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National Coal 10-K 2008
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================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

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

For the transition period from __________________ to ______________________.

Commission file number 0-26509

NATIONAL COAL CORP.

(Exact name of registrant as specified in its charter)

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

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

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


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

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

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

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

NONE

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

Yes [_] No[X]

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

Yes [_] No[X]

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

Yes [X] No[_]

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

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

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

Accelerated Filer [_] Smaller Reporting Company [_]

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

Yes [_] No[X]

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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





NATIONAL COAL CORP.
INDEX TO FORM 10-K

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

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

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

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

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

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

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


PART II

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

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

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

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

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

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

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

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


PART III

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

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

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

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

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


PART IV

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





PART I

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

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

o the worldwide demand for coal;

o the price of coal;

o the supply of coal and other competitive factors;

o the costs to mine and transport coal;

o the ability to obtain new mining permits;

o the costs of reclamation of previously mined properties;

o the risks of expanding coal production;

o industry competition;

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

o general economic conditions; and

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

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


1



ITEM 1. BUSINESS.

CORPORATE OVERVIEW

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

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

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

ACQUISITION OF MANN STEEL PRODUCTS, INC.

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


2



BUSINESS STRATEGY

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

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

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

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

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

HISTORY

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


3



MINING OPERATIONS

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



YEAR
2007 2006 2005 PERMITTED OPENED
MINING PRODUCTION PRODUCTION PRODUCTION RESERVES OR
MINE NAME LOCATION METHOD STATUS (000'S) (000'S) (000'S) (000'S) ACQUIRED
--------- -------- ------ ------ ------- ------- ------- ------- --------

TENNESSEE MINES
Mine #1 New River Tract UG Closed 0 0 19 0 2004
Mine #2 New River Tract UG Closed 0 0 0 0 2003
Mine #3 New River Tract Surface Active 83 29 0 1,909 2006
Mine #3 HWM New River Tract HWM Active 107 26 0 1,792 2006
Mine #7 Ketchen Lease Surface Active 285 300 268 3,440 2004
Mine #9 New River Tract UG Closed 0 0 35 0 2004
Mine #11 TVA Lease UG Active 359 371 327 656 2004
Mine #14 TVA Lease UG Not Open 4 0 0 0
Mine #17 New River Tract UG Idle 0 26 0 5,758 2006
----------------------------------------------------
TOTAL TENNESSEE MINES 838 752 649 13,555

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

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



UG = Underground
HWM = Highwall Miner

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


4



TENNESSEE MINES

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

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

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

KENTUCKY MINES

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

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

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

ALABAMA MINES

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

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


5



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

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

PERMITTED NON-OPERATING MINES

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

TRANSPORTATION

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

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

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

EMPLOYEES

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

MARKETING AND SALES

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


6



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

CUSTOMERS

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

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

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

COMPETITION

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

COAL MINING TECHNIQUES

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

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

7



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

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

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

COAL CHARACTERISTICS

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

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

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

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

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


8



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

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

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

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

COAL PRICES

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

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

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

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

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


9



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

REGULATORY MATTERS

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

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

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

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

MINE SAFETY AND HEALTH

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

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


10



ENVIRONMENTAL LAWS

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

SURFACE MINING CONTROL AND RECLAMATION ACT

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

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

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

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

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

CLEAN AIR ACT

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


11



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

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

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

o reducing electricity generating levels; or

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

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

CLEAN WATER ACT

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

RESOURCE CONSERVATION AND RECOVERY ACT

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

Subtitle C of RCRA exempted fossil fuel combustion wastes from
hazardous waste regulation until the EPA completed a report to Congress and made
a determination on whether the wastes should be regulated as hazardous. In a
1993 regulatory determination, the EPA addressed some high-volume, low- toxicity
coal combustion wastes generated at electric utility and independent power
producing facilities. In May 2000, the EPA concluded that coal combustion wastes
do not warrant regulation as hazardous under RCRA. The EPA is retaining the
hazardous waste exemption for these wastes. However, the EPA has determined that
national non-hazardous waste regulations under RCRA Subtitle D are needed for
coal combustion wastes disposed in surface impoundments and landfills and used
as mine-fill. The agency also concluded beneficial uses of these wastes, other
than for mine filling, pose no significant risk and no additional national
regulations are needed. As long as this exemption remains in effect, it is not


12



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

FEDERAL AND STATE SUPERFUND STATUTES

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

GLOBAL CLIMATE CHANGE

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

PERMITTING

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

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


13



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

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

GLOSSARY OF TERMS

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

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

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

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

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

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

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

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

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

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

SCRUBBER (FLUE GAS DESULFURIZATION UNIT). Any of several forms of
chemical/physical devices which operate to neutralize sulfur compounds formed
during coal combustion. These devices combine the sulfur in gaseous emissions
with other chemicals to form inert compounds, such as gypsum, that must then be
removed for disposal. Although effective in substantially reducing sulfur from


14



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

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

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

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

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

ITEM 1A. RISK FACTORS.

