
            
            —
            
            
            66,971




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





6


**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 U.S.
      generally accepted accounting principles 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, 2005. The accompanying unaudited
      condensed consolidated financial statements reflect all adjustments 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 nine month periods ended September 30, 2006 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. Certain
      prior period amounts have been reclassified to conform to the current year’s
      presentation.




**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 is currently assessing the potential impact
      of
      the interpretation on its financial position and results of
      operations.




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




**3.**
              **Stock-Based
                  Compensation**


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




Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation under
      Statement of Financial Accounting Standards No. 123 *Accounting
      for Stock-Based Compensation* (“FAS
      123”). As permitted under this standard, compensation cost was recognized using
      the intrinsic value method described in Accounting Principles Board Opinion
      No.
      25, *Accounting
      for Stock Issued to Employees* (“APB
      25”). APB 25 does not require any compensation expense to be recorded in the
      consolidated financial statements if the exercise price of the award was equal
      to or more than the market price on the date of the grant.




Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (Revised 2004), *Share-Based
      Payment* (“FAS
      123R”) using the modified-prospective transition method. FAS 123R requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized as compensation expense in the consolidated financial
      statements based on their fair values. Under the modified-prospective transition
      method, the Company recognizes compensation expense for the unvested portion
      of
      all share-based payments granted on or prior to December 31, 2005 over the
      remaining service period based on the grant date fair value estimated in
      accordance with FAS 123 and recognizes compensation cost for all share-based
      payments granted on or subsequent to January 1, 2006 over the service period
      based on grant date fair value estimated in accordance with FAS 123R. As
      permitted by FAS 123R, prior periods were not restated to reflect the impact
      of
      the new accounting standard. During the nine months ended September 30, 2006,
      the Company recognized $2,012,820 of compensation expense related to stock
      options, including $941,961 related to the accelerated vesting of options
      granted to the former CEO, the former General Counsel and Secretary who is
      also
      the spouse of the former CEO, and the former COO. The former CEO continues
      as
      Chairman.




7


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:




**Three
                months ended September 30,**
            
            **Nine
                months ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Risk
                free interest rate
            
            
            4.9
            %
            
            4.1
            %
            
            4.9
            %
            
            4.3
            %Expected
                term (years)
            
            
            6.25
            
            
            6.25
            
            
            6.25
            
            
            6.25Expected
                volatility
            
            
            54.2
            %
            
            47.6
            %
            
            53.9
            %
            
            47.8
            %Expected
                dividend yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %





The
      risk-free interest rate is based on the U.S. Treasury rate for the expected
      life
      at the time of grant, volatility is based on the average long-term implied
      volatilities of peer companies as the Company’s trading history is limited, and
      the expected term is determined using the *simplified* method
      as accepted under Securities and Exchange Commission Staff Accounting Bulletin
      No. 107 assuming a ten-year original contract term and graded vesting over
      four
      years. The weighted-average grant-date fair value of options issued during
      the
      nine months ended September 30, 2006 was $3.68.




8


The
      following table summarizes activity under the Plan for the nine months ended
      September 30, 2006:




**Options
                Outstanding**
            
            **Exercise
                Price**
            
            **Weighted
                Average Exercise Price**Outstanding
                at December 31, 2005
            
            
            1,532,385
            
            $
            2.20
                - $7.02
            
            $
            4.21Granted
            
            
            566,500
            
            $
            6.25
                - $10.14
            
            $
            6.40Exercised
            
            
            400,010
            
            $
            2.20
                - $6.25
            
            $
            2.41Forfeited
            
            
            136,250
            
            $
            5.60
                - $10.14
            
            $
            7.04Outstanding
                at September 30, 2006
            
            
            1,562,625
            
            $
            2.20
                - $7.98
            
            $
            5.21Vested
                (7.8 year weighted-average remaining contractual term)
            
            
            542,250
            
            $
            2.20
                - $7.02
            
            $
            3.56Unvested
                (9.2 year weighted-average remaining contractual term)
            
            
            1,020,375
            
            $
            2.20
                - $7.98
            
            $
            6.08Available
                for grant at September 30, 2006
            
            
            553,125




Exercise
      prices for stock options outstanding as of September 30, 2006 range from $2.20
      to $7.98 summarized as follows:




Range
                of exercise prices
            
            Number
                of shares underlying options
            
            Weighted-average
                remaining life (years)
            
            Weighted-average
                exercise price$2.00
                - $4.00
            
            387,500
            
            7.5
            
            $2.20$4.01
                - $6.00
            
            182,625
            
            7.6
            
            $5.24$6.01
                - $8.00
            
            992,500
            
            9.4
            
            $6.37




As
      of
      September 30, 2006, there was approximately $3,016,000 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 1.3
      years.




9


If
      the
      Company had adopted the fair value method of accounting for stock-based
      compensation on January 1, 2005, compensation costs which would have been
      recognized and pro forma net loss and loss per share for the three months and
      the nine months ended September 30, 2005 would have been as
      follows:




**Three
                            months ended**
                        
                        **Nine
                            months ended****September
                            30,**
                        
                        **September
                            30,****2005**
                        
                        **2005**Net
                            loss attributable to common shareholders, asreported
                        
                        $
                        (654,973
                        )
                        $
                        (4,671,146
                        )Add:
                            Stock-based compensation expenserecognized
                            under the intrinsic method
                        
                        
                        223,362
                        
                        
                        672,578Deduct:
                            Total stock-based compensation expensefor
                            stock options determined under the Black-Scholes option
                            pricing
                            model
                        
                        
                        (329,045
                        )
                        
                        (867,110
                        )Pro
                            forma net loss
                        
                        $
                        (760,656
                        )
                        $
                        (4,865,678
                        )Loss
                            per share:Basic
                            and diluted- as reported
                        
                        $
                        (0.05
                        )
                        $
                        (0.34
                        )Basic
                            and diluted- pro forma
                        
                        $
                        (0.06
                        )
                        $
                        (0.36
                        )
  **4.**
                          **Property,
                              Plant, Equipment and Mine Development and Assets
                              Held-For-Sale**


Property,
      plant, equipment and mine development consists of the following::




**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Furniture
                and office equipment
            
            $
            345,411
            
            $
            220,663Mining
                equipment and vehicles
            
            
            49,813,322
            
            
            36,509,990Land
                and buildings
            
            
            6,486,680
            
            
            6,721,858Mine
                development
            
            
            20,556,798
            
            
            18,311,553Total
                property, plant, equipment and mine development
            
            
            77,202,211
            
            
            61,764,064Less
                accumulated depreciation, depletion and amortization
            
            
            (19,286,105
            )
            
            (10,862,383
            )Property,
                plant, equipment and mine development, net
            
            $
            57,916,106
            
            $
            50,901,681







Mining
      equipment includes approximately $869,000 and $2,325,000 of gross assets under
      capital leases at September 30, 2006 and December 31, 2005,
      respectively.




Depreciation
      expense was approximately $3,392,000 and $2,850,000 for the three months ended
      September 30, 2006 and 2005, respectively, and $10,549,000 and $5,973,000 for
      the nine months ended September 30, 2006 and 2005, respectively.




The
        Company periodically reviews the estimated useful lives of its fixed assets.
        During the second quarter of 2005, this review indicated that the estimated
        useful lives for certain asset categories were generally determined to be
        less
        than those employed in calculating depreciation expense. As a result, the
        Company revised the estimated useful lives of mining equipment as of April
        1,
        2005. The impact of the change in estimated useful lives was to increase
        depreciation expense and the net loss by approximately $2,298,000 or $(0.17) per
        share
        for the nine months ended September 30, 2005.


10


During
      the three months ended March 31, 2006, the Company adopted a plan to sell
      existing transportation and mining equipment to various outside contractors.
      In
      September 2006, the Company completed sales of the majority of this equipment
      to
      various outside parties, including two contractors who perform hauling services
      for the Company. The equipment sold had a net book value of $919,549 and the
      sales resulted in a net loss of $22,550. The net book value of the remaining
      assets held for sale at September 30, 2006 approximates the fair value and
      is
      disclosed separately on the balance sheet.




On
      September 18, 2006 the Company entered into a sale-leaseback transaction with
      First National Capital Corporation’s assignee, GATX Financial Corporation,
      involving the Company’s highwall miner initially purchased in February 2006. The
      Company sold the highwall miner for approximately $6.4 million and recorded
      a
      deferred gain of approximately $875,000 which will be recognized over the
      forty-two month term of the lease. The lease is a “net” lease and requires that
      the Company maintain and insure the equipment as well as pay rental payments
      of
      $166,568 per month. As a condition of the lease, the Company provided two
      standby letters of credit totaling $1,282,770 in lieu of security deposits
      which
      are 100% collateralized with cash on deposit at two financial
      institutions.





