UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**


(Mark
      One)




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





For
      the
      quarterly period ended March 31, 2006


OR





[_]
            TRANSITION
                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).


Yes o No ý





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 May 1, 2006 was 16,654,681.








-1-


**FORM
      10-Q** **INDEX**




Page**PART
                I**
            **FINANCIAL
                INFORMATION**
            3**Item
                1.**
            **Financial
                Statements.**Condensed
                Consolidated Balance Sheetsas
                of March 31, 2006 and December 31, 2005
            3Condensed
                Consolidated Statements of Operationsfor
                the three months ended March 31, 2006 and 2005
            5Condensed
                Consolidated Statements of Changes in
                Shareholders’Equity (Deficit) and Comprehensive Income (Loss) for the
                three months ended March 31, 2006 and the year ended December 31,
                2005
            6Condensed
                Consolidated Statements of Cash Flowsfor the three months ended March 31, 2006 and 2005
            7Notes
                to Condensed Consolidated Financial
                Statements
            8**Item
                2.**
            **Management’s
                Discussion and Analysis of********Financial
                Condition and Results of****Operations****.**
            18**Item
                3.**
            **Quantitative
                and Qualitative Disclosure about Market
                Risk**
            30**Item
                4.**
            **Controls
                and Procedures**
            30**PART
                II**
            **OTHER
                INFORMATION**
            31**Item
                1.**
            **Legal
                Proceeding**
            31**Item
                1A.**
            **Risk
                Factors.**
            31**Item 2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**
            43**Item
                3.**
            **Defaults
                Under Senior
                Securities**
            43**Item 4.**
            **Submission
                of Matters to a Vote of Security
                Holders**
            43**Item
                5.**
            **Other
                Information**
            43**Item
                6.**
            **Exhibits**
            43**SIGNATURES**
            44Certifications
                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)





**March
                31, 2006**
            
            **December
                31, 2005****Assets**
            
            (Unaudited)Current
                assets:Cash
            
            $
            3,104
            
            
            8,936Receivables:Trade
            
            
            52,930
            
            
            35,326Other
            
            
            1,026
            
            
            1,099Total
                receivables
            
            
            53,956
            
            
            36,425Inventories:Coal
            
            
            10,491
            
            
            7,481Materials
                and supplies
            
            
            6,942
            
            
            6,536Total
                inventories
            
            
            17,433
            
            
            14,017Prepaid
                royalties
            
            
            4,422
            
            
            4,213Other
                current assets
            
            
            2,576
            
            
            4,126Total
                current assets
            
            
            81,491
            
            
            67,717Property,
                plant, and equipment, at cost:Land
            
            
            6,273
            
            
            6,142Mineral
                rights
            
            
            194,847
            
            
            194,824Buildings,
                machinery and equipment
            
            
            227,805
            
            
            207,558Mine
                development costs
            
            
            17,696
            
            
            16,380Construction-in-progress
            
            
            4,243
            
            
            7,438Total
                property, plant, and equipment
            
            
            450,864
            
            
            432,342Less
                accumulated depreciation, depletion, and amortization
            
            
            89,601
            
            
            72,342Property,
                plant and equipment, net
            
            
            361,263
            
            
            360,000Goodwill
            
            
            28,048
            
            
            28,048Other
                assets
            
            
            17,703
            
            
            16,904Total
                assets
            
            $
            488,505
            
            
            472,669








See
      accompanying notes to condensed consolidated financial statements





-3-


**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





Condensed
      Consolidated Balance Sheets


(in
      thousands)






**March
                  31, 2006**
              
              **December
                  31, 2005****Liabilities
                  and Shareholders' Equity**
              
              (Unaudited)Current
                  liabilities:Current
                  maturities of long-term debt (note 2)
              
              $
              -
              
              
              -Current
                  installments of obligations under capital leases
              
              
              392
              
              
              395Accounts
                  payable
              
              
              40,747
              
              
              32,855Accrued
                  salaries, wages, and employee benefits
              
              
              4,976
              
              
              4,289Workers'
                  compensation benefits
              
              
              10,050
              
              
              10,050Black
                  lung benefits
              
              
              2,930
              
              
              2,930Accrued
                  taxes
              
              
              5,366
              
              
              4,215Accrued
                  interest
              
              
              5,384
              
              
              1,851Other
                  current liabilities
              
              
              6,004
              
              
              5,009Total
                  current liabilities
              
              
              75,849
              
              
              61,594Long-term
                  debt, less current maturities (note 2)
              
              
              150,000
              
              
              150,000Other
                  liabilities:Noncurrent
                  portion of workers' compensation benefits
              
              
              42,515
              
              
              42,231Noncurrent
                  portion of black lung benefits
              
              
              24,790
              
              
              24,352Pension
                  obligations
              
              
              13,019
              
              
              13,598Asset
                  retirement obligations
              
              
              25,523
              
              
              24,930Obligations
                  under capital leases, excluding current installments
              
              
              165
              
              
              230Deferred
                  income taxes
              
              
              42,919
              
              
              44,240Other
              
              
              218
              
              
              227Total
                  liabilities
              
              
              374,998
              
              
              361,402Commitments
                  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 16,654,681 and 16,652,681,
                    respectively
              
              
              167
              
              
              167Paid-in-capital
              
              
              123,536
              
              
              135,923Deferred
                  stock-based compensation
              
              
              -
              
              
              (13,226
              )Accumulated
                  deficit
              
              
              (9,786
              )
              
              (11,187
              )Accumulated
                  other comprehensive loss
              
              
              (410
              )
              
              (410
              )Total
                  shareholders' equity
              
              
              113,507
              
              
              111,267Total
                  liabilities and shareholders' equity
              
              $
              488,505
              
              
              472,669





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****March
                  31, 2006**
              
              **March
                  31, 2005**Revenues
              
              $
              146,676
              
              
              97,875Cost
                  of sales:Cost
                  of coal sold
              
              
              119,246
              
              
              80,942Depreciation,
                  depletion and amortization
              
              
              17,420
              
              
              9,478Total
                  cost of sales
              
              
              136,666
              
              
              90,420Gross
                  profit
              
              
              10,010
              
              
              7,455Selling,
                  general and administrative expenses
              
              
              6,244
              
              
              5,035Total
                  operating income
              
              
              3,766
              
              
              2,420Interest
                  expense (note 2)
              
              
              3,889
              
              
              2,186Interest
                  income
              
              
              (5
              )
              
              (21
              )Miscellaneous
                  income, net
              
              
              (220
              )
              
              (123
              )Total
                  other expense, net
              
              
              3,664
              
              
              2,042Income
                  before income taxes
              
              
              102
              
              
              378Income
                  tax (benefit) expense
              
              
              (1,299
              )
              
              69Net
                  income
              
              $
              1,401
              
              
              309Earnings
                  per common share (note 5)Basic
                  earnings per common share
              
              $
              0.09
              
              
              0.02Shares
                  used to calculate basic earnings per share
              
              
              15,768
              
              
              13,800Diluted
                  earnings per common share
              
              $
              0.08
              
              
              0.02Shares
                  used to calculate diluted earnings per share
              
              
              16,745
              
              
              14,752See
                  accompanying notes to condensed consolidated financial
                  statements











-5-





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**


CondensedConsolidated
      Statements of Changes in
      Shareholders’


Equity
      (Deficit) and Comprehensive Income (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, 2004**
            
            
            14,716
            
            $
            147
            
            
            71,784
            
            
            (7,540
            )
            
            1,151
            
            
            43
            
            
            65,585Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,338
            )
            
            -
            
            
            (12,338
            )Minimum
                pension liability adjustment, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (410
            )
            
            (410
            )Reclassification
                  adjustment on sale ofmarketable
                  securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (43
            )
            
            (43
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12,791
            )Issuance
                  of restricted stock awards, netof
                  forfeitures
            
            
            132
            
            
            2
            
            
            8,073
            
            
            (8,075
            )
            
            -
            
            
            -
            
            
            -Issuance
                  on common stock net of offeringcosts
                  of $3,696
            
            
            1,500
            
            
            15
            
            
            45,039
            
            
            -
            
            
            -
            
            
            -
            
            
            45,054Common
                stock issued in acquisition (Note 8)
            
            
            338
            
            
            3
            
            
            10,997
            
            
            -
            
            
            -
            
            
            -
            
            
            11,000Repurchase
                of shares for tax withholding
            
            
            (36
            )
            
            -
            
            
            (1,158
            )
            
            
            
            
            
            
            
            
            
            
            (1,158
            )Tax
                benefit on vested shares of restricted stock
            
            
            -
            
            
            -
            
            
            1,058
            
            
            -
            
            
            -
            
            
            -
            
            
            1,058Stock
                based compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            2,389
            
            
            -
            
            
            -
            
            
            2,389Exercise
                of stock options
            
            
            3
            
            
            -
            
            
            93
            
            
            -
            
            
            -
            
            
            -
            
            
            93Capital
                contribution, net of tax
            
            
            -
            
            
            -
            
            
            37
            
            
            -
            
            
            -
            
            
            -
            
            
            37**Balances,
                December 31, 2005**
            
            
            16,653
            
            
            167
            
            
            135,923
            
            
            (13,226
            )
            
            (11,187
            )
            
            (410
            )
            
            111,267Adoption
                of SFAS 123R (Note 1)
            
            
            -
            
            
            -
            
            
            (13,226
            )
            
            13,226
            
            
            -
            
            
            -
            
            
            -Net
                income and comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,401
            
            
            
            
            
            1,401Issuance
                of restricted stock awards, netof
                forfeitures
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                based compensation
            
            
            -
            
            
            -
            
            
            839
            
            
            -
            
            
            -
            
            
            -
            
            
            839**Balances,
                March 31, 2006**
            
            
            16,655
            
            $
            167
            
            
            123,536
            
            
            -
            
            
            (9,786
            )
            
            (410
            )
            
            113,507








See
      accompanying notes to condensed consolidated financial statements








-6-




**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Statements of Cash Flows


(in
      thousands)


(unaudited)





