SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended	Commission File
September 30, 2005	Number 000-51129
JAMES RIVER COAL COMPANY
(Exact name of registrant as specified in its charter)
Virginia	54-1602012
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
901 E. Byrd Street, Suite 1600
Richmond, Virginia	23219
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (804) 780-3000

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

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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

Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x No o

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of September 30, 2005 was 16,788,380.

FORM 10-Q INDEX

			Page
	PART I	FINANCIAL INFORMATION	3
Item 1.		Financial Statements	3
		Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	3
		Condensed Consolidated Statements of Operations  for the three months ended September 30, 2005 (Successor) and September 30, 2004 (Successor)	5
		Condensed Consolidated Statements of Operations for the nine months ended September 30, 2005 (Successor), the five months ended September 30, 2004 (Successor) and the four months ended April 30, 2004 (Predecessor)	6
		Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the nine months ended September 30, 2005 (Successor), eight months ended December 31, 2004 (Successor) and four months ended April 30, 2004 (Predecessor)	7
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 (Successor), the five months ended September 30, 2004 (Successor) and the four months ended April 30, 2004 (Predecessor)	8
		Notes to Condensed Consolidated Financial Statements	9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3		Quantitative and Qualitative Disclosure about Market Risk	50
Item 4.		Controls and Procedures	50
	PART II	OTHER INFORMATION	51
Item 4.		Submission of Matters to a Vote of Securities Holders	51
Item 6.		Exhibits	51
SIGNATURES			52

Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002

-2-

PART I
FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(in thousands)

	September 30, 2005		December 31, 2004
	(Unaudited)
Assets
Current assets:
Cash	$	24,169		3,879
Receivables:
Trade		40,429		23,871
Other		1,101		7,362
Total receivables		41,530		31,233
Inventories:
Coal		10,935		2,305
Materials and supplies		6,104		4,084
Total inventories		17,039		6,389
Prepaid royalties		4,025		4,358
Other current assets		5,581		6,337
Total current assets		92,344		52,196
Property, plant, and equipment, at cost:
Land		6,116		2,698
Mineral rights		195,106		162,577
Buildings, machinery and equipment		189,250		106,105
Mine development costs		13,632		5,729
Construction-in-progress		933		231
Total property, plant, and equipment		405,037		277,340
Less accumulated depreciation, depletion, and amortization		57,538		21,765
Property, plant and equipment, net		347,499		255,575
Goodwill		31,869		—
Restricted cash (note 1(c))		—		8,404
Other assets		17,463		11,651
Total assets	$	489,175		327,826

See accompanying notes to condensed consolidated financial statements

-3-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(in thousands)

	September 30, 2005			December 31, 2004
	(Unaudited)
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt (note 3)	$	—			2,700
Current installments of obligations under capital leases		374			388
Accounts payable		25,327			15,116
Accrued salaries, wages, and employee benefits		3,626			2,093
Workers’ compensation benefits		12,475			12,090
Black lung benefits		2,600			2,600
Accrued taxes		4,224			3,530
Other current liabilities		9,969			3,633
Total current liabilities		58,595			42,150
Long-term debt, less current maturities (note 3)		150,000			92,300
Other liabilities:
Noncurrent portion of workers’ compensation benefits		39,375			38,223
Noncurrent portion of black lung benefits		23,806			23,341
Pension obligations		13,476			15,744
Asset retirement obligations		25,409			14,939
Obligations under capital leases, excluding current installments		363			637
Deferred income taxes		57,311			34,615
Other		226			292
Total liabilities		368,561			262,241
Shareholders’ equity
Preferred Stock, $1.00 par value.  Authorized 10,000,000 shares		—			—
Common stock, $.01 par value.  Authorized 100,000,000 shares; issued and outstanding  16,788,380 and 14,740,694, respectively		168			147
Paid-in-capital		140,421			71,784
Deferred stock-based compensation		(18,226	)		(7,540	)
Retained earnings (deficit)		(1,757	)		1,151
Accumulated other comprehensive income		8			43
Total shareholders’ equity		120,614			65,585
Commitments and contingencies (note 5)
Total liabilities and shareholders’ equity	$	489,175			327,826

See accompanying notes to condensed consolidated financial statements

-4-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

	Successor			Successor
	Three Months Ended 09/30/05			Three Months Ended 09/30/04
Revenues	$	122,937			89,881
Cost of sales:
Cost of coal sold		106,074			73,582
Depreciation, depletion, and amortization		14,769			8,023
Total cost of sales		120,843			81,605
Gross profit		2,094			8,276
Selling, general, and administrative expenses		6,651			4,842
Total operating income (loss)		(4,557	)		3,434
Interest expense (note 3)		3,935			2,068
Interest income		(80	)		(37	)
Miscellaneous income, net		(276	)		(377	)
Total other expense, net		3,579			1,654
Income (loss) before income taxes		(8,136	)		1,780
Income tax (benefit) expense		(5,936	)		381
Net income (loss)	$	(2,200	)		1,399
Earnings (loss) per common share (note 7)
Basic earnings (loss) per common share	$	(0.14	)		0.10
Shares used to calculate basic earnings (loss) per share		15,766			13,800
Diluted earnings (loss) per common share	$	(0.14	)		0.10
Shares used to calculate diluted earnings (loss) per share		15,766			14,629

See accompanying notes to condensed consolidated financial statements

-5-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

	Successor			Successor			Predecessor
	Nine Months Ended 09/30/05			Five Months Ended 09/30/04			Four Months Ended 04/30/04
Revenues	$	334,125			154,366			113,949
Cost of sales:
Cost of coal sold		277,981			120,892			89,294
Depreciation, depletion, and amortization		35,818			13,561			12,314
Total cost of sales		313,799			134,453			101,608
Gross profit		20,326			19,913			12,341
Selling, general, and administrative expenses		18,620			7,408			5,023
Total operating income		1,706			12,505			7,318
Interest expense (note 3)		9,040			3,371			566
Interest income		(140	)		(51	)		—
Charges associated with repayment of debt (note 3)		2,524			—			—
Miscellaneous income, net		(692	)		(666	)		(330	)
Total other expense, net		10,732			2,654			236
Income (loss) before reorganization items and income taxes		(9,026	)		9,851			7,082
Reorganization items, net (note 6)		—			—			(100,907	)
Income (loss) before income taxes		(9,026	)		9,851			107,989
Income tax (benefit) expense		(6,118	)		2,108			—
Net income (loss)	$	(2,908	)		7,743			107,989
Earnings (loss) per common share (note 7)
Basic earnings (loss) per common share	$	(0.20	)		0.56			6,393.67
Shares used to calculate basic earnings (loss) per share		14,681			13,800			17
Diluted earnings (loss) per common share	$	(0.20	)		0.53			6,393.67
Shares used to calculate diluted earnings (loss) per share		14,681			14,629			17

See accompanying notes to condensed consolidated financial statements

-6-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’
Equity (Deficit) and Comprehensive Income (Loss)
Nine Months ended September 30, 2005 (Successor), eight months ended December 31, 2004 (Successor) and
four months ended April 30, 2004 (Predecessor)
(in thousands)
(unaudited)

	Common stock		Paid-in- capital			Deferred stock- based Compensation			Retained earnings (accumulated deficit)			Subscribed shares			Accumulated other comprehensive income (loss)			Total
Predecessor Company
Balances, December 31, 2003	$	—		226			—			(107,989	)		(821	)		(15,017	)		(123,601	)
Net income		—		—			—			107,989			—			—			107,989
Minimum pension liability adjustment		—		—			—			—			—			(692	)		(692	)
Comprehensive income																			107,297
Application of fresh start accounting (note 2) Cancellation of Predecessor common stock		—		(226	)		—			—			—			—			(226	)
Elimination of Predecessor accumulated other comprehensive loss and subscribed shares		—		—			—			—			821			15,709			16,530
Balances, April 30, 2004		—		—			—			—			—			—			—
Successor Company
Issuance of Successor common stock		138		63,153			—			—			—			—			63,291
Net income		—		—			—			1,976			—			—			1,976
Unrealized gain on marketable securities, net		—		—			—			—			—			43			43
Comprehensive income																			2,019
Deferred compensation related to restricted stock awards		9		8,631			(8,640	)		—			—			—			—
Cost to register common stock		—		—			—			(825	)		—			—			(825	)
Amortization of deferred stock-based compensation		—		—			1,100			—			—			—			1,100
Balances, December 31, 2004		147		71,784			(7,540	)		1,151			—			43			65,585
Net loss		—		—			—			(2,908	)		—			—			(2,908	)
Change in unrealized gains and losses on investments, net of tax		—		—			—			—			—			(35	)		(35	)
Comprehensive income																			(2,943	)
Deferred compensation related to restricted stock awards		2		12,538			(12,540	)		—			—			—			—
Issuance of common stock net of offering costs of $3,696		15		45,039			—			—			—			—			45,054
Common stock issued in acquisition of Triad Mining, Inc		4		10,996			—			—			—						11,000
Repurchased shares for tax withholding		—		(1,128	)		—			—			—			—			(1,128	)
Tax benefit on vested shares of restricted stock		—		1,062			—			—			—			—			1,062
Amortization of deferred stock-based compensation		—		—			1,854			—			—			—			1,854
Exercise of stock options		—		93			—			—			—			—			93
Capital contribution, net of tax		—		37			—			—			—			—			37
Balances, September 30, 2005	$	168		140,421			(18,226	)		(1,757	)		—			8			120,614

See accompanying notes to condensed consolidated financial statements

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JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

	Successor			Successor			Predecessor
	Nine Months Ended 09/30/05			Five Months Ended 09/30/04			Four Months Ended 04/30/04
Cash flows from operating activities:
Net income (loss)	$	(2,908	)		7,743			107,989
Adjustments to reconcile net income to net cash provided by operating activities
Fresh start accounting adjustment		—			—			(111,533	)
Non-cash reorganization items		—			—			10,010
Depreciation, depletion, and amortization		35,818			13,561			12,313
Accretion of asset retirement obligations		1,085			503			397
Amortization of deferred financing costs		597			—			—
Amortization of deferred stock-based compensation		1,854			385			—
Deferred income tax benefit		(6,117	)		(197	)		—
(Gain) loss on sale or disposal of property, plant, and equipment		80			(52	)		19
Write-off of deferred financing costs		1,733			—			—
Changes in operating assets and liabilities:
Receivables		(616	)		2,393			(12,883	)
Inventories		(7,815	)		3,874			(4,028	)
Prepaid royalties and other current assets		2,509			1,131			(1,236	)
Other assets		(312	)		(6,500	)		132
Accounts payable		5,452			(10,713	)		(2,921	)
Accrued salaries, wages, and employee benefits		(22	)		(1,013	)		1,429
Accrued taxes		(433	)		2,505			139
Other current liabilities		5,834			(276	)		1,535
Workers’ compensation benefits		1,152			1,188			1,417
Black lung benefits		850			(635	)		(547	)
Pension obligations		(2,268	)		(1,464	)		(609	)
Asset retirement obligation		(788	)		71			(108	)
Other liabilities		(66	)		10			(2	)
Net cash provided by operating activities		35,619			12,514			1,513
Cash flows from investing activities:
Additions to property, plant, and equipment		(56,108	)		(13,688	)		(9,521	)
Payments for acquisitions, net of cash acquired		(59,404	)		—			—
Proceeds from sale of property, plant, and equipment		238			4,035			86
Decrease (increase) in restricted cash		8,404			(35	)		(28	)
Net cash used in investing activities		(106,870	)		(9,688	)		(9,463	)
Cash flows from financing activities:
Proceeds from borrowings		150,000			20,000			6,400
Repayment of long-term debt		(95,468	)		—			—
Repayment of registration fees		—			(232	)		—
Principal payments on short-term debt		—			(6,400	)		—
Net proceeds from issuance of common stock		45,054			—			—
Principal payments under capital lease obligations		(289	)		(182	)		(164	)
Capitalized deferred financing costs		(7,866	)		—			(1,874	)
Capital contribution and proceeds from stock options exercised		110			—			—
Net cash provided by financing activities		91,541			13,186			4,362
Increase in cash		20,290			16,012			(3,588	)
Cash at beginning of period		3,879			1,302			4,890
Cash at end of period	$	24,169			17,314			1,302

See accompanying notes to condensed consolidated financial statements

-8-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)       Summary of Significant Accounting Policies and Other Information

(a)	Description of Business and Principles of Consolidation
	The Company mines, processes and sells bituminous, steam- and industrial-grade coal through five operating subsidiaries located throughout eastern Kentucky and one in southern Indiana. The Company acquired its operating subsidiary in southern Indiana in May 2005 (see note 10). Substantially all coal sales and accounts receivable relate to the electric utility and industrial markets.
	The interim condensed consolidated financial statements include the accounts of James River Coal Company and its wholly owned subsidiaries. The interim condensed consolidated financial statements of James River Coal Company and subsidiaries (Company) presented in this report are unaudited.  All significant intercompany balances and transactions have been eliminated in consolidation.  The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2004.  The balances presented as of December 31, 2004 are derived from the Company’s audited consolidated financial statements.
	Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in order to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.  Significant estimates made by management include the valuation allowance for deferred tax assets, accrued reclamation costs and amounts accrued related to the Company’s workers’ compensation, black lung, health claim, and pension obligations.  Actual results could differ from these estimates.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, which are necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and cash flows for all periods presented.
(b)	Bankruptcy and Restructuring
	In June 2003, James River Coal Company and subsidiaries (the Company) filed a voluntary petition for relief under Chapter 11 with the United States Bankruptcy Court for the Middle District of Tennessee. On April 21, 2004 the United States Bankruptcy Court for the Middle District of Tennessee confirmed the Company’s Plan of Reorganization (the Plan). The Plan of Reorganization became effective May 6, 2004 (the Effective Date) which is the date on which the Company formally emerged from Chapter 11. Pursuant to the Plan, the Company’s unsecured creditors claims were discharged and terminated.
	The Company’s accompanying consolidated financial statements for the four months ended April 30, 2004, have been prepared in accordance with the American Institute of Certified Public Accountants’ Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), which provides guidance for financial reporting by entities that have filed petitions under Bankruptcy.  The consolidated financial statements after emergence are those of a new reporting entity (the Successor) and are not comparable to the consolidated financial statements of the pre-emergence Company (the Predecessor). A black line has been drawn in the financial statements to distinguish Predecessor and Successor financial information.  See note 2 for additional information.
(c)	Restricted Cash
	As of December 31, 2004, $8,404,000 of the Company’s cash was restricted as to its use. Restrictions were imposed by the Company’s banks relating to letters of credit issued (see note 5).  The Company had no restricted cash as of September 30, 2005.

