CORPORATE OVERVIEW

National Coal Corp. engages principally in the business of mining coal in Eastern Tennessee and Southeastern Kentucky. We own the coal mineral rights to approximately sixty-five thousand (65,000) acres and lease another approximate twelve thousand one hundred (12,100) acres in Tennessee, and own the coal mineral rights to approximately eleven thousand seven hundred (11,700) acres and lease another approximate eighteen thousand two hundred (18,200) acres in Kentucky. We commenced mining coal in July 2003 from a surface mine in Tennessee. At December 31, 2004, we were extracting coal from four deep mines and one surface mine.

We engage in coal production by locating, assembling, leasing, assessing, permitting and developing coal properties in Eastern Tennessee and Southeastern Kentucky. After obtaining permits from the U.S. Department of the Interior, Office of Surface Mining ("OSM") and posting reclamation bonds, we mine our properties for the extraction of coal minerals, and then sell the coal on a per ton basis at previously negotiated rates, primarily to state run utility companies. The reclamation bonds typically take the form of letters of credit or direct cash deposits with OSM. At December 31, 2004, we had $257,500 on deposit with OSM, had approximately $4.27 million of cash invested in certificates of deposit, against which irrevocable bank letters of credit are written in favor of OSM and had posted a $700,000 letter of credit in favor of OSM secured by our executive office building.

We typically sell our coal for a specified tonnage amount and at a negotiated price pursuant to short-term and long term contracts. We also price coal sales on a one-day or one-shipment tonnage amount. The price per ton for these types of sales typically fluctuates in direct correlation to the price per ton of coal quoted on the New York Mercantile Exchange, referred to as the "spot price." We intend to continue to reduce the price volatility for our coal by entering long-term supply contracts (contracts in excess of one year) for a majority of our coal production, which generally will provide us a fixed price for our coal over the term of the contract. We will continue to use the spot market to sell surplus coal produced above our long-term contract commitments.

We also sell coal that we purchase from third party coal producers on a case by case basis. We only enter into these transactions when the price per ton paid to these third party producers is below the price per ton at which we are able to sell the coal, usually from short term contracts. Additionally, when capacity is available, we charge third party coal producers a negotiated price per ton for their use of our load-out facility located in Turley, TN. This load-out facility allows easy, direct access to load previously mined coal onto rail cars for shipment to their customers. We do not expect the sale of coal purchased from third party producers or the rental to third parties of our load-out facility to represent a material portion of our future business.

During calendar 2004, we made significant advancements towards the realization of our long term business strategy by growing our mining operations through both acquisitions and organic growth. We funded this growth primarily by closing multiple debt and equity financing transactions. As a result of our growth, we had more substantial mining operations as compared to calendar 2003, and as such were able to sign a number of long term contracts with both utility and industrial customers. Our 2004 highlights include:

ACQUISITIONS: We acquired the following assets:

o In April 2004, we acquired from U.S. Coal, Inc., mining permits, a wash plant, a rail load-out facility, and mining equipment for an aggregate purchase price of $4.2 million plus the assumption of certain liabilities;

o In May 2004, we acquired land from Cumberland Timber Company, LLC for an aggregate purchase price of $631,000 payable in cash and stock;

o In October 2004, we acquired from Robert Clear Coal Corporation, mining assets including mining permits, a crusher and tipple, and mining equipment for an aggregate purchase price of $5.5 million plus the assumption of certain liabilities and the obligation to replace $3.9 million of the seller's reclamation bonds; and

o In November 2004, we acquired from Appalachian Fuels, LLC, mining permits, a wash plant, a rail load-out facility, and mining equipment for an aggregate purchase price of $12.5 million plus the assumption of certain liabilities and the obligation to replace $6.5 million of the seller's reclamation bonds.

FINANCING ACTIVITIES: We raised the following proceeds from debt and equity financings:

o In February 2004, we raised gross proceeds of $2.75 million from the sale of 1,250,000 shares of common stock;

o In April and May 2004, we raised gross proceeds of $7.5 million from the sale of debentures and common stock purchase warrants;

o In July 2004, we borrowed $663,300 from a bank;

o In August 2004, we issued $16.0 million of Series A convertible preferred stock and common stock purchase warrants for gross proceeds of $11.3 million in cash proceeds and the cancellation of $4.7 million of the debentures issued in April and May 2004;

o In August 2004, we raised gross proceeds of $3.0 million from the sale of debentures convertible into Series A preferred stock;

o In November 2004, we obtained a $21.0 million senior secured credit facility, pursuant to which we immediately borrowed gross proceeds of $15.0 million; and

o In December 2004, we raised gross proceeds of $3.6 million from the sale of additional Series A convertible preferred stock and common stock purchase warrants upon the exercise of additional purchase rights granted in our August 2004 financing.

