Table
      of Contents


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.**





**FORM
      10-K**





**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**








For
                the fiscal year ended
            Commission
                File Number**December
                31, 2005**
            **000-51129**




*JAMES
      RIVER COAL COMPANY*


*(Exact
      name of registrant as specified in its charter)*




***Virginia***
            
            ***54-1602012***(State
                or other jurisdiction
            
            (I.R.S.
                Employerof
                incorporation or organization)
            
            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**





Securities
                registered pursuant
                to Section 12(b) of the Act:
            NoneName
                of each exchangeon which registered:
            The
                Nasdaq National MarketSecurities
                registered pursuant
                to Section 12(g) of the Act:
            Common
                Stock, par value $0.01 per shareSeries
                A Participating Cumulative Preferred Stock Purchase
                Rights





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


Yes o No ý


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


Yes o No ý




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 ý No o




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


o




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




Large
                accelerated filero
            Accelerated
                filerý
            Non-accelerated
                filero





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


Yes o No ý








The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates of the registrant, based upon the closing sale price of Common
      Stock, par value $0.01 per share, on June 30, 2005 as reported on the
      Nasdaq National Market, was approximately $361,970,000 million (affiliates
      being, for these purposes only, directors, executive officers and holders of
      more than 5% of the registrant’s Common Stock).





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 ý No   o





The
      number of shares of the registrant’s Common Stock, par value $.01 per share,
      outstanding as of February 15, 2006 was 16,658,380.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Proxy Statement for the registrant’s 2006 Annual Meeting of Shareholders,
      to be filed with the Securities and Exchange Commission (the “SEC”), are
      incorporated by reference into Part III of this Annual Report on Form
      10-K .

















**JAMES
      RIVER COAL COMPANY**





**TABLEOF
      CONTENTS**


**FORM
      10-K ANNUAL REPORT**




**PART
      I**




**Item
                1.**
            **Business**
            **2****Item
                1A.**
            **Risk
                Factors**
            **17****Item
                1B.**
            **Unresolved
                Staff Comments**
            **30****Item
                2.**
            **Properties**
            **31****Item
                3.**
            **Legal
                Proceedings**
            **32****Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**
            **32****PART
                II****Item
              5.**
            **Market
                  for Registrant’s Common Equity, Related
                  Stockholders Matters****and Issuer Purchases of Equity
                  Securities**
            **33****Item
                6.**
            **Selected
                Financial Data**
            **34****Item
                7.**
            **Management’s
                Discussion and Analysis
                of********Financial Condition and Results
                of****Operations**
            **38****Item
                7A.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk**
            **54****Item
                8.**
            **Financial
                Statements and Supplementary
                Data**
            **55****Item
                9.**
            **Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure**
            **55****Item
                9A.**
            **Controls
                and Procedures**
            **55****Item
                9B.**
            **Other
                Information**
            **58****PART
                III****Item
                10.**
            **Directors
                and Executive Officers of the
                Registrant**
            **60****Item
                11.**
            **Executive
                Compensation**
            **60****Item
                12.**
            **Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stock
                **Matters****
            **60****Item
                13.**
            **Certain
                Relationships and Related
                Transactions**
            **60****Item
                14.**
            **Principal
                Accountant Fees and
                Services**
            **60****PART
                IV****Item
                15.**
            **Exhibits,
                and Financial Statement
                Schedules**
            **61**

















**PART
      I**







**Available
      Information**




The
      Company’s website address is *http://* *www.jamesrivercoal.com* . ** The Company makes available free of charge through its website its annual report
      on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
      any amendments to those reports as soon as reasonably practicable after filing
      or furnishing the material to the SEC. You
      may read and copy documents the Company files at the SEC’s public reference room
      at 450 Fifth Street, N.W., Washington D.C. 20549. Please
      call the SEC at 1-800-SEC-0330 for information on the public reference room. The
      SEC maintains a website that contains annual, quarterly and current reports,
      proxy statements and other information that issuers (including the Company)
      file
      electronically with the SEC. The
      SEC’s website is *http://www.sec.gov* *.*


























1


**Item** **** **1.**   **Business**





**General
      Business**




We
      mine, process and sell bituminous, steam- and industrial-grade coal through
      six
      operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
      and in southern Indiana. Our
      six mining complexes include 17 underground mines, 10 surface mines and eleven
      preparation plants, five of
      which have
      integrated rail loadout facilities and three of which use
      a common loadout facility at a separate location . As of December 31, 2005, we believe that we controlled approximately 262 million
      tons of proven and probable coal reserves. At current production levels, we believe these reserves would support greater
      than 24 years of production.





In
      2005, we
      produced 10.7
      million tons of coal (including 726,000 tons of coal produced in our mines that are operated by
      contract mine operators) and we purchased another 438,000 tons for resale. Of the 10.0 million tons we produced
      from Company-operated mines, approximately 81% came from underground mines,
      while the remaining 19% came from surface mines. In 2005 we generated revenues of $454.0 million and had a net loss of $12.3
      million. Approximately 85% of our revenues were generated from coal sales to
      electric utility companies and 15% came from coal sales to industrial and other
      companies or from synfuel handling fees .
      In 2005, Georgia Power and South Carolina Public Service Authority were our
      largest customers, representing approximately 27% and 17% of our revenues,
      respectively. No other customer accounted for more than 10% of our
      revenues.




The
      coal that we sell is obtained from three sources: our Company-operated mines,
      mines that are operated by independent contract mine operators, and other third
      parties from whom we purchase coal for resale. Contract mining and coal
      purchased from other third parties provide flexibility to increase or decrease
      production based on market conditions. The table below reflects the amount
      and
      percentage of coal obtained from those sources in 2005:




**Tons
                (000)**
            
            **Percentage
                of total**
              **coal
                obtained by the**
              **Company**Coal
                produced from Company-operated mines
            9,991
            
            89.6%Coal
                obtained from mines operated by independent contractors
            726
            
            6.5%Coal
                purchased from other third parties
            438
            
            3.9%**11,155**
            
            **100%**




We
      also 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 2005, 2% of our
      total operating revenues came from synfuel handling, shipping and
      marketing.




**Acquisition
      of Triad Mining, Inc.**





On
      May 31, 2005, the Company purchased all of the outstanding stock of Triad
      Mining, Inc.  Triad Mining, Inc., together with its wholly-owned
      subsidiary, Triad Underground Mining, LLC (collectively Triad), owns and
      operates five surface mines and one underground mine in southern
      Indiana.   The purchase price, including related costs and fees, of
      $70.4 million, net of cash acquired, was funded through the issuance of 338,295
      shares of our common stock valued at $11.0 million, and a portion of the cash
      proceeds from our equity and debt offerings in May 2005 (see Liquidity and
      Capital Resources).  In 2005, Triad produced approximately 3.5 million tons
      of coal (including approximately 2.1 million tons of coal after our acquisition
      of Triad).  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.




2


**Mining
      Methods**




Our
      Company-operated and contractor mines produce coal using different mining
      methods. These methods are room
      and pillar underground mining and surface mining . These
      methods are described in more detail below.




*Room
      and Pillar* .
      In the underground room and pillar method of mining, continuous mining machines
      cut three to nine entries into the coal seam and connect them by driving
      crosscuts, leaving a series of rectangular pillars, or columns of coal, to
      help
      support the mine roof and control the flow of air. Generally, openings are
      driven 20 feet wide and the pillars are 40 to 100 feet wide. As mining advances,
      a grid-like pattern of entries and pillars is formed. When mining advances
      to
      the end of a panel, or section of the mine, retreat mining may begin. In retreat
      mining, as much coal as is feasible is mined from the pillars that were created
      in advancing the panel, allowing the roof to cave. When retreat mining is
      completed to the mouth of the panel, the mined panel is abandoned.




The
      coal face is cut with continuous mining machines and the coal is transported
      from the continuous mining machine to the mine conveyor belts using either
      a
      continuous haulage system or shuttle cars. The mine conveyor system consists
      of
      a series of conveyor belts, which transport the coal from the active face areas
      to the surface. Once on the surface, the coal is transported to the preparation
      plants where it is processed to remove any impurities. The coal is then
      transported to the clean coal stockpiles or silos from which it is loaded for
      shipment to our customers. Reserve recovery, a measure of the percentage of
      the
      total coal in place that is ultimately produced, using this method of mining
      typically ranges from less than 50% to more than 70%, depending on the shape
      of
      the reserve, the amount of low-cover areas, and the geological characteristics
      of the reserve body.




*Surface
      Mining* .
      Surface mining is used when coal is found close to the surface. This
      method involves the removal of overburden (earth and rock covering the coal)
      with heavy earth-moving equipment and explosives, loading out the coal,
      replacing the overburden and topsoil after the coal has been excavated and
      reestablishing vegetation and plant life and making other improvements that
      have
      local community and environmental benefit. Overburden is typically removed
      at
      our mines by either hydraulic shovels or front-end loaders which place the
      overburden into large trucks.





We
      also consider c ontour
      and auger mining and mountain top removal to be surface mining. Contour and
      auger mining is used where removal of all the overburden overlying a coal seam
      is either uneconomical or impossible due to property control or other issues.
      With contour mining, a contour cut is taken along the outcrop of the seam and
      the coal is removed from the exposed pit. Augering can then take place where
      the
      seam is exposed in the highwall. An auger machine, which resembles a large,
      horizontal drill, drills into the seam with an auger of from less than 20” in
      diameter to more than 40” in diameter, depending on seam thickness and other
      conditions. The auger is drilled into the seam to an average depth of 150 feet.
      The coal is transported to the surface through the auger and loaded into trucks
      using a loader. The contour area is then reclaimed by returning overburden
      to
      the pit and restoring the mountainside to its approximate original contour.
      Reserve recovery using this method of mining is typically approximately
      35%.





The
      mountaintop removal method of surface mining is used where the seam is
      sufficiently close to the surface to allow removal of the overburden above
      an
      area of the coal seam. The overburden is removed and either placed in a valley
      fill or returned to the top of the mountain after the coal is extracted. With
      mountaintop removal, coal can be removed across the entire breadth of the
      mountain. Reserve recovery is typically approximately 80%.





**Underground
      Mine Characteristics**





Underground
      mines are characterized as either “drift” mines or “below drainage” mines. Drift
      mines are mines that are developed into the coal seam at a point where the
      seam
      intersects the surface. The area where the seam intersects the surface is
      commonly known as the “outcrop.” Multiple entries are developed into the coal
      seam and are used as airways for mine ventilation, passageways for miners and
      supplies, and entries for conveyor belts that transport coal from the active
      production areas of the mine to the surface.





In
      below drainage mines, the coal seam does not intersect the surface in the
      vicinity of the mining area. Therefore, the coal seam must be accessed through
      excavated passageways from the surface. These passageways typically consist
      of
      vertical shafts and angled slopes. The shafts are constructed with diameters
      ranging from 12 to 24 feet and are used as airways for mine ventilation and
      passageways for miners and supplies via elevators. The slopes, when used to
      house conveyor belts to transport the mined coal from the active production
      areas of the mine to the surface, are typically driven at an angle of less
      than
      17 degrees from the horizontal. In addition, the slopes provide passageways
      for
      miners and supplies, and airways for mine ventilation.


3





As
      of December 31, 2005, we had 17 Company-operated underground mines in operation,
      14 were drift mines, and the remaining three were slopes mines.





**Mining
      Operations**





Our
      coal production is conducted through five mining complexes in the Central
      Appalachia Region (CAPP) and one mining complex in the Midwest Region. We
      generally do not own the land on which we conduct our mining operations rather
      our coal reserves are controlled pursuant to leases from third party landowners.
      We believe that greater than 95% and 75% of our coal reserves in the Central
      Appalachia Region and Midwest Region, respectively, are controlled pursuant
      to
      leases from third party landowners. These leases typically convey mining rights
      to the coal producer in exchange for a per ton fee or royalty payment of a
      percentage of the gross sales price to the lessor. The average royalties for
      coal reserves from our producing properties were approximately 8.0% and 4.0%
      of
      produced coal revenue for the year ended December 31, 2005 in the Central
      Appalachia Region and the Midwest Region, respectively.





All
      of our operations are located on or near public highways and receive electrical
      power from commercially available sources. Existing facilities and equipment
      are
      maintained in good working condition and are continuously updated through
      capital expenditure investments.





The
      following table provides summary information on our mining complexes as of
      December 31, 2005:





Number
                and Type of Mines
            
            
            
            Quality
                of Shipments for the
              year
                ended 2005Mining
                Complex
            Underground
            
            Surface
            
            Total
            
            Tons
              Shipped
              (in
                000’s
              of
                tons)
            
            Sulfur
              Content
            
            Ash
              Content
            
            Average
              BTU
              Content***Central
                Appalachia***Bell
                County Coal Corporation
            2
            
            -
            
            2
            
            537
            
            1.1
            
            9.2
            
            12,645Bledsoe
                Coal Corporation
            3
            
            2
            
            5
            
            2,821
            
            1.2
            
            10.1
            
            12,456Blue
                Diamond Coal Corporation
            5
            
            2
            
            7
            
            1,852
            
            0.9
            
            9.2
            
            12,788Leeco,
                Inc.
            1
            
            1
            
            2
            
            1,326
            
            0.9
            
            9.5
            
            12,733McCoy
                Elkhorn Coal Corporation
            5
            
            -
            
            5
            
            2,487
            
            1.6
            
            9.1
            
            12,674***Midwest***Triad
                Mining, Inc (since acquisition)
            1
            
            5
            
            6
            
            2,068
            
            8.7
            
            13.8
            
            11,294





We
      obtained rights to these mining complexes as follows: McCoy Elkhorn and Bell
      County were the original operating companies that made up James River Coal
      Company when we were formed in 1988 through the purchase of General Energy
      Corp.
      In 1992, we acquired the operations of Johns Creek Coal Company and the Bevins
      Branch Preparation Plant, both of which are now included within the McCoy
      Elkhorn complex. The Leeco and Bledsoe operating companies were both acquired
      in
      our acquisition of Transco Coal Company in 1995. The Blue Diamond operating
      company was purchased in 1998. In 1999, we acquired Shamrock Coal Company,
      which
      added mines, reserves, a preparation plant and the Clover loadout facility
      to
      the Bledsoe complex. In 2005, we acquired Triad Mining, Inc.


4





The
      following summarizes additional information concerning each of our six mining
      complexes:





*Bell
      County* .
      The Bell County complex is located in Bell County in eastern Kentucky, and
      consists of two Company-operated underground mines. We use room and pillar
      mining to mine the Buckeye Springs seam of coal. Coal is processed at our
      preparation plant and loaded into railcars via an integrated four-hour unit
      train loadout that is serviced by both the CSX and Norfolk Southern railroads. As of December 31,
      2005, we employed 101 mining and support personnel at this complex.





*Bledsoe* .
      The Bledsoe complex is located in Leslie and Harlan counties in eastern
      Kentucky, and consists of three Company-operated underground mines and two
      contract surface mines. We use room and pillar mining to mine the Hazard #4
      seam
      of coal at this complex, and our contract mine operator uses the contour and
      auger method and the mountain top removal method to mine Hazard Seams #7, #10,
      #11 and #12. Coal is processed at one of two preparation plants and loaded
      into
      railcars at a separate location via a four-hour unit train loadout on the CSX
      railroad. As of December 31, 2005, we employed 342 mining and support personnel
      at this complex.





*Blue
      Diamond* .
      The Blue Diamond complex is located in Leslie, Perry, Letcher and Harlan
      counties in eastern Kentucky, and consists of five underground and two surface
      mines. These mines are operated by the Company with the exception of one
      underground and one surface mine that are contract mines. Our Company operated
      underground mines use room and pillar mining to mine the Hazard #4 and Alma
      seams of coal and our contract mine operator use s the same method to mine the Leatherwood seam. The surface mines use the contour
      and auger method to mine the Marker seam. Coal is processed at our preparation
      plant, and loaded into railcars via an integrated four-hour unit train loadout
      on the CSX railroad. As of December 31, 2005, we employed 249 mining and support
      personnel at this complex.





*Leeco* .
      The Leeco complex is located in Knott and Perry counties in eastern Kentucky,
      and consists of one Company-operated underground mine and one contract surface
      mine. Our Company mine uses room and pillar mining to mine the Amburgy seam
      of
      coal and the contract mine operator uses the contour and auger method to mine
      the Hazard #8 seam. Coal is processed at our preparation plant and loaded into
      railcars via an integrated four-hour unit train loadout on the CSX railroad.
      As
      of December 31, 2005, we employed 153 mining and support personnel at this
      complex.





*McCoy
      Elkhorn* .
      The McCoy Elkhorn complex is located in Pike and Floyd counties in eastern
      Kentucky, and consists of five Company-operated mines. All of the mines at
      this
      complex are underground mines. We use room and pillar mining to mine the
      Millard, Elkhorn #2, Elkhorn #3, and Pond Creek seams of coal. Coal is processed
      at one of two preparation plants and loaded into railcars via integrated
      four-hour unit train loadouts on the CSX railroad. As of December 31, 2005,
      we
      employed 307 mining and support personnel at this complex.





*Triad* .
      The Triad complex is located in Pike and Knox counties in southern Indiana
      and
      consists of five surface mines and one underground mine, all of which we
      operate.  We use room and pillar mining to mine the Springfield seam of
      coal, and use the surface mine  method to mine multiple seams, including
      the Danville, Millersburg, Hymera, Bucktown and Springfield seams.  Coal is
      processed at one of four active preparation plants and loaded into trucks for
      delivery to the customer at our Switz City loadout.  The Switz City loadout
      is serviced by Indiana Railroad and the Indiana Southern Railroad. As of
      December 31, 2005, we employed approximately 251 mining and support personnel
      at
      this complex.




Contract
      mining represented approximately 6.5% of our coal production in the year ended
      December 31, 2005. Each mining complex monitors its contract mining operations
      and provides geological and engineering assistance to the contract mine
      operators. The contract mine operators generally provide their own equipment
      and
      operate the mines using their employees. Independent contract mine operators
      are
      paid a fixed rate for each ton of saleable product. We are primarily responsible
      for the reclamation activities involved with all contractor-operated mines.
      Contractors that operate surface mines, however, typically are contractually
      obligated to perform, on our behalf, the reclamation activities associated
      with
      the mines they operate. Our relationships with contract mine operators typically
      can be cancelled by either party without penalty by giving between 30 and 60
      days notice.


5


**Reserves**





Beginning
      in late 2003 and continuing in 2004 and 2005, we increased our ongoing mineral
      development drilling and exploration program on our coal properties. The purpose
      of the drilling and exploration program is to assist us with planning our mining
      activities and to better assess our coal reserves. In April 2004, we asked
      Marshall Miller & Associates, Inc. (“MM&A”) to prepare a detailed study
      of our reserves in Central Appalachia as of March 31, 2004 based on all of
      our
      geologic information, including our updated drilling and mining data. MM&A
      completed their report on our Central Appalachia reserves in June 2004. 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.  MM&A completed their report on Triad’s reserves in March 2005.
      We have used MM&A’s March 31, 2004 study as the basis for our
      current internal estimate of our Central Appalachia reserves and MM&A’s
      February 1, 2005 study as the basis for our current internal estimate of
      our Midwest reserves.





The
      coal reserve studies conducted by MM&A were planned and performed to obtain
      reasonable assurance of our subject demonstrated (proven plus probable)
      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 using standards accepted by government and industry.





After
      reviewing the maps and information we supplied, MM&A prepared an independent
      mapping and estimate of our demonstrated reserves using methodology outlined
      in
      U.S. Geological Survey Circular 891 and SEC Industry Guide 7. MM&A developed
      reserve estimation criteria to assure that the basic geologic characteristics
      of
      the reserves ( *e.g.* ,
      minimum coal thickness and wash recovery, interval between deep mineable seams,
      mineable area tonnage for economic extraction, etc.) are in reasonable
      conformity with present and recent mine operation capabilities on our various
      properties. As a result of the MM&A study on our Central Appalachia
      reserves, we reduced our reserve estimate from 285 million tons to 207 million
      tons as of March 31, 2004.





MM&A
      has not conducted a coal reserve study on our December 31, 2005 reserve
      estimate. We continue to have an ongoing mineral development drilling and
      exploration program on our coal properties and plan to update our reserve study
      from time to time. Any future negative changes in our reserves could have a
      material adverse impact on our depreciation, depletion and amortization expense.
      A material adverse impact could also lead to a charge for impairment of the
      value of our coal property assets.





As
      of December  31, 2005, we estimated that we controlled approximately 241.6 million tons of proven and probable coal
      reserves in Central Appalachia and 20.2 millions tons of proven and probable
      coal reserves in the Midwest.





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 have been 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 at March 31, 2004 and found them to
      be reasonable (not withstanding 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. 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.


6


The
      following table provides information on our mining complexes. Except as noted,
      the reserve and quality information is based on the independent reserve studies
      conducted by MM& A as of March 31, 2004 for our mining complexes located in the CAPP region and
      as
      of February 1, 2005 for our Triad mining complex:





**Proven
                & Probable Reserves (1)**
              **(millions
                of tons)**
            
            
            
            **Approximate
                Overall**
              **Reserve
                Quality**
              **(2),
                (3)****Mining
                Complex**
            
            **As
                of**
              **Most**
              **Recent**
              **MM&A**
              **Report****(3)**
            
            **As
                of**
              **December
                31,**
              **2005
                (4)**
            
            **Estimated**
              **Years
                of**
              **Reserve
                Life**
              **Based
                on 2005**
              **Production**
              ******Levels**
            
            **Ash**
              **Content**
              ******(%)**
            
            **Sulfur**
              **Content**
              **(%)**
            
            **Heat
                Value**
              **(Btu/lb.)*****Central
                Appalachia***Bell
                County
            
            
            12.5
            
            
            12.4
            
            
            26.7
            
            
            5.1
            
            
            1.0
            
            
            13,500Bledsoe
            
            
            59.1
            
            
            58.8
            
            
            21.0
            
            
            7.8
            
            
            1.2
            
            
            13,000Blue
                Diamond
            
            
            66.2
            
            
            85.1
            
            
            45.8
            
            
            4.7
            
            
            1.1
            
            
            13,700Leeco
            
            
            35.7
            
            
            49.5
            
            
            43.2
            
            
            7.0
            
            
            1.2
            
            
            13,200McCoy
                Elkhorn
            
            
            33.8
            
            
            35.8
            
            
            15.0
            
            
            5.7
            
            
            1.6
            
            
            13,300**Total/Average**
            
            
            **207.3**
            
            
            **241.6**
            
            
            **27.9**
            
            
            **6.3**
            
            
            **1.3**
            
            
            **13,300*****Midwest***Triad
            
            
            **17.6**
            
            
            **20.2**
            
            
            **5.8**
            
            
            **8.8**
            
            
            **2.7**
            
            
            **11,200**





(1)
            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)
            Ash
                and sulfur content is expressed as the percent by weight of those
                constituents in the coal sample compared to the total weight of the
                sample
                being tested. Heat value is expressed as Btu per pound in the coal
                based
                on laboratory testing of coal samples. The samples are typically
                obtained
                from exploratory core borings placed at strategic locations within
                the
                coal reserve area. Approximately 82% of the reserve tons have
                representative samples (degree of representation varies from area
                to area)
                and 18% of the reserve tons have no site-specific samples (and are
                therefore not included in the overall quality estimate). The samples
                are
                sent to accredited laboratories for testing under protocols established
                by
                the American Society of Testing and Materials (ASTM). The estimated
                overall quality values are derived by a multiple step process, including:
                a) for each mine or reserve area, an arithmetic average quality (dry
                basis) was prepared to represent the coal tons within the area, based
                on
                samples from the area; b) the overall quality of reserves for each
                mine
                complex was determined by performing a tonnage-weighted average of
                the
                average quality of all mine and reserve areas within the division;
                and c)
                the resulting dry basis overall quality was converted to wet product
                basis
                to reflect its anticipated moisture content at the time of sale.
                The
                actual quality of the shipped coal may vary from these estimates
                due to
                factors such as: a) the particle size of the coal fed to the plant;
                b) the
                specific gravity of the float media in use at the preparation plant;
                c)
                the type of plant circuit(s); d) the efficiency of the plant circuit(s);
                e) the moisture content of the final product; and f) customer
                requirements.


7





(3)
            Represents
                reserve information, as of March 31, 2004 for our mining complexes
                located
                in the CAPP region and as of February 1, 2005 for our Triad mining
                complex, based on the independent reserve studies conducted by
                MM&A.





(4)
            Represents
                the Company’s estimate of reserves at December 31, 2005 based on
                additional information or reserves obtained from exploration and
                acquisition 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 used
                in the MM&A studies described above, but these December 31, 2005
                estimates have not been reviewed by
                MM&A.






**Processing
      and Transportation**





Coal
      from each of our mine complexes is transported by conveyor belt or by truck
      to
      one of our eleven preparation plants or directly to one of our load-outs, all
      of
      which are in close proximity to our mining operations. These preparation plants
      remove impurities from the run-of-mine coal (the raw coal that comes directly
      from the mine) and offer the flexibility to blend various coals and coal
      qualities to meet specific customer needs. We regularly upgrade and maintain
      all
      of our preparation plants to achieve a high level of coal cleaning efficiency
      and maintain the necessary capacity.





In
      Central Appalachia, substantially all of our coal is shipped by train and sold
      f.o.b. the railcar at the point of loading; transportation costs are normally
      borne by the purchaser. In addition to our well-positioned unit train loadout
      facilities on the CSX Corporation railroad, our Bell County mining complex
      has
      dual service provided by the CSX and Norfolk Southern Corporation railroads
      in
      Bell County, Kentucky.





