UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**


(Mark
      One)




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





For
      the
      quarterly period ended September 30, 2007




OR





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





For
      the
      transition period from __________________ to __________________





Commission
      File Number  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 1600Richmond,
                Virginia
            
            23219(Address
                of principal executive offices)
            
            (Zip
                Code)





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





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


Yes    ý             No    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 filer  o
            Accelerated
                filer   ý
            Non-accelerated
                filer  o








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


YesoNoý





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 October
      15, 2007 was 16,745,083.




















**FORM
      10-Q INDEX**







Page**PART
                I                     FINANCIAL
                INFORMATION**
            3**Item
                1.**
            **Financial
                Statements.**Condensed
                Consolidated Balance Sheets as of September 30,
                2007 and December 31, 2006
            3Condensed
                Consolidated Statements of Operations for the three
                months ended
              September
                30, 2007 and 2006
            5Condensed
                Consolidated Statements of Operations for the nine
                months ended
              September
                30, 2007 and 2006
            6Condensed
                Consolidated Statements of Changes in
                Shareholders’ Equity and
              Comprehensive
                Loss for the nine months ended September 30,
                2007 and the year year ended
              December
                31, 2006
            7Condensed
                Consolidated Statements of Cash Flows for the
                nine months ended
              September
                30, 2007 and 2006
            8Notes
                to Condensed Consolidated Financial
                Statements
            9**Item
                2.**
            **Management’s
                Discussion and Analysis ofFinancial Condition and
                Results of Operations.**
            19**Item
                3.**
            **Quantitative
                and Qualitative Disclosure about Market
                Risk.**
            32**Item
                4.**
            **Controls
                and Procedures.**
            33**PART
                II****OTHER
                INFORMATION**
            34**Item
                1.**
            **Legal
                Proceedings.**
            34**Item
                1A.**
            **Risk
                Factors.**
            34**Item 2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.**
            45**Item
                3.**
            **Defaults
                Upon Senior
                Securities.**
            46**Item 4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**
            46**Item
                5.**
            **Other
                Information.**
            46**Item
                6.**
            **Exhibits.**
            46**SIGNATURES**
            47Certifications
                pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
                2002











-2-








**PART
      I                               FINANCIALINFORMATION**





**IT****EM
      1.****FINANCIALSTATEMENTS**





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Balance Sheets


(in
      thousands)





**September
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006****Assets**
              
              (Unaudited)Current
                  assets:Cash
              
              $
              1,095
              
              
              
              1,807Receivables:Trade
              
              
              48,144
              
              
              
              47,383Other
              
              
              808
              
              
              
              853Total
                  receivables
              
              
              48,952
              
              
              
              48,236Inventories:Coal
              
              
              9,962
              
              
              
              5,512Materials
                  and supplies
              
              
              8,371
              
              
              
              7,448Total
                  inventories
              
              
              18,333
              
              
              
              12,960Prepaid
                  royalties
              
              
              3,878
              
              
              
              3,851Other
                  current assets
              
              
              5,283
              
              
              
              4,288Total
                  current assets
              
              
              77,541
              
              
              
              71,142Property,
                  plant, and equipment, at cost:Land
              
              
              5,762
              
              
              
              5,719Mineral
                  rights
              
              
              191,143
              
              
              
              190,346Buildings,
                  machinery and equipment
              
              
              279,418
              
              
              
              264,551Mine
                  development costs
              
              
              28,564
              
              
              
              21,727Construction-in-progress
              
              
              189
              
              
              
              189Total
                  property, plant, and equipment
              
              
              505,076
              
              
              
              482,532Less
                  accumulated depreciation, depletion, and amortization
              
              
              181,352
              
              
              
              144,752Property,
                  plant and equipment, net
              
              
              323,724
              
              
              
              337,780Goodwill
              
              
              26,492
              
              
              
              26,492Other
                  assets
              
              
              20,562
              
              
              
              15,840Total
                  assets
              
              $
              448,319
              
              
              
              451,254





See
      accompanying notes to condensed consolidated financial statements








-3-





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





Condensed
      Consolidated Balance Sheets


(in
      thousands)




**September
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006****Liabilities
                  and Shareholders' Equity**
              
              (Unaudited)Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              1,600
              
              
              
              -Accounts
                  payable
              
              
              45,282
              
              
              
              42,065Accrued
                  salaries, wages, and employee benefits
              
              
              6,861
              
              
              
              4,733Workers'
                  compensation benefits
              
              
              9,300
              
              
              
              9,300Black
                  lung benefits
              
              
              2,630
              
              
              
              2,630Accrued
                  taxes
              
              
              4,956
              
              
              
              6,028Other
                  current liabilities
              
              
              12,367
              
              
              
              8,975Total
                  current liabilities
              
              
              82,996
              
              
              
              73,731Long-term
                  debt, less current maturities (note 2)
              
              
              202,644
              
              
              
              167,493Other
                  liabilities:Noncurrent
                  portion of workers' compensation benefits
              
              
              47,165
              
              
              
              44,134Noncurrent
                  portion of black lung benefits
              
              
              25,370
              
              
              
              24,136Pension
                  obligations
              
              
              1,396
              
              
              
              13,011Asset
                  retirement obligations
              
              
              30,942
              
              
              
              27,394Deferred
                  income taxes
              
              
              -
              
              
              
              13,160Other
              
              
              1,827
              
              
              
              1,798Total
                  liabilities
              
              
              392,340
              
              
              
              364,857Commitments
                  and contingencies (note 4)Shareholders'
                  equityPreferred
                  Stock, $1.00 par value.  Authorized 10,000,000
                  shares
              
              
              -
              
              
              
              -Common
                  stock, $.01 par value.  Authorized 100,000,000
                  shares;issued
                  and outstanding  16,745,083 and 16,669,376,
                  respectively
              
              
              167
              
              
              
              167Paid-in-capital
              
              
              126,168
              
              
              
              124,191Accumulated
                  deficit
              
              
              (73,268
              )
              
              
              (37,704
              )Accumulated
                  other comprehensive income (loss)
              
              
              2,912
              
              
              
              (257
              )Total
                  shareholders' equity
              
              
              55,979
              
              
              
              86,397Total
                  liabilities and shareholders' equity
              
              $
              448,319
              
              
              
              451,254




See
      accompanying notes to condensed consolidated financial statements





-4-





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Statements of Operations


(in
      thousands, except per share data)


(unaudited)











**Three
                  Months**
              
              
              **Three
                  Months****Ended**
              
              
              **Ended****September
                  30,**
                **2007**
              
              
              **September
                  30,**
                **2006**Revenues
              
              $
              130,052
              
              
              
              138,107Cost
                  of sales:Cost
                  of coal sold
              
              
              119,251
              
              
              
              121,389Gain
                  on curtailment of pension plan
              
              
              (6,091
              )
              
              
              -Depreciation,
                  depletion and amortization
              
              
              17,358
              
              
              
              19,220Total
                  cost of sales
              
              
              130,518
              
              
              
              140,609Gross
                  profit (loss)
              
              
              (466
              )
              
              
              (2,502
              )Selling,
                  general and administrative expenses
              
              
              8,062
              
              
              
              7,959Total
                  operating loss
              
              
              (8,528
              )
              
              
              (10,461
              )Interest
                  expense (note 2)
              
              
              5,250
              
              
              
              4,221Interest
                  income
              
              
              (81
              )
              
              
              (177
              )Miscellaneous
                  income, net
              
              
              (84
              )
              
              
              (191
              )Total
                  other expense, net
              
              
              5,085
              
              
              
              3,853Loss
                  before income taxes
              
              
              (13,613
              )
              
              
              (14,314
              )Income
                  tax benefit
              
              
              (3,917
              )
              
              
              (5,900
              )Net
                  loss
              
              $
              (9,696
              )
              
              
              (8,414
              )Loss
                  per common share (note 5)Basic
                  loss per common share
              
              $
              (0.60
              )
              
              
              (0.53
              )Shares
                  used to calculate basic loss per share
              
              
              16,044
              
              
              
              15,899Diluted
                  loss per common share
              
              $
              (0.60
              )
              
              
              (0.53
              )Shares
                  used to calculate diluted loss per share
              
              
              16,044
              
              
              
              15,899See
                  accompanying notes to condensed consolidated financial
                  statements











-5-





CondensedConsolidated
      Statements of Operations


(in
      thousands, except per share data)


(unaudited)











**Nine
                  Months**
              
              
              **Nine
                  Months****Ended**
              
              
              **Ended****September
                  30,**
                **2007**
              
              
              **September
                  30,**
                **2006**Revenues
              
              $
              394,423
              
              
              
              424,959Cost
                  of sales:Cost
                  of coal sold
              
              
              355,295
              
              
              
              361,766Gain
                  on curtailment of pension plan
              
              
              (6,091
              )
              
              
              -Depreciation,
                  depletion and amortization
              
              
              54,621
              
              
              
              55,124Total
                  cost of sales
              
              
              403,825
              
              
              
              416,890Gross
                  profit (loss)
              
              
              (9,402
              )
              
              
              8,069Selling,
                  general and administrative expenses
              
              
              23,225
              
              
              
              21,723Total
                  operating loss
              
              
              (32,627
              )
              
              
              (13,654
              )Interest
                  expense (note 2)
              
              
              14,910
              
              
              
              12,117Interest
                  income
              
              
              (403
              )
              
              
              (279
              )Charges
                  associated with repayment of debt
              
              
              2,421
              
              
              
              -Miscellaneous
                  income, net
              
              
              (371
              )
              
              
              (628
              )Total
                  other expense, net
              
              
              16,557
              
              
              
              11,210Loss
                  before income taxes
              
              
              (49,184
              )
              
              
              (24,864
              )Income
                  tax benefit
              
              
              (13,620
              )
              
              
              (14,487
              )Net
                  loss
              
              $
              (35,564
              )
              
              
              (10,377
              )Loss
                  per common share (note 5)Basic
                  loss per common share
              
              $
              (2.23
              )
              
              
              (0.66
              )Shares
                  used to calculate basic loss per share
              
              
              15,983
              
              
              
              15,829Diluted
                  loss per common share
              
              $
              (2.23
              )
              
              
              (0.66
              )Shares
                  used to calculate diluted loss per share
              
              
              15,983
              
              
              
              15,829See
                  accompanying notes to condensed consolidated financial
                  statements





-6-

















**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**


CondensedConsolidated
      Statements of Changes in
      Shareholders’


Equity
      and Comprehensive Loss


(in
      thousands)


(unaudited)





**Common**
                **stock
                  shares**
              
              
              **Common**
                **stock
                  par**
                **value**
              
              
              **Paid-in-**
                **capital**
              
              
              **Deferred**
                **stock
                  based compensation**
              
              
              **Accumulated**
                **deficit**
              
              
              **Accumulated
                  other comprehensive**
                **income
                  (loss)**
              
              
              **Total****Balances,
                  December 31, 2005**
              
              
              16,653
              
              
              $
              167
              
              
              
              135,923
              
              
              
              (13,226
              )
              
              
              (11,187
              )
              
              
              (410
              )
              
              
              111,267Adoption
                  of SFAS 123R
              
              
              -
              
              
              
              -
              
              
              
              (13,226
              )
              
              
              13,226
              
              
              
              -
              
              
              
              -
              
              
              
              -Adoption
                  of SFAS 158Pension
                  plan
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (348
              )
              
              
              (2,650
              )
              
              
              (2,998
              )Black
                  lung obligation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,324
              
              
              
              1,324Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (26,169
              )
              
              
              -
              
              
              
              (26,169
              )Pension
                  liability adjustment, net
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,479
              
              
              
              1,479Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (24,690
              )Issuance
                    of restricted stock awards, netof
                    forfeitures
              