LONG-TERM CONTRACTS. During 2004, we signed six supply contracts with terms of at least one year with 3 utility and 3 industrial customers, pursuant to which we have committed to sell 984,000, 660,000, 600,000, and 120,000 tons of coal during calendar years 2005 through 2008, respectively.

The coal industry has been highly competitive with very low margins in the past several years. Recently, the surge in prices for natural gas has made coal more competitive with that alternative energy source which has enabled coal-fired power plants, using the latest clean air compliant scrubber technology, to be price competitive with natural gas-fired plants. We believe this has and will continue to cause increased demand for coal for the foreseeable future, resulting in higher prices and improved margins for our product. However, the price of coal is volatile, and there can be no assurances that the price of coal will not drop below current levels. To reduce our exposure to fluctuations in the price of coal, we intend to maintain long term contracts with respect to a majority of our coal production.

We estimate that our cost of commencing mining operations at a new mine is approximately $500,000 to $750,000, including the cost of reclamation bonds. Presently we do not generate sufficient cash from operations to fund new mine development and our expansion into new mines therefore depends on our ability to raise the required funds through debt or equity offerings. If we are not able to raise additional financing or if such financing is not available on acceptable terms, we may be unable to expand our mining operations beyond current production levels.

Our historical operations prior to April 30, 2003 reflect only the operations of National Coal Corporation, a Tennessee corporation. 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 Corp. 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 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, accordingly, are no longer in the exploration stage. As a result of the reorganization of the group and the commencement of operating activities, our results for the eleven months from inception (January 30, 2003) to December 31, 2003 are not comparable to those for the twelve months ended December 31, 2004.

COAL INDUSTRY BACKGROUND

Coal is one of the world's most abundant, efficient and affordable natural resources, and is used primarily as fuel for the generation of electricity. According to the Energy Information Administration, or EIA, a division of the Department of Energy, greater than 51% of all electricity consumed in the United States in 2003 was generated using coal.

As the table below indicates, coal fueled more electricity production in the United States in recent years than all other fuel sources combined.

ELECTRICITY FUEL SOURCES (BASED ON NET GENERATION):

1990 1995 2001 2002 2003 ---------- ---------- --------- --------- ---------

Coal............. 52.5% 51.0% 50.9% 50.2% 51.3% Nuclear.......... 19.0 20.1 20.6 20.2 19.8 Hydro............ 9.6 9.3 5.8 6.8 7.1 Natural Gas...... 12.3 14.8 17.1 17.9 16.3 Other............ 6.6 4.8 5.6 4.9 5.5 ---------- ---------- --------- --------- --------- Total........ 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========= ========= ========= ---------- Source: Department of Energy's Energy Information Administration Monthly Energy Review, June 2004.

The United States is the second largest coal producer in the world, exceeded only by China. Other leading coal producers include Australia, India and South Africa. The United States has the largest coal reserves in the world, with an estimated 250 years of supply based on current usage rates. United States coal reserves are more plentiful than United States oil or natural gas reserves, with coal representing more than 85% of the nation's fossil fuel reserves.

United States coal production has nearly doubled during the past 30 years. Based on statistics reported by EIA, in 2003, total United States coal production was estimated to be 1.07 billion tons. Approximately 67% of United States coal is produced by surface mining methods, while the remaining 33% is produced by underground mining methods.

The United States coal industry operates under a highly developed regulatory regime that governs all mining and mine safety activities, including land reclamation, which requires mined lands to be restored in accordance with plans submitted by us and approved by OSM.

COAL MARKETS

The EIA expects domestic consumption of coal by electric generators to grow at an annual rate of 1.4% per year from 2001 through 2025, predicated on natural gas price assumptions of $2.88 per million British Thermal Unit, or Btu, in 2005 and $3.30 in 2010. Demand from domestic electric generators accounts for more than 92% of domestic coal consumption. The EIA projects annual coal use growth by electric generators of nearly 400 million tons by 2025.