**Three
                  Months**
              
              **Three
                  Months****Ended**
              
              **Ended****March
                  31, 2006**
              
              **March
                  31, 2005**Cash
                  flows from operating activities:Net
                  income
              
              $
              1,401
              
              
              309Adjustments
                    to reconcile net income to net cash provided byoperating
                    activitiesDepreciation,
                  depletion, and amortization
              
              
              17,420
              
              
              9,478Accretion
                  of asset retirement obligations
              
              
              486
              
              
              325Amortization
                  of deferred financing costs
              
              
              319
              
              
              103Amortization
                  of deferred stock-based compensation
              
              
              839
              
              
              448Deferred
                  income tax benefit
              
              
              (1,321
              )
              
              (46
              )(Gain)
                  loss on sale or disposal of property, plant, and equipment
              
              
              (214
              )
              
              6Changes
                  in operating assets and liabilities:Receivables
              
              
              (17,531
              )
              
              (9,191
              )Inventories
              
              
              (3,416
              )
              
              (3,557
              )Prepaid
                  royalties and other current assets
              
              
              1,341
              
              
              627Other
                  assets
              
              
              (1,118
              )
              
              1,783Accounts
                  payable
              
              
              7,892
              
              
              9,927Accrued
                  salaries, wages, and employee benefits
              
              
              687
              
              
              1,142Accrued
                  taxes
              
              
              1,151
              
              
              796Other
                  current liabilities
              
              
              4,528
              
              
              1,021Workers'
                  compensation benefits
              
              
              284
              
              
              158Black
                  lung benefits
              
              
              438
              
              
              80Pension
                  obligations
              
              
              (579
              )
              
              (538
              )Asset
                  retirement obligation
              
              
              (103
              )
              
              (135
              )Other
                  liabilities
              
              
              (9
              )
              
              (47
              )Net
                  cash provided by operating activities
              
              
              12,495
              
              
              12,689Cash
                  flows from investing activities:Additions
                  to property, plant, and equipment
              
              
              (18,626
              )
              
              (14,690
              )Proceeds
                  from sale of property, plant, and equipment
              
              
              367
              
              
              -Increase
                  in restricted cash
              
              
              -
              
              
              (21
              )Net
                  cash used in investing activities
              
              
              (18,259
              )
              
              (14,711
              )Cash
                  flows from financing activities:Principal
                  payments under capital lease obligations
              
              
              (68
              )
              
              (133
              )Net
                  cash used in financing activities
              
              
              (68
              )
              
              (133
              )Decrease
                  in cash
              
              
              (5,832
              )
              
              (2,155
              )Cash
                  at beginning of period
              
              
              8,936
              
              
              3,879Cash
                  at end of period
              
              $
              3,104
              
              
              1,724














See
      accompanying notes to condensed consolidated financial statements





-7-





**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. The Company’s Central Appalachian segment has five
      operating subsidiaries located
      in e astern
      Kentucky and its Midwest segment has one operating subsidiary located in
      southern Indiana. Substantially all coal sales and accounts receivable relate
      to
      the electric utility and industrial markets.




The
      interim condensed consolidated financial statements include the accounts of
      James River Coal Company and its wholly owned subsidiaries. The interim
      condensed consolidated financial statements of James River Coal Company and
      subsidiaries (Company) presented in this report are unaudited. All significant
      intercompany balances and transactions have been eliminated in consolidation.
      The results of operations for any interim period are not necessarily indicative
      of the results to be expected for the full year. These financial statements
      should be read in conjunction with the consolidated financial statements and
      the
      notes thereto for the year ended December 31, 2005. The balances presented
      as of
      or for the year ended December 31, 2005 are derived from the Company’s audited
      consolidated financial statements.




Management
      of the Company has made a number of estimates and assumptions relating to the
      reporting of assets, liabilities, revenues and expenses and the disclosure
      of
      contingent assets and liabilities in order to prepare these condensed
      consolidated financial statements in conformity with accounting principles
      generally accepted in the United States of America. Significant estimates made
      by management include the valuation allowance for deferred tax assets, accrued
      reclamation costs and amounts accrued related to the Company’s workers’
compensation, black lung, health claim, and pension obligations. Actual results
      could differ from these estimates. In the opinion of management, the
      accompanying unaudited condensed consolidated financial statements contain
      all
      adjustments, consisting of normal recurring accruals, which are necessary to
      present fairly the consolidated financial position of the Company and the
      consolidated results of its operations and cash flows for all periods
      presented.




***Inventories***




Inventories
      of coal and materials and supplies are stated at the lower of cost or market.
      Cost is determined using the average cost for coal inventories and the first-in,
      first-out method for materials and supplies. Coal inventory costs include labor,
      supplies, equipment cost, depletion, royalties, black lung tax, reclamation
      tax
      and preparation plant cost. Coal is classified as inventory at the point and
      time that the coal is extracted and removed from the mine.




***Reclamation
      Costs***




Asset
      retirement obligations are recorded as a liability based on fair value, which
      is
      calculated as the present value of the estimated future cash flows, in the
      period in which it is incurred. The estimate of ultimate reclamation liability
      and the expected period in which reclamation work will be performed is reviewed
      periodically by the Company’s management and engineers. In estimating future
      cash flows, the Company considers the estimated current cost of reclamation
      and
      applies inflation rates and a third party profit. The third party profit is
      an
      estimate of the approximate markup that would be charged by contractors for
      work
      performed on behalf of the Company. When the liability is initially recorded,
      the offset is capitalized by increasing the carrying amount of the related
      long-lived asset. Over time, the liability is accreted to its present value
      each
      period, and the capitalized cost is depreciated over the useful life of the
      related asset. Accretion expense is included in cost of produced coal. To settle
      the liability, the obligation is paid, and to the extent there is a difference
      between the liability and the amount of cash paid, a gain or loss upon
      settlement is incurred. At March 31, 2006 and December 31, 2005, the Company
      had
      accrued $27.4 million and $26.8 million respectively, related to estimated
      mine
      reclamation costs.




-8-







***Workers’
      Compensation***




The
      Company is liable for workers’ compensation benefits for traumatic injuries
      under state workers’ compensation laws in which it has operations. For claims
      incurred prior to 2002, the Company is self-insured, except for those claims
      incurred between 1979 and 1982, which are covered by a third party insurance
      company. From 2002 to June 2005, a portion of its workers’ compensation benefits
      are payable under a high-deductible, fully-insured workers’ compensation
      insurance policy. In June of 2005, the Company became self insured for workers’
compensation for its Central Appalachia operations. Specific excess insurance
      with independent insurance carriers is in force to cover traumatic claims in
      excess of the self-insured limits.




The
      Company accrues for workers’ compensation benefits by recognizing a liability
      when it is probable that the liability has been incurred and the cost can be
      reasonably estimated. The Company provides information to independent actuaries,
      who after review and consultation with the Company with regards to actuarial
      assumptions, including discount rate, prepare an evaluation of the liabilities
      for workers’ compensation benefits.




***Black
      Lung Benefits***




The
      Company is responsible under the Federal Coal Mine Health and Safety Act of
      1969, as amended, and various states’ statutes for the payment of medical and
      disability benefits to employees and their dependents resulting from occurrences
      of coal worker’s pneumoconiosis disease (black lung). The Company provides for
      federal and state black lung claims through a self-insurance program for its
      Central Appalachia operations. The Company uses the service cost method to
      account for its self-insured black lung obligation. The liability measured
      under
      the service cost method represents the discounted future estimated cost for
      former employees either receiving or projected to receive benefits, and the
      portion of the projected liability relative to prior service for active
      employees projected to receive benefits. The Company has insured its black
      lung
      obligation for its Midwest operations.




The
      periodic expense for black lung claims under the service cost method represents
      the service cost, which is the portion of the present value of benefits
      allocated to the current year, interest on the accumulated benefit obligation,
      and amortization of unrecognized actuarial gains and losses. The Company
      amortizes unrecognized actuarial gains and losses over the average remaining
      work life of the workforce.




Annual
      actuarial studies are prepared by independent actuaries using certain
      assumptions to determine the liability. The calculation is based on assumptions
      regarding disability incidence, medical costs, mortality, death benefits,
      dependents, and interest rates . These
      assumptions are derived from actual Company experience and industry
      sources.




***Revenue
      Recognition***




Revenues
      include sales to customers of Company-produced coal and coal purchased from
      third parties. The Company recognizes revenue from the sale of Company-produced
      coal and coal purchased from third parties at the time delivery occurs and
      title
      passes to the customer, which is either upon shipment or upon customer receipt
      of coal based on contractual terms. Also, the sales price must be determinable
      and collection reasonably assured.




***Income
      Taxes***




Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      loss and tax credit carryforwards. Deferred tax assets and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. The income tax benefit for the three months ended March 31, 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.
      Management evaluated the quantitive impact of this adjustment, individually
      and
      in the aggregate, on previously reported periods, on the current fiscal period
      and on earnings taken as a whole. Based upon this evaluation, management
      concluded that the adjustment is not material to the Company's financial
      statements taken as a whole. Adjusted for the benefit for the reduction in
      state
      tax rates, our effective tax rate for the three months ended March 31, 2006
      is
      13.1%.




Our
      effective income tax rate is impacted by percentage depletion. Percentage
      depletion is an income tax deduction that is limited to a percentage of taxable
      income from each of our mining properties. Because percentage depletion can
      be
      deducted in excess of cost depletion, it creates a permanent difference and
      directly impacts the effective tax rate. Fluctuations in the effective tax
      rate
      may occur between interim fiscal periods due to the varying levels of
      profitability (and thus, taxable income and percentage depletion) projected
      at
      each of our mine locations.




-9-







***Equity-Based
      Compensation Plan***




The
      Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised
      2004), *Share-Based
      Payment* (SFAS
      123R), on January 1, 2006, using the modified prospective method. Prior to
      2006,
      the Company accounted for stock based compensation using the intrinsic value
      method under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting
      for Stock Issued to Employees” as permitted under SFAS 123, “Accounting for
      Stock-Based Compensation.” Accordingly, compensation costs for stock options
      granted to employees were not recognized in the statement of operations as
      the
      exercise price of options granted was equal to or greater than the market value
      of the stock at the date of grant. The company provided pro forma net income
      and
      earnings per share amounts as if stock option expense had been recognized based
      on fair value in the footnotes, as required.