              
              99
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
                  of shares for tax withholding
              
              
              (83
              )
              
              
              (1
              )
              
              
              (2,350
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,351
              )Stock
                  based compensation
              
              
              -
              
              
              
              -
              
              
              
              3,845
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,845**Balances,
                  December 31, 2006**
              
              
              16,669
              
              
              
              167
              
              
              
              124,191
              
              
              
              -
              
              
              
              (37,704
              )
              
              
              (257
              )
              
              
              86,397Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (35,564
              )
              
              
              -
              
              
              
              (35,564
              )Pension
                  liability adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,461
              
              
              
              3,461Amortization
                  of excess black lung liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (135
              )
              
              
              (135
              )Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (157
              )
              
              
              (157
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (35,721
              )Issuance
                    of restricted stock awards, netof
                    forfeitures
              
              
              136
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
                  of shares for tax withholding
              
              
              (60
              )
              
              
              (1
              )
              
              
              (878
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (879
              )Stock
                  based compensation
              
              
              -
              
              
              
              -
              
              
              
              2,856
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,856**Balances,
                  September 30, 2007**
              
              
              16,745
              
              
              $
              167
              
              
              
              126,168
              
              
              
              -
              
              
              
              (73,268
              )
              
              
              2,912
              
              
              
              55,979





See
      accompanying notes to condensed consolidated financial statements











-7-














**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Statements of Cash Flows


(in
      thousands)


(unaudited)





**Nine
                    Months**
                
                
                **Nine
                    Months****Ended**
                
                
                **Ended****September
                    30, 2007**
                
                
                **September
                    30, 2006**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (35,564
                )
                
                
                (10,377
                )Adjustments
                    to reconcile net income to net cash provided byoperating
                    activitiesDepreciation,
                    depletion, and amortization
                
                
                54,621
                
                
                
                55,124Accretion
                    of asset retirement obligations
                
                
                1,559
                
                
                
                1,556Amortization
                    of deferred financing costs
                
                
                1,172
                
                
                
                957Amortization
                    of deferred stock-based compensation
                
                
                2,856
                
                
                
                2,607Deferred
                    income tax benefit
                
                
                (13,317
                )
                
                
                (12,054
                )(Gain)/loss
                    on sale or disposal of property, plant, and equipment
                
                
                21
                
                
                
                (208
                )Gain
                    on curtailment of pension plan
                
                
                (6,091
                )
                
                
                -Write-off
                    of deferred financing costs
                
                
                2,421
                
                
                
                -Changes
                    in operating assets and liabilities:Receivables
                
                
                (716
                )
                
                
                (10,373
                )Inventories
                
                
                (5,373
                )
                
                
                (1,903
                )Prepaid
                    royalties and other current assets
                
                
                (1,222
                )
                
                
                (2,357
                )Other
                    assets
                
                
                (3,666
                )
                
                
                (3,989
                )Accounts
                    payable
                
                
                3,217
                
                
                
                3,795Accrued
                    salaries, wages, and employee benefits
                
                
                2,128
                
                
                
                1,367Accrued
                    taxes
                
                
                (1,951
                )
                
                
                (1,700
                )Other
                    current liabilities
                
                
                3,519
                
                
                
                4,717Workers'
                    compensation benefits
                
                
                3,031
                
                
                
                187Black
                    lung benefits
                
                
                1,099
                
                
                
                1,186Pension
                    obligations
                
                
                (2,063
                )
                
                
                (2,483
                )Asset
                    retirement obligation
                
                
                (1,342
                )
                
                
                (744
                )Other
                    liabilities
                
                
                29
                
                
                
                852Net
                    cash provided by operating activities
                
                
                4,368
                
                
                
                26,160Cash
                    flows from investing activities:Additions
                    to property, plant, and equipment
                
                
                (36,945
                )
                
                
                (51,094
                )Proceeds
                    from sale of property, plant, and equipment
                
                
                15
                
                
                
                6,676Net
                    cash used in investing activities
                
                
                (36,930
                )
                
                
                (44,418
                )Cash
                    flows from financing activities:Proceeds
                    from borrowings under long-term debt
                
                
                40,000
                
                
                
                -Repayment
                    of long-term debt
                
                
                (800
                )
                
                
                -Payments
                    on Revolver
                
                
                (24,493
                )
                
                
                (24,107
                )Proceeds
                    from borrowings on Revolver
                
                
                22,044
                
                
                
                35,500Principal
                    payments under capital lease obligations
                
                
                (252
                )
                
                
                (258
                )Capitalized
                    deferred financing costs
                
                
                (4,649
                )
                
                
                -Net
                    cash provided (used) by financing activities
                
                
                31,850
                
                
                
                11,135Decrease
                    in cash
                
                
                (712
                )
                
                
                (7,123
                )Cash
                    at beginning of period
                
                
                1,807
                
                
                
                8,936Cash
                    at end of period
                
                $
                1,095
                
                
                
                1,813











See
      accompanying notes to condensed consolidated financial statements








-8-








**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





Notesto
      Condensed Consolidated Financial Statements





(Unaudited)







**(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
      through five operating complexes located throughout eastern Kentucky and one
      in
      southern Indiana. Substantially all coal sales and accounts receivable relate
      to
      the electric utility and industrial markets.




The
      interim condensed consolidated financial statements include the accounts of
      the
      Company. The interim condensed consolidated financial statements of James River
      Coal Company and subsidiaries presented in this report are unaudited. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. The results of operations for any interim period are not
      necessarily indicative of the results to be expected for the full year. These
      consolidated financial statements should be read in conjunction with the
      consolidated financial statements and the notes thereto for the year ended
      December 31, 2006. The balances presented as of or for the year ended December
      31, 2006 are derived from the Company’s audited consolidated financial
      statements.




Management
      of the Company has made a number of estimates and assumptions relating to the
      reporting of assets, liabilities, revenues and expenses and the disclosure
      of
      contingent assets and liabilities in order to prepare these condensed
      consolidated financial statements in conformity with U.S. generally accepted
      accounting principles. 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. In the opinion of management, the accompanying unaudited condensed
      consolidated financial statements contain all adjustments, consisting of normal
      recurring accruals, which are necessary to present fairly the consolidated
      financial position of the Company and the consolidated results of its operations
      and cash flows for all periods presented.







***Recent
      Accounting Pronouncements***




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which
      clarifies the accounting and disclosure for uncertainty in tax positions, as
      defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. The Company is subject to the provisions of FIN 48 as
      of January 1, 2007, and has analyzed filing positions in all of the federal
      and state jurisdictions where it is required to file income tax returns, as
      well
      as all open tax years in these jurisdictions.  The Company has
      identified its federal tax return and its state tax returns in Virginia,
      Kentucky and Indiana as “major” tax jurisdictions, as defined. The only periods
      subject to examination for the Company’s federal return are the 2004 through
      2006 tax years. The periods subject to examination for the Company’s state
      returns in Virginia are years 2003 through 2006; Kentucky are years 2002 through
      2006 and Indiana are years 2004 through 2006. The Company believes that its
      income tax filing positions and deductions will be sustained on audit and does
      not anticipate any adjustments that will result in a material change to its
      financial position.  Therefore, no reserves for uncertain
      income tax positions have been recorded pursuant to FIN 48. In
      addition, the Company did not record a cumulative effect adjustment related
      to
      the adoption of FIN 48.





The
      Company’s policy for recording interest and penalties associated income taxes is
      to record such items as a component of income taxes in the condensed
      consolidated statement of operations.








-9-






**(2)**
            **Long
                Term Debt and Interest
                Expense**





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





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Senior
                Notes
            
            $
            150,000
            
            
            $
            150,000Term
                Facility
            
            
            39,200
            
            
            
            -Senior
                Secured Credit Facility – Revolver
            
            
            15,044
            
            
            
            -Prior
                Senior Secured Credit Facility – Revolver
            
            
            -
            
            
            
            17,493Total
                long-term debt
            
            
            204,244
            
            
            
            167,493Less
                amounts classified as current
            
            
            1,600
            
            
            
            -Total
                long-term debt, less current maturities
            
            $
            202,644
            
            
            $
            167,493




***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.  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 Facilities***




On
      February 26, 2007, the Company entered into a $35.0 million Revolving Credit
      Agreement (the Revolver) and a $100.0 million Term Credit Agreement
      (collectively the Facilities). The Term Credit Agreement consists of a $40.0
      million term facility (the Term Facility) and a $60.0 million letter of credit
      facility (the Letter of Credit Facility). A portion of the proceeds from the
      Facilities were used to repay the Prior Revolver and the Prior Letter of Credit
      Facilities (defined below) and to pay fees and expenses associated with the
      Facilities. The remaining proceeds are available for working capital and other
      general corporate purposes. 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 supports the issuance of up to $60
      million of letters of credit by the Company. The Company entered into an
      Amendment and Waiver to the Senior Secured Credit Facility on August 7,
      2007 (the Credit Amendment).  The Credit Amendment waived defaults under
      the Facilities as of June 30, 2007, modified certain existing financial
      covenants in the Facilities and added a minimum liquidity threshold. The Credit
      Amendment also increased the interest rates on the Facilities by 0.75%,
      prohibited prepayments of the Term Loan for a period of one year and exempted
      up
      to $40 million of cash proceeds from an equity offering from mandatory
      prepayment requirements.  The following is a summary of significant terms
      of the Facilities, as amended.








**Revolver**
            
            **Term
                Facility**
            
            **Letter
                of Credit**
              **Facility**Maturity
            
            February
                2012
            
            February
                2013
            
            February
                2013Interest/Usage
                Rate
            
            Company’s
                option of Base Rate(a)
                plus 1.75%
                or LIBOR plus 2.75% per annum
            
            Company’s
                option of Base Rate(a)
                plus 3.75%
                or LIBOR plus 4.75% per annum
            
            4.75%
                per annumMaximum
                Availability
            
            Lesser
                of $35.0 million and the borrowing base (b)
            
            $39.2
                million as of September 30, 2007.
            
            $60.0
                millionPeriodic
                Principal Payments
            
            None
            
            $400,000
                is due quarterly.
            
            Not
                applicable




(a)
            Base
                rate is the higher of (1) the Federal Fund Rate plus 0.5% and (2)
                the
                prime rate.








-10-








(b)
            The
                Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
                receivable plus the lesser of (1) up to 60% of eligible inventory
                and (2)
                up to 85% of the net orderly liquidation value of eligible inventory;
                minus reserve from time to time set by administrative
                agent.





The
      Revolver provides that the Company can use up to $10.0 million of the Revolver
      availability to issue letters of credit. The Revolver provides for a 2.75%
      fee
      on any outstanding letter of credits issued under the Revolver and a 0.5% fee
      on
      the unused portion of the Revolver. The Facilities require certain mandatory
      prepayments from certain asset sales, incurrence of indebtedness and excess
      cash
      flow. The Facilities include financial covenants that require the Company to
      maintain a minimum EBITDA and a maximum leverage ratio and limit capital
      expenditures, each as defined by the agreement. The Facilities are secured
      by
      substantially all of the Company’s assets.




As
      of
      September 30, 2007, $9.9 million of the Revolver is available to the
      Company.  The Company was in compliance with all of the financial covenants
      under the Facilities and the Senior Notes as of September 30, 2007.





***Interest
      Expense and Other***





During
      the three and nine months ended September 30, 2007, the Company paid
      approximately $1.2 million and $10.0 million, respectively, in
      interest.  During the three and nine months ended September 30, 2006,
      the Company paid $0.3 million and $7.5 million, respectively, in
      interest.





