<PAGE>
<PAGE>   1

                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.  20549

                                       Form 10-Q


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


For Quarter Ended December 31, 1996            Commission File Number 0-10610
                  -----------------                                   -------

                             BLUE DIAMOND COAL COMPANY                        
------------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)


       Delaware                                                62-0133200
-------------------------------                         ----------------------
(State or other jurisdiction of                            (I.R.S. Employer   
 incorporation or organization)                         Identification Number)


P. O. Box 59015, 341 Troy Circle, Knoxville, TN               37950-9015      
-----------------------------------------------         ----------------------
   (Address of principal executive offices)                    (Zip Code)     


Registrant's telephone number, including area code           (423) 588-8511   
                                                        ----------------------


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

                                                       YES    X       NO    
                                                            -----       -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1996.



              Class                           Outstanding at December 31, 1996
------------------------------------          --------------------------------
     Common Stock, $1 Par Value                         935,220 Shares
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                               BLUE DIAMOND COAL COMPANY

                                         INDEX

                                                                         Page 
PART I.  FINANCIAL INFORMATION                                          Number
                                                                        ------
     Item 1.   Financial Statements

               Consolidated Condensed Balance Sheet
               December 31, 1996 (Unaudited) and 
               March 31, 1996 (Audited)......................................3

               Consolidated Condensed Statement of
               Income (Unaudited) - Three-Months and Nine-Months
               Ended December 31, 1996 and 1995..............................5

               Consolidated Condensed Statements of
               Changes in Cash Flows (Unaudited)
               Nine-Months Ended December 31, 1996 and 1995..................6

               Notes to Consolidated Condensed
               Financial Statements..........................................7


     Item 2.   Management's Discussion and Analysis of Results
               of Operations and Financial Condition.........................9


PART II.  OTHER INFORMATION

     Item 6.   Exhibits and Reports on Form 8-K.............................10

<PAGE>
<PAGE>   3
                             PART I.  FINANCIAL INFORMATION
                       BLUE DIAMOND COAL COMPANY AND SUBSIDIARIES
                          CONSOLIDATED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                 December 31        March 31
                                                      1996            1996
                                                 ------------     -----------
<S>                                               (Unaudited)
ASSETS
CURRENT ASSETS                                   <C>               <C>
  Cash                                           $    400,024     $    304,815
  Short Term Investments                                    0           83,126
  Accounts and Notes Receivable                     8,811,178       10,854,635
  Inventories - Coal                                2,626,239        1,967,780
  Inventories - Supplies                            1,910,184        1,814,562
  Other Current Assets                                355,344          575,330
                                                  -----------      -----------
    TOTAL CURRENT ASSETS                           14,102,969       15,600,248

PROPERTY, PLANT AND EQUIPMENT                     116,023,840      115,162,832
  Less:  Accumulated Depreciation & Depletion      49,372,197       46,343,339
                                                  -----------      -----------
    NET PROPERTY, PLANT & EQUIPMENT                66,651,643       68,819,493

Investments                                           515,966          515,966
Other Assets                                        1,646,306        1,909,854
                                                  -----------      -----------
    TOTAL ASSETS                                  $82,916,884      $86,845,561
                                                   ==========       ==========


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Notes Payable                                  $          0     $  1,201,630
  Current Notes Payable and Capital Leases          2,234,696        2,878,279
  Accounts Payable and Accrued Expenses             9,976,044        9,354,901
  Current Portion of Reorganization Liabilities       428,183          463,174
                                                  -----------      -----------
    TOTAL CURRENT LIABILITIES                      12,638,923       13,897,984

LONG-TERM LIABILITIES
  Long-term Debt                                    8,545,144       11,080,585
  Reserve for Health Care & Workers' Compensation  23,978,360       26,335,770
  Reorganization Liabilities                        2,547,981        2,856,287
  Deferred Income Taxes                             1,569,500        1,569,500
  Other Liabilities                                   747,205          780,481
                                                   ----------       ----------
    TOTAL LONG-TERM LIABILITIES                    37,388,190       42,622,623
<PAGE>
<PAGE>   4


STOCKHOLDERS' EQUITY
  Common Stock - $1 Par Value, 1,000,000
    Shares Authorized, 961,220 Issued 
    (Including Treasury Stock)                        961,132         961,132
  Additional Paid-In-Capital                       24,305,480      24,305,480
  Treasury Stock-25,912 Shares at 12/31 & 3/31     (2,197,420)     (2,197,420)
  Retained Earnings                                 9,820,579       7,255,762
                                                  -----------     -----------
    TOTAL STOCKHOLDERS' EQUITY                     32,889,771      30,324,954
                                                   ----------      ----------
    TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $82,916,884     $86,845,561
                                                   ==========      ==========
</TABLE>

NOTE:   The Balance Sheet at March 31, 1996 has been derived from the Audited
        Financial Statements of that date.

