================================================================================

                                  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 March 31, 2006

                                       or

|_|      Transition Report Under Section 13 or 15(d) of the Securities  Exchange
         Act of 1934

  For the transition period from __________________ to ______________________.

                         Commission file number 0-26509

                               NATIONAL COAL CORP.
                (name of Registrant as Specified in its Charter)

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

                            8915 GEORGE WILLIAMS ROAD
                               KNOXVILLE, TN 37923
                    (Address of principal executive offices)

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

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

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

Large accelerated filer |_|     Accelerated filer |_|  Non-accelerated filer |X|

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

       As of May 18, 2006, the issuer had 15,594,307 shares of common stock, par
value $.0001 per share, issued and outstanding.

================================================================================


<PAGE>


                               NATIONAL COAL CORP.

                               INDEX TO FORM 10-Q

                                                                            PAGE
                                                                            ----

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

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

         Condensed Consolidated Balance Sheets as of March 31, 2006
         (unaudited)and December 31, 2005......................................3

         Condensed Consolidated Statements of Operations (unaudited)
         for the three months ended March 31, 2006 and March 31, 2005..........4

         Condensed Consolidated Statements of Cash Flows (unaudited)
         for the three months ended March 31, 2006 and March 31, 2005..........5

         Notes to Condensed Consolidated Financial Statements (unaudited)......6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of  Operations.................................16

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

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

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

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

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

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........38

Item 6.  Exhibits.............................................................38


                                       2
<PAGE>


                          PART I: FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

<TABLE>
                               NATIONAL COAL CORP.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                 MARCH 31,     DECEMBER 31,
                                                                                   2006            2005
                                                                               ------------    ------------
ASSETS                                                                          (unaudited)     (audited)
<S>                                                                            <C>             <C>
Current assets
   Cash and cash equivalents ...............................................   $  5,088,150    $ 25,434,988
   Accounts receivable .....................................................      3,667,384       2,929,735
   Inventory ...............................................................      1,723,058         360,614
   Other current assets ....................................................        662,911         274,591
                                                                               ------------    ------------
     Total current assets ..................................................     11,141,503      28,999,928

   Property, plant equipment and mine development, net .....................     57,241,095      50,901,681
   Assets held for sale ....................................................        979,891            --
   Deferred financing costs ................................................      2,830,818       2,958,666
   Restricted cash .........................................................     15,113,248       7,321,323
   Other non-current assets ................................................        420,382         225,820
                                                                               ------------    ------------
     Total Assets ..........................................................   $ 87,726,937    $ 90,407,418
                                                                               ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Current maturities of long-term debt ....................................   $  3,272,404    $  3,319,175
   Current installments of obligations under capital leases ................      1,283,261         958,907
   Accounts payable and accrued expenses ...................................     11,281,184       6,390,626
                                                                               ------------    ------------
     Total current liabilities .............................................     15,836,849      10,668,708

   Long-term debt, less current maturities, net of discount ................     54,152,829      54,541,225
   Obligations under capital leases, excluding current installments ........      1,067,378       1,196,143
   Asset retirement obligations ............................................      7,260,709       7,228,232
   Other non-current liabilities ...........................................        127,845         156,776
                                                                               ------------    ------------
     Total Liabilities .....................................................     78,445,610      73,791,084
                                                                               ------------    ------------

Commitments and contingencies (Note 11)

Stockholders' equity
   Series A convertible preferred stock, $.0001 par value; 5% coupon; 1,611
   shares authorized; 1,269.21 and 1,333.44 shares issued and outstanding at
   March 31, 2006 and December 31, 2005, respectively ......................           --              --
   Common stock, $.0001 per value; 80 million shares authorized; 14,242,005
   and 13,977,217 shares issued and outstanding at March 31, 2006 and
   December 31, 2005, respectively .........................................          1,424           1,398
   Additional paid-in capital ..............................................     37,511,983      37,168,122
   Accumulated deficit .....................................................    (28,232,080)    (20,553,186)
                                                                               ------------    ------------
      Total Stockholders' Equity ...........................................      9,281,327      16,616,334
                                                                               ------------    ------------
     Total Liabilities and Stockholders' Equity ............................   $ 87,726,937    $ 90,407,418
                                                                               ============    ============
</TABLE>

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


                                       3
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                                                                THREE MONTHS
                                                               ENDED MARCH 31,
                                                        ----------------------------
                                                            2006            2005
                                                        ------------    ------------
<S>                                                     <C>             <C>
Revenues
  Coal sales ........................................   $ 19,792,596    $ 12,584,404
  Other revenues ....................................        230,962            --
                                                        ------------    ------------
   Total revenues ...................................     20,023,558      12,584,404
                                                        ------------    ------------

Expenses
  Cost of sales .....................................     20,285,541      10,897,311
  Depreciation, depletion, amortization and accretion      3,832,236       1,286,957
  General and administrative ........................      2,056,709       1,915,042
                                                        ------------    ------------
   Total operating expenses .........................     26,174,486      14,099,310
                                                        ------------    ------------

Operating loss ......................................     (6,150,928)     (1,514,906)
                                                        ------------    ------------

Other income (expense)
  Interest expense ..................................     (1,868,844)       (660,511)
  Other income (expense), net .......................        340,878         (15,622)
                                                        ------------    ------------
   Total other income (expense) .....................     (1,527,966)       (676,133)
                                                        ------------    ------------

Net loss ............................................     (7,678,894)     (2,191,039)

Preferred stock dividend ............................       (240,599)       (291,190)
                                                        ------------    ------------

Net loss attributable to common shareholders ........   $ (7,919,493)   $ (2,482,229)
                                                        ============    ============

Basic net loss per common share .....................   $      (0.57)   $      (0.18)
                                                        ============    ============

Diluted net loss per common share ...................   $      (0.57)   $      (0.18)
                                                        ============    ============

Weighted average common shares ......................     13,871,167      13,470,799
                                                        ============    ============
</TABLE>

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


                                       4
<PAGE>


<TABLE>
                               NATIONAL COAL CORP.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                                                THREE MONTHS
                                                                               ENDED MARCH 31,
                                                                        ----------------------------
                                                                            2006            2005
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
Cash Flows from Operating Activities
  Net loss ..........................................................   $ (7,678,894)   $ (2,191,039)
  Adjustments to reconcile net loss to net cash provided by operating
     activities:
     Depreciation, depletion, amortization and accretion ............      3,832,236       1,405,326
      Amortization of deferred financing costs ......................        142,843            --
      Gain on disposal of assets ....................................       (115,579)           --
      Gain on extinguishment of debt ................................         (8,544)           --