The
      Company has elected the modified prospective transition method as permitted
      by
      SFAS 123R. Prior periods have not been restated to reflect the impact of stock
      option expense. Stock option expense will be recorded for all newly granted
      or
      modified options, as well as, unvested stock options that are expected to vest
      over the service period beginning on January 1, 2006. Stock option expense
      is
      generally recognized on a straight-line basis over the stated vesting period.
      The Company expensed $50,000 related to stock option in the three months ended
      March 31, 2006. The adoption of SFAS 123R did not impact the accounting for
      the
      Company’s remaining unvested stock-based compensation.





Prior
      to
      the adoption of SFAS 123R the Company recorded in equity the deferred stock
      based compensation associated with outstanding unvested restricted stock. Upon
      adoption of SFAS 123R on January 1, 2006, the deferred stock based compensation
      was reclassified to paid in capital.





***Reclassification*** **s**




Certain
      prior year amounts have been reclassified to conform to the fiscal 2006
      presentations.










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





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





**March
                31,**
              **2006**
            
            **December
                31,**
              **2005**Senior
                Notes
            
            $
            150,000
            
            $
            150,000Senior
                Secured Credit Facility - Revolver
            
            
            -
            
            
            -Total
                long-term debt
            
            
            150,000
            
            
            150,000Less
                amounts classified as current
            
            
            -
            
            
            -Total
                long-term debt, less current maturities
            
            $
            150,000
            
            $
            150,000




***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.




-10-




***Senior
      Secured Credit Facility***




Concurrent
      with the Senior Notes and equity offering, the Company entered into a Senior
      Secured Credit Facility consisting of a $25.0 million revolving credit facility
      (the Revolver) and a $75.0 million letter of credit facility (the Letter of
      Credit Facility).  The Revolver matures on May 31, 2010 and the Letter of
      Credit Facility matures on November 30, 2011.  The Senior Secured Credit
      Facility is secured by substantially all of the Company’s assets. The Company
      entered into an amendment and waiver to the Senior Secured Credit Facility
      on
      February 22, 2006 (the “First Amendment”).




Proceeds
      from the Revolver are available for working capital needs and other general
      corporate purposes.  The Revolver bears an interest rate per annum equal to
      a rate based on the Company’s leverage ratio (the Applicable Rate) plus the
      Company’s option of either (i) the greater of (a) the prime rate or (b) the
      federal funds open rate plus 0.5% or (ii) a Euro Rate as defined in the credit
      agreement. The Applicable Rate ranges from 1.00% to 1.75% for borrowing based
      on
      the prime rate or federal funds open rate and 2.00% to 2.75% for borrowing
      based
      on the Euro Rate.  Pursuant to the First Amendment, the Applicable Rate was
      increased to 2.0% for borrowings based on the prime rate or federal funds open
      rate and 3.0% for borrowing based on the Euro rate for the period from February
      22, 2006 to September 30, 2006. The Revolver also requires a 0.5% commitment
      fee
      on the unused balance of the Revolver. As of April 1, 2006, the Company has
      only
      $2.9 million of availability under the Revolver until at least the end of the
      second quarter 2006 due to a requirement in the Revolver to maintain a minimum
      leverage ratio.




The
      Letter of Credit Facility does not constitute a loan to the Company and
      accordingly is not available for borrowing by the Company.  The Letter of
      Credit Facility only supports the issuance of up to $75 million of letters
      of
      credit by the Company. The Company pays a 3.0% per annum fee on the full balance
      of the Letter of Credit Facility and an additional 0.25% annual fee on the
      average balance of letter of credits issued under the Letter of Credit Facility.
      Pursuant to the First Amendment, the per annum fee on the full balance of the
      Letter of Credit Facility was increased to 3.25% from February 22, 2006 to
      September 30, 2006.




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




The
      Senior Secured Credit Facility and the Senior Notes contain financial covenants
      including a fixed charge coverage ratio, leverage ratio, senior secured leverage
      ratio and maximum annual limits on capital expenditures.  The Company’s
      debt covenants also prohibit payment of cash dividends.  The Company was in
      compliance with all of the financial covenants as of March 31,
      2006.




***Interest
      Expense and Other***





During
      the three months ended March 31, 2006 and 2005, the Company paid $4,000 and
      $2.1
      million in interest, respectively.





**(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 15%
      or more of the Company’s outstanding common stock.




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




-11-











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




***Equity
      Based Compensation***




Under
      the
      2004 Equity Incentive Plan (the Plan), participants may be granted stock options
      (qualified and nonqualified), stock appreciation rights (“SARs”), restricted
      stock, restricted stock units, and performance shares. The total number of
      shares that may be awarded under the Plan is 1,650,000, and no more than
      1,000,000 of the shares reserved under the Plan may be granted in the form
      of
      incentive stock options.




Shares
      awarded or subject to purchase under the Plan that are not delivered or
      purchased, or revert to the Company as a result of forfeiture or termination,
      expiration or cancellation of an award or that are used to exercise an award
      or
      for tax withholding, will be again available for issuance under the Plan. At
      March 31, 2006, there were 547,608 shares available under the Plan for future
      awards.




*Restricted
      Stock Awards*




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




*Performance
      Stock Awards*




Performance
      stock awards have been made to certain employees pursuant to the Plan. The
      number of shares of common stock to be received under these awards by such
      employees at the end of the performance period will depend on the attainment
      of
      performance objectives based on achieving certain financial results and the
      successful development of a new mine. The expected cost of these shares is
      reflected in income over the performance period. No unearned performance shares
      remained outstanding as of March 31, 2006.




-12-


*Stock
      Options Awards*




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







Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation under
      the recognition and measurement provisions of APB 25. Under APB 25, the Company
      generally recognized compensation expense only for restricted stock. The Company
      recognized the compensation expense associated with the restricted stock ratably
      over the associated service period.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of SFAS 123R, using the modified prospective transition method, and therefore
      has not restated the results of prior periods. Under this transition method,
      stock-based compensation expense for the first quarter of 2006 includes
      (i) compensation expense for all stock-based compensation awards granted
      prior to, but not yet vested as of, January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      123, and (ii) compensation expense for all share-based payment awards
      granted after January 1, 2006 based on estimated grant-date fair values.
      Compensation expense is adjusted for estimated forfeitures and is recognized
      on
      a straight-line basis over the requisite service period of the award. The
      Company estimated future forfeiture rates based on its historical experience
      during the preceding fiscal years.





The
      following table highlights the expense related to share-based payment for the
      periods ended March 31 (in 000’s):




2006
            
            2005Restricted
                stock
            
            $
            789
            
            
            312Performance
                stock
            
            
            -
            
            
            136Stock
                options
            
            
            50
            
            
            -Stock
                based compensation
            
            $
            839
            
            
            448Stock
                based compensation, net of taxes
            
            $
            545
            
            
            159









The
      fair
      value of stock options was estimated using the Black-Scholes option pricing
      model. The Company used a risk free rate of 5%, expected volatility was zero,
      and no dividends were anticipated for the options issued in 2004 and a risk
      free
      rate of 4.6% was assumed, expected volatility was 40%, and no dividends were
      anticipated for stock options issued in 2005. 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 unvested options or
      restricted shares to be forfeited before vesting. The Company uses historical
      experience to estimate volatility.





The
      following table is a reconciliation of the Company’s net income and earnings per
      share to pro forma net income and pro forma earnings per share for the three
      months ended March 31, 2005 as if the Company had adopted the provisions of
      SFAS 123 to options granted under the Company’s stock option plans (in 000’s,
      except per share data):





**2005**Net
                  loss, as reported
              
              $
              309Add:
                  Net stock-based employee compensation reported
              
              
              358Deduct:
                  Net stock-based employee compensation under FAS123R
              
              
              (289
              )Pro
                  forma net loss
              
              $
              378Income
                  per share:Basic
                  and diluted- as reported
              
              $
              0.02Basic
                  and diluted- pro forma
              
              $
              0.03





The
      following is a summary of performance stock, restricted stock and stock option
      awards for the three months ended March 31, 2006:


-13-







Performance
                  Stock
              
              Restricted
                  Stock
              
              Stock
                  OptionsEstimated
              
              
              
              Estimated
              
              
              
              WeightedNumber
                  of
              
              Fair
                  Value
              
              Number
                  of
              
              Fair
                  Value
              
              Number
                  of
              
              AverageShares
              
              at
                  Issue
              
              Shares
              
              at
                  Issue
              
              Shares
              
              Exercise
                  PriceDecember
                  31, 2005
              
              
              18,750
              
              $
              4.59
              
              
              866,351
              
              $
              17.22
              
              
              236,000
              
              $
              15.66Granted
              
              
              -
              
              
              -
              
              
              8,000
              
              
              38.24
              
              
              -
              
              
              -Exercised/Vested
              
              
              (18,750
              )
              
              4.59
              
              
              -
              
              
              -
              
              
              -
              
              
              -Canceled
              
              
              -
              
              
              -
              
              
              (6,000
              )
              
              34.84
              
              
              -
              
              
              -March
                  31, 2006
              
              
              -
              
              
              -
              
              
              868,351
              
              
              17.29
              
              
              236,000
              
              
              15.66






The
      following table summarizes additional information about the stock options
      outstanding at March 31, 2006.






**Range
                  of Exercise Price**
              
              **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted
                  Average Remaining**
                **Contractual
                  Life**
                **(Years)**
              
              **Aggregate
                  Intrinsic**
                **Value
                  (1) (in**
                **000's)**Oustanding
                  at March 31, 2006
              
              $10.80-$33.75
              
              236,000
              
              $15.66
              
              8.3
              
              $
                  3,475Exercisable
                  at March 31, 2006
              
              $10.80-$17.50
              
              56,000
              
              $13.46
              
              8.1
              
              $   
                  695Vested
                  and Expected to vest at March 31, 2006
              
              
              
              236,000
              
              $15.66
              
              8.3
              
              $
                  3,475(1)
                  The difference between a stock award's exercise price and the underlying
                  stock's market price at March 31, 2006.