***Prior
      Senior Secured Credit Facility***




As
      discussed above, all amounts outstanding under the Company’s Prior Senior
      Secured Credit Facility were repaid with proceeds from the Term Facility on
      February 26, 2007. The Prior Senior Secured Credit Facility consisted of a
      $25.0
      million revolving credit facility (the Prior Revolver) and a $75.0 million
      letter of credit facility (the Prior Letter of Credit Facility).  The
      Company wrote off $2.4 million of financing charges in connection with the
      repayment of the Prior Senior Secured Credit Facility. The write off of the
      financing charges is classified as charges associated with repayment of debt
      in
      the accompanying condensed consolidated statements of operations.








**(3)**
            **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 20%
      or
      more of the Company’s outstanding common stock.




In
      the
      event that the Company is acquired in a merger or other business combination
      transaction or 50% or more of the Company’s consolidated assets or earning power
      is sold after a person or group has become an Acquiring Person, each holder
      of a
      Right, other than the Rights beneficially owned by the Acquiring Person (which
      will thereafter be void), will receive, upon the exercise of the Right, that
      number of shares of common stock of the acquiring company which at the time
      of
      such transaction will have a market value of two times the exercise price of
      the
      Right.  In the event that any person becomes an Acquiring Person, each
      Right holder, other than the Acquiring Person (whose Rights will become void),
      will have the right to receive upon exercise that number of shares of common
      stock having a market value of two times the exercise price of the
      Right.




The
      rights will expire May 25, 2014, unless that expiration date is extended. The
      Board of Directors may redeem the Rights at a price of $0.001 per Right at
      any
      time prior to the time that a person or group becomes an Acquiring
      Person.








-11-





***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
      September 30, 2007, there were 428,872 shares available under the Plan for
      future awards.





*Restricted
      Stock Awards*




Pursuant
      to the Plan certain directors and employees have been awarded restricted common
      stock with such shares vesting over three to five years. The related expense
      is
      amortized over the vesting period. Restricted shares subject to continuing
      vesting requirements are included in diluted shares outstanding.




*Stock
      Options Awards*




Pursuant
      to the Plan certain directors and employees have been awarded options to
      purchase common stock with such shares vesting ratably over three to five years.
      The Company’s stock options have been issued at exercise prices equal to or
      greater than the fair value of the Company’s stock at the date of
      grant.




The
      Company accounts for share-based compensation in accordance with SFAS No. 123R,
      “Share-Based Payment,” which was adopted January 1, 2006, utilizing the modified
      retrospective transition method. The following table highlights the expense
      related to share-based payment for the periods ended September 30 (in
      000’s):





**Three
                  months ended**
              
              
              **Nine
                  months ended****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Restricted
                  stock
              
              $
              894
              
              
              $
              870
              
              
              $
              2,617
              
              
              $
              2,433Stock
                  options
              
              
              84
              
              
              
              67
              
              
              
              239
              
              
              
              174Stock
                  based compensation
              
              $
              978
              
              
              $
              937
              
              
              $
              2,856
              
              
              $
              2,607Stock
                  based compensation, net of taxes
              
              $
              699
              
              
              $
              581
              
              
              $
              2,065
              
              
              $
              1,616




The
      fair
      value of the restricted stock outstanding and issued is equal to the value
      of
      shares at the grant date. At this time, the Company does not expect any of
      its
      restricted shares or options to be forfeited before vesting. The fair value
      of
      stock options was estimated using the Black-Scholes option pricing
      model.  The Company used a risk free rate of 4.8% and a volatility of
      50% for options issued during 2007.  The Company uses historical
      experience to estimate its volatility.  The Company has assumed no
      dividends would be issued in valuing its options.





-12-








The
      following is a summary of restricted stock and stock option awards for the
      nine
      months ended September 30, 2007:




Restricted
                  Stock
              
              
              Stock
                  OptionsWeighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              AverageNumber
                  of
              
              
              Fair
                  Value
              
              
              Number
                  of
              
              
              ExerciseShares
              
              
              at
                  Issue
              
              
              Shares
              
              
              PriceDecember
                  31, 2006
              
              
              739,720
              
              
              $
              18.25
              
              
              
              261,001
              
              
              $
              16.07Granted
              
              
              148,036
              
              
              
              4.65
              
              
              
              25,000
              
              
              
              14.60Exercised/Vested
              
              
              (174,509
              )
              
              
              14.42
              
              
              
              -
              
              
              
              -Canceled
              
              
              (11,940
              )
              
              
              18.52
              
              
              
              (21,667
              )
              
              
              17.72September
                  30, 2007
              
              
              701,307
              
              
              
              16.33
              
              
              
              264,334
              
              
              
              15.79






The
      following table summarizes additional information about the stock options
      outstanding at September 30, 2007.




**Range
                  of Exercise Price**
              
              
              **Shares**
              
              
              **Weighted
                  Average Exercise Price**
              
              
              **Weighted
                  Average Remaining Contractual Life (Years)**
              
              
              **Aggregate
                  Intrinsic Value (1) (in 000's)**Oustanding
                  at September 30, 2007
              
              $10.80-$33.75
              
              
              264,334
              
              
              $15.79
              
              
              7.2
              
              
              $-Exercisable
                  at September 30, 2007
              
              $10.80-$33.75
              
              
              157,670
              
              
              $15.74
              
              
              6.9
              
              
              $-Vested
                  and expected to vest at September 30, 2007
              
              $10.80-$33.75
              
              
              264,334
              
              
              $15.79
              
              
              7.2
              
              
              $-
 
 (1)
                  The difference between a stock award's exercise price and the underlying
                  stock's market price at September 30, 2007.No
                  value is assigned to stock awards whose option price exceeds the
                  the
                  stock's market price at September 30,
                  2007.




The
      following table summarizes the Company’s total unrecognized compensation cost
      related to stock based compensation as of September 30, 2007.




Weighted
                  AverageRemaining PeriodUnearned
              
              
              Of
                  ExpenseCompensation
              
              
              Recognition(in
                  000's)
              
              
              (in
                  years)Stock
                  Options
              
              $
              422
              
              
              
              1.9Restricted
                  Stock
              
              
              9,390
              
              
              
              2.9Total
              
              $
              9,812








**(4)**
            **Commitments
                and Contingencies**




The
      Company has established irrevocable letters of credit totaling $56.0 million
      as
      of September 30, 2007 to guarantee performance under certain contractual
      arrangements. The letters of credit were issued under the Company’s Letter of
      Credit Facility (see note 2).




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.





-13-













**(5)**
            **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.





The
      following table provides a
      reconciliation of the number of shares used to calculate basic and diluted
      earnings per share (shares in 000’s):




**Three
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30,**
              
              
              **September
                  30,**
              
              
              **September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Weighted
                    average number of common sharesoutstanding:Basic
              
              
              16,044
              
              
              
              15,899
              
              
              
              15,983
              
              
              
              15,829Effect
                  of dilutive instruments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
              
              
              16,044
              
              
              
              15,899
              
              
              
              15,983
              
              
              
              15,829









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
      0.6 million and 0.7 million for the three months and nine months ended September
      30, 2007, respectively, and 0.8 million and 0.9 million for the three months
      and
      nine months ended September 30, 2006, respectively.







-14-








**(6)**
            **Pension
                Expense**




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





**Three
                  Months Ended**
              
              
              **Three
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006**Service
                  cost
              
              $
              724
              
              
              
              624Interest
                  cost
              
              
              900
              
              
              
              805Expected
                  return on plan assets
              
              
              (1,027
              )
              
              
              (848
              )Net
                  periodic benefit cost
              
              $
              597
              
              
              
              581**Nine
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006**Service
                  cost
              
              $
              2,173
              
              
              
              1,872Interest
                  cost
              
              
              2,700
              
              
              
              2,415Expected
                  return on plan assets
              
              
              (3,082
              )
              
              
              (2,544
              )Net
                  periodic benefit cost
              
              $
              1,791
              
              
              
              1,743





Effective
      September 30, 2007, the Company froze pension plan benefit accruals for all
      employees covered under its non-contributory defined benefit pension plan,
      resulting in a curtailment gain of $6.1 million.  The weighted-average
      assumption used to determine the pension obligation as of September 30, 2007
      are
      as follows:





Discount
                  rate
              
              
              6.00
              %Expected
                  return on plan assets
              
              
              7.50
              %Measurement
                  date
              
              September
                  30, 2007













-15-





**(7)**
            **Pneumoconiosis
                (Black Lung) Benefits**




The
      expense for black lung benefits consists of the following (amounts in
      000’s):




**Three
                  Months Ended**
              
              
              **Three
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006**Service
                  cost
              
              $
              142
              
              
              
              131Interest
                  cost
              
              
              397
              
              
              
              348Amortization
                  of actuarial (gain) loss
              
              
              (45
              )
              
              
              73Total
                  expense
              
              $
              494
              
              
              
              552**Nine
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006**Service
                  cost
              
              $
              426
              
              
              
              393Interest
                  cost
              
              
              1,192
              
              
              
              1,044Amortization
                  of actuarial (gain) loss
              
              
              (135
              )
              
              
              219Total
                  expense
              
              $
              1,483
              
              
              
              1,656







-16-











**(8)**
            **Income
                Taxes**





The
      Company accounts 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, the Company takes into account various factors, including the
      expected level of future taxable income. The Company also considered tax
      planning strategies in determining the deferred tax asset that will ultimately
      be realized. The estimated annual effective tax rate includes an assumption
      that
      not all of the gross deferred tax asset projected as of December 31, 2007
      will more likely than not be realized.  As of September 30, 2007, the
      Company has recorded a valuation allowance on its deferred tax assets of
      approximately $7.3 million.








**(9)**
            **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 Appalachia (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 are shown below (amounts in thousands).








-17-








Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006RevenuesCAAP
              
              $
              106,519
              
              
              
              114,077
              
              
              
              326,424
              
              
              
              354,306Midwest
              
              
              23,533
              
              
              
              24,030
              
              
              
              67,999
              
              
              
              70,653Corporate
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              130,052
              
              
              
              138,107
              
              
              
              394,423
              
              
              
              424,959Depreciation,
                  depletion and amortizationCAAP
              
              $
              13,583
              
              
              
              15,536
              
              
              
              43,062
              
              
              
              44,403Midwest
              
              
              3,729
              
              
              
              3,655
              
              
              
              11,456
              
              
              
              10,637Corporate
              
              
              46
              
              
              
              29
              
              
              
              103
              
              
              
              84Total
              
              $
              17,358
              
              
              
              19,220
              
              
              
              54,621
              
              
              
              55,124Total
                  operating income (loss)CAAP
                  (1)
              
              $
              (4,226
              )
              
              
              (7,172
              )
              
              
              (19,601
              )
              
              
              (3,504
              )Midwest
              
              
              (28
              )
              
              
              417
              
              
              
              (1,056
              )
              
              
              745Corporate
              
              
              (4,274
              )
              
              
              (3,706
              )
              
              
              (11,970
              )
              
              
              (10,895
              )Total
              
              $
              (8,528
              )
              
              
              (10,461
              )
              
              
              (32,627
              )
              
              
              (13,654
              )Net
                  earnings (loss) (2)CAAP
                  (1)
              
              $
              (4,226
              )
              
              
              (7,172
              )
              
              
              (19,601
              )
              
              
              (3,504
              )Midwest
              
              
              (28
              )
              
              
              417
              
              
              
              (1,056
              )
              
              
              745Corporate
              
              
              (5,442
              )
              
              
              (1,659
              )
              
              
              (14,907
              )
              
              
              (7,618
              )Total
              
              $
              (9,696
              )
              
              
              (8,414
              )
              
              
              (35,564
              )
              
              
              (10,377
              )




(1)
              CAAP
                  operating income (loss) for the three and nine months ended September
                  30,
                  2007, includes a
                  $6.1 million curtailment gain of the pension
                  plan. (2)
              Income
                  and expense items that are not included in income (loss) from operations
                  are not
                  allocated to the
                  segments.