See Notes to Consolidated Condensed Financial Statements.


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<PAGE>   5
                      BLUE DIAMOND COAL COMPANY AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED STATEMENT OF INCOME
                                     UNAUDITED
<TABLE>
<CAPTION>
                         Three Months Ended Dec. 31  Nine Months Ended Dec. 31
                         --------------------------  -------------------------
                             1996         1995          1996         1995  
                         ------------  -----------   -----------  -----------
<S>                      <C>          <C>           <C>           <C>
REVENUES
 Net Product Sales        $22,029,064  $24,171,052   $68,159,660  $65,786,896
 Interest Income               22,101       31,567        66,948       56,105
 Gain (Loss) on Sale 
   of Fixed Assets                  0       12,030        24,000       33,012
                           ----------   ----------    ----------   ----------
   TOTAL REVENUES          22,051,165   24,214,649    68,250,608   65,876,013

COSTS AND EXPENSES
 Operating Expenses
   and Purchased Products  16,317,487   17,670,256    50,176,949   46,724,959
 Other Operating Charges    3,841,477    4,024,404    11,696,834   10,863,337
 Administrative, Selling &
  Transportation Expenses     377,803      400,000     1,307,699    1,355,000
 Interest Expense             793,401      972,526     2,494,336    3,032,817
 Other Expense                (47,941)      18,309         9,972       44,720
                            ----------   ----------    ----------   ----------
 TOTAL COSTS AND EXPENSES  21,282,227   23,085,495    65,685,790   62,020,833

Income Before Taxes           768,938    1,129,154     2,564,818    3,855,180
Income Tax Expense                  0            0             0            0
                            ----------   ----------    ----------   ----------
   NET INCOME             $   768,938  $ 1,129,154   $ 2,564,818  $ 3,855,180
                           ==========   ==========    ==========   ==========

Average Number of
 Common Shares Outstanding     935,220      935,220       935,220      935,220
                               =======      =======       =======      =======

PER SHARE OF COMMON STOCK:
Net Income Based on
 Average Shares Outstanding      $0.82        $1.21         $2.74        $4.12
                                  ====         ====          ====         ====

Cash Dividends Declared
  and Paid                       $0.00        $0.00         $0.00        $0.00
                                  ====         ====          ====         ====
</TABLE>

See Notes to Consolidated Condensed Financial Statements.<PAGE>
<PAGE>   6
                        BLUE DIAMOND COAL COMPANY AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CHANGE IN CASH FLOWS
                                         UNAUDITED
<TABLE>
<CAPTION>
                                              Nine-Months Ended December 31
                                              -----------------------------
                                                 1996              1995
<S>                                           ----------       ------------
OPERATING ACTIVITIES                          <C>              <C>
 Funds Provided (Used) from Operations,
   Adjusted for Depreciation and Gain on
   Sale of Fixed Assets                       $5,724,018        $7,059,006
 (Increase) Decrease in Accounts Receivables   2,043,457        (4,204,793)
 (Increase) Decrease in Inventories             (754,081)       (1,282,897)
 (Increase) Decrease in Prepaid Assets           566,658            (8,544)
 (Decrease) Increase in Accounts Payable      (2,112,840)         (320,912)
 Other Changes from Operations                         0           476,331
                                               ---------        ----------
NET CASH FLOW PROVIDED (USED)
 BY OPERATIONS ACTIVITIES                     $5,467,212         1,718,191

FINANCING ACTIVITIES
 Issuance (Reduction) of Short-Term Debt-Net  (1,201,630)          320,025
 Issuance (Reduction) of Long-Term Debt-Net   (3,002,337)       (1,974,326)
 Addition (Reduction) in Capital Lease-Net      (176,686)         (164,775)
                                               ---------        ----------
  CASH PROVIDED (USED)
   BY FINANCING ACTIVITIES                    (4,380,653)       (1,819,076)

INVESTMENT ACTIVITIES
 Expenditures for Property, Plant
   and Equipment                                (991,350)         (600,548)
 (Increase) Reduction of
   Employee Notes Receivable                           0            15,675
                                               ---------        ----------
  NET CASH USED BY INVESTING ACTIVITIES         (991,350)         (584,873)
                                               ---------        ----------

NET INCREASE (DECREASE) IN CASH
 & CASH EQUIVALENTS                               95,209          (685,758)
                                               ---------        ----------
Cash and Cash Equivalents
 at Beginning of Period                          304,815           694,811
                                               ---------        ----------
  CASH AND CASH EQUIVALENTS AT END OF PERIOD  $  400,024       $     9,053
                                               =========        ==========
</TABLE>

See Notes to Consolidated Condensed Financial Statements.