The
      following table summarizes the Company’s total unrecognized compensation cost
      related to stock based compensation as of March 31, 2006





Remaining
                  PeriodUnearned
              
              Of
                  ExpenseCompensation
              
              Recognition(in
                  000's)
              
              (in
                  years)Stock
                  Options
              
              $
              453
              
              
              2.2Restricted
                  Stock
              
              
              12,536
              
              
              3.5Total
              
              $
              12,989








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




The
      Company has established irrevocable letters of credit totaling $57.0 million
      as
      of March 31, 2006 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.




-14-





**(5)**
            **Earnings
                Per Share**




Basic
      earnings per share is computed by dividing net income available to common
      shareholders by the weighted average number of common shares outstanding during
      the period, excluding restricted common stock subject to continuing vesting
      requirements. Diluted earnings per share is calculated based on the weighted
      average number of common shares outstanding during the period and, when
      dilutive, potential common shares from the exercise of stock options and
      restricted common stock subject to continuing vesting requirements, pursuant
      to
      the treasury stock method.




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




**Three
                  Months Ended**
              
              **Three
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005**Weighted
                  average number of common sharesoutstanding:Basic
              
              
              15,768
              
              
              13,800Effect
                  of dilutive instruments
              
              
              977
              
              
              952Diluted
              
              
              16,745
              
              
              14,752




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




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




**Three
                        Months Ended**
                    
                    **Three
                        Months Ended****March
                        31, 2006**
                    
                    **March
                        31, 2005**Service
                        cost
                    
                    $
                    624
                    
                    
                    527Interest
                        cost
                    
                    
                    805
                    
                    
                    793Expected
                        return on plan assets
                    
                    
                    (848
                    )
                    
                    (761
                    )Net
                        periodic benefit cost
                    
                    $
                    581
                    
                    
                    559


**(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****March
                  31, 2006**
              
              **March
                  31, 2005**Service
                  cost
              
              $
              131
              
              
              74Interest
                  cost
              
              
              348
              
              
              340Amortization
                  of actuarial loss
              
              
              73
              
              
              54Total
                  expense
              
              $
              552
              
              
              468




-15-


**(8)**
            **Acquisition
                of Triad Mining, Inc.**





On
      May
      31, 2005, the Company purchased all of the outstanding stock of Triad Mining,
      Inc. (Triad).   Triad directly and through its wholly-owned
      subsidiary, Triad Underground Mining, LLC, owns and operates six surface mines
      and one underground mine in southern Indiana.  The purchase price,
      including related costs and fees, of approximately $70.4 million (net of cash
      received) was funded through the issuance of 338,295 shares of the Company’s
      common stock valued at $11.0 million and cash from the Company’s equity and debt
      offerings in May 2005.  The values of the shares issued were based on the
      market price of the Company’s stock over a reasonable period before and after
      the date at which the number of shares to be issued became fixed. In 2004,
      Triad
      produced approximately 3.4 million tons (unaudited) of coal.  The
      acquisition was accounted for as a purchase.





The
      Company also entered into an agreement with two of Triad’s principals to issue
      common stock valued at up to $5.0 million, if prior to May 31, 2007 the Company
      obtains the right to own, lease or mine certain proven and probable reserves.
      As
      of March 31, 2006, no amounts have been paid under this agreement.





The
      preliminary purchase accounting allocations related to the acquisition have
      been
      recorded in the accompanying consolidated financial statements as of, and for
      periods subsequent to, May 31, 2005, the date of acquisition of Triad. The
      final
      valuation of the net assets acquired is expected to be finalized upon completion
      of the Company’s analysis of the tax basis of assets and liabilities
      acquired.




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




Accounts
                  receivable
              
              $
              9,672Coal
                  inventory
              
              
              1,872Other
                  current assets
              
              
              1,852Property,
                  plant and equipment
              
              
              37,151Mineral
                  rights
              
              
              22,538Goodwill
                  (non-deductible)
              
              
              28,048Other
                  assets
              
              
              465Current
                  liabilities
              
              
              (6,934
              )Asset
                  retirement obligations
              
              
              (7,861
              )Deferred
                  taxes
              
              
              (15,812
              )Other
                  long term liabilities
              
              
              (587
              )Total
                  purchase price, net of cash received of $5,414
              
              $
              70,404





Had
      the
      acquisition of Triad occurred at the beginning of 2005, revenues, net income
      and
      net income per diluted share would have been $121.8 million, $1.6 million and
      $0.10, respectively, for the three months ended March 31, 2005. As the cash
      portion of the Triad purchase price was paid from a portion of the proceeds
      from
      the Senior Notes and the concurrent stock offering, the portion of these
      transactions that were necessary to complete the Triad acquisition are also
      assumed to have occurred at the beginning of the pro forma period.





**(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 Appalachian (CAPP) and in the Midwest (Midwest). The Company’s CAPP
      operations are located in eastern Kentucky and the Company’s Midwest operations
      are located in southern Indiana. Coal quality, coal seam height, transportation
      methods and regulatory issues are generally consistent within a basin.
      Accordingly, market and contract pricing have been developed by coal basin.
      The
      Company manages its coal sales by coal basin, not by individual mine complex.
      Mine operations are evaluated based on their per-ton operating costs. Operating
      segment results for the three months ended March 31, 2006 are shown below
      (segment results for periods prior to the acquisition of Triad on May 31, 2005
      are not provided as the Company had only one segment) (amounts in
      thousands).


-16-







**Three
                  months ended March 31, 2006****(Amounts
                  in thousands)**
              
              **CAPP**
              
              **Midwest**
              
              **Corporate**
              
              **Consolidated**Revenues
              
              $
              121,481
              
              
              25,195
              
              
              -
              
              
              146,676Income
                  (loss) from operations
              
              
              4,919
              
              
              1,813
              
              
              (2,966
              )
              
              3,766Depreciation,
                  depletion and amortization
              
              
              13,842
              
              
              3,550
              
              
              28
              
              
              17,420Interest
                  expense
              
              
              -
              
              
              -
              
              
              3,889
              
              
              3,889Interest
                  income
              
              
              -
              
              
              -
              
              
              (5
              )
              
              (5
              )Income
                  tax benefit
              
              
              -
              
              
              -
              
              
              (1,299
              )
              
              (1,299
              )Goodwill
              
              
              -
              
              
              28,048
              
              
              -
              
              
              28,048Total
                  assets
              
              
              385,124
              
              
              93,967
              
              
              9,414
              
              
              488,505







The
      Company does not allocate interest income, interest expense or income taxes
      to
      its segments.







-17-












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





The
      following discussion and analysis is provided to increase the understanding
      of,
      and should be read in conjunction with, the Condensed Consolidated Financial
      Statements and accompanying notes contained herein and the Company’s annual
      report on Form 10-K for the year ended December 31, 2005.





**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 Appalachian (CAPP) and the Midwest (Midwest)). Our Midwest business
      segment was added in 2005 through the acquisition of Triad Mining, Inc. We
      derived 88% of our total revenues (contract and spot) in the three months ended
      March 31, 2006 from coals 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, the majority of our coal is primarily sold to customers
      in
      the southern portion of the South Atlantic region of the United States. The
      South Atlantic Region includes the states of Florida, Georgia, South Carolina,
      North Carolina, West Virginia, Virginia, Maryland and Delaware. We have been
      providing coal to customers in the South Atlantic region since our formation
      in
      1988. For the three months ended March 31, 2006, CAPP produced 2.6 million
      tons
      of coal (including contract coal and purchased coal). Of the CAPP tons produced,
      79% came from Company operated underground mines. For the three months ended
      March 31, 2006, we shipped 2.5 million tons of coal and generated coal sale
      revenues of $119.6 million from our CAPP segment. For the three months ended
      March 31, 2006, Georgia Power and South Carolina Public Service Authority were
      our largest customers, representing approximately 24% and 14% of our total
      companywide revenues, respectively. No other CAPP customer accounted for more
      than 10% of our company wide 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 three months ended March 31, 2006, our Midwest mines produced 897,000
      tons of coal. Of the Midwest tons produced, 87% came from Company operated
      surface mines. For the three months ended March 31, 2006, we shipped 917,000
      tons of coal and generated coal sale revenues of $25.2 million from our Midwest
      segment. For the three months ended March 31, 2006, our Midwest segment’s
      largest customer was Indianapolis Power and Light which represented
      approximately 7% of our total company wide revenues.




**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. In connection with our acquisition of Triad,
      MM&A also prepared a detailed study of our Midwest reserves as of February
      1, 2005, based on similar data from Triad.  MM&A completed their report
      on our Midwest reserves in March 2005. The coal reserve studies conducted by
      MM&A were planned and performed to obtain reasonable assurance of the
      subject demonstrated reserves.  In connection with the studies, MM&A
      prepared reserve maps and had certified professional geologists develop
      estimates based on data supplied by us and Triad using standards accepted by
      government and industry. We have used MM&A’s March 31, 2004 study as the
      basis for our current internal estimate of our Central Appalachia reserves
      and
      MM&A’s February 1, 2005 study as the basis for our current internal estimate
      of our Midwest Reserves.