September
                  30,
              
              
              December
                  31,2007
              
              
              2006Total
                  AssetsCAAP
              
              $
              337,245
              
              
              
              351,846Midwest
              
              
              94,445
              
              
              
              93,384Corporate
              
              
              16,629
              
              
              
              6,024Total
              
              $
              448,319
              
              
              
              451,254GoodwillCAAP
              
              $
              -
              
              
              
              -Midwest
              
              
              26,492
              
              
              
              26,492Corporate
              
              
              -
              
              
              
              -Total
              
              $
              26,492
              
              
              
              26,492





-18-








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







The
      following discussion and analysis is provided to increase the understanding
      of,
      and should be read in conjunction with, the Condensed Consolidated Financial
      Statements and accompanying notes contained herein and the Company’s annual
      report on Form 10-K for the year ended December 31, 2006.





**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)). We derived 88% of our total revenues (contract and spot) in the
      nine
      months ended September 30, 2007 from coal sales to electric utility customers
      and the remaining 12% from coal sales to industrial and other companies or
      from
      synfuel handling fees.





***CAPP
      Segment***




In
      Central Appalachia, 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. We have been providing coal
      to
      customers in the South Atlantic region since our formation in 1988. For the
      nine
      months ended September 30, 2007, CAPP produced 6.9 million tons of coal
      (including contract coal and purchased coal). Of the CAPP tons produced, 76%
      came from Company operated underground mines. For the nine months ended
      September 30, 2007, we shipped 6.8 million tons of coal and generated coal
      sale
      revenues of $321.0 million from our CAPP segment. For the nine months ended
      September 30, 2007, Georgia Power and South Carolina Public Service Authority
      were our largest customers, representing approximately 28% and 20% of our total
      revenues, respectively. No other CAPP customer accounted for more than 10%
      of
      our total revenues.





***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.
      For the nine months ended September 30, 2007, our Midwest mines produced 2.4
      million tons of coal. Of the Midwest tons produced, 82% came from Company
      operated surface mines. For the nine months ended September 30, 2007, we shipped
      2.4 million tons of coal and generated coal sale revenues of $68.0 million
      from
      our Midwest segment. For the nine months ended September 30, 2007, our Midwest
      segment’s largest customer was Hoosier Energy which represented approximately 7%
      of our total revenues.





**Results
      of Operations**





***Three
      Months Ended September 30, 2007 Compared with the Three Months Ended September
      30, 2006***





The
      following tables shows selected operating results for the three months ended
      September 30, 2007 compared to the three months ended September 30, 2006 (in
      000’s except per ton amounts).





-19-
















**Three
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **Change****Total**
              
              
              **Per
                  Ton**
              
              
              **Total**
              
              
              **Per
                  Ton**
              
              
              **Total**Volume
                  shipped (tons)
              
              
              3,039
              
              
              
              
              
              
              3,231
              
              
              
              
              
              
              -6
              %RevenuesCoal
                  sales
              
              $
              128,457
              
              
              
              42.27
              
              
              $
              137,734
              
              
              
              42.63
              
              
              
              -7
              %Synfuel
                  handling
              
              
              1,595
              
              
              
              
              
              
              
              373
              
              
              
              
              
              
              
              328
              %Cost
                  of coal sold
              
              
              119,251
              
              
              
              39.24
              
              
              
              121,389
              
              
              
              37.57
              
              
              
              -2
              %Gain
                  on curtailment of pension plan
              
              
              (6,091
              )
              
              
              (2.00
              )
              
              
              -Depreciation,
                  depletion and amortization
              
              
              17,358
              
              
              
              5.71
              
              
              
              19,220
              
              
              
              5.95
              
              
              
              -10
              %Gross
                  profit (loss)
              
              
              (466
              )
              
              
              (0.15
              )
              
              
              (2,502
              )
              
              
              (0.77
              )
              
              
              -81
              %Selling,
                  general and administrative
              
              
              8,062
              
              
              
              2.65
              
              
              
              7,959
              
              
              
              2.46
              
              
              
              1
              %





**Volume
      and Revenues by Segment**


**Three
                    Months Ended September 30,**2007
                
                
                2006CAPP
                
                
                Midwest
                
                
                CAPP
                
                
                MidwestVolume
                    (tons)
                
                
                2,224
                
                
                
                815
                
                
                
                2,374
                
                
                
                857Coal
                    sales revenue
                
                $
                104,924
                
                
                
                23,533
                
                
                
                113,704
                
                
                
                24,030Average
                    sales price per ton
                
                $
                47.18
                
                
                
                28.87
                
                
                
                47.90
                
                
                
                28.04





Coal
      sales revenue for the three months ended September 30, decreased from $137.7
      million in 2006 to $128.5 million in 2007. This decrease was due to a decrease
      in both tons sold and the average sales price per ton in CAPP.  The
      decrease in tons sold in CAPP was due to weak market conditions for
      coal.  For the three months ended September 30, 2007, the CAPP region
      sold approximately 1.9 million tons of coal under long-term contracts (85%
      of
      total CAPP sales volume) at an average selling price of $46.14 per
      ton.  For the three months ended September 30, 2006, the CAPP region
      sold approximately 1.9 million tons of coal under long-term contracts (80%
      of
      total CAPP sales volume) at an average selling price of $44.80 per
      ton.  For the three months ended September 30, 2007, the CAPP region
      sold 340,000 tons of coal (15% of total CAPP sales volume) to the spot market
      at
      an average selling price of $59.26 per ton.  For the three months
      ended September 30, 2006, the CAPP region sold 466,000 tons of coal (20% of
      total CAPP sales volume) to the spot market at an average selling price of
      $60.40 per ton.





The
      Midwest’s region sales of coal were under long term contracts for both the 2007
      and 2006 periods. For the three months ended September 30, 2007, the Midwest
      region sold 815,000 tons at an average sales price of $28.87.  For the
      three months ended September 30, 2006, the Midwest region sold 857,000 tons
      at
      an average sales price of $28.04.











-20-





**Operating
      Costs by Segment**


**Three
                  Months Ended September 30,**2007
              
              
              2006CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              Corporate**Cost
                  of coal sold**
              
              $
              99,979
              
              
              
              19,272
              
              
              
              -
              
              
              
              102,149
              
              
              
              19,240
              
              
              
              -**Per
                  ton**
              
              
              44.95
              
              
              
              23.65
              
              
              
              -
              
              
              
              43.03
              
              
              
              22.45
              
              
              
              -**Depreciation,
                  depletion and amortization**
              
              
              13,583
              
              
              
              3,729
              
              
              
              46
              
              
              
              15,536
              
              
              
              3,655
              
              
              
              29**Per
                  ton**
              
              
              6.11
              
              
              
              4.58
              
              
              
              -
              
              
              
              6.54
              
              
              
              4.26
              
              
              
              -




C*ost
      of Coal Sold*




For
      the
      three months ended September 30, the cost of coal sold, excluding depreciation,
      depletion and amortization, decreased from $121.4 million in 2006 to $119.3
      million in 2007.  Our cost per ton of coal sold in the CAPP region
      increased from $43.03 per ton in the 2006 period to $44.95 per ton in the 2007
      period.  This $1.92 increase in cost per ton of coal sold was due to
      several factors.  Labor and benefit costs increased by $0.58 per ton
      in the 2007.  This increase was primarily due to the impact of
      increased regulatory scrutiny, which negatively impacted our productivity,
      and
      increased benefit costs which were primarily the result of additional health
      benefits paid.  Variable costs increased $0.91 per ton, due to an
      increase in equipment rental at our surface mines and the impact of additional
      fuel costs due to more surface tons being mined in the nine months ended
      September 30, 2007 as compared to 2006.  Our cost per ton of coal sold
      in the Midwest increased $1.20 per ton to $23.65 per ton in the 2007
      period.  The increase was primarily due to a $1.81 per ton increase in
      labor costs due to an increase in wages and an increase in
      headcount.  This increase in the Midwest was offset by a decrease in
      trucking costs of $0.46 per ton due to certain customers assuming responsibility
      for trucking costs.





*Gain
      on curtailment of pension plan*





Effective
      September 30, 2007, the Company froze pension plan benefit accruals for all
      employees covered under its non-contributory defined benefit pension plan,
      resulting in a curtailment gain of $6.1 million in the three months ended
      September 30, 2007.





*Depreciation,
      depletion and amortization*




For
      the three months ended September 30, depreciation, depletion and amortization
      decreased from $19.2 million in 2006 to $17.4 million in 2007.  In the
      CAPP region, depreciation, depletion and amortization decreased $2.0 million to
      $13.6 million or $6.11 per ton.  This decrease was primarily due to a
      drop in the depreciable assets base due to certain assets that became fully
      depreciated in May 2007.   In the Midwest, depreciation, depletion and
      amortization for the three months ended September 30, 2007 increased $0.1
      million to $3.7 million or $4.58 per ton.




*Selling,
      general and administrative*




Selling,
      general and administrative expenses were $8.0 million for the three months
      ended
      September 30, 2006 and $8.1 million for the three months ended September 30,
      2007.







**Income
      Taxes**





Our
      effective tax rate for the three months ended September 30, 2007 was
      29%.  Our effective tax rate includes an income tax valuation
      allowance based on our forecasted taxable losses.   See Critical
      Accounting Estimates - Income Taxes.





In
      the
      same period in the prior year our effective tax rate was 41%. 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.











-21-





***Nine
      Months Ended September 30, 2007 Compared with the Nine Months Ended September
      30, 2006***





The
      following tables shows selected operating results for the nine months ended
      September 30, 2007 compared to the nine months ended September 30, 2006 (in
      000’s except per ton amounts).





**Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **Change****Total**
              
              
              **Per
                  Ton**
              
              
              **Total**
              
              
              **Per
                  Ton**
              
              
              **Total**Volume
                  shipped (tons)
              
              
              9,135
              
              
              
              
              
              
              9,858
              
              
              
              
              
              
              -7
              %RevenuesCoal
                  sales
              
              $
              388,959
              
              
              
              42.58
              
              
              $
              421,652
              
              
              
              42.77
              
              
              
              -8
              %Synfuel
                  handling
              
              
              5,464
              
              
              
              
              
              
              
              3,307
              
              
              
              
              
              
              
              65
              %Cost
                  of coal sold
              
              
              355,295
              
              
              
              38.89
              
              
              
              361,766
              
              
              
              36.70
              
              
              
              -2
              %Gain
                  on curtailment of pension plan
              
              
              (6,091
              )
              
              
              (0.67
              )
              
              
              -
              
              
              
              -Depreciation,
                  depletion and amortization
              
              
              54,621
              
              
              
              5.98
              
              
              
              55,124
              
              
              
              5.59
              
              
              
              -1
              %Gross
                  profit
              
              
              (9,402
              )
              
              
              (1.03
              )
              
              
              8,069
              
              
              
              0.82
              
              
              
              -217
              %Selling,
                  general and administrative
              
              
              23,225
              
              
              
              2.54
              
              
              
              21,723
              
              
              
              2.20
              
              
              
              7
              %




**Volume
      and Revenues by Segment**





**Nine
                  Months Ended September 30,**2007
              
              
              2006CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
                  (tons)
              
              
              6,775
              
              
              
              2,360
              
              
              
              7,303
              
              
              
              2,555Coal
                  sales revenue
              
              $
              320,960
              
              
              
              67,999
              
              
              
              350,999
              
              
              
              70,653Average
                  sales price per ton
              
              $
              47.37
              
              
              
              28.81
              
              
              
              48.06
              
              
              
              27.65


Coal
      sales revenue for the nine months ended September 30, decreased from $421.7
      million in 2006 to $389.0 million in 2007. This decrease was due to a decrease
      in both tons sold and the average sales price per ton in CAPP.  The
      decrease in tons sold in CAPP was due to weak market conditions for
      coal.  For the nine months ended September 30, 2007, the CAPP region
      sold 6.0 million tons of coal under long term contracts (89% of total CAPP
      sales
      volume) at an average selling price of $46.22 per ton.  For the nine
      months ended September 30, 2006, the CAPP region sold approximately 5.7 million
      tons of coal under long-term contracts (79% of total CAPP sales volume) at
      an
      average selling price of $44.66 per ton.  For the nine months ended
      September 30, 2007, the CAPP region sold 777,000 tons of coal (11% of total
      CAPP
      sales volume) to the spot market at an average selling price of $56.43 per
      ton.  For the nine months ended September 30, 2006, the CAPP region
      sold 1.6 million tons of coal (21% of total CAPP sales volume) to the spot
      market at an average selling price of $60.58 per ton.