In
      the Midwest, coal is shipped by train and by truck to our customers. The trucked
      coal is primarily sold f.o.b delivery point with transportation costs normally
      borne by Triad. Coal delivered by train is sold f.o.b. the railcar at the point
      of loading, with transportation costs normally borne by the purchaser. Our
      Triad
      mining complex has rail service provided by Indiana Railroad.





Our
      mining complexes are supported by personnel located in London, Kentucky who
      provide engineering and permitting assistance, project management, land
      management and lease administration, coal quality control and quality reporting,
      accounting and purchasing support, and railroad transportation scheduling
      services.




**Customers
      and Coal Contracts**




As
      is customary in the coal industry, we regularly enter into long-term contracts
      (which we define as contracts with terms of more than one year) with many of
      our
      customers. These arrangements allow customers to secure a supply for their
      future needs and provide us with greater predictability of sales volume and
      sales prices. In 2005, we generated approximately 75% of our total revenues
      from
      seven long-term contracts to sell coal to electric utilities.




For
      the year ended December 31, 2005, Georgia Power (27%) and South Carolina Public
      Service Authority (17%) were our largest customers by revenues. No other customer accounted for more than 10% of revenues.




The
      terms of our contracts result from a bidding and negotiation process with our
      customers. Consequently, the terms of these contracts often vary significantly
      in many respects. Our long-term supply contracts typically contain one or more
      of the following pricing mechanisms:




·
            Fixed
                price contracts;





·
            Annually
                negotiated prices that reflect market conditions at the time;
                or





·
            Base-price-plus-escalation
                methods that allow for periodic price adjustments based on fixed
                percentages or, in certain limited cases, pass-through of actual
                cost
                changes.


8





A
      limited number of our contracts have features of several contract types, such
      as
      provisions that allow for renegotiation of prices on a limited basis within
      a
      base-price-plus-escalation agreement. Such re-opener provisions allow both
      the
      customer and us an opportunity to adjust prices to a level close to then current
      market conditions. Each contract is negotiated separately, and the triggers
      for
      re-opener provisions differ from contract to contract. Some of our existing
      contracts with re-opener provisions adjust the contract price to the market
      price at the time the re-opener provision is triggered. Re-opener provisions
      could result in early termination of a contract or a reduction in the volume
      to
      be purchased if the parties were to fail to agree on price.




Our
      long-term supply contracts also typically contain force majeure provisions
      allowing for the suspension of performance by the customer or us for the
      duration of specified events beyond the control of the affected party, including
      labor disputes. Some contracts may terminate upon continuance of an event of
      force majeure for an extended period, which are generally three to six months.
      Contracts also typically specify minimum and maximum quality specifications
      regarding the coal to be delivered. Failure to meet these conditions could
      result in substantial price reductions or termination of the contract, at the
      election of the customer. Although the volume to be delivered under a long-term
      contract is stipulated, we, or the buyer, may vary the timing of delivery within
      specified limits.




The
      terms of our long-term coal supply contracts also vary significantly in other
      respects, including: coal quantity parameters, flexibility and adjustment
      mechanisms, permitted sources of supply, treatment of environmental constraints,
      options to extend, suspension, termination and assignment provisions, and
      provisions regarding the allocation between the parties of the cost of complying
      with future government regulations.




**Competition**




The
      U.S. coal industry is highly competitive, with numerous producers in all coal
      producing regions. We compete against various large producers and hundreds
      of
      small producers. According to the U.S. Department of Energy, the largest
      producer produced approximately 17.3% (based on tonnage produced) of the total
      United States production in 2004, the latest year for which government
      statistics are available. The U.S. Department of Energy also reported 1,379
      active coal mines in the United States in 2004. Demand for our coal by our
      principal customers is affected by:




·
            the
                price of competing coal and alternative fuel supplies, including
                nuclear,
                natural gas, oil and renewable energy sources, such as hydroelectric
                power;





·
            coal
                quality;





·
            transportation
                costs from the mine to the customer;
                and





·
            the
                reliability of supply.





Continued
      demand for our coal and the prices that we obtain are affected by demand for
      electricity, environmental and government regulation, technological developments
      and the availability and price of competing coal and alternative fuel
      supplies.




**Employees**





At
      December 31, 2005, we had 1,429 employees. None of our employees are currently represented by collective
      bargaining agreements. Relations with our employees are generally
      good.


9


**2004
      Reorganization**





On
      May 6, 2004, we emerged from Chapter 11 bankruptcy proceedings under our Joint
      Plan of Reorganization confirmed by the U.S. Bankruptcy Court presiding over our Chapter 11 case (the
      "Plan of Reorganization") .
      Upon emergence from bankruptcy, we adopted “fresh start” accounting as described
      in the American Institute of Certified Public Accountant’s Statement of Position
      90-7, *Financial
      Reporting by Entities in Reorganization Under the Bankruptcy
      Code* (“SOP 90-7”). Fresh start accounting principles require that we determine the
      reorganization value of the reorganized Company. For purposes of applying fresh
      start accounting, we have used an enterprise value for the reorganized Company
      of $155 million.





In
      connection with the implementation of fresh start accounting, we recorded a
      gain
      of approximately $178 million from the extinguishment of our debt. Other
      adjustments were made to reflect the provisions of the Plan of Reorganization
      and to adjust the assets of the reorganized Company to their estimated fair
      value and liabilities to their estimated present value. The estimated fair
      value
      of our fixed assets was based on an appraisal performed for one of our lenders
      in connection with our reorganization. For financial reporting purposes, these
      transactions were reflected in our operating results before
      emergence.





The
      consummation of the Plan of Reorganization has been reflected as of April 30,
      2004, which was the end of our most recent month preceding the effective date
      of
      the Plan of Reorganization of May 6, 2004. The results of operations for the
      period from April 30, 2004 through May 5, 2004 were not material.





Our
      consolidated financial statements after emergence are those of a new reporting
      entity (the “Successor Company”) and are not comparable to the financial
      statements of the pre-emergence company (the “Predecessor Company”). See note 2
      to our December 31, 2005 consolidated financial statements for our unaudited
      condensed balance sheets presenting our historical consolidated balance sheet
      as
      of April 30, 2004 before the application of fresh start accounting (Predecessor
      Company) and after the application of fresh start accounting and other
      adjustments to reflect the provisions of the Plan of Reorganization (Successor
      Company).





**Government
      Regulation**





The
      coal mining industry is subject to extensive regulation by federal, state and local authorities on matters such
      as:





·
            employee
                health and safety;





·
            permitting
                and licensing requirements;





·
            air
                quality standards;





·
            water
                quality standards;





·
            plant,
                wildlife and wetlandprotection;





·
            blasting
                operations;


·
            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.


10


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.





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 generation activities, which could affect demand for our coal. The
      possibility exists that new legislation or regulations may be adopted which
      would have a significant impact on our mining operations or our customers’
ability to use coal and may require us or our customers to change operations
      significantly or incur substantial costs.





Numerous
      governmental permits and approvals are required for mining operations. In
      connection with obtaining these permits and approvals, we are, or may be,
      required to prepare and present to federal, state or local authorities data
      pertaining to the effect or impact that any proposed exploration for or
      production of coal may have upon the environment, the public, historical
      artifacts and structures, and our employees’ health and safety. The requirements
      imposed by such authorities may be costly and time-consuming and may delay
      commencement or continuation of exploration or production operations. Future
      legislation and administrative regulations may emphasize the protection of
      the
      environment and health and safety and, as a consequence, our activities may
      be
      more closely regulated. Such legislation and regulations, as well as future
      interpretations of existing laws, may require substantial increases in our
      equipment and operating costs and delays, interruptions or a termination of
      operations, the extent of which cannot be predicted.





While
      it is not possible to quantify the costs of compliance with all applicable
      federal and state laws, those costs have been and are expected to continue
      to be
      significant. We estimate that we will make capital expenditures of approximately
      $150,000 per year for environmental control facilities and employee safety
      in
      2006 and 2007. These costs are in addition to reclamation and mine closing
      costs
      and the costs of treating mine water discharge, when necessary. Compliance
      with
      these laws has substantially increased the cost of coal mining, but is, in
      general, a cost common to all domestic coal producers.




**Mine
      Health and Safety Laws**




Stringent
      health and safety standards were imposed by federal legislation when the Federal
      Coal Mine Safety and Health Act of 1969 was adopted. The Federal Mine Safety
      and
      Health Act of 1977, which significantly expanded the enforcement of safety
      and
      health standards of the Coal Mine Safety and Health Act of 1969, imposes safety
      and health standards on all mining operations. Regulations are comprehensive
      and
      affect numerous aspects of mining operations, including training of mine
      personnel, mining procedures, blasting, the equipment used in mining operations
      and other matters. The Federal Mine Safety and Health Administration monitors
      compliance with these federal laws and regulations and can impose penalties
      ranging from $60 to $60,000 per violation, as well as closure of the mine.
      In
      addition, as part of the Coal Mine Safety and Health Act of 1969 and the Federal
      Mine Safety and Health Act of 1977, the Black Lung Benefits Revenue Act of
      1977
      and the Black Lung Benefits Reform Act of 1977, as amended in 1981, requires
      payments of benefits to disabled coal miners with black lung disease and to
      certain survivors of miners who die from black lung disease.





In
      2001, Kentucky made significant changes to its mining laws. A new independent
      agency, the Kentucky Mine Safety Review Commission, was created to assess
      penalties against anyone, including owners or part owners (defined as anyone
      owning one percent or more shares of publicly traded stock), whose intentional
      violations or order to violate mine safety laws place miners in imminent danger
      of serious injury or death. Mine safety training and compliance with state
      statutes and regulations related to coal mining is monitored by the Kentucky
      Office of Mine Safety and Licensing. The Commission can impose a penalty of
      up
      to $10,000 per violation, as well as suspension or revocation of the mine
      license.





The
      recent mine disasters in West Virginia and other states have resulted in
      increased scrutiny of coal mining in general and underground coal mining in
      particular. New legislation has been introduced at the state and federal level
      that would create requirements for maintaining caches of self-contained
      self-rescuers throughout underground mines; equipping all underground miners
      with wireless communications devices and tracking devices; and in some cases,
      installing cable lifelines from the mine portal to all sections of the mine
      for
      assistance in emergency escape. Additionally, new requirements for prompt
      reporting of accidents and increased fines and penalties for violation of these
      and other regulations have been proposed and in some states already implemented.
      Effective March 9, 2006, the
      Federal Mine Safety and Health Administration issued an emergency temporary
      standard that places new or amended requirements on all underground mines
      relating to the storage and use of self-contained self-rescuers, evacuation
      training for miners, the installment and maintenance of lifelines and
      notification of MSHA in the event of an accident.


11





It
      is our responsibility to our employees to provide a safe and healthy environment
      through training, communication, following and improving safety standards and
      investigating all accidents, incidents and losses to avoid reoccurrence. The
      combination of federal and state safety and health regulations in the coal
      mining industry is, perhaps, the most comprehensive system for protection of
      employee safety and health affecting any industry. Most aspects of mine
      operations are subject to extensive regulation. This regulation has a
      significant effect on our operating costs. However, our competitors are subject
      to the same level of regulation.










**Black
      Lung Legislation**




Under
      the federal Black Lung Benefits Act (as amended) (the “Black Lung Act”), each
      coal mine operator is required to make black lung benefits or contribution
      payments to:





·
            current
                and former coal miners totally disabled from black lung
                disease;





·
            certain
                survivors of a miner who dies from black lung disease or pneumoconiosis;
                and





·
            a
                trust fund for the payment of benefits and medical expenses to any
                claimant whose last mine employment was before January 1, 1970, or
                where a
                miner’s last coal employment was on or after January 1, 1970 and no
                responsible coal mine operator has been identified for claims, or
                where
                the responsible coal mine operator has defaulted on the payment of
                such
                benefits.





Federal
      black lung benefits rates are periodically adjusted according to the percentage
      increase of the federal pay rate.





In
      addition to the Black Lung Act, we also are liable under various state statutes
      for black lung claims. To a certain extent, our federal black lung liabilities
      are reduced by our state liabilities. Our total (federal and state) black lung
      benefit liabilities, including the current portions, totaled approximately
      $27.3
      million at December 31, 2005. These obligations were unfunded at December 31,
      2005.





The
      United States Department of Labor issued a final rule, effective January 19,
      2001, amending the regulations implementing the Black Lung Act. The amendments
      give greater weight to the opinion of the 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 black
      lung
      regulations could significantly increase our exposure to federal black lung
      benefits liabilities. Experience to date related to these changes is not
      sufficient to determine the impact of these changes. The National Mining
      Association challenged the amendments but the courts, to date, with minor
      exception, affirmed the rules. However, the decision left many contested issues
      open for interpretation. Consequently, we anticipate increased litigation until
      the various federal District Courts have had an opportunity to rule on these
      issues.





The
      Kentucky Supreme Court has taken discretionary review of a Kentucky Court of
      Appeals decision, *Bartrum
      v. Hunter Excavating,* which rendered unconstitutional a 2002 statute governing black lung claims.
      The
      Court of Appeals held that to the extent the statute limited evidence, it
      violated due process rights. The effect upon future black lung claims, if any,
      is dependent upon the Kentucky Supreme Court’s review.





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


12


**Workers’
      Compensation**





We
      are required to compensate employees for work-related injuries. Our accrued
      workers’ compensation liabilities, including the current portion, were $52.3
      million at December 31, 2005. These obligations are unfunded. Our expense for
      workers’ compensation was $10.9 million in 2005. Both the federal government and
      the states in which we operate consider changes in workers’ compensation laws
      from time to time. Such changes, if enacted, could adversely affect
      us.




**Environmental** **Laws and Regulations**





We
      are subject to various federal environmental laws and regulatory entities,
      including:





·
            the
                Surface Mining Control and Reclamation Act of
                1977;





·
            the
                Clean Air Act;





·
            the
                Clean Water Act;





·
            the
                Toxic Substances Control Act;





·
            the
                Comprehensive Environmental Response, Compensation and Liability
                Act;
                and





·
            the
                U.S. Army Corps of Engineers;





·
            the
                Resource Conservation and Recovery
                Act.





We
      are also subject to state laws of similar scope in each state in which we
      operate.





These
      environmental laws require reporting, permitting and/or approval of many aspects
      of coal operations. Both federal and state inspectors regularly visit mines
      and
      other facilities to ensure compliance. We have ongoing compliance and permitting
      programs designed to ensure compliance with such environmental
      laws.





Given
      the retroactive nature of certain environmental laws, we have incurred and
      may
      in the future incur liabilities, including clean-up costs, in connection with
      properties and facilities currently or previously owned or operated as well
      as
      sites to which we or our subsidiaries sent waste materials.




***Surface
      Mining Control and Reclamation Act (SMCRA)***




The
      SMCRA, and its state counterparts, establish operational, reclamation and
      closure standards for all aspects of surface mining as well as many aspects
      of
      underground mining. The Act requires that comprehensive environmental protection
      and reclamation standards be met during the course of and following completion
      of mining activities. Permits for all mining operations must be obtained from
      the Federal Office of Surface Mining Reclamation and Enforcement or, where
      state
      regulatory agencies have adopted federally approved state programs under the
      Act, the appropriate state regulatory authority.





The
      SMCRA and similar state statutes, among other things, require that mined
      property be restored in accordance with specified standards and approved
      reclamation plans. The mine operator must submit a bond or otherwise secure
      the
      performance of these reclamation obligations. The earliest a reclamation bond
      can be fully released is five years after reclamation has been achieved. All
      states impose on mine operators the responsibility for repairing or compensating
      for damage occurring on the surface as a result of mine subsidence, a possible
      consequence of underground mining. In addition, the Abandoned Mine Reclamation
      Fund, which is part of the SMCRA, imposes a tax on all current mining
      operations, the proceeds of which are used to restore unreclaimed mines closed
      before 1977. The maximum tax is $0.35 per ton on surface-mined coal and $0.15
      per ton on underground-mined coal.


13





Effective
      January 1, 2003, we adopted Statement of Financial Accounting Standards No.
      143
      (“Statement No. 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 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 are capitalized
      as part of the carrying amount of the long-lived asset. Asset retirement
      obligations primarily relate to the closure of mines and the reclamation of
      the
      land upon exhaustion of coal reserves. At December 31, 2005 and December 31,
      2004, we had accrued $26.8 million and $16.0 million, respectively, related
      to
      estimated mine reclamation costs. The 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 rate.





Our
      future operating results would be adversely affected if these accruals were
      determined to be insufficient. These obligations are unfunded. The amount that
      was expensed for the year ended December 31, 2005 was $1.6 million, while the
      related cash payment for such liability during the same period was $1.4
      million.





We
      also lease some of our coal reserves to third-party operators. Under the SMCRA,
      responsibility for unabated violations, unpaid civil penalties and unpaid
      reclamation fees of independent contract mine operators can be imputed to other
      companies which are deemed, according to the regulations, to have “owned” or
“controlled” the contract mine operator. Sanctions against the “owner” or
“controller” are quite severe and can include being blocked, nationwide, from
      receiving new permits and revocation of any permits that have been issued since
      the time of the violations or, in the case of civil penalties and reclamation
      fees, since the time such amounts became due.




***Clean
      Air Act***




The
      federal Clean Air Act and similar state laws and regulations, which regulate
      emissions into the air, affect coal mining and processing operations primarily
      through permitting and/or emissions control requirements. In addition, the
      Environmental Protection Agency (the “EPA”) has issued certain, and is
      considering further, regulations relating to fugitive dust and particulate
      matter emissions that could restrict our ability to develop new mines or require
      us to modify our operations. In July 1997, the EPA adopted new, more stringent
      National Ambient Air Quality Standards for particulate matter, which may require
      some states to change existing implementation plans for particulate matter.
      Because coal mining operations and plants burning coal emit particulate matter,
      our mining operations and utility customers are likely to be directly affected
      when the revisions to the National Ambient Air Quality Standards are implemented
      by the states. Regulations under the Clean Air Act may restrict our ability
      to
      develop new mines or could require us to modify our existing operations, and
      may
      have a material adverse effect on our financial condition and results of
      operations.





The
      Clean Air Act also indirectly affects coal mining operations by extensively
      regulating the air emissions of coal-fired electric power generating plants.
      Coal contains impurities, such as sulfur, mercury and other constituents, many
      of which are released into the air when coal is burned. New environmental
      regulations governing emissions from coal-fired electric generating plants
      could
      reduce demand for coal as a fuel source and affect the volume of our sales.
      For
      example, the federal Clean Air Act places limits on sulfur dioxide emissions
      from electric power plants. In order to meet the federal Clean Air Act limits
      for sulfur dioxide emissions from electric power plants, coal users 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 low
      sulfur coal or other fuels. 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 EPA 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.





14


Other
        new and proposed reductions in emissions of sulfur dioxides, nitrogen oxides,
        particulate matter or various 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 EPA recently proposed separate regulations to reduce the interstate
        transport of fine particulate matter and ozone through reductions
        in sulfur dioxides and nitrogen oxides throughout the eastern United States.
        The
        EPA 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 and for certain major sources
        contributing to those exceedances. In addition, the EPA has issued draft
        regulations, and 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 in the planning and building of utility power
        plants
        in the future. To the extent that any new and proposed requirements affect
        our
        customers, this could adversely affect our operations and
        results.





Along
      with these regulations addressing ambient air quality, 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 may restrict 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. These requirements could limit the demand for coal
      in
      some locations.





The
      United States 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. Some of these lawsuits have settled, requiring the utilities to pay
      penalties install pollution control equipment and/or undertake other emission
      reduction measures, and the remaining lawsuits or future lawsuits could require
      the utilities involved to take similar steps, which could adversely impact
      their
      demand for coal.





Any
      reduction in coal’s share of the capacity for power generation could have a
      material adverse effect on our business, financial condition and results of
      operations. The effect such regulations, or other requirements that may be
      imposed in the future, could have on the coal industry in general and on us
      in
      particular cannot be predicted with certainty.





We
      believe we have obtained all necessary permits under the Clean Air Act. We
      monitor permits required by operations regularly and take appropriate action
      to
      extend or obtain permits as needed. Our permitting costs with respect to the
      Clean Air Act are typically less than $25,000 per year.




***Framework
      Convention On Global Climate Change***




The
      United States and more than 160 other nations are signatories to the 1992 United
      Nations Framework Convention on Climate Change, commonly known as the Kyoto
      Protocol, which is intended to reduce or offset emissions of greenhouse gases
      such as carbon dioxide. In December 1997, the signatories to the convention
      established a 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 94% 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 regulations focusing on greenhouse gas emissions are implemented
      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 coal bed methane gas also may affect the use of coal as
      an
      energy source.




***Clean
      Water Act***




The
      federal Clean Water Act and corresponding state laws affect coal mining
      operations by imposing restrictions on discharges into regulated effluent
      waters. Permits requiring regular monitoring and compliance with effluent
      limitations and reporting requirements govern the discharge of pollutants into
      regulated waters. We believe we have obtained all permits required under the
      Clean Water Act and corresponding state laws and are in substantial compliance
      with such permits. However, new requirements under the Clean Water Act and
      corresponding state laws may cause us to incur significant additional costs
      that
      could adversely affect our operating results.


15





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 also cause us to incur significant additional
      operating costs.




***Comprehensive
      Environmental Response, Compensation and Liability
      Act***




The
      Comprehensive Environmental Response, Compensation and Liability Act (commonly
      known as Superfund) and similar state laws create liabilities for the
      investigation and remediation of releases of hazardous substances into the
      environment and for damages to natural resources. Our current and former coal
      mining operations incur, and will continue to incur, expenditures associated
      with the investigation and remediation of facilities and environmental
      conditions, including underground storage tanks, solid and hazardous waste
      disposal and other matters under these environmental laws. We also must comply
      with reporting requirements under the Emergency Planning and Community
      Right-to-Know Act and the Toxic Substances Control Act.





The
      magnitude of the liability and the cost of complying with environmental laws
      with respect to particular sites cannot be predicted with certainty due to
      the
      lack of specific information available, the potential for new or changed laws
      and regulations and for the development of new remediation technologies and
      the
      uncertainty regarding the timing of remedial work. As a result, we may incur
      material liabilities or costs related to environmental matters in the future
      and
      such environmental liabilities or costs could adversely affect our results
      and
      financial condition. In addition, there can be no assurance that changes in
      laws
      or regulations would not result in additional costs and affect the manner in
      which we are required to conduct our operations.




***Resource
      Conservation and Recovery Act***




The
      RCRA and corresponding state laws and regulations affect coal mining operations
      by imposing requirements for the treatment, storage and disposal of hazardous
      wastes. Facilities at which hazardous wastes have been treated, stored or
      disposed of are subject to corrective action orders issued by the EPA and other
      potential obligations, which could adversely affect our results and financial
      condition.








**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. These
      statements are known as “forward-looking statements,” as that term is used in
      Section 27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934. **** 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;


16





·
            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
                successful integration of the Triad mining complex into our overall
                operations.





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; our dependency on one railroad
      for
      transportation of a large percentage of our products; failure to exploit
      additional coal reserves; failure to diversify our operations; increased capital
      expenditures; increased compliance costs; lack of availability of financing
      sources; the effects of regulation and competition; the failure to successfully
      integrate the Triad mining complex into our overall operations; and the risk
      factors set forth in this Annual Report on Form 10-K under Item 1A “Risk
      Factors.” Those are representative of factors that could affect the outcome of
      the forward-looking statements. These and the other factors discussed elsewhere
      in this document are not necessarily all of the important factors that could
      cause our results to differ materially from those expressed in our
      forward-looking statements. Forward-looking statements speak only as of the
      date
      they are made and we undertake no obligation to update them.





**Item
      1A.**  **Risk
      Factors**




**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 revenues and profitability to decline
      significantly.***




We
      derived 85% of our total revenues (contract and spot) in 2005 and 83% of total
      revenue in 2004, 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.


17




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.





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.
      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. 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.


18




Our
      Central Appalachia mines generally ship coal via rail systems. During 2005,
      we
      shipped in excess of 95% of our coal from our Central Appalachia mines via
      CSX.
      In the Midwest, we shipped approximately 62% of our produced coal by truck
      and
      the remainder via rail systems. Our dependence upon railroads and third party
      trucking companies impacts our ability to deliver coal to our customers.
      Disruption of 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.




In
      past years, the major eastern railroads (CSX and Norfolk Southern) have
      experienced an increase in overall rail traffic from the expanding economy
      and
      shortages of both equipment and personnel. This increase in traffic could impact
      our ability to obtain the necessary rail cars to deliver coal to our customers
      and have an adverse impact on our financial results.





***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;•
            blasting
                operations;•
            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 or the volume and price of our coal sales, or making coal
      a
      less attractive fuel alternative in the planning and building of utility power
      plants in the future.


19




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.


20




***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.




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.


21




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.




***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 (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 applied only to certain counties in southern West Virginia (where
      we
      do not now operate) and did allow permits to continue to be issued under the
      more costly and time consuming individual permit process. On November 23, 2005,
      the 4 th Circuit U.S. Court of Appeals completely reversed Judge Goodwin and held that
      NWP 21 are valid permits.




In
      January 2005, a virtually identical claim to that filed in West Virginia was
      filed in Kentucky. The plaintiffs in this case, *Kentucky
      Riverkeepers, 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. Oral arguments in this case were heard on November 7, 2005. A ruling
      for the plaintiffs in this matter could have an adverse impact on our planned
      surface mining 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.


22




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 December 31, 2005, we had accrued
      $26.8 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.