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(d)	Inventories
	Inventories of coal and materials and supplies are stated at the lower of cost or market. Cost is determined using the average cost for coal inventories and the first-in, first-out method for materials and supplies.  Coal inventory costs include labor, supplies, equipment cost, depletion, royalties, black lung tax, reclamation tax and preparation plant cost.  Coal is classified as inventory at the point in time that the coal is extracted from the mine.
(e)	Reclamation Costs
	Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations requires that asset retirement obligations be recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows, in the period in which it is incurred. The estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed is reviewed periodically by the Company’s management and engineers. In estimating future cash flows, the Company considers the estimated current cost of reclamation and applies inflation rates and a third party profit, as necessary. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on behalf of the Company. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Accretion expense is included in cost of produced coal. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is incurred. At September 30, 2005 and December 31, 2004, the Company had accrued $27.0 million and $16.0 million respectively, related to estimated mine reclamation costs.
(f)	Workers’ Compensation
	The Company is liable for workers’ compensation benefits for traumatic injuries under state workers’ compensation laws in which it has operations. Subsequent to 2001, a portion of its workers’ compensation benefits are payable under a high-deductible, fully-insured workers’ compensation insurance policy. For claims incurred prior to 2002, the Company is self-insured, except for those claims incurred between 1979 and 1982, which are covered by a third party insurance company. Additionally, in June of 2005, the Company became self insured for workers’ compensation for its Kentucky operations.  Specific excess insurance with independent insurance carriers is in force to cover traumatic claims in excess of the self-insured limits.
	The Company accrues for workers’ compensation benefits by recognizing a liability when it is probable that the liability has been incurred and the cost can be reasonably estimated. To assist in the determination of this estimated liability, the Company utilizes the services of third party administrators who develop claim reserves from historical experience. These third parties provide information to independent actuaries, who after review and consultation with the Company with regards to actuarial assumptions, including discount rate, prepare an evaluation of the liabilities for workers’ compensation benefits.
(g)	Black Lung Benefits
	The Company is responsible under the Federal Coal Mine Health and Safety Act of 1969, as amended, and various states’ statutes for the payment of medical and disability benefits to employees and their dependents resulting from occurrences of coal worker’s pneumoconiosis disease (black lung). The Company provides for federal and state black lung claims through a self-insurance program for its Kentucky operations.  The Company uses the service cost method to account for its self-insured black lung obligation. The liability measured under the service cost method represents the discounted future estimated cost for former employees either receiving or projected to receive benefits, and the portion of the projected liability relative to prior service for active employees projected to receive benefits. The Company has insured its black lung obligation for its Midwest operations.
	The periodic expense for black lung claims under the service cost method represents the service cost, which is the portion of the present value of benefits allocated to the current year, interest on the accumulated benefit obligation, and amortization of unrecognized actuarial gains and losses. The Company amortizes unrecognized actuarial gains and losses over the average remaining work life of the workforce.
	Annual actuarial studies are prepared by independent actuaries using certain assumptions to determine the liability. The calculation is based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents, and interest rates. These assumptions are derived from actual Company experience and industry sources.

-10-

(h)	Revenue Recognition
	Revenues include sales to customers of Company-produced coal and coal purchased from third parties. The Company recognizes revenue from the sale of Company-produced coal and coal purchased from third parties at the time delivery occurs and title passes to the customer, which is either upon shipment or upon customer receipt of coal based on contractual terms. Also, the sales price must be determinable and collection reasonably assured.
(i)	Income Taxes
	Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
	Our effective income tax rate is impacted by percentage depletion.  Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties.  Because percentage depletion can be deducted in excess of cost depletion, it creates a permanent difference and directly impacts the effective tax rate.  Fluctuations in the effective tax rate may occur between interim fiscal periods due to the varying levels of profitability (and thus, taxable income and percentage depletion) projected at each of our mine locations.
(j)	Equity-Based Compensation Plan
	The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights and performance equity units is recorded based on the quoted market price of the Company’s stock at the end of the period. Stock-based compensation other than stock options is recorded to expense on a straight-line basis. The Company has implemented the disclosure-only provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation”. The Company has not recognized stock-based compensation expense related to stock options in any period as all options granted had an exercise price at least equal to the fair value of the underlying common stock on the date of the grant.
	In performing the Statement No. 123 analysis for stock options, a risk free rate of 5% was assumed, expected volatility was zero, and no dividends were anticipated for the options issued in 2004 (136,668 of unvested options and 59,332 of vested options issued in 2004 remain outstanding at September 30, 2005) and a risk free rate of 4.6% was assumed, expected volatility was 40%, and no dividends were anticipated for stock options issued in 2005 (40,000 of unvested options issued in 2005 remain outstanding at September 30, 2005). If the Company had followed the fair value method under FASB Statement No. 123 to account for stock based compensation cost for restricted stock grants the amount of stock based compensation, net of related tax, the difference between the reported amount and the amount calculated in accordance with FASB Statement No. 123 for the four months ended April 30, 2004 and the three and five months ended September 30, 2004 would have been less than $0.01 per share.  The following is the impact if the Company had followed the fair value method under FASB Statement No. 123 to account for stock based compensation for the three and nine months ended September 30, 2005 (in 000’s except per share amounts):

-11-

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30,2005
Net loss, as reported	$	(2,200	)		(2,908	)
Add:  Net stock-based employee compensation expense recorded for restricted and performance based stock grants		589			1,149
Deduct:  Net stock-based employee compensation expense for options and restricted and performance based stock grants determined under Black-Scholes option pricing model		(491	)		(932	)
Pro forma net loss	$	(2,102	)		(2,691	)
Income per share:
Basic and diluted- as reported	$	(0.14	)		(0.20	)
Basic and diluted- pro forma	$	(0.13	)		(0.18	)

The Financial Accounting Standards Board (“FASB”) has issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), which requires all public companies to measure compensation cost in the income statement for all share-based payments (including employee stock options) at fair value for fiscal years beginning after June 15, 2005. The Company intends to adopt FAS 123R on January 1, 2006 using the modified-prospective method. The Company has not completed its assessment of the impact of the adoption of this statement on its consolidated financial statements.

(2)       Fresh Start Accounting

The Company implemented fresh start accounting and reporting in accordance with SOP 90-7 on April 30, 2004, the end of the Company’s most recent fiscal month prior to the Effective Date. Fresh start accounting requires that the reorganization value of the reorganized debtors be allocated to their assets in conformity with FASB Statement No. 141, Business Combinations, for transactions reported under the purchase method.  The enterprise value (value of the net assets and liabilities excluding cash, debt, and capital leases) of the reorganized company was estimated to range from $145 million to $165 million based on a third-party valuation prepared in connection with the bankruptcy proceedings.  For purposes of applying fresh start accounting, an enterprise value for the reorganized company of $155 million was utilized.

The effects of the Plan and the application of fresh-start accounting on the Company’s pre-confirmation consolidated balance sheet include adjustments to record the gain on the debt extinguished under the plan and adjustments to record the assets of the Company at their estimated fair value and the liabilities of the Company at their estimated present values. The reorganization value was derived from the enterprise value for the reorganized company as follows: (in 000’s)

Estimated enterprise value of the reorganized company	$	155,000
Borrowings under credit facility		(6,400	)
Capital leases assumed		(1,396	)
Cash balance excluded from enterprise value		1,301
Administrative claims payable excluded from enterprise value		(10,214	)
		138,291
Less: new secured debt issued to extinguish prepetition debt		75,000
Fair value of common shares issued to extinguish prepetition debt	$	63,291

-12-

James River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004
(in thousands)
(Unaudited)

			Fresh Start Adjustments
Assets	Predecessor Company April 30, 2004		Debt Extinguishment			Reorganization Adjustments			Successor Company April 30, 2004
Cash	$	1,301		—			—			1,301
Receivables		35,838		—			—			35,838
Inventories		11,930		—			1,079	(2)		13,009
Prepaid royalties		9,932		—			(362	)  (2)		9,570
Other current assets		4,463		—			(347	)  (2)		4,116
Total current assets		63,464		—			370			63,834
Land and mineral rights		223,004		—			(57,567	)  (2)		165,437
Buildings, machinery, and equipment		236,901		—			(155,050	)  (2)		81,851
Mine development costs		12,984		—			(12,984	)  (2)		—
Construction-in-progress		974		—			—			974
		473,863		—			(225,601	)		248,262
Less accumulated depreciation, depletion, and amortization		219,604		—			(219,604	)  (2)		—
Net property, plant, and  equipment		254,259		—			(5,997	)		248,262
Restricted cash		8,348		—			—			8,348
Other long-term assets		6,518		(3,110	)  (1)		(734	)  (2)		2,674
Total assets	$	332,589		(3,110	)		(6,361	)		323,118

-13-

James River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004
(in thousands)
(Unaudited)

				Fresh Start Adjustments
Liabilities and Shareholders’ Equity (Deficit)	Predecessor Company April 30, 2004			Debt Extinguishment			Reorganization Adjustments			Successor Company April 30, 2004
Borrowings under DIP credit agreement	$	6,400			—			—			6,400
Current installments of obligations under capital leases		749			—			(272	)  (3)		477
Accounts payable		26,293			—			—			26,293
Accrued salaries, wages and employee benefits		4,501			—			—			4,501
Workers’ compensation benefits		9,500			—			—			9,500
Black lung benefits		2,500			—			—			2,500
Accrued taxes		3,588			—			—			3,588
Other current liabilities		4,037			—			—			4,037
Total current liabilities		57,568			—			(272	)		57,296
Long term debt		—			75,000	(1)		—			75,000
Noncurrent portion of workers’ compensation benefits		42,699			—			—			42,699
Noncurrent portion of black lung benefits		10,661			—			13,610	(4)		24,271
Pension obligations		14,267			—			3,363	(5)		17,630
Asset retirement obligations		13,963			—			—			13,963
Obligations under capital leases, excluding current installments		1,159			—			(240	)  (3)		919
Deferred income taxes		—			—			27,391	(6)		27,391
Other long term liabilities		658			—			—			658
Total other liabilities		83,407			—			44,124			127,531
Liabilities subject to compromise		319,451			(319,451	)  (1)		—			—
Total liabilities		460,426			(244,451	)		43,852			259,827
Common stock		—			138	(1)		—			138
Paid-in-capital		226			63,153	(1)		(226	)  (7)		63,153
Retained earnings (accumulated deficit)		(111,533	)		178,050	(1)		(66,517	)  (7)		—
Subscribed shares		(821	)		—			821	(7)		—
Accumulated other comprehensive income (loss)		(15,709	)		—			15,709	(7)		—
Total shareholders’ equity (deficit)		(127,837	)		241,341			(50,213	)		63,291
Total liabilities and shareholders’ equity	$	332,589			(3,110	)		(6,361	)		323,118

-14-

The following is a description of the fresh start adjustments for debt extinguishment and reorganization adjustments:

Extinguishment of Debt

          (1)          Liabilities subject to compromise that were extinguished in bankruptcy consist of the following (amounts in 000’s):

Pre-petition bank loan agreement	$	207,807
Pre-petition senior note		37,953
Accrued and unpaid interest		12,234
Terminated interest rate swap		8,434
Total secured		266,428
Promissory notes		5,176
Redeemable preferred stock		8,500
Accounts payable and other		39,347
Total unsecured		53,023
Total liabilities subject to compromise	$	319,451

The Company issued new common shares, new secured debt, and transferred its interest in specified life insurance policies held in a rabbi trust to the creditors in full satisfaction of pre-petition claims.  The gain on extinguishment of pre-petition claims is calculated as follows (amounts in 000’s):

Liabilities subject to compromise	$	319,451
Less:  Assets of rabbi trust transferred to creditors		(3,110	)
Less:  New secured debt issued in exchange for pre-petition debt		(75,000	)
Less:  Fair value of common shares issued		(63,291	)
Gain on extinguishment of pre-petition claims	$	178,050

Reorganization Adjustments
(2)	In connection with the application of fresh start accounting, the Company made adjustments aggregating approximately $6.3 million to record its identifiable assets at fair value as follows: (amounts in 000’s):

	Increase/(Decrease)
Coal inventories	$	1,079
Prepaid royalties		(362	)
Other current assets		(347	)
Land and mineral rights		(57,567	)
Buildings, machinery and equipment		(155,050	)
Mine development costs		(12,984	)
Less accumulated depreciation, depletion, and amortization		219,604
Other long-term assets		(734	)
Total fair value adjustments to identifiable assets	$	(6,361	)

(3)	Contractual terms of certain capital lease agreements were renegotiated during bankruptcy.  Obligations under capital leases have been adjusted to reflect the revised terms.
(4)	The liability for black lung benefits has been adjusted to reflect the total discounted benefit obligation.
(5)	The pension liability has been adjusted to reflect the total discounted projected benefit obligation of the plan.
(6)	Deferred income taxes have been adjusted to reflect differences in the book and tax basis of the revalued assets and liabilities of the Company after application of fresh start accounting.  In addition to the $27.4 million increase in deferred tax liability that was originally recorded in connection with the fresh start accounting adjustment, the Company has recorded an additional increase in the deferred tax liability of $15.9 million to adjust the fair values assigned to certain assets and liabilities for purposes of applying fresh start accounting.
(7)	The equity of the predecessor company, including subscribed shares and accumulated other comprehensive loss, has been eliminated in fresh start accounting.

-15-

(3)           Long Term Debt and Interest Expense

Long-term debt is as follows (amounts in 000’s):

	September 30, 2005		December 31, 2004
Senior Notes	$	150,000		—
Senior Secured Credit Facility – Revolver		—		—
Prior Senior Secured Credit Facility - Term loan		—		20,000
Prior Term Credit Facility		—		75,000
Total long-term debt		150,000		95,000
Less amounts classified as current		—		2,700
Total long-term debt, less current maturities	$	150,000		92,300

(a)          Senior Notes

In May 2005, the Company issued $150 million of Senior Notes due on June 1, 2012 (the Senior Notes).  The Senior Notes are unsecured and accrue interest at 9.375% per annum.  Interest payments on the Senior Notes are required semi-annually.  Proceeds from the Senior Notes and the concurrent equity offering (see note 4) were used to repay the Prior Senior Secured Credit Facility and Prior Term Credit Facility, to fund the acquisition of Triad (note 10) and for general corporate purposes.   The Company may redeem the Senior Notes, in whole or in part, at any time on or after June 1, 2009 at redemption prices from 104.86% in 2009 to 100% in 2011.  In addition, at any time prior to June 1, 2008, the Company may redeem up to 35% of the principal amount of the Senior Notes with the net cash proceeds of a public equity offering at a redemption price of 109.375%, plus accrued and unpaid interest to the redemption date.

The Senior Notes limit the Company’s ability, among other things, to pay cash dividends.  In addition, if a change of control occurs (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Company to repurchase all or a part of the Senior Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of repurchase.

(b)          Senior Secured Credit Facility

Concurrent with the Senior Notes and equity offering, the Company entered into a Senior Secured Credit Facility consisting of a $25.0 million revolving credit facility (the Revolver) and a $75.0 million letter of credit facility (the Letter of Credit Facility).  The Revolver matures on May 31, 2010 and the Letter of Credit Facility matures on November 30, 2011.  The Senior Secured Credit Facility is secured by substantially all of the Company’s assets.