      Settlement of asset retirement obligations ....................        (68,316)           --
     Non-cash compensation:
       Stock option expense .........................................        348,848         225,844
     Changes in operating assets and liabilities:
       Accounts receivable ..........................................       (737,649)        164,306
       Inventory ....................................................     (1,362,443)         81,210
       Prepaid and other ............................................       (582,882)         (1,784)
       Accounts payable and accrued liabilities .....................      4,665,778       1,636,126
       Other noncurrent liabilities .................................         (2,787)           --
       Deferred revenue .............................................        (26,144)           --
                                                                        ------------    ------------
         Net cash flows provided by (used in) operating activities ..     (1,593,533)      1,319,989
                                                                        ------------    ------------

Cash Flows from Investing Activities
  Property, plant and equipment purchased, net ......................    (10,612,483)     (7,274,060)
  Prepaid royalty ...................................................           --          (151,364)
  Restricted cash ...................................................     (7,791,925)        103,000
                                                                        ------------    ------------
     Net cash flows used in investing activities ....................    (18,404,408)     (7,322,424)
                                                                        ------------    ------------

Cash Flows from Financing Activities
  Proceeds from issuance of common and preferred stock ..............          9,018            --
  Proceeds from exercise of options and warrants ....................        223,300         539,500
  Proceeds from issuance of notes payable ...........................        477,967       6,537,726
  Loan acquisition costs ............................................           --           (90,062)
   Payments on notes payable ........................................       (917,089)        (80,158)
   Payments on capital leases .......................................        (69,712)       (478,631)
  Payments for deferred financing costs .............................        (72,381)           --
  Other .............................................................           --             1,755
                                                                        ------------    ------------
     Net cash flows provided by (used in) financing activities ......       (348,897)      6,430,130
                                                                        ------------    ------------

NET INCREASE (DECREASE) IN CASH .....................................    (20,346,838)        427,695
Cash and cash equivalents at beginning of period ....................     25,434,988         351,698
                                                                        ------------    ------------
Cash and cash equivalents at end of period ..........................   $  5,088,150    $    779,393
                                                                        ------------    ------------

Supplemental disclosures
  Interest paid in cash .............................................   $    120,159    $    660,511
   Non-cash investing and financing transactions:
      Warrants issued in connection with notes payable ..............           --           665,855
      Preferred stock dividends payable .............................        240,599         260,699
      Refinancing of capital leases .................................        265,300            --
      Constructive dividend attributable to preferred shareholders ..           --            30,891
</TABLE>

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


                                       5
<PAGE>


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

1.       BASIS OF PRESENTATION

         The  unaudited  condensed  consolidated  financial  statements  do  not
include footnotes and certain financial  information normally presented annually
under accounting  principles  generally accepted in the United States of America
and should,  therefore,  be read in  conjunction  with the Annual Report on Form
10-K of National  Coal Corp.  (the  "Company")  for the year ended  December 31,
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  quarter  ended  March  31,  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.       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 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  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 three months ended March 31, 2006, the
Company recognized  approximately $350,000 of related stock compensation expense
as part of general and administrative expenses.


                                       6
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         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 income and  earning  per share for the three
months ending March 31, 2005 would have been as follows:

                                                                    THREE MONTHS
                                                                       ENDED
                                                                      MARCH 31,
                                                                        2005
                                                                    -----------
Net loss attributable to common shareholders,
   as reported ..............................................       $(2,482,229)
Add: Stock-based compensation expense recognized
   under the intrinsic method ...............................           225,844
Deduct: Total stock-based compensation expense
   for stock options determined under
   the Black-Scholes option pricing model ...................          (319,875)
                                                                    -----------
Pro forma net loss ..........................................       $(2,576,260)
                                                                    ===========

Loss per share:
Basic - as reported .........................................       $     (0.18)
Basic - pro forma ...........................................       $     (0.19)
Diluted - pro forma .........................................       $     (0.19)

         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          THREE MONTHS ENDED
                                      MARCH 31,                  MARCH 31,
                                        2006                        2005
                                 ------------------          ------------------
Risk free interest rate                 4.36%                      3.23%
Expected term (years)                   6.25                       6.25
Expected volatility                    50.58%                     48.60%
Expected dividend yield                 0.00%                      0.00%
                                 ==================          ==================


                                       7
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

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

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

<TABLE>
<CAPTION>
                                                              MARCH 31,      DECEMBER 31,
                                                                2006            2005
                                                            ------------    ------------
<S>                                                         <C>             <C>
Furniture and office equipment ..........................   $    230,748    $    220,663
Mining equipment and vehicles ...........................     45,646,636      36,509,990
Land and buildings ......................................      6,723,990       6,721,858
Mine development ........................................     18,520,338      18,311,553
                                                            ------------    ------------
   Total property, plant, equipment and mine development      71,121,712      61,764,064
Less accumulated depreciation, depletion and amortization    (13,880,617)    (10,862,383)
                                                            ------------    ------------
   Property, plant, equipment and mine development, net .   $ 57,241,095    $ 50,901,681
                                                            ============    ============
</TABLE>


         Mining equipment includes approximately  $11,635,000 and $11,440,000 of
gross  assets  under  capital  leases at March 31, 2006 and  December  31, 2005,
respectively.

         Depreciation expense for the three months ended March 31, 2006 and 2005
was approximately $3,484,000 and $1,012,000, 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 effect of this revision was to increase  depreciation  expense and
the net loss by approximately  $1,508,000 or approximately ($0.11) per share for
the three months ended March 31, 2006.

         During the three  months ended March 31,  2006,  the Company  adopted a
plan to sell its  existing  transportation  equipment  and  vehicles  to various
outside  contractors.  Although we do not know the detail of all sales that will
occur related to this decision, we are currently in negotiations with an outside
party who is  performing  hauling  services  for the  Company as an  independent
contractor to sell assets with a book value of appoximately  $786,000 consisting
primarily of 13 tractor trailers,  a truck, and  miscellaneous  other equipment.
The net book value of the Company's  transportation  assets at March 31, 2006 of
$979,891  has  been  disclosed   separately  on  the  balance  sheet  as  assets
held-for-sale.