U.S. COAL CONSUMPTION BY SECTOR

Coal is the primary resource used in the United States for the generation of electricity. It is also used by steel companies to make products with furnaces, by industrial users for heat and power generation, and a variety of manufacturing and processing facilities such as paper mills, chemical plants and cement manufacturers. The breakdown of coal consumption by major sector for 2003 and 2002 is as follows:

U.S. COAL PRODUCTION BY MAJOR SECTOR (IN MILLION TONS):

2003 2002 ----------------------- ---------------------- % OF % OF TONS TOTAL TONS TOTAL ---------- ---------- --------- ---------

Electric power plants.... 1004.3 91.7% 977.5 91.2% Industrial plants........ 86.2 7.9% 84.4 8.4% Residential/Commercial... 4.2 0.4% 4.4 0.4% ---------- ---------- --------- --------- Total................ 1,094.7 100.0% 1,006.4 100.0% ========== ========== ========= ========= ---------- Source: Department of Energy's Energy Information Administration, Annual Coal Report 2003.

SOURCES OF COAL DEMAND GROWTH

In the aggregate, coal-fueled plants currently utilize approximately 70% of their capacity, although the optimal sustainable capacity utilization is estimated at 85% for a typical plant, and most plants can run at higher rates for short periods. An increase from 70% capacity utilization to 85% capacity utilization would translate into approximately 200 million tons of additional annual coal consumption.

In addition to expected greater utilization of existing plants, a number of new coal-fueled generating plants have been announced in recent years to meet the United State's needs for inexpensive base-load energy generating capacity.

REGIONAL COAL MARKETS

Coal is mined from coalfields throughout the United States, with the major production centers located in the Powder River Basin, Central/Southern Appalachia, Northern Appalachia, the Illinois Basin and in other western coalfields. The breakdown of historical and projected coal production by supply region is as follows:

U.S. COAL PRODUCTION BY SUPPLY REGION (IN MILLION TONS):

HISTORICAL PROJECTED ------------- ----------------------------- 2001 2003 2005 2010 2015 2020 ----- ----- ----- ----- ----- -----

Powder River Basin ............. 408 400 410 509 563 632 Central/Southern Appalachia .... 290 250 272 286 286 280 Northern Appalachia ............ 143 125 131 124 120 128 Illinois Basin ................. 95 88 103 102 104 107 Other Western US ............... 194 206 200 200 205 204 Other .......................... 9 2 9 9 8 8 ----- ----- ----- ----- ----- ----- Total ...................... 1,139 1,071 1,125 1,230 1,286 1,359 ===== ===== ===== ===== ===== ===== ---------- Source: Energy Information Administration, Annual Energy Outlook 2004.

We operate in the Central/Southern Appalachia region. The Central/Southern Appalachia region contains coalfields in eastern Kentucky, Tennessee, Alabama, southwestern Virginia, and central and southern West Virginia. Production in Central/Southern Appalachia has decreased from approximately 305 million tons in 1996 to approximately 250 million tons in 2003. Production declined in all major

sections of Central/Southern Appalachia except for southern West Virginia, which has grown due to the expansion of more economically attractive surface mines. The region has experienced significant consolidation in the past several years due to modest demand growth and strong competition from western coal. Central/Southern Appalachian operators market approximately 67% of their coal to electric generators, principally in the southeastern United States. Central/Southern Appalachia producers also sell extensively in the export market and to industrial customers. The coal of Central/Southern Appalachia has an average heat content of 12,500 Btu per pound and generally has low sulfur content.

COAL CHARACTERISTICS

There are four types of coal: lignite, sub-bituminous, bituminous and anthracite. Each has characteristics that make it more or less suitable for different end uses. In general, coal of all geological composition is characterized by end use as either "steam coal" or "metallurgical coal," sometimes known as "met coal." Steam coal is used by electricity generators and by industrial facilities to produce steam, electricity or both. Metallurgical coal is refined into coking coal, which is used in the production of steel. Heat value and sulfur content, the two most important coal characteristics, determine the best end use of particular types of coal. Our coal is generally characterized as steam coal.

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 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 in this document, 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 this document "low sulfur" is referred 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 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 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 because electric generating plants 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. Moisture content in coal, as sold, can range from approximately 5% to 30% of the coal's weight.

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.