Proceeds from the Revolver are available for working capital needs and other general corporate purposes.  The Revolver bears an interest rate per annum equal to a rate based on the Company’s leverage ratio (the Applicable Rate) plus the Company’s option of either (i) the greater of (a) the prime rate or (b) the federal funds open rate plus 0.5% or (ii) a Euro Rate as defined in the credit agreement. The Applicable Rate ranges from 1.00% to 1.75% for borrowing based on the prime rate or federal funds open rate and 2.00% to 2.75% for borrowing based on the Euro Rate.  The Revolver also requires a 0.5% commitment fee on the unused balance of the Revolver.

The Letter of Credit Facility does not constitute a loan to the Company and according is not available for borrowing by the Company.  The Letter of Credit Facility only supports the issuance of up to $75 million of letters of credit by the Company. The Company pays a 3.0% per annum fee on the full balance of the Letter of Credit Facility and an additional 0.25% annual fee on the average balance of letter of credits issued under the Letter of Credit Facility. 

The Senior Secured Credit Facility requires mandatory repayments or reductions in the amount of 50% of the net proceeds of any sale or issuance of equity securities, 100% of the net proceeds of any incurrence of certain indebtedness and 100% of the net proceeds of any sale or other disposition of any assets. Voluntary prepayments are permitted at any time.

The Senior Secured Credit Facility and the Senior Notes contain financial covenants including a fixed charge coverage ratio, senior secured leverage ratio and maximum annual limits on capital expenditures.   The Company’s debt covenants also prohibit payment of cash dividends.  The Company was in compliance with all of the financial covenants of the Senior Secured Credit Facility as of September 30, 2005. 

-16-

(c)       Prior Senior Secured Credit Facility and Prior Term Credit Facility

On May 6, 2004, the Company entered into a $50 million senior secured credit facility with Wells Fargo Foothill, Inc. (the Prior Senior Secured Credit Facility).  This facility was used to repay outstanding amounts and replace letters of credit previously issued under a $20 million debtor-in-possession facility to pay expenses associated with the Company’s exit from bankruptcy and to provide liquidity for general corporate purposes.   Also on May 6, 2004, the Company entered into a $75 million term credit facility with the Company’s pre-petition secured lenders (the Prior Term Credit Facility) in partial satisfaction of its prepetition obligations, pursuant to the Plan of Reorganization.   The Prior Senior Secured Credit Facility was comprised of a $30 million revolver component and a $20 million term component.  Borrowings under the revolver component bore interest at LIBOR + 2.5% or the Base Rate (as defined in the credit agreement) + 1.0%.  Borrowings under the term component bore interest at LIBOR + 5.25% or the Base Rate + 3.85%. 

As discussed above, the Company used a portion of the proceeds from the Senior Notes and the related equity offering to repay all outstanding amounts under the Prior Senior Secured Credit Facility and the Prior Term Credit Facility.  The Company incurred a prepayment penalty of $791,000 as result of the repayment of the Prior Senior Secured Credit Facility.  Additionally, the Company wrote off $1,733,000 of deferred financing costs associated with the Prior Senior Secured Credit Facility and the Prior Term Credit Facility.  The prepayment penalty and the write off of the deferred financing costs have been included in charges associated with repayment of debt on the consolidated statements of operations. 

(d)       Interest Expense and Other

Until the date of filing of bankruptcy, the Company accrued interest. The Company determined that there was insufficient collateral to cover the interest portion of the scheduled payments on its prepetition debt obligations. As of the bankruptcy date the Company ceased accruing interest on all the prepetition secured debt obligations. If such interest had continued to be accrued, interest expense for four months ended April 30, 2004 would have been approximately $7.6 million higher than reported. During the four months ended April 30, 2004, the Company paid $0.3 million in interest. During the five months ended September 30, 2004, the Company paid approximately $3.1 million in interest. During the three months and nine months ended September 30, 2005, the Company paid approximately $0.2 million and $3.9 million, respectively, in interest.

(4)       Equity

(a)	Preferred Stock and Shareholder Rights Agreement
	The Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per share, the rights and preferences of which are established by the Board of the Directors.  The Company has reserved 500,000 of these shares as Series A Participating Cumulative Preferred Stock for issuance under a shareholder rights agreement (the “Rights Agreement”)
	On May 25, 2004, the Company’s shareholders approved the Rights Agreement and declared a dividend of one preferred share purchase right (“Right”) for each two shares of common stock outstanding.  Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of our Series A Participating Cumulative Preferred Stock, par value $1.00 per share, at a price of $200 per one one-hundredth of a Series A preferred share.  The Rights are not exercisable until a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired or announced the intention to acquire 15% or more of the Company’s outstanding common stock.
	In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of the Company’s consolidated assets or earning power is sold after a person or group has become an Acquiring Person, each holder of a Right, other than the Rights beneficially owned by the Acquiring Person (which will thereafter be void), will receive, upon the exercise of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.  In the event that any person becomes an Acquiring Person, each Right holder, other than the Acquiring Person (whose Rights will become void), will have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right.
	The rights will expire May 25, 2014, unless that expiration date is extended. The Board of Directors may redeem the Rights at a price of $0.001 per Right at any time prior to the time that a person or group becomes an Acquiring Person.

-17-

(b)	Equity Offering
	On May 31, 2005, the Company completed an offering of 1.5 million shares of common stock at a price of $32.50 per share. The Company received net proceeds of approximately $45.0 million from the offering. (see note 3(a))
(c)	Redeemable Preferred Stock (Predecessor Company)
	Prior to the bankruptcy petition, the Company had 8,500 shares of Class C, nonvoting, mandatory redeemable preferred stock outstanding. The preferred shares had a par value of $1,000 per share and a dividend rate of 8%.
	On July 1, 2003, the Company adopted Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which required that dividends on redeemable preferred stock be reported as a financing cost in our consolidated statement of operations. Accordingly, preferred dividends of $226,667 for the four months ended April 30, 2004, are included in interest expense in the consolidated statements of operations.
	The preferred stock was cancelled on May 6, 2004 in accordance with the terms of the Plan of Reorganization.

(5)	Commitments and Contingencies
	The Company has established irrevocable letters of credit totaling $50.0 million as of September 30, 2005 to guarantee performance under certain contractual arrangements.  The letters of credit were issued under the Company’s Letter of Credit Facility (see note 3).
	The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
(6)	Reorganization Items, Net
	Reorganization items, net, consist of the following (amounts in 000’s):

		Predecessor Company Four Months Ended April 30, 2004
Professional fees and administrative expenses	$	10,685
Interest income		(59	)
Gain on extinguishment of debt and fresh start accounting adjustments		(111,533	)
	$	(100,907	)

(7)	Earnings Per Share
	Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding restricted common stock subject to continuing vesting requirements.  Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from the exercise of stock options and restricted common stock subject to continuing vesting requirements, pursuant to the treasury stock method.
	The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings per share:

-18-

	Successor Three Months Ended September 30, 2005		Successor Three Months Ended September 30, 2004
Weighted average number of common shares outstanding:
Basic		15,766,279		13,799,994
Effect of dilutive instruments		—		829,000
Diluted		15,766,279		14,628,994

	Successor Nine Months Ended September 30, 2005		Successor Five Months Ended September 30, 2004		Predecessor Four Months Ended April 30, 2004
Weighted average number of common shares outstanding:
Basic		14,681,061		13,799,994		16,890
Effect of dilutive instruments		—		829,000		—
Diluted		14,681,061		14,628,994		16,890

On May 6, 2004 the Company emerged from bankruptcy under a joint plan of reorganization.  On that date the Company cancelled all existing equity securities and issued 13,799,994 shares of new common stock, which were distributed pro-rata to the pre-petition secured creditors.

For periods in which there was a loss, the Company has excluded from its diluted earning per share calculation options to purchase shares with underlying exercise prices less than the average market prices and the unvested portion of time vested restricted shares, as inclusion of these securities would have reduced the net loss per share.  The excluded instruments would have increased the diluted weighted average number of common shares by approximately 1.0 million and 0.9 million for the three months and nine months ended September 30, 2005, respectively.

-19-

(8)	Pension Expense
	The components of net periodic benefit cost are as follows (amounts in 000’s):

	Successor
	Three Months Ended September 30, 2005			Three Months Ended September 30, 2004
Service cost	$	527			458
Interest cost		793			735
Expected return on plan assets		(761	)		(645	)
Amortization of prior service cost		—			—
Recognized actuarial loss		—			—
Net periodic benefit cost	$	559			548

	Successor						Predecessor
	Nine Months Ended September 30, 2005			Five Months Ended September 30, 2004			Four Months Ended April 30, 2004
Service cost	$	1,579			765			611
Interest cost		2,378			1,224			965
Expected return on plan assets		(2,282	)		(1,076	)		(811	)
Amortization of prior service cost		—			—			130
Recognized actuarial loss		—			—			340
Net periodic benefit cost	$	1,675			913			1,235

-20-

(9)	Pneumoconiosis (Black Lung) Benefits
	The expense for black lung benefits consists of the following (amounts in 000’s):

	Successor
	Three Months Ended September 30, 2005		Three Months Ended September 30, 2004
Service cost	$	74		74
Interest cost		340		188
Amortization of actuarial loss		54		—
Total expense	$	468		262

	Successor				Predecessor
	Nine Months Ended September 30, 2005		Five Months Ended September 30, 2004		Four Months Ended April 30, 2004
Service cost	$	222		124		99
Interest cost		1,021		320		254
Amortization of actuarial loss		163		—		263
Total expense	$	1,406		444		616

-21-

(10)	Acquisition of Triad Mining, Inc.
	On May 31, 2005, the Company purchased all of the stock of Triad Mining, Inc. (Triad).   Triad directly and through its wholly-owned subsidiary, Triad Underground Mining, LLC, owns and operates six surface mines and one underground mine in southern Indiana.  The purchase price, including related costs and fees, of approximately $70.4 million was funded through the issuance of 338,295 shares of the Company’s common stock valued at $11.0 million and cash from the Company’s equity and debt offerings in May 2005 (see notes 3 and 4).  In 2004, Triad produced approximately 3.4 million tons of coal.  The acquisition was accounted for as a purchase.
	The Company also entered into an agreement with two of Triad’s principals to issue common stock valued at up to $5.0 million, if prior to May 31, 2007 the Company obtains the right to own, lease or mine certain proven and probable reserves.
	The preliminary purchase accounting allocations related to the acquisition have been recorded in the accompanying condensed consolidated financial statements as of, and for periods subsequent to, May 31, 2005, the date of acquisition of Triad. The final valuation of the net assets acquired is expected to be finalized once third-party appraisals are completed including the final valuation of mineral rights.   Additionally, adjustments to the estimated liabilities assumed in connection with the acquisition may still be required.

The following table summarizes the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (in 000’s):

Accounts receivable	$	9,672
Coal inventory		1,872
Other current assets		1,896
Property, plant and equipment		37,151
Mineral rights		22,538
Goodwill		31,869
Other assets		495
Current liabilities		(6,783	)
Asset retirement obligations		(7,861	)
Deferred taxes and other liabilities		(20,445	)
Total purchase price, net of cash received of $5,414	$	70,404

The following are the pro forma revenues, net income and earnings per share, as if Triad had been included in the Company’s results of operations during the nine months ended September 30, 2005.  As the cash portion of the Triad purchase price was paid from a portion of the proceeds from the Senior Notes and the concurrent stock offering, the portion of these transactions that were necessary to complete the Triad acquisition are also assumed to have occurred at the beginning of the pro forma period.

	Nine Months ended September 30, 2005
Revenues (in 000’s)	$	373,747
Net loss (in 000’s)		(2,801	)
Earning per share – Basic and Diluted		(0.18	)

(11)

Segment Information

The Company mines, processes and sells bituminous, steam-and industrial-grade coal to electric utilities and industrial customers. The Company has two segments based on the coal basins in which the Company operates.  These basins are located in Central Appalachian (CAPP) and in the Midwest (Midwest).  The Company’s CAPP operations are located in eastern Kentucky and the Company’s Midwest operations are located in southern Indiana.  Coal quality, coal seam height, transportation methods and regulatory issues are generally consistent within a basin.  Accordingly, market and contract pricing have been developed by coal basin.  The Company manages its coal sales by coal basin, not by individual mine complex.  Mine operations are evaluated based on their per-ton operating costs.  Operating segment results for the three months and nine months ended September 20, 2005 are shown below (segment results for periods prior to the acquisition of Triad on May 31, 2005 are not provided as the Company had only one segment).

-22-

Three months ended September 30, 2005

(Amounts in thousands, except per ton amounts)	CAPP			Midwest		Corporate			Consolidated
Revenues	$	98,659			24,278		—			122,937
Income from operations		(1,954	)		698		(3,301	)		(4,557	)
Depreciation, depletion and amortization		11,079			3,662		28			14,769
Total assets		375,351			111,265		2,559			489,175

Nine months ended September 30, 2005

(Amounts in thousands, except per ton amounts)	CAPP		Midwest (1)		Corporate			Consolidated
Revenues	$	301,806		32,319		—			334,125
Income from operations		9,218		1,388		(8,900	)		1,706
Depreciation, depletion and amortization		30,959		4,776		83			35,818
Total assets		375,351		111,265		2,559			489,175

(1)   Includes the results of operation of Triad from the date of its acquisition (May 31, 2005).

The difference between consolidated income from operations of the Company's segments and the Company's consolidated income before income taxes is due to items that are not allocated to the segments (such as interest income and expense, charges associated with the repayment of debt and reorganization items).

-23-

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

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes contained herein.

Overview

We mine, process and sell bituminous, low sulfur, steam- and industrial-grade coal through six operating subsidiaries (“mining complexes ”) located throughout eastern Kentucky and southern Indiana.  We have two reportable business segments based on the coal basins in which we operate (Central Appalachian (CAPP) and the Midwest (Midwest)).  For the nine months ended September 30, 2005, we generated approximately 78% of our revenues from several long-term contracts with electric utilities, including 28% derived from our largest customer, Georgia Power Company.  Of the remaining revenues, 20% were generated by industrial accounts and 2% were generated from fees from the handling and marketing of coal-based synfuel product.

As compared to the prior year, we experienced a significant increase in mining costs during the first nine months of 2005.  The increased costs were primarily due to higher labor costs and an increase in the cost of roof support materials, mining bits and machine parts due to an increase in steel prices.    We continue to focus on reducing our operating costs at each mine and improving miner productivity. 

Reserves

Marshall Miller & Associates, Inc. (“MM&A”) prepared a detailed study of our CAPP reserves as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data.   In connection with our acquisition of Triad, MM&A also prepared a detailed study of Triad’s reserves as of February 1, 2005, based on similar data from Triad.  The coal reserve studies conducted by MM&A were planned and performed to obtain reasonable assurance of the subject demonstrated reserves.  In connection with the studies, MM&A prepared reserve maps and had certified professional geologists develop estimates based on data supplied by us and Triad using standards accepted by government and industry. 