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

RISKS RELATED TO OUR BUSINESS

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

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

o reducing our ability to obtain additional financing;

o reducing our cash flow;

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

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

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

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

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


15



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

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

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

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

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

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

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

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


16



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

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

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

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

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

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

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

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

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

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


17



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

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

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

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

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

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

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


18



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

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

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

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

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

THERE IS NO ASSURANCE THAT WE WILL FIND PURCHASERS OF OUR PRODUCT AT PROFITABLE
PRICES.

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

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

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

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

o the demand for electricity;

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

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

o regulatory, administrative and court decisions;

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

o the effect of worldwide energy conservation measures.


19



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

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

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

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

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

IF TRANSPORTATION FOR OUR COAL BECOMES UNAVAILABLE OR UNECONOMIC FOR OUR
CUSTOMERS, OUR ABILITY TO SELL COAL COULD SUFFER.

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

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

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

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

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

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


20



SIGNIFICANT COMPETITION FROM ENTITIES WITH GREATER RESOURCES COULD RESULT IN OUR
FAILURE.

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

THERE IS NO ASSURANCE THAT OUR LIMITED REVENUES WILL BE SUFFICIENT TO OPERATE
PROFITABLY, OR THAT WE WILL GENERATE GREATER REVENUES IN THE FUTURE.

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

Our coal sales for the year ended December 31, 2007 were approximately
$92.0 million. There is no assurance that we can achieve greater sales or
generate profitable sales. We expect that many other coal producers could
produce and sell coal at cheaper prices per ton than our production cost rates,
which could adversely affect our revenues and profits, if any. There is no
assurance that we will ever operate profitably. There is no assurance that we
will generate continued revenues or any profits, or that the market price of our
common stock will be increased thereby.

OUR INABILITY TO DIVERSIFY OUR OPERATIONS MAY SUBJECT US TO ECONOMIC
FLUCTUATIONS WITHIN OUR INDUSTRY.

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

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

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

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

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

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

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


21



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

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

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

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

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

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

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

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

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

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

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

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


22



RISKS RELATED TO ENVIRONMENTAL AND OTHER REGULATION

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

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

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

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

OUR OPERATIONS COULD BE ADVERSELY AFFECTED IF WE FAIL TO MAINTAIN REQUIRED
BONDS.

Federal and state laws require bonds or cash deposits to secure our
obligations to reclaim lands used for mining, to pay federal and state workers'
compensation, to secure coal lease obligations and to satisfy other
miscellaneous obligations. At December 31, 2007, $257,500 was on deposit with


23



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

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

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

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

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

Our business is affected by general economic conditions, fluctuations
in consumer confidence and spending, and market liquidity, which can decline as
a result of numerous factors outside of our control, such as terrorist attacks
and acts of war. Our business also may be affected by environmental activists
who engage in activities intended to disrupt our business operations. In
particular, environmental activists have conducted protests outside the homes of
certain of our executives, including our former Chief Executive Officer. We
spent approximately $431,000 and $875,000 during the years ended December 31,
2007 and 2006, respectively, on security measures. Future terrorist attacks
against U.S. targets, rumors or threats of war, actual conflicts involving the
United States or its allies, or military or trade disruptions affecting our
customers may materially adversely affect our operations. As a result, there
could be delays or losses in transportation and deliveries of coal to our
customers, decreased sales of our coal and extension of time for payment of
accounts receivable from our customers. Strategic targets such as energy-related
assets may be at greater risk of future terrorist attacks than other targets in
the United States. In addition, disruption or significant increases in energy
prices could result in government-imposed price controls. It is possible that
any, or a combination, of these occurrences could have a material adverse effect
on our business, financial condition and results of operations.

OUR FAILURE TO OBTAIN AND RENEW PERMITS NECESSARY FOR OUR MINING OPERATIONS
COULD NEGATIVELY AFFECT OUR BUSINESS.