                                       8
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

4.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses are as follows:

                                                      MARCH 31,     DECEMBER 31,
                                                         2006           2005
                                                     -----------     -----------
Accounts payable ...............................     $ 6,372,053     $ 4,409,005
Accrued payroll and related taxes ..............         133,205         383,642
Accrued interest ...............................       1,471,438          47,466
Accrued insurance premiums .....................         330,000         789,810
Accrued preferred dividends ....................         240,599            --
Accrued equipment repair .......................       1,812,146            --
Royalty obligations ............................         388,964         204,433
Accrued federal, state and local taxes .........         532,779         556,270
                                                     -----------     -----------
Total accounts payable and accrued expenses ....     $11,281,184     $ 6,390,626
                                                     ===========     ===========

5.       DEBT AND FINANCING ARRANGEMENTS

              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. The notes had an original  maturity date of August 10, 2005, later
updated to March 10,  2006,  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 maturity  dates were  extended and the notes were repaid on
December 29, 2005.

              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  from the then  outstanding  obligation  of
$300,000.

         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.


                                       9
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

              10.5% SENIOR SECURED NOTES DUE 2010

         On December 29, 2005,  the Company  issued  $55,000,000 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 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 twenty days out of a thirty day 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   $52,100,000.   The  Company   immediately   used   approximately
$22,100,000  of the proceeds to repay  existing  indebtedness.  During the three
months  ended March 31, 2006 we used  approximately  $2.0  million to purchase a
forty-two  mile rail line in Tennessee,  approximately  $6.5 million to purchase
our second highwall miner,  approximately  $8.3 million as collateral to support
reclamation bonds, and approximately $6.0 million as working capital.

         The indenture  allows the Company to incur a first lien credit facility
in  the  amount  of  $10.0  million  but  restricts  the  Company  from  further
indebtedness unless certain fixed charge coverage ratios are maintained on a pro
forma  basis.  The fixed  charge  coverage  ratio is defined as the ratio of net
income (loss) plus (i) fixed charges including 25% of capital  expenditures made
by  the  Company  and  its  subsidiaries,   (ii)  depreciation,   depletion  and
amortization,  (iii) taxes, (iv)  extraordinary  losses,  and (v) other non-cash
income and expenses to fixed charges including 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.

         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.  If the  exchange  offer
registration  statement is not declared  effective  within 240 days of the issue
date of the notes,  the Company must pay each of the purchasers  additional cash
interest  at the rate of 0.25% per annum for each  ninety day  period  following
default  up  to  a  maximum  of  1.00%  per  annum.  Pursuant  to  the  separate
registration rights agreement, the Company has filed two registration statements
with the Securities and Exchange Commission in May 2006.


                                       10
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

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

                                                     MARCH 31,     DECEMBER 31,
                                                       2006            2005
                                                   ------------    ------------

10.5% Notes, due 2010 ..........................   $ 55,000,000    $ 55,000,000
Bank note (prime + 1%), due 2007 ...............      1,047,971       1,200,018
Equipment note (non-interest bearing), due 2006            --           280,000
Installment purchase obligations, due 2008 .....      4,673,333       5,270,611
Equipment notes (8.39%-9.28%, due 2009-2011) ...        153,281            --
Equipment note (4.48%, due 2009) ...............        314,009            --
Other ..........................................           --            19,931
Less unamortized discounts .....................     (3,763,361)     (3,910,160)
                                                   ------------    ------------
                                                     57,425,233      57,860,400
Less current portion of long-term debt .........     (3,272,404)     (3,319,175)
                                                   ------------    ------------
Long-term debt .................................   $ 54,152,829    $ 54,541,225
                                                   ============    ============

6.       LEASES

         The  Company   leases   mining  and  certain  other   equipment   under
noncancelable  lease agreements  ranging in initial term from six months to five
years.  Rental  expense for equipment  under  operating  lease  agreements  with
initial  lease  terms of one year or  greater  was  approximately  $145,000  and
$295,000 for the three months ending March 31, 2006 and 2005, respectively.

         During the first  quarter of 2006,  the Company  entered into a capital
lease agreement of approximately  $265,000 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.

7.       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.


                                       11
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

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

         Obligation at December 31, 2005 ...............   $ 7,228,232
         Current portion included in accrued expenses ..          --
                                                           -----------
         Long-term liability at December 31, 2005 ......     7,228,232
         Accretion expense .............................       100,793
         Additions resulting from property additions ...          --
         Adjustments from recosting ....................          --
         Obligations settled ...........................       (68,316)
                                                           -----------
         Obligation at March 31, 2006 ..................     7,260,709
         Current portion included in accrued expenses ..          --
                                                           -----------
          Long-term liability at March 31, 2006 ........   $ 7,260,709
                                                           ===========

8.       STOCKHOLDERS' EQUITY

         On December 29, 2005, the Company issued 55,000  Warrants to purchase a
total of 1,732,632  shares of the Company's common stock in conjunction with the
issue of  $55,000,000  of 10.5% Senior  Secured  Notes.  The issue  consisted of
55,000  units each of which  entitle  the holder to purchase  31.5024  shares of
Company  common  stock at an  exercise  price of $8.50  per  share,  subject  to
adjustment.  The warrants are subject to mandatory  conversion  if the price the
Company's  common stock  remains above $12.75 for more than twenty days out of a
thirty day period.  The  Warrants  will be  exercisable  at any time on or after
their first anniversary date and will expire on December 15, 2010.

         During the three  months ended March 31, 2006 and 2005,  no  previously
issued warrants were exercised.

         During the three months ended March 31, 2006 and 2005, holders of 64.23
and 36.33  shares of  Series A  convertible  preferred  stock  with  liquidation
preferences totaling  approximately $963,000 and $545,000 plus accrued dividends
of $16,278 and $6,198, converted  their shares into 163,288 and 91,358 shares of
common stock, respectively.

         During the three  months  ended  March 31,  2006 and 2005,  the Company
issued 101,500 and 206,250 shares of common stock and received gross proceeds of
approximately  $223,000 and $469,500,  respectively,  upon the exercise of stock
options by employees or former employees.