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


**5.**
                **Accounts
                    Payable and Accrued
                    Expenses**


Accounts
      payable and accrued expenses are as follows:




**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Accounts
                payable
            
            $
            9,591,769
            
            $
            3,744,295Accrued
                payroll and related taxes
            
            
            300,610
            
            
            383,642Accrued
                interest
            
            
            1,703,933
            
            
            47,466Accrued
                insurance
            
            
            330,000
            
            
            789,810Accrued
                preferred dividends
            
            
            377,105
            
            
            —Royalty
                obligations
            
            
            722,490
            
            
            869,143Accrued
                federal, state and local taxes
            
            
            695,976
            
            
            556,270Total
                accounts payable and accrued expenses
            
            $
            13,721,883
            
            $
            6,390,626




**6.**
                **Long-Term
                    Debt**




***Note
      Payable***




In
      January 2005, the Company signed an agreement committing the Company to the
      purchase of a highwall miner for a total purchase price of approximately
      $5,500,000, and paid a $500,000 deposit toward that purchase commitment. In
      March 2005, the Company borrowed approximately $5,140,000 pursuant to certain
      note and warrant purchase agreements and completed the purchase of this mining
      equipment. The Company issued notes in the aggregate principal amount of
      approximately $5,140,000 to three purchasers, including Crestview Capital
      Master, LLC (“CCM, LLC”). CCM, LLC is a related party to the Company due to the
      significant number of shares it holds in the Company. The notes had an original
      maturity date of August 10, 2005, later extended to December 10, 2005, were
      secured by the highwall miner, and had an interest rate of eighteen percent
      (18%). The Company paid an origination fee of approximately $200,000 upon the
      execution of the loan document. The note purchasers were also issued five-year
      common stock purchase warrants to purchase up to 140,000 shares of the Company’s
      common stock at an exercise price per share of $8.50. The notes were repaid
      on
      December 29, 2005 with an additional 3% late
      payment penalty.




11


***Equipment
      Notes***




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




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




***10.5%
      Senior Secured Notes Due 2010***




On
      December 29, 2005, the Company issued $55.0 million of 10.5% Senior Secured
      Notes and Warrants to purchase a total of 1,732,632 shares of the Company’s
      common stock. The issue consisted of 55,000 units, with each unit comprised
      of
      one $1,000 principal amount note due 2010 and one warrant, which entitles the
      holder to purchase 31.5024 shares of the Company’s common stock at an exercise
      price of $8.50 per share, subject to adjustment. The warrants are subject to
      mandatory conversion if the price of the Company’s common stock remains above
      $12.75 for more than nineteen days out of a consecutive thirty day trading
      period. The warrants will be exercisable at any time on or after their first
      anniversary date and will expire on December 15, 2010. Net proceeds from this
      sale were approximately $52.1 million. The Company immediately used
      approximately $22.1 million of the proceeds to repay existing indebtedness.
      During the nine months ended September 30, 2006 the Company used approximately
      $2.0 million to purchase a forty-two mile rail line in Tennessee, approximately
      $8.3 million as collateral to support reclamation bonds, and $19.7 million
      to
      purchase other equipment, refurbish preparation facilities and rail loadouts,
      and provide working capital.





The
      indenture allows the Company to incur a first lien credit facility in the amount
      of $10.0 million, but limits further indebtedness unless certain fixed charge
      coverage ratios are maintained on a pro forma basis. Please refer to Note
      12. "Events Subsequent to September 30, 2006," for a discussion of our entrance
      into such a credit facility. The fixed charge coverage ratio is defined as
      the
      ratio of net income (loss) plus (i) fixed charges, (ii) depreciation, depletion
      and amortization, (iii) taxes, (iv) extraordinary losses, and (v) other non-cash
      income and expenses to fixed charges defined to include 25% of capital
      expenditures made by the Company and its subsidiaries. To incur additional
      indebtedness, the Company must maintain a fixed charge coverage ratio of 2.0
      to
      1 for the first year of the Notes, 2.25 to 1 for the second year, and 2.5 to
      1
      for the remaining term of the Notes. The indenture also restricts payment of
      dividends on the Company’s common stock. Notes issued under the indenture are
      guaranteed fully and unconditionally as well as jointly and severally by the
      Company, which has no independent assets or operations, and each of its wholly
      owned subsidiaries.





12


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




***Installment
      Purchase Obligations***




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





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





In
      April
      2006, the Company entered into new installment sale contracts with an equipment
      manufacturer pursuant to which the Company refinanced equipment with an
      aggregate principal value of approximately $2,729,000 formerly acquired under
      various capital leases resulting in a gain on extinguishment of debt of
      approximately $261,000. These installment sale contracts require payments over
      36 months at fixed interest rates ranging from 7.03% to 7.50%. The obligations
      under the installment sale contracts are secured by the equipment purchased.




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





13


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




**September
                30,**
            
            **December
                31,****2006**
            
            **2005**10.5%
                Senior Secured Notes, due 2010
            
            $
            55,000,000
            
            $
            55,000,000Bank
                note (prime + 1%), due 2007
            
            
            738,495
            
            
            1,200,018Installment
                purchase obligations, due 2009
            
            
            3,533,162
            
            
            —Installment
                purchase obligations, due 2008
            
            
            3,450,779
            
            
            5,270,611Equipment
                note (non-interest bearing), due 2006
            
            
            —
            
            
            280,000Equipment
                notes (8.39%-9.28%, due 2009-2011)
            
            
            134,891
            
            
            —Equipment
                note (4.48%, due 2009)
            
            
            261,447
            
            
            —Other
            
            
            90,430
            
            
            19,931Less
                unamortized discounts
            
            
            (3,459,026
            )
            
            (3,910,160
            )59,750,178
            
            
            57,860,400Less
                current portion of long-term debt
            
            
            (4,709,945
            )
            
            (3,319,175
            )Long-term
                debt
            
            $
            55,040,233
            
            $
            54,541,225


**7.**
                **Leases**


The
      Company leases mining and certain other equipment under noncancelable lease
      agreements ranging in initial term from nine months to five years. Rental
      expense for equipment under operating lease agreements with initial lease terms
      of one year or greater was approximately $232,000 and $188,000 for the three
      months ended September 30, 2006 and 2005, respectively and approximately
      $414,000 and $879,000 for the nine months ended September 30, 2006 and 2005,
      respectively.




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




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




**8.**
            **Asset
                Retirement Obligations**




In
      accordance with SFAS No. 143, the Company recognizes a liability for the fair
      value of asset retirement obligations associated with mine reclamation in the
      period in which the obligations are incurred or acquired. The liability is
      accreted to the expected reclamation date at the Company’s credit-adjusted
      risk-free rate.




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




Obligation
                at December 31, 2005
            
            $
            7,228,232Additions
                resulting from property additions
            
            
            289,731Accretion
                expense
            
            
            344,397Obligations
                settled
            
            
            (937,925
            )Obligation
                at September 30, 2006
            
            $
            6,924,435







14




**9.**
            **Stockholders’
                Equity**




During
      the nine months ended September 30, 2006 and 2005, 152,500 and 0 warrants were
      exercised with gross proceeds totaling $1,006,500 and $0,
      respectively.




During
      the nine months ended September 30, 2006 and 2005, holders of 542.01 and 82.77
      shares of Series A convertible preferred stock with liquidation preferences
      totaling $8,130,156 and $1,241,550 plus accrued dividends of $63,717 and
      $18,198, converted their shares into 1,364,166 and 209,958 shares of common
      stock, respectively.




During
      the nine
      months ended September 30, 2006 and 2005, the Company issued 400,010 and 222,940
      shares of common stock and received gross proceeds of $963,622 and $506,218
      respectively, upon the exercise of stock options by employees or former
      employees. Additionally, 101,503 shares of common stock were issued during
      the
      nine months ended September 30, 2006 for gross proceeds of $897,018, including
      100,000 shares purchased by the Company’s new Chief Executive Officer.




In
      October 2006, the Company determined that it had not fully complied fully with
      a
      preferred stock purchase agreement provision which resulted in the accrual
      of
      $198,220 of additional preferred stock dividends.  Management determined
      that the impact of this accrual is not material to the Company’s consolidated
      financial statements in prior periods.  Therefore, the Company has
      reflected this accrual as a one-time adjustment to shareholders’ equity during
      the third quarter of 2006.  In November 2006, a majority of the preferred
      shareholders voted to eliminate the provision which gave rise to this
      accrual.


**10.**
                **Earnings
                    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 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 are not included in
      the
      diluted earnings or loss per share calculations. 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 September 30, 2006 and 2005, 3,314,927 and 5,062,942
      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 nine months ended
      September 30, 2006 and 2005, 4,152,204 and 5,143,773 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.