***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
      2005, we generated approximately 80% of our total revenues from several
      long-term contracts with electrical utilities, including 27% from our largest
      customer, Georgia Power Company, and 17% from South Carolina Public Service
      Authority. At December 31, 2005, we had coal supply agreements with these
      customers that expire in 2006 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 for 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:


23




•
            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 have been
      required in the past to purchase sulfur credits or make other pricing
      adjustments to comply with contractual requirements relating to the sulfur
      content of coal sold to our customers, 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.




***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. Petroleum prices have risen significantly in the past twelve 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:


24




•
            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.





***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 developments. If we are unable to
      successfully implement these 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 4% 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.


25




***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
      which we have updated for current activity using similar methodologies. 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.





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.




***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 December 31, 2005, we had outstanding surety
      bonds with third parties for post-mining reclamation totaling $48.0 million.
      Furthermore, we have surety bonds for an additional $44.2 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 December
      31, 2005, the current and non-current portions of these obligations included
      $27.3 million for coal workers’ black lung benefits and $52.3 million for
      workers’ compensation benefits.


26




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, 2005, we
      estimated that our pension plan was underfunded by approximately $18.8 million.
      As of the same date, we had long-term pension obligations of $13.6 million,
      with
      the difference between that amount and the underfunded amount due to unamortized
      actuarial losses. 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.




***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 results
      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 instruments. 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
      instruments.***




Our
      debt instruments impose a number of restrictions on us. A failure to comply
      with
      these restrictions could adversely affect our ability to borrow under our
      revolving credit facility or result in an event of default under our debt
      instruments. Our debt instruments 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:




•
            minimum
                fixed charge coverage ratio;•
            maximum
                total leverage ratio and senior secured leverage ratio;
                and•
            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 our costs of debt financings and impair
      our
      ability to obtain additional debt financing.


27





As
      a result of our lower than expected operating results in the fourth quarter
      2005, we were not in compliance with the fixed charge coverage ratio and the
      leverage ratio required by our debt facility as of December 31, 2005. 
We entered into an amendment to the facility in February 2006 that brought
      us
      into compliance with all of these financial covenants as of December 31, 2005
      and revised certain covenants during 2006 to levels that we project we
      will meet.





***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.




***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 2005, 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 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 and southern
      Indiana. We may also consider opportunities in other energy-related areas that
      are not prohibited by the Indenture governing our senior notes due 2012. If
      we
      undertake these diversification strategies and fail to execute them
      successfully, our financial condition and results of operations may be adversely
      affected.


28





***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. Other than the transaction disclosed in Item 7A “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations -
      Other
      Supplemental Information,” 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 may not be sufficient to finance any additional
      acquisitions.***




We
      believe that our current cash on hand and our availability under our revolver
      will satisfy our operating and capital requirements for at least the next 12
      months. However, such funds 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.




***Our
      current reserve base in southern Indiana is limited.***




Our
      southern Indiana mining complex currently has rights to proven and probable
      reserves that we believe will be exhausted in approximately 5.8 years at 2005
      levels of production, compared to our current Central Appalachia mining
      complexes, which have reserves that we believe will last an average of
      approximately 28 years at 2005 levels of production. We intend to increase
      our
      reserves in southern Indiana by acquiring rights to additional exploitable
      reserves that are either adjacent to or nearby our current reserves. If we
      are
      unable to successfully acquire such rights on acceptable terms, or if our
      exploration or acquisition activities indicate that such coal reserves or rights
      do not exist or are not available on acceptable terms, our production and
      revenues will decline as our reserves in that region are depleted. Exhaustion
      of
      reserves at particular mines also may have an adverse effect on our operating
      results that is disproportionate to the percentage of overall production
      represented by such mines.




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




Our
      surface mining operations have increased regulatory significantly since our
      acquisition of Triad in May 2005. 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.


29





***Underground
      mining is subject to increased regulation, and may require us to incur
      additional cost.***





The
      recent mine disasters in West Virginia and other states have resulted in
      increased scrutiny of coal mining in general and underground coal mining in
      particular. New legislation has been introduced at the state and federal level
      that would create requirements for maintaining caches of self-contained
      self-rescuers throughout underground mines; equipping all underground miners
      with wireless communications devices and tracking devices; and in some cases,
      installing cable lifelines from the mine portal to all sections of the mine
      for
      assistance in emergency escape. Additionally, new requirements for prompt
      reporting of accidents and increased fines and penalties for violation of these
      and other regulations have been proposed and in some states already
      implemented.







**Risks
      Relating to our Common Stock**





***The
      market price of our common stock has been volatile and difficult to predict,
      and
      may continue to be volatile and difficult to predict in the future, and the
      value of your investment may decline.***




The
      market price of our common stock has been volatile in the past and may continue
      to be volatile in the future. The market price of our common stock will be
      affected by, among other things:




•
            variations
                in our quarterly operating results;•
            changes
                in financial estimates by securities analysts;•
            sales
                of shares of our common stock by our officers and directors or by
                our
                shareholders;•
            changes
                in general conditions in the economy or the financial
                markets;•
            changes
                in accounting standards, policies or interpretations;•
            other
                developments affecting us, our industry, clients or competitors;
                and•
            the
                operating and stock price performance of companies that investors
                deem
                comparable to us.





Any
      of these factors could have a negative effect on the price of our common stock
      on the Nasdaq National Market, make it difficult to predict the market price
      for
      our common stock in the future and cause the value of your investment to
      decline.




***Dividends
      are limited by our senior secured credit facility.***




We
      do not anticipate paying any cash dividends on our common stock in the near
      future. In addition, covenants in our senior secured credit facility restrict
      our ability to pay cash dividends and may prohibit the payment of dividends
      and
      certain other payments.




***Provisions
      of our articles of incorporation, bylaws and shareholder rights agreement could
      discourage potential acquisition proposals and could deter or prevent a change
      in control.***




Some
      provisions of our articles of incorporation and bylaws, as well as Virginia
      statutes, may have the effect of delaying, deferring or preventing a change
      in
      control. These provisions may make it more difficult for other persons, without
      the approval of our Board of Directors, to make a tender offer or otherwise
      acquire substantial amounts of our common stock or to launch other takeover
      attempts that a shareholder might consider to be in such shareholder's best
      interest. These provisions could limit the price that some investors might
      be
      willing to pay in the future for shares of our common stock.




On
      May 25, 2004, our shareholders approved a rights agreement which, in certain
      circumstances, including a person or group acquiring, or the commencement of
      a
      tender or exchange offer that would result in a person or group acquiring,
      beneficial ownership of more than 15% of the outstanding shares of our common
      stock, would entitle each right holder, other than the person or group
      triggering the plan, to receive, upon exercise of the right, shares of our
      common stock having a then-current fair value equal to twice the exercise price
      of a right. This shareholder rights agreement provides us with a defensive
      mechanism that decreases the risk that a hostile acquirer will attempt to take
      control of us without negotiating directly with our board of directors. The
      shareholder rights agreement may discourage acquirers from attempting to
      purchase us, which may adversely affect the price of our common
      stock.




Item
      1B.Unresolved Staff
      Comments






30




**Item2.** **Properties**




As
      of December 31, 2005, we owned
      approximately 10,300 acres of
      land .
      Our mineral rights are primarily controlled through leases. In a mining context,
      control of a property is typically divided into three categories:





·
            mineral
                rights, which allows the controlling party to remove the minerals
                on the
                property;





·
            surface
                rights, which allows the controlling party to use and disturb the
                surface
                of the property; and





·
            fee
                control, which includes both mineral and surface
                rights.





Our
      rights with respect to properties that we lease vary from lease to lease, but
      encompass mineral rights, surface rights, or both.





The
      coal properties that we control in Central Appalachia are located in the Big
      Sandy, Hazard and Upper Cumberland coal districts of the Central Appalachian
      coal basin in eastern Kentucky and north central Tennessee *.* These
      three coal districts are located in the Appalachian Plateau structural and
      physiographic province. The coal properties that we control in the Midwest
      are
      part of the Illinois Coal basin and are located in southwest Indiana. We hold
      over 400 leases, the terms of which vary significantly, including the following
      provisions:





·
            length
                of term;





·
            renewal
                requirements;





·
            minimum
                royalties;





·
            recoupment
                provisions;





·
            tonnage
                royalty rates;





·
            minimum
                tonnage royalty rates;





·
            wheelage
                rates;





·
            usage
                fees; and





·
            other
                factors.





Our
      leases typically provide for periodic royalty payments, subject to specified
      annual minimums. The annual minimums are typically based on the forecasted
      tonnage of coal to be produced on the leased property over the term of the
      lease. Payments made pursuant to these minimums for years in which periodic
      royalty payments do not meet the minimums are typically recoupable against
      future periodic production royalties paid within a fixed period of time. We
      typically are responsible for the payment of property taxes due on the
      properties we have under lease.





For
      a discussion of our coal reserves see Item 1 Business “Reserves”.





Our
      corporate headquarters are located in Richmond, Virginia and are occupied
      pursuant to a lease that expires in June 2008.


31










**Item** **3.**   **Legal
      Proceedings**




We
      are parties to a number of legal proceedings incidental to our normal business
      activities, including a large number of workers’ compensation claims. While we
      cannot predict the outcome of these proceedings, in our opinion, any liability
      arising from these matters individually and in the aggregate should not have
      a
      material adverse effect on our consolidated financial position, cash flows
      or
      results of operations.







**Item** **4.**   **Submission
      of Matters to a Vote of Security H** **olders**




There
      were no matters submitted to a vote of security holders of the Company through
      a
      solicitation of proxies or otherwise during the fourth quarter of the Company’s
      year ended December 31, 2005.



























32


**PART
      II**




**Item****5.**
            **Marketfor
                Registrant’s Common Equity, Related Stockholders
                Matters and Issuers Purchases of Equity
                Securities**







**Market
      Information**




On
      January 25, 2005, our
      common stock commenced trading on the Nasdaq National Market under the ticker symbol
      “JRCC”. From
      November 15, 2004 until January 24, 2005, our common stock was quoted on the
      Over-the-Counter Bulletin Board. The
      table  below
      sets forth the high and low  sales
      prices for our common stock for the periods
      indicated, as reported by Nasdaq or quoted through the OTC Bulletin Board. The per share quotations for the periods in which our common stock was traded in
      the over-the-counter market represent inter-dealer prices,
      without adjustment for retail mark  ups ,
      mark-down s or commissions and may not necessarily represent actual transactions.




**Range of Sales Price**High
            
            
            LowFiscal
                year ended December 31, 2004Fourth
                quarter (a)
            
            
            $49.75
            
            
            $35.63Fiscal
                year ended December 31, 2005First
                quarter
            
            
            $45.75
            
            
            $37.41Second
                quarter
            
            
            40.50
            
            
            28.64Third
                quarter
            
            
            52.56
            
            
            34.47Fourth
                quarter
            
            
            51.37
            
            
            36.96(a)Covers
              the period starting November 15, 2004.






**Recent
      Sales of Unregistered Securities**




We
      issued common stock and options to purchase common stock to the following
      persons or classes of persons, in reliance upon the exemption contained in
      Section 4(2) of the Securities Act of 1933, as follows:




**Recipient**
            
            
            **No.**
              **Shares**
            
            
            **No.**
              **Options**
            
            
            
            **Date of**
              **Issuance**
            
            
            **Consideration**
            
            
            
            **Option**
              **Exercise**
              **Price**Operating
                and senior management
            
            
            342,470
            
            
            -
            
            
            
            January
                10, 2005 to
              July
                1, 2005
            
            
            Services
              rendered
            
            
            
            N/ANon-employee
                directors (aggregate)
            
            
            4,000
            
            
            40,000
            
            
            
            May
                7, 2005 and
              June
                6, 2005
            
            
            Services
              rendered
            
            
            
            $33.57
                to $33.75Former
                shareholders of Triad Inc.(a)
            
            
            338,295
            
            
            -
            
            
            
            May
                31, 2005
            
            
            Equity
                of Triad
              Mining,
                Inc.
            
            
            
            N/A


(a)
      Shares issued in connection with our acquisition of Triad Mining Inc.





Please
      refer to note 8 of our December 31, 2005 consolidated financial statements
      for
      securities authorized to be issued under our 2004
      Equity Incentive Plan.





33





**Holders**




As
      of December 31, 2005, there were 63 record holders of our common stock.




**Dividends**




We
      have not paid any cash dividends on our common stock during the last two
      completed fiscal years or during 2005. We intend to retain our earnings and
      do
      not anticipate paying cash dividends in the foreseeable future. Any future
      determination as to the payment of cash dividends will depend upon such factors
      as earnings, capital requirements, our financial condition, restrictions in
      financing agreements and other factors deemed relevant by the Board of
      Directors. The payment of cash dividends is also currently prohibited by our
      credit facilities.




**Item** **6.**   **Selected
      Financial Data**




In
      March 2003, the Company and all of its subsidiaries filed voluntary petitions
      with the United States Bankruptcy Court for the Middle District of Tennessee
      for
      reorganization under Chapter 11. Upon emergence from bankruptcy, we adopted
      “fresh start” accounting as contained in the American Institute of Certified
      Public Accountant’s Statement of Position 90-7, *Financial
      Reporting by Entities in Reorganization Under the Bankruptcy
      Code* (“SOP 90-7”). In connection with the implementation of fresh start accounting,
      we recorded a gain of approximately $178.0 million from the extinguishment
      of
      our debt. Other adjustments were made to reflect the provisions of the Plan
      of
      Reorganization and to adjust the assets of the reorganized Company to their
      estimated fair value and liabilities to their estimated present value. For
      purposes of applying fresh start accounting, we have used an enterprise value
      for the reorganized Company of $155 million which was based on an appraisal performed for one of our lenders in connection with
      our reorganization. For financial reporting purposes, these transactions were
      reflected in our operating results before emergence.





Our
      consolidated financial statements after emergence are those of a new reporting
      entity (the “Successor Company”) and are not comparable to the financial
      statements of the pre-emergence company (the “Predecessor Company”). For a
      complete discussion of our application of fresh start accounting, please refer
      to note 2 of our December 31, 2005 consolidated financial
      statements.





The
      following table presents our selected consolidated financial and operating
      data
      as of and for each of the periods indicated. The selected consolidated financial
      data for year ended December 31, 2005 and the eight months ended December 31,
      2004 (the successor period) and for each of the years ended December 31, 2001
      through December 31, 2003 and the four months ended April 30, 2004 (predecessor
      periods) are derived from our audited consolidated financial statements. The
      selected consolidated financial and operating data should be read in conjunction
      with “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” and our consolidated financial statements and related
      notes.






34





**James
          River Coal Company and Subsidiaries**
 Selected
          Financial Data
  **Successor
                    Company**
                
                **Predecessor
                    Company****Year**
                  **Ended**
                  **2005**
                
                **Eight
                    Months**
                  **Ended**
                  **December
                    31,**
                  **2004**
                
                **Four
                    Month**
                  **Ended**
                  **April
                    30,**
                  **2004**
                
                **Year**
                  **Ended**
                  **2003**
                
                **Year**
                  **Ended**
                  **2002**
                
                **Year**
                  **Ended**
                  **2001**(in
                    thousands, except per share, per ton and number of employees
                    information)**Consolidated
                    Statement of Operations:**Revenues
                
                $
                453,999
                
                
                231,698
                
                
                
                
                113,949
                
                
                304,052
                
                
                397,599
                
                
                384,248Cost
                    of coal sold
                
                
                389,222
                
                
                190,926
                
                
                
                
                89,294
                
                
                278,939
                
                
                344,222
                
                
                328,408Depreciation,
                    depletion, and amortization
                
                
                51,822
                
                
                21,765
                
                
                
                
                12,314
                
                
                40,427
                
                
                46,393
                
                
                43,175Gross
                    profit (loss)
                
                
                12,955
                
                
                19,007
                
                
                
                
                12,341
                
                
                (15,314
                )
                
                6,984
                
                
                12,665Selling,
                    general, and administrative expenses
                
                
                25,453
                
                
                11,412
                
                
                
                
                5,023
                
                
                19,835
                
                
                19,994
                
                
                15,725Other
                    operating expenses
                
                
                -
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                26,554
                
                
                -Operating
                    income (loss)
                
                
                (12,498
                )
                
                7,595
                
                
                
                
                7,318
                
                
                (35,149
                )
                
                (39,564
                )
                
                (3,060
                )Interest
                    expense
                
                
                12,892
                
                
                5,733
                
                
                
                
                567
                
                
                18,536
                
                
                29,883
                
                
                23,923Interest
                    income
                
                
                (226
                )
                
                (72
                )
                
                
                
                -
                
                
                (144
                )
                
                (1,003
                )
                
                (662
                )Charges
                    associated with repayment of debt
                
                
                2,524
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -Miscellaneous
                    income, net
                
                
                (1,067
                )
                
                (833
                )
                
                
                
                (331
                )
                
                (1,519
                )
                
                (1,222
                )
                
                206Reorganization
                    items, net
                
                
                -
                
                
                -
                
                
                
                
                (100,907
                )
                
                7,630
                
                
                -
                
                
                -Income
                    tax expense (benefit)
                
                
                (14,283
                )
                
                791
                
                
                
                
                -
                
                
                (2,891
                )
                
                (8,125
                )
                
                (10,318
                )Income
                    (loss) before cumulative effect of accounting change
                
                
                (12,338
                )
                
                1,976
                
                
                
                
                107,989
                
                
                (56,761
                )
                
                (59,097
                )
                
                (16,209
                )Cumulative
                    effect of accounting change
                
                
                -
                
                
                -
                
                
                
                
                -
                
                
                (3,045
                )
                
                -
                
                
                -Net
                    income (loss)
                
                
                (12,338
                )
                
                1,976
                
                
                
                
                107,989
                
                
                (59,806
                )
                
                (59,097
                )
                
                (16,209
                )Preferred
                    dividends
                
                
                -
                
                
                -
                
                
                
                
                -
                
                
                (340
                )
                
                (680
                )
                
                (595
                )(Increase)
                    decrease in redemption amount of redeemable common stock
                
                
                -
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                8,798
                
                
                45,831Net
                    income (loss) attributable to common shareholders
                
                
                (12,338
                )
                
                1,976
                
                
                
                
                107,989
                
                
                (60,146
                )
                
                (50,979
                )
                
                29,027


35


**James
        River Coal Company and Subsidiaries**
 **Selected
                  Financial Data**
  **Successor
                            Company**
                        
                        
                        **Predecessor
                            Company****Year**
                          **Ended**
                          **2005**
                        
                        
                        **Eight**
                          **Months**
                          **Ended**
                          **December
                            31,**
                          **2004**
                        
                        
                        **Four**
                          **Months**
                          **Ended**
                          **April
                            30,**
                          **2004**
                        
                        
                        **Year**
                          **Ended**
                          **2003**
                        
                        
                        **Year**
                          **Ended**
                          **2002**
                        
                        
                        **Year**
                          **Ended**
                          **2001**(in
                            thousands, except per share, per ton and number of employees
                            information)Basic
                            earnings (loss) per common share:Income
                            (loss) before cumulative effect of accounting change
                        
                        $
                        (0.83
                        )
                        
                        0.14
                        
                        
                        6,393.67
                        
                        
                        (3,380.78
                        )
                        
                        (3,018.31
                        )
                        
                        1,718.56Cumulative
                            effect of accounting change
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (180.28
                        )
                        
                        -
                        
                        
                        -Net
                            income (loss)
                        
                        
                        (0.83
                        )
                        
                        0.14
                        
                        
                        6,393.67
                        
                        
                        (3,561.06
                        )
                        
                        (3,018.31
                        )
                        
                        1,718.56Shares
                            used to calculate basic earnings (loss) per common share
                        
                        
                        14,955
                        
                        
                        13,800
                        
                        
                        17
                        
                        
                        17
                        
                        
                        17
                        
                        
                        17Diluted
                            earnings (loss) per common share:Income
                            (loss) before cumulative effect of accounting change
                        
                        $
                        (0.83
                        )
                        
                        0.14
                        
                        
                        6,393.67
                        
                        
                        (3,380.78
                        )
                        
                        (3,018.31
                        )
                        
                        1,718.56Cumulative
                            effect of accounting change
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (180.28
                        )
                        
                        -
                        
                        
                        -Net
                            income (loss)
                        
                        
                        (0.83
                        )
                        
                        0.14
                        
                        
                        6,393.67
                        
                        
                        (3,561.06
                        )
                        
                        (3,018.31
                        )
                        
                        1,718.56Shares
                            used to calculate diluted earnings (loss) per share
                        
                        
                        14,955
                        
                        
                        14,623
                        
                        
                        16,890
                        
                        
                        16,890
                        
                        
                        16,890
                        
                        
                        16,890





36


**James
            River Coal Company and Subsidiaries**
 **Selected
                      Financial Data**
 **Successor
                        Company**
                    
                    
                    **Predecessor
                        Company****December
                        31,**
                    
                    
                    **April
                        30,**
                    
                    **December
                        31,****2005**
                    
                    **2004**
                    
                    
                    **2004**
                    
                    **2003**
                    
                    **2002**
                    
                    **2001**(in
                        thousands, except per share, per ton and number of employees
                        information)**Consolidated
                        Balance Sheet Data:**Working
                        capital (deficit)
                    
                    $
                    6,123
                    
                    
                    10,046
                    
                    
                    
                    5,896
                    
                    
                    9,009
                    
                    
                    (263,149
                    )
                    
                    (241,857
                    )Property,
                        plant, and equipment, net
                    
                    
                    360,000
                    
                    
                    255,575
                    
                    
                    
                    254,259
                    
                    
                    257,156
                    
                    
                    270,989
                    
                    
                    310,643Total
                        assets
                    
                    
                    472,669
                    
                    
                    327,826
                    
                    
                    
                    332,589
                    
                    
                    318,289
                    
                    
                    340,311
                    
                    
                    393,411Long
                        term debt, including current portion
                    
                    
                    150,000
                    
                    
                    95,000
                    
                    
                    
                    6,400
                    
                    
                    -
                    
                    
                    252,876
                    
                    
                    249,576Liabilities
                        subject to compromise
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    319,451
                    
                    
                    319,595
                    
                    
                    -
                    
                    
                    -Total
                        shareholders’ equity (deficit)
                    
                    
                    111,267
                    
                    
                    65,585
                    
                    
                    
                    (127,837
                    )
                    
                    (123,601
                    )
                    
                    (68,726
                    )
                    
                    (9,034
                    )
 **Successor
                      Company**
                  
                  **Predecessor
                      Company****Year**
                    **Ended**
                    **2005**
                  
                  **Eight**
                    **Months
                      Ended**
                    **December
                      31, 2004**
                  
                  **Four
                      Months Ended**
                    **April
                      30,**
                    **2004**
                  
                  **Year**
                    **Ended**
                    **2003**
                  
                  **Year**
                    **Ended**
                    **2002**
                  
                  **Year**
                    **Ended**
                    **2001**(in
                      thousands, except per share, per ton and number of employees
                      information)**Consolidated
                      Statement of Cash Flow Data:**Net
                      cash provided by operating activities
                  
                  $
                  48,990
                  
                  
                  14,098
                  
                  
                  
                  1,513
                  
                  
                  23,033
                  
                  
                  28,899
                  
                  
                  30,793Net
                      cash used in investing activities
                  
                  
                  (135,362
                  )
                  
                  (21,744
                  )
                  
                  
                  (9,463
                  )
                  
                  (15,660
                  )
                  
                  (33,522
                  )
                  
                  (43,640
                  )Net
                      cash provided by (used in) financing activities
                  
                  
                  91,429
                  
                  
                  10,224
                  
                  
                  
                  4,361
                  
                  
                  (2,489
                  )
                  
                  3,347
                  
                  
                  14,119**Supplemental
                      Operating Data:**Tons
                      sold
                  
                  
                  11,091
                  
                  
                  5,775
                  
                  
                  
                  3,107
                  
                  
                  10,083
                  
                  
                  13,926
                  
                  
                  14,065Tons
                      produced
                  
                  
                  11,155
                  
                  
                  5,770
                  
                  
                  
                  3,081
                  
                  
                  9,294
                  
                  
                  12,350
                  
                  
                  13,134Revenue
                      per ton sold (excluding synfuel)
                  
                  $
                  40.19
                  
                  
                  39.21
                  
                  
                  
                  35.98
                  
                  
                  29.53
                  
                  
                  28.26
                  
                  
                  27.29Number
                      of employees
                  
                  
                  1,429
                  
                  
                  1,070
                  
                  
                  
                  984
                  
                  
                  1,127
                  
                  
                  1,145
                  
                  
                  1,319Capital
                      expenditures
                  
                  $
                  84,987
                  
                  
                  25,811
                  
                  
                  
                  9,521
                  
                  
                  20,116
                  
                  
                  22,925
                  
                  
                  43,694





37


**Item
      7.**  **Management’s
      Discussion and Analysis of** **** **Financial
      Condition and Results of** **Operations**







The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our consolidated financial
      statements and the accompanying notes and "Selected Financial Data" included
      elsewhere in this f iling.
      This discussion contains forward-looking statements that involve risks and
      uncertainties. Our actual results could differ materially from those anticipated
      in the forward-looking statements as a result of numerous factors, including
      the
      risks discussed in "Risk Factors" in this filing.





**Overview**




We
      mine, process and sell bituminous, steam- and industrial-grade coal through
      six
      operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
      and in southern Indiana. We have two reportable business segments based on
      the
      coal basins in which we operate (Central Appalachia (CAPP) and the Midwest
      (Midwest)). Our Midwest business segment was added in 2005 through the
      acquisition of Triad Mining, Inc. In 2005, our mines produced 10.7 million
      tons
      of coal (including 726,000 tons of contract coal) and we purchased another 438,000 tons for resale. Of the 10.0 million tons we produced
      from Company operated mines, approximately 81% came from underground mines,
      while the remaining 19% came from surface mines. In
      2005, we generated revenues of $454.0 million and a net loss of $12.3 million.