Reserves for these purposes are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.  The reserve estimates were prepared using industry-standard methodology to provide reasonable assurance that the reserves are recoverable, considering technical, economic and legal limitations.  Although MM&A has reviewed our reserves and found them to be reasonable (notwithstanding unforeseen geological, market, labor or regulatory issues that may affect the operations), by assignment, MM&A has not performed an economic feasibility study for our reserves.  In accordance with standard industry practice, we have performed our own economic feasibility analysis for our assigned reserves.  It is not generally considered to be practical, however, nor is it standard industry practice, to perform a feasibility study for a company’s entire reserve portfolio.  In addition, MM&A did not independently verify our control of our properties, and has relied solely on property information supplied by us and Triad.  Reserve acreage, average seam thickness, average seam density and average mine and wash recovery percentages were verified by MM&A to prepare a reserve tonnage estimate for each reserve.  There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves as discussed in “Critical Accounting Estimates – Coal Reserves”.

Based on the MM&A reserve studies and the foregoing assumptions and qualifications, and after giving effect to our operations from the respective dates of the studies through September 30, 2005, we estimate that, as of September 30, 2005, we controlled approximately 241.2 million tons of proven and probable coal reserves in the CAPP region and 19.9 millions tons in the Midwest.  The following table provides additional information regarding changes to our reserves since December 31, 2004 (in millions of tons):

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	CAPP			Midwest			Total
Proven and Probable Reserves, as of December 31, 2004		207.4			—			207.4
Coal Extracted (1)		(6.6	)		(1.2	)		(7.8	)
Acquisitions (2)		39.4			19.9			59.3
Adjustments (3)		1.0			1.2			2.2
Proven and Probable Reserves, as of September 30, 2005		241.2			19.9			261.1

1) Calculated in the same manner, and based on the same assumptions and qualifications, as described above.  Proven reserves have the highest degree of geologic assurance and are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.  Probable reserves have a moderate degree of geologic assurance and are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced.  The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.  This reserve information reflects recoverable tonnage on an as-received basis with 5.5% moisture.

(2) Represents estimated reserves on properties acquired during the relevant period.  We calculated the reserves in the same manner, and based on the same assumptions and qualifications, as described above, but such estimates were not covered by the MM&A reports.

(3) Represents changes in reserves due to additional information obtained from exploration activities, production activities or discovery of new geologic information.  We calculated the adjustments to the reserves in the same manner, and based on the same assumptions and qualifications, as described above, but such estimates were not covered by the MM&A reports.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), which requires all public companies to measure compensation cost in the income statement for all share-based payments (including employee stock options) at fair value for fiscal years beginning after June 15, 2005. We intend to adopt FAS 123R on January 1, 2006 using the modified-prospective method.  We have not completed our assessment of the impact of the adoption of this statement on our consolidated financial statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption to the extent non-qualified stock options are exercised.

Key Performance Indicators

We manage our business through several key performance metrics that provide a summary of information in the areas of sales, operations, and general/administrative costs.

In the sales area, our long-term metrics are the volume-weighted average remaining term of our contracts and our open contract position for the next several years.  During periods of high prices, such as the current period, we may seek to lengthen the average remaining term of our contracts and reduce the open tonnage for future periods.  In the short-term, we closely monitor the Average Selling Price per Ton (ASP), and the mix between our spot sales and contract sales.

In the operations area, we monitor the volume of coal that is produced by each of our principal sources, including company mines, contract mines, and purchased coal sources.  For our company mines, we focus on both operating costs and operating productivity.  Our operating costs are measured by our operating costs per ton produced.

In the selling, general and administrative area, we closely monitor the gross dollars spent per mine operation and in support functions.  We also regularly measure our performance against our internally prepared budgets.

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Trends In Our Business

We expect the current strong pricing environment for coal to weaken somewhat during the next one to two years.  This is due to increased incremental production that has historically come into the markets during periods of strong pricing.  We believe that the impact of this potentially increased production will be offset by the need of utilities to rebuild diminished coal inventories resulting from service difficulties that the major railroads have experienced.  According to the Energy Information Administration (EIA), coal stockpiles at utilities are currently below normal levels.  Any effort by the utilities to rebuild their inventory positions should absorb a portion of any increased coal production.  Continuing difficulties with rail transportation may also have an impact on increased production and market pricing.  If marginal increases in the production of coal cannot be delivered to the utility customers by rail in a timely manner, the depressing effect of the increased production on market prices will be reduced.  In addition, any new coal production would likely require additional permits, labor and equipment, which are currently difficult and time consuming to obtain.

Although the current pricing environment for U.S. coal is strong, coal prices are subject to change based on a number of factors beyond our control, including:

• the supply of domestic and foreign coal;

• the demand for electricity;

• the demand for steel and the continued financial viability of the domestic and foreign steel industries;

• the cost of transporting coal to the customer;

• domestic and foreign governmental regulations and taxes;

• air emission standards for coal-fired power plants; and

• the price and availability of alternative fuels for electricity generation.

As discussed previously, our costs of production have continued to increase.  We expect the higher costs to continue for the next several years, due to a highly competitive market for a limited supply of skilled mining personnel and higher costs in worldwide commodity markets.  We are actively recruiting and training new personnel to staff our mines.  However, we expect the strong market pricing for coal to increase turnover of existing personnel and potentially lead to higher costs for employees that we retain.  Our industry has also experienced increased mining costs due to significant price increases for various commodities, including steel and diesel fuel.  We expect that these increases in commodity prices will moderate in 2006.

Plan of Reorganization

In June 2003, we and all of our subsidiaries filed voluntary petitions with the United States Bankruptcy Court for the Middle District of Tennessee for reorganization under Chapter 11.  In January 2004, we filed a Plan of Reorganization for the Chapter 11 cases.  The plan was subsequently accepted by the required percentage of creditors entitled to vote on the plan and was confirmed by the bankruptcy court in April 2004.

On May 6, 2004, after securing a new senior secured line of credit and term loan facility, our Plan of Reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings.  Our implementation of fresh start accounting pursuant to SOP 90-7 resulted in material changes to our consolidated financial statements, including the valuation of our assets and liabilities at fair value in accordance with principles of purchase accounting, and the valuation of our equity based on a valuation of our business prepared by our independent financial advisors.

As a result of the reorganization transactions and the implementation of fresh start accounting, our results of operations after our emergence from bankruptcy are those of a new reporting entity (the “Successor Company”), and are not comparable to the results of operations of the pre-emergence Company (the “Predecessor Company”) for prior periods described in this management’s discussion and analysis and reported in our consolidated financial statements.

Our interim consolidated financial statements for the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005, presented in this report are unaudited.  The financial statements for the nine months ended September 30, 2004 include the effects of our bankruptcy proceedings.  These include the classification of certain expenses, and gains and losses as reorganization items, and other matters described in the notes to our consolidated financial statements.

Recent Developments

Acquisition of Triad Mining, Inc.

On May 31, 2005, the Company purchased all of the stock of Triad Mining, Inc.  Triad Mining, Inc., together with its wholly-owned subsidiary, Triad Underground Mining, LLC (collectively Triad), owns and operates six surface mines and one underground mine in southern Indiana.   The purchase price, including related costs and fees, of $70.4 million was funded through the issuance of 338,295 shares of our common stock valued at $11.0 million and the remainder was funded with cash from the our equity and debt offerings in May 2005 (see Liquidity and Capital Resources).  In 2004, Triad produced approximately 3.4 million tons of coal.  The acquisition was accounted for as a purchase.

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The Company also entered into an agreement with two of Triad’s principals to issue common stock valued at up to $5.0 million, if prior to May 31, 2007 the Company obtains the right to own, lease or mine certain proven and probable reserves.

The preliminary purchase accounting allocations related to the Triad acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, May 31, 2005, the date of acquisition of Triad. The final valuation of the net assets acquired is expected to be finalized once third-party appraisals are completed including the final valuation of mineral rights.   Additionally, adjustment to the estimated liabilities assumed in connection with the acquisition may still be required.

In connection with the Triad acquisition, we have also entered into a registration rights agreement with the holders of Triad stock giving those holders the right to require us to register the shares of our common stock received by them in the acquisition.

Results of Operations

Three Months Ended September 30, 2005 Compared with the Three Months Ended September 30, 2004

The following table shows selected operating results for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 (in 000’s, except per ton amounts).  The Company’s results of operations include the impact of the Triad acquisition subsequent to May 31, 2005.

	Three Months Ended September 30,
	2005				2004				Change
	Total		Per Ton		Total		Per Ton		Total
Volume (tons)		3,167				2,219				43	%
Revenues
Coal sales		120,372		38.01		88,021		39.67		37	%
Synfuel handling		2,565				1,860				38	%
Cost of coal sold		106,074		33.49		73,582		33.16		44	%
Depreciation, depletion and amortization		14,769		4.66		8,023		3.62		84	%
Gross profit		2,094		0.66		8,276		3.73		-75	%
Selling, general and administrative		6,651		2.10		4,842		2.18		37	%

Volume and Revenues by Segment

	Three Months Ended September 30,
	2005				2004
	CAPP		Midwest		CAPP		Midwest
Volume (tons)		2,247		920		2,219		—
Coal sales revenue	$	96,094		24,278		88,021		—
Average sales price per ton	$	42.77		26.39		39.67		—

For the three months ended September 30, 2005 we shipped 3.2 million tons of coal compared to 2.2 million tons for the same period in 2004.  This increase was primarily due to the acquisition of Triad which added 920,000 tons in 2005.

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Coal sales revenue for the three months ended September 30, increased from $88.0 million in 2004 to $120.4 million in 2005. This increase was due to an increase in the average sales price per ton for sales under long-term contracts and spot sales in CAPP and a $24.3 million increase due to the acquisition of Triad.  For the three months ended September 30, 2005, the CAPP region sold approximately 2.0 million tons of coal under long-term contracts (89% of total CAPP sales volume) at an average selling price of $39.88 per ton.  For the three months ended September 30, 2004, the CAPP region sold 1.7 million tons of coal (77% of total CAPP sales volume) under long-term contracts at an average selling price of $35.47 per ton.  For the three months ended September 30, 2005, the CAPP region sold 241,000 tons of coal (11% of total CAPP sales volume) to the spot market at an average selling price of $66.64 per ton.  For the three months ended September 30, 2004, the CAPP region sold approximately 500,000 tons (23% of total CAPP sales volume) to the spot market at an average selling price of $54.03 per ton. 

Operating Costs by Segment

	Three Months Ended September 30,
	2005						2004
	CAPP		Midwest		Corporate		CAPP		Midwest		Corporate
Cost of coal sold	$	87,130		18,944		—		73,582		—		—
Per ton		38.78		20.59		—		33.16		—		—
Depreciation, depletion and amortization		11,079		3,662		28		7,995		—		27
Per ton		4.93		3.98		—		3.60		—		—

Cost of Coal Sold

For the three months ended September 30, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $73.6 million in 2004 to $106.1 million in 2005.  Our cost per ton of coal sold in the CAPP region increased from $33.16 per ton in the 2004 period to $38.78 per ton in the 2005 period.  This $5.60 increase in cost per ton of coal sold was due to several factors.  Labor and benefit costs increased by $1.65 per ton in the 2005 period primarily due to a wage increase to all production employees, effective January 1, 2005.  The competitive job market in the coal industry necessitated the wage increase.  The labor and benefit costs were also impacted by the implementation of a safety bonus program in 2005 and a refund of insurance premiums totaling $0.8 million.  Variable costs increased by $1.85 per ton, primarily due to a per ton increase in roof support materials, mining bits and machine parts due to the increase in steel prices   Trucking costs increased by $1.20 per ton in the 2005 period due to higher fuel costs.  The cost per ton of coal sold in the Midwest was $20.59 per ton in the 2005 period.

Depreciation, depletion and amortization

For the three months ended September 30, depreciation, depletion and amortization, increased from $8.0 million in 2004 to $14.8 million in 2005.  In the CAPP region, depreciation, depletion and amortization increased $3.1 million to $11.1 million or $4.93 per ton.  This increase was due to normal capital expenditures which increased the depreciable asset base.  In the Midwest, depreciation, depletion and amortization was $3.7 million or $3.98 per ton which reflects the depreciation, depletion and amortization based on the preliminary purchase price allocation for the acquisition of Triad.

Selling, general and administrative

Selling, general and administrative expenses increased from $4.8 million for the three months ended September 30, 2004 to $6.7 million for the three months ended September 30, 2005.  The increase was due to a $2.6 million increase in costs primarily related to stock related compensation, salaries and benefits costs, professional fees and bank charges related to letters of credit.  These increases were offset by a reduction in the bonus accrual of $0.7 million in the nine months ended September 30, 2005.

Income Taxes

Our effective tax rate for the three months ended September 30, 2005 was 73.0%.  Our effective income tax rate is impacted by percentage depletion.  Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties.  Because percentage depletion can be deducted in excess of cost depletion, it creates a permanent difference and directly impacts the effective tax rate.  Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations. 

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Nine Months Ended September 30, 2005 Compared with the Nine Months Ended September 30, 2004

In order to provide a basis for comparing the nine months ended September 30, 2005 with the nine months ended September 30, 2004, the operating results of the Successor Company for the five months ended September 30, 2004 have been combined with the operating results for the Predecessor Company for the four months ended April 30, 2004, for purposes of the following table and discussion.  The combination of predecessor and successor accounting periods is not permitted by generally accepted accounting principles and the operating results are not comparable. Additionally, the Company’s results of operations include the impact of the Triad acquisition subsequent to May 31, 2005.

The following table shows selected operating results for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 (in 000’s, except per ton amounts):

	Nine Months Ended September 30,
	2005				2004				Change
	Total		Per Ton		Total		Per Ton		Total
Volume (tons)		8,044				6,878				17	%
Revenues
Coal sales		327,828		40.75		262,942		38.23		25	%
Synfuel handling		6,297				5,373				17	%
Cost of coal sold		277,981		34.56		210,186		30.56		32	%
Depreciation, depletion and amortization		35,818		4.45		25,875		3.76		38	%
Gross Profit		20,326		2.53		32,254		4.69		-37	%
Selling, general and administrative		18,620		2.31		12,431		1.81		50	%

Volume and Revenues by Segment

	Nine Months Ended September 30,
	2005				2004
	CAPP		Midwest		CAPP		Midwest
Volume (tons)		6,825		1,219		6,878		—
Coal sales revenue	$	295,509		32,319		262,942		—
Average sales price per ton	$	43.30		26.51		38.23		—

For the nine months ended September 30, we shipped 8.0 million tons of coal in 2005 as compared to 6.9 million tons in 2004.  This increase was primarily due to the acquisition of Triad which added 1.2 million tons in 2005.