15


The
      computations for basic and diluted earnings per share from continuing operations
      for the following periods are illustrated below:




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,**2006
            
            2005
            
            2006
            
            2005Numerator:Net
                loss
            
            $
            (3,327,046
            )
            $
            (390,953
            )
            $
            (15,903,521
            )
            $
            (3,811,361
            )Preferred
                dividends
            
            
            (377,105
            )
            
            (264,020
            )
            
            (739,991
            )
            
            (859,785
            )Numerator
                for basic and diluted
            
            $
            (3,704,151
            )
            $
            (654,973
            )
            $
            (16,643,512
            )
            $
            (4,671,146
            )Denominator:Weighted
                average shares - basic
            
            
            15,778,005
            
            
            13,804,791
            
            
            15,029,335
            
            
            13,671,490Effect
                of warrants
            
            
            —
            
            
            250,000
            
            
            155,898
            
            
            250,000Effect
                of convertible preferred shares
            
            
            1,978,024
            
            
            3,480,558
            
            
            2,534,566
            
            
            3,546,034Effect
                of stock options
            
            
            1,336,903
            
            
            1,332,384
            
            
            1,461,740
            
            
            1,347,739Adjusted
                weighted average shares - diluted
            
            
            19,092,932
            
            
            18,867,733
            
            
            19,181,539
            
            
            18,815,263Basic
                net loss per common share
            
            $
            (0.23
            )
            $
            (0.05
            )
            $
            (1.11
            )
            $
            (0.34
            )Diluted
                net loss per common share
            
            $
            (0.23
            )
            $
            (0.05
            )
            $
            (1.11
            )
            $
            (0.34
            )


**11.**
                **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 of Appeals. The U.S. Sixth Circuit Court of Appeals upheld
      the dismissal by the District Court. The plaintiff filed an application for
      review by the Court “en banc”.




Concurrent
      with the above action, the same plaintiffs filed a similar action alleging
      a
      NEPA violation regarding OSM’s approval of an application for a revision of the
      same permit. An unfavorable outcome of this action would not involve direct
      monetary damages; however significant financial losses could result from
      curtailed mining operations. The Company believes that this matter will be
      resolved favorably and without a material impact on its cash flows, results
      of
      operations or financial condition.




During
      2005, the Company underwent an audit by its previous workers’ compensation
      insurance provider which subsequently contended that an additional approximately
      $1.4 million in premiums is owed for the policy year ended April 15, 2005.
      The
      matter primarily involves the classification of employees performing certain
      job
      functions. In January 2006, the Company attempted to settle the dispute by
      submitting a full accounting of the matter with a payment of approximately
      $427,000 to the previous insurance provider. Currently, the matter has not
      been
      resolved nor has any legal action been pursued by either party. The Company
      and
      the insurance provider are currently attempting to negotiate a settlement.
      The
      Company does not believe that the ultimate liability with respect to this action
      will materially affect the operating results or the financial position of the
      Company.




16




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 at the Company’s operations in Kentucky. The Company
      is the sublessee of the right to mine coal using the underground method on
      the
      property in question as the result of a 2004 acquisition. The complainant claims
      that it possesses the right to mine the coal at this property through the
      surface mining method and that by mining the coal by the highwall mining method,
      the Company committed either an intentional or negligent trespass. The
      complainant seeks damages in the range of $1.2 million to $2.8 million which
      it
      estimates to be the range of gross profits to total revenues of the coal mined.
      The Company acknowledges that it mined the coal in question but contends that
      by
      using the highwall mining method, it mined the coal by an underground mining
      method and therefore committed no trespass. In response, the Company has filed
      a
      third-party complaint against a contractor who advised the Company that it
      had
      the right to mine the coal. This suit could allow the Company to recover a
      portion of any amounts lost if the original complainant is successful.
      Management is unable to estimate with reasonable certainty the probable outcome
      of these suits.




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




On
      April
      12, 2006, the Company was named as a defendant in a suit along with Calvary
      Coal
      Company, Inc. (“Calvary”), a former subcontractor who managed the Company’s
      Kentucky operations during a portion of 2004 and 2005, by Appalachian Fuels,
      LLC
      (the “Plaintiff ”).
      The
      Plaintiff seeks to recover approximately $360,000; funds allegedly supplied
      to
      Calvary by the Plaintiff around the time of the Company’s purchase of the
      Kentucky operations from the Plaintiff. The purchase agreement related to the
      Kentucky operations allows for deduction of the funds in question from the
      Company’s operating payments to Calvary only upon Calvary’s written consent
      which, despite the Company’s communication, 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. The Company
      believes that this matter will be resolved favorably and without a material
      impact on its cash flows, results of operations or financial
      condition.




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




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


17
 **12.**
                **Events
                    Subsequent to September 30,
                    2006**


On
      October 12, 2006, the Company’s wholly-owned subsidiary, National Coal
      Corporation, entered into a term loan credit facility that provides for
      borrowings of up to $10.0 million with Guggenheim Corporate Funding, LLC.
      National Coal Corporation immediately borrowed $5.0 million to be used to pay
      related transaction costs of approximately $314,000 and to fund general
      operating needs. National Coal Corporation has the right to borrow the remaining
      $5.0 million on up to two occasions prior to July 12, 2007.




Under
      this credit facility, the Company’s obligations are secured by a priority senior
      lien on substantially all of the assets of the Company. All amounts under the
      credit facility become due and payable in March 2010 and the interest under
      this
      facility is payable at a rate equal to, at our option, the Eurodollar Rate
      plus
      3.5% or the Base Rate (which approximates the prime rate) plus 2.5%. The term
      loan credit facility contains customary 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.




From
      October 1, 2006 through November 9, 2006, holders of 8.67 shares of our Series
      A
      convertible preferred stock with liquidation preferences totaling $130,050
      and
      unpaid dividends totaling $1,722 converted their shares into 21,962 shares
      of
      common stock.




From
      October 1, 2006 through November 9, 2006, the Company issued 312,500 shares
      of
      common stock and received gross proceeds of $687,500 upon the exercise of stock
      options by its former CEO.




18


**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,
      2005
      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:




·
            the
                worldwide demand for coal;




·
            the
                price of coal;




·
            the
                supply of coal and other competitive
                factors;




·
            the
                costs to mine and transport coal;




·
            the
                outcome of litigation and collection on insurance
                claims;




·
            the
                ability to obtain new mining
                permits;




·
            the
                costs of reclamation of previously mined
                properties;




·
            the
                risks of expanding coal production;




·
            industry
                competition;




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




·
            general
                economic conditions; and




·
            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.”




19


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




**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 September
      30, 2006, our mining complexes included four underground mines, two surface
      mines, and two highwall mines. In addition, we have four preparation plants,
      three active and one inactive, and four unit train loading facilities, three
      active and one inactive, served by the CSX and Norfolk Southern (“NS”)
      railroads. We hold permits that allow us to open four new mines close to our
      current operations. As of September 30, 2006, we controlled approximately 37.4
      million estimated recoverable tons. During the nine months ended September
      30,
      2006, we generated total revenues of $65.0 million and Adjusted EBITDA (See
      EBITDA NOTE below) of $2,486,085 and sold approximately 1,237,000 tons of coal.
      We expect our production to increase significantly as we continue to expand
      operations.




Since
      our
      inception, 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”), in 2004
      the Southeast region accounted for 23% of coal generated electricity in the
      United States. Also according to the 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 according to the EIA. In addition,
      the Southeast region is projected by the EIA to account for 27% of the expansion
      of coal generated electricity in the United States over the next 20 years.
      For
      the nine months ended September 30, 2006, approximately 85% of our revenue
      was
      generated from coal sales to electric utility companies in the Southeastern
      United States and our largest customers were Georgia Power, South Carolina
      Public Service Authority (Santee Cooper) and Duke Power, representing
      approximately 28%, 33% and 16% of our revenues, respectively.




In
      the
      nine months ended September 30, 2006, our mines produced approximately 1,046,000
      tons of coal. Approximately 52.2% of our production for the quarter was produced
      at underground mines and 47.8% was produced at our surface and highwall mine
      operations. We have taken advantage of a pricing environment strong in
      historical reference to obtain long-term (greater than 12 months in duration)
      supply agreements with key customers at a weighted average price of
      approximately $51 per ton. We plan to continue to capitalize on this
      historically strong pricing environment by pursuing additional long-term
      contracts and selling coal on the spot market for the remainder of our
      production.