9.       EARNINGS PER SHARE

         Basic earnings or loss per share are computed by dividing net income by
the  weighted  average  number of common  shares  outstanding  during  the year.
Diluted  earnings per share are 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


                                       12
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

market price for a period, which are defined as anti-dilutive,  are not included
in  the  diluted  earnings  (loss)  per  share  calculations  because  of  their
anti-dilutive  effect. In periods of losses,  diluted loss per share is computed
on the same  basis  as  basic  loss per  share  as the  inclusion  of any  other
potential shares outstanding would be anti-dilutive.

         For the three  months  ended  March 31,  2006 and 2005,  4,429,951  and
6,052,345 potentially dilutive shares of the Company from warrants,  convertible
preferred  stock and stock  options  were not  included  in the  computation  of
diluted earnings (loss) per share because to do so would be anti-dilutive.

         The  computations  for  basic  and  diluted  earnings  per  share  from
continuing operations for the three months ended March 31 are as follows:

                                                      2006             2005
                                                  ------------     ------------
Numerator:
Net loss .....................................      (7,678,894)    $ (2,191,039)
Preferred dividends ..........................        (240,599)        (291,190)
                                                  ------------     ------------
Numerator for basic and diluted ..............    $ (7,919,493)    $ (2,482,229)

Denominator:
Weighted average shares - basic ..............      13,871,167       13,470,799
Effect of warrants ...........................            --          1,038,892
Effect of convertable preferred shares .......       3,273,816        3,620,640
Effect of stock options ......................       1,156,135        1,392,813
                                                  ------------     ------------
Adjusted weighted average shares - diluted ...      18,301,118       19,523,144
                                                  ============     ============

Net income (loss) per share - basic ..........    $      (0.57)    $      (0.18)

Net income (loss) per share - diluted ........    $      (0.57)    $      (0.18)

10.      COMMITMENTS AND CONTINGENCIES

         In December 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.  Hearings are  scheduled  for 2006.
Concurrently, the same plaintiffs filed a similar action alleging NEPA violation
regarding OSM's approval of an application for a revision of the same permit. An
unfavorable  outcome of either action would not involve direct monetary damages;
however  significant   financial  losses  could  result  from  curtailed  mining
operations.  The Company believes that these matters will be resolved  favorably
and  without a  material  impact on its cash  flows,  results of  operations  or
financial condition.


                                       13
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         During  2005,  the  Company  was  audited  by  its  previous   workers'
compensation insurance provider which contends that an additional  approximately
$1.4 million in premiums is owed for the year ended April 15,  2005.  The matter
primarily  involves the  application  of premium  rates to employees  performing
certain job  functions.  In January  2006,  the Company  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.

         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  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 consultant who advised the
Company  that it had the  right to mine the  coal.  This  suit  would  allow the
Company to recover any amounts lost if the original  complainant  is successful.
Outside  counsel is unable to estimate  with  reasonable  certainty the probable
outcome of these suits however if the Company is  unsuccessful,  possible awards
could be as  substantial  as the gross  profits  received by the Company for the
sale of the coal in question.

         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  are  expected  to be  approximately
$1,800,000  and were  recorded as a cost of sales in the first  quarter of 2006.
The Company's initial insurance claim was denied and management  intends to take
legal  action  against  the  insurance  provider  but  is  currently  unable  to
reasonably predict an outcome.

         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.

11.      RELATED PARTY TRANSACTIONS

         In March 2005,  the Company  borrowed  approximately  $5,140,000 at 18%
interest with five-year common stock purchase warrants to purchase up to 140,000
shares of the Company's  common stock at an exercise price per share of $8.50 by
issuing notes to three  purchasers,  including  Crestview  Capital Master,  LLC,
which  is a  significant  shareholder  of  the  Company.  The  Company  paid  an
origination  fee of  approximately  $200,000  upon  the  execution  of the  loan
document. The notes were repaid on December 29, 2005 with an additional 3% fee.

12.      EVENTS SUBSEQUENT TO MARCH 31, 2006 (UNAUDITED)

         In April 2006, the Company entered into new installment sales contracts
with  an  equipment  manufacturer  pursuant  to  which  the  Company  refinanced
equipment with an aggregate principal value of


                                       14
<PAGE>


                               NATIONAL COAL CORP.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

approximately  $2,729,000 formerly acquired under various capital leases.  These
installment  sales contracts  require  payments over 36 months at fixed interest
rates ranging from 7.03% to 7.5%.

         On April 21, 2006,  the  Company's  common  stock began  trading on the
Nasdaq  National  Market under its ticker  symbol  "NCOC".  The Company had been
trading on the Nasdaq SmallCap Market (SM) since April 22, 2005.

         Between April 1, 2006 and May 18, 2006, 152,500 warrants were exercised
with gross proceeds totaling $1,006,500.

         Between April 1, 2006 and May 18, 2006, holders of 457.74 shares of our
Series A  convertible  preferred  stock with  liquidation  preferences  totaling
approximately $6,867,000 and unpaid dividends of approximately $41,000 converted
their shares into 1,151,292 shares of our common stock.

         Between  April 1, 2006 and May 18,  2006,  the  Company  issued  48,510
shares of common stock and received  gross  proceeds of  approximately  $190,000
upon the exercise of stock options by employees or former employees.


                                       15
<PAGE>


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

         The  information  contained in this Form 10-Q is intended to update the
information  contained  in our  Annual  Report on Form  10-K for the year  ended
December 31, 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:

         o        the worldwide demand for coal;

         o        the price of coal;

         o        the supply of coal and other competitive factors;

         o        the costs to mine and transport coal;

         o        the ability to obtain new mining permits;

         o        the costs of reclamation of previously mined properties;

         o        the risks of expanding coal production;

         o        industry competition;

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

         o        general economic conditions; and

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

         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-


                                       16
<PAGE>


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 March  31,  2006,  our  mining  complexes  included  three
underground  mines,  two surface mines,  and one highwall mine. In addition,  we
have four preparation  plants, two active and two inactive,  and four unit train
loading facilities,  two active and two inactive,  served by the CSX and Norfolk
Southern ("NS") railroads.  We hold permits that allow us to open five new mines
close  to  our  current  operations.   As  of  March  31,  2006,  we  controlled
approximately  38.2 million estimated  recoverable tons. During the three months
ended March 31, 2006, we generated  total revenues of $20.0 million and Adjusted
EBITDA (See EBITDA NOTE below) of ($2.0) million and sold approximately  372,109
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 2.0%  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 three  months  ended  March 31,  2006,
approximately  87.6% 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  Authority  (Santee Cooper) and East
Kentucky  Power,  representing  approximately  35.8%,  33.5%  and  10.7%  of our
revenues, respectively.