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

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


24



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

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

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

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

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

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

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


25



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

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

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


26



RISKS RELATED TO OUR COMMON STOCK

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

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

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

Factors that may influence our quarterly operating results include:

o the worldwide demand for coal;

o the price of coal;

o the supply of coal and other competitive factors;

o the costs to mine and transport coal;

o the ability to obtain new mining permits;

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

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

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

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

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

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

o interest rates;

o changes in accounting principles;

o sales of common stock by existing security holders;

o announcements of key developments by our competitors; and

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

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

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


27



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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

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

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

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

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


28



GEOLOGY

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

COAL RESERVES

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

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

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

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


29



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

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

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


30



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



LOCATION COAL SEAM CONTROL ACRES RECOVERABLE QUALITY: QUALITY:
RESERVES BTU SULFUR (%)
(millions of tons)

TENNESSEE RESERVES:
NEW RIVER TRACT OWNED 65,000
(Anderson, Campbell and Big Mary Seam 1,553 4.3 13,583 2.51
Scott County)
Beech Grove Seam 502 1.1 12,734 1.79
Lower Dean Seam 683 1.8 13,737 1.28
Windrock Seam 1,033 2.6 13,631 1.30


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


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

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



----------------------------
KENTUCKY SUBTOTALS 27,350 8.7
----------------------------




31





LOCATION COAL SEAM CONTROL ACRES RECOVERABLE QUALITY: QUALITY:
RESERVES BTU SULFUR (%)

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



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


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

ITEM 3. LEGAL PROCEEDINGS.

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

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

None.


32



PART II

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

COMMON STOCK

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

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

HIGH LOW
---- ---

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

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


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

DIVIDENDS

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

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


33



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


34



PERFORMANCE GRAPH

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

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

[PERFORMANCE GRAPH OMITTED]




MAY 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2004 2005 2006 2007
------------ ------------ ------------ ------------ ------------

National Coal Corp. .............. 100.0 289.5 151.3 131.6 121.93

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

Russell 2000 Stock Index ......... 100.0 121.0 126.5 149.8 147.41




35



ITEM 6. SELECTED FINANCIAL DATA.




ELEVEN MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED
------------------------------------------------------------ DECEMBER 31,
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENT OF INCOME DATA: (In thousands, except per share, per ton and number of employee amounts)

Coal sales ................................. $ 91, 943 $ 86,830 $ 65,258 $ 16,871 $ 1,013
Total revenue .............................. $ 92,780 $ 87,517 $ 65,873 $ 16,999 $ 1,191
Operating loss ............................. $ (17,349) $ (16,457) $ (2,564) $ (7,040) $ (3,036)
Net loss ................................... $ (25,764) $ (23,421) $ (6,791) $ (10,429) $ (3,333)
Net loss attributable to common shareholders
per share - basic ....................... $ (1.46) $ (1.59) $ (0.58) $ (2.60) $ (0.36)
Net loss attributable to common shareholders
per share - diluted ..................... $ (1.46) $ (1.59) $ (0.58) $ (2.60) $ (0.36)
Preferred dividends per share .............. $ (0.02) $ (0.07) $ (0.08) $ (0.02) --

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

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



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

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

(3) Includes obligations under capital leases.

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


36





TWELVE MONTHS ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
----------------------------------------------------------- DECEMBER 31,
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------ ------------

Net loss ...................... $ (25,764) $ (23,421) $ (6,791) $ (10,429) $ (3,333)
Other (income) expense, net ... (1,052) 280 261 41 (75)
Interest expense .............. 10,765 7,476 3,967 3,349 372
Interest income ............... (1,298) (792) (129) (129) --
Depreciation, depletion,
accretion and amortization 16,526 15,363 10,108 2,473 617
------------ ------------ ------------ ------------ ------------
EBITDA ........................ $ (823) $ (1,094) $ 7,545 $ (4,566) $ (2,419)
============ ============ ============ ============ ============




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




TWELVE MONTHS ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
--------------------------------------------------------- DECEMBER 31,
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------ ------------

Total operating expenses ...... $ 110,129 $ 103,974 $ 68,436 $ 24,038 $ 68,436
Less: Cost of purchased coal .. 17,012 15,584 4,446 2,351 4,446
Less: Depreciation, depletion,
accretion and amortization 16,526 15,363 10,108 2,473 10,108
------------ ------------ ------------ ------------ ------------
AVERAGE CASH COST ............. $ 76,591 $ 73,027 $ 53,882 $ 19,214 $ 53,882
============ ============ ============ ============ ============
PER TON ....................... $ 56.69 $ 56.30 $ 44.29 $ 53.89 $ 44.29
============ ============ ============ ============ ============




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

The following discussion and analysis should be read together with the
Consolidated Financial Statements of National Coal Corp. and the Notes to
Consolidated Financial Statements included elsewhere in this report. This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of National
Coal Corp. for the fiscal years ended December 31, 2007, 2006 and 2005. Except
for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operation are
forward-looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control.