-18-









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




Based
      on
      the MM&A reserve studies and the foregoing assumptions and qualifications,
      and after giving effect to our operations from the respective dates of the
      studies through March 31, 2006, we estimate that, as of March 31, 2006, we
      controlled approximately 242.1 million tons of proven and probable coal reserves
      in the CAPP region and 24.2 millions tons of proven and probable coal reserves
      in the Midwest region.  The following table provides additional information
      regarding changes to our reserves since December 31, 2005 (in millions of
      tons):






**CAPP**
              
              **Midwest**
              
              **Total**Proven
                  and Probable Reserves, as of December 31, 2005 (1)
              
              
              241.6
              
              
              20.2
              
              
              261.8Coal
                  Extracted
              
              
              (2.4
              )
              
              (0.9
              )
              
              (3.3
              )Acquisitions
                  (2)
              
              
              -
              
              
              4.9
              
              
              4.9Adjustments
                  (3)
              
              
              2.9
              
              
              -
              
              
              2.9Proven
                  and Probable Reserves, as of March 31, 2006
              
              
              242.1
              
              
              24.2
              
              
              266.3





1)
      Calculated in the same manner, and based on the same assumptions and
      qualifications, as used in the MM&A studies described above, but these
      estimates have not been reviewed by MM&A.  Proven reserves have the
      highest degree of geologic assurance and are reserves for which (a) quantity
      is
      computed from dimensions revealed in outcrops, trenches, workings, or drill
      holes; grade and/or quality are computed from the results of detailed sampling
      and (b) the sites for inspections, sampling and measurement are spaced so
      closely and the geologic character is so well defined that size, shape, depth
      and mineral content of reserves are well-established.  Probable reserves
      have a moderate degree of geologic assurance and are reserves for which quantity
      and grade and/or quality are computed from information similar to that used
      for
      proven reserves, but the sites for inspection, sampling and measurement are
      farther apart or are otherwise less adequately spaced.  The degree of
      assurance, although lower than that for proven reserves, is high enough to
      assume continuity between points of observation.  This reserve information
      reflects recoverable tonnage on an as-received basis with 5.5%
      moisture.





(2)
      Represents estimated reserves on properties acquired during the relevant
      period.  We calculated the reserves in the same manner, and based on the
      same assumptions and qualifications, as used in the MM&A studies described
      above, but these estimates have not been reviewed by MM&A.





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





**Recent
      Accounting Pronouncements**




The
      Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised
      2004), *Share-Based
      Payment* (SFAS
      123R), on January 1, 2006, using the modified prospective method. Prior to
      2006,
      the Company accounted for stock based compensation using the intrinsic value
      method under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting
      for Stock Issued to Employees” as permitted under SFAS No. 123, “Accounting for
      Stock-Based Compensation.” Accordingly, compensation costs for stock options
      granted to employees were not recognized in net income as the exercise price
      of
      options granted was equal to or greater than the market value of the stock
      at
      the date of grant. The company provided pro forma net income and earnings per
      share amounts as if stock option expense had been recognized based on fair
      value
      in the footnotes, as required.


-19-








The
      Company has elected the modified prospective transition method as permitted
      by
      SFAS 123R. Prior periods have not been restated to reflect the impact of stock
      option expense. Stock option expense will be recorded for all newly granted
      or
      modified options, as well as unvested stock options that are expected to vest
      over the service period beginning on January 1, 2006. Stock option expense
      is
      generally recognized on a straight-line basis over the stated vesting period.
      The Company expensed $50,000 related to stock option in the three months ended
      March 31, 2006. The adoption of SFAS 123R did not impact the Company’s remaining
      unvested stock-based compensation.





Prior
      to
      the adoption of SFAS 123R the Company recorded in equity the deferred stock
      based compensation associated with outstanding unvested restricted stock. Upon
      adoption of SFAS 123R in January 2006, the deferred stock based compensation
      was
      reclassified to paid in capital.





**Key
      Performance Indicators**





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





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





In
      the
      operations area, we monitor the volume of coal that is produced by each of
      our
      principal sources, including company mines, contract mines, and purchased coal
      sources. For our company mines, we focus on both operating costs and operating
      productivity. We closely monitor the cost per ton of our mines against our
      budgeted costs and against our other mines.





EBITDA
      is
      also a measure 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 (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. 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.




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





**Trends
      In Our Business**





We
      expect
      coal prices to remain near their current levels in the near term. However,
      historically high coal prices have caused an increased production that has
      resulted in downward pressures on coal prices. We believe that the impact of
      this potentially increased production will be offset by the need of utilities
      to
      rebuild diminished coal inventories resulting from service difficulties that
      the
      major railroads have experienced. Any effort by the utilities to rebuild their
      inventory positions should absorb a portion of any increased coal production.
      Continuing difficulties with rail transportation may also have an impact on
      increased production and market pricing. If marginal increases in the production
      of coal cannot be delivered to the utility customers by rail in a timely manner,
      the depressing effect of the increased production on market prices will be
      reduced. In addition, any new coal production would likely require additional
      permits, labor and equipment, which are currently difficult and time consuming
      to obtain.





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





·
            the
                supply of domestic and foreign
                coal;


·
            the
                demand for electricity;


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


·
            the
                cost of transporting coal to the
                customer;


·
            domestic
                and foreign governmental regulations and
                taxes;


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


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


-20-







Our
      costs
      of production have increased over the comparable period in the prior year.
      We
      expect the higher costs to continue for the next several years, due to a highly
      competitive market for a limited supply of skilled mining personnel and higher
      costs in worldwide commodity markets. We are actively recruiting and training
      new personnel to staff our mines. However, we expect the strong demand for
      coal
      labor to continue leading to higher costs for employees that we retain. Our
      industry has also experienced increased mining costs due to significant price
      increases for various commodities, including steel and diesel fuel. We expect
      that these increases in commodity prices will moderate in 2006. The recent
      mine
      disasters in West Virginia and other states have also resulted in increased
      scrutiny of coal mining in general and underground coal mining in particular.
      We
      expect that the increased scrutiny will result in new regulations which we
      believe will cause our and other coal companies’ mining costs to rise.




**Results
      of Operations**





***Three
      Months Ended March 31, 2006 Compared with the Three Months Ended March 31,
      2005***





The
      following tables shows selected operating results for the three months ended
      March 31, 2006 compared to the three months ended March 31, 2005 (in 000’s
      except per ton amounts). The Company’s results of operations include the impact
      of the Triad acquisition subsequent to May 31, 2005.




**Three
                  Months Ended March 31,****2006**
              
              **2005**
              
              **Change****Total**
              
              **Per
                  Ton**
              
              **Total**
              
              **Per
                  Ton**
              
              **Total**Volume
                  shipped (tons)
              
              
              3,401
              
              
              
              
              
              2,228
              
              
              
              
              
              53%RevenuesCoal
                  sales
              
              $
              144,767
              
              
              42.57
              
              
              96,401
              
              
              43.27
              
              
              50%Synfuel
                  handling
              
              
              1,909
              
              
              
              
              
              1,474
              
              
              
              
              
              30%Cost
                  of coal sold
              
              
              119,246
              
              
              35.06
              
              
              80,942
              
              
              36.33
              
              
              47%Depreciation,
                  depletion and amortization
              
              
              17,420
              
              
              5.12
              
              
              9,478
              
              
              4.25
              
              
              84%Gross
                  profit
              
              
              10,010
              
              
              2.94
              
              
              7,455
              
              
              3.35
              
              
              34%Selling,
                  general and administrative
              
              
              6,244
              
              
              1.84
              
              
              5,035
              
              
              2.26
              
              
              24%








**Volume
      and Revenues by Segment**





**Three
                  Months Ended March 31,**2006
              
              2005CAPP
              
              Midwest
              
              CAPP
              
              MidwestVolume
                  (tons)
              
              
              2,484
              
              
              917
              
              
              2,228
              
              
              -Coal
                  sales revenue
              
              $
              119,572
              
              
              25,195
              
              
              96,401
              
              
              -Average
                  sales price per ton
              
              $
              48.14
              
              
              27.48
              
              
              43.27
              
              
              -




Coal
      sales revenue for the three months ended March 31, increased from $96.4 million
      in 2005 to $144.8 million in 2006. This increase was due to an increase in
      both
      tons sold and the average sales price per ton in CAPP and a $25.2 million
      increase due to the acquisition of Triad. For the three months ended March
      31,
      2006, the CAPP region sold approximately 2.0 million tons of coal under
      long-term contracts (82% of total CAPP sales volume) at an average selling
      price
      of $45.17 per ton. For the three months ended March 31, 2005, the CAPP region
      sold 1.9 million tons of coal (87% of total CAPP sales volume) under long-term
      contracts at an average selling price of $40.46 per ton. For the three months
      ended March 31, 2006, the CAPP region sold 452,000 tons of coal (18% of total
      CAPP sales volume) to the spot market at an average selling price of $61.40
      per
      ton. For the three months ended March 31, 2005, the CAPP region sold
      approximately 296,000 tons (13% of total CAPP sales volume) to the spot market
      at an average selling price of $61.63 per ton.


-21-








**Operating
      Costs by Segment**




**Three
                  Months Ended March 31,**2006
              
              2005CAPP
              
              Midwest
              
              Corporate
              
              CAPP
              
              Midwest
              
              Corporate**Cost
                  of coal sold**
              
              $
              99,895
              
              
              19,351
              
              
              -
              
              
              80,942
              
              
              -
              
              
              -**Per
                  ton**
              
              
              40.22
              
              
              21.10
              
              
              -
              
              
              36.33
              
              
              -
              
              
              -**Depreciation,
                  depletion and amortization**
              
              
              13,842
              
              
              3,550
              
              
              28
              
              
              9,450
              
              
              -
              
              
              28**Per
                  ton**
              
              
              5.57
              
              
              3.88
              
              
              -
              
              
              4.24
              
              
              -
              
              
              -




C *ost
      of Coal Sold*




For
      the
      three months ended March 31, the cost of coal sold, excluding depreciation,
      depletion and amortization, increased from $80.9 million in 2005 to $119.2
      million in 2006. Our cost per ton of coal sold in the CAPP region increased
      from
      $36.33 per ton in the 2005 period to $40.22 per ton in the 2006 period. This
      $3.89 increase in cost per ton of coal sold was due to several factors. Labor
      and benefit costs increased by $1.87 per ton in the 2006 period primarily due
      to
      increases benefits, necessitated by a competitive job market in the coal
      industry. Variable costs increased by $0.87 per ton, primarily due to a change
      in mix between surface and deep mines and an overall increase in commodity
      costs. Sales related costs increased by $0.55 per ton primarily due to the
      increase in average sales price. The cost per ton of coal sold in the Midwest
      was $21.10 per ton in the 2005 period.