EBITDA
      NOTE:




EBITDA
      is
      defined as net loss plus (i) other (income) expense, net, (ii) interest expense,
      and (iii) depreciation, depletion, amortization, and accretion, less (iv)
      interest income. Adjusted EBITDA is defined as EBITDA plus stock-based
      compensation expense and other material non-recurring items. We present EBITDA
      and Adjusted EBITDA to enhance understanding of our operating performance.
      We
      use EBITDA and Adjusted EBITDA as 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 making
      compensation decisions. We believe that EBITDA and Adjusted EBITDA are operating
      performance measures that provide investors and analysts with a measure of
      our
      operating performance and permit them to evaluate our cost effectiveness and
      production efficiencies relative to competitors. However, EBITDA and Adjusted
      EBITDA are not measurements of financial performance under accounting principles
      generally accepted in the United States of America (“GAAP”) and may not be
      comparable to other similarly titled measures of other companies. EBITDA 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:




20




Three
                Months Ended September 30,
            
            Nine
                months Ended September 30,2006
            
            2005
            
            2006
            
            2005Net
                loss
            
            $
            (3,327,046
            )
            $
            (390,953
            )
            $
            (15,903,521
            )
            $
            (3,811,361
            )Other
                (income) expense, net (1)
            
            
            215,081
            
            
            (244,847
            )
            
            (247,376
            )
            
            (297,761
            )Interest
                income
            
            
            (168,622
            )
            
            (80,529
            )
            
            (553,818
            )
            
            (82,545
            )Interest
                expense
            
            
            1,673,464
            
            
            1,054,180
            
            
            5,401,498
            
            
            2,801,755Depreciation,
                depletion, amortization, and accretion
            
            
            3,812,736
            
            
            3,208,522
            
            
            11,726,482
            
            
            7,166,450EBITDA
            
            $
            2,205,613
            
            $
            3,546,373
            
            $
            423,265
            
            $
            5,776,538Stock-based
                compensation expense (2)
            
            
            1,308,880
            
            
            223,362
            
            
            2,012,820
            
            
            672,568Non-recurring
                item: Highwall miner damage and insurance recovery
            
            
            (1,866,909
            )
            
            —
            
            
            50,000
            
            
            —Adjusted
                EBITDA
            
            $
            1,647,584
            
            $
            3,769,735
            
            $
            2,486,085
            
            $
            6,449,106




(1)
      For
      the three months ended September 30, 2006, figure includes $259,158 loss related
      to the demolition of a preparation plant and a $44,077 net gain on asset
      disposal.


(2)
      Figure includes $941,961 attributable to the acceleratedvesting of options held by the former CEO, the former General Counsel
      and
      Secretary - who is also the spouse of the former CEO, and the former
      COO.




21


**Results
      of Operations**




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




Three
                Months Ended September 30,
            
            Nine
                months Ended September 30,2006
            
            2005
            
            2006
            
            2005Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Expenses:Cost
                of sales
            
            
            74.5
            
            
            71.3
            
            
            88.1
            
            
            76.6Depreciation,
                depletion, amortizationand
                accretion
            
            
            18.1
            
            
            17.6
            
            
            18.0
            
            
            15.3General
                and administrative
            
            
            15.0
            
            
            9.3
            
            
            11.3
            
            
            11.1Total
                operating expenses
            
            
            107.6
            
            
            98.2
            
            
            117.4
            
            
            103.0Operating
                income:
            
            
            (7.6
            )
            
            1.8
            
            
            (17.4
            )
            
            (3.0
            )Other
                income (expense):Interest
                expense
            
            
            (7.9
            )
            
            (5.7
            )
            
            (8.3
            )
            
            (6.0
            )Interest
                income
            
            
            0.8
            
            
            0.5
            
            
            0.9
            
            
            0.2Other
                income (expense), net
            
            
            (1.1
            )
            
            1.3
            
            
            0.3
            
            
            0.7Net
                loss
            
            
            (15.8
            )
            
            (2.1
            )
            
            (24.5
            )
            
            (8.1
            )




*Comparison
      of three months ended* *September
      30, 2006 and three months ended September 30, 2005*




**Three
                Months**
              **Ended**
              **September
                30,**
            
            **Three
                Months**
              **Ended**
              **September
                30,**
            
            **Percent
                Change****2006**
            
            **2005**RevenuesCoal
                sales
            
            $
            21,068,684
            
            $
            18,159,270
            
            
            16.0
            %Other
                revenues
            
            
            45,061
            
            
            115,430
            
            
            (61.0
            )%Total
                revenues
            
            $
            21,113,745
            
            $
            18,274,700
            
            
            15.5
            %ExpensesCost
                of sales
            
            $
            15,735,132
            
            $
            13,031,078
            
            
            20.8
            %Depreciation,
                depletion, amortization and accretion
            
            
            3,812,736
            
            
            3,208,522
            
            
            18.8
            %General
                and administrative
            
            
            3,173,000
            
            
            1,697,249
            
            
            86.9
            %Total
                operating expenses
            
            $
            22,720,868
            
            $
            17,936,849
            
            
            26.7
            %Other
                income (expense)Interest
                expense
            
            $
            (1,673,464
            )
            $
            (1,054,180
            )
            
            58.7
            %Interest
                income
            
            
            168,622
            
            
            80,529
            
            
            109.4
            %Other
                income (expense), net
            
            
            (215,081
            )
            
            244,847
            
            
            (187.8
            )%Total
                other income (expense)
            
            $
            (1,719,923
            )
            $
            (728,804
            )
            
            (136.0
            )%




22




*Revenues*




For
      the
      three months ended September 30, 2006, our coal revenues were derived entirely
      from coal sales to ten customers, four of which were utilities and six of which
      were industrial customers. Our five largest customers, which  include
      the fourutilities, represented
      90% of our total revenues. The increase in coal sales of approximately $2.9
      million, or 16.0%, for the three months ended September 30, 2006, compared
      to
      the three months ended September 30, 2005 was attributable to an increase in
      sales volume of approximately 50,000 tons to approximately 409,000 tons in
      the
      third quarter of 2006 partially offset by an average decline in the contract
      price of our five largest customers of 5.9%. Other revenues for the three months
      ended September 30, 2006 include approximately $114,000 charged to another
      coal
      producer for use of our train loading facilities in Kentucky and royalty
      receipts, which were not reflected in 2005. These were partially offset by
      previously recognized lease revenue credited as part of the settlement with
      a
      purchaser of certain mining equipment.




*Operating
      Expenses*




*Cost
      of sales*




Cost
      of
      sales consists primarily of salary, benefits and other compensation costs paid
      directly to miners, and direct costs paid to third party vendors whose goods
      and
      services were directly used in the process of producing coal inventory. Third
      party vendor costs include contract mining, coal purchases, equipment leases
      and
      maintenance costs, blasting costs, fuel costs, parts and supplies, and
      transportation costs. Excluding the September 2006 insurance settlement related
      to one of our highwall miners damaged by a rock collapse in March 2006,
      resulting in a reduction of cost of sales of $1.9 million, cost of sales
      increased approximately $4.6 million or 35.3% for the three months ended
      September 30, 2006 as compared to the same period in 2005. The primary reason
      for the increase in total cost is the increase in the volume of coal sales
      of
      approximately 15% when compared to the same period in the prior year.
      Additionally, in August 2005, we terminated an agreement with a subcontractor
      for the management of our Kentucky properties. This agreement was financially
      favorable, however, it presented certain risks including a risk to the on-going
      financial health of the subcontractor and thus the uninterrupted continuation
      of
      service. As a result of this termination, our cost structure has increased
      by an
      estimated $0.8 million to $1.1 million per quarter.




*Depreciation,
      depletion* *,
      amortization and accretion expense*




The
      18.8%
      increase in depreciation, depletion, amortization and accretion expense for
      the
      three months ended September 30, 2006 as compared to the comparable period
      in
      2005, is attributable to the acquisition of property, plant and equipment in
      support of increased mining activity.




*General
      and administrative expenses*




General
      and administrative expenses primarily include salary, benefits, and related
      expenses; consulting expenses; professional
      fees; insurance expenses; and travel and travel related expenses. The 86.9%
      increase in general and administrative expenses for the three months ended
      September 30, 2006 as compared to the same period in the previous year is
      primarily attributable to an increase in stock option expense of approximately
      $1,086,000 primarily due to our adoption of FAS 123(R) and an accelerated
      vesting of executive stock options for the former CEO, the former General
      Counsel and Secretary who is also the spouse of the former CEO, and the former
      COO, an increase in executive and accounting payroll of approximately $129,000,
      and an increase in professional fees primarily related to legal services of
      approximately $134,000.




23




*Other
      Income (Expense)*




The
      58.7%
      increase in interest expense for the three months ended September 30, 2006
      compared to the three months ended September 30, 2005 is attributable to an
      increase in the average outstanding balance of our debt and capital lease
      obligations of approximately $33.5 million, or 126.5%, partially offset by
      a
      decrease in our weighted average interest rate of approximately 4.8%. Interest
      income increased by 109.4% primarily due to larger average short-term deposit
      balances. Other income (expense), of $(215,081) consists primarily of a loss
      related to the demolition of one of our processing plants.