         In  the  three  months  ended  March  31,  2006,   our  mines  produced
approximately  318,730 tons of coal.  Approximately  61.4% of our production for
the quarter  was  produced at  underground  mines and 38.6% was  produced at our
surface  and  highwall  mine  operations.  We have taken  advantage  of a strong
pricing  environment  to obtain  long-term  (greater than 12 months in duration)
supply  agreements  with key customers at prices  averaging over $50 per ton. We
plan to continue to capitalize on the currently  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,
         (ii) interest and financing  fees, and (iii)  depreciation,  depletion,
         accretion and  amortization.  Adjusted EBITDA is defined as EBITDA plus
         stock-based compensation expense. We present EBITDA and Adjusted EBITDA
         to enhance  understanding of our operating  performance.  We use EBITDA
         and Adjusted EBITDA as criteria for evaluating our performance relative
         to that of our peers,  including  measuring our cost  effectiveness and
         return  on  capital,   assessing  our   allocations  of  resources  and
         production  efficiencies and making compensation  decisions. We believe
         that EBITDA and Adjusted EBITDA are operating performance 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.  In  addition,  our
         management  uses EBITDA and Adjusted EBITDA to monitor and evaluate our
         business  operations.  However,  EBITDA  and  Adjusted  EBITDA  are not
         measurements of financial performance under accounting principles



                                       17
<PAGE>


         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:

                                                         Three Months Ended
                                                              March 31,
                                                      -------------------------
                                                          2006         2005
                                                      -----------   -----------
Net loss ..........................................   $(7,678,894)  $(2,191,039)

Other (income) expense ............................      (340,878)       15,622

Interest and financing fees .......................     1,868,844       660,511

Depreciation, depletion, amortization and accretion     3,832,236     1,286,957
                                                      -----------   -----------
EBITDA ............................................    (2,318,692)     (227,949)

Stock-based compensation expense ..................       348,848       225,844
                                                      -----------   -----------
Adjusted EBITDA ...................................   $(1,969,844)  $    (2,105)
                                                      ===========   ===========


RECENT ACCOUNTING PRONOUNCEMENTS

         In March 2005, the Financial Accounting Standards Board ("FASB") issued
Interpretation  No. 47 ("FIN 47"),  ACCOUNTING FOR CONDITIONAL  ASSET RETIREMENT
OBLIGATIONS, which clarifies that an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation when incurred if
the  liability's  fair value can be reasonably  estimated.  A conditional  asset
retirement  obligation  is  defined  as a  legal  obligation  to  perform  asset
retirement  activity  in which the  timing  and (or)  method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity.  FIN 47 is  effective no later than the end of fiscal years ending after
December 15, 2005. Our adoption of FIN 47 will not result in a change to current
practice.

         At its March 30, 2005 meeting,  the FASB ratified the consensus reached
by the Emerging  Issues Task Force  ("EITF") in Issue No. 04-6,  ACCOUNTING  FOR
STRIPPING COSTS INCURRED  DURING  PRODUCTION IN THE MINING  INDUSTRY.  Issue No.
04-6  requires  that the costs of removing  overburden  and waste  materials  to
access mineral deposits during the production phase of a mine, commonly referred
to as STRIPPING COSTS, be included in the costs of the inventory produced.  EITF
Issue No.  04-6 is  effective  for the  first  fiscal  period  in  fiscal  years
beginning  after  December  15, 2005,  with early  adoption  permitted.  We have
adopted the EITF effective January 1, 2006.  Management  believes this EITF will
have no impact on our financial statements.

         In  May  2005,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 154,  ACCOUNTING CHANGES AND ERROR  CORRECTIONS,  A REPLACEMENT OF
APB OPINION NO. 20 AND FASB STATEMENT NO. 3, which changes the  requirements for
the  accounting  for and  reporting of a change in  accounting  principle.  This
statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine the  period-specific  effects or the cumulative effect of change. When
it is impracticable to determine the period-specific effects of an


                                       18
<PAGE>


accounting  change  on one or more  individual  prior  periods  presented,  this
Statement requires that the new accounting  principle be applied to the balances
of assets and  liabilities as of the beginning of the earliest  period for which
retrospective  application is practicable and that a corresponding adjustment be
made to the opening  balance of retained  earnings  for that period  rather than
being reported in the income statement.  Management believes this statement will
have no impact on our financial statements.

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
                                                                MARCH 31,
                                                           -------------------
                                                             2006        2005
                                                           -------     -------

Revenues ...............................................     100.0 %     100.0 %
                                                           -------     -------
Operating expenses:
   Cost of sales and selling expenses ..................     101.3        86.6
   Depreciation, depletion, amortization
   and accretion .......................................      19.1        10.2
   General and administrative ..........................      10.3        15.2
                                                           -------     -------
     Total operating expenses ..........................     130.7       112.0
                                                           -------     -------
Loss from operations ...................................     (30.7)      (12.0)
Other income (expense):
   Interest expense ....................................      (9.3)       (5.3)
   Other income (expense), net .........................       1.7        (0.1)
                                                           -------     -------
Net loss ...............................................     (38.3)%     (17.4)%
                                                           =======     =======


                                       19
<PAGE>


COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND THREE MONTHS ENDED MARCH 31,
2005

<TABLE>
<CAPTION>
                                              THREE MONTHS    THREE MONTHS
                                                  ENDED           ENDED
                                                MARCH 31,       MARCH 31,        PERCENT
                                                  2006            2005           CHANGE
                                              ------------    ------------    ------------
<S>                                           <C>             <C>                  <C>
Revenues
  Coal sales ..............................   $ 19,792,596    $ 12,584,404            57.3%
  Other revenues ..........................        230,962            --                 *
                                              ------------    ------------    ------------
   Total revenues .........................     20,023,558      12,584,404            59.1%
                                              ------------    ------------

Expenses
  Cost of sales ...........................     20,285,541      10,897,311            86.2%
  Depreciation, depletion, amortization and
     accretion ............................      3,832,236       1,286,957           197.8%
  General and administrative ..............      2,056,709       1,915,042             7.4%
                                              ------------    ------------    ------------
   Total operating expenses ...............     26,174,486      14,099,310            85.6%
                                              ------------    ------------

Other income (expense)
  Interest expense ........................     (1,868,844)       (660,511)          182.9%
  Other income (expense), net .............        340,878         (15,622)        2,282.0%
                                              ------------    ------------    ------------
   Total other income (expense) ...........     (1,527,966)       (676,133)          126.0%
                                              ------------    ------------
</TABLE>
*  Percent change not meaningful.