*Depreciation,
      depletion and amortization*




For
      the
      three months ended March 31, depreciation, depletion and amortization, increased
      from $9.4 million in 2005 to $17.4 million in 2006. In the CAPP region,
      depreciation, depletion and amortization increased $4.4 million to $13.8 million
      or $5.57 per ton. This increase was due to capital expenditures which increased
      the depreciable asset base. In the Midwest, depreciation, depletion and
      amortization for the three months ended March 31, 2006 was $3.6 million or
      $3.88
      per ton.




*Selling,
      general and administrative*




Selling,
      general and administrative expenses increased from $5.0 million for the three
      months ended March 31, 2005 to $6.2 million for the three months ended March
      31,
      2006. The increase was primarily due to an increase in bank charges of $0.6
      million and $0.5 million of selling, general and administrative expenses
      attributed to the acquisition of Triad. The remaining increase was related
      to
      stock related compensation, salaries and benefits costs and contractor costs.
      These increases were offset by a $0.4 million reduction in taxes primarily
      due
      to a reduction in the accrual for franchise taxes.




**Income
      Taxes**


The
      first
      quarter ended March 31, 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 three months ended March 31, 2006
      was
      13.1%. 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.








-22-


**Liquidity
      and Capital Resources**





As
      of
      March 31, 2006, our outstanding long term debt consists of $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. 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.





We
      also
      have a Senior Secured Credit Facility consisting of a $25.0 million revolving
      credit facility (the Revolver) and a $75.0 million letter of credit facility
      (the Letter of Credit Facility). The Revolver matures on May 31, 2010 and the
      Letter of Credit Facility matures on November 30, 2011. The Senior Secured
      Credit Facility is secured by substantially all of the Company’s assets. We
      entered into an amendment and waiver to the Senior Secured Credit Facility
      on
      February 22, 2006 (the “First Amendment”). The material terms of the Senior
      Secured Credit Facility and the First Amendment are described below.




Proceeds
      from the Revolver are available for working capital needs and other general
      corporate purposes.  The Revolver bears an interest rate per annum equal to
      a rate based on the our leverage ratio (the Applicable Rate) plus our
      option of either (i) the greater of (a) the prime rate or (b) the federal funds
      open rate plus 0.5% or (ii) a Euro Rate as defined in the credit agreement.
      The
      Applicable Rate ranges from 1.00% to 1.75% for borrowing based on the prime
      rate
      or federal funds open rate and 2.00% to 2.75% for borrowing based on the Euro
      Rate.  Pursuant to the First Amendment, the Applicable Rate was increased
      to 2.0% for borrowings based on the prime rate or federal funds open rate and
      3.0% for borrowing based on the Euro rate for the period from February 22,
      2006
      to September 30, 2006. The Revolver also requires a 0.5% commitment fee on
      the
      unused balance of the Revolver. As discussed below, as of April 1, 2006, we
      have
      only $2.2 million of availability under the Revolver until at least the end
      of
      the second quarter 2006 due to a requirement in the Revolver to maintain a
      minimum leverage ratio.




The
      Letter of Credit Facility does not constitute a loan to us and accordingly
      is
      not available for borrowing by us.  The Letter of Credit Facility only
      supports the issuance of up to $75 million of letters of credit by us. We pay
      a
      3.0% per annum fee on the full balance of the Letter of Credit Facility and
      an
      additional 0.25% annual fee on the average balance of letter of credits issued
      under the Letter of Credit Facility. Pursuant to the First Amendment, the per
      annum fee on the full balance of the Letter of Credit Facility was increased
      to
      3.25% from February 22, 2006 to September 30, 2006.




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




The
      Senior Secured Credit Facility and the Senior Notes contain financial covenants
      including a fixed charge coverage ratio, leverage ratio, senior secured leverage
      ratio and maximum annual limits on capital expenditures. Our debt covenants
      also
      prohibit payment of cash dividends. Our lower than expected operating results
      in
      the fourth quarter 2005 resulted in our being out of compliance with the fixed
      charge coverage ratio and the leverage ratio required by the Senior Secured
      Credit Facility as of December 31, 2005. The First Amendment waived these
      financial covenants as of December 31, 2005 and revised certain covenants
      during 2006 to levels that we project we will be able to comply with. We were
      in
      compliance with all of the financial covenants of the Senior Secured Credit
      Facility as of March 31, 2006. There can be no assurance, however, that we
      will achieve operating results for the remainder of 2006 that will cause us
      to
      continue to be in compliance with such covenants. If our projected results
      are
      not achieved we may be forced to seek a further amendment to our credit
      facility.





As
      of
      March 31, 2006, we had cash on hand of approximately $3.1 million. Although
      we were in compliance with all covenants under our $2.7 million Revolver as
      of
      March 31, 2006, we have only $2.9 million of availability under the
      Revolver until at least the end of the second quarter 2006 due to the minimum
      leverage ratio covenant in the Revolver. We are in discussions with the lenders’
agent regarding amending the Senior Secured Credit Facility to provide full
      access to the Revolver during the second quarter. However, we cannot be certain
      if or when such an amendment will be achieved. While we believe that our cash
      on
      hand and cash generated from our operations will provide us with adequate
      liquidity at least through the second quarter, we may need to either amend
      the
      terms of the Revolver to increase the leverage ratio or secure other financing
      to fund our operations and service our debt through the remainder of 2006.


-23-








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




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





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




Net
      cash
      provided by or used in operating activities reflects net income or loss adjusted
      for non-cash charges and changes in net working capital (including non-current
      operating assets and liabilities). Net cash provided by operating activities
      was
      $12.5 million for the three months ended March 31, 2006, and net cash provided
      by operating activities was $12.7 million for the three months ended March
      31,
      2005. For the three months ended March 31, 2006, our net income, as adjusted
      for
      non cash charges, was offset by a $6.4 million decrease in cash from our
      operating assets and liabilities. This change was primarily caused by an
      increase in accounts receivable of $17.5 million due to an increase in tons
      sold
      and average sales price for the first quarter of 2006 as compared to the fourth
      quarter of 2005 and an increase in accounts payables which is due to our
      increased first quarter production and timing of payments.





Net
      cash
      used by investing activities increased $3.5 million to $18.3 million for the
      three months ended March 31, 2006 as compared to the same prior in 2005. The
      change was primarily due to an increase in capital expenditures of $3.9 million
      as compared to 2005. Capital expenditures primarily consisted of new and
      replacement mine equipment and various projects to improve the production and
      efficiency of our mining operations.





Net
      cash
      provided by or used in financing activities primarily reflects changes in short-
      and long-term financing. Net cash used in financing activities was $0.1 million
      for the three months ended March 31, 2006 and 2005.








**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 March 31, 2006, we had $93.5 million of
      outstanding surety bonds with third parties. These bonds were in place to secure
      obligations as follows: post-mining reclamation bonds of $49.3 million, workers'
      compensation bonds of $40.3 million, wage payment, collection bonds, and other
      miscellaneous obligation bonds of $3.9 million. Recently, surety bond costs
      have
      increased, while the market terms of surety bonds have generally become less
      favorable. To the extent that surety bonds become unavailable, we would seek
      to
      secure obligations with letters of credit, cash deposits, or other suitable
      forms of collateral.


-24-








We
      also
      use bank letters of credit to secure our obligations for workers’ compensation
      programs, various insurance contracts and other obligations. At March 31, 2006,
      we had $57.0 million of letters of credit outstanding. The
      letters of credits were issued under our Letter of Credit Facility.





**Critical
      Accounting Estimates**




***Overview***




Our
      discussion and analysis of our financial condition, results of operations,
      liquidity and capital resources are based upon our consolidated financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States of America. U.S. generally accepted
      accounting principles require estimates and judgments that affect reported
      amounts for assets, liabilities, revenues and expenses. The estimates and
      judgments we make in connection with our consolidated financial statements
      are
      based on historical experience and various other factors we believe are
      reasonable under the circumstances. Note 1 of the notes to the condensed
      consolidated financial statements and to our annual consolidated financial
      statement filed on Form 10-K list and describes our significant accounting
      policies. The following critical accounting policies have a material affect
      on
      amounts reported in our condensed consolidated financial statements





***Workers'
      Compensation***




Our
      most
      significant long-term obligation is the obligation to provide workers’
compensation benefits. We are liable under various state statutes for providing
      workers' compensation benefits. To fulfill these obligations, we have used
      self-insurance programs with varying excess insurance levels, and, since June
      7,
      2002, a high-deductible, fully insured program. The high deductible, fully
      insured program is comparable to a self-insured program where the excess
      insurance threshold equals the deductible level. In
      June
      of 2005, we became self insured for workers’ compensation for our Central
      Appalachia 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 5.1% at December 31, 2005.
      Significant changes to interest rates result in substantial volatility to our
      consolidated financial statements. If we were to decrease our estimate of the
      discount rate from 5.1% to 4.1%, all other things being equal, the present
      value
      of our workers’ compensation obligation would increase by approximately $3.1
      million. A change in the law, through either legislation or judicial action,
      could cause these assumptions to change. If the estimates do not materialize
      as
      anticipated, our actual costs and cash expenditures could differ materially
      from
      that currently estimated. Our estimated workers’ compensation liability as of
      March 31, 2006 was $52.6 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 bonds with maturities similar to the estimated future cash
      flows. The discount rate used to calculate the present value of these future
      obligations was 5.1% at December 31, 2005. Significant changes to interest
      rates
      result in substantial volatility to our consolidated financial statements.
      If we
      were to decrease our estimate of the discount rate from 5.1% to 4.1%, all other
      things being equal, the present value of our black lung obligation would
      increase by approximately $6.9 million. A change in the law, through either
      legislation or judicial action, could cause these assumptions to change. If
      these estimates prove inaccurate, the actual costs and cash expenditures could
      vary materially from the amount currently estimated. Our estimated
      pneumoconiosis liability as of March 31, 2006 was $27.7 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. We used a 5.25% discount rate to
      determine the obligation at December 31, 2005 and the expense for the three
      months ended March 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 5.25% to 4.25%, all other things
      being equal, the present value of our projected benefit obligation would
      increase by approximately $11.2 million. ** The
      rate
      of increase in compensation levels is determined based upon our long-term plans
      for such increases. The rate of increase in compensation levels used to
      determine the expense for the three months ended March 31, 2006 was 4.0 %.
      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
      three
      months ended March 31, 2006. Significant changes to these rates would introduce
      substantial volatility to our pension expense. Our accrued pension obligation
      as
      March 31, 2006 was $13.0 million.