Coal sales revenue for the nine months ended September 30, increased from $262.9 million in 2004 to $327.8 million in 2005. This increase was due to an increase in the average sales price per ton for sales and a $32.3 million increase due to the acquisition of Triad on May 31, 2005.   For the nine months ended September 30, 2005, the CAPP region sold 5.9 million tons of coal under long-term contracts (86% of total CAPP sales volume) at an average selling price of $40.12 per ton.  For the nine months ended September 30, 2004, the CAPP region sold 5.3 million tons of coal (78% of total CAPP sales volume) under long-term contracts at an average selling price of $35.00 per ton.  For the nine months ended September 30, 2005, the CAPP region sold 927,000 tons of coal (14% of total CAPP sales volume) to the spot market at an average selling price of $63.53 per ton.  For the nine months ended September 30, 2004, the CAPP region sold approximately 1.6 million tons (22% of CAPP total sales volume) to the spot market at an average selling price of $49.48 per ton. 

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Operating Costs by Segment

	Nine Months Ended September 30,
	2005						2004
	CAPP		Midwest		Corporate		CAPP		Midwest		Corporate
Cost of Coal Sold	$	253,060		24,921		—		210,186		—		—
Per ton		37.08		20.44		—		30.56		—		—
Depreciation, depletion, and amortization		30,959		4,776		83		25,783		—		92
Per ton		4.54		3.92		—		3.75		—		—

Cost of Coal Sold

For the nine months ended September 30, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $210.2 million in 2004 to $278.0 million in 2005.  Our cost per ton of coal sold in the CAPP region increased from $30.56 per ton in the 2004 period to $37.08 per ton in the 2005 period.  This $6.52 increase in cost per ton of coal sold was due to several factors.  Labor and benefit costs increased by $1.50 per ton in the 2005 period due to a wage increase to all production employees, effective January 1, 2005.  The competitive job market in the coal industry necessitated this increase.  Variable costs increased by $2.50 per ton, primarily due to a per ton increase in roof support materials, mining bits and machine parts due to the increase in steel prices.  Trucking costs increased by $1.18 per ton in the 2005 period due to higher fuel costs.  Cost per ton of coal sold in the Midwest region was $20.44 in the 2005 period.

Depreciation, depletion and amortization

For the nine months ended September 30, depreciation, depletion and amortization, increased from $25.9 million in 2004 to $35.8 million in 2005.  In the CAPP region, depreciation, depletion and amortization increased $5.2 million to $31.0 million or $4.54 per ton.  These expenses are not comparable due to the impact of fresh start accounting on our asset base.  In the Midwest, depreciation, depletion and amortization was $4.8 million or $3.92 per ton which reflects the depreciation, depletion and amortization from the preliminary purchase price allocation for the acquisition of Triad.

Selling, general and administrative

Selling, general and administrative expenses increased from $12.4 million for the nine months ended September 30, 2004 to $18.6 million for the nine months ended September 30, 2005. Approximately $3.8 million of this increase was due to stock related compensation, salaries and benefits costs, professional fees and bank charges related to letters of credit.

Income Taxes

Our effective tax rate for the nine months ended September 30, 2005 was 67.8%.  Our effective income tax rate is impacted by percentage depletion.  Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties.  Because percentage depletion can be deducted in excess of cost depletion, it creates a permanent difference and directly impacts the effective tax rate.  Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations. 

Liquidity and Capital Resources

In May 2005, we issued 1.5 million shares of common stock at $32.50 per share and $150 million of Senior Notes due on June 1, 2012 (the Senior Notes).  The net proceeds of $187.2 million from the Senior Notes and the concurrent equity offering were used to repay existing debt, to fund our acquisition of Triad and for general corporate purposes.  The Senior Notes are unsecured and accrue interest at 9.375% annum.  Interest payments on the Senior Notes are required semi-annually.  We may redeem the Senior Notes, in whole or in part, at any time on or after June 1, 2009 at redemption prices from 104.86% in 2009 to 100% in 2011.  In addition, at any time prior to June 1, 2008, we may redeem up to 35% of the principal amount of the Senior Notes with the net cash proceeds of a public equity offering at a redemption price of 109.375%, plus accrued and unpaid interest to the redemption date.

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The Senior Notes limit our ability, among other things, to pay cash dividends.  In addition, if a change of control occurs (as defined in the Indenture), each holder of the Senior Notes will have the right to require us to repurchase all or a part of the Senior Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of repurchase.

Concurrent with the Senior Notes and equity offering, we entered into a Senior Secured Credit Facility consisting of a $25.0 million revolving credit facility (the Revolver) and a $75.0 million letter of credit facility (the Letter of Credit Facility).  The Revolver matures on May 31, 2010 and the Letter of Credit Facility matures on November 30, 2011.  The Senior Secured Credit Facility is secured by substantially all of the Company’s assets.

Proceeds from the Revolver are available for working capital needs and other general corporate purposes.  The Revolver bears an interest rate per annum equal to a rate based on our leverage ratio (the Applicable Rate) plus the Company’s option of either (i) the greater of (a) the prime rate or (b) the federal funds open rate plus 0.5% or (ii) a Euro Rate as defined in the credit agreement. The Applicable Rate ranges from 1.00% to 1. 75% for borrowing based on the prime rate or federal funds open rate and 2.00% to 2.75% for borrowing based on the Euro Rate.  The Revolver also requires a 0.5% commitment fee on the unused balance of the Revolver.

The Letter of Credit Facility does not constitute a loan to us and according is not available to us for borrowing.  The Letter of Credit Facility only supports the issuance of up to $75 million of letters of credit.  We pay a 3.0% per annum fee on the full balance of the Letter of Credit Facility and an additional 0.25% annual fee on the average balance of letters of credit issued under the Letter of Credit Facility. 

The Senior Secured Credit Facility requires mandatory repayments or reductions in the amount of 50% of the net proceeds of any sale or issuance of equity securities, 100% of the net proceeds of any incurrence of certain indebtedness and 100% of the net proceeds of any sale or other disposition if any assets. Voluntary prepayments are permitted at any time.

The Senior Secured Credit Facility and the Senior Notes contain financial covenants including a fixed charge coverage ratio, senior secured leverage ratio and maximum annual limits on capital expenditures.   Our debt covenants also prohibit payment of cash dividends.  We were in compliance with all of the financial covenants of the Senior Secured Credit Facility as of September 30, 2005.  

The following chart reflects the components of our debt as of September 30, 2005 and December 31, 2004:

	September 30, 2005		December 31, 2004
Senior Notes	$	150,000		—
Senior Secured Credit Facility – Revolver		—		—
Prior Senior Secured Credit Facility - Term loan		—		20,000
Prior Term Credit Facility		—		75,000
Total long-term debt		150,000		95,000
Less amounts classified as current		—		2,700
Total long-term debt, less current maturities	$	150,000		92,300

As of September 30, 2005, we had available liquidity of approximately $49.2 million.  This consisted of unrestricted cash on hand of approximately $24.2 million and availability under the Revolver of our Senior Secured Credit Facility of approximately $25.0 million.  

Excluding the financings discussed above, our primary source of cash will be sales of coal to our utility and industrial customers.  The price of coal received can change dramatically based on supply and demand and will directly affect this source of cash.  Our primary uses of cash include the payment of ordinary mining expenses to mine coal, capital expenditures and benefit payments.  Ordinary mining expenses are driven by the cost of supplies, including steel prices and diesel fuel.  Benefit payments include payments for workers’ compensation and black lung benefits paid over the lives of our employees as the claims are submitted.  We are required to pay these when due, and are not required to set aside cash for these payments.  We have posted surety bonds with state regulatory departments to guarantee these payments and have issued letters of credit to secure these bonds.  We believe that our Letter of Credit Facility provides us with the ability to meet the necessary bonding requirements. 

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Our secondary source of cash is the Revolver.  We believe that cash on hand, cash generated from our operating activities, and availability under the revolver component of our Senior Secured Credit Facility will be sufficient to meet our working capital needs, to fund our capital expenditures for existing operations and to meet our debt service obligations for the next twelve months.  Nevertheless, there are many factors beyond our control, including general economic and coal market conditions that could have a material adverse impact on our ability to meet our liquidity needs.

In the event that the sources of cash described above are not sufficient to meet our future cash requirements, we will need to reduce certain planned expenditures, seek additional financing, or both.  If debt financing is not available on favorable terms, we may seek to raise funds through the issuance of our equity securities.  If such actions are not sufficient, we may need to limit our growth, reduce or curtail some of our operations to levels consistent with the constraints imposed by our available cash flow, or both.  Our ability to seek additional debt or equity financing may be limited by our existing and any future financing arrangements, economic and financial conditions, or both.  In particular, our Senior Notes and new Senior Secured Credit Facility, restrict our ability to incur additional indebtedness.  We cannot provide assurance that any reductions in our planned expenditures or in our expansion would be sufficient to cover shortfalls in available cash or that additional debt or equity financing would be available on terms acceptable to us, if at all.

Other than ordinary course of business expenses and capital expenditures for existing mines during the next several years, our only large expected use of cash are discussed below in the “Project Development” section.  We expect that such expenditures will be funded through cash on hand; cash generated by operations and from our Senior Secured Credit Facility.

Net cash provided by or used in operating activities reflects net income or loss adjusted for non-cash charges and changes in net working capital (including non-current operating assets and liabilities).  Net cash provided by operating activities was $35.6 million for the nine months ended September 30, 2005 as compared to $14.0 million in the nine months ended September 30, 2004.  Although our cash from operations has changed significantly in the periods discussed, we do not believe that these periods are comparable due to our emergence from bankruptcy.  We experienced unusual swings in working capital leading up to and entering bankruptcy.  We also were able to renegotiate our coal contracts due to the bankruptcy, which increased our revenues. 

Net cash used by investing activities was $106.9 million in the nine months ended September 30, 2005 as compared to $19.2 million in the nine months ended September 30, 2004.  The increase was primarily due to capital expenditures for the development of Mine 15 at our McCoy Elkhorn complex of $15.2 million and $59.4 million of payments in connection with our acquisition of Triad, net of cash acquired, during the nine months ended September 30, 2005.  The remaining capital expenditures primarily consisted of new and replacement mine equipment and various projects to improve the efficiency of our mining operations.

Net cash provided by or used in financing activities primarily reflects changes in short- and long-term financing.  Net cash provided by financing activities was $91.5 million for the nine months ended September 30, 2005 and $17.5 million for the nine months ended September 30, 2004.  The cash provided by financing in the nine months ended September 30, 2005 was the primarily the result of the completion of the concurrent stock and note offerings, net of the repayment of our previous debt and offering costs.

Certain Risks

For a discussion of certain risk factors that may impact our business, refer to “Critical Accounting Estimates and Assumptions” within this Form 10-Q.  The following are additional risks and uncertainties that we believe are material to our business.  It is possible that there are additional risks and uncertainties that affect our business that will arise or become material in the future.

Risks Related to the Coal Industry

Because the demand and pricing for coal is greatly influenced by consumption patterns of the domestic electricity generation industry, a reduction in the demand for coal by this industry would likely cause our profitability to decline significantly.

We derived 83% of our total revenues (contract and spot) in the year ended December 31, 2004 and the nine months ended September 30, 2005, from our electric utility customers. Fuel cost is a significant component of the cost associated with coal-fired power generation, with respect to not only the price of the coal, but also the costs associated with emissions control and credits (i.e., sulfur dioxide, nitrogen oxides, etc.), combustion by-product disposal (i.e., ash) and equipment operations and maintenance (i.e., materials handling facilities). All of these costs must be considered when choosing between coal generation and alternative methods, including natural gas, nuclear, hydroelectric and others.

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Weather patterns also can greatly affect electricity generation. Extreme temperatures, both hot and cold, cause increased power usage and, therefore, increased generating requirements from all sources. Mild temperatures, on the other hand, result in lower electrical demand, which allows generators to choose the lowest-cost sources of power generation when deciding which generation sources to dispatch. Accordingly, significant changes in weather patterns could reduce the demand for our coal.

Overall economic activity and the associated demands for power by industrial users can have significant effects on overall electricity demand. Robust economic activity can cause much heavier demands for power, particularly if such activity results in increased utilization of industrial assets during evening and nighttime periods. The economic slowdown experienced during the last several years significantly slowed the growth of electrical demand and, in some locations, resulted in contraction of demand.

Any downward pressure on coal prices, whether due to increased use of alternative energy sources, changes in weather patterns, decreases in overall demand or otherwise, would likely cause our profitability to decline.

Deregulation of the electric utility industry may cause our customers to be more price-sensitive in purchasing coal, which could cause our profitability to decline.

Electric utility deregulation is expected to provide incentives to generators of electricity to minimize their fuel costs and is believed to have caused electric generators to be more aggressive in negotiating prices with coal suppliers. To the extent utility deregulation causes our customers to be more cost-sensitive, deregulation may have a negative effect on our profitability.

Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability.

We compete in a worldwide market. The pricing and demand for our products is affected by a number of factors beyond our control. These factors include:

• currency exchange rates;

• growth of economic development; and

• ocean freight rates.

Any decrease in the amount of coal exported from the United States, or any increase in the amount of coal imported into the United States, could have a material adverse impact on the demand for our coal, our pricing and our profitability.

Increased consolidation and competition in the U.S. coal industry may adversely affect our revenues and profitability.

During the last several years, the U.S. coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive. According to Platts, the world’s largest energy information provider, although there are more than 600 coal producers in the United States, the ten largest coal companies accounted for approximately 63% of total domestic coal production in 2003. Consequently, many of our competitors in the domestic coal industry are major coal producers who have significantly greater financial resources than us. The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and profitability.

Fluctuations in transportation costs and the availability and dependability of transportation could affect the demand for our coal and our ability to deliver coal to our customers.

Increases in transportation costs could have an adverse effect on demand for our coal. Customers choose coal supplies based, primarily, on the total delivered cost of coal. Our coal is generally shipped via rail systems (CSX and Norfolk Southern), although we also transport a small portion of our coal by truck. During 2004, we shipped in excess of 95% of our coal via CSX. Any increase in transportation costs would cause an increase in the total delivered cost of coal. That could cause some of our customers to seek less expensive sources of coal or alternative fuels to satisfy their energy needs. In addition, significant decreases in transportation costs from other coal-producing regions, both domestic and international, could result in increased competition from coal producers in those regions. For instance, coal mines in the western U.S. could become more attractive as a source of coal to consumers in the eastern U.S. if the costs of transporting coal from the West were significantly reduced.

We depend primarily upon railroads, and, in particular, the CSX railroad, to deliver coal to our customers. Disruption of railroad service due to weather-related problems, strikes, lockouts, bottlenecks and other events could temporarily impair our ability to supply coal to our customers, resulting in decreased shipments. Decreased performance levels over longer periods of time could cause our customers to look elsewhere for their fuel needs, negatively affecting our revenues and profitability.

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Recently, the major eastern railroads (CSX and Norfolk Southern) experienced significant service problems. These problems were caused by an increase in overall rail traffic from the expanding economy and shortages of both equipment and personnel. The service problems had an adverse effect on our shipments. If these service problems persist, they could have an adverse impact on our financial results for the remainder of 2005 and beyond.