COAL MINING TECHNIQUES

Coal mining operations commonly use four distinct techniques to extract coal from the ground, and one relatively new technique. The most appropriate 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; consequently, technological improvements have resulted in increased productivity. The four most common mining techniques are continuous mining, longwall mining, truck-and-shovel mining, and dragline mining, and the newer technique is highwall mining. We use continuous mining and truck-and-shovel mining techniques and, subject to our ability to acquire adequate financing, we anticipate implementing highwall mining within the next six months.

CONTINUOUS MINING. Continuous mining is an underground mining method in which main airways and transportation entries are developed and remote-controlled mining equipment, referred to as "continuous miners", extract coal from "rooms," leaving "pillars" to support the roof. Shuttle cars transport coal from the face to a conveyor belt for transport to the surface. This method is often used to mine smaller coal blocks or thin seams, and seam recovery is typically approximately 50%. Productivity for continuous mining averages 25 to 50 tons per miner shift.

TRUCK-AND-SHOVEL MINING. Truck-and-shovel mining is an open-cast method that uses large electric-powered shovels to remove overburden, which is used to backfill pits after coal removal. Shovels load coal in haul trucks for transportation to the preparation plant or rail load-out. Seam recovery using the truck-and-shovel method is typically 90%. Productivity depends on 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 to thirty to 80 tons per miner shift in Eastern regions of the United States.

HIGHWALL MINING. Highwall mining is a method of coal mining 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 miner to an open-air installation for stockpiling and transport. This process forms a series of parallel, unsupported drives. It is vital that the coal pillars remaining between adjacent drives are capable of supporting the overburden structure.

It is generally easier to mine coal seams that are thick and located close to the surface than 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 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 protrudes more deeply into the earth, requiring removal of more material over the seam, known as the "overburden." For example, many seams of coal in the Midwest are five to ten feet thick and located hundreds of feet below the surface. In contrast, seams in the Powder River Basin of Wyoming may be eighty feet thick and located only fifty feet below the surface.

Once the raw coal is mined, it is often crushed, sized and washed in preparation plants where the 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.

TECHNOLOGY

Coal mining technology is continually evolving and improving, among other things, underground mining systems and larger earth-moving equipment for surface mines, as well as highwall mining equipment. For example, longwall mining technology has increased the average recovery of coal from large blocks of underground coal from 50% to 70%. At larger surface mines, haul trucks have capacities of 240 to 400 tons, which is nearly double the maximum capacity of the largest haul trucks used a decade

ago. This increase in capacity, along with larger shovels and draglines, has increased overall mine productivity.

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 delivered cost per million Btu.

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 labor costs than surface mining including costs for labor benefits and healthcare and high capital costs, including modern mining equipment and construction of extensive ventilation systems.

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, sulfur, ash and moisture content. Met coal has higher carbon and lower ash content and is usually priced $4 to $10 per ton higher than steam coal produced in the same regions. Higher prices are paid for special coking coal with low volatility characteristics.

TRANSPORTATION COSTS. Coal used for domestic consumption is generally sold freight on board, or FOB, at the mine, as described above, and the purchaser normally bears the transportation costs. Export coal, however, is usually sold at the loading port, and coal producers are responsible for shipment to the export coal-loading facility and the buyer pays the ocean freight.

Most electric generators arrange long-term shipping contracts with rail or barge companies to assure stable delivered costs. Transportation can be a large component of the buyer'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. According to the National Mining Association, railroads account for nearly two-thirds of total United States coal shipments. 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. Most coal mines are served by a single rail company, but much of the Powder River Basin is served by two competing rail carriers.

DEREGULATION OF THE ELECTRICITY GENERATION INDUSTRY

Congress enacted the Energy Policy Act of 1992 to stimulate competition in electricity markets by giving wholesale suppliers access to the transmission lines of United States electricity generators. In April 1996, the Federal Energy Regulatory Commission ("FERC") issued the first of a series of orders establishing rules providing for open access to electricity transmission systems. The federal government is currently exploring a number of options concerning utility deregulation. Some individual states are also proceeding with their own deregulation initiatives.

The pace of deregulation differs significantly from state to state. As of September 2003, seventeen states and the District of Columbia had either enacted legislation leading to the deregulation of the electricity market or issued a regulatory order to implement retail access that would allow customers to choose their own supplier of generation. Five states have delayed restructuring and twenty seven are not actively pursuing deregulation. In California, where supply and demand imbalances created electricity supply shortages, the California Public Utilities Commission suspended deregulation.