Prices
      for coal have
      increased significantly since mid 2003 due to a combination of conditions in
      the
      U.S. and worldwide that caused a shortage of certain grades of coal.
      Consequently, we have seen significant increases in both spot coal prices and
      in
      the prices of our long term contracts to sell coal during that time. We believe
      that coal prices will continue to remain near their current level. The fixed
      price contractual commitments that we have with certain utility customers
      mitigate short term swings in spot coal prices (up or down).








***CAPP
      Segment***





In
      Central Appalachia, the majority of our coal is primarily sold to customers
      in
      the southern portion of the South Atlantic region of the United States. The
      South Atlantic Region includes the states of Florida, Georgia, South Carolina,
      North Carolina, West Virginia, Virginia, Maryland and Delaware. According to
      the US Energy Information Administration (EIA), in 2004 the South
      Atlantic region consumed about 23% of all coal for electric generation in the
      United States. The South Atlantic region had an increase in coal consumption
      in
      the electric power sector of 1.0% in 2004. We
      have been providing coal to customers in the South Atlantic region since our
      formation in 1988. In 2005, Georgia Power and South Carolina Public Service
      Authority were our largest customers, representing approximately 27% and 17%
      of
      our total revenues, respectively. No other customer accounted for more than
      10%
      of our revenues.





According
      to the EIA, coal productions increased in the Appalachia region by 3.7% in
      2004,
      but remained lower than the 2002 production levels. Production increases in
      the
      Appalachia regions continue to be impacted by transportation problems, rising
      operating costs and difficulty in permitting new mines. During 2005, our CAPP
      segment shipped 9.0 million tons of coal. As
      of December 31, 2005, we estimate that we controlled approximately 242 million
      tons of proven and probable coal reserves. Based on our most recent analysis
      prepared by Marshall Miller & Associates,
      Inc. (“MM&A”) on March 31, 2004, we estimate that th ese
      reserves have an average heat content of 13,300 BTU per pound and an average
      sulfur content of 1.3%. At current production levels, we believe these reserves
      would support approximately 28 years of production.





Our
      CAPP segment experienced a significant increase in mining costs during 2005.
      The
      increased costs were primarily due to higher royalties (due to an increase
      in
      sales price) and severance taxes, labor costs, commodity based variable mining
      costs, and trucking costs. We are focused on reducing our operating costs at
      each mine and improving miner productivity. We continue to select
      projects for capital expenditures for equipment, facilities, and infrastructure that we believe will provide
      high
      returns. We are also focused on enhancing our training programs to help our
      personnel be safer and more productive.


38








***Midwest
      Segment***





In
      the Midwest, the majority of our coal is sold in the East North Central Region,
      which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin. According
      to the  EIA, in 2004 the East North Central Region consumed about 22%
      of all coal consumed for electric generation in the United States. The East
      North Central Region had an increase in coal consumption for the electric power
      sector of 1.9% in 2004. In
      2004, our Midwest segment’s largest customer was Indianapolis Power and Light
      which represented approximately 8% of our total revenues.




During
      2005 (which includes the period subsequent to May 31, 2005), our Midwest segment
      shipped 2.1 million tons of coal. We
      believe that coal-fired electric utilities value the high energy coal that
      comprises the majority of our Midwest reserves. As of December 31, 2005, we
      estimate that we controlled approximately 20.2 million tons of proven and
      probable coal reserves. Based on our most recent analysis prepared by MM&A
      as of February 1, 2005, we estimate that t hese
      reserves have an average heat content of 11,200 Btu per pound and average sulfur
      content of 2.7%. At current production levels, we believe these reserves would
      support approximately 5.8 years of production.







**Reserves**




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.
      MM&A completed their report on our CAPP reserves in June 2004. In connection
      with our acquisition of Triad, MM&A also prepared a detailed study of our
      Midwest reserves as of February 1, 2005, based on similar data from Triad. 
MM&A completed their report on our Midwest reserves in March 2005. 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. We have used MM&A’s March 31,
      2004 study as the basis for our current internal estimate of our Central
      Appalachia reserves and MM&A’s February 1, 2005 study as the basis for our
      current internal estimate of our Midwest Reserves.






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 December 31, 2005, we estimate that, as of December
      31, 2005, we controlled approximately 241.6 million tons of proven and probable
      coal reserves in the CAPP region and 20.2 millions tons in the Midwest region.
       The following table provides additional information regarding changes to
      our reserves since December 31, 2004 (in millions of tons):




39












**CAPP**
            
            **Midwest**
            
            **Total**Proven
                and Probable Reserves, as of December 31, 2004 (1)
            
            
            207.4
            
            
            -
            
            
            207.4Coal
                Extracted
            
            
            (8.7
            )
            
            (2.0
            )
            
            (10.7
            )Acquisitions
                (2)
            
            
            42.9
            
            
            22.3
            
            
            65.2Adjustments
                (3)
            
            
            -
            
            
            (0.1
            )
            
            (0.1
            )Proven
                and Probable Reserves, as of December 31, 2005 (1)
            
            
            241.6
            
            
            20.2
            
            
            261.8








(1)
      Calculated in the same manner, and based on the same assumptions and
      qualifications, as used in the MM&A studies described above, but these
      estimates have not been reviewed by MM&A.  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 used in the MM&A studies described
      above, but, except for the reserve study of the Triad reserves as of February
      1,
      2005, these estimates have not been reviewed by MM&A.





(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 used in the
      MM&A studies described above, but these estimates have not been reviewed by
      MM&A.





**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 and
      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. We closely monitor the cost per ton of our mines against
      our budgeted costs and against our other mines.





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.





**Trends
      In Our Business**





We
      expect coal prices to remain near their current levels in the near term.
      However, historically high coal prices have caused an increased production
      that
      has resulted in downward pressures on coal prices. 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


40


Information
      Administration (EIA), coal stockpiles at utilities dropped by 12.2% in 2004.
      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 demand for
      coal
      labor to continue leading 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. The recent
      mine
      disasters in West Virginia and other states have also resulted in increased
      scrutiny of coal mining in general and underground coal mining in particular.
      We
      expect that the increased scrutiny will result in new regulations which we
      believe will cause our and other coal companies’ mining costs to rise.




**2004
      Reorganization**





In
      March 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. Our Plan of Reorganization was confirmed by
      the
      bankruptcy court in April 2004. On
      May 6, 2004, 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
      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.





Financial
      statements for periods after March 25, 2003 and prior to April 30, 2004 include
      the effects of our bankruptcy proceedings. These include the classification
      of
      certain liabilities as “liabilities subject to compromise,” the classification
      of certain expenses, and gains and losses as reorganization items, and other
      matters described in the notes to our consolidated financial
      statements.


41





**Results
      of Operations**





***Year
      Ended December 31, 2005 Compared with the Year Ended December 31,
      2004***





In
      order to provide a basis for comparing the year ended December 31, 2005 (“2005”)
      with the year ended December 31, 2004 (“2004”) , the
      operating results of the Successor Company for the eight months ended December
      31, 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 combining of the predecessor and successor accounting
      periods is not permitted by U.S. generally accepted accounting principles.
      Additionally, as explained above, the operating results of the Successor Company
      and the Predecessor Company 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 2005 and 2004 (in
      000’s):





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **Change****Total**
            
            **Per
                Ton**
            
            **Total**
            
            **Per
                Ton**
            
            **Total**Volume
                Shipped (tons)
            
            
            11,091
            
            
            
            
            
            8,882
            
            
            
            
            
            25
            %Coal
                sales
            
            $
            445,742
            
            
            40.19
            
            
            338,297
            
            
            38.09
            
            
            32
            %Synfuel
                handling
            
            
            8,257
            
            
            
            
            
            7,350
            
            
            
            
            
            12
            %Cost
                of coal sold
            
            
            389,222
            
            
            35.09
            
            
            280,220
            
            
            31.55
            
            
            39
            %Depreciation,
                depletion and amortization
            
            
            51,822
            
            
            4.67
            
            
            34,079
            
            
            3.84
            
            
            52
            %Gross
                profit
            
            
            12,955
            
            
            1.17
            
            
            31,348
            
            
            3.53
            
            
            -59
            %Selling,
                general and administrative
            
            
            25,453
            
            
            2.29
            
            
            16,435
            
            
            1.85
            
            
            55
            %





**Volume
      and Revenues by Segment**





**Year
                Ended December 31,**2005
            
            2004CAPP
            
            Midwest
            
            CAPP
            
            MidwestVolume
                Shipped (tons)
            
            
            9,023
            
            
            2,068
            
            
            8,882
            
            
            -Coal
                sales revenue
            
            $
            389,861
            
            
            55,881
            
            
            338,297
            
            
            -Average
                sales price per ton
            
            $
            43.21
            
            
            27.02
            
            
            38.09
            
            
            -







In
      2005, we shipped 11.1 million tons of coal compared to 8.9 million tons for
      the
      same period in 2004.  This increase was primarily due to the acquisition of
      Triad which added 2.1 million tons in 2005.  Coal
      sales revenue increased from $338.3 million in 2004 to $445.7 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 $55.9 million
      increase due to the acquisition of Triad.  In 2005, the CAPP region sold
      approximately 7.9 million tons of coal under long-term contracts (87% of total
      CAPP sales volume) at an average selling price of $40.12 per ton.  In 2004,
      the CAPP region sold 7.2 million tons of coal (81% of total CAPP sales volume)
      under long-term contracts at an average selling price of $35.22 per ton. 
In 2005, the CAPP region sold 1.1 million tons of coal (13% of total CAPP sales
      volume) to the spot market at an average selling price of $64.74 per ton. 
In 2004, the CAPP region sold approximately 1.7 million tons (19% of total
      CAPP
      sales volume) to the spot market at an average selling price of $50.09 per
      ton.  The Midwest revenues were primarily from sales under long-term
      contracts.




42









**Year
                Ended December 31,**2005
            
            2004CAPP
            
            Midwest
            
            Corporate
            
            CAPP
            
            Midwest
            
            Corporate**Cost
                of Coal Sold**
            $
            
            344,094
            
            
            45,128
            
            
            -
            
            
            280,220
            
            
            -
            
            
            -**Per
                ton**
            
            
            38.14
            
            
            21.82
            
            
            -
            
            
            31.55
            
            
            -
            
            
            -**Depreciation,
                depletion, and amortization**
            
            
            43,687
            
            
            7,985
            
            
            150
            
            
            33,961
            
            
            -
            
            
            118**Per
                ton**
            
            
            4.84
            
            
            3.86
            
            
            -
            
            
            3.82
            
            
            -
            
            
            -





*Cost
      of Coal Sold*





The
      cost of coal sold, excluding depreciation, depletion and amortization increased
      from $280.2 million in 2004 to $389.2 million in 2005. Our cost per ton of
      coal
      sold in the CAPP region increased from $31.55 per ton in the 2004 period to
      $38.14 per ton in the 2005 period. This $6.59 increase in cost per ton of coal
      sold was due to several factors. For production from our company-operated mines,
      sales related costs (primarily royalties and severance taxes) increased by
      $0.59
      per ton as a result of increased sales prices. Labor and benefit costs increased
      at our company operated mines by $1.58 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 $2.26 per ton, primarily due to rising commodity prices for
      petroleum and steel based products such as belting, roof support materials,
      mining bits and machine parts. Trucking costs increased by $1.02 per ton in
      2005
      due to higher fuel costs. The remaining increase was primarily due to an
      increase per ton in the cost of our purchased coal of $10.38 per ton and our
      contract coal of $8.26 per ton. Cost per ton of coal sold in the Midwest region
      was $21.82 in 2005.




*Depreciation,
      depletion and amortization*




Depreciation,
      depletion and amortization, increased from $34.1 million in 2004 to $51.8
      million in 2005. In the CAPP region, depreciation, depletion and amortization
      increased $9.7 million to $43.7 million or $4.84 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 $8.0 million, or $3.86
      per
      ton, which reflects the depreciation, depletion and amortization from the
      acquisition of Triad.




*Selling,
      general and administrative*




Selling,
      general and administrative expenses increased from $16.4 million for 2004 to
      $25.5 million for 2005. Of this increase $2.8 million was related to an increase
      in compensation, salary and benefit costs. We have added an entire team of
      employees dedicated to the development of our new surface mines. This team
      includes technical, operations, and land acquisition personnel to acquire
      additional properties, design the new mines, obtain all necessary permits,
      and
      manage the new mine operations. An additional $766,000 was related to an
      increase in stock compensation costs primarily reflecting the additional
      restricted shares issued in 2005. Bank charges also increased by $1.5 million,
      primarily reflecting fees related to our letter of credit facility. The Company
      also had a $900,000 increase in other taxes primarily related to an increase
      in
      the unmined mineral tax rates.




43


*Income
      Taxes*





Our
      effective tax rate for 2005 was 53.7%. 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.








***Year
      Ended December 31, 2004 Compared with the Year Ended December 31,
      2003***





In
      order to provide a basis for comparing the year ended December 31, 2004 (“2004”)
      with the year ended December 31, 2003 (“2003”), the operating results of the
      Successor Company for the eight months ended December 31, 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 combining of the predecessor and successor accounting periods is not
      permitted by U.S. generally accepted accounting principles. Additionally, as
      explained above, the operating results of the Successor Company and the
      Predecessor Company are not comparable.





The
      following table shows selected operating results for 2004 and 2003 (in
      000’s) :





**2004**
            
            **2003**
            
            ******Change**Volume
                (tons)
            
            
            8,882
            
            
            10,083
            
            
            (12%)RevenuesCoal
                sales
            
            $
            338,297
            
            $
            297,713
            
            
            14%Synfuel
                handling
            
            
            7,350
            
            
            6,339
            
            
            16%Cost
                of coal sold
            
            
            280,220
            
            
            278,939
            
            
            1%




**Volume
      and revenues**





We
      shipped 10.1 million tons of coal in 2003 and 8.9 million tons in 2004.
      Production from our company mines decreased by approximately 138,000 tons in
      2004 as compared to 2003. This decrease in production from our company mines
      was
      due to adverse geological conditions at several of our mines and several major
      moves of mining equipment and personnel in the third and fourth quarters of
      2004. In addition, there was a reduction during the year of 54% or 635,000
      tons
      from contract mining operations. This reduction in coal obtained from contract
      mining operations is attributed to several underground mine contractors
      terminating our contract mine agreements to seek higher-priced opportunities
      with our competitors or closing operations due to depletion of reserves. We
      also
      experienced a decrease of 57%, or 448,000 tons, in coal purchased by us for
      resale. The reduction in coal purchased for resale from third parties is the
      result of the increased competition for purchased coal. We continue to be
      challenged in replacing contract mine operators and purchased coal sources
      due
      to the continued strong coal market. Coal sales revenue increased from $297.7
      million in 2003 to $338.3 million in 2004. This increase was due to an increase
      in spot coal sales, which commanded a higher price in 2004 than in 2003, as
      well
      as an increase in the average sales price per ton for sales under long-term
      contracts. For the year ended December 31, 2004, we sold 7.2 million tons of
      coal under long-term contracts (81% of total sales volume) at an average selling
      price of $35.22 per ton. For 2003, we sold 9.3 million tons of coal under
      long-term contracts (92% of total sales volume) at an average selling price
      of
      $28.91 per ton. The increase in average selling price from 2003 to 2004 was
      due
      to the renegotiation of below-market contract prices as part of our bankruptcy
      proceedings. For the year ended December 31, 2004, we sold 1.7 million tons
      of
      coal (19% of total sales volume) to the spot market at an average selling price
      of $50.09 per ton. For 2003, we sold 772,000 tons of coal (8% of total sales
      volume) to the spot market at an average selling price of $36.91 per
      ton.





Revenues
      related to the handling, loading and shipping of synfuel increased from $6.3
      million for the year ended December 31, 2003 to $7.4 million for the year ended
      December 31, 2004. We processed and shipped 6% less coal as synfuel in 2004
      than
      we processed and shipped in 2003. However, our fees, on a per ton basis,
      increased during the same period.


44





**Operating
      Costs**





The
      cost of coal sold, excluding depreciation, depletion and amortization, increased
      from $278.9 million in 2003 to $280.2 million in 2004, even though the amount
      of
      coal we shipped decreased by 1.2 million tons. Our cost per ton of coal sold
      increased from $27.67 per ton in 2003 to $31.55 per ton in 2004. This $3.88
      increase in cost per ton of coal sold was due to several factors. For production
      from our company-operated mines, sales related costs (primarily royalties and
      severance taxes) increased by $1.42 per ton as a result of increased sales
      prices. Labor and benefit costs for those tons increased by $1.00 per ton in
      2004 primarily due to lower productivity at several mines. The labor and benefit
      costs were partially offset by a reduction in workers compensation costs of
      $3.5
      million, or $0.40 per ton, during the fourth quarter of 2004, reflecting
      improved actuarial trends. Variable costs increased by $1.12 per ton, primarily
      due to higher roof support and machine parts costs primarily related to the
      increased cost of steel. In addition, the cost of coal produced by independent
      contract mine operators (6% of our 2004 tonnage) increased by $2.89 per ton
      while the cost of coal purchased from outside parties for resale (4% of our
      2004
      tonnage) increased by $3.39 per ton for the period. The application of fresh
      start accounting required that we increase the value of our inventory by
      approximately $1.1 million on April 30, 2004. This adjustment increased our
      cost
      of coal sold and reduced gross profit during the eight months ended December
      31,
      2004 by a corresponding amount.





For
      the year ended December 31, depreciation, depletion and amortization decreased
      from $40.4 million in 2003 to $34.1 million in 2004. On a per ton basis,
      depreciation, depletion and amortization was $4.01 in 2003 and $3.84 in 2004.
      This decrease was primarily due to the impact of fresh start accounting on
      our
      asset base.





Selling,
      general and administrative expenses decreased from $19.8 million in 2003 to
      $16.4 million in 2004. This decrease was primarily due to a $4.2 million
      reduction in certain costs due to our exit from bankruptcy. This decrease was
      offset by approximately $1.1 million of stock-based compensation expense
      recorded in 2004. We had no stock based compensation expense in
      2003.





**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% per 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.





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. We entered into an
      amendment and waiver to the Senior Secured Credit Facility on February 22,
      2006
      (the “First Amendment”). The material terms of the Senior Secured Credit
      Facility and the First Amendment are described below.




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 our leverage ratio (the Applicable Rate) plus our 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.  Pursuant to the First Amendment, the Applicable Rate was
      increased to 2.0% for borrowings based on the prime rate or federal funds open
      rate and 3.0% for borrowing based on the Euro rate for the period from February
      22, 2006 to September 30, 2006. The Revolver also requires a 0.5% commitment
      fee
      on the unused balance of the Revolver.




45


The
      Letter of Credit Facility does not constitute a loan to us and accordingly
      is
      not available for borrowing by us.  The Letter of Credit Facility only
      supports the issuance of up to $75 million of letters of credit by us. 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 letter of credits issued
      under the Letter of Credit Facility. Pursuant to the First Amendment, the per
      annum fee on the full balance of the Letter of Credit Facility was increased
      to
      3.25% from February 22, 2006 to September 30, 2006.




With
      the exception of certain permitted transactions, 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, leverage ratio, senior secured leverage
      ratio and maximum annual limits on capital expenditures.  Our debt
      covenants also prohibit payment of cash dividends.  As a result of our
      lower than expected operating results in the fourth quarter 2005, we were not
      in
      compliance with the fixed charge coverage ratio and the leverage ratio and
      exceeded the maximum annual limits on capital expenditure required by the Senior
      Secured Credit Facility as of December 31, 2005.  The First Amendment
      waived these financial covenants of the Senior Secured Credit Facility as of
      December 31, 2005 and revised certain covenants during 2006 to levels that
      we
      project we will be able to comply with during 2006.





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





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





As
      of December 31, 2005, we had available liquidity of approximately $33.9 million.
      This consisted of unrestricted cash on hand of approximately $8.9 million and
      availability under the Revolver of our Senior Secured Credit Facility of
      approximately $25.0 million.





Our
      primary source of cash is expected to 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.


46





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 $49.0 million for the year ended December 31, 2005, and net
      cash
      provided by operating activities was $15.6 million for the year ended December
      31, 2004. For the year ended December 31, 2005, our net income, as adjusted
      for
      non cash charges, was offset by a $17.6 million increase in cash from our
      operating assets and liabilities. This change was primarily caused by increase
      in accounts payables of $13.4 million due to timing of certain projects as
      compared with the prior year.




Net
      cash used by investing activities increased $ 104.2 million to $135.4 million for the year ended December 31, 2005 as compared
      to
      the year ended December 31, 2004. The change was primarily due to the
      acquisition of Triad for $59.4 million and an increase in capital expenditures
      of $49.7 million as compared to 2004. Capital expenditures primarily consisted
      of new and replacement mine equipment (including new surface mine equipment)
      and
      various projects to improve the production and efficiency of our mining
      operations (including Mine 15 at the McCoy complex). Our cash used by investing
      activities in 200 3
      was $15.7 million, including $20.1 million of capital expenditures, offset
      by
      $4.3 million of proceeds from the sale of investments and an increase in
      restricted cash.




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
      $91.4 million for the year ended December 31, 2005 and net cash provided by
      financing activities was $14.6 million for the year ended December 31, 2004.
      During 2005, we received $142.1 million of net proceeds from the issuance of
      Senior Notes and $45.0 of net proceeds from the issuance of common stock, which
      was offset by a $95.5 repayment of our previously outstanding debt. During
      2004,
      we received $20.0 million in proceeds, less $2.2 million capitalized debt
      issuance costs, from our credit facility. During 2004, we also borrowed and
      repaid $6.4 million under our Debtor in Possession Loan. We had no proceeds
      from
      borrowings and had $1.9 million in principal payments during the year ended
      December 31, 2003.


47


**Contractual
      Obligations**





The
      following is a summary of our contractual obligations and commitments as of
      December 31, 2005:





**Payment
                Due by Period (thousands)****Contractual
                Obligations**
            
            **Total**
            
            **2006**
            
            **2007-2008**
            
            **2009-2010**
            
            **Thereafter**Long
                term debt
            
            $
            150,000
            
            
            -
            
            
            -
            
            
            -
            
            
            150,000Interest
                on long term debt(1)
            
            
            91,406
            
            
            14,062
            
            
            28,125
            
            
            28,125
            
            
            21,094Capital
                lease obligations(2)
            
            
            670
            
            
            432
            
            
            238
            
            
            -
            
            
            -Operating
                lease obligations(2)
            
            
            1,195
            
            
            557
            
            
            430
            
            
            208
            
            
            -Royalty
                obligations(3)
            
            
            157,503
            
            
            18,402
            
            
            33,170
            
            
            31,850
            
            
            74,081Purchase
                obligations(4)
            
            
            40,648
            
            
            28,240
            
            
            12,408
            
            
            -
            
            
            -$
            441,422
            
            
            61,693
            
            
            74,371
            
            
            60,183
            
            
            245,175





(1)
            Consists
                of interest payments on our Senior
                Notes.





(2)
            Capital
                lease obligations include the amount of imputed interest over the
                terms of
                the leases. See Note 12 in the notes to the consolidated financial
                statements for additional information on capital and operating
                leases.





(3)
            Royalty
                obligations include minimum royalties payable on leased coal rights.
                Certain coal leases do not have set expiration dates but extend until
                completion of mining of all merchantable and mineable coal reserves.
                For
                purposes of this table, we have generally assumed that minimum royalties
                on such leases will be paid for a period of ten years. Certain coal
                leases
                require payment based on minimum tonnage, for these contracts an
                average
                sales price of $48.35 was used to project the future
                commitment.





(4)
            Purchase
                obligations include agreements to purchase coal that include fixed
                quantities or minimum amounts and a fixed price provision. They do
                not
                include agreements to purchase coal with vendors that do not include
                quantities or minimum tonnages, or monthly purchase
                orders.





Additionally,
      we have liabilities relating to pension, workers compensation, black lung,
      and
      mine reclamation and closure. As of December 31, 2005, payments related to
      these
      items are estimated to be:




**Payments
                Due by Years (In Thousands)****Within
                1**
              **Year**
            
            **2
                - 3**
              **Years**
            
            **4
                - 5**
              **Years**$21,753
            
            $28,780
            
            $25,324




Our
      determination of these noncurrent liabilities 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. Moreover, in
      particular for periods after 2006, our estimates may change from the amounts
      included in the table, and may change significantly, if our assumptions change
      to reflect changing conditions. These assumptions are discussed in the Notes
      to
      the Consolidated Financial Statements and in the Critical Accounting Estimates
      in Management’s Discussion and Analysis.


48





**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 December 31, 2005, we had $92.2 million of
      outstanding surety bonds with third parties. These bonds were in place to secure
      obligations as follows: post-mining reclamation bonds of $48.0 million, workers'
      compensation bonds of $40.3 million, wage payment, collection bonds, and other
      miscellaneous obligation bonds of $3.9 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.





We
      also use bank letters of credit to secure our obligations for workers’
compensation programs, various insurance contracts and other obligations. At
      December 31, 2005, we had $52.0 million of letters of credit
      outstanding. The letters of credits were issued under our 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. U.S. 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 5.1% at December 31, 2005.
      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 5.1% to 4.1%, all other things being equal, the present
      value
      of our workers’ compensation obligation would increase by approximately $3.1
      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
      December 31, 2005 was $52.3 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.