Shortages or increased costs of skilled labor in the Central Appalachian coal region may hamper our ability to achieve high labor productivity and competitive costs.

Coal mining continues to be a labor-intensive industry. As the demand for coal has increased, many producers have attempted to increase coal production, which has resulted in a competitive market for the limited supply of trained coal miners in the Central Appalachian region. In some cases, this market situation has caused compensation levels to increase, particularly for “skilled” positions such as electricians and mine foremen. To maintain current production levels, we may be forced to respond to these increases in wages and other forms of compensation, and related recruiting efforts by our competitors. Any future shortage of skilled miners, or increases in our labor costs, could have an adverse impact on our labor productivity and costs and on our ability to expand production.

Government laws, regulations and other requirements relating to the protection of the environment, health and safety and other matters impose significant costs on us, and future requirements could limit our ability to produce coal.

We are subject to extensive federal, state and local regulations with respect to matters such as:

• employee health and safety;

• permitting and licensing requirements;

• air quality standards;

• water quality standards;

• plant, wildlife and wetland protection;

• the management and disposal of hazardous and non-hazardous materials generated by mining operations;

• the storage of petroleum products and other hazardous substances;

• reclamation and restoration of properties after mining operations are completed;

• discharge of materials into the environment, including air emissions and wastewater discharge;

• surface subsidence from underground mining; and

• the effects of mining operations on groundwater quality and availability.

Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations. We could incur substantial costs, including clean up costs, fines, civil or criminal sanctions and third party claims for personal injury or property damage as a result of violations of or liabilities under these laws and regulations.

The coal industry is also affected by significant legislation mandating specified benefits for retired miners. In addition, the utility industry, which is the most significant end user of coal, is subject to extensive regulation regarding the environmental impact of its power generating activities. Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, the volume and price of our coal sales or could making coal a less attractive fuel alternative in the planning and building of utility power plants in the future.

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New legislation, regulations and orders adopted or implemented in the future (or changes in interpretations of existing laws and regulations) may materially adversely affect our mining operations, our cost structure and our customers’ operations or ability to use coal.

The majority of our coal supply agreements contain provisions that allow the purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in too great an increase in the cost of coal. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.

The passage of legislation responsive to the Framework Convention on Global Climate Change or similar governmental initiatives could result in restrictions on coal use.

The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide. In December 1997, the signatories to the convention established a potentially binding set of emissions targets for developed nations. Although the specific emissions 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. The U.S. Senate has not ratified the treaty commitments, and the Bush administration has officially opposed the Kyoto Protocol and has proposed an alternative to reduce the intensity of United States emissions of greenhouse gases. With Russia’s ratification of the Kyoto Protocol in 2004, it became binding on all ratifying countries. The implementation of the Kyoto Protocol in a number of countries, and other emissions limits, such as those adopted by the European Union, could affect demand for coal outside the United States. If the Kyoto Protocol or other comprehensive legislation focusing on greenhouse gas emissions is enacted by the United States, it could have the effect of restricting the use of coal. Other efforts to reduce emissions of greenhouse gases and federal initiatives to encourage the use of natural gas also may affect the use of coal as an energy source.

We are subject to the federal Clean Water Act and similar state laws which impose treatment, monitoring and reporting obligations.

The federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. New requirements under the Clean Water Act and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results.

New regulations have expanded the definition of black lung disease and generally made it easier for claimants to assert and prosecute claims, which could increase our exposure to black lung benefit liabilities.

In January 2001, the United States Department of Labor amended the regulations implementing the federal black lung laws to give greater weight to the opinion of a claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents. The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand. These and other changes to the federal black lung regulations could significantly increase our exposure to black lung benefits liabilities.

In recent years, legislation on black lung reform has been introduced but not enacted in Congress. It is possible that this legislation will be reintroduced for consideration by Congress. If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase. Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations.

Extensive environmental laws and regulations affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales to decline.

The Clean Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal. Compliance with such laws and regulations, which can take a variety of forms, may reduce demand for coal as a fuel source because they require significant emissions control expenditures for coal-fired power plants to attain applicable ambient air quality standards, which may lead these generators to switch to other fuels that generate less of these emissions and may also reduce future demand for the construction of coal-fired power plants.

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The U.S. Department of Justice, on behalf of the EPA, has filed lawsuits against several investor-owned electric utilities and brought an administrative action against one government-owned utility for alleged violations of the Clean Air Act. We supply coal to some of the currently-affected utilities, and it is possible that other of our customers will be sued. These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures, any of which could adversely impact their demand for our coal.

A regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks restricts the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions.

The Clean Air Act also imposes standards on sources of hazardous air pollutants. For example, the EPA has announced that it would regulate hazardous air pollutants from coal-fired power plants. Under the Clean Air Act, coal-fired power plants will be required to control hazardous air pollution emissions by no later than 2009, which likely will require significant new investment in controls by power plant operators. These standards and future standards could have the effect of decreasing demand for coal.

Other so-called multi-pollutant bills, which could regulate additional air pollutants, have been proposed by various members of Congress. If such initiatives are enacted into law, power plant operators could choose other fuel sources to meet their requirements, reducing the demand for coal.

The characteristics of coal may make it difficult for coal users to comply with various environmental standards related to coal combustion. As a result, they may switch to other fuels, which would affect the volume of our sales.

Coal contains impurities, including sulfur, nitrogen oxide, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, and the volume and price of our coal sales.  Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future.

For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users may need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low sulfur coal or switch to other fuels. Each option has limitations. Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs. The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines. Switching to other fuels may require expensive modification of existing plants.

On March 15, 2005, the U.S. Environmental Protection Agency adopted a new federal rule to cap and reduce mercury emissions from both new and existing coal-fired power plants. The reductions will be implemented in stages, primarily through a market-based cap-and-trade program. Nevertheless, the new regulations will likely require some power plants to install new equipment, at substantial cost, or discourage the use of certain coals containing higher levels of mercury.

Other new and proposed reductions in emissions of sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels. For example, the Environmental Protection Agency recently proposed separate regulations to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxides through the eastern United States. The Environmental Protection Agency continues to require reduction of nitrogen oxide emissions in 22 eastern states and the District of Columbia and will require reduction of particulate matter emissions over the next several years for areas that do not meet air quality standards for fine particulates. In addition, Congress and several states are now considering legislation to further control air emissions of multiple pollutants from electric generating facilities and other large emitters. These new and proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative to the planning and building of utility power plants in the future. To the extent that any new or proposed requirements affect our customers, this could adversely affect our operations and results.

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We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations.

Numerous governmental permits and approvals are required for mining operations. Our operations are principally regulated under permits issued by state regulatory and enforcement agencies pursuant to the Surface Mining Control and Reclamation Act of 1977 (“SMCRA”). Regulatory authorities exercise considerable discretion in the timing and scope of permit issuance. Requirements imposed by these authorities may be costly and time consuming and may result in delays in the commencement or continuation of exploration or production operations. In addition, we often are required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration for or production of coal might have on the environment. Further, the public may comment on and otherwise engage in the permitting process, including through intervention in the courts. Accordingly, the permits we need may not be issued, or, if issued, may not be issued in a timely fashion, or may involve requirements that restrict our ability to conduct our mining operations or to do so profitably.

Prior to placing excess fill material in valleys, coal mining companies are required to obtain a permit from the U.S. Army Corps of Engineers under Section 404 of the Clean Water Act. The permit can be either a simplified Nation Wide Permit #21 (“NWP 21”) or a more complicated individual permit. On July 8, 2004, U.S. District Judge Joseph R. Goodwin of the Southern District of West Virginia, Huntington Division found that NWP 21 is in violation of the Clean Water Act. This ruling applies only to certain counties in southern West Virginia (where we do not now operate) and does allow permits to continue to be issued under the more costly and time consuming individual permit process. It is possible that in the future, a similar ruling could be made for our operating areas.

In January 2005, a virtually identical claim to that filed in West Virginia was filed in Kentucky. The plaintiffs in this case, Kentucky River Keeper, Inc., et al. v. Colonel Robert A. Rowlette, Jr., et al., Civil Action No 05-CV-36-JBC, seek the same relief as that sought in West Virginia. Though the matter is still in the preliminary stages, a ruling for the plaintiffs in this matter could have an adverse effect on our operations.

Recent litigation could impact our ability to conduct underground mining operations.

On March 29, 2002, the United States District Court for the District of Columbia issued a ruling that could restrict underground mining activities conducted in the vicinity of public roads, within a variety of federally protected lands, within national forests and within a certain proximity of occupied dwellings. The lawsuit, Citizens Coal Council v. Norton, was filed in February 2000 to challenge regulations issued by the Department of Interior providing, among other things, that subsidence and underground activities that may lead to subsidence are not surface mining activities within the meaning of SMCRA. SMCRA generally contains restrictions and certain prohibitions on the locations where surface mining activities can be conducted. The District Court entered summary judgment on the plaintiffs’ claims that the Secretary of the Interior’s determination violated SMCRA. This decision was recently reversed by the United States Court of Appeals for the Fourth Circuit, which upheld the regulation. In December 2003, a petition for a writ of certiorari was filed by the Citizens Coal Council and others requesting U.S. Supreme Court review.

In the future, we intend to conduct underground mining activities on properties that are within federally protected lands or national forests where the above-mentioned restrictions within the meaning of SMCRA could apply. Any reinstatement of the District Court decision by the Supreme Court would pose a potential restriction on underground mining within 100 feet of a public road as well as other restrictions. If these SMCRA restrictions ultimately apply to underground mining, considerable uncertainty would exist about the nature and extent of this restriction. While, even if that occurs, it could remain possible to obtain permits for underground mining operations in these areas, the time and expense of that permitting process would be likely to increase significantly and the restrictions placed on the mining of those properties could adversely affect our costs.

We have significant reclamation and mine closure obligations. If the assumptions underlying our accruals are materially inaccurate, we could be required to expend greater amounts than anticipated.

The SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. We accrue for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary. Effective January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143 (SFAS 143) to account for the costs related to the closure of mines and the reclamation of the land upon exhaustion of coal reserves. This statement requires the fair value of an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. At September 30, 2005, we had accrued $27.0 million related to estimated mine reclamation costs. These amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates. Furthermore, these obligations are unfunded. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

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Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.

Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations. Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States. In addition, disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Operations

The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues.

For the nine months ended September 30, 2005, we generated approximately 78% of our total revenues from several long-term contracts with electrical utilities, including 28% from our largest customer, Georgia Power Company, and 17% from South Carolina Public Service Authority. At September 30, 2005, we had coal supply agreements with these customers that expire at various times from 2005 to 2007.  The execution of a substantial coal supply agreement is frequently the basis on which we undertake the development of coal reserves required to be supplied under the contract.

Many of our coal supply agreements contain provisions that permit adjustment of the contract price upward or downward at specified times. Failure of the parties to agree on a price under those provisions may allow either party to either terminate the contract or reduce the coal to be delivered under the contract. Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the customer or us the duration of specified events beyond the control of the affected party. Most coal supply agreements contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as:

• British thermal units (Btu’s);

• sulfur content;

• ash content;

• grindability; and

• ash fusion temperature.

In some cases, failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts. In addition, all of our contracts allow our customers to renegotiate or terminate their contracts in the event of changes in regulations or other governmental impositions affecting our industry that increase the cost of coal beyond specified limits. Further, we and Triad have been required in the past to purchase sulfur credits or make other pricing adjustments to comply with contractual requirements of our customers relating to the sulfur content of coal sold to them, and may be required to do so in the future.

The operating profits we realize from coal sold under supply agreements depend on a variety of factors. In addition, price adjustment and other provisions may increase our exposure to short-term coal price volatility provided by those contracts. If a substantial portion of our coal supply agreements are modified or terminated, we could be materially adversely affected to the extent that we are unable to find alternate buyers for our coal at the same level of profitability. The current strength in the coal market may not continue. As a result, we might not be able to replace existing long-term coal supply agreements at the same prices or with similar profit margins when they expire.

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Our profitability will be negatively impacted if we are unable to balance our mix of contract and spot sales.

We have implemented a sales plan that includes long-term contracts (greater than one year) and spot sales/short-term contracts (less than one year). We have structured our sales plan based on the assumptions that demand will remain adequate to maintain current shipping levels and that any disruptions in the market will be relatively short-lived. If we are unable to maintain a balance of contract sales with spot sales, or our markets become depressed for an extended period of time, our volumes and margins could decrease, negatively affecting our profitability.

Our ability to operate our company effectively could be impaired if we lose senior executives or fail to employ needed additional personnel.

The loss of senior executives could have a material adverse effect on our business. There may be a limited number of persons with the requisite experience and skills to serve in our senior management positions. We may not be able to locate or employ qualified executives on acceptable terms. In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. We might not continue to be able to employ key personnel, or to attract and retain qualified personnel in the future. Failure to retain senior executives or attract key personnel could have a material adverse effect on our operations and financial results.

Unexpected increases in raw material costs could significantly impair our operating results.

Our coal mining operations use significant amounts of steel, petroleum products and other raw materials in various pieces of mining equipment, supplies and materials, including the roof bolts required by the room and pillar method of mining described below. Scrap steel prices have risen significantly in recent months, and historically, the prices of scrap steel and petroleum have fluctuated. If the price of steel or other of these materials increase, our operational expenses will increase, which could have a significant negative impact on our operating results.

Coal mining is subject to conditions or events beyond our control, which could cause our quarterly or annual results to deteriorate.

Our coal mining operations are conducted, in large part, in underground mines and, to a lesser extent, at surface mines. These mines are subject to conditions or events beyond our control that could disrupt operations, affect production and the cost of mining at particular mines for varying lengths of time and have a significant impact on our operating results. These conditions or events have included:

• variations in thickness of the layer, or seam, of coal;

• variations in geological conditions;

• amounts of rock and other natural materials intruding into the coal seam;

• equipment failures and unexpected major repairs;

• unexpected maintenance problems;

• unexpected departures of one or more of our contract miners;

• fires and explosions from methane and other sources;

• accidental minewater discharges or other environmental accidents;

• other accidents or natural disasters; and

• weather conditions.

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Mining in Central Appalachia is complex due to geological characteristics of the region.

The geological characteristics of coal reserves in Central Appalachia, such as depth of overburden and coal seam thickness, make them complex and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. These factors could materially adversely affect the mining operations and cost structures of, and customers’ ability to use coal produced by, operators in Central Appalachia, including us.

Our future success depends upon our ability to acquire or develop additional coal reserves that are economically recoverable.