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


37



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

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

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

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

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

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

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


38



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

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

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

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

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

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

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

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


39



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

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

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

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

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

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

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


40



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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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


41



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

RESULTS OF OPERATIONS

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

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

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

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

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

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

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


42



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

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


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

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

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

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

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

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

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

OPERATING EXPENSES



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

Cost of sales ........................... $ 86,566,454 $ 79,354,327 9.1%
General and administrative expenses ..... 7,036,524 9,257,241 (24.0%)
Depreciation, depletion, accretion
and amortization expense ............. 16,525,583 15,362,829 7.6%
------------ ------------
Total operating expenses ................ $110,128,561 $103,974,397 5.9%
============ ============




43



COST OF SALES


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

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


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

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

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

GENERAL AND ADMINISTRATIVE EXPENSES

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

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


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

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


44



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

DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION EXPENSE

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

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

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

OTHER INCOME (EXPENSE)



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


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




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

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

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


45



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

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

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


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

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


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

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

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


46



OPERATING EXPENSES



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


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




COST OF SALES

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

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

GENERAL AND ADMINISTRATIVE EXPENSES

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

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

DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION EXPENSE

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


47



OTHER INCOME (EXPENSE)

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

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


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

RELATED TRANSACTIONS

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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


48



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

ACQUISITION OF MANN STEEL PRODUCTS, INC.

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

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

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

SALE OF KENTUCKY PROPERTIES

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


49



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

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

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

DEBT REDUCTION

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

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


50



DEBT OBLIGATIONS

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

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


12% NOTES PAYABLE DUE IN 2012

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

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

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


51



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

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

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

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

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

TERM LOAN CREDIT FACILITY

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


52



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

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

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

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

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


53



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

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

10.5% SENIOR SECURED NOTES DUE 2010

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

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

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

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

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


54



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

o incur or guarantee additional indebtedness or issue preferred
stock;

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

o make investments;

o issue or sell capital stock of restricted subsidiaries;

o engage in transactions with affiliates;

o grant or assume liens; or

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

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

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

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

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

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

EQUIPMENT NOTES

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


55



INSTALLMENT PURCHASE OBLIGATIONS AND SALE-LEASEBACK

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

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

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

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

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

CASH FLOWS

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

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


OPERATING ACTIVITIES

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


56



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

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

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

INVESTING ACTIVITIES

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

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

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

FINANCING ACTIVITIES

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


57



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

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

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2007, 2006, and 2005, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance, variable interest or special purpose
entities, except as noted below, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

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

CONTRACTUAL OBLIGATIONS

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



PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
LESS THAN 1 1-3 3-5 AFTER
TOTAL YEAR YEARS YEARS 5 YEARS
------------ ------------ ------------ ------------ ------------

Long-term debt (including
interest) ............ $180,591,620 $ 22,253,230 $ 76,289,326 $ 75,928,724 $ 6,120,340
Operating leases ........ 4,517,019 2,004,871 2,510,633 1,515 --
Capital leases .......... 282,806 183,806 99,000 -- --
------------ ------------ ------------ ------------ ------------
Total contractual
obligations ....... $185,391,445 $ 24,441,907 $ 78,898,959 $ 75,930,239 $ 6,120,340
============ ============ ============ ============ ============




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

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


58



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

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

INTEREST RATE RISKS

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

COMMODITY RISKS

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

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

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

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


59



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

FOREIGN CURRENCY

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


60



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

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

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

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

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

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

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


61



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of
National Coal Corp.

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

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

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

/S/ ERNST & YOUNG LLP

Nashville, Tennessee
April 14, 2008


62



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

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

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

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


/S/ GORDON, HUGHES & BANKS, LLP

Greenwood Village, Colorado
February 17, 2006


63




NATIONAL COAL CORP.
CONSOLIDATED BALANCE SHEETS


DECEMBER 31,
------------------------------
2007 2006
------------- -------------

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

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

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

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

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




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


64




NATIONAL COAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS


YEAR ENDED DECEMBER 31,
-----------------------------------------------
2007 2006 2005
------------- ------------- -------------

Revenues
Coal sales ......................................... $ 91,942,750 $ 86,830,095 $ 65,258,071
Other revenues ..................................... 837,278 686,992 614,563
------------- ------------- -------------
Total revenues .................................. 92,780,028 87,517,087 65,872,634
------------- ------------- -------------

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

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

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

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

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

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

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

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

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

Weighted average common shares ........................ 20,680,015 15,346,799 13,712,813