A possible consequence of deregulation is downward pressure on fuel prices. However, because of coal's cost advantage and because some coal-fueled generating facilities are underutilized in the

current regulated electricity market, we believe that additional coal demand would arise as electricity markets are deregulated if the most efficient coal-fueled power plants are operated at greater capacity.

OUR OPERATIONS

We currently are mining coal from one surface mine and four deep mines in Eastern Tennessee and Southeastern Kentucky. At March 1, 2005, we were attempting to secure permits for four surface mines and seven deep mines to open additional mines on our properties. The following table provides operational information for calendar 2004 about our active mines at December 31, 2004:

2004 TONS DATE ------------------ ESTABLISHED MINE DESCRIPTION LOCATION PRODUCED SHIPPED OR ACQUIRED ---------------------- ------------------- -------- -------- -------------

Surface mine TN #7 ... Elk Valley, TN 26,300 25,600 October 2004 Deep mine TN #1 ...... Devonia, TN 25,700 24,900 August 2004 Deep mine TN #9 ...... Smokey Junction, TN 131,000 128,200 April 2004 Deep mine TN #11 ..... Smokey Junction, TN 12,200 9,200 November 2004 Deep mine KY #1 ...... Straight Creek, KY 15,100 14,300 November 2004 -------- -------- Total ........... 210,300 202,200 ======== ========

SURFACE MINE TN #7: In late October 2004, we acquired from Robert Clear Coal Corporation permits and mining rights to surface mine #7 pursuant to a lease agreement on approximately 7,000 acres of land located in the Elk Valley area of Eastern Tennessee, and commenced extracting coal soon thereafter. The mining rights included TN permit #3154 which was originally permitted for the removal of approximately 7.1 million tons of coal from a surface mine at this location. We estimate that at December 31, 2004, there was approximately 6.0 million tons of coal remaining to be mined pursuant to the permit. Coal produced from this location is typically trucked directly to one of our customers without any processing (i.e. the coal is not first sent to a wash facility prior to delivery to a customer).

DEEP MINE TN #1: In August 2004, we began mining operations at deep mine TN #1 pursuant to a lease agreement with Lexington Coal, LLC. Deep mine TN #1 is on part of The New River Tract - 65,000 acres purchased in the second calendar quarter 2003 (SEE "AREA OF INTEREST" BELOW) - and the lease agreement with Lexington Coal was part of the original agreement when we purchased The New River Tract. The mine is located near Devonia, TN. We are mining pursuant to permit #3026 which was originally permitted for the removal of approximately 800,000 tons of coal from this deep mine. We estimate that at December 31, 2004, there was approximately 774,000 tons of coal remaining to be mined pursuant to the permit. Coal produced from this location is typically trucked to our wash plant in Smoky Junction, TN and then trucked to our tipple facility in Turley, TN where the coal is either trucked directly to one of our customers or sent via rail. The Turley tipple, which is adjacent to a portion of the Norfolk Southern rail line, and the Smoky Junction wash plant, were assets acquired from U.S. Coal, Inc.

DEEP MINE TN #9: In mid April 2004, we acquired from U.S. Coal, Inc., mining rights to deep mine TN #9 which is located near Smoky Junction, TN, and immediately commenced extracting coal. The mining rights included permit #3151 which was permitted for the removal of approximately 400,000 tons of coal from this deep mine. We estimate that at December 31, 2004, there was approximately 269,000 tons of coal remaining to be mined pursuant to the permit. Coal produced from this location is typically processed at our wash plant in Smoky Junction, TN and then trucked to our tipple facility in Turley, TN where the coal is either trucked directly to one of our customers or sent via rail.

DEEP MINE TN #11: In mid April 2004, we acquired from U.S. Coal, Inc., mining rights to deep mine TN #11 pursuant to a lease agreement U.S. Coal had with the Tennessee Valley Authority ("TVA") and located near Smoky Junction, TN. We commenced extracting coal in mid November 2004. The mining rights included permit #TN-018 which was originally permitted for the removal of approximately 2.6 million tons of coal from this deep mine. We estimate that at December 31, 2004, there was approximately 2.59 million tons of coal remaining to be mined pursuant to the permit. Coal produced

from this location is typically trucked to our wash plant in Smoky Junction, TN and then trucked to our tipple facility in Turley, TN where the coal is either trucked directly to one of our customers or sent via rail.