The
      Midwest’s region sales of coal were under long term contracts for both the 2007
      and 2006 periods. For the nine months ended September 30, 2007, the Midwest
      region sold 2.4 million tons at an average sales price of $28.81. For the nine
      months ended September 30, 2006, the Midwest region sold 2.6 million tons at
      an
      average sales price of $27.65.





**Operating
      Costs by Segment**





**Nine
                  Months Ended September 30,**2007
              
              
              2006CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              Corporate**Cost
                  of coal sold**
              
              $
              299,801
              
              
              
              55,494
              
              
              
              -
              
              
              
              304,241
              
              
              
              57,525
              
              
              
              -**Per
                  ton**
              
              
              44.25
              
              
              
              23.51
              
              
              
              -
              
              
              
              41.66
              
              
              
              22.51
              
              
              
              -**Depreciation,
                  depletion and amortization**
              
              
              43,062
              
              
              
              11,456
              
              
              
              103
              
              
              
              44,403
              
              
              
              10,637
              
              
              
              84**Per
                  ton**
              
              
              6.36
              
              
              
              4.85
              
              
              
              -
              
              
              
              6.08
              
              
              
              4.16
              
              
              
              -




-22-







C*ost
      of Coal Sold*




For
      the
      nine months ended September 30, the cost of coal sold, excluding depreciation,
      depletion and amortization, decreased from $361.8 million in 2006 to $355.3
      million in 2007.  Our cost per ton of coal sold in the CAPP region
      increased from $41.66 per ton in the 2006 period to $44.25 per ton in the 2007
      period.  This $2.59 increase in cost per ton of coal sold was due to
      several factors.  Labor and benefit costs increased by $0.78 per ton
      in the 2007 period.  This increase was primarily due to the impact of
      increased regulatory scrutiny, which negatively impacted our productivity,
      and
      increased benefit costs which were primarily the result of additional health
      benefits paid.  Variable costs increased by $1.05 per ton, primarily
      due to an increase in equipment rental at our surface mines an increase in
      maintenance and repair parts and the costs of complying with new safety
      standards and the impact of continuing regulatory scrutiny that began in 2006,
      which has impacted both our productivity and our overall mining
      costs.  Our cost per ton of coal sold in the Midwest increased $1.00
      per ton to $23.51 per ton in the 2007 period.  The increase in cost
      per ton of coal sold was primarily due to a $1.91 per ton increase in labor
      costs due to an increase in wages and an increase in headcount.  This
      increase in the Midwest was offset by a decrease in trucking costs of $0.63
      per
      ton due to certain customers assuming responsibility for trucking
      costs.





*Gain
      on curtailment of pension plan*





Effective
      September 30, 2007, the Company froze pension plan benefit accruals for all
      employees covered under its non-contributory defined benefit pension plan,
      resulting in a curtailment gain of $6.1 million in the nine months ended
      September 30, 2007.




*Depreciation,
      depletion and amortization*




For
      the
      nine months ended September 30, depreciation, depletion and amortization
      decreased from $55.1 million in 2006 to $54.6 million in 2007.  In the
      CAPP region, depreciation, depletion and amortization decreased $1.3 million
      to
      $43.1 million or $6.36 per ton.  This decrease was primarily due to a
      drop in the depreciable assets base due to certain assets that became fully
      depreciated in 2007. In the Midwest, depreciation, depletion and amortization
      for the nine months ended September 30, 2007 increased $0.8 million to $11.5
      million or $4.85 per ton.  The increase in depreciation, depletion and
      amortization, in the Midwest, was due to capital expenditures which increased
      the depreciable asset base.




*Selling,
      general and administrative*




Selling,
      general and administrative expenses increased from $21.7 million for the nine
      months ended September 30, 2006 to $23.2 million for the nine months ended
      September 30, 2007.  The lower expense in 2006 was in part due to $0.5
      million decrease in taxes in the nine months ended September 30, 2006, due
      to a
      reduction in the accrual for franchise taxes. The remaining increase in 2007
      was
      due to an increase in certain salary and benefit amounts.




*Charges
      associated with repayment of debt*





The
      Company wrote off $2.4 million of financing charges in connection with the
      repayment of the Prior Senior Secured Credit Facility. The write off of the
      financing charges is classified as charges associated with repayment of
      debt.





**Income
      Taxes**





Our
      effective tax rate for the nine months ended September 30, 2007 was
      28%.  Our effective tax rate includes an income tax valuation
      allowance based on our forecasted taxable losses.  See Critical
      Accounting Estimates - Income Taxes.





The
      nine
      months ended September 30, 2006 includes a deferred income tax benefit of $1.3
      million or $0.08 per fully diluted share due to a reduction in future state
      tax
      rates as enacted in 2005. Adjusted for the benefit for the reduction in state
      tax rates, our effective tax rate for the nine months ended September 30, 2006
      was 53%. 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.








-23-





**Liquidity
      and Capital Resources**





As
      September 30, 2007, our outstanding long term debt consists of $150 million
      of
      Senior Notes due on June 1, 2012 (the Senior Notes) and amounts outstanding
      under our Senior Secured Credit Facilities (discussed below).  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.





At
      December 31, 2006, we also had a Prior Senior Secured Credit Facility consisting
      of a $25.0 million revolving credit facility (the Prior Revolver) and a $75.0
      million letter of credit facility (the Prior Letter of Credit
      Facility).




On
      February 26, 2007, we entered into a $35.0 million Revolving Credit Agreement
      (the Revolver) and a $100.0 million Term Credit Agreement (collectively the
      Facilities). The Term Credit Agreement consists of a $40.0 million term facility
      (the Term Facility) and a $60.0 million letter of credit facility (the Letter
      of
      Credit Facility). A portion of the proceeds from the Facilities were used to
      repay the Prior Revolver and Prior Letter of Credit Facilities and to pay fees
      and expenses associated with the Facilities. The remaining proceeds are
      available for working capital and other general corporate purposes. 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 supports the
      issuance of up to $60 million of letters of credit. We entered into an
      Amendment and Waiver to the Senior Secured Credit Facility on August
      7, 2007 (the Credit Amendment).  The Credit Amendment waived defaults under
      the Facilities as of June 30, 2007, modified certain existing financial
      covenants in the Facilities and added a minimum liquidity threshold. The Credit
      Amendment also increased the interest rates on the Facilities by 0.75%,
      prohibits prepayments of the Term Loan for a period of one year and exempts
      up
      to $40 million of cash proceeds from an equity offering from mandatory
      prepayment requirements.  The following is a summary of significant terms
      of the Facilities, as amended.




**Revolver**
            
            **Term
                Facility**
            
            **Letter
                of Credit Facility**Maturity
            
            February
                2012
            
            February
                2013
            
            February
                2013Interest/Usage
                Rate
            
            Our
                option of Base Rate(a)
                plus 1.75%
                or LIBOR plus 2.75% per annum
            
            Our
                option of Base Rate(a)
                plus 3.75%
                or LIBOR plus 4.75% per annum
            
            4.75%
                per annumMaximum
                Availability
            
            Lesser
                of $35.0 million and the borrowing base (b)
            
            $39.2
                million as of September 30, 2007.
            
            $60.0
                millionPrincipal
                Repayments
            
            None
            
            $400,000
                is due quarterly.
            
            Not
                applicable




(a)
            Base
                rate is the higher of (1) the Federal Fund Rate plus 0.5% and (2)
                the
                prime rate.




(b)
            The
                Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
                receivable plus the lesser of (1) up to 60% of eligible inventory
                and (2)
                up to 85% of the net orderly liquidation value of eligible inventory;
                minus reserves from time to time set by the administrative
                agent.





The
      Revolver provides that we can use up to $10.0 million of the Revolver
      availability to issue letters of credit. The Revolver provides for a 2.75%
      fee
      on any outstanding letter of credits issued under the Revolver and a 0.5% fee
      on
      the unused portion of the Revolver. The Facilities require certain mandatory
      prepayments from certain asset sales, incurrence of indebtedness and excess
      cash
      flow. The Facilities include financial covenants that require us to maintain
      a
      minimum EBITDA, a maximum leverage ratio and a minimum liquidity threshold
      and limit capital expenditures, each as defined by the agreement.  We were
      not in compliance with the minimum EBITDA and leverage ratio covenants required
      by our Senior Secured Credit Facility as of June 30, 2007. The Credit Amendment
      in August 2007 waived these defaults as of June 30, 2007, modified the existing
      financial covenants, added a minimum liquidity threshold and made other changes
      to the Facilities.  As a result of the Credit Amendment, we were in
      compliance with all of the financial covenants under the Facilities as of
      September 30, 2007.  For more detail regarding the covenants under the
      Facilities, see Part II - Item 1A - Risk Factors - “We may
      be unable
      to comply with restrictions imposed by the terms of our indebtedness, which
      could result in a default under these instruments.”  The
      Facilities are secured by substantially all of our assets.





-24-








We plan
      to raise approximately $30 million of capital during the fourth quarter of
      2007.  We have not yet determined the type of equity security we
      will issue.  We intend to use the proceeds from any
      such transaction to (1) to pay down the revolving credit facility; (2) to
      fund capital expenditures mandated by federal and state safety regulations;
      (3)
      to fund capital expenditures associated with cost-cutting changes to the mine
      portfolio; and (4) for general corporate purposes.  We intend to
      review our capital raising options as expeditiously as possible, and expect
      to complete any such transaction prior to December 31,
      2007.  There can be no assurance however, that any such capital
      raising efforts can be completed within this timeframe or on terms
      acceptable to us.  We believe that the planned capital raise will
      allow us to meet our capital needs as described above and the minimum liquidity
      threshold of $25 million that will be effective under our Facilities at December
      31, 2007.  If necessary, we will consider the issuance of equity, the sale
      of assets or other alternatives to ensure that we remain in compliance with
      the
      covenants.




Nothing
      in this Quarterly Report on Form 10-Q shall constitute an offer to sell or
      the
      solicitation of an offer to buy any securities.




The
      following chart reflects the components of our debt as of September 30, 2007 and
      December 31, 2006:





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Senior
                Notes
            
            $
            150,000
            
            
            $
            150,000Term
                Facility
            
            
            39,200
            
            
            
            -Senior
                Secured Credit Facility – Revolver
            
            
            15,044
            
            
            
            -Prior
                Senior Secured Credit Facility – Revolver
            
            
            -
            
            
            
            17,493Total
                long-term debt
            
            
            204,244
            
            
            
            167,493Less
                amounts classified as current
            
            
            1,600
            
            
            
            -Total
                long-term debt, less current maturities
            
            $
            202,644
            
            
            $
            167,493





As
      a
      result of the completion of the Facilities, as amended, we expect to have
      adequate liquidity to operate our business throughout the remainder of
      2007. We
      believe that we must pursue one of several options to meet the minimum liquidity
      requirement under the Facilities at December 31, 2007.  Further, we believe
      that the proposed capital raise will allow us to meet the minimum liquidity
      requirement at December 31, 2007. At
      September 30, 2007, we had available liquidity of $11.0 million. This available
      liquidity consisted of cash and cash equivalents of $1.1 million and
      availability of $9.9 million under the Revolver.