Our recoverable reserves decline as we produce coal. Since we attempt, where practical, to mine our lowest-cost reserves first, we may not be able to mine all of our reserves as profitably as we do at our current operations. Our planned development and exploration projects might not result in significant additional reserves, and we might not have continuing success developing additional mines. For example, our construction of additional mining facilities necessary to exploit our reserves could be delayed or terminated due to various factors, including unforeseen geological conditions, weather delays or unanticipated development costs. Our ability to acquire additional coal reserves in the future also could be limited by restrictions under our existing or future debt facilities, competition from other coal companies for attractive properties, or the lack of suitable acquisition candidates.

In order to develop our reserves, we must receive various governmental permits.  We have not yet applied for the permits required or developed the mines necessary to mine all of our reserves. In addition, we might not continue to receive the permits necessary for us to operate profitably in the future. We may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain our leasehold interests in properties on which mining operations are not commenced during the term of the lease.

Our financial performance may suffer if we do not successfully execute our development plans.

We are currently undertaking numerous project development plans as discussed in “Project Development” below.  If we our unable to successfully implement our planned development projects our financial performance could be negatively affected.

Factors beyond our control could impact the amount and pricing of coal supplied by our independent contractors and other third parties.

In addition to coal we produce from our Company-operated mines, we have mines that typically are operated by independent contract mine operators, and we purchase coal from third parties for resale. For 2006, we anticipate approximately 6% of our total production will come from mines operated by independent contract mine operators and that almost 5% of our total coal sold will come from third party purchased coal sources. Operational difficulties, changes in demand for contract mine operators from our competitors and other factors beyond our control could affect the availability, pricing and quality of coal produced for us by independent contract mine operators. The demand for contract mining companies has increased significantly due to the current strong market prices for coal from Central Appalachia. Disruptions in supply, increases in prices paid for coal produced by independent contract mine operators or purchased from third parties, or the availability of more lucrative direct sales opportunities for our purchased coal sources could increase our costs or lower our volumes, either of which could negatively affect our profitability.

We face significant uncertainty in estimating our recoverable coal reserves, and variations from those estimates could lead to decreased revenues and profitability.

Forecasts of our future performance are based on estimates of our recoverable coal reserves. Estimates of those reserves are based on studies conducted by Marshall Miller & Associates, Inc. in accordance with industry-accepted standards. A number of sources of information were used to determine recoverable reserves estimates, including:

• currently available geological, mining and property control data and maps;

• our own operational experience and that of our consultants;

• historical production from similar areas with similar conditions;

• previously completed geological and reserve studies;

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

• assumptions governing future prices and future operating costs.

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Reserve estimates will change from time to time to reflect, among other factors:

• mining activities;

• new engineering and geological data;

• acquisition or divestiture of reserve holdings; and

• modification of mining plans or mining methods.

Therefore, actual coal tonnage recovered from identified reserve areas or properties, and costs associated with our mining operations, may vary from estimates. These variations could be material, and therefore could result in decreased profitability. For a further discussion of our coal reserves, see “Reserves” above.

Our operations could be adversely affected if we are unable to obtain required surety bonds.

Federal and state laws require bonds to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations. As of September 30, 2005, we had outstanding surety bonds with third parties for post-mining reclamation totaling $47.8 million. Furthermore, we have surety bonds for an additional $44.3 million in place for our federal and state workers’ compensation obligations and other miscellaneous obligations. Insurance companies have informed us, along with other participants in the coal industry, that they no longer will provide surety bonds for workers’ compensation and other post-employment benefits without collateral. We have satisfied our obligations under these statutes and regulations by providing letters of credit or other assurances of payment. However, letters of credit can be significantly more costly to us than surety bonds. The issuance of letters of credit under our Senior Secured Credit Facility also reduces amounts that we can borrow under our Senior Secured Credit Facility for other purposes. If we are unable to secure surety bonds for these obligations in the future, and are forced to secure letters of credit indefinitely, our profitability may be negatively affected.

We have significant unfunded obligations for long-term employee benefits for which we accrue based upon assumptions, which, if incorrect, could result in us being required to expend greater amounts than anticipated.

We are required by law to provide various long-term employee benefits. We accrue amounts for these obligations based on the present value of expected future costs. We employed an independent actuary to complete estimates for our workers’ compensation and black lung (both state and federal) obligations. At September 30, 2005, the current and non-current portions of these obligations included $26.4 million for coal workers’ black lung benefits and $51.9 million for workers’ compensation benefits.

We use a valuation method under which the total present and future liabilities are booked based on actuarial studies. Our independent actuary updates these liability estimates annually. However, if our assumptions are incorrect, we could be required to expend greater amounts than anticipated. All of these obligations are unfunded. In addition, the federal government and the governments of the states in which we operate consider changes in workers’ compensation laws from time to time. Such changes, if enacted, could increase our benefit expenses and payments.

We may be unable to adequately provide funding for our pension plan obligations based on our current estimates of those obligations.

We provide pension benefits to eligible employees. As of December 31, 2004, we estimated that our pension plan was underfunded by approximately $21.9 million. As of the same date, we had long-term pension obligations of $15.7 million, with the difference between that amount and the underfunded amount due to unamortized actuarial losses. As of September 30, 2005, we had long-term pension obligations of $13.5 million. If future payments are insufficient to fund the pension plan adequately to cover our future pension obligations, we could incur cash expenditures and costs materially higher than anticipated. The pension obligation is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year. In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated.

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As a result of our adoption of “fresh start” accounting in connection with our emergence from bankruptcy, you will not be able to compare our financial statements for periods before our emergence from bankruptcy with our financial results for periods after our emergence from bankruptcy.

As a result of the consummation of our Plan of Reorganization and the transactions contemplated thereby, we are operating our business under a new capital structure. In addition, we became subject to the fresh start accounting rules upon emerging from bankruptcy. Accordingly, our financial condition and results of operations disclosed for periods after our emergence from bankruptcy differ significantly from the financial condition or results of operations reflected in our financial statements for periods before our emergence from bankruptcy.

Substantially all of our assets are subject to security interests.

Substantially all of our cash, receivables, inventory and other assets are subject to various liens and security interests under our debt agreements.  If one of these security interest holders becomes entitled to exercise its rights as a secured party, it would have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to its security interest, and the collateral accordingly would be unavailable to us and our other creditors, except to the extent, if any, that other creditors have a superior or equal security interest in the affected collateral or the value of the affected collateral exceeds the amount of indebtedness in respect of which these foreclosure rights are exercised.

We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these agreements.

Our debt agreements impose a number of restrictions on us. A failure to comply with these restrictions could adversely affect our ability to borrow under our Revolver or result in an event of default. Our debt agreements contain financial and other covenants that create limitations on our ability to, among other things, borrow the full amount on our Revolver, issue letters of credit under our Letter of Credit Facility  or incur additional debt, and require us to maintain various financial ratios and comply with various other financial covenants. These covenants include the following requirements:

• minimum fixed charge coverage ratio;

• maximum total leverage ratio and senior secured leverage ratio;

• maximum limits on capital expenditures.

In the event of a default, our lenders could terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable. If this were to occur, we might not be able to pay these amounts or we might be forced to seek an amendment to our debt agreements which could make the terms of these agreements more onerous for us and require the payment of amendment or waiver fees. Failure to comply with these restrictions, even if waived by our lenders, also could adversely affect our credit ratings, which could increase the costs of debt financings to us and impair our ability to obtain additional debt financing.

Changes in our credit ratings could adversely affect our costs and expenses.

Any downgrade in our credit ratings could adversely affect our ability to borrow and result in more restrictive borrowing terms, including increased borrowing costs, more restrictive covenants and the extension of less open credit. This, in turn, could affect our internal cost of capital estimates and therefore impact operational decisions.

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Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs.

We conduct substantially all of our mining operations on properties that we lease. The loss of any lease could adversely affect our ability to mine the associated reserves. Because we generally do not obtain title insurance or otherwise verify title to our leased properties, our right to mine some of our reserves has been in the past, and may again in the future be, adversely affected if defects in title or boundaries exist. In order to obtain leases or rights to conduct our mining operations on property where these defects exist, we have had to, and may in the future have to, incur unanticipated costs. In addition, we may not be able to successfully negotiate new leases for properties containing additional reserves. Some leases have minimum production requirements. Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.

Inability to satisfy contractual obligations may adversely affect our profitability.

From time to time, we have disputes with our customers over the provisions of long-term contracts relating to, among other things, coal quality, pricing, quantity and delays in delivery. In addition, we may not be able to produce sufficient amounts of coal to meet our commitments to our customers. Our inability to satisfy our contractual obligations could result in our need to purchase coal from third party sources to satisfy those obligations or may result in customers initiating claims against us. We may not be able to resolve all of these disputes in a satisfactory manner, which could result in substantial damages or otherwise harm our relationships with customers.

The disallowance or early termination of Section 29 tax credits for synfuel plants by the Internal Revenue Service could decrease our revenues.

We supply coal to a third party synfuel plant and receive fees for the handling, shipping and marketing of the synfuel product. Synfuel is a synthetic fuel product that is produced by chemically altering coal. In 2004, 2% of our total revenues came from synfuel handling, shipping and marketing revenues. Sales of the fuel processed through these types of facilities are eligible for non-conventional fuels tax credits under Section 29 of the Internal Revenue Code. The owner of the facility that we supply with coal has obtained a Private Letter Ruling (“PLR”) from the Internal Revenue Service confirming that the facility produces a qualified fuel eligible for Section 29 tax credits. The Section 29 tax credit program is scheduled to expire on December 31, 2007. There is a risk that the IRS could modify or disallow the Section 29 tax credit, or (in certain circumstances related to the market price of oil), terminate the credit earlier than expected, making operation of the synfuel plant unprofitable. If the synfuel plant ceases operations, we will no longer receive the handling, shipping and marketing fees for our services, which may negatively affect our profitability.

We may be unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act.

Beginning with our annual report for the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require us to include an internal control report of management with our annual report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year and will also include our independent auditors’ evaluation of management’s assessment and effectiveness of our internal control over financial reporting.

Achieving compliance with Section 404 within the prescribed period, and remedying any deficiencies, significant deficiencies or additional material weaknesses that we or our auditors may identify, will require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remediate such deficiencies. In addition, we cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is effective. If we fail to timely remedy any deficiencies, significant deficiencies or additional material weaknesses that we or our auditors may identify, we may be unable to accurately report our financial results, detect fraud or comply with the requirements of Section 404. In addition, we can give no assurance that our independent auditors will agree with our management’s assessment or conclude that our internal control over financial reporting is effective.

We may be unable to exploit opportunities to diversify our operations.

Our future business plan may consider opportunities other than underground and surface mining in eastern Kentucky and southern Indiana. We will consider opportunities to further increase the percentage of coal that comes from surface mines. We may also consider opportunities to expand both surface and underground mining activities in areas that are outside of eastern Kentucky southern Indiana. We may also consider opportunities in other energy-related areas, which are not prohibited by the Indenture governing our Senior Notes. If we undertake these diversification strategies and fail to execute them successfully, our financial condition and results of operations may be adversely affected.

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There are risks associated with our acquisition strategy, including our inability to successfully complete acquisitions, our assumption of liabilities, dilution of your investment, significant costs and additional financing required.

We intend to expand our operations through strategic acquisitions of other coal mining companies, although we currently have no agreement or understanding for any specific acquisition. Risks associated with our current and potential acquisitions include the disruption of our ongoing business, problems retaining the employees of the acquired business, assets acquired proving to be less valuable than expected, the potential assumption of unknown or unexpected liabilities, costs and problems, the inability of management to maintain uniform standards, controls, procedures and policies, the difficulty of managing a larger company, the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprises and the difficulty of integrating the acquired operations and personnel into our existing business.

We may choose to use shares of our common stock or other securities to finance a portion of the consideration for future acquisitions, either by issuing them to pay a portion of the purchase price or selling additional shares to investors to raise cash to pay a portion of the purchase price. If shares of our common stock do not maintain sufficient market value or potential acquisition candidates are unwilling to accept shares of our common stock as part of the consideration for the sale of their businesses, we will be required to raise capital through additional sales of debt or equity securities, which might not be possible, or forego the acquisition opportunity, and our growth could be limited. In addition, securities issued in such acquisitions may dilute the holdings of our current or future shareholders.

Our currently available cash proceeds may not be sufficient to finance any additional acquisitions.

We believe that our current cash on hand and our the availability under our Revolver satisfy our operating and capital requirements for at least the next 12 months. However, such proceeds likely will not provide sufficient cash to fund any future acquisitions . Accordingly, we may need to conduct additional debt or equity financings in order to fund any such additional acquisitions, unless we issue shares of our common stock as consideration for those acquisitions. If we are unable to obtain any such financings, we may be required to forego future acquisition opportunities.

We may be unable to successfully integrate the Triad  operations.

We may be unable to successfully integrate Triad’s operations, or to operate those operations profitably. Our failure to successfully integrate Triad’s operations would have a material adverse effect on our results of operations and financial conditions.

Surface mining is subject to increased regulation, and may require us to incur additional costs.

Our surface mining operations increased significantly with the acquisition of Triad. Surface mining is subject to numerous regulations related to blasting activities that can result in additional costs. For example, when blasting in close proximity to structures, additional costs are incurred in designing and implementing more complex blast delay regimens, conducting pre-blast surveys and blast monitoring, and the risk of potential blast-related damages increases. Since the nature of surface mining requires ongoing disturbance to the surface, environmental compliance costs can be significantly greater than with underground operations. In addition, the U.S. Army Corps of Engineers imposes stream mitigation requirements on surface mining operations. These regulations require that footage of stream loss be replaced through various mitigation processes, if any ephemeral, intermittent, or perennial streams are in-filled due to mining operations. These regulations may cause us to incur significant additional costs, which could adversely impact our operating performance.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements, including guarantees, operating leases, indemnifications, and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds.  Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and, except for the operating leases, we do not expect any material impact on our cash flow, results of operations or financial condition from these off-balance sheet arrangements.

We use surety bonds to secure reclamation, workers’ compensation and other miscellaneous obligations.  At September 30, 2005, we had $92.1 million of outstanding surety bonds with third parties.  These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $47.8 million, workers’ compensation bonds of $40.3 million, wage payment, collection bonds, and other miscellaneous obligation bonds of $4.0 million.  Recently, surety bond costs have increased, while the market terms of surety bonds have generally become less favorable.  To the extent that surety bonds become unavailable, we would seek to secure obligations with letters of credit, cash deposits, or other suitable forms of collateral.

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We also use bank letters of credit to secure our obligations for workers’ compensation programs, various insurance contracts and other obligations.  At September 30, 2005, we had $50.0 million of letters of credit outstanding.  The letters of credits were issued under the Company’s Letter of Credit Facility.

Critical Accounting Estimates

Overview

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  Generally accepted accounting principles require estimates and judgments that affect reported amounts for assets, liabilities, revenues and expenses.  The estimates and judgments we make in connection with our consolidated financial statements are based on historical experience and various other factors we believe are reasonable under the circumstances.  Note 1 of the notes to the consolidated financial statements lists and describes our significant accounting policies.  The following critical accounting policies have a material affect on amounts reported in our consolidated financial statements.