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


65




NATIONAL COAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS


YEAR ENDED DECEMBER 31,
--------------------------------------------
2007 2006 2005
------------ ------------ ------------

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

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

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

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




66





NATIONAL COAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED


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




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


67




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



Preferred Stock Common Stock Additional
--------------------------- ------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------

Balance, January 1, 2005 .... 1,456.67 $ -- 13,391,344 $ 1,300 $ 32,361,741 $(13,762,015) $ 18,601,026

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

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

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




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


68



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

1. BUSINESS OVERVIEW

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

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

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

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

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

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


69



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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

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

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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

INVENTORY

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


70



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

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

PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

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

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

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

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

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

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

DEFERRED FINANCING COSTS

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


71



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

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

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

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

RESTRICTED CASH

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

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


INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

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

PREPAID MINING ROYALTIES

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

RECLAMATION AND ASSET RETIREMENT OBLIGATIONS

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


72



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

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

STOCK-BASED COMPENSATION

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

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

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


73



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

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

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

WORKERS' COMPENSATION

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

REVENUE RECOGNITION

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

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

FREIGHT REVENUE AND COSTS

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

INCOME TAXES

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


74



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

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

COMPREHENSIVE LOSS

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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


75



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

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

3. ACQUISITION OF MANN STEEL PRODUCTS, INC.

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

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

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

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

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


76



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

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

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

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

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

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

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


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

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


77



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

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

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

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


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

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

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

4. INVENTORY

Inventory at December 31 is as follows:

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


78



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

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

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

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


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

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

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

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

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

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


79



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

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

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

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

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

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

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


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


80



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

6. OTHER NONCURRENT ASSETS

Other noncurrent assets at December 31 are as follows:

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


7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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


8. DEBT AND FINANCING ARRANGEMENTS

EQUIPMENT NOTES

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

10.5% SENIOR SECURED NOTES DUE 2010

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


81



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

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

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

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

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

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

TERM LOAN CREDIT FACILITY

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

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


82



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

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

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

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

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

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


83



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

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

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

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

INSTALLMENT PURCHASE OBLIGATIONS

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

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

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

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

12% NOTES PAYABLE DUE IN 2012

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

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


84



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

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

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

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

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

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

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


85



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

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

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

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


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

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


86



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

9. LEASES

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

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

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

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

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


87



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

10. ASSET RETIREMENT OBLIGATIONS

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

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


11. STOCKHOLDERS' EQUITY (DEFICIT)

SERIES A CUMULATIVE, CONVERTIBLE PREFERRED STOCK

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

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

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


88



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

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

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

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

NATIONAL COAL CORP. COMMON STOCK

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

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


89



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

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

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

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

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

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


90



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

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

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

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

OUTSTANDING STOCK PURCHASE WARRANTS

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



CURRENT
NUMBER OF STRIKE EARLIEST
TITLE SHARES PRICE* EXERCISE DATE EXPIRATION DATE
-------------------- --------- --------- ----------------- -----------------

Crestview Warrants . 396,620 $ 3.00 March 10, 2005 March 10, 2010
Bond Warrants ...... 1,732,632 $ 8.50 December 29, 2006 December 15, 2010
Alabama Warrant .... 250,000 $ 4.00 October 19, 2007 December 31, 2010
Refinance Fee
Warrants ......... 750,000 $ 3.00 December 31, 2007 December 31, 2011


* Crestview Warrants have been adjusted per anti-dilution provision in
warrant agreement

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


91



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

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

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

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

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

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

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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


92



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

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



2007 2006
--------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------

Financial Assets
Cash and cash equivalents $ 9,854,351 $ 9,854,351 $ 2,180,885 $ 2,180,885
Accounts receivable ..... 8,649,985 8,649,985 3,712,779 3,712,779
Restricted cash ......... 29,146,293 29,146,293 17,246,751 17,246,751

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



13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

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

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

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

* Less than 10%

14. INCOME TAXES

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


93



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

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

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

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

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


94



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

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

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


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

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

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

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

15. EARNINGS PER SHARE

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

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


95



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

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



2007 2006 2005
------------ ------------ ------------

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

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

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

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



16. STOCK-BASED COMPENSATION PLANS

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

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

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


96



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

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

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


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

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



WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
OPTIONS EXERCISE CONTRACTUAL INTRINSIC
OUTSTANDING PRICE TERM (IN YEARS) VALUE
-------------- -------------- -------------- --------------