<PAGE>
<PAGE>  7

                BLUE DIAMOND COAL COMPANY AND SUBSIDIARIES
           NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                             December 31, 1996


NOTE A -- FINANCIAL STATEMENTS

In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to
present fairly its financial position as of December 31, 1996 and
March 31, 1996, the results of operations for the three-month and
nine-month periods ended December 31, 1996 and 1995 and cash flows for
the nine-month periods ended December 31, 1996 and 1995.

While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
condensed financial statements be read in conjunction with the
financial statements and related notes included in the Company's
March 31, 1996 Annual Report on Form 10-K.


NOTE B -- INCOME TAXES

Due to the Company's net operating loss and investment tax credit
carry-forward position, no provision for federal income tax is
required for the current fiscal year.


NOTE C -- CHAPTER 11 REORGANIZATION PROCEEDINGS

On May 17, 1991, Blue Diamond Coal Company (the "Company") filed a
voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Tennessee (the "Bankruptcy Court").  The filing had been
preceded by a merger of all significant wholly-owned subsidiaries into
the Company.  This filing was precipitated by cash flow problems
resulting from extensive capital expenditures for new coal processing
facilities coupled with operating losses at existing mines.

As Debtor-in-Possession, the Company continued to operate its business
and formulated a business plan for future operations.  This plan
formed the basis for the Company's proposed plan of reorganization
that was intended to enable the Company to satisfy its pre-petition
obligations and emerge from Chapter 11.  This proposed plan of
reorganization developed into the Fourth Amended Plan of
Reorganization dated December 10, 1992 (as implemented and approved by
the Confirmation Order, the "Plan of Reorganization").  On December
11, 1992, the Bankruptcy Court entered an order confirming the Plan of
Reorganization.  On April 6, 1995, the Bankruptcy Court entered a
final decree that the Company's bankruptcy case was closed.
<PAGE>
<PAGE>   8


NOTE D -- WORKERS' COMPENSATION LIABILITY

In conjunction with the Company's Reorganization Plan, the Office of
Workers' Compensation Programs of the United States Department of
Labor (DOL) has assumed responsibility for the Company's pre-June,
1991 federal black lung claims.  The Company is responsible for
payment of claims and expenses related to pre-petition Kentucky
Workers' compensation liabilities.  The amount reserved for future
Kentucky Workers' Compensation claims is $8,561,400 at December 31,
1996.  Effective June 19, 1991, the Company obtained and continues to
carry commercial insurance to cover its current State and Federal
workers' compensation liabilities.


NOTE E -- UMWA RETIREE HEALTHCARE BENEFITS LIABILITY

During 1994, the Company received notice from the Social Security
Administration (SSA) claiming the Company is responsible for health
care and death benefit premiums for certain retired coal miners who
were members of the United Mine Workers of America (UMWA) and their
beneficiaries pursuant to the Coal Industry Retiree Health Benefit Act
of 1992 (the Coal Act).  The recorded reserve for payments was
$17,502,200 at December 31, 1996.


NOTE F -- CONTINGENT GAINS

The Company has not had a contractual relationship with the UMWA since
1964 and never bargained for nor guaranteed any health care or death
benefits.  A lawsuit was filed which challenges the constitutionality
of the Coal Act, but the Federal District Court ruled against the
Company.  During 1996, the United States Court of Appeals upheld the
Federal District Court decision.  A petition for rehearing was filed
and denied.  A Petition for Writ of Certiorari, filed in September
with the Supreme Court of the United States, was denied on January 6,
1997.  This denial ended the Company's challenge to the
constitutionality of the Coal Act.

The Company has also made a request to the Social Security
Administration for relief based on an administrative review of
approximately one-third of the assigned individuals.  This matter
could cause future payments under the Coal Act to be reduced
significantly, although subsequent assignments of individuals to the
Company may offset this relief.  The ultimate outcome of these review
proceedings is uncertain.