*Comparison
      of* *nine
      months ended September 30, 2006 and nine months ended September 30,
      2005*




**Nine
                months**
              **Ended**
              **September
                30,**
            
            **Nine
                months**
              **Ended**
              **September
                30,**
            
            **Percent
                Change****2006**
            
            **2005**RevenuesCoal
                sales
            
            $
            64,448,256
            
            $
            46,754,319
            
            
            37.8
            %Other
                revenues
            
            
            524,109
            
            
            115,430
            
            
            354.0
            %Total
                revenues
            
            $
            64,972,365
            
            $
            46,869,749
            
            
            38.6
            %ExpensesCost
                of sales
            
            $
            57,218,065
            
            $
            35,898,144
            
            
            59.4
            %Depreciation,
                depletion, amortization and accretion
            
            
            11,726,482
            
            
            7,166,450
            
            
            63.6
            %General
                and administrative
            
            
            7,331,035
            
            
            5,195,067
            
            
            41.1
            %Total
                operating expenses
            
            $
            76,275,582
            
            $
            48,259,661
            
            
            58.1
            %Other
                income (expense)Interest
                expense
            
            
            (5,401,498
            )
            
            (2,801,755
            )
            
            92.8
            %Interest
                income
            
            
            553,818
            
            
            82,545
            
            
            570.9
            %Other
                income (expense), net
            
            
            247,376
            
            
            297,761
            
            
            (16.9
            )%Total
                other income (expense)
            
            $
            (4,600,304
            )
            $
            (2,421,449
            )
            
            (90.0
            )%




*Revenues*




For
      the
      nine months ended September 30, 2006, our revenues were derived entirely from
      coal sales to twelve customers, four of which were utilities and eight of which
      were industrial customers. Our five largest customers, which  include the
      four utilities, represented
      93% of our total revenues. The increase in coal sales of approximately $17.7
      million, or 37.8%, for the nine months ended September 30, 2006, compared to
      the
      nine months ended September 30, 2005 was attributable to an increase in sales
      volume of approximately 387,000 tons to approximately 1,237,000 tons in the
      2006
      period net of an average decline in the contract price per ton for our five
      largest customers of approximately 3.6% Additionally, net quality adjustments
      to
      coal shipped to our customers improved by approximately $837,000. Other revenues
      for the nine months ended September 30, 2006 include approximately $407,000
      charged to another coal producer for use of our train loading facilities in
      Kentucky and royalty receipts, which were not reflected in 2005.




24




*Operating
      Expenses*




*Cost
      of sales*




Cost
      of
      sales increased approximately $21.3 million or 59.4% for the nine months ended
      September 30, 2006 as compared to the same period in 2005. The primary reason
      for the increase in total cost is the increase in the volume of coal sales
      of
      approximately 46% when compared to the same period in the prior year.
      Additionally, in August 2005, we terminated an agreement with a subcontractor
      for the management of our Kentucky properties. This agreement was financially
      favorable, however, it presented certain risks including a risk to the on-going
      financial health of the subcontractor and thus the uninterrupted continuation
      of
      service. As a result of this termination, our cost structure for 2006 has
      increased by an estimated $0.8 million to $1.1 million per quarter.




*Depreciation,
      depletion* *,
      amortization and accretion expense*




The
      63.6%
      increase in depreciation, depletion, amortization and accretion expense for
      the
      nine months ended September 30, 2006 as compared to the comparable period in
      2005, is attributable to the acquisition of property, plant and equipment in
      support of increased mining activity and a change in the estimated useful lives
      of certain mining equipment at April 1, 2005. Had
      this
      revision been made as of January 1, 2005, the effect would have been to increase
      depreciation expense by approximately $1.6 million for the nine months ended
      September 30, 2005.




*General
      and administrative expenses*




The 41.1%
      increase in general and administrative expenses for the nine months ended
      September 30, 2006 as compared to the same period in the previous year is
      attributable to an increase in stock option expense of approximately $1,340,000
      primarily due to our adoption of FAS 123(R) and an accelerated vesting of
      executive stock options for the former CEO, the former General Counsel and
      Secretary who is also the spouse of the former CEO, and the former COO, an
      increase in executive and accounting payroll of approximately $394,000, and
      an
      increase in professional fees primarily related to legal services of
      $199,000.




*Other
      Income (Expense)*




The
      92.8%
      increase in interest expense for the nine months ended September 30, 2006
      compared to the nine months ended September 30, 2005 is attributable to an
      increase in the average outstanding balance of our debt and capital lease
      obligations of approximately $36.1 million or 149.6% partially offset by a
      decrease in our weighted average interest rate of approximately 3.5%. Interest
      income increased by 570.9% primarily due to larger average short-term deposit
      balances early in the year. Other income (expense), net includes a gain of
      approximately $270,000 on the extinguishment of debt related to an equipment
      refinancing and a net loss of approximately $22,000 primarily due to a net
      loss
      related to the demolition of one of our processing plants offset by a net gain
      on various disposals of mining and transportation equipment.




**Liquidity
      and Capital Resources**




At
      September 30, 2006, we had cash and cash equivalents of approximately $1.8
      million, negative working capital of approximately $10.5 million, and cash
      flows
      from operations of approximately $2.4 million for the nine months then ended.
      On
      October 12, 2006, we entered into a term loan credit facility that provides
      borrowings of up to $10.0 million with Guggenheim Corporate Funding, LLC. We
      borrowed $5.0 million at closing to be used to pay the costs of the transaction
      of approximately $314,000 and to fund general operating and working capital
      needs. We have the right to borrow the remaining $5.0 million on up to two
      occasions prior to July 12, 2007.




25





At
      September 30, 2006, we had shareholders' equity of $4.9 million and have
      incurred net losses of $15.9 million for the nine months then ended. Despite
      anticipated increases in sales volume, we expect that we will continue to incur
      net losses into the foreseeable future which may result in a negative equity
      position unless the Company were to raise additional equity. There are no
      assurances that the Company's efforts to raise additional equity will be
      successful.





If
      our
      operating and expansion plans for the remainder of 2006 vary significantly
      from
      these expectations, we may have to seek additional financing sources in excess
      of those previously noted. There
      are
      no assurances that the Company’s efforts to raise additional financial resources
      will be successful.




On
      December 29, 2005, we issued $55,000,000 in aggregate principal amount of 10.5%
      Senior Secured Notes due 2010 (the “Senior Notes”) and 55,000 warrants to
      purchase a total of 1,732,632 shares of the Company’s common stock (the
“Warrants”). The Senior Notes and Warrants were sold in Units (the “Units”)
      consisting of one $1,000 principal amount Note and one Warrant, which entitled
      the holder to purchase 31.5024 shares of Company common stock at an exercise
      price of $8.50 per share, subject to adjustment. The warrants are subject to
      mandatory conversion if the price of the Company’s common stock remains above
      $12.75 for more than twenty days out of a thirty day period. The Units were
      sold
      in a private placement exempt from the registration requirements under the
      Securities Act of 1933, as amended (the "Securities Act"). The Senior 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 theSecurities Act.





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





The
      Senior 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 Notes will mature on December 15, 2010. The Senior Notes are
      subordinated to our new $10 million Credit Facility with Guggenheim Corporate
      Partners, LLC, which holds a first priority secured lien senior to the Notes,
      and ranks senior to our existing and future subordinated debt.





Before
      December 15, 2008, we may, at any time or from time to time, redeem up to 35%
      of
      the aggregate principal amount of the Senior Notes with the net proceeds of
      a
      public or private equity offering at 110.500% of the principal amount of the
      Senior Notes, plus any accrued and unpaid interest, if at least 65% of the
      aggregate principal amount of the notes remains outstanding after such
      redemption and the redemption occurs within 90 days of the date of the closing
      of such equity offering.





In
      addition, up to 35% of the Senior Notes are redeemable, at our option, in whole
      or in part, at any time up to December 15, 2008 at a redemption price of
      110.500%. The remaining 65% of the Senior Notes are redeemable, at our option,
      in whole or part, on or after December 15, 2008, in each case at the redemption
      prices described in the table below. All redemptions prices are in addition
      to
      any accrued and unpaid interest to the date of the redemption.




26


**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 Notes, among other things and subject to certain
      exceptions, limits our ability and the ability of our subsidiaries to:





·
            incur
                or guarantee additional indebtedness or issue preferred stock;


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


·
            make
                investments;


·
            issue
                or sell capital stock of restricted subsidiaries;


·
            engage
                in transactions with affiliates;


·
            grant
                or assume liens; or


·
            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
      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 Notes in
      order
      to exchange freely tradable notes for the Senior 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.




We
      immediately used approximately $22,100,000 of the proceeds of the Senior Note
      offering to repay existing indebtedness. During the nine months ended September
      30, 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 a other equipment, refurbish
      a
      preparation plant and rail loadout, and to use as working capital.




