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Article by DailyStocks_admin    (08-12-08 08:10 AM)

Filed with the SEC from July 31 to Aug 6:

National Coal (NCOC)
Small Ventures USA plans to discuss the possibility of a buyout of the coal-mining company, contingent on the participation of management. Small Ventures said it believed that National Coal's stock was undervalued, due to an increase in the market value of coal and related futures contracts. Small Ventures has not yet had substantive conversations regarding a buyout with the company, nor has it made substantial steps toward arranging such a buyout with other parties. Small Ventures currently holds 2,011,843 shares (6.2%).

BUSINESS OVERVIEW

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.

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.

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.

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.

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.

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. 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 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.

CEO BACKGROUND

Robert Heinlein has served as a director since April 1, 2005. Since 2003 Mr. Heinlein has worked as a business consultant with respect to Sarbanes-Oxley regulations. From August 2000 through 2003, Mr. Heinlein was a private investor. From June 1994 through August 2000, Mr. Heinlein served in various management positions with Boca Research, Inc., including as Vice President of Finance and Chief Financial Officer from August 1999 to August 2000 and as Vice President, Corporate Comptroller and Treasurer from July 1998 to August 1999. Mr. Heinlein is a Certified Public Accountant. Mr. Heinlein has a Bachelor’s and Master’s degree in accounting from Florida Atlantic University.

Gerald Malys has served as a director since November 2006. Mr. Malys is Senior Vice President, Finance and Chief Financial Officer of Apex Silver Mines Limited, a position he has held since June 2006. Mr. Malys was a private investor from 1999 to June 2006. Prior to this position, Mr. Malys was employed in positions of increasing authority by Cyprus Amax Minerals Company from 1985 to 1999. He served as a director of Amax Gold Inc. from 1993 to 1998 and of Kinross Gold Corporation from 1998 to 1999. Mr. Malys has a Bachelor of Science degree in accounting from Gannon University, is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.

Daniel Roling is President and Chief Executive Officer of National Coal Corp., positions he has held since February 2007 and August 2006, respectively. Prior to joining the Company, Mr. Roling served as a financial analyst in the metals and mining industries for more than 25 years. He joined Merrill Lynch in 1981, and was ranked on both the Institutional Investor’s All-American Research Team and the Greenwich Associates’ poll. Mr. Roling is also a long standing member of the National Coal Council. He holds a bachelor’s degree in accounting from the University of Iowa and an MBA from the University of Kansas. He is a certified public accountant (CPA) a Chartered Financial Analyst (CFA) and a member of the American Institute of Certified Public Accountants.

Kenneth Scott has served as a director since April 1, 2005, and as Chairman of the Board since June 25, 2007. Mr. Scott has been a Partner with Colonnade Strategies, LLC a business consulting firm, since 2002. Prior to joining Colonnade Strategies, LLC, Mr. Scott was the Executive Vice President for Europe and Vice President, Energy Industry, for Perot Systems Corporation, which provides technology-based business solutions to help organizations worldwide control costs and cultivate growth. Mr. Scott worked for Perot Systems Corporation from 1998 through 2002.

Michael R. Castle has served as our Senior Vice President and Chief Financial Officer since December 2007, and serves as our principal financial and accounting officer. From 1999 until joining us, Mr. Castle was in professional practice specializing in management advisory and consulting services. In his practice he offered various financial and operational skill sets designed to help companies grow, acquire, or sell coal mining and natural gas properties throughout the Kentucky, West Virginia, Ohio, Tennessee and Virginia region. He also provided income tax planning and compliance services for coal mining and coal industry related businesses. From 1991 to 1999, Mr. Castle served as Vice President, Chief Financial Officer of Quaker Coal Company, Inc., a 12-million ton per year Kentucky-based coal mining company with over 1,000 employees. Mr. Castle is a Certified Public Accountant and received a B.S. degree in Accounting from the University of Kentucky.

Charles Kite has served as our General Counsel since May 2004, and served as a director from February 2003 until May 2004. Prior to becoming our General Counsel, Mr. Kite, an attorney since 1973, was our outside corporate counsel, and since 1990 was engaged in general legal practice with the Tennessee law firm of Kite, Bowen & Associates, P. A., where he specialized in commercial business representation, tax representation and litigation, estate planning, and probate matters. From 1985 to 1990, Mr. Kite was a senior partner with the law firm of Brabson, Kite & Vance in Sevierville, Tennessee. Prior to that, he served as an associate at the law offices of Heiskell, Donelson, Bearman, Adams, Williams & Kirsch from 1983 to 1985. Mr. Kite served as Senior Trial Attorney with the Chief Counsel’s Office of the Internal Revenue Service from 1977 to 1983. He graduated from Carson Newman College in 1967 with a Bachelor of Arts degree, and received his Juris Doctorate degree from the University of Tennessee in 1973. Charles Kite is the stepfather of Jon Nix’s spouse.

William Snodgrass has served as our Chief Operating Officer since August 2007, and as our Senior Vice President of Business Development since March 2007. Mr. Snodgrass served as our Operations Manager from July 2003 until March 2006, and as our Chief Operating Officer from May 2006 until March 2007. Mr. Snodgrass also served as our consultant from February 2003 to July 2003. Prior to joining us, Mr. Snodgrass served as superintendent and area manager for Tennessee Mining, Inc., a subsidiary of Addington Enterprises, Inc., one of the largest coal companies in the nation, a position he held from 1994 until February 2003. Mr. Snodgrass has extensive knowledge and expertise in the coal mining industry and has been involved in numerous mining projects in the Kentucky and Tennessee areas. Mr. Snodgrass has over 20 years of experience in the coal industry.