Workers’ Compensation

Our most significant long-term obligation is the obligation to provide workers’ compensation benefits.  We are liable under various state statutes for providing workers’ compensation benefits.  To fulfill these obligations, we have used self-insurance programs with varying excess insurance levels, and, since June 7, 2002, a high-deductible, fully insured program.  The high deductible, fully insured program is comparable to a self-insured program where the excess insurance threshold equals the deductible level.  In June of 2005, we became self insured for workers’ compensation for our Kentucky operations.

We accrue for the present value of certain workers’ compensation obligations as calculated by an independent actuary based upon assumptions for work-related injury and illness rates, discount rates and future trends for medical care costs.  The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows.  The discount rate used to calculate the present value of these future obligations was 5.25% at December 31, 2004.  Significant changes to interest rates result in substantial volatility to our consolidated financial statements.  If we were to decrease our estimate of the discount rate from 5.25% to 4.25%, all other things being equal, the present value of our workers’ compensation obligation would increase by approximately $3.5 million.  A change in the law, through either legislation or judicial action, could cause these assumptions to change.  If the estimates do not materialize as anticipated, our actual costs and cash expenditures could differ materially from that currently estimated.  Our estimated workers’ compensation liability as of September 30, 2005 was $51.9 million.

Coal Miners’ Pneumoconiosis

We are required under the Federal Mine Safety and Health Act of 1977, as amended, as well as various state statutes, to provide pneumoconiosis (black lung) benefits to eligible current and former employees and their dependents.  We provide these benefits through self-insurance programs and, for those claims incurred with last exposure after June 6, 2002, a high-deductible, fully insured program.

An independent actuary has calculated the estimated pneumoconiosis liability based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents and interest rates.  The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows.  The discount rate used to calculate the present value of these future obligations was 5.25% at December 31, 2004.  Significant changes to interest rates result in substantial volatility to our consolidated financial statements.  If we were to decrease our estimate of the discount rate from 5.25% to 4.25%, all other things being equal, the present value of our black lung obligation would increase by approximately $3.3 million.  A change in the law, through either legislation or judicial action, could cause these assumptions to change.  If these estimates prove inaccurate, the actual costs and cash expenditures could vary materially from the amount currently estimated.  Our estimated pneumoconiosis liability as of September 30, 2005 was $26.4 million.

Defined Benefit Pension

The estimated cost and benefits of our non-contributory defined benefit pension plans are determined by independent actuaries, who, with our review and approval, use various actuarial assumptions, including discount rate, future rate of increase in compensation levels and expected long-term rate of return on pension plan assets.  In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments.  At December 31, 2004, the discount rate used to determine the obligation was 5.5%.  Significant changes to interest rates result in substantial volatility to our consolidated financial statements.  If we were to decrease our estimate of the discount rate from 5.5% to 4.5%, all other things being equal, the present value of our pension liability would increase by approximately $11.0 million.  The rate of increase in compensation levels is determined based upon our long-term plans for such increases.  The rate of increase in compensation levels used was 4.0% for the year ended December 31, 2004.  The expected long-term rate of return on pension plan assets is based on long-term historical return information and future estimates of long-term investment returns for the target asset allocation of investments that comprise plan assets.  The expected long-term rate of return on plan assets used to determine expense in each period was 8.0% for of the year ended December 31, 2004.  Significant changes to these rates would introduce substantial volatility to our pension expense.  Our pension obligation as of September 30, 2005 was $13.5 million.

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Reclamation and Mine Closure Obligation

The Surface Mining Control Reclamation Act of 1977 establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining.  Our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering estimates related to these requirements.  Statement No. 143 requires that asset retirement obligations be recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows.  Our management and engineers periodically review the estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed.  In estimating future cash flows, we considered the estimated current cost of reclamation and applied inflation rates and a third party profit, as necessary.  The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on our behalf.  The discount rate is based on interest rates of bonds with maturities similar to the estimated future cash flow.  The estimated liability can change significantly if actual costs vary from assumptions or if governmental regulations change significantly.  The actual costs could be different due to several reasons, including the possibility that our estimates could be incorrect, in which case our liabilities would differ.  If we perform the reclamation work using our personnel rather than hiring a third party, as assumed under Statement No. 143, then the costs should be lower.  If governmental regulations change, then the costs of reclamation will be impacted.  Statement No. 143 recognizes that the recorded liability will be different than the final cost of the reclamation and addresses the settlement of the liability.  When the obligation is settled, and there is a difference between the recorded liability and the amount of cash paid to settle the obligation, a gain or loss upon settlement is included in earnings.  Our asset retirement obligation as of September 30, 2005 was $27.0 million.

Contingencies

We are the subject of, or a party to, various suits and pending or threatened litigation involving governmental agencies or private interests.  We have accrued the probable and reasonably estimable costs for the resolution of these claims based upon management’s best estimate of potential results, assuming a combination of litigation and settlement strategies.  Unless otherwise noted, management does not believe that the outcome or timing of current legal or environmental matters will have a material impact on our financial condition, results of operations, or cash flows.  See the notes to the condensed consolidated financial statements for further discussion on our contingencies.

Income Taxes

We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes (“Statement No. 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.  Statement No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized.  In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income.  We have also considered, but not relied upon, tax planning strategies in determining the deferred tax asset that will ultimately be realized.  If actual results differ from the assumptions made in the evaluation of the amount of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

At December 31, 2004, we had a $61.1 million valuation allowance that was established against net operating losses (NOLs) and alternate minimum tax carryforwards that were expected to be lost due to our emergence from bankruptcy or that we expected to expire unused.  During 2005, we eliminated $59.4 million of those tax assets against the related valuation allowance.  As of September 30, 2005, we had a valuation allowance of $1.7 million recorded against the remaining NOLs that are expected to expire unused.

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Coal Reserves

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves.  Many of these uncertainties are beyond our control.  As a result, estimates of economically recoverable coal reserves are by their nature uncertain.  Information about our reserves consists of estimates based on engineering, economic and geological data assembled by our staff and analyzed by Marshall Miller & Associates, Inc.  A number of sources of information were used to determine accurate recoverable reserves estimates, including:

• all currently available data;

• our own operational experience and that of our consultants;

• historical production from similar areas with similar conditions;

• previously completed geological and reserve studies;

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

• assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

• mining activities;

• new engineering and geological data;

• acquisition or divestiture of reserve holdings; and

• modification of mining plans or mining methods.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves.  For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially.  Actual production, revenue and expenditures with respect to reserves will likely vary from estimates, and these variances could be material.  In particular, a variance in reserve estimates could have a material adverse impact on our annual expense for depreciation, depletion and amortization and on our annual calculation for potential impairment.  For a further discussion of our coal reserves, see “Reserves.”

Other Supplemental Information

Labor and Turnover

Recruiting, hiring, and retaining skilled mine production personnel has become challenging during the past several years.  This is due to the aging of the industry workforce and the availability of other suitable positions for potential employees.  The current strong market prices have also contributed to a higher level of turnover as competing coal mining companies attempt to increase production. 

Based on average employment of production personnel in Central Appalachia, our gross turnover has been approximately 22.2% during the twelve months ended September 30, 2005.  Our net turnover in Central Appalachia during this period, after considering employees that have left and been rehired, is approximately 13.1%.  We believe that our retention of employees is equal to, or better, than other coal mining companies in our operating area.

We are actively working to improve our retention of employees by implementing safety and incentive plans that we believe will reduce turnover.

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Sales Commitments

          As of September 30, 2005, we had the following contractual commitments to ship coal at a fixed and known price (tons in 000’s):

	Year Ended				Year Ended				Year Ended				Year Ended
	2006				2007				2008				2009
	Average Price Per Ton		Tons		Average Price Per Ton		Tons		Average Price Per Ton		Tons		Average Price Per Ton		Tons
CAPP	$	45.82		8,159	$	38.37		1,630		—		—		—		—
Midwest (a)	$	24.92		3,446	$	24.77		1,250	$	25.24		1,250	$	25.75		1,250

(a)  Certain contracts in the Midwest include a customer option to increase or decrease the stated tons in the contract.  We have included option tons that we believe will be exercised based on current market prices.

Project Development

          Mine 15 Update

Initial coal production began on September 21, 2005.  The major item to be completed before beginning normal production operations is the underground development to tie together the slope with the ventilation shaft.  This is expected to be completed in early November.  The mine is expected to have very limited production in the fourth quarter of 2005 before ramping up to full annualized production levels of approximately 1.4 to 1.5 million tons per year by the end of 2006.

          Coal Production

Our strategic plan is to achieve a balance between underground and surface mining methods and coal basins.  As part of executing this plan, we are developing surface mines in the Central Appalachia region.

Our initial project was the development of the Commissary surface mine within the Blue Diamond mining complex.  This project was originally planned to be operated by a contract miner.  Our management team decided during the first quarter to change this mine to a Company mine.  The mine began production in September 2005.

Our operations and engineering teams have identified more than 40 additional surface mining projects that merit further review.  We currently control more than 75% of these reserves.  Sixteen of the projects have current state mine permits, and the Corps of Engineers permitting process has already begun on these properties.  We expect initial production from two of these projects to begin during the second half of 2006 with an expected production of approximately 100,000 tons per month by the end of 2006.  This production has not been included in current guidance.

We have also identified six highwall mining projects for further review.  Five of these projects are currently permitted.  We are currently completing engineering and financial analyses for these projects.  If we decide to proceed with one, or more, of these projects, we would expect initial production to begin by mid-year 2006.  This production has not been included in current guidance.

As a related project to upgrading our inefficient coal preparation plants, we are currently evaluating a project to recover up to 1.1 million tons of coal product from an existing impoundment.  The evaluation process is expected to be completed by December 31, 2005.  If we decide to proceed with the project, we would expect the initial production to begin by the end of the 3^rd quarter of 2006.  These tons are not included in current guidance.

          Preparation Plant

We have developed a list of projects that are intended to improve the yield from our existing preparation plants.  The projects are concentrated in the screening and separation areas of the plants.  We expect these projects to require total funds of $9-11 million.  Approximately ninety percent (90%) of these funds will be capital expenditures.  These projects are expected to improve the overall yield of our preparation plants by 1-2%, or 200,000-400,000 tons per year.  We have negotiated contracts required to implement the major preparation plant projects.  All major projects are expected to be completed by the end of the second quarter of 2006.

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FORWARD-LOOKING INFORMATION

From time to time, we make certain comments and disclosures in reports and statements, including this report, or statements made by our officers, which may be forward-looking in nature. Examples include statements related to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding. These forward-looking statements could also involve, among other things, statements regarding our intent, belief or expectation with respect to:

• our cash flows, results of operation or financial condition;

• the consummation of acquisition, disposition or financing transactions and the effect thereof on our business;

• governmental policies and regulatory actions;

• legal and administrative proceedings, settlements, investigations and claims;

• weather conditions or catastrophic weather-related damage;

• our production capabilities;

• availability of transportation;

• market demand for coal, electricity and steel;

• competition;

• our relationships with, and other conditions affecting, our customers;

• employee workforce factors;

• our assumptions concerning economically recoverable coal reserve estimates;

• future economic or capital market conditions;

• our plans and objectives for future operations and expansion or consolidation; and

• the integration of the Triad acquisition.

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Any forward-looking statements are subject to the risks and uncertainties that could cause actual cash flows, results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control.

We wish to caution readers that forward-looking statements, including disclosures which use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and similar statements, are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations.  These risks and uncertainties include, but are not limited to, the following: a change in the demand for coal by electric utility customers; the loss of one or more of our largest customers; failure to exploit additional coal reserves; failure to diversify our operations; increased capital expenditures; encountering difficult mining conditions; increased compliance costs; bottlenecks or other difficulties in transporting coal to our customers; lack of availability of financing sources; the effects of regulation and competition; the risk that the Company is unable to successfully integrate the Triad business; and the risk factors detailed under the heading “Certain Risks” above.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our $150 million Senior Notes have a fixed interest rate and are not sensitive to changes in the general level of interest rates.  The revolver component of our Senior Secured Credit Facility has floating interest rates based on our leverage ratio (the Applicable Rate) plus the Company’s option of either (i) the greater of (a) the prime rate or (b) the federal funds open rate plus 0.5% or (ii) a Euro Rate as defined in the credit agreement.  As of September 30, 2005, we had no borrowings outstanding under the term component of the Senior Secured Credit Facility.  We do not expect to use interest rate swaps to manage this risk.  A 100 basis point (1.0%) increase in the average interest rate for our floating rate borrowings would increase our annual interest expense by approximately $0.1 million for each $10 million of borrowings under the Senior Secured Credit Facility.

We manage our commodity price risk through the use of long-term coal supply agreements, which we define as contracts with a term of one year or more, rather than through the use of derivative instruments.  We believe that the percentage of our sales pursuant to long-term contracts was approximately 82% for the nine months ended September 30, 2005.

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

We are not engaged in any foreign currency exchange rate or commodity price-hedging transactions and we have no trading market risk.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CAO, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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Beginning with our annual report for the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require us to include an internal control report of management with our annual report on Form 10-K.  That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year and will also include our independent auditors’ evaluation of management’s assessment and the effectiveness of our internal control over financial reporting.  We cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete the work required for our management to be able to conclude that our internal control over financial reporting is effective.  If we fail to timely remedy any deficiencies, significant deficiencies or additional material weaknesses that we or our auditors may identify, we may be unable to accurately report our financial results, detect fraud or comply with the requirements of Section 404.  In addition, we can give no assurance that our independent auditors will agree with our management’s assessment or conclude that our internal control over financial reporting is effective.

PART II
OTHER INFORMATION

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

(a)	Annual Meeting of Shareholders held July 26, 2005.
(b)	Not applicable
(c)	There were 16,578,989 shares of common stock , $0.01 par value per share (the “Common Stock”), of James River outstanding and entitled to vote as of June 24, 2005, the record date for the 2005 Annual Meeting of Shareholders.  Each share of Common Stock entitled the holder thereof to one vote.  A total of 13,046,935 votes (or 78.7% of the total) were cast.  There were no broker non-votes.
	All of the Board of Directors’ nominees for directors of the corporation were elected with the following vote:

Director Nominee	Votes For		Votes Withheld
Joseph H. Vipperman		12,976,616		70,319
Alan F. Crown		12,863,409		183,526

(d) Not applicable

ITEM 6. EXHIBITS 

	Exhibit
The following exhibits are filed herewith:
Credit Agreement dated as of May 31, 2005, among James River Coal Company, as borrower, The Lenders Party Hereto, PNC Bank, National Association, as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Syndication Agent	10.9
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	31.1
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	31.2
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.1
Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.2

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	James River Coal Company
	By:	/s/  Peter T. Socha
		Peter T. Socha
		Chairman, President and
		Chief Executive Officer
	By:	/s/ Samuel M. Hopkins II
		Samuel M. Hopkins, II
		Vice President and
		Chief Accounting Officer
November ___, 2005

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