On
      September 18, 2006, we entered into a sale-leaseback transaction involving
      one
      of our highwall miners. The highwall miner had a net book value of approximately
      $5,538,326 and was sold to GATX Financial Corporation for $6,413,852. The lease
      is accounted for as an operating lease.




27




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




**September
                30,**
            
            **December
                31,****2006**
            
            **2005**10.5%
                Notes, due 2010
            
            $
            55,000,000
            
            $
            55,000,000Bank
                note (prime + 1%), due 2007
            
            
            738,495
            
            
            1,200,018Installment
                purchase obligations, due 2009
            
            
            3,533,162
            
            
            —Installment
                purchase obligations, due 2008
            
            
            3,450,779
            
            
            5,270,611Equipment
                note (non-interest bearing), due 2006
            
            
            —
            
            
            280,000Equipment
                notes (8.39%-9.28%, due 2009-2011)
            
            
            134,891
            
            
            —Equipment
                note (4.48%, due 2009)
            
            
            261,447
            
            
            —Other
            
            
            90,430
            
            
            19,931Less
                unamortized discounts
            
            
            (3,459,026
            )
            
            (3,910,160
            )59,750,178
            
            
            57,860,400Less
                current portion of long-term debt
            
            
            (4,709,945
            )
            
            (3,319,175
            )Long-term
                debt
            
            $
            55,040,233
            
            $
            54,541,225




***Cash
      Flows***




We
      currently satisfy our working capital requirements primarily through cash flows
      generated from operations, the incurrence of debt, and the sale of equity
      securities. For the nine months ended September 30, 2006, we had a net decrease
      in cash and cash equivalents of approximately $23.6 million. Cash flows from
      operating, financing and investing activities for the nine months ended
      September 30, 2006 and 2005 are summarized in the following table:




**Nine
                    months****Ended
                    September 30,****Activity**
                
                **2006**
                
                **2005**Operating
                    activities
                
                $
                2,357,889
                
                $
                6,262,885Investing
                    activities
                
                
                (26,043,719
                )
                
                (11,173,105
                )Financing
                    activities
                
                
                41,385
                
                
                5,351,896Net
                    increase (decrease) in cash
                
                $
                (23,644,435
                )
                $
                441,676


*Operating
      Activities*




The
      decrease in net cash provided by operating activities of approximately $3.9
      million to $2.4 million during the nine months ended September 30, 2006 was
      primarily the result of an increase in net loss, net of depreciation, depletion,
      amortization and accretion and non-cash stock option expense, of $6.2 million.
      The increase was primarily due to lower contract prices, increased purchases
      of
      coal due in part to the highwall miner damage during the year, and the
      termination of a financially favorable agreement with a subcontractor for the
      management of our Kentucky properties. Offsetting the overall decrease in cash
      flow from operations is a greater increase in accounts payable of $4.7 million
      primarily attributable to the refurbishment of our Baldwin preparation plant
      and
      loadout facility which has taken place in 2006 and increased interest due to
      higher debt balances. These and other expansion activities have also resulted
      in
      a greater increase in inventory of $1.6 million in current year and $0.9 of
      asset retirement obligation settlements, both of which decreased cash from
      operations.





28




*Investing
      Activities*




Cash
      used
      in investing activities of $26.0 million was primarily related to net capital
      expenditures of approximately $16.2 million including the acquisition of a
      forty-two mile rail line in Tennessee and renovations to a processing facility
      in Tennessee along with an increase in cash collateral supporting reclamation
      bonds of approximately $9.7 million. The $11.2 million in cash used in investing
      activities for the nine months ended September 30, 2005 consisted primarily
      of
      the purchase of a $5.5 million dollar highwall miner and the refurbishment
      of
      mining equipment purchased in 2004.




*Financing
      Activities*




The
      decrease in net cash provided by financing activities of approximately $5.3
      million to less than $0.1 million during the nine months ended September 30,
      2006 was primarily the result of the Senior Notes issued in December 2005 which
      decreased the need for additional funding as compared to $5.4 million provided
      during the nine months ended September 30, 2005.




***Contractual
      Obligations***




The
      following summarizes our contractual obligations at September 30, 2006 and
      the
      effects such obligations are expected to have on liquidity and cash flow in
      future periods:




**Payments
                due by period****Less
                than 1**
            
            **1-3**
            
            **3-5**
            
            **After****Total**
            
            **Year**
            
            **Years**
            
            **Years**
            
            **5
                Years**Long-term
                debt
            
            $
            63,209,204
            
            
            4,710,055
            
            
            3,474,514
            
            
            55,024,635
            
            
            —Operating
                leases
            
            
            7,252,817
            
            
            2,101,716
            
            
            4,151,695
            
            
            999,406
            
            
            —Capital
                leases
            
            
            766,781
            
            
            355,351
            
            
            411,430
            
            
            —
            
            
            —Total
                contractual obligations
            
            $
            71,228,802
            
            
            7,167,122
            
            
            8,037,639
            
            
            56,024,041
            
            
            —




The
      contractual obligations table above does not include $5.0 million borrowed
      under
      a term loan credit facility in October 2006. The term loan matures in
      2010.




We
      rent
      mining equipment pursuant to operating lease agreements, and made lease payments
      totaling approximately $414,000 during the nine months ended September 30,
      2006.




For
      the
      nine months ended September 30, 2006, we accrued dividends to the holders of
      our
      Series A convertible preferred stock in the aggregate of approximately $739,991,
      $66,995 of which we paid out in May 2006 as a result of a redemption.
      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 convertible preferred stock of $295,891 were paid in July. The
      dividend rate of our Series A preferred stock increased from 5% to 8% on
      September 1, 2006.




**Off-Balance
      Sheet Arrangements**




At
      September 30, 2006, 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.




29


**Critical
      Accounting Policies, Judgments and Estimates**




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




Accounting
      measurements at interim dates inherently involve greater reliance on estimates
      than those made at year-end. The results for the three and nine months ended
      September 30, 2006 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, 2005 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.




**Stock-Based
        Compensation**
  Prior
        to
        January 1, 2006, the Company accounted for stock-based compensation under
        Statement of Financial Accounting Standards No. 123 *Accounting
        for Stock-Based Compensation* (“FAS
        123”). As permitted under this standard, compensation cost was recognized using
        the intrinsic value method described in Accounting Principles Board Opinion
        No.
        25, *Accounting
        for Stock Issued to Employees* (“APB
        25”). APB 25 does not require any compensation expense to be recorded in the
        consolidated financial statements if the exercise price of the award was
        equal
        to or more than the market price on the date of the grant.
  Effective
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        No. 123 (Revised 2004), *Share-Based
        Payment* (“FAS
        123R”) using the modified-prospective transition method. FAS 123R requires all
        share-based payments to employees, including grants of employee stock options,
        to be recognized as compensation expense in the consolidated financial
        statements based on their fair values. Under the modified-prospective transition
        method, the Company recognizes compensation expense for the unvested portion
        of
        all share-based payments granted on or prior to December 31, 2005 over the
        remaining service period based on the grant date fair value estimated in
        accordance with FAS 123 and recognizes compensation cost for all share-based
        payments granted on or subsequent to January 1, 2006 over the service period
        based on grant date fair value estimated in accordance with FAS 123R. As
        permitted by FAS 123R, prior periods were not restated to reflect the impact
        of
        the new accounting standard. During the nine months ended September 30, 2006,
        the Company recognized $2,012,820 of compensation expense related to stock
        options, including $941,961 related to the accelerated vesting of options
        granted to the former CEO, the former General Counsel and Secretary who is
        also
        the spouse of the former CEO, and the former COO. The former CEO continues
        as
        Chairman.
  As
        of
        September 30, 2006, there was approximately $3,016,000 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
        1.3
        years.




30


**Cautionary
      Statements and Risk Factors**




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




**Risks
      Related To Our Business**




**Our
      substantial level of indebtedness could adversely affect our financial
      condition.**





We
      have,
      and will continue to have substantial indebtedness. At September 30, 2006,
      we
      had approximately $55.0 million principal value of total senior debt. Subsequent
      to September 30, 2006, our senior indebtedness has increased by an additional
      $5.0 million and could increase an additional $5.0 million under our term loan
      credit facility, which has priority over senior debt with respect to security
      interests in the collateral. Our high level of indebtedness could have important
      consequences, including the following:




•  reducing
      our ability to obtain additional financing;


•  reducing
      our cash flow;


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


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


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





**Despite
      existing debt levels, we may still be able to incur substantially more debt,
      which would increase the risks associated with our
      leverage.**





We
      may be
      able to incur substantial amounts of additional debt in the future, including
      debt under a future credit facility, which will have priority over senior debt
      with respect to security interests in the collateral. Although the terms of
      the
      senior debt and any future credit facility may limit our ability to incur
      additional debt, such terms do not and will not prohibit us from incurring
      substantial amounts of additional debt for specific purposes or under certain
      circumstances. The incurrence of additional debt could adversely impact our
      ability to service payments on senior debt.