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.





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 will be sufficient to meet our working capital needs, to
      fund our capital expenditures for existing operations and to meet our debt
      service obligations through the remainder of 2007. We
      believe that we must pursue one of several options to meet the minimum liquidity
      requirement under the Facilities at December 31, 2007.  Further, we believe
      that the proposed capital raise will allow us to meet the minimum liquidity
      requirement at December 31, 2007. If
      these
      sources prove inadequate to meet our capital needs, we may consider the
      sale of assets or other alternatives.****Nevertheless, there
      are many factors beyond our control, including general economic, regulatory
      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 additional equity securities. If such actions are not sufficient, we may
      need to limit our growth, sell assets or 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 the
      Facilities 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.





Currently,
      our primary use of cash during the next several years is expected to be ordinary
      course of business expenses and capital expenditures for existing mines. We
      currently project that our capital expenditures for 2007 will be approximately
      $50 to $55 million.  We expect that such expenditures will be funded
      through cash on hand; cash generated by operations and borrowings under our
      debt
      Facilities.





Net
      cash
      provided by 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
      $4.4 million for the nine months ended September 30, 2007, and net cash provided
      by operating activities was $26.2 million for the nine months ended September
      30, 2006. The decrease in cash provided by operations is primarily due to the
      increase in our net loss as compared to the prior year. During the nine months
      ended September 30, 2007, our net loss, as adjusted for non cash charges, was
      offset by a $3.3 million decrease in cash from our operating assets and
      liabilities.





-25-








Net
      cash
      used in investing activities decreased by $7.5 million to $36.9 million for
      the
      nine months ended September 30, 2007 as compared to the same period in 2006.
      The
      decrease was primarily due to a reduction in capital expenditures. Capital
      expenditures primarily consisted of new and replacement mine equipment and
      various projects to improve the production and efficiency of our mining
      operations.  In the nine months ended 2006, we also received $6.7
      million of proceeds from the sale of property.





Net
      cash
      provided by financing activities was $31.9 million for the nine months ended
      September 30, 2007. During the nine months ended September 30, 2007, we received
      $40 million of proceeds from the Term Loan and had $15.0 million of net
      borrowings on our Revolver. These cash inflows were offset by a $17.5 million
      repayment of our Prior Revolver, $4.6 million of costs associated with the
      Senior Secured Credit Facilities and $1.1 million of other debt
      repayments.










**Reserves**




Marshall
      Miller & Associates, Inc. (MM&A) prepared a detailed study of our CAPP
      reserves as of March 31, 2004 based on all of our geologic information,
      including our updated drilling and mining data. MM&A completed their report
      on our CAPP reserves in June 2004. For the Midwest properties, MM&A also
      prepared a detailed study of the Midwest reserves as of February 1, 2005 for
      the
      reserves obtained in the acquisition of the Midwest properties and as of April
      11, 2006 for certain additional reserves acquired in the second quarter of
      2006.  The MM&A studies 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 and April 11, 2006 studies
      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. Reserve acreage,
      average seam thickness, average seam density and average mine and wash recovery
      percentages were verified by MM&A to prepare a reserve tonnage estimate for
      each reserve.  There are numerous uncertainties inherent in estimating
      quantities and values of economically recoverable coal reserves as discussed
      in
“Critical Accounting Estimates - Coal Reserves”.





Based
      on
      the MM&A reserve studies and the foregoing assumptions and qualifications,
      and after giving effect to our operations from the respective dates of the
      studies through September 30, 2007, we estimate that, as of September 30, 2007,
      we controlled approximately 228.1 million tons of proven and probable coal
      reserves in the CAPP region and 42.5 millions tons in the Midwest region.
 The following table provides additional information regarding changes to
      our reserves since December 31, 2006 (in millions of tons):








**CAPP**
              
              
              **Midwest**
              
              
              **Total**Proven
                  and Probable Reserves, as of December 31, 2006 (1)
              
              
              233.0
              
              
              
              40.2
              
              
              
              273.2Coal
                  Extracted
              
              
              (6.3
              )
              
              
              (2.4
              )
              
              
              (8.7
              )Acquisitions
                  (2)
              
              
              0.6
              
              
              
              2.5
              
              
              
              3.1Divesture
                  (3)
              
              
              (1.2
              )
              
              
              -
              
              
              
              (1.2
              )Adjustments
                  (4)
              
              
              2.0
              
              
              
              2.2
              
              
              
              4.2Proven
                  and Probable Reserves, as of September 30, 2007 (1)
              
              
              228.1
              
              
              
              42.5
              
              
              
              270.6





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.





-26-











(2)
      Represents estimated reserves on leased entered into or 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 these estimates have not been reviewed by
      MM&A.





(3)
      Represents changes in reserves due to expired leases.





(4)
      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.





**Recent
      Accounting Pronouncements**




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which
      clarifies the accounting and disclosure for uncertainty in tax positions, as
      defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. We are subject to the provisions of FIN 48 as
      of January 1, 2007, and have analyzed filing positions in all of the
      federal and state jurisdictions where it is required to file income tax returns,
      as well as all open tax years in these jurisdictions.  We believe that
      our income tax filing positions and deductions will be sustained on audit and
      do
      not anticipate any adjustments that will result in a material change to our
      financial position.  Therefore, no reserves for uncertain
      income tax positions have been recorded pursuant to FIN 48. In
      addition, we did not record a cumulative effect adjustment related to the
      adoption of FIN 48.





**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, 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.





EBITDA
      and Adjusted EBITDA are also measures used by management to measure operating
      performance. We define EBITDA as net income plus interest expense (net), income
      tax expense (benefit) and depreciation, depletion and amortization, to better
      measure our operating performance. We regularly use EBITDA to evaluate our
      performance as compared to other companies in our industry that have different
      financing and capital structures and/or tax rates. In addition, we use EBITDA
      in
      evaluating acquisition targets. EBITDA is not a recognized term under GAAP
      and
      is not an alternative to net income, operating income or any other performance
      measures derived in accordance with GAAP or an alternative to cash flow from
      operating activities as a measure of operating liquidity.  Adjusted
      EBITDA is used in calculating compliance with our debt covenants and adjusts
      EBITDA for certain items as defined in our debt agreements, including stock
      compensation and bank fees.





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.











-27-





**Trends
      In Our Business**





Beginning
      in 2006, demand slowed for coal which led to a softening in coal
      prices.  Recently, we believe that the demand for coal has begun to
      tighten.  We believe that the tightening in demand is due to an
      increase in export coal and the decrease in production in the CAPP region due
      to
      increased regulatory pressures on costs and the recent soft market keeping
      coal
      prices lower.   We believe that these factors will continue into
      2008 and lead to increased coal prices.  We believe that, in the long
      term, the market for coal in the United States remains strong as coal continues
      to be one of the most economical energy sources. However, while we are not
      able
      to predict when the coal market will begin to strengthen, we believe that a
      projected long term increase in demand for coal will lead to higher coal prices
      in the future. A number of factors beyond our control impact coal prices,
      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.





Our
      costs
      of production have increased in recent years, particularly in the CAPP region.
      In 2007, the Company has experienced increased mining costs due to the costs
      associated with complying with the new underground mining safety regulations
      and
      other cost pressures.  We expect these higher costs to continue for
      the next several years, due to a number of factors, including the increased
      governmental regulations, high prices in worldwide commodity markets and a
      highly competitive market for a limited supply of skilled mining
      personnel.  See the risk factors titled “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”, “Underground mining
      is subject to increased regulation, and may require us to incur additional
      cost”
and “Unexpected increases in raw material costs could significantly impair our
      operating results” in Part II, Item 1A of this Form 10-Q.








**Off-Balance
      Sheet Arrangements**





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





We
      use
      surety bonds to secure reclamation, workers’ compensation and other
      miscellaneous obligations. At September 30, 2007, we had $101.7 million of
      outstanding surety bonds with third parties. These bonds were in place to secure
      obligations as follows: post-mining reclamation bonds of $56.7 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
      miscellaneous obligation bonds of $4.7 million. Recently, surety bond costs
      have
      increased and 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 September 30,
      2007, we had $56.0 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 U.S generally accepted
      accounting principles. 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 condensed consolidated financial statements and to our
      annual consolidated financial statements filed on Form 10-K list and describe
      our significant accounting policies. The following critical accounting policies
      have a material affect on amounts reported in our condensed consolidated
      financial statements.





-28-








***Workers'
      Compensation***




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
      annually 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 5.4% at December 31, 2006.
      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 5.4% to 4.9%, all other things being equal, the present
      value
      of our workers’ compensation obligation would increase by approximately $1.5
      million. A change in the law, through either legislation or judicial action,
      could cause these assumptions to change. If the estimates do not materialize
      as
      anticipated, our actual costs and cash expenditures could differ materially
      from
      that currently estimated. Our estimated workers’ compensation liability as of
      September 30, 2007 was $56.5 million.





***Coal
      Miners' Pneumoconiosis***




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




An
      independent actuary calculates the estimated pneumoconiosis liability annually
      based on assumptions regarding disability incidence, medical costs, mortality,
      death benefits, dependents and interest rates. The discount rate is based on
      interest rates on high quality corporate bonds with maturities similar to the
      estimated future cash flows. The discount rate used to calculate the present
      value of these future obligations was 5.5% at December 31, 2006. Significant
      changes to interest rates result in substantial volatility to our consolidated
      financial statements. If we were to decrease our estimate of the discount rate
      from 5.5% to 5.0%, all other things being equal, the present value of our black
      lung obligation would increase by approximately $1.7 million. A change in
      the law, through either legislation or judicial action, could cause these
      assumptions to change. If these estimates prove inaccurate, the actual costs
      and
      cash expenditures could vary materially from the amount currently estimated.
      Our
      estimated pneumoconiosis liability as of September 30, 2007 was $28.0
      million.





***Defined
      Benefit Pension***





The
      estimated cost and benefits of our non-contributory defined benefit pension
      plans are determined annually 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, 2006, the discount
      rate used to determine the obligation was 5.55%. 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 5.55% to 5.05%,
      all other things being equal, the present value of our projected benefit
      obligation would increase by approximately $5.3 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 period ended September 30, 2007. 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 period ended
      September 30, 2007.





Effective
      September 30, 2007, the Company froze pension plan benefit accruals for all
      employees covered under its non-contributory defined benefit pension plan,
      resulting in a curtailment gain of $6.1 million.  As of September 30,
      2007, the Company valued the pension obligation to reflect the impact of the
      curtailment.  As of September 30, 2007, the Company used a discount
      rate of 6.0% and a 7.5% long term rate of return on assets to value its pension
      obligation.  Significant changes to these rates would introduce
      volatility to our pension expense. Our accrued pension obligation as of
      September 30, 2007 was $1.4 million.








-29-





***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 initially 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 paid to settle the
      obligation, a gain or loss upon settlement is included in earnings. Our asset
      retirement obligation as of September 30, 2007 was $33.4 million.




***Contingencies***





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





***Income
      Taxes***





We
      account for income taxes in accordance with FASB Statement No. 109, Accounting
      for Income Taxes (“Statement No. 109”), which requires that deferred tax assets
      and liabilities be recognized using enacted tax rates for the effect of
      temporary differences between the book and tax bases of recorded assets and
      liabilities. Statement No. 109 also requires that deferred tax assets be reduced
      by a valuation allowance if it is more likely than not that some portion of
      the
      deferred tax asset will not be realized. In evaluating the need for a valuation
      allowance, we take into account various factors, including the expected level
      of
      future taxable income. We have also considered 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.