49


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 5.1% at December 31, 2005. 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 5.1% to 4.1%, all other things
      being equal, the present value of our black lung obligation would increase
      by
      approximately $6.9 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 December 31, 2005 was $27.3 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, 2005, the discount
      rate used to determine the obligation was 5.25%. 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 projected benefit
      obligation would increase by approximately $11.2 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, 2005. 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 was 7.5% for  the
      year ended December 31, 2005. Significant changes to these rates would introduce
      substantial volatility to our pension expense. Our accrued pension obligation
      as
      of December 31, 2005 was $13.6 million.




***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. U.S generally accepted accounting principles
      require 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. 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 U.S. generally
      accepted accounting principles, then the costs should be lower. If governmental
      regulations change, then the costs of reclamation will be impacted. U.S.
      generally accepted accounting principles recognize that the recorded liability
      could 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 December 31, 2005 was $26.8
      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 consolidated
      financial statements for further discussion on our
      contingencies.


50








***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 reduced the tax basis
      of
      these assets and eliminated the related valuation allowance. As of December
      31, 2005 ,
      we had no valuation allowance recorded for deferred tax assets.





***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.


51


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.”





**Recent
      Accounting Pronouncements**




The
      Financial Accounting Standards Board (“FASB”) has issued Statement of Financial
      Accounting Standards No. 123R, *“Share-Based
      Payment- an amendment of FASB Statements No. 123 and 95”* (FAS 123R), which we will adopt on January 1, 2006. FAS 123R provides additional
      guidance on accounting for stock based compensation and will require companies
      to measure such awards at fair value in the income statement on a prospective
      basis. We will adopt FAS 123R using the modified-prospective method.
      We estimate that as a result of the adoption of FAS 123R, we will recognize
      incremental compensation expense for the year ended December 31, 2006 of
      less than $200,000, net of taxes, for stock options that are outstanding at
      December 31, 2005. The Company does not believe that FAS 123R will significantly
      impact its accounting for restricted stock awards.




**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 22.3% during the twelve months ended December
      31, 2005. Our net turnover in Central Appalachia during this period, after
      considering employees that have left and been rehired, is approximately 15.0%.
      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 results in this area including the payment
      of safety incentives that we believe will further reduce our employee turnover
      and improve employee relations.





***Sales
      Commitments***




As
      of December 31, 2005, we had the following contractual commitments (including
      long term and short term contracts) to ship coal at a fixed and known
      price:


52








Year
                Ended
            
            Year
                Ended
            
            Year
                Ended
            
            Year
                Ended2006
            
            2007
            
            2008
            
            2009Average
              Price
                Per
              Ton
            Tons
            
            Average
              Price
              Per
                Ton
            Tons
            
            Average
              Price
                Per
              Ton
            Tons
            
            Average
              Price
                Per
              Ton
            TonsCAPP
            $46.98
            9,083
            
            $38.37
            1,630
            
            -
            -
            
            -
            -Midwest
                (a)
            $28.38
            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. The prices
                for
                the Midwest in years 2007 to 2009 are minimum base price amounts
                that will
                be adjusted for fuel escalators. The escalators in 2006 associated
                with
                the tons committed for 2007 to 2009 range from $3.15 to $3.37. However,
                there can be no assurances future adjustments will be comparable
                to those
                received in 2006.







***Project
      Development***





**Mine
      15**





Mine
      15 at McCoy Elkhorn began producing coal in September 2005. Two crews of miners
      and equipment have been working separately at the base of the slope and shaft
      completing bottom development work. Due to the 10-15 year expected life of
      this
      mine, this development work has been more expensive and more time consuming
      than
      normal mining operations. The bottom development work has been completed and
      the
      two crews of miners have joined together to begin advance mining. The second
      section of miners and equipment are expected to begin production during the
      second quarter of 2006.




**Surface
      Mines and Highwall Miner**




Our
      strategic plan is to achieve balance between mining methods (underground and
      surface) and coal basins (CAPP and Illinois Basin). The Company believes that
      these strategies will result in greater stability and visibility in operating
      and financial performance. As part of executing this plan, the Company is
      developing CAPP surface mine reserves that we primarily control. Our operations
      and engineering teams have identified more than 40 projects that merit further
      review. Approximately six projects have been identified for short and medium
      term development, including the following:




Our
      first company-operated surface mine in the CAPP region opened in September
      2005.




The
      second surface mining project that we are developing in the CAPP region is
      a
      highwall miner project at the Leeco mine complex. This mine is expected to
      begin
      production during the second quarter of 2006. We are currently conducting site
      preparation activities.




We
      anticipate that the third company operated surface mine in the CAPP region
      will
      begin production during the fourth quarter of 2006.




**Preparation
      Plant Upgrade Projects**




The
      Bevins Branch Plant at the McCoy Elkhorn mine complex is being upgraded and
      expanded to accommodate extra production from Mine 15. Mine 15 is directly
      across the street from the Bevins Branch Plant. All coal from Mine 15 and the
      adjacent Mine 16 will be transported by beltline directly into the preparation
      plant. The upgrade and modification project is expected to significantly
      decrease our trucking costs at this mine complex. The newly expanded Bevins
      Branch plant is expected to begin processing coal in early March
      2006.


53








The
      Leatherwood Plant at the Blue Diamond mine complex will replace older and less
      efficient coal processing technology with new heavy media cyclones. This project
      is expected to increase the output of clean coal from the plant by 1.5% to
      2%.
      The efficiency project is expected to be completed in April
      2006.








**Indiana
      Land and Mineral Company Definitive Agreement**




We
      have entered into a definitive agreement to acquire coal reserves and rail
      loadout facilities in southern Indiana from Indiana Land and Mineral Company,
      LLC (IL&M) for approximately $9 million in cash. The IL&M transaction
      has been approved by the Company's Board of Directors and by the Board of
      Directors and members of IL&M. The transaction is subject to customary
      closing conditions, including the Company obtaining financing for the
      acquisition on terms and conditions approved by its Board of Directors. The
      Company will also explore completing this acquisition through a sale leaseback
      transaction with one its existing land company relationships.




The
      assets covered by the definitive agreement include:




·
            15.8
                million tons of underground reserves located primarily in Pike and
                Warrick
                counties, Indiana




·
            750,000
                tons of surface reserves located in Pike County, Indiana.




·
            A
                rail loadout facility located in Pike County,
                Indiana.




***Strategic
      Alternative Investigation***




We
      have engaged Morgan Stanley & Co, as financial advisor to assist in
      exploring various strategic alternatives to maximize shareholder value. We
      are
      considering a wide range of options, which may include a possible sale of the
      Company. We have authorized Morgan Stanley to contact and provide information
      to
      prospective strategic and financial purchasers. No assurance can be given that
      any transaction will be pursued, or if a transaction is pursued, that it will
      be
      consummated.




**Item7A.** **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 December 31, 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
      year
      ended December 31, 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 .


54





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




See
      list of Financial Statements on page F-1.




**I** **tem9.** **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures**




None.





**Item9A.** **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 provide reasonable assurance 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 timely
      reported as provided in the Securities and Exchange Commission rules and forms.





***Management’s
      Report on Internal Controls over Financial
      Reporting***





Internal
      control over financial reporting is a process to provide reasonable assurance
      regarding the reliability of consolidated financial reporting and the
      preparation of financial statements for external purposes in accordance with
      U.S. generally accepted accounting principles.  There has been no change in
      the Company’s internal control over financial reporting during the year ended
      December 31, 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.





Management
      conducted an evaluation of the effectiveness of our internal control over
      financial reporting based on the framework in *Internal
      Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission.
      Based on this evaluation, management concluded that the company’s internal
      control over financial reporting was effective as of December 31, 2005.





In
      reliance on the implementation guidance set forth by the SEC in June 2004 (and
      revised on October 6, 2004) to issuers relating to the SEC’s final rules on
      internal control over financial reporting, the Company did not include the
      internal controls of Triad Mining, Inc., which the Company acquired on May
      31,
      2005, in its evaluation of the effectiveness of its internal control over
      financial reporting. The acquired entity represented $105.8 million of total
      consolidated assets (including $28.0 million of goodwill) of the Company as
      of
      December 31, 2005, and $55.8 million of revenues and $1.3 million of operating
      income for the year ended December 31, 2005. Refer to Note 3 to the consolidated
      financial statements for a further discussion of the acquisition and its impact
      on the Company's consolidated financial statements.





KPMG
      LLP has audited this assessment of our internal control over financial
      reporting; as stated in their report, which is included in Item 9A .





55





***Report
      of Independent Registered Public Accounting Firm***





The
      Board of Directors


James
      River Coal Company:





We
      have audited management's assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting *,* that
      James River Coal Company and subsidiaries (the Company) maintained effective
      internal control over financial reporting as of December 31, 2005, based on
      criteria established in *Internal
      Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO). The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management's assessment and an opinion on the
      effectiveness of the Company’s internal control over financial reporting based
      on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with U.S. generally accepted accounting principles. A company’s internal control
      over financial reporting includes those policies and procedures that (1) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that receipts and expenditures of the
      company are being made only in accordance with authorizations of management
      and
      directors of the company; and (3) provide reasonable assurance regarding
      prevention or timely detection of unauthorized acquisition, use, or disposition
      of the company’s assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our opinion, management’s assessment that the Company maintained effective
      internal control over financial reporting as of December 31, 2005, is fairly
      stated, in all material respects, based on criteria established in *Internal
      Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO). ** Also,
      in our opinion, the Company maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2005, based on criteria
      established in *Internal
      Control—Integrated Framework* issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) .





In
      conducting their evaluation of the effectiveness of internal control over
      financial reporting, the Company did not include the internal controls of Triad
      Mining, Inc., which the Company acquired on May 31, 2005. The acquired entity
      represented $105.8 million of total consolidated assets (including $28.0 million
      of goodwill) of the Company as of December 31, 2005, and $55.8 million of
      consolidated revenues and $1.3 million of consolidated operating income for
      the
      year ended December 31, 2005. Refer to Note 3 to the consolidated financial
      statements for a further discussion of the acquisition and its impact on the
      Company’s consolidated financial statements. Our audit of internal control over
      financial reporting of the Company also excluded an evaluation of the internal
      control over financial reporting of Triad Mining, Inc.


56








We
      also have audited, in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheets
      of
      James River Coal Company and subsidiaries as of December 31, 2005 and 2004
      (Successor Company), and the related consolidated statements of operations,
      changes in shareholders’ equity (deficit) and comprehensive income (loss), and
      cash flows for the year ended December 31, 2005 (Successor Company), the eight
      months ended December 31, 2004 (Successor Company), the four months ended April
      30, 2004 (Predecessor Company), and the year ended December 31, 2003
      (Predecessor Company), and our report dated March 9, 2006 ** expressed
      an unqualified opinion on those consolidated financial statements.











/s/
      KPMG LLP





Richmond,
      Virginia


March
      9, 2006


57


**Item
      9B.** **OtherInformation**





Retention
        and Severance Plan
 
 On
        March
        13, 2006, the Board of Directors approved a Retention and Severance Plan
        (the
“Plan”) providing for certain continuing benefits for certain administrative
        employees if they are terminated after a change in control of the Company.
        These
        arrangements cover all of the Company’s executive officers other than the Chief
        Executive Officer, whose employment agreement entered into in May 2004 addresses
        these matters. Adoption of the Plan was recommended to the Board by the
        Compensation Committee, which was advised by an independent compensation
        consultant. The Plan is intended to encourage these key administrative employees
        of the Company to continue their service to the Company rather than seeking
        new
        employment, which was considered to be of critical importance to the Company
        given its recent announcement that it is investigating strategic
        alternatives.
 
 The
        material terms of the Plan are as follows:
  ·
            Salary
                would be continued for 12 months in the event of a termination of
                the
                employee’s employment by the Company other than for cause or by the
                employee with good reason, in either case within the 12-month period
                following a change in control of the Company. The terms “for cause”, “with
                good reason”, and “change in control of the Company” will be defined in
                the definitive agreement to be entered into between the Company and
                each
                of these employees.  ·
            Health
                and welfare plan continuation for 12 months upon a termination of
                employment in the circumstances described immediately
                above.  ·
            Automatic
                acceleration of all unvested restricted stock held by any of the
                covered
                employees upon a change in control of the Company, defined as
                above. 
 ·
            There
                will be no gross up or cut back provisions for benefits potentially
                subject to any excise tax under Internal Revenue Code Section 280G,
                except
                that an employee’s benefit will be reduced to the 280G limit if such
                reduction would result in the employee receiving a higher after-tax
                benefit than if the benefit was uncapped and triggered 280G excise
                tax. 
 The
        Compensation Committee will proceed to memorialize these provisions in
        agreements to be entered into with each of the covered employees.
 
 As
        of the
        date hereof, the number of shares of unvested restricted stock held by each
        of
        the executive officers of the Company that participate in the Plan is as
        follows:


58











Name
            
            
            Number
                of Unvested SharesC.
                K Lane
            
            
            100,000Samuel
                M. Hopkins, II
            
            
            55,000











The
      total
      number of unvested restricted shares that would be accelerated by the Plan
      in
      the event of a change of control of the Company is 343,950 as of the date
      hereof. Of such unvested shares, 61,160 would vest on May 25, 2006, including
      5,000 shares of Mr. Lane and 13,750 shares of Mr. Hopkins.





The
      aggregate salary continuation payments under the Plan, assuming all participants
      were terminated in a manner qualifying for benefits, is estimated to be
      approximately $2.6 million. The Company would expect actual payments, if any,
      to
      be lower than this potential maximum figure because less than all participating
      employees would be expected to be terminated in a manner qualifying for
      benefits.






















59


**PART
      III**






**Item** **10.** **Directorsand
      Executive Officers of the
      Registrant**




The
      information contained under the headings “Election of Director s”,
      “Section 16(a) Beneficial Ownership Reporting Compliance ” " Board
      Matters "
      and "Management" in the definitive Proxy Statement used in connection with
      the
      solicitation of proxies for the Company’s 2006 Annual Meeting of Shareholders,
      to be filed with the Commission, is hereby incorporated herein by
      reference .





**Item** **11.** **ExecutiveCompensation**




The
      information contained under the headings “Compensation
      Committee Report,”  “Executive Compensation ,” “ Equity
      Compensation Plans ,” and “Compensation
      Committee Interlocks and Insider Participation ”
      in the definitive Proxy Statement used in connection with the solicitation
      of
      proxies for the Company’s 2006 Annual Meeting of Shareholders ,  to
      be filed with the Commission , is hereby incorporated herein by reference .





**Item
      12.** **Security** **Ownership
      of Certain Beneficial Owners and Management and Related Stock
      Matters**





The
      information contained under the headings “Principal
      Shareholders and Securities Ownership of Management, ”
      and “Equity Compensation Plans”
      in the definitive Proxy Statement used in connection with the solicitation
      of
      proxies for the Company’s 2006 Annual Meeting of Shareholders, to be filed with
      the Commission, is hereby incorporated herein by reference .





**Item** **13.** **Certain** **Relationships
      and Related Transactions**





The
      information contained under the heading “Compensation
      Committee Interlocks and Insider Participation ”
      in the definitive Proxy Statement used in connection with the solicitation
      of
      proxies for the Company’s 2006 Annual Meeting of Shareholders, to be filed with
      the Commission, is hereby incorporated herein by reference .





**Item
      14.****Principal
      Accountant Fees and Services**




The
      information contained under the heading “Independent Registered Public
      Accountants” in the definitive Proxy Statement used in connection with the
      solicitation of proxies for the Company’s 200 6 Annual Meeting of Shareholders , to be filed
      with the Commission,
      is hereby incorporated herein by reference .









60


**PART
      IV**






**Item
      15.** **Exhibitsand
      Financial Statement** **Schedules**





**(a)** The
      following documents are filed as part of this Report:




**1.** **Financial
      Statements**





The
      following financial statements and related report of Independent Registered
      Public Accounting Firm are incorporated in Item 8 of this
      report:





Report
      of Independent Registered Public Accounting Firm





Consolidated
      Balance Sheets as of December 31, 2005 and December 31, 2004





Consolidated
      Statements of Operations for the year ended December 31, 2005 (Successor),
      the
      eight months ended December 31, 2004 (Successor), the four months ended April
      30, 2004 (Predecessor) and the year ended December 31, 2003
      (Predecessor)





Consolidated
      Statements of Changes in Shareholders’ Equity (Deficit) and Comprehensive Income
      (Loss) for the year ended December 31, 2005 (Successor), the eight months ended December
      31, 2004 (Successor), the four months ended April 30, 2004 (Predecessor) and
      the year ended December 31, 2003 (Predecessor)





Consolidated
      Statements of Cash Flows for the for the year ended December 31, 2005
      (Successor),the eight months ended December 31, 2004 (Successor), the four
      months ended April
      30, 2004 (Predecessor) and the year ended December 31, 2003
      (Predecessor)




Notes
      to Consolidated Financial Statements








**2.** **Financial
      Statement Schedules**




**None.**




61


**3.** **Exhibits**




The
      following exhibits are required to be filed with this Report by Item 601 of
      Regulation S-K:




**Exhibit**
              **Number**
            
            **Description**2.1#
            
            Second
                Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
                Code of the Registrant and its Subsidiaries, dated as of April 20,
                20042.2##
            
            Stock
                Purchase Agreement by and among James River Coal Company, Triad Mining,
                Inc. and the Stockholders of Triad Mining, Inc. dated as of March
                30,
                20053.1#
            
            Amended
                and Restated Articles of Incorporation of the Registrant, as
                Amended3.2#
            
            Amended
                and Restated Bylaws of the Registrant4.1#
            
            Specimen
                common stock certificate4.2#
            
            Rights
                Agreement between the Registrant and SunTrust Bank as Rights Agent,
                dated
                as of May 25, 200410.1#
            
            Registration
                Rights Agreement by and among the Registrant and the Shareholders
                identified therein, dated May 6, 200410.2#
            
            Loan
                and Security Agreement by and among the Registrant and its Subsidiaries,
                the Lenders that are Signatories thereto, Wells Fargo Foothill, Inc.
                and
                Morgan Stanley Senior Funding, Inc., dated as of May 6,
                200410.3#
            
            $75,000,000
                Term Loan Agreement by and among the Registrant and its Subsidiaries,
                the
                Lenders from time to time party thereto and BNY Asset Solutions LLC,
                dated
                as of May 6, 200410.4*#
            
            Employment
                Agreement between the Registrant and Peter T. Socha, dated as of
                May 7,
                200410.5*#
            
            2004
                Equity Incentive Plan of the Registrant10.6#
            
            Form
                of Indemnification Agreement between the Registrant and its officers
                and
                directors10.7**#
            
            Agreement
                for Purchase and Sale of Coal among Georgia Power Company, the Registrant
                and James River Coal Sales, Inc., dated as of March 11,
                200410.8**#
            
            Fuel
                Supply Agreement #141944 between South Carolina Public Service Authority
                and the Registrant, dated as of March 1, 200410.9
            
            Triad
                Registration Rights Agreement10.10###
            
            PNC
                Credit Agreement10.11
            
            First
                Amendment to PNC Credit Agreement21
            
            Subsidiaries
                of the Registrant23.1
            
            Consent
                of Marshall Miller & Associates, Inc.23.2
            
            Consent
                of KPMG LLP31.1
            
            Certification
                of Peter T. Socha, President and Chief Executive Officer of James
                River
                Coal Company, pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange
                Act,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.










62


31.2
              
              Certification
                  of Samuel M. Hopkins, II, Vice President and Chief Accounting Officer
                  of
                  James River Coal Company, pursuant to rule 13a-14(a) or 15d-14(a)
                  of the
                  Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002.32.1
              
              Certification
                  of Peter T. Socha, President and Chief Executive Officer of James
                  River
                  Coal Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of Samuel M. Hopkins, II, Vice President and Chief Accounting Officer
                  of
                  James River Coal Company, pursuant to 18 U.S.C. Section 1350, as
                  adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 
 *
              Management
                  contract or compensatory plan or arrangement.**
              Portions
                  of these documents have been omitted and filed separately with
                  the
                  Securities and Exchange Commission pursuant to a request for confidential
                  treatment of the omitted portions.#
              Filed
                  in the Company’s Registration Statement on Form S-1, initially filedas
                  ofAugust
                  13, 2004, as amended.##
              Filed
                  in the Company’s Registration Statement on Form S-1, initially filedas
                  ofApril
                  19, 2005, as amended###
              Filed
                  in the Company’s Quarterly Report on 10-Q, filed November 14,
                  2005











63




**INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Audited
                  Financial Statements**
              **Page**Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of December 31, 2005 and 2004
              F-3Consolidated
                  Statements of Operations for the year ended December 31, 2005 (Successor),
                  the eight months ended December 31, 2004 (Successor), the four
                  months
                  ended April 30, 2004 (Predecessor) and the year ended December
                  31, 2003
                  (Predecessor)
              F-5Consolidated
                  Statements of Changes in Shareholders’ Equity (Deficit) and Comprehensive
                  Income (Loss) for the year ended December 31, 2005 (Successor),
                  the eight
                  months ended December 31, 2004 (Successor), the four months ended
                  April
                  30, 2004 (Predecessor) and the year ended December 31, 2003
                  (Predecessor)
              F-6Consolidated
                  Statements of Cash Flows for the year ended December 31, 2005 (Successor),
                  the eight months ended December 31, 2004 (Successor), the four
                  months
                  ended April 30, 2004 (Predecessor) and the year ended December
                  31, 2003
                  (Predecessor)
              F-7Notes
                  to Consolidated Financial Statements
              F-8
   
      
 F-1
  Report
        of Independent Registered Public Accounting Firm
  The
        Board of Directors
 James
        River Coal Company:
  We
        have audited the accompanying consolidated balance sheets of James River
        Coal
        Company and subsidiaries (the Company) as of December 31, 2005 and 2004
        (Successor Company), and the related consolidated statements of operations,
        changes in shareholders’ equity (deficit) and comprehensive income (loss), and
        cash flows for the year ended December 31, 2005 (Successor Company), the
        eight
        months ended December 31, 2004 (Successor Company), the four months ended
        April
        30, 2004 (Predecessor Company), and the year ended December 31, 2003
        (Predecessor Company). These consolidated financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our
        audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our opinion, the consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of James River Coal
        Company and subsidiaries as of December 31, 2005 and 2004 (Successor Company),
        and the results of their operations and their cash flows for the year ended
        December 31, 2005 (Successor Company), the eight months ended December 31,
        2004
        (Successor Company), the four months ended April 30, 2004 (Predecessor Company),
        and the year ended December 31, 2003 (Predecessor Company), in conformity
        with
        U.S. generally accepted accounting principles.
  As
        described more fully in Notes 1 and 2 to the consolidated financial statements,
        the Company was reorganized under a plan of reorganization confirmed by the
        United States Bankruptcy Court for the Middle District of Tennessee, effective
        May 6, 2004. In connection with the Company’s emergence from Chapter 11, all
        assets and liabilities were restated to their respective fair values in order
        to
        reflect the effects of fresh start accounting. As a result of the application
        of
        fresh start accounting, the consolidated financial statements of the Successor
        Company are presented on a different basis than those of the Predecessor
        Company
        and, therefore, are not comparable in all respects.
  As
        discussed in Notes 8 and 15 to the consolidated financial statements, the
        Company changed its method of accounting for reclamation liabilities and
        its
        method of accounting for redeemable preferred stock in 2003.
  We
        also have audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the effectiveness of the Company’s
        internal control over financial reporting as of December 31, 2005, based
        on
        criteria established in *Internal
        Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO), and our report dated March 9, 2006 expressed an unqualified opinion
        on
        management’s assessment of, and the effective operation of, internal control
        over financial reporting *.*
  
  /s/
        KPMG LLP
 
  Richmond,
        Virginia
 March
        9, 2006
   F-2
  **JAMES
        RIVER COAL COMPANY**
 **AND
        SUBSIDIARIES**
 Consolidated
        Balance Sheets
 December
        31, 2005 and 2004
 (in
        thousands, except share data)
  **December
                    31, 2005**
                
                **December
                    31, 2004****Assets**Current
                    assets:Cash
                
                $
                8,936
                
                
                3,879Receivables:Trade
                
                
                35,326
                
                
                23,871Other
                
                
                1,099
                
                
                7,362Total
                    receivables
                
                
                36,425
                
                
                31,233Inventories:Coal
                
                
                7,481
                
                
                2,305Materials
                    and supplies
                
                
                6,536
                
                
                4,084Total
                    inventories
                
                
                14,017
                
                
                6,389Prepaid
                    royalties
                
                
                4,213
                
                
                4,358Other
                    current assets
                
                
                4,126
                
                
                6,337Total
                    current assets
                
                
                67,717
                
                
                52,196Property,
                    plant, and equipment, at cost:Land
                
                
                6,142
                
                
                2,698Mineral
                    rights
                
                
                194,824
                
                
                162,577Buildings,
                    machinery and equipment
                
                
                207,558
                
                
                106,105Mine
                    development costs
                
                
                16,380
                
                
                5,729Construction-in-progress
                
                
                7,438
                
                
                231Total
                    property, plant, and equipment
                
                
                432,342
                
                
                277,340Less
                    accumulated depreciation, depletion, and amortization
                
                
                72,342
                
                
                21,765Property,
                    plant and equipment, net
                
                
                360,000
                
                
                255,575Goodwill
                
                
                28,048
                
                
                -Restricted
                    cash (note 1)
                
                
                -
                
                
                8,404Other
                    assets
                
                
                16,904
                
                
                11,651Total
                    assets
                
                $
                472,669
                
                
                327,826See
                    accompanying notes to consolidated financial statements.
 