**We
      may not be able to generate the significant amount of cash needed to pay
      interest and principal amounts on our debt.**





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





31


**We
      face numerous uncertainties in estimating our economically recoverable coal
      reserves, and inaccuracies in our estimates could result in lower than expected
      revenues, higher than expected costs or decreased
      profitability.**





We
      estimate that as of September 30, 2006, we control approximately 37.4 million
      tons of proven and probable reserves that are recoverable at this time. We
      base
      our reserves estimates on engineering, economic and geological data assembled
      and analyzed by our staff, which includes various engineers and geologists,
      and
      aspects of which have been reviewed by outside firms. Our estimates of our
      proven and probable reserves and our recoverable reserves, as well as the Btu
      or
      sulfur content of our reserves, may be revised and updated to reflect the
      resolution of uncertainties and assumptions, the production of coal from the
      reserves and new drilling or other data received.




In
      January 2006, we engaged Marshall Miller & Associates, Inc., an independent
      mining engineering firm, to evaluate our reserves. Their evaluation efforts
      are
      ongoing and they have not yet submitted their final report. Future estimates
      of
      our reserves, including estimates prepared by Marshall Miller, could be
      materially different from current estimates. There are numerous uncertainties
      inherent in estimating quantities and qualities of and costs to mine recoverable
      reserves, including many factors beyond our control. Estimates of economically
      recoverable coal reserves and net cash flows necessarily depend upon a number
      of
      variable factors and assumptions, all of which may vary considerably from actual
      results such as:





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


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


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


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





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





**Our
      future success depends upon our ability to continue acquiring and developing
      coal reserves that are economically recoverable and to raise the capital
      necessary to fund our expansion.**





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





32


**Our
      ability to implement our planned development and exploration projects is
      dependent on many factors, including the ability to receive various government
      permits.**





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





**Defects
      in title or loss of any leasehold interests in our properties could adversely
      affect our ability to mine these properties.**





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





**Due
      to variability in coal prices and in our cost of producing coal, as well as
      certain provisions in our long term contracts, we may be unable to sell coal
      at
      a profit.**





We
      typically sell our coal for a specified tonnage amount and at a negotiated
      price
      pursuant to short-term and long-term contracts. For the nine months ended
      September 30, 2006, 97% of the coal we produced was sold under long-term
      contracts. Price adjustment, “price reopener” and other similar provisions in
      long-term supply agreements may reduce the protection from short-term coal
      price
      volatility traditionally provided by such contracts. Three of our long-term
      contracts, representing 43% of our coal sales in the nine months ended September
      30, 2006 and which expire at the end of 2007, 2008, and 2010, contain provisions
      allowing the purchase price to be renegotiated or adjusted based on market
      prices at the time at periodic intervals. Any adjustment or renegotiation
      leading to a significantly lower contract price would result in decreased
      revenues and lower our gross margins. Coal supply agreements also typically
      contain force majeure provisions allowing temporary suspension of performance
      by
      us or our customers during the duration of specified events beyond the control
      of the affected party. Most of our coal supply agreements contain provisions
      requiring us to deliver coal meeting quality thresholds for certain
      characteristics such as Btu, sulfur content, ash content, hardness and ash
      fusion temperature. Failure to meet these specifications could result in
      economic penalties, including price adjustments, the rejection of deliveries
      or,
      in the extreme, termination of the contracts. Consequently, due to the risks
      mentioned above with respect to long-term supply agreements, we may not achieve
      the revenue or profit we expect to achieve from these sales commitments. In
      addition, we may not be able to successfully convert these sales commitments
      into long-term supply agreements.





33


**The
      coal industry is highly cyclical, which subjects us to fluctuations in prices
      for our coal.**





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





**We
      depend heavily on a small number of large customers, the loss of any of which
      would adversely affect our operating results.**





For
      the
      nine months ended September 30, 2006, we derived approximately 77% of our coal
      revenues from sales to our three largest customers. At September 30, 2006,
      we
      had coal supply agreements with these customers that expire at various times
      through 2008. When these agreements expire, we may not be successful at
      renegotiating them and these customers may not continue to purchase coal from
      us
      pursuant to long-term coal supply agreements. If a number of these customers
      were to significantly reduce their purchases of coal from us, or if we were
      unable to sell coal to them on terms as favorable to us as the terms under
      our
      current agreements, our financial condition and results of operations could
      suffer materially.





**Significant
      competition from entities with greater resources could result in our
      failure.**




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




**There
      is no assurance that our limited revenues will be sufficient to operate
      profitably, or that we will generate greater revenues in the
      future.**




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




Our
      coal
      sales for the nine months ended September 30, 2006 were approximately $64.4
      million. There is no assurance that we can achieve greater sales or generate
      profitable sales. We expect that many coal producers could produce and sell
      coal
      at cheaper prices per ton than our production cost rates, which could adversely
      affect our revenues and profits, if any. There is no assurance that we will
      ever
      operate profitably. There is no assurance that we will generate continued
      revenues or any profits, or that the market price of our common stock will
      be
      increased thereby.




34


**If
      we need to sell or issue additional shares of common stock or assume additional
      debt to finance future growth, our shareholders’ ownership could be diluted or
      our earnings could be adversely impacted.**





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





**Our
      inability to diversify our operations may subject us to economic fluctuations
      within our industry.**




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




**Certain
      provisions in our Series A convertible preferred stock may impact our ability
      to
      obtain additional financing in the future.**





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





**The
      loss of key management personnel could adversely affect our
      business.**





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





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





**Our
      director and officer indemnification policies in conjunction with the provisions
      of Florida law could result in substantial un-recoupable expenditures and
      reduced remedies against directors and officers.**




35


Florida
      Revised Statutes provide for the indemnification of our directors, officers,
      employees, and agents, under certain circumstances, against attorney’s fees and
      other expenses incurred by them in any litigation to which they become a party
      arising from their association with or activities on our behalf. We will also
      bear the expenses of such litigation for any of our directors, officers,
      employees, or agents, upon such person’s promise to repay us such amounts, if it
      is ultimately determined that such person was not entitled to indemnification.
      This indemnification policy could result in substantial expenditures by us
      that
      we will be unable to recoup.




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




**There
      is no assurance that we will find purchasers of our product at profitable
      prices.**




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




**The
      coal industry is intensely competitive, and our failure to compete effectively
      could reduce our revenue and margins, and delay or prevent our ability to
      service our debt.**





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





•  competition
      from energy sources other than coal;


•  coal
      quality;


•  efficiency
      in extracting and transporting coal; and


•  proximity
      to customers.





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





**If
      transportation for our coal becomes unavailable or uneconomic for our customers,
      our ability to sell coal could suffer.**




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




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




36


**We
      face risks inherent to mining which could increase the cost of operating our
      business.**





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





**A
      shortage of skilled labor in the mining industry could pose a risk to achieving
      optimal labor productivity and competitive costs, which could adversely affect
      our profitability.**





Efficient
      coal mining using modern techniques and equipment requires skilled laborers,
      preferably with at least a year of experience and proficiency in multiple mining
      tasks. In order to support our planned expansion opportunities, we intend to
      sponsor both in-house and vocational coal mining programs at the local level
      in
      order to train additional skilled laborers. In the event the shortage of
      experienced labor continues or worsens or we are unable to train the necessary
      amount of skilled laborers, there could be an adverse impact on our labor
      productivity and costs and our ability to expand production and therefore have
      a
      material adverse effect on our earnings. In addition, we have supplemented
      our
      direct workforce through the use of contract miners. If our contract miners
      are
      unable to perform their duties as expected, we may experience temporary
      disruptions in our production. For example, in October 2005, we terminated
      our
      agreement with one of our contract miners, and as a result we were required
      to
      purchase coal to satisfy our sales requirements. We do not expect that this
      will
      have a material effect on our results of operations for 2006. However, if
      difficulties with our contract miners arise in the future, there could be an
      adverse effect on our productivity and costs and our ability to expand
      production and therefore have a material adverse effect on our earnings.