During
      2007, due to our estimate of forecasted taxable losses for the year our annual
      effective tax rate includes an assumption that not all of the gross
      deferred tax asset projected as of December 31, 2007 will more likely than
      not
      be realized.




***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 initially assembled
      by our staff and analyzed by Marshall Miller & Associates, Inc. (MM&A).
      The reserve information has subsequently been updated by our staff. The updates
      to the reserves have been calculated in the same manner, and based on the same
      assumptions and qualifications, as used in the MM&A studies described above,
      but these updates to the reserve estimates have not been reviewed by
      MM&A.  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





-30-








·
            assumptions
                governing future prices and future operating
                costs.





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





·
            mining
                activities;





·
            new
                engineering and geological data;





·
            acquisition
                or divestiture of reserve holdings;
                and





·
            modification
                of mining plans or mining methods.





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






**Other
      Supplemental Information**




*Sales
      Commitments*




As
      of
      September 30, 2007, we had the following contractual commitments to ship coal
      at
      a fixed and known price (tons in 000’s):





2008
              
              
              2009
              
              
              2010Average
                Price
                  Per
                Ton
              
              
              Tons
              
              
              Average
                Price
                  Per
                Ton
              
              
              Tons
              
              
              Average
                Price
                  Per
                Ton
              
              
              TonsCAPP
              
              $
              48.01
              
              
              
              5,988
              
              
              $
              51.18
              
              
              
              1,000
              
              
              $
              -
              
              
              
              -Midwest
                  (a)
              
              $
              28.36
              
              
              
              3,230
              
              
              $
              28.08
              
              
              
              2,540
              
              
              $
              29.00
              
              
              
              200




(a)
            Certain
                contracts in the Midwest include a customer option to increase or
                decrease
                the stated tons in thecontract.  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 forfuel
                escalators.






*Reconciliation
        of Non-GAAP Measures*
 
 EBITDA
        is
        a measure used by management to measure operating performance.  We define
        EBITDA as net income or loss plus interest expense (net), income tax expense
        (benefit) and depreciation, depletion and amortization (EBITDA), to better
        measure our operating performance.  We regularly use EBITDA to evaluate our
        performance as compared to other companies in our industry that have different
        financing and capital structures and/or tax rates.  In addition, we use
        EBITDA in evaluating acquisition targets.
 
 Adjusted
        EBITDA and the leverage ratio are the amounts used in our current debt
        covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for
        certain cash and non-cash charges.  Adjusted EBITDA and the leverage ratio
        are used to determine compliance with financial covenants and our ability
        to
        engage in certain activities such as incurring additional debt and making
        certain payments.
 
 EBITDA,
        Adjusted EBITDA, and the leverage ratio are not recognized terms under GAAP
        and
        are not an alternative to net income, operating income or any other performance
        measures derived in accordance with GAAP or an alternative to cash flow from
        operating activities as a measure of operating liquidity.  Because not all
        companies use identical calculations, this presentation of EBITDA, Adjusted
        EBITDA and the leverage ratio may not be comparable to other similarly titled
        measures of other companies.  Additionally, EBITDA or Adjusted EBITDA are
        not intended to be a measure of free cash flow for management’s discretionary
        use, as they do not reflect certain cash requirements such as tax payments,
        interest payments and other contractual obligations.
 
 The
        leverage ratio is calculated as the
        Company’s Senior Funded Indebtedness divided by annualized adjusted EBITDA as
        calculated below.  The Senior Funded Indebtedness is $114.2 million and
        includes the amounts outstanding under our revolver, amounts of the letters
        of
        credit available to be issued under our letter of credit facility and the
        amounts outstanding on the term loan as of September 30, 2007.
   -31-
  **Three
                        Months Ended**
                    
                    
                    **Nine
                        Months Ended****September
                        30,**
                      **2007**
                    
                    
                    **September
                        30,**
                      **2006**
                    
                    
                    **September
                        30,**
                      **2007**
                    
                    
                    **September
                        30,**
                      **2006**Net
                        loss
                    
                    $
                    (9,696
                    )
                    
                    
                    (8,414
                    )
                    
                    
                    (35,564
                    )
                    
                    
                    (10,377
                    )Income
                        tax benefit
                    
                    
                    (3,917
                    )
                    
                    
                    (5,900
                    )
                    
                    
                    (13,620
                    )
                    
                    
                    (14,487
                    )Interest
                        expense
                    
                    
                    5,250
                    
                    
                    
                    4,221
                    
                    
                    
                    14,910
                    
                    
                    
                    12,117Interest
                        income
                    
                    
                    (81
                    )
                    
                    
                    (177
                    )
                    
                    
                    (403
                    )
                    
                    
                    (279
                    )Depreciation,
                        depletion,and
                        amortization
                    
                    
                    17,358
                    
                    
                    
                    19,220
                    
                    
                    
                    54,621
                    
                    
                    
                    55,124EBITDA
                        (before adjustments)
                    
                    $
                    8,914
                    
                    
                    
                    8,950
                    
                    
                    
                    19,944
                    
                    
                    
                    42,098Other
                        adjustments specifiedin
                        our currentdebt
                        agreement:Gain
                        on curtailment of pension plan
                    
                    
                    (6,091
                    )
                    
                    
                    -
                    
                    
                    
                    (6,091
                    )
                    
                    
                    -Charges
                        associated with repaynent of debt
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    2,421
                    
                    
                    
                    -Other
                        adjustments
                    
                    
                    2,406
                    
                    
                    
                    1,727
                    
                    
                    
                    6,695
                    
                    
                    
                    5,366Adjusted
                        EBITDA
                    
                    $
                    5,229
                    
                    
                    
                    10,677
                    
                    
                    
                    22,969
                    
                    
                    
                    47,464


**FORWARD-LOOKING
      INFORMATION**




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





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





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





·
            governmental
                policies and regulatory actions;





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




·
            weather
                conditions or catastrophic weather-related
                damage;





·
            our
                production capabilities;





·
            availability
                of transportation;





·
            market
                demand for coal, electricity and
                steel;





·
            competition;





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





·
            employee
                workforce factors;





·
            our
                assumptions concerning economically recoverable coal reserve
                estimates;





·
            future
                economic or capital market conditions
                and;





·
            our
                plans and objectives for future operations and expansion or
                consolidation.







-32-




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 Form 10-Q under Part II - 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
      3.  QUANTITATIVEAND 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.  Our Revolver and Term Facility
      entered into in February of 2007 have floating interest rates based on our
      option of either the base rate or LIBOR rate. As of September 30, 2007, we
      had
      $15.0 million outstanding under the Revolver and $39.2 million outstanding
      under
      the Term Facility. We are considering whether 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 Revolver
      and Term Facilities.





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 87% for the nine months
      ended September 30, 2007.




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





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








**ITEM
      4.  CONTROLSAND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




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




There
      were no changes in our internal control over financial reporting during the
      three months ended September 30, 2007 that materially affected, or are
      reasonably likely to materially affect, our 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.








-33-





**PART
      II**


**OTHERINFORMATION**











**ITEM
      1.  LEGALPROCEEDINGS**





We
      are
      party 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
      1A. RISKFACTORS**





**Certain
      Risks**





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








**Risks
      Related to the Coal Industry**





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





We
      derived 88% of our total revenues (contract and spot) for the nine months ended
      September 30, 2007 and 88% of our total revenues in 2006, 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.




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.




-34-




***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 United States could become more attractive as a source
      of
      coal to consumers in the eastern United States, if the costs of transporting
      coal from the West were significantly reduced.





Our
      Central Appalachia mines generally ship coal via rail systems. During 2006,
      we
      shipped in excess of 95% of our coal from our Central Appalachia mines via
      CSX.
      In the Midwest, we shipped approximately 63% of our produced coal by truck
      and
      the remainder via rail systems. We believe that our 2007 transportation modes
      will be comparable to those used in 2006. 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.





-35-




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.
 
 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.





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




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




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





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




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




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.





-36-







A
        regional haze program initiated by the EPA to protect and to improve visibility
        at and around national parks, national wilderness areas and international
        parks
        restricts the construction of new coal-fired power plants whose operation
        may
        impair visibility at and around federally protected areas and may require
        some
        existing coal-fired power plants to install additional control measures designed
        to limit haze-causing emissions.
 The
        Clean
        Air Act also imposes standards on sources of hazardous air pollutants. For
        example, the EPA has announced that it would regulate hazardous air pollutants
        from coal-fired power plants. Under the Clean Air Act, coal-fired power plants
        will be required to control hazardous air pollution emissions by no later
        than
        2009, which likely will require significant new investment in controls by
        power
        plant operators. These standards and future standards could have the effect
        of
        decreasing demand for coal.




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






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




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





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




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





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





***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.







-37-








Prior
      to
      placing excess fill material in valleys in connection with surface mining
      operations, coal mining companies are required to obtain a permit from the
      U.S.
      Army Corps of Engineers (Corps) 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. Litigation respecting the validity of the NWP
      21
      permit program as currently administered has been ongoing for several years.
      On
      March 23, 2007, U.S. District Judge Robert Chambers of the Southern District
      of
      West Virginia struck down several 404 permits that had been issued by the Corps
      and found that the Corps’ decisions to issue such permits did not conform to the
      requirements of the Clean Water Act or the National Environmental Policy Act
      because the Corps failed to do a full assessment of all of the impacts of
      eliminating headwarter streams. This ruling applied only to the permits at
      issue
      in the case before Judge Chambers and has precedence only with respect to
      certain counties in southern West Virginia (where we do not now operate).
      However, the matters at issue in that case are likely to be litigated in the
      future in jurisdictions in which we do operate and a ruling for the plaintiffs
      in that litigation or the NWP 21 litigation could have an adverse impact on
      our
      planned surface mining operations




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. The court
      heard oral arguments on a summary judgment motion in late 2005. A ruling for
      the
      plaintiffs in this matter could have an adverse impact on our planned surface
      mining operations.





***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. Under U.S. generally accepted
      accounting principles we are required to account for the costs related to the
      closure of mines and the reclamation of the land upon exhaustion of coal
      reserves. Specifically, the fair value of an asset retirement obligation is
      recognized in the period in which it is incurred if a reasonable estimate of
      fair value can be made. The present value of the estimated asset retirement
      costs is capitalized as part of the carrying amount of the long-lived asset.
      At
      September 30, 2007, we had accrued $33.4 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
      the
      nine months ended September 30, 2007, we generated approximately 84% of our
      total revenues from several long-term contracts with electrical utilities,
      including 28% from our largest customer, Georgia Power Company, and 20% from
      South Carolina Public Service Authority. At September 30, 2007, we had coal
      supply agreements with these customers that expire in 2007 to 2009. 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:





-38-











•
            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. 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
      operating results.





***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.




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





The
      mine
      disasters that occurred during 2006 in West Virginia and other states led to
      the
      enactment of significant new federal and state laws and regulations relating
      to
      safety in underground coal mines and increased enforcement activities by federal
      and state regulators.  These laws and regulations include requirements for
      constructing and maintaining caches for the storage of additional self-contained
      self rescuers throughout underground mines; installing rescue chambers in
      underground mines; constant tracking of and communication with personnel in
      the
      mines; installing cable lifelines from the mine portal to all sections of the
      mine to assist in emergency escape; submission and approval of emergency
      response plans; and new and additional safety training.  Additionally, new
      requirements for the prompt reporting of accidents and increased fines and
      penalties for violation of these and existing regulations have been
      implemented.  Most recently, on May 22, 2007, the Mine Safety and Health
      Administration issued an emergency temporary standard respecting the
      construction standards for seals in underground mines and related matters.
      These
      new laws and regulations will cause us to incur substantial additional costs,
      which will adversely impact our operating performance.