         REVENUES

         For the three months ended March 31,  2006,  our revenues  were derived
entirely from coal sales to nine customers,  four of which were utilities,  four
of which were industrial customers, and one of which was a coal broker. Our five
largest  customers  represented 94% of our total revenues.  For the three months
ended March 31, 2005, our revenues were derived  entirely from coal sales to ten
customers,  seven of which were  utilities  and three of which  were  industrial
customers. Our five largest customers represented 90% of our total revenues. The
increase in coal sales of  approximately  $7.2 million,  or 57.3%, for the three
months ended March 31,  2006,  compared to the three months ended March 31, 2005
was attributable to an increase in sales volume of approximately 146,000 tons to
approximately 372,000 tons in the first quarter of 2006 and a net improvement in
quality adjustments of approximately $1,100,000 net of an average decline in the
contract  price per ton of  approximately  3.1%.  Other  revenues  for the three
months ended March 31, 2006 include  approximately  $163,000  charged to another
coal  producer  for  use  of  our  train  loading  facilities  in  Kentucky  and
approximately  $26,000 of royalty receipts not reflected in the first quarter of
2005.

         OPERATING EXPENSES

              COST OF SALES

         Cost  of  sales  consist  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 cost of repairs to
our second  highwall  miner,  which was damaged by a rock collapse in March 2006
resulting in approximately  $1.8 million of unexpected  expenses,  cost of sales
increased


                                       20
<PAGE>


approximately  $7.6  million or 70% for the three months ended March 31, 2006 as
compared to the same period in 2005. Our initial  insurance  claim for damage to
the highwall miner was denied by our insurance  carrier.  The primary reason for
the  increase  in  total  cost is the  increase  in the  volume  coal  sales  of
approximately  64.5% when  compared  to the same  period in the prior  year.  An
1,158.5%  increase  in third  party coal  purchases  from the same period in the
prior year along with a 34% decrease in low cost coal produced from our highwall
miner is  responsible  for the remainder of the  increase.  Our goal is to lower
costs as a percentage of revenues by employing  the latest mining  technologies,
analyzing the Company's coal properties in order to mine them  efficiently,  and
increasing volume to achieve economies of scale.

              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 7.4% increase in general
and  administrative  expenses  for the three  months  ended  March  31,  2006 as
compared to the same period in the previous year is primarily attributable to an
increase in  executive  and  accounting  staff  offset by an  approximately  61%
decrease in consulting expenses.

              DEPRECIATION, DEPLETION AMORTIZATION AND ACCRETION EXPENSE

         The  197.8%  increase  in  depreciation,  depletion,  amortization  and
accretion  expense for the three  months ended March 31, 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 from seven
to three year lives which had the effect of increasing  depreciation  expense by
approximately  $1,508,000.  Given  that  the coal  mining  business  is  capital
intensive,  we expect our  depreciation  expense to increase in the remainder of
2006 and beyond as we increase our acquisition of property, plant and equipment.

         OTHER INCOME (EXPENSE)

         The 182.9%  increase in interest  expense  for the three  months  ended
March 31, 2006 compared to the three months ended March 31, 2005 is attributable
to an increase in the average  outstanding balance of our senior credit facility
of  approximately  $39,300,000 or 250.3%.  Other income  includes  approximately
$217,000 of interest income on short-term deposits and an approximately $116,000
gain on the disposal of certain mining and transportation equipment.

LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 2006, we had cash and cash  equivalents  of  approximately
$5.1 million and negative working capital of approximately $4.7 million, and had
negative  cash flows from  operations  of $1.6 million for the three months then
ended. During the remainder of fiscal 2006 we expect to expend substantially all
of our current cash on hand as we continue to expand  coals  mining  operations.
These  plans  include  refurbishing  a 42-mile  rail line  acquired in the first
quarter  and certain  other coal  processing  facilities,  and we also expect to
acquire  additional  mining  equipment.  It is  anticipated  that we will fund a
portion of these  refurbishing  and expansion costs by utilizing our $10 million
secured credit facility and other equipment financing. However, 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.

         On December  29,  2005,  the Company  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


                                       21
<PAGE>


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  on a senior
secured basis by all of our wholly-owned  subsidiaries and were offered and sold
within the United States only to qualified  institutional  buyers in reliance on
Rule 144A under the Securities Act.

         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 Jefferies & Company,
Inc.

         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 will be our senior  secured  obligations,  and will rank  equally with our
existing  and  future  senior  debt  and  senior  to  our  existing  and  future
subordinated  debt.  The Notes provide for us to obtain a $10 million  revolving
line of credit  which  will hold a first  priority  secured  lien  senior to the
Notes.

         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,  the Senior Notes are redeemable,  at our option, in whole
or in part,  at any time on or after  December  15,  2008,  in each  case at the
redemption  prices  described in the table below,  together with any accrued and
unpaid interest to the date of the redemption.

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


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

         o        incur or guarantee additional  indebtedness or issue preferred
                  stock;

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

         o        make investments;

         o        issue or sell capital stock of restricted subsidiaries;

         o        engage in transactions with affiliates;

         o        grant or assume liens; or

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


                                       22
<PAGE>


         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 have agreed,  pursuant to a registration  rights  agreement with the
initial purchaser,  to use our commercially  reasonable efforts to 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.  The
Warrants  and  Warrant  Shares  have  not been  registered  with the SEC and are
subject to transfer  restrictions.  Under the terms of the  registration  rights
agreement relating to the Warrants,  we have agreed to file a shelf registration
statement  with the SEC  covering  the resale of the  Warrants  and the  Warrant
Shares,  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 a registration statement on Form S-3 in May 2006.

         We immediately  used  approximately  $22,100,000 of the proceeds of the
Senior Note  offering to repay  existing  indebtedness.  During the three months
ended March 31, 2006 we used approximately $1.96 million to purchase a forty-two
mile rail line in Tennessee,  approximately  $6.5 million to purchase our second
highwall miner,  approximately $8.3 million as collateral to support reclamation
bonds to the OSM, and approximately $6.0 million as working capital.