**The
      government extensively regulates our mining operations, which imposes
      significant costs on us, and future regulations could increase those costs
      or
      limit our ability to produce coal.**





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





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





37


**If
      the coal industry experiences overcapacity in the future, our profitability
      could be impaired.**




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




**Our
      operations could be adversely affected if we fail to maintain required
      bonds.**




Federal
      and state laws require bonds or cash deposits to secure our obligations to
      reclaim lands used for mining, to pay federal and state workers’ compensation,
      to secure coal lease obligations and to satisfy other miscellaneous obligations.
      At September 30, 2006, $257,500 was on deposit with OSM for reclamation bonds
      related to our Patterson Mountain mining operations. In addition, we have
      approximately $14.1 million of cash invested in certificates of deposit, against
      which irrevocable bank letters of credit are written in favor of OSM and have
      posted a $700,000 letter of credit secured by our executive office building
      in
      favor of OSM. Reclamation bonds are typically renewable on a yearly basis if
      they are not posted with cash. Our failure to maintain, or inability to acquire,
      bonds that are required by state and federal law would have a material adverse
      effect on us. That failure could result from a variety of factors including
      the
      following:




1.
            lack
                of availability, higher expense or unfavorable market terms of new
                bonds;


2.
            restrictions
                on the availability of collateral for current and future third-party
                bond
                issuers under the terms of our indenture or new credit facility;
                and


3.
              the
                  exercise by third-party bond issuers of their right to refuse to
                  renew the
                  bonds.


**Terrorist
      threats and environmental zealotry may negatively affect our business, financial
      condition and results of operations.**





Our
      business is affected by general economic conditions, fluctuations in consumer
      confidence and spending, and market liquidity, which can decline as a result
      of
      numerous factors outside of our control, such as terrorist attacks and acts
      of
      war. Our business also may be affected by environmental activists who engage
      in
      activities intended to disrupt our business operations. In particular,
      environmental activists have conducted protests outside the homes of certain
      of
      our executives, including our former Chief Executive Officer. We have spent
      approximately $667,000 during the nine months ended September 30, 2006 on
      security measures. We plan to reduce our security expenses during the remainder
      of 2006. Future terrorist attacks against U.S. targets, rumors or threats of
      war, actual conflicts involving the United States or its allies, or military
      or
      trade disruptions affecting our customers may materially adversely affect our
      operations. As a result, there could be delays or losses in transportation
      and
      deliveries of coal to our customers, decreased sales of our coal and extension
      of time for payment of accounts receivable from our customers. Strategic targets
      such as energy-related assets may be at greater risk of future terrorist attacks
      than other targets in the United States. In addition, disruption or significant
      increases in energy prices could result in government-imposed price controls.
      It
      is possible that any, or a combination, of these occurrences could have a
      material adverse effect on our business, financial condition and results of
      operations.





38


**A
      substantial or extended decline in coal prices could reduce our revenues and
      the
      value of our coal**


**reserves.**





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





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


•  the
      demand for electricity;


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


•  domestic
      and foreign governmental regulations and taxes;


•  air
      emission standards for coal-fired power plants;


•  regulatory,
      administrative and court decisions;


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


•  the
      effect of worldwide energy conservation measures.





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





**Our
      ability to collect payments from our customers could be impaired due to credit
      issues.**





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






39


**Risks
      Related To Our Common Stock**




**A
      limited public market exists for our securities, which may restrict our
      shareholders’ ability to trade in our stock.**




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




**We
      do not intend to pay dividends on shares of our common
      stock.**





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





**Our
      issuance of more shares of common stock may result in the loss of control by
      present management and shareholders.**





We
      may
      issue further shares as consideration for cash, assets or services out of our
      authorized but not issued common stock that could, upon issuance, represent
      a
      majority of our voting power and equity. The result of such an issuance would
      be
      that those new shareholders and management would control us, and unknown persons
      could replace our management at that time. Such an occurrence would result
      in a
      greatly reduced percentage of ownership of us by our current
      shareholders.





**We
      operate in an industry that is subject to significant fluctuations in operating
      results from quarter to quarter that may result in unexpected reductions in
      revenue and stock price volatility.**




Factors
      that may influence our quarterly operating results include:




·
            the
                worldwide demand for coal;


·
            the
                price of coal;


·
            the
                supply of coal and other competitive
                factors;


·
            the
                costs to mine and transport coal;


·
            the
                ability to obtain new mining
                permits;


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





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




**Our
      stock price may decrease, which could adversely affect our business and cause
      our shareholders to suffer significant losses.**




40


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




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


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


·
            interest
                rates;


·
            changes
                in accounting principles;


·
            sales
                of common stock by existing security
                holders;


·
            announcements
                of key developments by our competitors; and


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








**If
      we need to sell or issue additional shares of common stock or assume additional
      debt to finance future growth, our shareholders’ ownership could be diluted or
      our earnings could be adversely impacted.**




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




**Officers
      and directors own a significant portion of our common stock, which could limit
      our shareholders’ ability to influence the outcome of key
      transactions.**




As
      of
      November 9, 2006, our officers and directors and their affiliates owned
      approximately 41.3% of our outstanding voting shares. As a result, our officers
      and directors are able to exert considerable influence over the outcome of
      any
      matters submitted to a vote of the holders of our common stock, including the
      election of our Board of Directors. The voting power of these shareholders
      could
      also discourage others from seeking to acquire control of us through the
      purchase of our common stock which might depress the price of our common stock.




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




Please
      refer to Part II, Item 7A, “Quantitative and Qualitative Discussions About
      Market Risk,” in our Annual Report on Form 10-K for the year ended December 31,
      2005, for a discussion of certain market risk factors, which may impact our
      business. There has been no significant change to our market risk exposures
      for
      the nine months ended September 30, 2006.




**Item
      4. Controls and Procedures.**




Members
      of the Company's management, including our 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 September 30, 2006, the end
      of
      the period covered by this report. Based upon that evaluation, Messrs. Roling
      and Love concluded that our disclosure controls and procedures are
      effective.




There
      has
      been no change in our internal control over financial reporting during the
      nine
      months ended September 30, 2006 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.




41




Our
      management, including our CEO and CFO, does not expect that the company’s
      disclosure controls and procedures or the company’s internal controls will
      prevent all errors and all fraud. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. Because of
      the
      inherent limitations in all control systems, no evaluation of the controls
      can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within the company have been detected.




42


**PART
      II: OTHER INFORMATION**




**Item** **1.**  **Legal
      Proceedings.**




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




On
      April
      12, 2006, we were named as a defendant in a suit along with Calvary Coal
      Company, Inc. (“Calvary”), a former subcontractor who managed the Company’s
      Kentucky operations during a portion of 2004 and 2005, by Appalachian Fuels,
      LLC
      (the “Plaintiff ”).
      The
      Plaintiff seeks to recover approximately $360,000; funds allegedly supplied
      to
      Calvary by the Plaintiff around the time of our purchase of the Kentucky
      operations from the Plaintiff. The purchase agreement related to the Kentucky
      operations allows for deduction of the funds in question from our operating
      payments to Calvary only upon Calvary’s written consent which, despite our
      communication, the Plaintiff did not obtain. Because the required written
      consent was not obtained, we did not deduct the funds in question and submit
      them to the Plaintiff. We believe that this matter will be resolved favorably
      and without a material impact on our cash flows, results of operations or
      financial condition.




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




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




**Item
      1A.**  **Risk
      Factors.**




A
      restated description of the risk factors associated with our business is
      included under “Cautionary Statements and Risk Factors” in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations,”
contained in Item 2 of Part I of this report. This description includes any
      material changes to and supersedes the description of the risk factors
      associated with our business previously disclosed in our 2005 Annual Report
      on
      Form 10-K and is incorporated herein by reference.




43


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




During
      the three months ended September 30, 2006, no holders of shares of our Series
      A
      convertible preferred stock converted their shares into shares of our common
      stock.




From
      October 1, 2006 through October 24, 2006, holders of 8.67 shares of our Series
      A
      convertible preferred stock with liquidation preferences totaling $130,050
      and
      unpaid dividends totaling $1,722 converted their shares into 21,962 shares
      of
      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.




During
      the three months ended September 30, 2006, no holders of warrants to purchase
      shares of our common stock exercised such warrants.




**Item
      6.**  **Exhibits**




**The
      following exhibits are filed as part of this report:**




**Exhibit
                Number**
            
            **Exhibit
                Title**10.1
            
            Credit
                Agreement, dated October12, 2006, among National Coal Corp., National
                Coal
                Corporation, the Lenders, and Guggenheim Corporate Funding,
                LLC.10.2
            
            Security
                and Guarantee Agreement, dated October 12, 2006, among National Coal
                Corporation, National Coal Corp., Subsidiary Grantors and Guggenheim
                Corporate Funding, LLC.10.3
            
            Intercreditor
                Agreement, dated as of October 12, 2006, by and between Guggenheim
                Corporate Funding LLC, and Wells Fargo Bank, N.A., and acknowledged
                and
                agreed to by National Coal Corporation, National Coal Corp., and
                Guarantors.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.31.3
            
            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.




44


**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:
              November 13, 2006
            By:
            /s/ T.
              Michael LoveIts:Chief
                Financial Officer
              (Principal
                Financial andAccounting
                Officer)




45