Outstanding at December 31, 2006 ........ 1,323,625 $ 6.90 8.81 505,825
Granted ................................. 390,000 $ 3.53 -- --
Exercised ............................... -- $ -- -- --
Forfeited ............................... (145,500) $ 5.19 -- --
Expirations ............................. (2,500) $ 6.95 -- --
-------------- -------------- -------------- --------------
Outstanding at December 31, 2007 ........ 1,565,625 $ 6.22 8.19 $ 1,053,320
==============
Vested or expected to vest at December
31, 2007 ............................. 1,405,163 $ 6.18 7.77 $ 474,819
==============
Exercisable ............................. 611,564 $ 5.99 7.61 $ 359,458
==============



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


97



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

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

17. COMMITMENTS AND CONTINGENCIES

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

18. RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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


98



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

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

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

19. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR INFORMATION

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


99



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

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


SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2007


NCC NCA ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------

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




100



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


SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2007


NCC NCA ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------

Revenues
Coal sales .................... $ 79,038,521 $ 12,904,229 $ -- $ 91,942,750
Other revenues ................ 1,079,213 -- (241,935) 837,278
------------- ------------- ------------- -------------
Total revenues ............. 80,117,734 12,904,229 (241,935) 92,780,028
------------- ------------- ------------- -------------

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

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

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

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




101



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


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


NCC NCA ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------


Cash Flows from Operating Activities:

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

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

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

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


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




102



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

20. EVENTS SUBSEQUENT TO DECEMBER 31, 2007

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

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

21. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data for 2007 and 2006 is as follows:



Three Months Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
2007 2007 2007 2007
------------ ------------ ------------ ------------

Total revenues ......... $ 19,034,945 $ 18,882,445 $ 20,857,295 $ 34,005,343
Operating loss ......... (4,266,461) (4,666,536) (5,364,612) (3,050,924)
Net loss attributable to
common shareholder .... (6,169,393) (7,654,813) (7,837,398) (8,560,008)
Loss per common share:
Basic .................. $ (0.35) $ (0.38) $ (0.39) $ (0.34)
Diluted ................ $ (0.35) $ (0.38) $ (0.39) $ (0.34)





Three Months Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
2006 2006 2006 2006
------------ ------------ ------------ ------------

Total revenues ......... $ 20,468,732 $ 24,125,155 $ 21,428,881 $ 21,494,319
Operating loss ......... (6,150,928) (3,545,168) (1,607,123) (5,154,091)
Net loss attributable to
common shareholder ... (7,919,493) (5,019,870) (3,704,151) (7,807,629)
Loss per common share:
Basic .................. $ (0.56) $ (0.33) $ (0.23) $ (0.48)
Diluted ................ $ (0.56) $ (0.33) $ (0.23) $ (0.48)




103



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

None

ITEM 9A(T). CONTROLS AND PROCEDURES.

CONTROLS AND PROCEDURES

Members of our management, including our President and Chief Executive
Officer, Daniel A. Roling, and Chief Financial Officer, Michael R. Castle, have
evaluated the effectiveness of our disclosure controls and procedures, as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of December
31, 2007, the end of the period covered by this report. Based upon that
evaluation, Messrs. Roling and Castle concluded that our disclosure controls and
procedures were effective as of December 31, 2007.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

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

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

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


104



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting
or in other factors identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the
fourth quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION.

None.


105



PART III

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

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

ITEM 11. EXECUTIVE COMPENSATION.

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

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

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

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

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

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


106



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

1. CONSOLIDATED FINANCIAL STATEMENTS

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

2. FINANCIAL STATEMENT SCHEDULES

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

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

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

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


107



SIGNATURES

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


NATIONAL COAL CORP.

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


POWER OF ATTORNEY

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

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

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

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


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


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


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


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


108



INDEX TO EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

4.1 Amended and Restated 2004 National Coal Corp. Option Plan. (8)

4.2 Indenture dated as of December 29, 2005 among National Coal Corp., its
subsidiaries, and WellsFargo Bank, National Association, a national
banking association, as trustee. (9)

4.3 Security Agreement dated as of December 29, 2005, by and among National
Coal Corp., its subsidiaries, in favor of Wells Fargo Bank National
Association, in its capacity as trustee under the Indenture dated
December 29, 2005. (9)

4.4 Debt Registration Rights Agreement, dated as of December 29, 2005 by
and between National Coal Corp., its subsidiaries, and Jefferies &
Company, Inc. (9)

4.5 Equity Registration Rights Agreement, dated as of December 29, 2005 by
and between National Coal Corp. and Jefferies & Company, Inc. (9)

4.6 Warrant Agreement dated as of December 29, 2005 between National Coal
Corp., and Wells Fargo Bank, National Association as warrant agent. (9)