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

                                                     MARCH 31,      DECEMBER 31,
                                                       2006            2005
                                                   ------------    ------------

10.5% Notes, due 2010 ..........................   $ 55,000,000    $ 55,000,000
Bank note (prime + 1%), due 2007 ...............      1,047,971       1,200,018
Equipment note (non-interest bearing), due 2006            --           280,000
Installment purchase obligations, due 2008 .....      4,673,333       5,270,611
Equipment notes (8.39%-9.28%), due 2009-2011) ..        153,281            --
Equipment note (4.48%, due 2009) ...............        314,009            --
Other ..........................................           --            19,931
Less unamortized discounts .....................     (3,763,361)     (3,910,160)
                                                   ------------    ------------
                                                     57,425,233      57,860,400
Less current portion of long-term debt .........     (3,272,404)     (3,319,175)
                                                   ------------    ------------
Long-term debt .................................   $ 54,152,829    $ 54,541,225
                                                   ============    ============


         CASH FLOWS

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and sales of debt and equity  securities.
For the three  months  ended March 31,  2006,  we had a net  decrease in cash of
approximately $20.3 million. Cash flows from operating,  financing and investing
activities  for the three months ended March 31, 2006 and 2005 are summarized in
the following table:


                                       23
<PAGE>


                                                      THREE MONTHS
                                                     ENDED MARCH 31,
                                              ----------------------------
              ACTIVITY                            2006            2005
         ----------------------------------   ------------    ------------

         Operating activities .............   $ (1,593,533)   $  1,319,989
         Investing activities .............    (18,404,408)     (7,322,424)
         Financing activities .............       (348,897)      6,430,130
                                              ------------    ------------
            Net increase (decrease) in cash   $(20,346,838)   $    427,695
                                              ============    ============

         OPERATING ACTIVITIES

         The net cash used in operating activities of approximately $1.6 million
during the three  months  ended  March 31,  2006 was  primarily  the result of a
significant  increase  in  inventory  levels in an effort to better  manage  our
customers'  shipping and quality  requirements  as compared to cash  provided by
operating  activities of  approximately  $1.3 million for the three months ended
March 31, 2005.

         INVESTING ACTIVITIES

         Cash  used in  investing  activities  of $18.4  million  was  primarily
related to net capital expenditures of approximately $10.6 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  $7.8  million as  compared  to
approximately  $7.3 million used in  investing  activities  for the three months
ended March 31, 2005.

         FINANCING ACTIVITIES

         The net cash used in  financing  activities  of  approximately  $84,000
during  the three  months  ended  March 31,  2006 was  primarily  the  result of
decreased  borrowings and increased  repayments of bank loans and capital leases
as compared to $6.4  million  provided  during the three  months ended March 31,
2005.

         CONTRACTUAL OBLIGATIONS

         The following summarizes our contractual  obligations at March 31, 2006
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

<TABLE>
<CAPTION>
                                                                  PAYMENTS DUE BY PERIOD
                                     ---------------------------------------------------------------------------------
                                                       LESS THAN 1          1-3              3-5             AFTER
                                         TOTAL            YEAR             YEARS            YEARS           5 YEARS
----------------------------------   --------------   --------------   --------------   ---------------   ------------
<S>                                    <C>               <C>              <C>              <C>            <C>
Notes payable                          $61,188,594       $3,272,404       $2,884,006       $55,032,184    $        --
Operating leases                           299,064          256,676           42,388                --             --
Capital leases                           2,350,639        1,283,261        1,067,378                --             --
                                     --------------   --------------   --------------   ---------------   ------------
     Total contractual obligations     $63,838,297       $4,812,341       $3,993,772       $55,032,184    $        --
                                     ==============   ==============   ==============   ===============   ============
</TABLE>

         We rent mining equipment  pursuant to operating lease  agreements,  and
made lease  payments  totaling  approximately  $133,000  during the three months
ended March 31, 2006.


                                       24
<PAGE>


         For the three months ended March 31, 2006, we accrued  dividends to the
holders  of our  Series  A  convertible  preferred  stock  in the  aggregate  of
approximately  $241,000.  We are  required  to make  semi-annual  cash  dividend
payments to the holder of the Series A preferred  stock on June 30 and  December
31.

OFF-BALANCE SHEET ARRANGEMENTS

         At  March  31,   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.

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
months  ended March 31,  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.

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 March
31, 2006, we had  approximately  $55.0 million  principal  value of total senior
debt,  and for the twelve  months  ended  March 31,  2006 our ratio of  Adjusted
EBITDA to  interest  expense  was 1.2:1  and our ratio of total  senior  debt to
Adjusted EBITDA was 8.0:1. Our indebtedness  could be increased by an additional
$10.0  million  under a future  credit  facility,  which will have priority over
senior debt with respect to security interests in the collateral. Our high level
of indebtedness could have important consequences, including the following:


                                       25
<PAGE>


         o        reducing our ability to obtain additional financing;

         o        reducing our cash flow;

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

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

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

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

         We may be able to incur  substantial  amounts of additional debt in the
future,  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 indentures  currently in place and any future credit facility will limit our
ability to sell assets and also restrict 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

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 March 31, 2006, we control  approximately  80.5
million tons of proven and probable in-place reserves,  including  approximately
38.2 million tons of 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:


                                       26
<PAGE>


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

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

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

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

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

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

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


                                       27
<PAGE>


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 three
months  ended  March  31,  2006,  100% 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.  Two
of our  long-term  contracts,  representing  44% of our coal  sales in the three
months  ended  March  31,  2006 and  which  expire  at the end of 2007 and 2008,
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


                                       28
<PAGE>


achieve  from  these  sales  commitments.  In  addition,  we may  not be able to
successfully convert these sales commitments into long-term supply agreements.

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

         We are exposed to swings in the demand for coal, which has an impact on
the prices for our coal.  The demand for coal products and,  thus, the financial
condition and results of operations of companies in the coal industry, including
us, are generally  affected by  macroeconomic  fluctuations in the world economy
and the domestic and international demand for energy. In recent years, the price
of coal has 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 three months ended March 31, 2006, we derived approximately 79%
of our coal  revenues from sales to our three  largest  customers.  At March 31,
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  three  months  ended  March  31,  2006  were
approximately  $19.8 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.

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.


                                       29
<PAGE>


         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.