-25-











***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 of cash paid to settle
      the obligation, a gain or loss upon settlement is included in earnings. Our
      asset retirement obligation as of March 31, 2006 was $27.3 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 SFAS 109, *Accounting
      for Income Taxes* (“SFAS
      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. SFAS 109 also requires that
      deferred tax assets be reduced by a valuation allowance if it is more likely
      than not that some portion of the deferred tax asset will not be realized.
      In
      evaluating the need for a valuation allowance, we take into account various
      factors, including the expected level of future taxable income. We have also
      considered, but not relied upon, tax planning strategies in determining the
      deferred tax asset that will ultimately be realized. If actual results differ
      from the assumptions made in the evaluation of the amount of our valuation
      allowance, we record a change in valuation allowance through income tax expense
      in the period such determination is made.





As
      of March
      31,
      2006 ,
      we had
      no valuation allowance recorded for deferred tax assets.





***Coal
      Reserves***


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




·
            all
                currently available data;





·
            our
                own operational experience and that of our
                consultants;


-26-








·
            historical
                production from similar areas with similar
                conditions;





·
            previously
                completed geological and reserve
                studies;





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





·
            assumptions
                governing future prices and future operating
                costs.





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





·
            mining
                activities;





·
            new
                engineering and geological data;





·
            acquisition
                or divestiture of reserve holdings;
                and





·
            modification
                of mining plans or mining methods.




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





**Other
      Supplemental Information**





*Labor
      and Turnover*





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





Based
      on
      average employment of production personnel in Central Appalachia, our gross
      turnover has been approximately 23.7% during the twelve months ended March
      31,
      2006. Our net turnover in Central Appalachia during this period, after
      considering employees that have left and been rehired, is approximately 15.4%.
      We believe that our retention of employees is equal to, or better, than other
      coal mining companies in our operating area.


-27-







*Sales
      Commitments*




As
      of
      March 31, 2006, we had the following contractual commitments to ship coal at
      a
      fixed and known price (tons in 000’s):





Remaining2006
            
            2007
            
            2008
            
            2009Average
                Price Per Ton
            
            Tons
            
            Average
                Price Per Ton
            
            Tons
            
            Average
                Price Per Ton
            
            Tons
            
            Average
                Price Per Ton
            
            TonsCAPP
            
            $
            47.15
            
            
            7,019
            
            $
            43.49
            
            
            3,630
            
            $
            49.09
            
            
            1,000
            
            
            -
            
            
            -Midwest
                (a)
            
            $
            28.25
            
            
            2,536
            
            $
            24.77
            
            
            1,250
            
            $
            25.24
            
            
            1,250
            
            $
            25.75
            
            
            1,250





(a)
      Certain contracts in the Midwest include a customer option to increase or
      decrease the stated tons in the contract. We have included option tons that
      we
      believe will be exercised based on current market prices. The prices for the
      Midwest in years 2007 to 2009 are minimum base price amounts that will be
      adjusted for fuel escalators. The escalators in 2006 associated with the tons
      committed for 2007 to 2009 range from $3.15
      to
      $3.37. However, there can be no assurances future adjustments will be comparable
      to those received




*Project
      Development*




**Mine
      15**




Mine
      15
      at McCoy Elkhorn began producing coal in September 2005. Two crews of miners
      and
      equipment completed bottom development work in February 2006. The second section
      of miners and equipment are expected to begin production in May 2006. The third
      section of miners and equipment are expected to begin production in the fourth
      quarter of 2006.




**Surface
      Mines and Highwall Miner**




Our
      strategic plan is to achieve balance between mining methods (underground and
      surface) and coal basins (CAPP and Illinois Basin). The Company believes that
      this strategy will result in greater stability and visibility in operating
      and
      financial performance. As part of executing this plan, the Company is developing
      CAPP surface mine reserves that we primarily control. The following represents
      the current status of our projects begun in 2005 and 2006:




·
            Our
                first company-operated surface mine in the CAPP region opened in
                September
                2005.·
            Our
                highwall miner project at the Leeco complex in CAPP began producing
                coal
                on April 4, 2006·
            The
                third company operated surface mine in the CAPP region is expected
                to
                begin production during the fourth quarter of
                2006.





**Preparation
      Plant Upgrade Projects**





The
      Bevins Branch Plant at the McCoy Elkhorn mine complex has been upgraded and
      expanded to accommodate new production from Mine 15. This upgrade and
      modification project has significantly decreased our trucking costs at this
      mine
      complex. The newly expanded Bevins Branch Plant began processing coal in March
      2006.




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





**OTHER
      DEVELOPMENTS**





On
      April
      17, 2006, there was a large landslide in Leatherwood, Kentucky more than one
      mile from the nearest company mine. The incident was not related to any mining
      operations being conducted by the Company.





The
      local
      area was declared to be a disaster area. The Company assisted state and local
      authorities by providing a substantial amount of equipment and personnel to
      assist in the cleanup effort.


-28-




The
      Company incurred direct costs by providing emergency assistance. The Company
      also incurred indirect costs due to lost production as a result of a temporary
      power outage at one mine and the closure of the main coal haulage road in the
      area impacting two company mines. The Company currently estimates the total
      cost
      from this incident to be less than $1.0 million, although this amount has not
      been finalized at this time.





**FORWARD-LOOKING
      INFORMATION**




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




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





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





·
            governmental
                policies and regulatory actions;





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





·
            weather
                conditions or catastrophic weather-related
                damage;





·
            our
                production capabilities;





·
            availability
                of transportation;





·
            market
                demand for coal, electricity and
                steel;





·
            competition;





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





·
            employee
                workforce factors;





·
            our
                assumptions concerning economically recoverable coal reserve
                estimates;





·
            future
                economic or capital market
                conditions;





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





·
            the
                integration of the Triad
                acquisition.





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 of 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.


-29-








**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. The revolver component of our Senior
      Secured Credit Facility has floating interest rates based on our leverage ratio
      (the Applicable Rate) plus the
      Company’s option of either (i) the greater of (a) the prime rate or (b) the
      federal funds open rate plus 0.5% or (ii) a Euro Rate as defined in the credit
      agreement. As of March 31, 2006, we had no borrowings outstanding under the
      term
      component of the Senior Secured Credit Facility. We do not expect to use
      interest rate swaps to manage this risk. A 100 basis point (1.0%) increase
      in
      the average interest rate for our floating rate borrowings would increase our
      annual interest expense by approximately $0.1 million for each $10 million
      of
      borrowings under the Senior Secured Credit Facility.





We
      manage
      our commodity price risk associated with the sale of coal 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. The
      percentage of our sales pursuant to long-term contracts was approximately 80%
      for the three months ended March 31, 2006.





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





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








**ITEM
              4.**
            **CONTROLS
                AND
                PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**





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




During
      the first quarter of 2006, our Midwest segment began using the same accounts
      payable and payroll system as our remaining subsidiaries. While we do not
      believe that the system previously used had any significant deficiencies or
      material weaknesses, the conversion provides consistency across our operations.
      There were no other changes in our internal control over financial reporting
      during the first quarter of 2006 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.


-30-





**PARTII**


**OTHER
      INFORMATION**











**ITEM
      1.    LEGALPROCEEDINGS**





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





**ITEM
      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 revenues (contract and spot) for the three months ended
      March
      31, 2006 and 85% of our total revenues in 2005 from our electric utility
      customers. Fuel cost is a significant component of the cost associated with
      coal-fired power generation, with respect to not only the price of the coal,
      but
      also the costs associated with emissions control and credits ( *i.e.* ,
      sulfur
      dioxide, nitrogen oxides, etc.), combustion by-product disposal ( *i.e.* ,
      ash)
      and equipment operations and maintenance ( *i.e.* ,
      materials handling facilities). All of these costs must be considered when
      choosing between coal generation and alternative methods, including natural
      gas,
      nuclear, hydroelectric and others.





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.




-31-


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




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




•
            currency
                exchange rates;•
            growth
                of economic development; and•
            ocean
                freight rates.




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




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




During
      the last several years, the U.S. coal industry has experienced increased
      consolidation, which has contributed to the industry becoming more competitive.
      Consequently, many of our competitors in the domestic coal industry are major
      coal producers who have significantly greater financial resources than us.
      The
      intense competition among coal producers may impact our ability to retain or
      attract customers and may therefore adversely affect our future revenues and
      profitability.




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




Increases
      in transportation costs could have an adverse effect on demand for our coal.
      Customers choose coal supplies based, primarily, on the total delivered cost
      of
      coal. Any increase in transportation costs would cause an increase in the total
      delivered cost of coal. That could cause some of our customers to seek less
      expensive sources of coal or alternative fuels to satisfy their energy needs.
      In
      addition, significant decreases in transportation costs from other
      coal-producing regions, both domestic and international, could result in
      increased competition from coal producers in those regions. For instance, coal
      mines in the western U.S. could become more attractive as a source of coal
      to
      consumers in the eastern U.S. if the costs of transporting coal from the West
      were significantly reduced.