4.7 Intellectual Property Security Agreement dated as of December 29, 2005
by and among National Coal Corp., its subsidiaries, in favor of Wells
Fargo Bank, N.A. as collateral agent. (9)


109



EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------------------
4.8 Registration Rights Agreement, dated October 19, 2007, between National
Coal Corp. and the Holders named therein. (2)

4.9 Warrant Agreement, dated as of October 19, 2007, between National Coal
Corp. and the Holders. (2)

4.10 Form of Subscription Agreement, dated February 28, 2007, by and between
National Coal Corp. and the investors identified on the signature page
therein. (10)

4.11 Form of Registration Rights Agreement, dated February 28, 2007, by and
between National Coal Corp. and the investors identified on the
signature page therein. (10)

4.12 Registration Rights Agreement, dated December 27, 2007, between
National Coal Corp. and Centaurus Energy Master Fund, LP. (11)

4.13 Warrant Agreement, dated December 31, 2007, between National Coal
Corp., Steelhead Offshore Capital, LP, Big Bend 38 Investments L.P. and
J-K Navigator Fund, L.P. (12)

10.1 Form of Indemnification Agreement of Registrant. (7)

10.2 Preferred Stock and Warrant Purchase Agreement by and between National
Coal Corp. and the persons listed on Schedule I thereto, with respect
to Registrant's Series A Cumulative Convertible Preferred Stock and
Warrants to Purchase Common Stock dated August 31, 2004, including Form
of Warrant. (3)

10.3 Investor Rights Agreement by and between National Coal Corp. and the
Purchasers listed on Schedule I thereto, dated August 31, 2004. (7)

10.4 Amended Employment Agreement by and between National Coal Corporation
and Jon E. Nix dated October 1, 2004. (7)*

10.4.1 Separation Agreement among National Coal Corp., National Coal
Corporation and Jon E. Nix, dated September 11, 2006. (13)*

10.5 Employment Agreement by and between National Coal Corporation and T.
Michael Love, dated November 14, 2005. (9)*

10.5.1 Separation Agreement, dated as of November 28, 2007, between T. Michael
Love and National Coal Corp. (14)*

10.5.2 Consulting Agreement, dated as of November 28, 2007, between T. Michael
Love and National Coal Corp. (14)*

10.6 Employment Agreement by and between National Coal Corporation and
Kenneth Hodak, dated September 20, 2005. (9)*

10.7 Amended Employment Agreement by and between National Coal Corporation
and Charles W. Kite dated September 16, 2004. (7)*

10.8 Amended Employment Agreement by and between National Coal Corporation
and Joseph A. Davis, Jr. dated September 16, 2004. (7)*

10.9 Amended Employment Agreement by and between National Coal Corporation
and William R. Snodgrass dated October 1, 2004. (7)*

10.10 Form of Note and Warrant Purchase Agreements by an among National Coal
Corp., National Coal Corporation, and each of Crestview Capital Master,
LLC, Big Bend Investments, L.P., and CCA (US) Fund I, L.P., dated March
10, 2005, including form of Secured Promissory Note and form of Common
Stock Purchase Warrant attached as exhibits thereto. (15)

10.11 Form of Amendment Number One to Secured Promissory Note by and between
National Coal Corporation, and each of Crestview Capital Master, LLC,
Big Bend Investments, L.P., and CCA (US) Fund I, L.P., dated August 10,
11 and 12, 2005, respectively. (16)


110



EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------------------
10.12 Security Agreement by and between National Coal Corporation and
Crestview Capital Master, LLC as agent for itself, Big Bend Investment,
L.P. and CCA (US) Fund I, L.P., dated March 10, 2005. (15)

10.13 Continuing and Unconditional Guaranty of National Coal Corp., dated
March 10, 2005, guaranteeing full payment and performance of the Notes
issued by National Coal Corporation and the Security Agreement executed
by National Coal Corporation pursuant to the Note and Warrant Purchase
Agreements dated March 10, 2005. (15)

10.14 Installment Sale Contract by and between National Coal Corporation and
Whayne Supply Company, effective July 1, 2005. (16)

10.15 Installment Sale Contract by and between National Coal Corporation and
Stowers Machinery Corporation (twenty vehicles), effective July 1,
2005. (16)

10.16 Installment Sale Contract by and between National Coal Corporation and
Stowers Machinery Corporation (three vehicles), effective July 1, 2005.
(16)

10.17 Asset Purchase Agreement (Baldwin Facility), dated as of May 8, 2005,
by and between National Coal Corporation and LCC Tennessee, LLC. (16)