DEEP MINE KY #1: In late November 2004, we acquired from Appalachian Fuels, LLC, mining rights and permits on approximately 31,000 acres of land located on the Straight Creek and Pine Mountain properties in Southeastern Kentucky, and commenced operating on deep mine KY #1 at the Straight Creek location soon thereafter. The mining rights included KY permit #8480233 which was originally permitted for the removal of approximately 3.9 million tons of coal from two deep mines at the Straight Creek location. We estimate that at December 31, 2004, there was approximately 3.0 million tons of coal remaining to be mined pursuant to the permit. Coal produced from this location is typically sent via rail from the Viall tipple which is adjacent to parts of the CSX rail line directly to one of our customers after first being processed at a nearby wash plant. Both the Viall tipple and nearby wash plant were assets acquired from Appalachian Fuels.

In September 2004, we ceased mining operations at our surface mine TN # 2 located in Devonia, TN. This was our first mine at which we began mining operations in July 2003.

AREAS OF INTEREST

We own the coal mineral rights to approximately sixty-five thousand (65,000) acres and lease another approximate twelve thousand one hundred (12,100) acres in Anderson, Campbell and Scott Counties, Eastern Tennessee, and own the coal mineral rights to approximately eleven thousand seven hundred (11,700) acres and lease another approximate eighteen thousand two hundred (18,200) acres in Bell, Harlan and Leslie Counties in Southeastern Kentucky. The Tennessee property we own is sometimes referred to as the New River Tract mineral rights assemblage, which had previously been mined by Tennessee Mining, Inc., and is located approximately twenty-five miles northwest of Knoxville, Tennessee. Portions of the mineral rights extend into Anderson, Campbell and Scott Counties, Tennessee. The property we lease from the TVA is adjacent to the New River Tract and covers areas on both Cross Mountain and Adkins Mountain, which extends into Anderson, Campbell and Scott Counties, Tennessee. We also lease property from Lexington Coal, LLC which is located in Anderson County, Tennessee. The mineral rights we acquired from Robert Clear Coal Corporation are located in the Elk Valley area of Eastern Tennessee. The mineral rights we acquired from Appalachian Fuels, LLC are located in Bell, Clay and Harlan Counties, Kentucky.

The following chart lists our active permitted mines, inactive permitted mines, the total tonnage allowed to be mined pursuant to the approved permits issued by OSM, and the estimated permitted tons remaining to be mined at December 31, 2004:

TOTAL REMAINING PERMIT PERMITTED PERMITTED MINE DESCRIPTION: NUMBER TONS TONS ----------------- ---------- ---------- ---------- ACTIVE MINES: Surface mine TN #7 ................... 3154 7,151,000 6,000,000 Deep mine TN #1 ...................... 3026 800,000 774,000 Deep mine KY #1 & #2 ................. 8480233 3,900,000 3,000,000 Deep mine TN #9 ...................... 3151 400,000 269,000 Deep mine TN #11 ..................... TN-018 2,600,000 2,588,000 ---------- ---------- Sub Total ........................ 14,851,000 12,631,000 ---------- ----------

PERMITTED BUT INACTIVE MINES: Surface mine TN #3 ................... 3138 930,000 930,000 Surface mine TN #4 ................... 3140 2,600,000 2,600,000 Deep mine TN #12 ..................... 3153 500,000 500,000 Deep mine TN #10 ..................... TN-016 1,250,000 1,250,000 ---------- ---------- Sub Total ....................... 4,350,000 4,350,000 ---------- ----------

Total ........................... 19,201,000 16,981,000 ========== ==========

TRANSPORTATION

Our Tennessee and Kentucky operations are both within a few miles of major interstate highways, which provide access for trucking transport of our coal. Our Turley, TN rail load-out facility is immediately adjacent to a portion of the Norfolk Southern rail system, and our Straight Creek, KY rail load-out facility is immediately adjacent to a portion of the CSX rail system.

GEOLOGY

Known coal bearing strata on the New River Tract property include coal beds from the Crab Orchard and Crooked Fork groups, and the Slatestone, Indian Bluff, Graves Gap, Red Oak Mountain, Vowell Mountain and Cross Mountain formations. Only coal seams from the Blue Gem coal, located near the top of the Slatestone formation upwards, occur on the New River Tract. Core drilling has indicated the existence of coal as low as the Wilder coals at the top of the Gizzard Group. The strata that exists 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 six 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 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.