Our
      Central Appalachia mines generally ship coal via rail systems. During 2005,
      we
      shipped in excess of 95% of our coal from our Central Appalachia mines via
      CSX.
      In the Midwest, we shipped approximately 62% of our produced coal by truck
      and
      the remainder via rail systems. We believe that our 2006 transportation modes
      will be comparable to those used in 2005. 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.***




-32-


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




•
            employee
                health and safety;•
            permitting
                and licensing requirements;•
            air
                quality standards;•
            water
                quality standards;•
            plant,
                wildlife and wetland protection;•
            blasting
                operations;•
            the
                management and disposal of hazardous and non-hazardous materials
                generated
                by mining operations;•
            the
                storage of petroleum products and other hazardous
                substances;•
            reclamation
                and restoration of properties after mining operations are
                completed;•
            discharge
                of materials into the environment, including air emissions and wastewater
                discharge;•
            surface
                subsidence from underground mining; and•
            the
                effects of mining operations on groundwater quality and
                availability.





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




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





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.




-33-


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




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




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




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




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





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




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




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




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




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




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




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




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


-34-







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.




Prior
      to
      placing excess fill material in valleys, coal mining companies are required
      to
      obtain a permit from the U.S. Army Corps of Engineers under Section 404 of
      the
      Clean Water Act. The permit can be either a simplified Nation Wide Permit #21
      (“NWP 21”) or a more complicated individual permit. On July 8, 2004, U.S.
      District Judge Joseph R. Goodwin of the Southern District of West Virginia,
      Huntington Division found that NWP 21 is in violation of the Clean Water Act.
      This ruling applied only to certain counties in southern West Virginia (where
      we
      do not now operate) and did allow permits to continue to be issued under the
      more costly and time consuming individual permit process. On November 23, 2005,
      the 4 th Circuit
      U.S. Court of Appeals completely reversed Judge Goodwin and held that NWP 21
      are
      valid permits.




In
      January 2005, a virtually identical claim to that filed in West Virginia was
      filed in Kentucky. The plaintiffs in this case, *Kentucky
      Riverkeepers, Inc., et al. v. Colonel Robert A. Rowlette, Jr., et
      al.* ,
      Civil
      Action No 05-CV-36-JBC, seek the same relief as that sought in West Virginia.
      Oral arguments in this case were heard on November 7, 2005. A ruling for the
      plaintiffs in this matter could have an adverse impact on our planned surface
      mining operations.




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




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


-35-








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




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




The
      SMCRA
      establishes operational, reclamation and closure standards for all aspects
      of
      surface mining as well as many aspects of underground mining. We accrue for
      the
      costs of current mine disturbance and of final mine closure, including the
      cost
      of treating mine water discharge where necessary. 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
      March 31, 2006, we had accrued $27.3 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
      three months ended March 31, 2006, we generated approximately 78% of our total
      revenues from several long-term contracts with electrical utilities, including
      24% from our largest customer, Georgia Power Company, and 14% from South
      Carolina Public Service Authority. At March 31, 2006, we had coal supply
      agreements with these customers that expire in 2006 to 2008. 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:





•
            British
                thermal units (Btu’s);•
            sulfur
                content;•
            ash
                content;•
            grindability;
                and•
            ash
                fusion temperature.





-36-





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




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




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




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




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




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




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




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




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




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







•
            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.





-37-





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




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




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




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




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




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




We
      are
      currently undertaking numerous project developments. If we are unable to
      successfully implement these planned development projects, our financial
      performance could be negatively affected.




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




In
      addition to coal we produce from our Company-operated mines, we have mines
      that
      typically are operated by independent contract mine operators, and we purchase
      coal from third parties for resale. For 2006, we anticipate approximately 6%
      of
      our total production will come from mines operated by independent contract
      mine
      operators and that almost 4% of our total coal sold will come from third party
      purchased coal sources. Operational difficulties, changes in demand for contract
      mine operators from our competitors and other factors beyond our control could
      affect the availability, pricing and quality of coal produced for us by
      independent contract mine operators. The demand for contract mining companies
      has increased significantly due to the current strong market prices for coal
      from Central Appalachia. Disruptions in supply, increases in prices paid for
      coal produced by independent contract mine operators or purchased from third
      parties, or the availability of more lucrative direct sales opportunities for
      our purchased coal sources could increase our costs or lower our volumes, either
      of which could negatively affect our profitability.





***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.





-38-





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 March 31, 2006, we had outstanding surety
      bonds
      with third parties for post-mining reclamation totaling $49.3 million.
      Furthermore, we have surety bonds for an additional $44.2 million in place
      for
      our federal and state workers’ compensation obligations and other miscellaneous
      obligations. Insurance companies have informed us, along with other participants
      in the coal industry, that they no longer will provide surety bonds for workers’
compensation and other post-employment benefits without collateral. We have
      satisfied our obligations under these statutes and regulations by providing
      letters of credit or other assurances of payment. However, letters of credit
      can
      be significantly more costly to us than surety bonds. The issuance of letters
      of
      credit under our senior secured credit facility also reduces amounts that we
      can
      borrow under our senior secured credit facility for other purposes. If we are
      unable to secure surety bonds for these obligations in the future, and are
      forced to secure letters of credit indefinitely, our profitability may be
      negatively affected.




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




We
      are
      required by law to provide various long-term employee benefits. We accrue
      amounts for these obligations based on the present value of expected future
      costs. We employed an independent actuary to complete estimates for our workers’
compensation and black lung (both state and federal) obligations. At March
      31,
      2006, the current and non-current portions of these obligations included $27.7
      million for coal workers’ black lung benefits and $52.6 million for workers’
compensation benefits.





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




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




We
      provide pension benefits to eligible employees. As of December 31, 2005, we
      estimated that our pension plan was underfunded by approximately $18.8 million.
      As of the same date, we had long-term pension obligations of $13.6 million,
      with
      the difference between that amount and the underfunded amount due to unamortized
      actuarial losses. Our long-term pension obligation was $13.0 million at March
      31, 2006. 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.


-39-







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




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




•
            minimum
                fixed charge coverage ratio;•
            maximum
                total leverage ratio and senior secured leverage ratio;
                and•
            maximum
                limits on capital expenditures.





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





As
      a
      result of our lower than expected operating results in the fourth quarter 2005,
      we were not in compliance with the fixed charge coverage ratio and the leverage
      ratio required by our Senior Credit Facility as of December 31, 2005. We
      entered into an amendment to the facility in February 2006 that brought us
      into
      compliance with all of these financial covenants as of December 31, 2005
      and revised certain covenants during 2006. We believe that we will be in
      compliance with these amended covenants for 2006 based on our projected
      operating results for the remainder of 2006. There can be no assurance, however,
      that these projected operating results will be achieved. If we do not achieve
      our projected results, we may be forced to seek an additional amendment to
      our
      credit facility.




Although
      we were in compliance with all covenants under our $2.9 million Revolver as
      of
      March 31, 2006, we have only $2.9 million of availability under the
      Revolver until at least the end of the second quarter 2006 due to a requirement
      in the Revolver to maintain a minimum leverage ratio. We are in discussions
      with
      the lenders’ agent regarding amending the Senior Secured Credit Facility to
      provide full access to the Revolver during the second quarter. However, we
      cannot be certain if or when such an amendment will be achieved. While we
      believe that our cash on hand and cash generated from our operations will
      provide us with adequate liquidity for at least the second quarter, we may
      need
      to either amend the terms of the Revolver to increase the leverage ratio or
      secure other financing to fund our operations and service our debt through
      the
      remainder of 2006.








***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.




-40-


***Inability
      to satisfy contractual obligations may adversely affect our
      profitability.***




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




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




We
      supply
      coal to a third party synfuel plant and receive fees for the handling, shipping
      and marketing of the synfuel product. Synfuel is a synthetic fuel product that
      is produced by chemically altering coal. In 2005, 2% of our total revenues
      came
      from synfuel handling, shipping and marketing revenues. Sales of the fuel
      processed through these types of facilities are eligible for non-conventional
      fuels tax credits under Section 29 of the Internal Revenue Code. The owner
      of
      the facility that we supply with coal has obtained a Private Letter Ruling
      (“PLR”) from the Internal Revenue Service confirming that the facility produces
      a qualified fuel eligible for Section 29 tax credits. The Section 29 tax credit
      program is scheduled to expire on December 31, 2007. There is a risk that the
      IRS could modify or disallow the Section 29 tax credit, or (in certain
      circumstances related to the market price of oil), terminate the credit earlier
      than expected, making operation of the synfuel plant unprofitable. If the
      synfuel plant ceases operations, we will no longer receive the handling,
      shipping and marketing fees for our services, which may negatively affect
      ourprofitability.




***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.





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




We
      intend
      to expand our operations through strategic acquisitions of other coal mining
      companies. Other than the transaction disclosed in Item 2 “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations -
      Other
      Supplemental Information,” we currently have no agreement or understanding for
      any specific acquisition. Risks associated with our current and potential
      acquisitions include the disruption of our ongoing business, problems retaining
      the employees of the acquired business, assets acquired proving to be less
      valuable than expected, the potential assumption of unknown or unexpected
      liabilities, costs and problems, the inability of management to maintain uniform
      standards, controls, procedures and policies, the difficulty of managing a
      larger company, the risk of becoming involved in labor, commercial or regulatory
      disputes or litigation related to the new enterprises and the difficulty of
      integrating the acquired operations and personnel into our existing
      business.




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





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




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




-41-





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




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




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




Our
      surface mining operations have increased significantly since our acquisition
      of
      Triad in May 2005. Surface mining is subject to numerous regulations related
      to
      blasting activities that can result in additional costs. For example, when
      blasting in close proximity to structures, additional costs are incurred in
      designing and implementing more complex blast delay regimens, conducting
      pre-blast surveys and blast monitoring, and the risk of potential blast-related
      damages increases. Since the nature of surface mining requires ongoing
      disturbance to the surface, environmental compliance costs can be significantly
      greater than with underground operations. In addition, the U.S. Army Corps
      of
      Engineers imposes stream mitigation requirements on surface mining operations.
      These regulations require that footage of stream loss be replaced through
      various mitigation processes, if any ephemeral, intermittent, or perennial
      streams are in-filled due to mining operations. These regulations may cause
      us
      to incur significant additional costs, which could adversely impact our
      operating performance.





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





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





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




-42-


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




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




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




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




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




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





None





**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





-43-


**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










May
      10, 2006














-44-