<PAGE>
<PAGE>   9

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

Results of the Company's coal operations for the three-month and
nine-month periods ended December 31, 1996 and 1995 are summarized as
follows:

<TABLE>
<CAPTION>
                             Three-Months Ended Dec. 30      Nine-Months Ended Dec. 30
                             --------------------------      -------------------------
                                 1996         1995              1996         1995
                             -----------   ----------       -----------  -----------
<S>                          <C>        <C>                <C>          <C>
Net Product sales            $22,029,064  $24,171,052       $68,159,660  $65,786,896
Operating expenses and
  purchased products          16,317,487   17,670,256        50,176,949   46,724,959
Other operating expense        3,841,477    4,024,404        11,696,834   10,863,337
Adm. Selling and
 Transportation expenses         377,803      400,000         1,307,699    1,355,000
                              ----------   ----------        ----------   ----------

 Total Expenses               20,536,767   22,094,660        63,181,482   58,943,296
                              ----------   ----------        ----------   ----------
INCOME FROM COAL
 OPERATIONS                  $ 1,492,297  $ 2,076,392       $ 4,978,178  $ 6,843,600
                              ==========   ==========        ==========   ==========

Tons sold                        778,287      821,320         2,345,388    2,191,341

Sales per ton                     $28.31       $29.43            $29.06       $30.02
Cost of sales per ton              26.39        26.90             26.94        26.90
                                   -----        -----             -----        -----
 Margin per ton                   $ 1.92       $ 2.53            $ 2.12       $ 3.12
                                   =====        =====             =====        =====

</TABLE>


The Company's coal operations have generated $929,268, $1,644,360 and
$1,492,300 during the first, second and third quarters, respectively, of
the current fiscal year.  These results compare with $2,340,400,
$2,426,800 and $2,076,400 for the same quarters of the preceding fiscal
year.  Annual shipped tons are anticipated to increase to approximately
3,109,000 from last year's shipments of 3,008,000.  Reduced sales prices
per ton reflect lower long-term and spot market prices.  The Company and
its contract producers have been able to obtain Workers' Compensation
coverage in the voluntary market at favorable rates.  Recent Kentucky
Workers' Compensation Reform Legislation should further reduce these
costs.
<PAGE>
<PAGE>   10

Interest expense accrued for the nine months ended December 31, 1996 and
1995 was as follows:

<TABLE>
<CAPTION>
                                                              Increase
                                        1996         1995    (Decrease)
                                     ---------   ----------   --------
<S>                                 <C>          <C>         <C>

Kentucky Workers' Compensation       $  470,179   $  426,500  $  43,679
Coal Act Healthcare                     962,053    1,204,800   (242,747)
Bank and Reorganization Liabilities   1,062,104    1,401,500   (339,396)
                                      ---------    ---------    -------
                                     $2,494,336   $3,032,800  $(538,464)
                                      =========    =========    =======

</TABLE>

Continuing the trend from the first two quarters, less debt and lower
interest rates reduced bank debt interest, reduced reserves lowered Coal
Act interest and increased reserves increased Workers' Compensation
interest.


FINANCIAL CONDITION AND LIQUIDITY

The Company's working capital ratio was 1.12 at December 31, 1996,
compared to 1.12 at March 31st.  Capital expenditures of $991,400 were in
line with projections.  Long-term debt has been reduced by $3,000,000
during the first nine months of this year.  A renegotiation of the
Company's bank debt has resulted in improved terms and interest rates. 
Coal Act premium payments ($2,412,000) and Kentucky Workers' Compensation
payments ($1,235,200) continue to challenge the Company's liquidity.



                              PART II.  OTHER INFORMATION


ITEM 6.  Exhibits and Reports on Form 8-K

    (a)   Exhibits - Exhibit 27, Financial Data Schedule

    (b)   Reports on Form 8-K - No current reports were filed during the
          quarter ended December 31, 1996.

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<PAGE>   11

                                      SIGNATURES


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




                                             BLUE DIAMOND COAL COMPANY
                                           -----------------------------
                                                    Registrant



Date:  February 12, 1997                           Ted B. Helms
                                           -----------------------------
                                                   Ted B. Helms
                                                    President



Date:  February 12, 1997                          W. S. Lyon, III         
                                           -----------------------------
                                                  W. S. Lyon, III
                                                    Treasurer