MANAGEMENT DISCUSSION FROM LATEST 10K

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.

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.

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 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.

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.

RESULTS OF OPERATIONS

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.

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.

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.

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 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 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).

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.

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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 AND THREE MONTHS ENDED

MARCH 31, 2007

PRODUCTION

REVENUES

For the three months ended March 31, 2008, approximately 82.7% of coal sales were made to four utilities and four industrial customers under contracts and open purchase order arrangements with original terms of twelve months or longer. The remaining coal sales for the three month period were made under short term contracts or purchase orders.

The increase in revenue from coal sales for the three months ended March 31, 2008 as compared to the same period in 2007 was primarily the result of the addition of National Coal of Alabama which sold 293,650 tons of coal during the period at an average price of $66.49 per ton. A $2.8 million decline in coal sales at our Tennessee and Kentucky operations was primarily the result of a 65,250 ton decline in volume net of an average $1.58 increase in the per ton sales price to an average of $52.66 for the three months ended March 31, 2008.

Other revenues representing less than 1% of total revenues consisted primarily of fees charged to another coal producer for use of our train loading facilities in Southeast Kentucky which were sold on March 31, 2008.

Total cost of sales increased 97.5% during the three months ended March 31, 2008 as compared to the same three month period in 2007 primarily as a result of the addition of National Coal of Alabama which sold 293,650 tons of coal at an average cost per ton sold of $56.25. An increase in total cost of sales at our Tennessee and Kentucky operations resulted in an average cost per ton sold of $60.15, a 25.9% increase as compared to the three months ended March 31, 2007 on a per ton basis. Our Tennessee and Kentucky operations experienced large increases in the cost of labor, explosives, equipment repair, and fuel while experiencing deceases in both production and sales which resulted in the significant increase in the average cost per ton sold. A decreased reliance on purchased coal to meet commitments in the three months ended March 31, 2008 as compared to the same period in 2007 resulted in a 64.0% decline in the overall cost of purchased coal.

The 32.6% increase in depreciation, depletion, amortization, and accretion expense for the three months ended June 30, 2008 as compared to the comparable period in 2007, is attributable primarily to the addition of National Coal of Alabama which sold 293,650 tons of coal with an associated average cost of depreciation, depletion, amortization, and accretion per ton of $5.78 as compared to our Tennessee and Kentucky operations which recognized depreciation, depletion, amortization, and accretion of $10.28 per ton, a 4.4% increase over the three months ended March 31, 2007.

The 12.2% decline in general and administrative expenses for the three months ended March 31, 2008 as compared to the same period in the previous year is primarily attributable to the effect of approximately $434,000 of related party option expense which was reflected in the three months ended March 31, 2007.

OTHER INCOME (EXPENSE)

The 132.3% increase in interest expense for the three months ended March 31, 2008 as compared to the same three month period in 2007, was primarily the result of the October 19, 2007 issuance of our 12.0% Senior Secured Notes the proceeds of which were used to purchase Mann Steel Products, Inc.

Interest income declined 23.3% to approximately $229,000 in the 2008 period as a result of lower average cash balances. Other income (expense) reflected a loss of approximately $381,000 on the sale of our Straight Creek properties, a gain of approximately $148,000 on the exchange of $3.0 million of our 10.5% Senior Secured Notes due 2010, and a loss of approximately $570,000 on the write-off of deferred debt issuance costs related to the partial extinguishment of our Term Loan Credit Facility.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2008, we had cash and cash equivalents of approximately $10.0 million, negative working capital of approximately $176,000, and cash flows provided by operations of approximately $2.7 million for the three months then ended. At March 31, 2008, we had stockholders' equity of $1.7 million and incurred net losses of $10.7 million, excluding preferred stock dividends, for the three months then ended. We expect that we may continue to incur net losses into the foreseeable future which would reduce our stockholders' equity.

We invested $750,000 in equipment and mine development during the three months ended March 31, 2008 including $74,000 purchased through equipment financing arrangements. We intend to make approximately $15.5 million of capital expenditures during the remainder of 2008 to expand operations and an additional approximately $900,000 to maintain existing assets.

Our operating plan for the remainder of 2008 includes cash receipts from sales committed under contracts or open purchase order arrangements with long time customers, the release of restricted cash from the March 31, 2008 sale of our Southeast Kentucky properties, and the sale of common stock 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. 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. Accordingly, on May 12, 2008, we sold 2,332,000 shares of our common stock at a price of $4.65 in a private placement for gross proceeds to us of $10,843,800. We also intend to pursue a $10 million revolver type credit facility during 2008 to provide additional working capital as needed.

Included in cash and cash equivalents at March 31, 2008 is approximately $5.1 million held at National Coal of Alabama, Inc. 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 the remainder of fiscal 2008, we anticipate National Coal of Alabama's operations to provide limited cash for use in our other operations.

On March 31, 2008 we used a portion of the proceeds from the sale to repay $5.0 million of the $10.0 million Term Loan Credit Facility entered into in October 2006 with Guggenheim Corporate Funding, L.L.C. as administrative agent and accrued interest of $50,000. On April 2, 2008, we repaid the remaining $5.0 million and accrued interest of $51,667 which indebtedness otherwise would have matured in December 2008. The repayment resulted in a loss of approximately $570,000 in each of the three months ended March 31, 2008 and the subsequent quarter from the write-off of deferred financing costs associated with the Term Loan Credit facility. The loss is reflected in OTHER (EXPENSE) INCOME, NET on our condensed consolidated statement of operations.

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