  F-3
  **JAMES
        RIVER COAL COMPANY**
 **AND
        SUBSIDIARIES**
 Consolidated
        Balance Sheets
 December
        31, 2005 and 2004
 (in
        thousands, except share data)
 
 **December
                    31, 2005**
                
                **December
                      31, 2004****Liabilities
                    and Shareholders' Equity**Current
                    liabilities:Current
                    maturities of long-term debt (note 5)
                
                $
                -
                
                
                2,700Current
                    installments of obligations under capital leases
                
                
                395
                
                
                388Accounts
                    payable
                
                
                32,855
                
                
                15,116Accrued
                    salaries, wages, and employee benefits
                
                
                4,289
                
                
                2,093Workers'
                    compensation benefits
                
                
                10,050
                
                
                12,090Black
                    lung benenfits
                
                
                2,930
                
                
                2,600Accrued
                    taxes
                
                
                4,215
                
                
                3,530Other
                    current liabilities
                
                
                6,860
                
                
                3,633Total
                    current liabilities
                
                
                61,594
                
                
                42,150Long-term
                    debt, less current maturities (note 5)
                
                
                150,000
                
                
                92,300Other
                    liabilities:Noncurrent
                    portion of workers' compensation benefits
                
                
                42,231
                
                
                38,223Noncurrent
                    portion of black lung benefits
                
                
                24,352
                
                
                23,341Pension
                    obligations
                
                
                13,598
                
                
                15,744Asset
                    retirement obligations
                
                
                24,930
                
                
                14,939Obligations
                    under capital leases, excluding current installments
                
                
                230
                
                
                637Deferred
                    income taxes
                
                
                44,240
                
                
                34,615Other
                
                
                227
                
                
                292Total
                    other liabilities
                
                
                149,808
                
                
                127,791Total
                    liabilities
                
                
                361,402
                
                
                262,241Commitments
                    and contingencies (note 13)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 16,652,681 and 14,715,694 sharesas
                    of December 31, 2005 and 2004, respectively
                
                
                167
                
                
                147Paid-in-capital
                
                
                135,923
                
                
                71,784Deferred
                    stock-based compensation
                
                
                (13,226
                )
                
                (7,540
                )Retained
                    earnings (accumulated deficit)
                
                
                (11,187
                )
                
                1,151Accumulated
                    other comprehensive income (loss)
                
                
                (410
                )
                
                43Total
                    shareholders' equity
                
                
                111,267
                
                
                65,585Total
                    liabilities and shareholders' equity
                
                $
                472,669
                
                
                327,826See
                    accompanying notes to consolidated financial statements.
  F-4
  **JAMES
        RIVER COAL COMPANY**
 **AND
        SUBSIDIARIES**
 Consolidated
        Statements of Operations
 (in
        thousands, except per share data)
   **Successor**
                  
                  **Successor**
                  
                  
                  **Predecessor**
                  
                  **Predecessor****Year**
                  
                  **Eight
                      Months**
                  
                  
                  **Four
                      Months**
                  
                  **Year****Ended**
                  
                  **Ended**
                  
                  
                  **Ended**
                  
                  **Ended****December
                      31,**
                  
                  **December
                      31,**
                  
                  
                  **April
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004**
                  
                  
                  **2004**
                  
                  **2003**Revenues
                  
                  $
                  453,999
                  
                  
                  231,698
                  
                  
                  
                  113,949
                  
                  
                  304,052Cost
                      of sales:Cost
                      of coal sold
                  
                  
                  389,222
                  
                  
                  190,926
                  
                  
                  
                  89,294
                  
                  
                  278,939Depreciation,
                      depletion, and amortization
                  
                  
                  51,822
                  
                  
                  21,765
                  
                  
                  
                  12,314
                  
                  
                  40,427Total
                      cost of sales
                  
                  
                  441,044
                  
                  
                  212,691
                  
                  
                  
                  101,608
                  
                  
                  319,366Gross
                      profit (loss)
                  
                  
                  12,955
                  
                  
                  19,007
                  
                  
                  
                  12,341
                  
                  
                  (15,314
                  )Selling,
                      general, and administrative expenses
                  
                  
                  25,453
                  
                  
                  11,412
                  
                  
                  
                  5,023
                  
                  
                  19,835Total
                      operating income (loss)
                  
                  
                  (12,498
                  )
                  
                  7,595
                  
                  
                  
                  7,318
                  
                  
                  (35,149
                  )Interest
                      expense
                  
                  
                  12,892
                  
                  
                  5,733
                  
                  
                  
                  567
                  
                  
                  18,536Interest
                      income
                  
                  
                  (226
                  )
                  
                  (72
                  )
                  
                  
                  -
                  
                  
                  (144
                  )Charges
                      associated with repayment of debt (note 5)
                  
                  
                  2,524
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Miscellaneous
                      income, net
                  
                  
                  (1,067
                  )
                  
                  (833
                  )
                  
                  
                  (331
                  )
                  
                  (1,519
                  )Total
                      other expense , net
                  
                  
                  14,123
                  
                  
                  4,828
                  
                  
                  
                  236
                  
                  
                  16,873Income
                      (loss) before reorganization items and income taxes
                  
                  
                  (26,621
                  )
                  
                  2,767
                  
                  
                  
                  7,082
                  
                  
                  (52,022
                  )Reorganization
                      items, net (note 14)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  (100,907
                  )
                  
                  7,630Income
                      (loss) before income taxes
                  
                  
                  (26,621
                  )
                  
                  2,767
                  
                  
                  
                  107,989
                  
                  
                  (59,652
                  )Income
                      tax expense (benefit)
                  
                  
                  (14,283
                  )
                  
                  791
                  
                  
                  
                  -
                  
                  
                  (2,891
                  )Net
                      income (loss) before cumulative effect of accounting
                      change
                  
                  
                  (12,338
                  )
                  
                  1,976
                  
                  
                  
                  107,989
                  
                  
                  (56,761
                  )Cumulative
                      effect of accounting change (note 15)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (3,045
                  )Net
                      income (loss)
                  
                  
                  (12,338
                  )
                  
                  1,976
                  
                  
                  
                  107,989
                  
                  
                  (59,806
                  )Preferred
                      dividends (note 8)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (340
                  )Net
                      income (loss) attributable to common shareholders
                  
                  $
                  (12,338
                  )
                  
                  1,976
                  
                  
                  
                  107,989
                  
                  
                  (60,146
                  )Earnings
                      (loss) per common share (note 16)Basic
                      earnings (loss) per common shareIncome
                      (loss) before cumulative effect of accounting change
                  
                  $
                  (0.83
                  )
                  
                  0.14
                  
                  
                  
                  6,393.67
                  
                  
                  (3,380.78
                  )Cumulative
                      effect of accounting change
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (180.28
                  )Net
                      income (loss)
                  
                  $
                  (0.83
                  )
                  
                  0.14
                  
                  
                  
                  6,393.67
                  
                  
                  (3,561.06
                  )Shares
                      used to calculate basic earnings (loss) per share
                  
                  
                  14,955
                  
                  
                  13,800
                  
                  
                  
                  17
                  
                  
                  17Diluted
                      earnings (loss) per common shareIncome
                      (loss) before cumulative effect of accounting change
                  
                  $
                  (0.83
                  )
                  
                  0.14
                  
                  
                  
                  6,393.67
                  
                  
                  (3,380.78
                  )Cumulative
                      effect of accounting change
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (180.28
                  )Net
                      income (loss)
                  
                  $
                  (0.83
                  )
                  
                  0.14
                  
                  
                  
                  6,393.67
                  
                  
                  (3,561.06
                  )Shares
                      used to calculate dilutive earnings (loss) per share
                  
                  
                  14,955
                  
                  
                  14,623
                  
                  
                  
                  17
                  
                  
                  17
 See
          accompanying notes to consolidated financial
          statements.
 F-5
  **JAMES
        RIVER COAL COMPANY**
 **AND
        SUBSIDIARIES**
 Consolidated
        Statements of Changes in Shareholders’
 Equity
        (Deficit) and Comprehensive Income (Loss)
 
 (in
        thousands)
 **Predecessor
                      Company**
                  
                  **Common**
                    **stock**
                    **shares**
                  
                  **Common**
                    **stock
                      par**
                    **value**
                  
                  **Paid-in-**
                    **capital**
                  
                  **Deferred**
                    **stock
                      based compensation**
                  
                  **Retained
                      earnings (accumulated deficit)**
                  
                  **Subscribed
                      shares**
                  
                  **Accumulated
                      other comprehensive income (loss)**
                  
                  **Total****Balances,
                      December 31, 2002**
                  
                  
                  17
                  
                  $
                  -
                  
                  
                  226
                  
                  
                  -
                  
                  
                  (47,843
                  )
                  
                  (906
                  )
                  
                  (20,204
                  )
                  
                  (68,727
                  )Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (59,806
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (59,806
                  )Minimum
                      pension liability adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,194
                  )
                  
                  (1,194
                  )Reclassification
                      to interest expense, net oftaxes
                      of $2,890
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,381
                  
                  
                  6,381Comprehensive
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (54,619
                  )Forgiveness
                      of receivable for subscribed shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  85
                  
                  
                  -
                  
                  
                  85Preferred
                      dividends
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (340
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (340
                  )**Balances,
                      December 31, 2003**
                  
                  
                  17
                  
                  
                  -
                  
                  
                  226
                  
                  
                  -
                  
                  
                  (107,989
                  )
                  
                  (821
                  )
                  
                  (15,017
                  )
                  
                  (123,601
                  )Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  107,989
                  
                  
                  -
                  
                  
                  -
                  
                  
                  107,989Minimum
                      pension liability adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (692
                  )
                  
                  (692
                  )Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  107,297Application
                      of fresh start accounting (note 2)Cancellation
                      of Predecessor commonstock
                  
                  
                  (17
                  )
                  
                  -
                  
                  
                  (226
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (226
                  )Elimination
                      of Predecessor accumulatedother
                      comprehensive loss andsubscribed
                      shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  821
                  
                  
                  15,709
                  
                  
                  16,530**Balances,
                      April 30, 2004**
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -**Successor
                      Company**Issuance
                      of Successor common stock
                  
                  
                  13,800
                  
                  
                  138
                  
                  
                  63,153
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  63,291Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,976
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,976Unrealized
                      gain on marketable securities, net
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  43
                  
                  
                  43Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,019Issuance
                      of restricted stock awards
                  
                  
                  916
                  
                  
                  9
                  
                  
                  8,631
                  
                  
                  (8,640
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Cost
                      to register common stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (825
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (825
                  )Amortization
                      of stock based compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,100
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,100**Balances,
                      December 31, 2004**
                  
                  
                  14,716
                  
                  
                  147
                  
                  
                  71,784
                  
                  
                  (7,540
                  )
                  
                  1,151
                  
                  
                  -
                  
                  
                  43
                  
                  
                  65,585Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (12,338
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (12,338
                  )Minimum
                      pension liability adjustment, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (410
                  )
                  
                  (410
                  )Reclassification
                      adjustment on sale ofmarketable
                      securities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (43
                  )
                  
                  (43
                  )Comprehensive
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (12,791
                  )Issuance
                      of restricted stock awards, netof
                      forfeitures
                  
                  
                  132
                  
                  
                  2
                  
                  
                  8,073
                  
                  
                  (8,075
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Issuance
                      on common stock net of offeringcosts
                      of $3,696
                  
                  
                  1,500
                  
                  
                  15
                  
                  
                  45,039
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  45,054Common
                      stock issued in acquisition (Note 3)
                  
                  
                  338
                  
                  
                  3
                  
                  
                  10,997
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  11,000Repurchase
                      of shares for tax withholding
                  
                  
                  (36
                  )
                  
                  -
                  
                  
                  (1,158
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,158
                  )Tax
                      benefit on vested shares of restricted stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,058
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,058Amortization
                      of stock based compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,389
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,389Exercise
                      of stock options
                  
                  
                  3
                  
                  
                  -
                  
                  
                  93
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  93Capital
                      contribution, net of tax
                  
                  
                  -
                  
                  
                  -
                  
                  
                  37
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  37**Balances,
                      December 31, 2005**
                  
                  
                  16,653
                  
                  $
                  167
                  
                  
                  135,923
                  
                  
                  (13,226
                  )
                  
                  (11,187
                  )
                  
                  -
                  
                  
                  (410
                  )
                  
                  111,267See
                      accompanying notes to consolidated financial statements.
  F-6
 **JAMES
        RIVER COAL COMPANY**
 **AND
        SUBSIDIARIES**
 Consolidated
        Statements of Cash Flows
 (in
        thousands)
  **Successor**
                  
                  **Successor**
                  
                  
                  **Predecessor**
                  
                  **Predecessor****Year**
                  
                  **Eight
                      Months**
                  
                  
                  **Four
                      Months**
                  
                  **Year****Ended**
                  
                  **Ended**
                  
                  
                  **Ended**
                  
                  **Ended****December
                      31,**
                  
                  **December
                      31,**
                  
                  
                  **April
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004**
                  
                  
                  **2004**
                  
                  **2003**Cash
                      flows from operating activities:Net
                      income (loss)
                  
                  $
                  (12,338
                  )
                  
                  1,976
                  
                  
                  
                  107,989
                  
                  
                  (59,806
                  )Adjustments
                      to reconcile net income (loss) to net cash provided byoperating
                      activitiesDepreciation,
                      depletion, and amortizationof
                      property, plant, and equipment
                  
                  
                  51,822
                  
                  
                  21,765
                  
                  
                  
                  12,314
                  
                  
                  40,692Accretion
                      of asset retirement obligations
                  
                  
                  1,562
                  
                  
                  807
                  
                  
                  
                  397
                  
                  
                  1,128Amortization
                      of debt issue costs
                  
                  
                  919
                  
                  
                  275
                  
                  
                  
                  -
                  
                  
                  -Amortization
                      of deferred stock-based compensation
                  
                  
                  2,389
                  
                  
                  1,100
                  
                  
                  
                  -
                  
                  
                  -Deferred
                      income tax expense (benefit)
                  
                  
                  (14,707
                  )
                  
                  766
                  
                  
                  
                  -
                  
                  
                  (2,891
                  )Gain
                      (loss) on sale or disposal of property, plant, and
                      equipment
                  
                  
                  43
                  
                  
                  (36
                  )
                  
                  
                  19
                  
                  
                  (23
                  )Write-off
                      of deferred financing costs
                  
                  
                  1,733
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Gain
                      on sale of investment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (999
                  )Fresh
                      start accounting adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  (111,533
                  )
                  
                  -Non-cash
                      reorganization items
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  10,010
                  
                  
                  796Cumulative
                      effect of change in accounting principle
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  3,045Realized
                      loss on termination of interest rate swap agreement
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  9,272Unrealized
                      gain on interest rate swap
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  (949
                  )Changes
                      in operating assets and liabilities:Receivables
                  
                  
                  4,488
                  
                  
                  4,604
                  
                  
                  
                  (12,882
                  )
                  
                  4,193Inventories
                  
                  
                  (4,838
                  )
                  
                  6,619
                  
                  
                  
                  (4,028
                  )
                  
                  (233
                  )Prepaid
                      royalties and other current assets
                  
                  
                  3,747
                  
                  
                  3,093
                  
                  
                  
                  (1,236
                  )
                  
                  991Other
                      assets
                  
                  
                  (100
                  )
                  
                  (7,001
                  )
                  
                  
                  132
                  
                  
                  661Accounts
                      payable
                  
                  
                  13,351
                  
                  
                  (11,177
                  )
                  
                  
                  (2,921
                  )
                  
                  15,016Accrued
                      salaries, wages, and employee benefits
                  
                  
                  490
                  
                  
                  (2,408
                  )
                  
                  
                  1,429
                  
                  
                  (818
                  )Accrued
                      taxes
                  
                  
                  (474
                  )
                  
                  (58
                  )
                  
                  
                  139
                  
                  
                  (651
                  )Other
                      current liabilities
                  
                  
                  2,427
                  
                  
                  (404
                  )
                  
                  
                  1,535
                  
                  
                  6,574Workers'
                      compensation benefits
                  
                  
                  4,008
                  
                  
                  (1,886
                  )
                  
                  
                  1,417
                  
                  
                  5,770Black
                      lung benefits
                  
                  
                  (1,286
                  )
                  
                  (830
                  )
                  
                  
                  (547
                  )
                  
                  (630
                  )Pension
                      obligations
                  
                  
                  (2,803
                  )
                  
                  (1,887
                  )
                  
                  
                  (609
                  )
                  
                  2,906Asset
                      retirement obligations
                  
                  
                  (1,378
                  )
                  
                  (477
                  )
                  
                  
                  (108
                  )
                  
                  (978
                  )Other
                      liabilities
                  
                  
                  (65
                  )
                  
                  (743
                  )
                  
                  
                  (4
                  )
                  
                  (33
                  )Net
                      cash provided by operating activities
                  
                  
                  48,990
                  
                  
                  14,098
                  
                  
                  
                  1,513
                  
                  
                  23,033Cash
                      flows from investing activities:Additions
                      to property, plant, and equipment
                  
                  
                  (84,987
                  )
                  
                  (25,811
                  )
                  
                  
                  (9,521
                  )
                  
                  (20,116
                  )Payment
                      for acquisitions, net of cash acquired
                  
                  
                  (59,404
                  )
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Proceeds
                      from sale of property, plant and equipment
                  
                  
                  185
                  
                  
                  4,123
                  
                  
                  
                  86
                  
                  
                  179Proceeds
                      from sale of investments
                  
                  
                  440
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  2,000(Increase)
                      decrease in restricted cash
                  
                  
                  8,404
                  
                  
                  (56
                  )
                  
                  
                  (28
                  )
                  
                  2,277Net
                      cash used in investing activities
                  
                  
                  (135,362
                  )
                  
                  (21,744
                  )
                  
                  
                  (9,463
                  )
                  
                  (15,660
                  )Cash
                      flows from financing activities:Proceeds
                      from issuance of long-term debt
                  
                  
                  150,000
                  
                  
                  20,000
                  
                  
                  
                  -
                  
                  
                  -Repayment
                      of long-term debt
                  
                  
                  (95,468
                  )
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Proceeds
                      from (repayments of) short-term borrowings
                  
                  
                  -
                  
                  
                  (6,400
                  )
                  
                  
                  6,400
                  
                  
                  (1,940
                  )Net
                      proceeds from issuance of common stock
                  
                  
                  45,054
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Common
                      stock registration costs
                  
                  
                  -
                  
                  
                  (825
                  )
                  
                  
                  -
                  
                  
                  -Principal
                      payments under capital lease obligations
                  
                  
                  (400
                  )
                  
                  (370
                  )
                  
                  
                  (165
                  )
                  
                  (549
                  )Debt
                      issuance costs
                  
                  
                  (7,866
                  )
                  
                  (2,181
                  )
                  
                  
                  (1,874
                  )
                  
                  -Capital
                      contributions and proceeds from stock options exercised
                  
                  
                  109
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -Net
                      cash provided by (used in) financing activities
                  
                  
                  91,429
                  
                  
                  10,224
                  
                  
                  
                  4,361
                  
                  
                  (2,489
                  )Increase
                      (decrease) in cash
                  
                  
                  5,057
                  
                  
                  2,578
                  
                  
                  
                  (3,589
                  )
                  
                  4,884Cash
                      at beginning of period
                  
                  
                  3,879
                  
                  
                  1,301
                  
                  
                  
                  4,890
                  
                  
                  6Cash
                      at end of period
                  
                  $
                  8,936
                  
                  
                  3,879
                  
                  
                  
                  1,301
                  
                  
                  4,890
 See
          accompanying notes to consolidated financial statements.
 F-7
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(1)**
              **Summary
                  of Significant Accounting Policies and Other
                  Information**
  ***Description
        of Business and Principles of Consolidation***
  The
        Company mines, processes and sells bituminous, steam - and industrial-grade coal. The Company’s Central Appalachian segment has five
        operating subsidiaries located in e astern
        Kentucky and its Midwest segment has one operating subsidiary located in
        southern Indiana. As described in note 3, the Company’s Midwest segment was
        added through an acquisition in 2005. Substantially all coal sales and accounts
        receivable relate to the electric utility and industrial markets.
  The
        consolidated financial statements include the accounts of James River Coal
        Company and its wholly owned subsidiaries. All significant intercompany accounts
        and transactions have been eliminated in consolidation.
  ***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 and for the year ended December 31, 2003 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. As a result, all assets and liabilities
        were restated to reflect their respective fair values. Although the Effective
        Date of the Plan of Reorganization was May 6, 2004, the consummation of the
        Plan
        of Reorganization has been reflected as of April 30, 2004, the end of the
        Company’s most recent fiscal month prior to the Effective Date. 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 further discussion.
  ***Restricted
        Cash***
  As
        of December 31, 2004, $8.4 million of the Company’s cash was restricted as to
        its use. Restrictions were imposed by the Company’s banks relating to letters of
        credit outstanding as of that date. The Company had no restricted cash as
        of
        December 31, 2005.
  ***Trade
        Receivables***
  Trade
        receivables are recorded at the invoiced amount and do not bear interest.
        The
        Company evaluates the need for an allowance for doubtful accounts based on
        review of historical write off experience and industry data. The Company
        has
        determined that no allowance is necessary for trade receivables as of December
        31, 2005 and 2004. The Company does not have any off-balance sheet credit
        exposure related to its customers.
   F-8
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  ***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
        and
        time that the coal is extracted and removed from the mine.
  ***Asset
        Retirement Obligations***
  Asset
        retirement obligations are 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. 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 December 31, 2005 and December 31, 2004, the Company
        had accrued $26.8 million and $16.0 million respectively, related to estimated
        mine reclamation costs.
  The
        change in the asset retirement obligation for the years ended December 31,
        2005
        and 2004 are as follows (in thousands):
  **2005**
                
                **2004**Asset
                    retirement obligation at beginning of year
                
                $
                15,979
                
                
                14,724Liabilities
                    incurred (Predecessor Company)Predecessor
                    Company
                
                
                —
                
                
                636Successor
                    Company
                
                
                2,722
                
                
                —Liabilities
                    assumed in acquisition
                
                
                7,861Revisions
                    in estimated cash flows
                
                
                24
                
                
                —Accretion
                    expensePredecessor
                    Company
                
                
                —
                
                
                398Successor
                    Company
                
                
                1,562
                
                
                806Liabilities
                    settledPredecessor
                    Company
                
                
                —
                
                
                (131
                )Successor
                    Company
                
                
                (1,373
                )
                
                (454
                )Asset
                    retirement obligation at end of year
                
                
                26,775
                
                
                15,979Less
                    amount included in other current liabilities
                
                
                (1,845
                )
                
                (1,040
                )Total
                    non-current liability
                
                $
                24,930
                
                
                14,939
  ***Property,
        Plant, and Equipment***
  Expenditures
        for maintenance and repairs are charged to expense, and the costs of mining
        equipment rebuilds and betterments that extend the useful life are capitalized.
        Depreciation is provided principally using the straight-line method based
        upon
        estimated useful lives, generally ten to 20 years for buildings and one to
        seven years for machinery and equipment. Equipment held under capital
        leases is amortized using the straight line method over the lesser of the
        lease
        term or the estimated useful life of the asset. Mine development costs are
        capitalized and amortized by the units of production method over estimated
        total
        recoverable proven and probable reserves. Amortization of mineral rights
        is
        provided by the units of production method over estimated total recoverable
        proven and probable reserves.
   F-9
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  ***Impairment
        of Long-Lived Assets***
  Long-lived
        assets, such as property, plant, and equipment, and purchased intangibles
        subject to amortization, are reviewed for impairment whenever events or changes
        in circumstances indicate that the carrying amount of an asset may not be
        recoverable. Recoverability of assets to be held and used is measured by
        a
        comparison of the carrying amount of an asset to estimated undiscounted future
        cash flows expected to be generated by the asset. If the carrying amount
        of an
        asset exceeds its estimated future cash flows, an impairment charge is
        recognized for the amount by which the carrying amount of the asset exceeds
        the
        fair value of the asset. The Company did not recognize any impairment charges
        during the periods presented.
  ***Prepaid
        Royalties***
  Mineral
        rights are often acquired in exchange for advance royalty payments. Royalty
        payments representing prepayments recoupable against future production are
        capitalized, and amounts expected to be recouped within one year are
        classified as a current asset. As mining occurs on these leases, the prepayment
        is offset against earned royalties and is included in the cost of coal sold.
        Amounts determined to be nonrecoupable are charged to expense.
  ***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.
 