By
      letter
      dated June 14, 2007, our Blue Diamond Coal Company Mine No. 77 was notified
      by
      the U.S. Department of Labor, Mine Safety and Health Administration (MSHA),
      that
      a potential pattern of violations may exist at Mine No. 77 based upon initial
      screening and pattern criteria review by MSHA.  After conducting a
      comprehensive review of the operation, Blue Diamond submitted a plan to MSHA
      designed to enhance employee safety at the mine through better education,
      training, mining practices, and safety management.   Following
      implementation of the plan, MSHA conducted a complete inspection of the mine
      and
      further evaluated the situation.  By letter dated October 2, 2007, MSHA
      advised Blue Diamond Coal Company that a potential pattern of violations no
      longer continues to exist at the mine and that MSHA therefore will take no
      further action with respect to this matter.   However, MSHA will
      continue to review mine No. 77 and our other mines and could decide to issue
      a
      Notice of a Pattern of Violations. The issuance of a Notice of a Pattern of
      Violations could have a significant impact on our operations.





-39-








***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.
      Recently, petroleum prices and other commodity prices have risen significantly,
      and, historically, the prices of scrap steel and petroleum have fluctuated.
      If
      the price of steel or other of these materials continue to increase, our
      operational expenses will increase, which could have a significant negative
      impact on our operating results




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




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







•
            variations
                in thickness of the layer, or seam, of coal;•
            variations
                in geological conditions;•
            amounts
                of rock and other natural materials intruding into the coal
                seam;•
            equipment
                failures and unexpected major repairs;•
            unexpected
                maintenance problems;•
            unexpected
                departures of one or more of our contract miners;•
            fires
                and explosions from methane and other sources;•
            accidental
                minewater discharges or other environmental accidents;•
            other
                accidents or natural disasters; and•
            weather
                conditions.





***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.







-40-





***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 the nine months ended September 30,
      2007, approximately 1% of our total production came from mines operated by
      independent contract mine operators and approximately 8% of our total coal
      produced came 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. Disruptions in
      supply, increases in prices paid for coal produced by independent contract
      mine
      operators or purchased from third parties, or the availability of more lucrative
      direct sales opportunities for our purchased coal sources could increase our
      costs or lower our volumes, either of which could negatively affect our
      profitability.





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




Forecasts
      of our future performance are based on estimates of our recoverable coal
      reserves. Estimates of those reserves are based on studies conducted by Marshall
      Miller & Associates, Inc. in accordance with industry-accepted standards
      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 September 30, 2007, we had outstanding surety
      bonds with third parties for post-mining reclamation totaling $56.7 million.
      Furthermore, we have surety bonds for an additional $45.0 million in place
      for
      our federal and state workers’ compensation obligations and other miscellaneous
      obligations. Insurance companies have informed us, along with other participants
      in the coal industry, that they no longer will provide surety bonds for workers’
compensation and other post-employment benefits without collateral. We have
      satisfied our obligations under these statutes and regulations by providing
      letters of credit or other assurances of payment. However, letters of credit
      can
      be significantly more costly to us than surety bonds. The issuance of letters
      of
      credit under our senior secured credit facility also reduces amounts that we
      can
      borrow under our senior secured credit facility for other purposes. If we are
      unable to secure surety bonds for these obligations in the future, and are
      forced to secure letters of credit indefinitely, our profitability may be
      negatively affected.





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




We
      are
      required by law to provide various long-term employee benefits. We accrue
      amounts for these obligations based on the present value of expected future
      costs. We employed an independent actuary to complete estimates for our workers’
compensation and black lung (both state and federal) obligations. At September
      30, 2007, the current and non-current portions of these obligations included
      $28.0 million for coal workers’ black lung benefits and $56.5 million for
      workers’ compensation benefits.





-41-








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 September 30, 2007, we
      estimated that our pension plan was underfunded by approximately $1.4 million.
      If future payments are insufficient to fund the pension plan adequately to
      cover
      our future pension obligations, we could incur cash expenditures and costs
      materially higher than anticipated. The pension obligation is calculated
      annually and is based on several assumptions, including then prevailing
      conditions, which may change from year to year. In any year, if our assumptions
      are inaccurate, we could be required to expend greater amounts than
      anticipated.




***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, some of which become more
      restrictive over time. 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:




•
            The
                facilities require that we achieve minimum Adjusted EBITDA (as defined
                in
                the facilities as Consolidated EBITDA) of at least $19.0 million
                for the
                nine months ended September 30, 2007.  The amount of minimum Adjusted
                EBITDA is then measured at the end of each quarter on a trailing
                12-month
                basis, beginning with $23.2 million for the 12 months ended December
                31,
                2007, and increasing each quarter thereafter.  For the nine months
                ended September 30, 2007, we had Adjusted EBITDA of $23 million. 
                Adjusted EBITDA is not a recognized term under GAAP and is not an
                alternative to net income, operating income or any other performance
                measures derived in accordance with GAAP or an alternative to cash
                flow
                from operating activities as a measure of operating liquidity.  The
                most directly comparable GAAP financial measure is net loss.  For the
                nine months ended September 30, 2007, we had net loss of $35.6
                million.  Adjusted EBITDA is defined and reconciled to EBITDA and Net
                Loss under “Reconciliation of Non-GAAP Measures” in Part I – Item 2 –
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations.





•
            The
                facilities require that our Leverage Ratio (as defined in the facilities)
                not exceed a specified multiple at the end of each quarter.  As of
                September 30, 2007, our Leverage Ratio was required not to exceed
                4.5x.  The Leverage Ratio is permitted to be higher as of December
                31, 2007 and March 31, 2008, but decreases to 3.6x as of June 30,
                2008 and
                decreases further thereafter.  As of September 30, 2007, our Leverage
                Ratio was 3.7x.  Leverage Ratio is defined and reconciled to EBITDA
                and Net Loss under “Reconciliation of Non-GAAP Measures” in Part I – Item
                2 – Management’s Discussion and Analysis of Financial Condition and
                Results of Operations.





•
            The
                facilities limit the Capital Expenditures (other than Mandated Capital
                Expenditures) (as both are defined in the facilities) that we may
                make or
                agree to make in any fiscal year.  For the fiscal years ended
                December 31, 2007 and 2008, we may not make Capital Expenditures
                in excess
                of $56.1 million.  For the fiscal year ended December 31, 2009 and
                each fiscal year thereafter, we may not make Capital Expenditures
                in
                excess of $66 million.  For the nine months ended September 30, 2007,
                we had made Capital Expenditures of $37
                million.





•
            The
                facilities require that our Minimum Liquidity (as defined in the
                facilities) be no less than a specified amount at the end of each
                quarter.  As of September 30, 2007, we were required to have Minimum
                Liquidity of at least $10.0 million.  The Minimum Liquidity
                Requirement increases to $25.0 million as of December 31, 2007, and
                declines as of March 31, 2008 and thereafter.  As of September 30,
                2007, our Minimum Liquidity was $ 21
                million.




Additional
      detail regarding the terms of the facilities, including these covenants and
      the
      related definitions, can be found in our current report on Form 8-K filed on
      August 8, 2007.


-42-







We
        were
        not in compliance with the minimum Adjusted EBITDA and leverage Ratio required
        by our facilities as of June 30, 2007. We entered into an amendment to the
        facilities in August 2007 that waived the non-compliance as of June 30,
        2007, and also modified our minimum Adjusted EBITDA, total leverage ratio
        and
        maximum limits on capital expenditures covenants for future periods. The
        amendment also added the minimum liquidity threshold and made other changes
        to
        the facilities.  As a result of this amendment, we were in compliance
        with all of the financial covenants of the facilities as of September 30,
        2007, although we cannot assure you that we will remain in compliance in
        subsequent periods.
 
 We plan
        to raise approximately $30 million of capital during the fourth
        quarter.  We believe that the planned capital raise will allow us to
        meet the minimum liquidity threshold of $25 million that will be effective
        under
        our facilities at December 31, 2007.  There can be no assurance however,
        that such capital raising efforts can be completed within this timeframe or
        on terms acceptable to us.
 
 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 amendments 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.




***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 and expiration 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 the nine months ended 2007, 1%
      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 market price of oil could make the operation of the synfuel
      plant unprofitable and cause the synfuel plants to cease operations. Synfuel
      plant closures will result in the loss of 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.








-43-





***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
        may
        explore opportunities to expand our operations through strategic acquisitions
        of
        other coal mining companies. 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 cash on hand, the availability under our Revolver and
      cash generated from our operations will provide us with adequate
      liquidity through the remainder of 2007.  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 12.1 years at 2006
      levels of production, compared to our current Central Appalachia mining
      complexes, which have reserves that we believe will last an average of
      approximately 26.0 years at 2006 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.***




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.





**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.








-44-








Any
      of
      these factors could have a negative effect on the price of our common stock
      on
      the Nasdaq Global Select 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 and senior notes
      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.




We
      have a
      shareholder 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 20%
      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.







***We
      may issue additional common stock without your approval, which would dilute
      the
      ownership interests of our existing stockholders and may depress share
      prices.***








Subject
      to the rules of the Nasdaq Stock Market, we may issue additional shares of
      common stock without stockholder approval, in a number of
      circumstances.  We may issue common stock for cash, for assets or in
      exchange for our outstanding indebtedness.  Any such issuances may be
      at prices or valuations that are lower than the then-prevailing market price
      of
      our common stock.  The issuance by us of additional common stock will
      have the following effects:





·
            Our
                existing stockholders’ proportionate ownership interest in us will
                decrease;


·
            The
                relative voting strength of each previously outstanding share may
                be
                diminished; and


·
            The
                market price of our common stock may
                decline.








**ITEM 2.
      UNREGISTEREDSALES OF EQUITY SECURITIES AND
      USE OF
      PROCEEDS**





We
      have
      made no sales of unregistered securities during the period covered by this
      report.







-45-





**ISSUER
      PURCHASES OF EQUITY SECURITIES**




The
      following table contains information about purchases by us of our equity
      securities during the period covered by this report.




**Period**
            
            **Total Number**
              **of
                Shares**
              **Purchased**
            
            **Average Price**
              **Paid per Share**
            
            **Total Number of**
              **Shares**
              **Purchased
                as**
              **Part
                of Publicly**
              **Announced**
              **Plans
                or**
              **Programs**
            
            **Maximum**
              **Number
                of**
              **Shares that May**
              **Yet
                Be**
              **Purchased**
              **Under
                the Plans**
              **or
                Programs**July 1-31,
                2007(a)
            
            742
            
            $12.37
            
            N/A
            
            N/A





(a)
            The
                “Total Number of Shares Purchased” column consists of shares that were
                deemed to be purchased by the Company in connection with participants’
                surrender of shares to satisfy tax withholding obligation arising
                in
                connection with the vesting of restricted shares pursuant to our
                2004
                Stock Plan.








**ITEM 3.
      DEFAULTSUNDER SENIOR SECURITIES**





None.





**ITEM 4.
      SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





None.





**ITEM 5.
      OTHERINFORMATION**





None








**ITEM 6.
      EXHIBITS**





The
                following exhibits are filed herewith:
            ExhibitCertification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.
            31.1Certification
                of Chief Accounting Officer pursuant to Section 302 of
                the  Sarbanes-Oxley Act of 2002.
            31.2Certification
                of Chief Executive Officer pursuant to Section 906 of
                the  Sarbanes-Oxley Act of 2002.
            32.1Certification
                of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.
            32.2





-46-





**SIGNATURES**





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








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




November
      2, 2007








-47-