10.18 Separation Agreement by and between the Company and Robert Chmiel,
dated March 21, 2005. (15)*

10.19 Separation Agreement between National Coal Corp. and Mark A. Oldham,
dated November 14, 2005. (9)*

10.20 Employment Agreement, dated May 25, 2006, by and among National Coal
Corporation, National Coal Corp., and Daniel A. Roling. (17)*

10.21 Credit Agreement, dated October12, 2006, among National Coal Corp.,
National Coal Corporation, the Lenders, and Guggenheim Corporate
Funding, LLC. (18)

10.22 Security and Guarantee Agreement, dated October 12, 2006, among
National Coal Corporation, National Coal Corp., Subsidiary Grantors and
Guggenheim Corporate Funding, LLC. (18)

10.23 Intercreditor Agreement, dated as of October 12, 2006, by and between
Guggenheim Corporate Funding LLC, and Wells Fargo Bank, N.A., and
acknowledged and agreed to by National Coal Corporation, National Coal
Corp., and Guarantors. (18)

10.24 Form of Subscription Agreement between National Coal Corp. and the
Investors to be named therein. (2)

10.25 Note Purchase Agreement, dated October 19, 2007, by and among National
Coal of Alabama, Inc., TCW Energy Fund XIV, L.P., TCW Energy Fund
XIV-A, L.P., TCW Energy Fund XIV (Cayman), L.P., and TCW Asset
Management Company as Administrative Agent. (2)

10.26 Security Agreement, dated October 19, 2007, by and among National Coal
of Alabama, Inc., the Grantors named therein and TCW Asset Management
Company as Administrative Agent. (2)

10.27 Waiver and Amendment No. 3, dated as of October 19, 2007 to the Credit
Agreement, dated as of October 12, 2006 (as previously amended), among
National Coal Corp., National Coal Corporation, the Lenders party
thereto, and Guggenheim Corporate Funding, LLC, as administrative
agent. (2)


111



EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------------------
10.28 Amendment, dated as of March 30, 2007, to the Credit Agreement, dated
as of October 12, 2006, among National Coal Corp., National Coal
Corporation, the Lenders party thereto from time to time, and
Guggenheim Corporate Funding, LLC, as administrative agent and as
collateral agent for the Lenders. (19)

10.29 Waiver dated as of November 16, 2007 to the Credit Agreement among
National Coal Corp., National Coal Corporation, and the lenders party
thereto. (20)

10.30 Employment Offer Letter, dated November 28, 2007, between Michael
Castle and National Coal Corp. (14)*

10.31 Form of Subscription Agreement, dated December 20, 2007, between
National Coal Corp. and each of the GR Fund Investors. (11)

10.32 Subscription Agreement, dated December 27, 2007, between National Coal
Corp. and Centaurus Energy Master Fund, LP. (11)

14.1 National Coal Corp. Code of Ethical Conduct. (21)

21.1 Subsidiaries of National Coal Corp.

23.1 Consent of Gordon, Hughes & Banks, LLP.

23.2 Consent of Ernst & Young, LLP.

31.1 Certification of Principal Executive Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Principal Financial Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-------------
* Indicates a management contract or compensatory plan.

(1) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006.

(2) Incorporated by reference to our Current Report on Form 8-K, filed on
October 25, 2007.

(3) Incorporated by reference to our Current Report on Form 8-K, filed
February 12, 2008.

(4) Incorporated by reference to our Current Report on Form 8-K, filed
February 28, 2008.

(5) Incorporated by reference to our Registration Statement on Form 10-SB
filed June 25, 1999.

(6) Incorporated by reference to our Current Report on Form 8-K, filed
August 7, 2003.

(7) Incorporated by reference to our Registration Statement on Form SB-2
(File No. 333-120146).

(8) Incorporated by reference to our Current Report on Form 8-K filed on
July 27, 2007.

(9) Incorporated by reference to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.

(10) Incorporated by reference to our Registration Statement on Form S-3
(File No. 333-142403).

(11) Incorporated by reference to our Current Report on Form 8-K, filed
December 28, 2007.

(12) Incorporated by reference to our Current Report on Form 8-K, filed
January 3, 2008.

(13) Incorporated by reference to our Current Report on Form 8-K, dated
September 11, 2006.

(14) Incorporated by reference to our Current Report on Form 8-K, filed
December 3, 2007.

(15) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2005.

(16) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2005.


112



(17) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006.

(18) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2006.

(19) Incorporated by reference to our Current Report on Form 8-K, filed
April 3, 2007.

(20) Incorporated by reference to our Current Report on Form 8-K, filed
November 21, 2007.

(21) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004.


113


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