OUR  DIRECTOR  AND  OFFICER  INDEMNIFICATION  POLICIES IN  CONJUNCTION  WITH THE
PROVISIONS OF FLORIDA LAW COULD RESULT IN SUBSTANTIAL UN-RECOUPABLE EXPENDITURES
AND REDUCED REMEDIES AGAINST DIRECTORS AND OFFICERS.

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

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


                                       30
<PAGE>


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:

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

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

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.

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


                                       31
<PAGE>


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.


                                       32
<PAGE>


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 March 31, 2006, $257,500 was on deposit with OSM
for reclamation bonds related to our Patterson  Mountain mining  operations.  In
addition,  we have approximately  $13.8 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 Chief Executive Officer. We have spent
approximately  $236,000 during the three months ended March 31, 2006 on security
measures  and  related  legal  fees,  largely as a result of the actions of some
environmental  activists.  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.

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:


                                       33
<PAGE>


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

         o        the demand for electricity;

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

         o        domestic and foreign governmental regulations and taxes;

         o        air emission standards for coal-fired power plants;

         o        regulatory, administrative and court decisions;

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

         o        the effect of worldwide energy conservation measures.

         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.

                        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 any future  credit  facility  will 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,


                                       34
<PAGE>


and  unknown  persons  could  replace  our  management  at  that  time.  Such an
occurrence  would result in a greatly  reduced  percentage of ownership of us by
our current shareholders.

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

         Factors that may influence our quarterly operating results include:

         1.       the worldwide demand for coal;

         2.       the price of coal;

         3.       the supply of coal and other competitive factors;

         4.       the costs to mine and transport coal;

         5.       the ability to obtain new mining permits;

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

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

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

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

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

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

         3.       interest rates;

         4.       changes in accounting principles;

         5.       sales of common stock by existing security holders;

         6.       announcements of key developments by our competitors; and

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

IF WE  NEED TO SELL OR  ISSUE  ADDITIONAL  SHARES  OF  COMMON  STOCK  OR  ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH,  OUR SHAREHOLDERS'  OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED.

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

OFFICERS AND  DIRECTORS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH
COULD  LIMIT  OUR  SHAREHOLDERS'   ABILITY  TO  INFLUENCE  THE  OUTCOME  OF  KEY
TRANSACTIONS.


                                       35
<PAGE>


         As of May 18, 2006,  our officers and  directors  and their  affiliates
owned  approximately  38.8% 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 three months ended March 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES.

         Members of the  company's  management,  including  our Chief  Executive
Officer and President,  Jon Nix, 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 March 31,
2006, the end of the period covered by this report.  Based upon that evaluation,
Messrs.  Nix 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 three  months  ended  March 31,  2006 that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.

         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.


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<PAGE>


                           PART II: OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         Information regarding reportable legal proceedings is contained in Part
I, "Item 3. Legal  Proceedings"  in our Annual  Report on Form 10-K for the year
ended December 31, 2005. The following describes legal proceedings, if any, that
became  reportable  during the  quarter  ended  March 31,  2006,  and amends and
restates  descriptions of previously  reported legal  proceedings in which there
have been material developments during such quarter.

         In December 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.  Hearings are  scheduled  for 2006.
Concurrently, the same plaintiffs filed a similar action alleging NEPA violation
regarding OSM's approval of an application for a revision of the same permit. An
unfavorable  outcome of either action would not involve direct monetary damages;
however  significant   financial  losses  could  result  from  curtailed  mining
operations.  The Company believes that these matters will be resolved  favorably
and  without a  material  impact on its cash  flows,  results of  operations  or
financial condition.

         During  2005,  the  Company  was  audited  by  its  previous   workers'
compensation insurance provider which contends that an additional  approximately
$1.4 million in premiums is owed for the year ended April 15,  2005.  The matter
primarily  involves the  application  of premium  rates to employees  performing
certain job  functions.  In January  2006,  the Company  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.

         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  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 consultant who advised the
Company  that it had the  right to mine the  coal.  This  suit  would  allow the
Company to recover any amounts lost if the original  complainant  is successful.
Outside  counsel is unable to estimate  with  reasonable  certainty the probable
outcome of these suits however if the Company is  unsuccessful,  possible awards
could be as  substantial  as the gross  profits  received by the Company for the
sale of the coal in question.

         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 are expected to be


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<PAGE>


approximately  $1,800,000  and were  recorded  as a cost of  sales in the  first
quarter of 2006. The Company's initial insurance claim was denied and management
intends to take legal  action  against the  insurance  provider but is currently
unable to reasonably predict an outcome.

         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.

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.

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

         During the three months  ended March 31, 2006,  holders of 64.23 shares
of our  Series  A  convertible  preferred  stock  with  liquidation  preferences
totaling  approximately  $963,000 and unpaid  dividends  totaling  approximately
$16,000,  converted  their shares into 163,288  shares of our common stock.  The
issuance of these  securities was exempt from the  registration  requirements of
the  Securities  Act  pursuant to Section  3(a)(9) of the  Securities  Act as an
exchange by the issuer with its existing security holders where no commission or
other remuneration is paid for soliciting such exchange.

         From April 1, 2006  through May 18, 2006,  holders of 457.74  shares of
our Series A convertible  preferred stock with liquidation  preferences totaling
approximately  $6,867,000 and unpaid dividends  totaling  approximately  $41,000
converted their shares into 1,151,292  shares of our common stock.  The issuance
of these  securities  was  exempt  from  the  registration  requirements  of the
Securities Act pursuant to Section  3(a)(9) of the Securities Act as an exchange
by the issuer with its existing  security  holders  where no commission or other
remuneration is paid for soliciting such exchange.

         In  addition,  from  April 1, 2006  through  May 18,  2006,  holders of
warrants  to  purchase  an  aggregate  of  152,500  shares of our  common  stock
exercised  such  warrants  at a price of $6.60 per share for  proceeds  to us of
$1,006,500.  The  issuance  and sale of these  securities  was  exempt  from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act as a transaction  not involving any public
offering.

ITEM 6.  EXHIBITS

              THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

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

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.


                                       38
<PAGE>


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.


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<PAGE>


                                   SIGNATURES

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

                                         NATIONAL COAL CORP.


Date: May 22, 2006                         /s/ T. Michael Love
                                         ---------------------------------------
                                     By:   T. Michael Love
                                     Its:  Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)


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