Known coal bearing strata on the Straight Creek, Kentucky property include coal beds in the Hazard 4A and Copeland seams (on Pine Mountain) and Hazard 8 seam (on Straight Creek Mountain). Unlike the New River Tract, we have not had an internal report prepared by outside professional geologists for our Straight Creek property. We do however intend to engage an outside firm within the next twelve months to prepare such information.

RAILROAD LOADING AND WASHPLANT FACILITIES

We currently have two active railroad loading facilities; one in Turley, Tennessee, and one in Straight Creek, Kentucky, and one inactive railroad loading facility in Smoky Junction, Tennessee. We also have railroad facilities located at Devonia, Tennessee, where Tennessee Mining, Inc. was active until the spring of 1998. The Devonia location is currently idle and requires capital improvements to become operational. A washplant facility is located at all four of the above railroad facilities. The washplants in Smoky Junction and Straight Creek are fully functional, and the washplants in Devonia and Turley are in

need of capital improvements to become operational. We intend, subject to availability of funds, to improve the rail and washplant facilities where necessary to serve our production needs.

RESERVES

We do not disclose coal "reserves" in our financial statements. "Reserves," to be so classified, must (i) be based upon reasonably accurate scientific data and professional analysis, (ii) be recoverable (economically and physically), (iii) have a permitted and operating mine facility at the coal location, and (iv) be subject to current sales. We have not satisfied all of these requirements with respect to our coal mineral rights. To record coal reserves, in addition to the other requirements, we would have to engage a geologist to render a professional report indicating the recoverable tonnage on the portions of our property which are being actively mined.

PERMITTING

Mining companies must obtain numerous permits that impose strict regulations on various environmental and safety matters in connection with coal mining. 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"), the 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 and documents required of the Office of Surface Mining's Applicant Violator System.

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 before it can be approved. Some SMCRA mine permits can take over a year to prepare, depending on the size and complexity of the mine and often take six months to sometimes two years to receive approval. Regulatory authorities have considerable discretion in the timing of the permit issuance and the public has rights 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 permits (except availability of cash for bond deposits). It is our policy to ensure that our operations are in full compliance with the requirements of the SMCRA and the state laws and regulations governing mine reclamation.

OUR STRATEGY

Our strategy primarily is to grow our business by expanding our coal producing capabilities by acquiring additional active mines and obtaining permits to open new mines on our existing properties. We intend to submit approximately four to six new permit applications each year to open new mines on our properties, which we intend to fund from operations, and acquire additional mines and related properties on a case by case basis, which we intend to fund from the sale of debt and/or equity securities. Additionally, we intend to obtain greater price certainty for our coal by entering into long-term sales

contracts, which we define as contracts with an initial term of one year or greater, for approximately 75% of our coal production.

MARKETING AND SALES

Our marketing and sales efforts are based in the corporate office in Knoxville, TN and are led by our Vice President of Sales, who has over twenty-five years of sales experience in the coal industry. Our sales efforts primarily are focused on increasing our customer base of state-run electric utilities primarily in the Southeastern region of the United States. We are also targeting industrial customers. We do not export any of our coal, and do not anticipate exporting any of our production for the foreseeable future.

During the year ended December 31, 2004, we sold over 356,000 tons of coal, 134,000 tons of which were sold in the fourth quarter at an average price of nearly $47.50 per ton, resulting in approximately $16.9 million in coal sales. Our top two customers, both state-run utilities, represented approximately 55% of these coal sales.

CUSTOMERS

During the twelve months ended December 31, 2004, we generated all of our coal sales revenue from fourteen customers, six of which were electric utilities, six of which were industrial companies, and two of which were coal resellers. All of our sales in 2003 and in the first nine months of 2004 were made pursuant to short term contracts with our electric utility and industrial customers. Sales to coal resellers were made on a spot basis. Most of our coal sales in the fourth quarter 2004 were derived from long-term contracts. We intend to expand the number of customers we serve as our coal production increases, and to enter into long term contracts for approximately 75% of our coal production to obtain greater price certainty for our coal. At December 31, 2004, we had six contracts of one year or longer. The following table summarizes, as of December 31, 2004, the tons of coal that we are committed to deliver at prices determined under existing long-term contracts, which prices are subject to change under the terms of our contracts, during the calendar years 2005 through 2008:

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

2005 ................................. 984,000 $ 55.47 $ 54,581,900 2006 ................................. 660,000 $ 53.86 $ 35,550,000 2007 ................................. 600,000 $ 53.40 $ 32,040,000 2008 ................................. 120,000 $ 51.00 $ 6,120,000 ------------ --------- ------------ Total ............................ 2,364,000 $ 54.27 $128,291,900 ============ ========= ============

COMPETITION

The coal industry is intensely competitive. There are numerous producers in the coal producing regions in which we operate. We compete with several major and a number of smaller coal producers in the Central/Southern Appalachia area. We also compete with producers of other fuels used in electricity generation, including nuclear, natural gas and hydroelectric producers. We compete with other coal producers and producers of other fuels based on a delivered cost per heating value unit basis. 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.

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 after mining has been completed, 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 our industry.

In addition, the industry is 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.

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 in the industry. The majority of any such violations result from natural causes, such as heavy rainfall or diverse temperature conditions, that cause the physical changes to the land surface or water levels then 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 of the states, including the states of Tennessee and Kentucky in which we operate, have state 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 United States competitors are subject to the same degree of regulation.

ENVIRONMENTAL LAWS

We are subject to various federal, state and foreign 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 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 deep 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, the state becomes the regulatory authority, as in Kentucky where we operate.

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. Since that date, a fee is assessed each year to cover the expected health care benefit costs of the orphan beneficiaries. We are current on all Abandoned Mine Land Fund payments.

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 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 10 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.

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 ("RCRA"), 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 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.

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).

CLEAN AIR ACT AMENDMENTS. A comprehensive set of amendments to the federal law governing the nation's air quality adopted in 1990. The Clean Air Act was originally passed in 1970 to address significant air pollution problems in our cities. The 1990 amendments broadened and strengthened the original law to address specific problems such as acid deposition, urban smog, hazardous air pollutants and stratospheric ozone depletion.

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 in a continuous operation.

DEEP MINE. An underground coal mine.

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

HIGHWALL MINING. Highwall mining is a method of coal mining 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 miner to an open-air installation for stockpiling and transport. This process forms a series of parallel, unsupported drives.

METALLURGICAL COAL. Various grades of coal suitable for carbonization to make coke for steel manufacture. Also known as "met" coal, it possesses four important qualities: volatility, which affects coke yield; the level of impurities, which affects coke quality; composition, which affects coke strength; and basic characteristics, which affect coke oven safety. Met coal has a particularly high Btu, but low ash content.

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

OVERBURDEN RATIO/STRIPPING RATIO. The amount of overburden that must be removed compared to a given quantity of coal. It is commonly expressed in cubic yards per ton of coal or as a ratio comparing the thickness of the overburden with the thickness of the coal bed.

PILLAR. An area of coal left to support the overlying strata in a mine. Pillars are sometimes left permanently to support surface structures.

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.

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

ROOF. A stratum of rock or other mineral above a coal seam or the overhead surface of an underground coal working place. Same as "back" or "top."

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. Room-and-pillar mining is done either by conventional or continuous mining.

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 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.

SULFUR CONTENT. 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 1.0% or less sulfur.

SURFACE MINE. A coal mine in which the coal lies near the surface and can be extracted by removing the covering layer of soil (see "Overburden"). About 60% of total United States coal production comes from surface mines.

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.

TRUCK-AND-SHOVEL MINING. A form of mining where large shovels are used to remove overburden, which is used to backfill pits after the coal is removed. Smaller shovels load coal in haul trucks for transportation to the preparation plant or rail loading facility.

UNDERGROUND MINE. Also known as a "deep" mine. Usually located several hundred feet below the earth's surface, an underground mine's coal is removed mechanically and transferred by shuttle car or conveyor to the surface. Most underground mines are located east of the Mississippi River and account for about 40% of annual United States coal production.

EMPLOYEES

At December 31, 2004, we had 159 full-time employees, of which 136 were engaged in direct mining operations, seven in mining supervision, and sixteen in executive management, sales, legal and general administration. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be favorable. We currently utilize the services of one independent consultant in research. The miners and supervisors are based in Eastern Tennessee; the Chief Executive Officer/President, and the General Counsel are based in Knoxville, Tennessee; and the Chief Financial Officer is based in Knoxville, but lives outside of Los Angeles, California.