 ***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.
   F-10
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
  ***Accumulated
        Comprehensive Income (Loss)***
  The
        accumulated other comprehensive income at December 31, 2004 represents the
        aggregate unrealized gain on marketable securities. The accumulated other
        comprehensive loss at December 31, 2005, represents the aggregate minimum
        pension liability adjustment.
  ***Derivative
        Financial Instruments***
  The
        Company currently does not utilize any interest rate swaps, however, the
        Company
        has in the past utilized interest rate swaps to hedge the impact of changes
        in
        interest rates on its floating rate debt.
  In
        2003, the Company did not make the required monthly interest payments on
        floating rate debt. Accordingly, the cash flow hedge designation for the
        related
        interest rate swaps was discontinued. As a result, the balance in accumulated
        other comprehensive loss related to the swaps as of that date was recorded
        as
        interest expense in 2003. An unrealized gain of approximately $949,000
        representing subsequent changes in the fair value of the swaps was credited
        to
        interest expense in 2003.
  ***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. The Company provides 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.
  ***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.
   F-11
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
  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.
  ***Health
        Claims***
  The
        Company is self-insured for certain health care coverage. The cost of this
        self-insurance program is accrued based upon estimates of the costs for known
        and anticipated claims. The Company recorded an estimated amount to cover
        known
        claims and claims incurred but not reported of $1.7 million and $1.1 million
        as
        of December 31, 2005 and 2004, respectively, which is included in accrued
        salaries, wages, and employee benefits.
  ***Stock
        Plans***
   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 (140,000 of unvested options and 56,000 of
        vested
        options issued in 2004 remain outstanding at December 31, 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 December 31, 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 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 year ended
        December 31, 2005 and the eight months ended December 31, 2004 (in thousands
        except per share amounts):
  F-12
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 
 **Year**
                
                **Eight
                    Months****Ended**
                
                **Ended****December
                    31**
                
                **December
                    31****2005**
                
                **2004**Net
                    income (loss), as reported
                
                $
                (12,338
                )
                
                1,976Add:
                    Net stock-based employee compensationexpense
                    recorded for restricted andperformance
                    based stock grants
                
                
                1,481
                
                
                785Deduct:
                    Net stock-based employee compensationexpense
                    for options and restricted andperformance
                    based stock grants determinedunder
                    Black-Scholes option pricing model
                
                
                (1,482
                )
                
                (479
                )Pro
                    forma net income (loss)
                
                $
                (12,339
                )
                
                2,282Income
                    (loss) per share:Basic
                    - as reported
                
                $
                (0.83
                )
                
                0.14Basic
                    - pro forma
                
                $
                (0.83
                )
                
                0.17Diluted-
                    as reported
                
                $
                (0.83
                )
                
                0.14Diluted-
                    pro forma
                
                $
                (0.83
                )
                
                0.16
   The
        Financial Accounting Standards Board (“FASB”) has issued Statement of Financial
        Accounting Standards No. 123R, *“Share-Based
        Payment- an amendment of FASB Statements No. 123 and 95”* (FAS 123R), which the Company will adopt on January 1, 2006. FAS 123R provides
        additional guidance on accounting for stock based compensation and will require
        companies to measure such awards at fair value in the income statement on
        a
        prospective basis. The Company will adopt FAS 123R using the
        modified-prospective method. The
        Company estimates that as a result of the adoption of FAS 123R, it will
        recognize incremental compensation expense for the year ended December 31,
        2006 of less than $200,000, net of taxes, for stock options that are outstanding
        at December 31, 2005. The Company does not believe that FAS 123R will
        significantly impact its accounting for restricted stock awards.
  ***Use
        of Estimates***
  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 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, asset retirement
        obligations and amounts accrued related to the Company’s workers’ compensation,
        black lung, pension and health claim obligations. Actual results could differ
        from these estimates.
  **(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.
   F-13
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
  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 thousands)
  Estimated
                  enterprise value of the reorganized company
              
              $155,000Borrowings
                  under credit facility
              
              (6,400
              )Capital
                  leases assumed
              
              
              (1,396
              )Cash
                  balance excluded from enterprise value
              
              
              1,301Administrative
                  claims payable excluded from enterprise value
              
              
              (10,214
              )138,291Less:
                  new secured debt issued to extinguish prepetition debt
              
              
              75,000Fair
                  value of common shares issued to extinguish prepetition
                  debt
              
              $
              63,291
  F-14
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 **Fresh
                  Start Adjustments****Assets**
              
              **Predecessor**
                **Company**
                **April,
                  30, 2004**
              
              **Debt**
                **Extinguishment**
              
              
              **Reorganization**
                **Adjustments**
              
              
              **Successor**
                **Company**
                **April
                  30,**
                **2004**Cash
              
              $
              1,301
              
              
              -
              
              
              
              
              -
              
              
              
              
              1,301Receivables
              
              
              35,838
              
              
              -
              
              
              
              
              -
              
              
              
              
              35,838Inventories
              
              
              11,930
              
              
              -
              
              
              
              
              1,079
              
              (2)
              
              
              13,009Prepaid
                  royalties
              
              
              9,932
              
              
              -
              
              
              
              
              (362
              )
              (2)
              
              
              9,570Other
                  current assets
              
              
              4,463
              
              
              -
              
              
              
              
              (347
              )
              (2)
              
              
              4,116**Total
                  current assets**
              
              
              63,464
              
              
              -
              
              
              
              
              370
              
              
              
              
              63,834Land
                  and mineral rights
              
              
              223,004
              
              
              -
              
              
              
              
              (57,567
              )
              (2)
              
              
              165,437Buildings,
                  machinery, and equipment
              
              
              236,901
              
              
              -
              
              
              
              
              (155,050
              )
              (2)
              
              
              81,851Mine
                  development costs
              
              
              12,984
              
              
              -
              
              
              
              
              (12,984
              )
              (2)
              
              
              -Construction-in-progress
              
              
              974
              
              
              -
              
              
              
              
              -
              
              
              
              
              974473,863
              
              
              -
              
              
              
              
              (225,601
              )
              
              
              
              248,262Less
                  accumulated depreciation, depletion, and amortization
              
              
              219,604
              
              
              -
              
              
              
              
              (219,604
              )
              (2)
              
              
              -**Net
                  property, plant, and equipment**
              
              
              254,259
              
              
              -
              
              
              
              
              (5,997
              )
              
              
              
              248,262Restricted
                  cash
              
              
              8,348
              
              
              -
              
              
              
              
              -
              
              
              
              
              8,348Other
                  long-term assets
              
              
              6,518
              
              
              (3,110
              )
              (1)
              
              
              (734
              )
              (2)
              
              
              2,674**Total
                  assets**
              
              $
              332,589
              
              
              (3,110
              )
              
              
              
              (6,361
              )
              
              
              
              323,118
 
   F-15
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 **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
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              6,400Current
                  installments of obligations  under capital leases
              
              
              749
              
              
              -
              
              
              
              
              
              (272
              )
              (3)
              
              
              
              477Accounts
                  payable
              
              
              26,293
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              26,293Accrued
                  salaries, wages and employee  benefits
              
              
              4,501
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              4,501Workers’
                  compensation benefits
              
              
              9,500
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              9,500Black
                  lung benefits
              
              
              2,500
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              2,500Accrued
                  taxes
              
              
              3,588
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              3,588Other
                  current liabilities
              
              
              4,037
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              4,037**Total
                  current liabilities**
              
              
              57,568
              
              
              -
              
              
              
              
              
              (272
              )
              
              
              
              
              57,296Long
                  term debt
              
              
              -
              
              
              75,000
              
              (1)
              
              
              
              -
              
              
              
              
              
              75,000Noncurrent
                  portion of workers’ compensation benefits
              
              
              42,699
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              42,699Noncurrent
                  portion of black lung  benefits
              
              
              10,661
              
              
              -
              
              
              
              
              
              13,610
              
              (4)
              
              
              
              24,271Pension
                  obligations
              
              
              14,267
              
              
              -
              
              
              
              
              
              3,363
              
              (5)
              
              
              
              17,630Asset
                  retirement obligations
              
              
              13,963
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              13,963Obligations
                  under capital leases, excluding current installments
              
              
              1,159
              
              
              -
              
              
              
              
              
              (240
              )
              (3)
              
              
              
              919Deferred
                  income taxes
              
              
              -
              
              
              -
              
              
              
              
              
              27,391
              
              (6)
              
              
              
              27,391Other
                  long term liabilities
              
              
              658
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              658**Total
                  other liabilities**
              
              
              83,407
              
              
              -
              
              
              
              
              
              44,124
              
              
              
              
              
              127,531Liabilities
                  subject to compromise
              
              
              319,451
              
              
              (319,451
              )
              (1)
              
              
              
              -
              
              
              
              
              
              -**Total
                  liabilities**
              
              
              460,426
              
              
              (244,451
              )
              
              
              
              
              43,852
              
              
              
              
              
              259,827Common
                  stock
              
              
              -
              
              
              138
              
              (1)
              
              
              
              -
              
              
              
              
              
              138Paid-in-capital
              
              
              226
              
              
              63,153
              
              (1)
              
              
              
              (226
              )
              (7)
              
              
              
              63,153Retained
                  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
 
   F-16
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  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 (in
        thousands):
  Pre-petition
                  bank loan agreement
              
              $
              207,807Pre-petition
                  senior note
              
              
              37,953Accrued
                  and unpaid interest
              
              
              12,234Terminated
                  interest rate swap
              
              
              8,434Total
                  secured
              
              
              266,428Promissory
                  notes
              
              
              5,176Redeemable
                  preferred stock
              
              
              8,500Accounts
                  payable and other
              
              
              39,347Total
                  unsecured
              
              
              53,023Total
                  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 (in thousands):
 
 Liabilities
                subject to compromise
              
              $
              319,451Less:
                  Assets of rabbi trust transferred to creditors
              
              
              (3,110
              )Less:
                  New secured debt issued in exchange for pre-petition debt
              
              
              (75,000
              )Less: 
                Fair valueof 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 (in thousands):
 **Increase/(Decrease)**Coal
                      inventories
                  
                  $
                  1,079Prepaid
                      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
                  
                  
                  219,604Other
                      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.
  F-17
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 (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
                  $16.3
                  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.
 
 **(3)**
              **Acquisition
                  of Triad Mining, Inc.**
  On
        May 31, 2005, the Company purchased all of the outstanding 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 (net of
        cash
        received) 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 5 and 8).  The values of the shares issued
        were based on the market price of the Company’s stock over a reasonable period
        before and after the date at which the number of shares to be issued became
        fixed. In 2004, Triad produced approximately 3.4 million tons (unaudited)
        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.
        As
        of December 31, 2005, no amounts have been paid under this
        agreement.
 
 The
        preliminary purchase accounting allocations related to the 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 upon completion
        of the Company’s analysis of the tax basis of assets and liabilities
        acquired.
  F-18
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  The
        following table summarizes the preliminary estimated fair values of the assets
        acquired and the liabilities assumed at the date of acquisition (in thousands):
  Accounts
                  receivable
              
              $
              9,672Coal
                  inventory
              
              
              1,872Other
                  current assets
              
              
              1,852Property,
                  plant and equipment
              
              
              37,151Mineral
                  rights
              
              
              22,538Goodwill
                  (non-deductible)
              
              
              28,048Other
                  assets
              
              
              465Current
                  liabilities
              
              
              (6,934
              )Asset
                  retirement obligations
              
              
              (7,861
              )Deferred
                  taxes
              
              
              (15,812
              )Other
                  long term liabilities
              
              
              (587
              )Total
                  purchase price, net of cash received of $5,414
              
              $
              70,404
 
 Had
        the acquisition of Triad occurred at the beginning of 2004, revenues, net
        income
        (loss) and net income (loss) per diluted share would have been $493.6 million,
        $(12.2) million and $(0.79), respectively, for the year ended December 31,
        2005
        and $284.8 million, $3.1 million and $0.19, respectively, for the eight months
        ended December 31, 2004. 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. Pro forma information for the four months
        ended April 30, 2004 (predecessor company) has not been provided due to the
        differing capital structure prior to the application of fresh start accounting.
        Triad had unaudited revenues of $28.5 million and unaudited income before
        taxes
        of $4.3 million for the four months ended April 30, 2004.
  
 **(4)**
              **Other
                  Current Assets**
  Other
        current assets at December 31, 2005 and 2004 are as follows (in
        thousands):
 **2005**
                
                
                **2004**Prepaid
                    insurance
                
                $
                2,809
                
                $
                3,535Income
                    tax receivable
                
                
                346
                
                
                2,575Other
                
                
                971
                
                
                227$
                4,126
                
                $
                6,337
  F-19
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(5)**
              **Long
                  Term Debt and Interest
                  Expense**
  Long-term
        debt is as follows at December 31, 2005 and 2004 (in thousands):
  **2005**
              
              **2004**Senior
                  Notes
              
              $
              150,000
              
              
              -Senior
                  Secured Credit Facility - Revolver
              
              
              -
              
              
              -Prior
                  Senior Secured Credit Facility - Term loan
              
              
              -
              
              
              20,000Prior
                  Term Credit Facility
              
              
              -
              
              
              75,000Total
                  long-term debt
              
              
              150,000
              
              
              95,000Less
                  amounts classified as current
              
              
              -
              
              
              2,700Total
                  long-term debt, less current maturities
              
              $
              150,000
              
              
              92,300
   ***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 8) were used to repay the Prior Senior Secured Credit
        Facility and Prior Term Credit Facility, to fund the acquisition of Triad
        (note
        3) 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 ranging 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.
  ***Senior
        Secured Credit***
  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. The Company
        entered into an amendment and waiver to the Senior Secured Credit Facility
        on
        February 22, 2006 (the “First Amendment”).
  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.  Pursuant to the First Amendment, the Applicable Rate was
        increased to 2.0% for borrowings based on the prime rate or federal funds
        open
        rate and 3.0% for borrowing based on the Euro rate for the period from February
        22, 2006 to September 30, 2006. The Revolver also requires a 0.5% commitment
        fee
        on the unused balance of the Revolver.
   F-20
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
   The
        Letter of Credit Facility does not constitute a loan to the Company and
        accordingly 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.
        Pursuant to the First Amendment, the per annum fee on the full balance of
        the
        Letter of Credit Facility was increased to 3.25% from February 22, 2006 to
        September 30, 2006.
  With
        the exception of certain permitted transactions, 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, leverage ratio, senior secured leverage
        ratio and maximum annual limits on capital expenditures.  The Company’s
        debt covenants also prohibit payment of cash dividends.  As a result of
        lower than expected operating results in the fourth quarter 2005, The Company
        was not in compliance with the fixed charge coverage ratio and the leverage
        ratio and exceeded the maximum annual limits on capital expenditures required
        by
        the Senior Secured Credit Facility as of December 31, 2005.  The First
        Amendment waived these financial covenants of the Senior Secured Credit Facility
        as of December 31, 2005 and revised certain covenants during 2006 to levels
        that
        the Company projects it will be able to comply with during 2006.
  
 ***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
        $1.7 million 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.
  F-21
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 
 ***Interest
        Expense and Other***
 
 During
        the year ended December 31, 2005 and the eight months ended December 31,
        2004,
        the Company paid $10.5 million and $5.5 million in interest,
        respectively.
 
 Until
        the date of filing of bankruptcy, the Company accrued interest on its debt
        obligations. 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 and the year ended December 31, 2003 would have been
        approximately $7.6 million and $16.3 million higher than reported. During
        the
        four months ended April 30, 2004 and the year ended December 31, 2003, the
        Company paid $0.3 million and $2.9 million, respectively, in
        interest.
 
  **(6)**
              **Workers’
                  Compensation Benefits**
  As
        of December 31, 2005 and 2004, workers’ compensation benefit obligation
        consisted of the following (in thousands):
 **2005**
                
                **2004**Workers'
                    compensation benefits
                
                $
                52,281
                
                $
                50,313Less
                    current portion
                
                
                10,050
                
                
                12,090Noncurrent
                    portion of workers' compensation benefits
                
                $
                42,231
                
                $
                38,223
  Actuarial
        assumptions used in the determination of the liability for the self-insured
        portion of workers’ compensation benefits included a discount rate of 5.1%,
        5.25% and 5.5% at December 31, 2005, 2004 and 2003, respectively.
  **(7)**
              **Pneumoconiosis
                  (Black Lung) Benefits**
  As
        of December 31, 2005 and 2004, black lung benefits obligation consisted of
        the
        following (in thousands):
  **2005**
                
                **2004**Black
                    lung benefits
                
                $
                27,282
                
                $
                25,941Less
                    current portion
                
                
                2,930
                
                
                2,600Noncurrent
                    portion of black lung benefits
                
                $
                24,352
                
                $
                23,341
  
   F-22
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  A
        reconciliation of the changes in the black lung benefit obligation is as
        follows
        (in 000’s):
  **2005**
                
                **2004**Beginning
                    of the year black lung obligation
                
                $
                28,730
                
                $
                13,708Fresh
                    Start adjustment (note 3)
                
                
                -
                
                
                13,610Liabilities
                    assumed in acquisition
                
                
                587
                
                
                -Change
                    in unprovided actuarial loss
                
                
                901
                
                
                -Service
                    cost:Predecessor
                    Company
                
                
                -
                
                
                99Successor
                    Company
                
                
                348
                
                
                221Interest
                    cost:Predecessor
                    Company
                
                
                -
                
                
                254Successor
                    Company
                
                
                1,379
                
                
                566Amortization
                    of the actuarial loss:Predecessor
                    Company
                
                
                -
                
                
                261Successor
                    Company
                
                
                217
                
                
                2,789Benefit
                    payments:Predecessor
                    Company
                
                
                -
                
                
                (1,613
                )Successor
                    Company
                
                
                (1,188
                )
                
                (1,165
                )End
                    of year accumulated black lung obligation
                
                
                30,974
                
                
                28,730Unamortized
                    actuarial loss
                
                
                (3,692
                )
                
                (2,789
                )Accrued
                    black lung obligation
                
                $
                27,282
                
                $
                25,941
  The
        actuarial assumptions used in the determination of accumulated black lung
        obligations as of December 31, 2005 and 2004 included a discount rate of
        5.1%
        and 5.25%, respectively. For purposes of determining net periodic expense
        related to such obligations, the Company used a discount rate of 5.25%, 5.5%,
        5.5% and 6.75% for the year ended December 31, 2005 (Successor), the eight
        months ended December 31, 2004 (Successor), the four months ended
        April 30, 2004 (Predecessor), and the year ended December 31, 2003
        (Predecessor).
 
 **(8)**
              **Equity**
  ***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.
   F-23
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
 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.
 
  ***Equity
        Based Compensation***
  Under
        the 2004 Equity Incentive Plan (the Plan), participants may be granted stock
        options (qualified and nonqualified), stock appreciation rights (“SARs”),
        restricted stock, restricted stock units, and performance shares. The total
        number of shares that may be awarded under the Plan is 1,650,000, and no
        more
        than 1,000,000 of the shares reserved under the Plan may be granted in the
        form
        of incentive stock options.
  Shares
        awarded or subject to purchase under the Plan that are not delivered or
        purchased, or revert to the Company as a result of forfeiture or termination,
        expiration or cancellation of an award or that are used to exercise an award
        or
        for tax withholding, will be again available for issuance under the Plan.
        At
        December 31, 2005, there were 399,608 shares available under the Plan for
        future
        awards.
  *Restricted
        Stock Awards*
  Pursuant
        to the Plan certain employees and directors have been awarded restricted
        common
        stock with such shares vesting over three or five years, respectively, or
        earlier under certain conditions. The related expense is amortized over the
        vesting period. Restricted shares subject to continuing vesting requirements
        are
        included in diluted shares outstanding. For the year ended December 31, 2005
        and
        the eight months ended December 31, 2004, the Company recognized $2.2 million
        and $0.5 million, respectively, in compensation expense related to these
        shares.
  *Performance
        Stock Awards*
  Performance
        stock awards have been made to certain employees pursuant to the Plan. The
        number of shares of common stock to be received under these awards by such
        employees at the end of the performance period will depend on the attainment
        of
        performance objectives based on achieving certain financial results and the
        successful development of a new mine. The expected cost of these shares is
        reflected in income over the performance period. For the year ended December
        31,
        2005 and the eight months ended December 31, 2004, the Company recorded $0.2
        million and $0.6 million in compensation expense related to these shares.
        Since
        performance-based stock is contingent upon satisfying conditions, those unvested
        shares are considered to be contingently issuable shares and are not included
        in
        the computation of diluted earnings per share.
   F-24
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  *Stock
        Options Awards*
  The
        following table summarizes information about the stock options outstanding
        at
        December 31, 2005.
  **Options
                    Outstanding**
                
                
                
                **Options
                    Exercisable****Range
                    of Exercise**
                  **Price**
                
                **Outstanding**
                  **Options**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Weighted
                    Average**
                  **RemainingContractual
                    Life**
                  **(Years)**
                
                **Number**
                  **Exercisable**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**$10.80
                
                150,000
                
                $10.80
                
                8.3
                
                30,000
                
                $10.80$15.00-$17.50
                
                46,000
                
                $15.87
                
                8.4
                
                26,000
                
                $16.54$33.57-$33.75
                
                40,000
                
                $33.62
                
                9.4
                
                -
                
                -$10.80-$33.75
                
                236,000
                
                $15.66
                
                8.5
                
                56,000
                
                $13.46
 The
        following is a summary of performance stock, restricted stock and stock option
        awards:
  Performance
                    Stock
                
                Restricted
                    Stock
                
                Stock
                    OptionsEstimated
                
                
                
                Estimated
                
                
                
                WeightedNumber
                    of
                
                Fair
                    Value
                
                Number
                    of
                
                Fair
                    Value
                
                Number
                    of
                
                AverageShares
                
                at
                    Issue
                
                Shares
                
                at
                    Issue
                
                Shares
                
                Exercise
                    PriceOutstanding
                    at April 30, 2004
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -Granted
                
                
                100,000
                
                
                4.59
                
                
                839,000
                
                
                4.96
                
                
                270,000
                
                
                13.41Exercised/Vested
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Canceled
                
                
                -
                
                
                -
                
                
                (23,300
                )
                
                4.59
                
                
                -
                
                
                -December
                    31, 2004
                
                
                100,000
                
                
                4.59
                
                
                815,700
                
                
                4.97
                
                
                270,000
                
                
                13.41Granted
                
                
                -
                
                
                -
                
                
                346,470
                
                
                35.88
                
                
                40,000
                
                
                33.62Exercised/Vested
                
                
                -
                
                
                -
                
                
                (161,952
                )
                
                4.97
                
                
                (3,334
                )
                
                15.00Canceled
                
                
                (81,250
                )
                
                4.59
                
                
                (133,867
                )
                
                5.72
                
                
                (70,666
                )
                
                17.26December
                    31, 2005
                
                
                18,750
                
                $
                4.59
                
                
                866,351
                
                $
                17.22
                
                
                236,000
                
                $
                15.66
  ***Redeemable
        Preferred Stock (Predecessor Company)***
  As
        of December 31, 2003, the Company had 8,500 shares of Class C, nonvoting,
        mandatorily 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 statements of operations. Accordingly,
        preferred dividends of $227,000 for the four months ended April 30, 2004
        and
        $340,000 for the year ended December 31, 2003, are included in interest expense
        in the consolidated statements of operations. Prior to the adoption of Statement
        No. 150, preferred dividends are shown separately as preferred dividends
        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.
   F-25
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(9)**
              **Income
                  Taxes**
  Income
        tax expense (benefit) consists of (in thousands):
 **Year**
                    **Ended**
                    **2005**
                  
                  **Eight
                            Months**
                          **Ended**
                          **December
                            31,**
                          **2004**
                  
                  
                  **Four
                      Months**
                    **Ended**
                    **April
                      30,**
                    **2004**
                  
                  **Year**
                    **Ended**
                    **2003**Current:Federal
                  
                  $
                  22
                  
                  
                  25
                  
                  
                  
                  -
                  
                  
                  -State
                  
                  
                  401
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  -423
                  
                  
                  25
                  
                  
                  
                  -
                  
                  
                  -Deferred:Federal
                  
                  
                  (12,084
                  )
                  
                  692
                  
                  
                  
                  -
                  
                  
                  (2,528
                  )State
                  
                  
                  (2,623
                  )
                  
                  74
                  
                  
                  
                  -
                  
                  
                  (363
                  )(14,707
                  )
                  
                  766
                  
                  
                  
                  -
                  
                  
                  (2,891
                  )$
                  (14,284
                  )
                  
                  791
                  
                  
                  
                  -
                  
                  
                  (2,891
                  )
  A
        reconciliation of income taxes computed at the statutory federal income tax
        rate
        to the expense (benefit) for income taxes included in the consolidated
        statements of operations is presented below:
 **Year**
                      **Ended**
                      **2005**
                    
                    **Eight
                        Months**
                      **Ended**
                      **December
                        31,**
                      **2004**
                    
                    
                    **Four
                        Months**
                      **Ended**
                      **April
                        30,**
                      **2004**
                    
                    **Year**
                      **Ended**
                      **2003**Federal
                        income taxes at statutory rates
                    
                    (34.0)
                    %
                    34.0
                    %
                    
                    34.0
                    %
                    (34.0)
                    %Percentage
                        depletion
                    
                    (15.2)
                    
                    (42.0)
                    
                    
                    (2.2)
                    
                    (0.5)Other
                        permanent items
                    
                    (2.2)
                    
                    12.3
                    
                    
                    -
                    
                    -Amortization
                        of coal properties not deductible
                    
                    -
                    
                    -
                    
                    
                    -
                    
                    0.8Non-taxable
                        gain on debt discharge
                    
                    -
                    
                    -
                    
                    
                    (35.1)
                    
                    -Non-deductible
                        reorganization costs
                    
                    -
                    
                    -
                    
                    
                    3.3
                    
                    -Change
                        in valuation allowance
                    
                    -
                    
                    23.8
                    
                    
                    -
                    
                    28.5State
                        income taxes, net of federal
                    
                    (5.5)
                    
                    1.8
                    
                    
                    -
                    
                    (0.4)Other,
                        net
                    
                    3.2
                    
                    (1.3)
                    
                    
                    -
                    
                    1.0(53.7)
                    %
                    28.6
                    %
                    
                    -
                    %
                    (4.6)
                    %
   F-26
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
    The
        tax effects of temporary differences that give rise to significant portions
        of
        the deferred tax assets and deferred tax liabilities at December 31, 2005
        and 2004 are presented below (in 000’s):
  **2005**
                
                **2004**Deferred
                    tax assets:Accruals
                      for financial reporting purposes, principallyworkers'
                      compensation and black lung obligations
                
                $
                50,040
                
                $
                46,279Alternative
                    minimum tax credit carryforwards
                
                
                
                
                
                5,450Net
                    operating loss carryforwards
                
                
                21,264
                
                
                55,631Accumulated
                    comprehensive income
                
                
                247
                
                
                26Total
                    gross deferred tax assets
                
                
                71,551
                
                
                107,386Less
                    valuation allowance
                
                
                -
                
                
                61,081Net
                    deferred tax asset
                
                
                71,551
                
                
                46,305Deferred
                        tax liabilities - property, plant and equipment,principally
                        due to differences in depreciation, depletionand
                        amortization
                
                
                115,791
                
                
                80,920Net
                    deferred tax asset (liability)
                
                $
                (44,240
                )
                $
                (34,615
                )
   As
        discussed in note 1, the Company emerged from Chapter 11 bankruptcy on May
        6,
        2004. Emergence from bankruptcy substantially reduced the income tax attributes
        of the Company’s tax assets such as net operating loss carryforwards (NOLs), tax
        credits, and tax basis in its other assets, by any cancellation of indebtedness
        (COI) income realized. This reduction was effective as of January 1, 2005.
        At
        December 31, 2004, we had a $61.1 million valuation allowance that was
        established against the tax assets that were expected to be lost due to our
        emergence from bankruptcy or that we expected to expire unused. During
        2005, we reduced the tax basis of these assets and eliminated the related
        valuation allowance. As of December
        31, 2005 ,
        we had no valuation allowance recorded for taxes, as management believes
        it is
        more likely that not that the remaining deferred tax asset will be
        realized.
  At
        December 31, 2005, the Company has consolidated NOLs for federal income tax
        purposes of approximately $60.0 million which expire beginning in 2023 and
        consolidated Kentucky net operating loss carryforwards of approximately $14.5
        million which expire in 2025. These net operating loss carryforwards generate
        a
        combined federal and state tax benefit of approximately $21.3 million.
  In
        addition to the $27.4 million increase in the deferred tax liability that
        was
        originally recorded in connection with the fresh start accounting adjustment
        (see note 2), the Company recorded an additional increase in the deferred
        tax
        liability of $6.5 million in 2004 and $9.8 million in 2005 to adjust the
        fair
        values assigned to certain tax assets and liabilities for purposes of applying
        fresh start accounting. These adjustments resulted in an increase to the
        amount
        allocated to mineral rights.
 
 During
        the year ended December 31, 2003, the Company received income tax refunds
        of
        $5.0 million. The Company made no income tax payments for the four months
        ended
        April 30, 2004. The Company made income tax payments of $2.6 million for
        the
        eight months ended December 31, 2004. During the year ended December 31,
        2005,
        the Company received income tax refunds of $1.8 million.
   F-27
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  
  **(10)**
                **Employee
                    Benefit Plans**
  ***Defined
        Benefit Pension Plan***
  Substantially
        all employees of the Company who meet certain length of service requirements
        are
        covered by a qualified noncontributory defined benefit pension plan. The
        Company’s funding policy is to contribute annually an amount at least equal to
        the minimum funding requirements actuarially determined in accordance with
        the
        Employee Retirement Income Security Act of 1974.
  The
        plan assets for the qualified defined benefit pension plan are held by an
        independent trustee. The plan’s assets include cash and cash equivalents,
        corporate and government bonds, preferred and common stocks. The Company
        has an
        internal investment committee that sets investment policy, selects and monitors
        investment managers and monitors asset allocation.
  The
        investment policy for the pension plan assets includes the objectives of
        providing growth of capital and income while achieving a target annual rate
        of
        return of 7.5% over a full market cycle, approximately 5 to 7 years.
        Diversification of assets is employed to reduce risk. The current target
        asset
        allocation is 70% for equity securities (including 45% Large Cap, 15% Small
        Cap,
        10% International) and 30% for cash and interest bearing securities. The
        investment policy is based on the assumption that the overall portfolio
        volatility will be similar to that of the target allocation. Given the
        volatility of the capital markets, strategic adjustments in various asset
        classes may be required to rebalance asset allocation back to its target
        policy.
        Investment fund managers are not permitted to invest in certain securities
        and
        transactions as outlined by the investment policy statements specific to
        each
        investment category without prior investment committee approval.
  To
        develop the expected long-term rate of return on assets assumption, the Company
        considered the historical returns and the future expectations for returns
        for
        each asset class, as well as the target asset allocation of the pension
        portfolio. This evaluation resulted in the selection of the 7.5% long-term
        rate
        of return on assets assumption for the year ended December 31,
        2005.
  The
        fair value of the major categories of qualified defined benefit pension plan
        assets includes the following (dollars in thousands):
  **2005**
                
                **2004**Amount
                
                Percentage
                
                Amount
                
                PercentageEquity
                    securities
                
                $
                30,728
                
                
                70.1
                %
                $
                24,859
                
                
                67.7
                %Debt
                    securities
                
                
                12,278
                
                
                28.0
                %
                
                10,689
                
                
                29.1
                %Other
                      (includes cash and cashequivalents)
                
                
                858
                
                
                1.9
                %
                
                1,195
                
                
                3.2
                %$
                43,864
                
                
                100.0
                %
                $
                36,743
                
                
                100.0
                %
  
   F-28
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  The
        following table sets forth changes in the plan’s benefit obligations, changes in
        the fair value of plan assets, and funded status at December 31, 2005 and
        2004 (in thousands):
  **2005**
                
                **2004**Change
                    in benefit obligation:Projected
                    benefit obligation at beginning of year
                
                $
                58,636
                
                
                48,522Service
                    cost
                
                
                2,105
                
                
                1,834Interest
                    cost
                
                
                3,170
                
                
                2,924Actuarial
                    loss
                
                
                418
                
                
                7,207Benefits
                    paid
                
                
                (1,694
                )
                
                (1,851
                )Projected
                    benefit obligation at end of year
                
                $
                62,635
                
                
                58,636Change
                    in plan assets:Fair
                    value of plan assets at beginning of year
                
                $
                36,743
                
                
                29,717Actual
                    return on plan assets
                
                
                3,779
                
                
                3,590Employer
                    contributions
                
                
                5,036
                
                
                5,287Benefits
                    paid
                
                
                (1,694
                )
                
                (1,851
                )Fair
                    value of plan assets at end of year
                
                $
                43,864
                
                
                36,743Reconciliation
                    of funded status:Funded
                    status
                
                $
                (18,771
                )
                
                (21,893
                )Unrecognized
                    actuarial loss
                
                
                5,830
                
                
                6,149Net
                    amount recognized
                
                $
                (12,941
                )
                
                (15,744
                )Amounts
                      recognized in the consolidated balance sheetsconsist
                      of:Accrued
                    benefit liability
                
                $
                (13,598
                )
                
                (15,744
                )Accumulated
                    other comprehensive loss
                
                
                657
                
                
                -Net
                    amount recognized
                
                $
                (12,941
                )
                
                (15,744
                )
  The
        accumulated benefit obligation of the plan was approximately $57.5 million
        and
        $52.4 million as of December 31, 2005 and 2004, respectively. Company
        contributions in 2006 are expected to be approximately $5.4
        million.
  During
        Fresh Start Accounting (note 2), the Company adjusted the previously
        unrecognized actuarial loss and the previously unrecognized prior service
        costs
        to zero.
   F-29
   The
        components of net periodic benefit cost and the benefits paid by period are
        as
        follows (in thousands):
  **Successor**
                    
                    
                    **Predecessor****Year**
                    
                    **Eight
                        Months**
                    
                    
                    **Four
                        Months**
                    
                    **Year****Ended**
                    
                    **December
                        31,**
                    
                    
                    **April
                        30,**
                    
                    **Ended****2005**
                    
                    **2004**
                    
                    
                    **2004**
                    
                    **2003**Service
                        cost
                    
                    $
                    2,105
                    
                    
                    1,223
                    
                    
                    
                    611
                    
                    
                    1,764Interest
                        cost
                    
                    
                    3,170
                    
                    
                    1,959
                    
                    
                    
                    965
                    
                    
                    2,707Expected
                      return on plan assets
                    
                    
                    (3,061
                    )
                    
                    (1,721
                    )
                    
                    
                    (811
                    )
                    
                    (2,092
                    )Amortization
                        of prior service cost
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    130
                    
                    
                    843Recognized
                        actuarial loss
                    
                    
                    19
                    
                    
                    -
                    
                    
                    
                    340
                    
                    
                    1,178Net
                        periodic benefit cost
                    
                    $
                    2,233
                    
                    
                    1,461
                    
                    
                    
                    1,235
                    
                    
                    4,400Benefits
                        paid
                    
                    $
                    1,694
                    
                    
                    1,288
                    
                    
                    
                    563
                    
                    
                    1,947
      F-30
 **JAMES
              RIVER COAL COMPANY**
 **AND
              SUBSIDIARIES**
 Notes
              to Consolidated Financial Statements
  The
        weighted-average assumptions used in determining the pension benefit obligation
        and pension expense are as follows:
  **2005**
                  
                  **2004**Discount
                      rate
                  
                  
                  5.25%
                  
                  
                  5.50%Expected
                      return on plan assets
                  
                  
                  7.50%
                  
                  
                  8.00%Rate
                      of compensation increase
                  
                  
                  4.00%
                  
                  
                  4.00%Measurement
                      date
                  
                  
                  October
                      1, 2005
                  
                  
                  October
                      1, 2004
 The
            weighted-average assumptions used to determine the net periodic benefit
            cost are
            as follows:
  **2005**
                    
                    **2004**
                    
                    **2003**Discount
                        rate
                    
                    
                    5.50%
                    
                    
                    6.00%
                    
                    
                    6.75%Expected
                        return on plan assets
                    
                    
                    8.00%
                    
                    
                    8.00%
                    
                    
                    8.50%Rate
                        of compensation increase
                    
                    
                    4.00%
                    
                    
                    4.00%
                    
                    
                    4.00%Measurement
                        date
                    
                    
                    October
                        1, 2004
                    
                    
                    October
                        1, 2003
                    
                    
                    October
                        1, 2002
  The
            following benefit payments are expected to be paid (based on the assumptions
            described above (in thousands)).
  Year
                        ended December 31:2006
                    
                    $
                    2,6882007
                    
                    
                    1,8602008
                    
                    
                    2,0632009
                    
                    
                    2,25320010
                    
                    
                    2,460Thereafter
                    
                    
                    16,272
  ***Savings
            and Profit Sharing Plan***
  The
            Company sponsors profit sharing plans and defined contribution pension
            plans.
            All U.S. employees are eligible for at least one of the Company’s plans. The
            Company’s contributions vary depending on the plan and cannot exceed the maximum
            allowable for tax purposes.  The
            Company recognized approximately $2.1million, $588,000, $253,000 and
            $832,000 of
            expense relating to the Savings and Profit Sharing Plan for the year
            ended
            December 31, 2005, the eight months ended December 31, 2004, the four
            months
            ended April 30, 2004 and the year ended December 31, 2003,
            respectively.
  ***Nonqualified
            Retirement Plan***
  The
            Company sponsored a nonqualified plan that provided retirement benefits
            to
            certain officers to supplement benefits not provided under the qualified
            plan.
            The Company owned insurance policies designed to fund benefits under
            the
            nonqualified plan, which were placed in a Rabbi Trust. The Plan was terminated
            March 25, 2003.
  F-31
 **JAMES
              RIVER COAL COMPANY**
 **AND
              SUBSIDIARIES**
 Notes
              to Consolidated Financial Statements
 The
          components of net periodic benefit cost for the year ended December 31,
          2003 are
          as follows (in thousands):
 **2003**Service
                      cost
                  
                  $
                  14Interest
                      cost
                  
                  
                  95Amortization
                      of prior service cost
                  
                  
                  28Recognized
                      actuarial loss
                  
                  
                  6Recognized
                      benefits forfeited
                  
                  
                  (2,371
                  )Effect
                      of plan termination
                  
                  
                  4,388Net
                      periodic benefit cost
                  
                  $
                  2,160
  The
          weighted-average assumptions used in determining the pension benefit obligation
          and pension expense are as follows:
  **2003**Discount
                      rate
                  
                  
                  6.00%Rate
                      of compensation increase
                  
                  
                  4.00%Measurement
                      date
                  
                  
                  March
                      25, 2003
  As
        part of the Company’s Plan of Reorganization the assets of the Rabbi Trust were
        transferred to the unsecured creditors Liquidating Trust to pay unsecured
        creditors’ claims. Prior to the termination of the Plan, the Company recognized
        a gain on benefits forfeited by a Company employee as part of a settlement
        agreement. The Company also recorded an expense of approximately $4.4 million
        on
        March 25, 2003 when the Plan was terminated.
  **(11)**
              **Major
                  Customers**
  During
        the year ended December 31, 2005, approximately 44% of revenues were from
        two
        customers, the largest of which represented 27% of revenues. These customers
        are
        both included in the CAPP segment in Note 18. During the eight months ended
        December 31, 2004, approximately 50% of revenues were from two customers,
        the
        largest of which represented 30% of revenues. In the four months ended April
        30,
        2004, approximately 54% of revenues were from two customers, the largest
        of
        which represented 31% of revenues. During 2003, approximately 73% of total
        revenues were from three customers, the largest of which represented 43%
        of
        revenues.
     F-32
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
   **(12)**
              **Leases**
  The
          Company is obligated under capital leases covering certain machinery and
          equipment that expire at various dates during the next three years. At
          December 31, 2005 and 2004, the gross amount of machinery and equipment and
          related accumulated amortization recorded under capital leases were as
          follows
          (in thousands):
  **2005**
                
                **2004**Machinery
                    and equipment
                
                $
                1,243
                
                
                1,367Less
                    accumulated amortization
                
                
                864
                
                
                539$
                379
                
                
                828
   Amortization
          of assets held under capital leases is included with depreciation expense.
          Future minimum lease payments under noncancelable operating leases (with
          initial
          or remaining lease terms in excess of one year) and future minimum capital
          lease payments as of December 31, 2005 were as follows (in
          thousands):
 Capital
                
                OperatingLease
                
                LeaseYear
                    ended December 31,2006
                
                $
                432
                
                
                5572007
                
                
                238
                
                
                4302008
                
                
                -
                
                
                208670
                
                
                1,195Less
                    amount representing interest (at 8.5%)
                
                
                45Present
                    value of net minimum capital lease payments
                
                
                625Less
                    current portion of obligations under capital lease
                
                
                395Obligations
                    under capital lease, excluding current portion
                
                $
                230
  The
        Company incurred rent expense on equipment and offices space of approximately
        $1.0 million, $462,000, $278,000, and $1.1 million for the year ended December
        31, 2005, the eight months ended December 31, 2004, the four months ended
        April
        30, 2004 and the year ended December 31, 2003, respectively.
  F-33
 **JAMES
              RIVER COAL COMPANY**
 **AND
              SUBSIDIARIES**
 Notes
              to Consolidated Financial Statements
   **(13)**
              **Commitments
                  and Contingencies**
  Future
        minimum royalty commitments under coal lease agreements at December 31,
        2005 were as follows (in thousands):
  **Royalty****commitments**Year
                    ended December 31:2006
                
                $
                18,4022007
                
                
                16,8512008
                
                
                16,3192009
                
                
                16,1312010
                
                
                15,7192011
                    and thereafter
                
                
                74,081$
                157,503
  Certain
        coal leases do not have set expiration dates but extend until completion
        of
        mining of all merchantable and mineable coal reserves. For purposes of this
        table, we have generally assumed that minimum royalties on such leases will
        be
        paid for a period of ten years.
 
 Certain
        coal leases require payment based on minimum tonnage, for these contracts
        an
        average sales price of $48.35 was used to project the future
        commitment.
  The
        Company has established irrevocable letters of credit totaling $52.0 million
        as
        of December 31, 2005 to guarantee performance under certain contractual
        arrangements. The letters of credit were issued under the Letter of Credit
        Facility (note 5).
  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.
   F-34
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(14)**
              **Reorganization
                  Items, Net**
 
 Reorganization
        items consist of the following (in thousands):
 **Predecessor****Four
                          months**
                      **ended**
                    **April
                      30,**
                  **2004**
                
                **Year
                        ended**
                    **December
                      31,**
                  **2003**Professional
                    fees and administrative expenses
                
                $
                10,685
                
                
                8,399Forgiveness
                    of receivable for subscribed shares, including accrued
                    interest
                
                
                -
                
                
                94Gain
                    on settlements of obligations, net
                
                
                (111,533
                )
                
                (798
                )Interest
                    income
                
                
                (59
                )
                
                (65
                )$
                (100,907
                )
                
                7,630
  Cash
        paid for reorganization items totaled $850,000, $8.1 million, $1.2 million
        and
        $9.9 million for the year ended December 31, 2005, the eight months ended
        December 31, 2004, the four months ended April 30, 2004 and for the year
        ended
        December 31, 2003, respectively. The Company also received $900,000 during
        2003
        in a settlement of potential litigation related to collecting the remaining
        proceeds from the sale of mining property and retained royalty obligations
        in
        1998.
  **(15)**
              **Cumulative
                  Effect of Accounting Change for Reclamation
                  Liabilities**
  Effective
        January 1, 2003 the Company changed its method of accounting for
        reclamation liabilities in accordance with the provisions of Statement No.
        143.
        As a result of the adoption of Statement No. 143, the Company recognized
        an
        increase in total reclamation liability of approximately $6.8 million. The
        Company recorded the related capitalized asset retirement costs by increasing
        property, plant and equipment, net of accumulated depreciation, by approximately
        $3.8 million. The cumulative effect of the change on prior years resulted
        in a
        charge to operations of approximately $3.0 million.
  **(16)**
              **Earnings
                  (Loss) Per Share**
  Basic
        earnings (loss) per share is computed by dividing net income (loss) 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.
   F-35
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  The
        following table provides a reconciliation of the number of shares used to
        calculate basic and diluted earnings (loss) per share (in
        thousands):
  **Successor**
                
                
                **Predecessor****Year
                    Ended**
                  **December
                    31, 2005**
                
                **Eight
                    Months**
                  **Ended**
                  **December
                    31.**
                  **2004**
                
                
                **Four
                    Months**
                  **Ended**
                  **April
                    30,**
                  **2004**
                
                **Year
                    Ended**
                  **December
                    31,**
                  **2003**Weighted
                    average number of common shares outstanding:Basic
                
                
                14,955
                
                
                13,800
                
                
                
                17
                
                
                17Effect
                    of dilutive instruments
                
                
                -
                
                
                823
                
                
                
                -
                
                
                -Diluted
                
                
                14,955
                
                
                14,623
                
                
                
                17
                
                
                17
   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
        959,000 for the year ended December 31, 2005.
   **(17)**
              **Fair
                  Value of Financial
                  Instruments**
  The
        estimated fair value of financial instruments has been determined by the
        Company
        using available market information. As of December 31, 2005 and 2004, except
        for
        long-term debt obligations, the carrying amounts of all financial instruments
        approximate their fair values due to their short maturities.
  The
        Company believes that the fair value of its Senior Notes was $157.1 million
        at
        December 31, 2005 based on available market information at that date. The
        Company believes that the fair value of its outstanding debt approximated
        fair
        value at December 31, 2004 based on the timing of the issuance of these
        securities.
   F-36
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(18)**
              **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 year ended December 31, 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) (amounts in
        thousands).
   CAPP
                
                Midwest
                    (1)
                
                
                Corporate
                
                
                ConsolidatedRevenues
                
                $
                398,118
                
                
                55,881
                
                
                -
                
                
                453,999Depreciation,
                    depletion and amortization
                
                
                43,687
                
                
                7,985
                
                
                150
                
                
                51,822Income
                    (loss) from operations
                
                
                94
                
                
                1,349
                
                
                (13,941
                )
                
                (12,498
                )Interest
                    income
                
                
                -
                
                
                -
                
                
                (226
                )
                
                (226
                )Interest
                    expense
                
                
                -
                
                
                -
                
                
                12,892
                
                
                12,892Income
                    tax expense (benefit)
                
                
                -
                
                
                -
                
                
                (14,283
                )
                
                (14,283
                )Goodwill
                
                
                -
                
                
                28,048
                
                
                -
                
                
                28,048Total
                    assets
                
                
                363,265
                
                
                99,357
                
                
                10,047
                
                
                472,669Capital
                    Expenditures
                
                
                83,038
                
                
                1,837
                
                
                112
                
                
                84,987
  (1)
                    Includes the results of operations of Triad from the date of
                    its
                    acquisition (May 31, 2005)
  The
        Company does not allocate interest income, interest expense or income taxes
        to
        its segments.
   
   F-37
 **JAMES
            RIVER COAL COMPANY**
 **AND
            SUBSIDIARIES**
 Notes
            to Consolidated Financial Statements
  **(19)**
              **Quarterly
                  Information (Unaudited)**
  Set
        forth below is the Company’s quarterly financial information for the previous
        two fiscal years (dollars in 000’s):
 **Three
                    Months Ended (1)****March
                    31,**
                
                **June
                    30,**
                
                **September 30,**
                
                **December 31,****2005**
                
                **2005**
                
                **2005**
                
                **2005**Total
                    revenue
                
                $
                97,875
                
                
                113,313
                
                
                122,937
                
                
                119,874Gross
                    profit (loss)
                
                
                7,455
                
                
                10,777
                
                
                2,094
                
                
                (7,371
                )Income
                    (loss) from operations
                
                
                2,420
                
                
                3,843
                
                
                (4,557
                )
                
                (14,204
                )Income
                    (loss) before taxes
                
                
                378
                
                
                (1,268
                )
                
                (8,136
                )
                
                (17,595
                )Net
                    income (loss)
                
                
                309
                
                
                (1,017
                )
                
                (2,200
                )
                
                (9,430
                )Income
                    (loss) per share (Basic and Diluted):
                
                $
                0.02
                
                
                (0.07
                )
                
                (0.14
                )
                
                (0.60
                )
  
 **Three
                        Months Ended (1)****March
                        31,**
                    
                    **June
                        30,**
                    
                    **September 30,**
                    
                    **December 31,****2004**
                    
                    **2004**
                    
                    **2004**
                    
                    **2004**Total
                        revenue
                    
                    $
                    80,858
                    
                    
                    97,576
                    
                    
                    89,881
                    
                    
                    77,332Gross
                        profit (loss)
                    
                    
                    5,879
                    
                    
                    18,099
                    
                    
                    8,276
                    
                    
                    (906
                    )Income
                        (loss) from operations
                    
                    
                    2,318
                    
                    
                    14,071
                    
                    
                    3,434
                    
                    
                    (4,910
                    )Reorganization
                        items gain (loss), net
                    
                    
                    (1,557
                    )
                    
                    102,465
                    
                    
                    -
                    
                    
                    -Income
                        (loss) before taxes
                    
                    
                    411
                    
                    
                    115,650
                    
                    
                    1,780
                    
                    
                    (7,085
                    )Net
                        income (loss)
                    
                    
                    411
                    
                    
                    113,923
                    
                    
                    1,399
                    
                    
                    (5,768
                    )Income
                        (loss) per share (Basic and Diluted):
                    
                    $
                    24.33
                    
                    
                    N/A
                    (2)
                    
                    0.10
                    
                    
                    (0.42
                    )
 
 (1)
              The
                  quarter ended March 31, 2004, represent the results of the Predecessor
                  Company. The quarter ended June 30, 2004 includes the Predecessor
                  Company
                  for one month (April 2004) and the Successor Company for two months.
                  The
                  subsequent quarters in 2004 and 2005 represent the results of the
                  Successor Company. As discussed in Note 1, the consolidated financial
                  statements of the Company after emergence from bankruptcy are those
                  of a
                  new reporting entity (the Successor) and are not comparable to
                  the
                  financial statements of the pre-emergence Company (the
                  Predecessor).
    F-38
 **JAMES
              RIVER COAL COMPANY**
 **AND
              SUBSIDIARIES**
 Notes
              to Consolidated Financial Statements
    (2)
              Information
                  for the net income per share for the two months ended June 30,
                  2004
                  (Successor) and the one month ended April 30, 2004 (Predecessor)
                  follows:
 Two
                  Months
                Ended
                June
                  30, 2004
              
              One
                  Month
                Ended
                April
                  30, 2004Total
                  revenue
              
              $64,485
              
              33,091Gross
                  profit (loss)
              
              11,637
              
              6,462Income
                  from operations
              
              9,071
              
              5,000Reorganization
                  items gain (loss), net
              
              -
              
              102,465Income
                  before taxes
              
              8,072
              
              107,578Net
                  income
              
              6,345
              
              107,578Basic
                  Earnings Per Share
              
              0.46
              
              6,369.32Diluted
                  Earning Per Share
              
              0.43
              
              6,369.32








F-39




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this Report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, on the 16th day of March,
      2006.




**JAMES
                RIVER COAL COMPANY**By:/s/
                Peter T. SochaPeter
                T. SochaChairman
                of the Board,President
                and Chief Executive Officer(principal
                executive officer)





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Report has
      been
      signed below by the following persons on behalf of the Registrant in the
      capacities indicated on the 16th day of March, 2006.







Signature
            Title/s/
                Peter T. Socha
              Peter T. Socha
            Chairman
                of the Board, President and Chief Executive Officer (principal executive
                officer)/s/
                Samuel M. Hopkins, II
              
              Samuel
                M. Hopkins, II
            Vice
                President and Chief Accounting Officer (principal financial officer
                and
                principal accounting officer)/s/
                Alan F. Crown
              Alan
                F. Crown
            Director/s/
                Leonard J. Kujawa
              Leonard
                J. Kujawa
            Director/s/
                Joseph H. Vipperman
              
              Joseph
                H. Vipperman
            DirectorJames
                F. Wilson
            Director